China's Trapped Transition_ The Limits of Developmental Autocracy - Minxin Pei [59]
Grain procurement remained basically unchanged until the early 1990s.10 Under the pressure of rising fiscal outlays in grain subsidies, however, the government decided, in April 1992, to unify the purchase and sale prices for grain; prior to this change, the purchase prices were higher than sale prices, causing policy losses in the SOEs in the procurement system. The unification of grain prices eventually evolved into a brief but abortive attempt to fully liberalize prices in October 1993. Price liberalization unexpectedly gave monopoly SOEs in the system an opportunity to engage in hoarding and price gouging, which precipitated an artificial shortage of grain supplies. Provincial governments reacted by imposing restrictions on exports of grain, further exacerbating the shortage.11 The ensuing panic buying in the cities forced the government to halt the reform abruptly.
In the wake of the failed liberalization of the grain procurement system, the state restored the previous administrative controls, reinstated the quota system, set price limits, and reimposed its monopoly. The government decided that it must control 70-80 percent of the grain on the market. In 1995, it set the target of 50 million tons to be purchased at quota prices (contracts signed with farmers directly) and an additional 40 million tons at negotiated prices (county governments were responsible for procuring this amount). The 1995 restoration of state control was also known as the Grain-Bag Policy, or the Governors’ Grain-Bag Responsibility System (GGBRS), with provincial governors assuming primary responsibility over food production. The price for mandatory grain sales to the government was immediately increased by 40 percent at the end of 1994 to encourage more grain production.12 In essence, the pre-1992 system was thus restored. The same old problems—such as regional barriers to grain trade, closed markets, SOEs’ monopoly, and high operating costs—returned as well. Even though the government controlled 70-80 percent of the grain available on the market, the government did not set the sale prices, allowing the SOEs in the system to pocket the rent at the expense of the farmers.13
But the large price increases at the end of 1994 led to abundant harvests in the following years and caused a glut; China, a net importer of grain in the mid-1990s, became a net exporter at the end of the 1990s. With purchase prices substantially higher than sale prices, the state-controlled grain procurement system ran up huge losses. In 1998, losses totaled 40 billion yuan. Surplus grain was filling up the granarics as well. The costs of storage fees and loan interests on the grain reserves in 1998 were 50 billion yuan. Additionally, 8 million tons, or 20 percent of the grain in the granaries, was deemed unfit for consumption due to low quality and long storage.14
Faced with ever-rising grain subsidies, the government was forced to cut its quota and protection prices in 1998. Under the guise of a new round of reforms, the government banned private firms from participating in the market and deployed the police, tax authorities, and other regulatory agencies to crack down on private grain purchasers and vendors. The core feature of the 1998 reform was the government’s use of administrative measures, instead of market mechanisms, in managing supply and demand in the grain market. The government removed certain grains (classified as low quality) from price protection and thus forced peasants to reduce production. It also banned peasants from directly selling their grains on the markel.15 The reassertion of government control in the grain market marked a major reversal of