China's Trapped Transition_ The Limits of Developmental Autocracy - Minxin Pei [60]
Analysis
In many ways, the experience of reforming the grain procurement system is a typical example of the gradualist approach to reform. The government experimented with various forms of price liberalization, only to reassert control when such experiments led to unsustainable increases in fiscal subsidies or market turmoil. Abortive reforms eventually made little dent on the inefficient old system. However, the costs of failure to reform continued to mount, as seen in the accumulated huge losses in the grain procurement system (214 billion yuan from 1992 to 1998 alone) and high market volatility.18 Throughout the reform period, two different and sometimes conflicting impulses drove policy considerations. The government was determined to retain its ability to control the vital market for grain because of its political importance. Yet at the same time, the government was also averse to paying too high a price, in the form of mounting fiscal subsidies, for such control. As a result, whenever supply conditions improved or a glut emerged, the government behaved opportunistically by cutting the prices it set for grain purchases and reduced the amount of grain it had committed to buying from the growers at the preset prices.
Indeed, the primary motivations for changing the procurement policy, mainly through reducing prices paid to grain growers, appeared to be the reduction of rising grain subsidies, as in 1985, 1992, and 1998.19 But farmers responded to the state’s opportunistic behavior by withholding grain. This quickly led to shortages, forcing the government to raise prices. In this game, the underlying market structure gave the growers a slight edge. Of all the grain produced in China, farmers themselves normally consume two-thirds and sell the remaining one-third—about 150 million tons in the mid-1990s—on the market.20 To maximize their income, peasants sold the bulk of their surplus grain (about two-thirds and usually of poorer quality) to the state-owned grain bureaus and firms, which typically held down the prices. They sold the remaining one-third (higher quality grain) to private purchasing agents who offered higher prices.21 As peasants could respond to market conditions either by withholding sales when prices were too low or reducing their own consumption when prices were attractive, the aggregate impact of their response to the government’s behavior on the supply side was considerable.
This structural feature of the Chinese grain market, coupled with the flaws inherent in the state-run grain procurement and reserve systems, made the market more susceptible to supply and demand shocks. A small fluctuation in supply, either a shortage or excess supply of 10 million to 15 million tons, or 8 to 10 percent of the marketable grain supplies, could destabilize the market.22 Also notable in the case of the failure to reform the grain procurement system is the striking fact that the government had never intended to alter the underlying organizational structure of the grain market. In 1985, 1992-7993, and 1998, the govcrnmcnt adjusted prices, but did not set out to abolish the monopoly granted to the SOEs in the system. As the case of failed full liberalization of prices in 1994 demonstrated, removing price controls without ending the SOEs’ monopoly was bound to encourage price gouging and market manipulation by these firms.
An intriguing question is: who has benefited from this inefficient and volatile marketing arrangement? The state, which has suffered huge fiscal losses, does not appear to be a winner, nor do grain-producing farmers, who had