China's Trapped Transition_ The Limits of Developmental Autocracy - Minxin Pei [58]
The Grain Procurement System
The decollectivization of agriculture between 1979 and 1982 was the most radical economic reform implemented by the Communist Party. It laid the foundation for China’s transition to a market economy. Following decollectivization, individual rural households regained their autonomy in agricultural production. But this reform did not end the government’s use of administrative power to intervene in the agrarian sector. Through its continued monopoly of the procurement and sale of the most critical agricultural products (grain and cotton) and inputs (diesel fuel and chemical fertilizers), the state has retained its ability to extract rents from the rural sector despite having relinquished direct control over the farmers’ day-to-day economic decision making.1
The grain procurement system provides a clue to the interlocking relationship among rent protection, regime survival, and economic inefficiency. From an economic perspective, the unreformed procurement system appears to have simultaneously achieved the worst of all worlds: high supply and price volatility, huge financial losses (both through subsidies and operating losses of SOEs in the system), and extraction of rural income (through purchase of grain from peasants at below-market prices).2 Between 1990 and 1996, the total extraction of rural income through an implicit tax on grain collected through the procurement system totaled 259.2 billion yuan, averaging 37 billion yuan a year (roughly 18 percent of rural GDP).3 Such a system, according to a wide-ranging assessment by the OECD in 2002, “has had adverse consequences for macroeconomic performance in recent years: grain surpluses and falling market prices have depressed agricultural incomes and contributcd to a marked slowdown in rural consumption growth.”4 A case study of grain production and trade in Fujian province between 1986 and 1996 also concluded that the procurement system was too unpredictable to enable farmers to have confidence in the government’s policies.5
Yet, from a regime survival perspective, the monopoly of grain procurement is critical. The grain procurement system has intrinsic political strategic importance. Like telecommunication services and banking, the monopoly of this system gives the government the control of a vital resource (food supplies). Allowing market forces to dictate the activities in such a strategic sector poses high risks for an autocracy because shocks to the sector can threaten the regime’s hold on power. In addition, monopoly and government intervention in these sectors create high rents and plenty of opportunities for officials to profiteer, thus securing the loyalty of the regime’s supporters.
The Evolution of the Grain Procurement System
Until 1985, the Chinese government had maintained a unified procurement system (tonggou) of grain procurement that required peasants to sell all their grain to the government at fixed prices. This system was replaced, in 1985, by the “contract procurement” system (hetongdinggou). Like China’s dual-track prices for everything from steel to chemical fertilizers, the new system also had two prices. Grain-growing farmers signed contracts with the state for delivering a fixed quantity at a fixed price (quota price) to government-run grain purchasing stations (liangzhan). 6Prior to the increase in the quota prices in 1995, the government intentionally kept such prices at artificially low levels to extract an implicit tax from grain growers. This hidden tax on grain disappeared only after 1995 as market prices, caused by a glut, fell below the quota prices.7
In addition, the government purchased grain from peasants at higher negotiated prices (or extra-quota prices) for the