A Farmer's Market

Chinese director Jia Zhangke’s latest hit, A Touch of Sin, begins with a startling story: in a northern village in China, a man named Dahai begins a solitary campaign against the village chiefs, who have grown rich selling collective property. While his protests provoke no official response, the problem is eventually resolved with blood: Dahai kills all the village officials with a shotgun. The New York Times calls the movie “a story of lives rocked by violence… with visual lyricism, emotional weight and a belief in individual rights.” But solving real-life problems in contemporary China is much more complicated than putting bullets in the heads of a few corrupt officials.

Dahai was attempting to deal with a problem that is similar to the one faced by hundreds of millions of Chinese farmers: because all natural resources in China are supposed to be owned by the state, and all rural land is supposed to be “collectively owned,” it is not clear who is to determine how to make use of these resources. In other words, if property rights are seen as “a bundle of rights,” including ownership and rights of use, then in China the latter is often less clearly attributed to a single party.

Poorly defined property rights can lead to problems – not only does the Coase Theorem tell us that they prevent market players from bargaining freely, but they have also been the at the root of prevalent corruption and rural property disputes in China. But how did ambiguous property rights come into existence in the first place, and what has the Chinese government done so far to tackle the problem?

The Chinese Communist Party defeated the Kuomintang in the late 1940s, a victory that could be largely attributed to the Communists’ promise of land and power to the farmer class. After the Agrarian Reform Law was passed in 1950, not only was land transferred from landlords to farmers, but farmers were also granted the right to sell and lease their land. In the mid-1950s, however, a second land reform during the Great Leap Forward compelled individual farmers to join “collectives,” and all rural land has been henceforth “collectively owned.” When Deng Xiaoping’s family-based contract system was implemented in the early 1980s, more than 97 percent of China’s agrarian land was contracted by rural households, marking the separation of land use rights from ownership of the land.

Since then, Chinese farmers have been “contracting” land from the “collective organizations” in the village and cultivating the land on their own. However, the government or any developers approved by the government can claim the land through the collective organization and turn the “agrarian land” into “urban construction land,” with the agreement of only the organization, not the farmers affiliated with it.

An obvious disadvantage of having a “collective organization” in the middle of the negotiating table is the rent-seeking space it leaves for village officials: even though compensation will be granted to the farmers, the huge difference between the land’s value as urban construction land and as agrarian land can motivate the collective organization to make decisions regardless of the farmer’s willingness to accept the compensation.

What’s more, even with good will and the absence of greedy officials, undesirable situations can still develop. In 2000, the government of Dengfeng, a city in Henan Province, took some land from its farmers on behalf of the Railroad Construction Company of Dengfeng. The compensation fee that the railroad company was supposed to pay the farmers was received and intercepted by the government, which used the money to invest in the railroad and back its share in the railroad operator. In this case, the government took the compensation “for public good”—it was supposed to make more money out of its investment and serve its community better with a larger budget. However, as the term “for public good” is poorly defined, it is unclear whether the farmers whose land had been taken should be entitled to more benefit than those who hadn’t lost their land.

So why not just put all the compensation directly in the hands of farmers? Why are local governments allowed to stand in the way between the new land user and the old one? It makes no sense to blame the central government: for a government that already abolished agricultural tax once and for all, there seems to be nothing it won’t do to maintain the stability within its farmer communities or to prevent an outbreak of discontent among its farmers. But the situation is not that simple: in provinces such as Guangxi and Anhui, stories of farmers who lose a just-received compensation fee overnight on the gambling table and then find it hard to find a stable job afterwards are never wanting. Other farmers spend the money excessively on renovating the graves of their ancestors or even improving their own future graves. This, in turn, added pressure to the social welfare system run by the local government.

It would take another three decades for China to see the next big step in its land reform: the Third Plenary Session of the 17th CPC Central Committee under the Hu Jintao-Wen Jiabao administration, held in 2008, called for establishing a market to exchange land operating rights while further ensuring farmers’ rights to use and profit from contracted land. So, after years of underground land operating rights transactions, the transfer of “rights of use” was finally on the table. However, at least two problems remained intact: First, if it is not clear who is getting the operating rights for what, then one prerequisite for Coase’s “free negotiations” is still not met. Second, while the transfer of farmland has become a much easier task, farmers still cannot transfer their “house sites”—a piece of land reserved only for residential purposes—to outsiders without the collective organizations’ permission. As these questions wait to be answered, a potentially substantial windfall for farmers remains locked in the land under their feet.

Why not take a bolder step and allow for the ownership and sale of land? After all, if China was shown capable of handling the market economy in most sectors after 30 years of central planning, why can’t the government slacken its grip on land transaction as well? Well, first of all, most countries today have at least some type of restrictions on how their land can be used. After all, China is not the only country that keeps an eye on whether its farmland guarantees its self-sufficiency. Second, once the land market is completely free, the so-called “collective ownership” would have no role to play, and rural land would be essentially privatized. Also foregone would be the economic foundation for China’s rural self-governance mechanism. This is an insurmountable ideological challenge to the current regime: If collective ownership of land is how the CPC gained its legitimacy 70 years ago as well as a defining element of socialism – though one with Chinese characteristics – then its absence would require a whole new system of explanation.

A third argument is that individual farmers would, in a free land market, have less bargaining power than experienced property developers, and farmers would tend to sell their land as soon as restrictions are lifted. This income would allow them to start living in cities. Once urbanization and industrialization slow down and jobs evaporate, however, there would be no turning back for these new immigrant workers. Free market theories tell us that some trial and error must be tolerated for success. Nevertheless, the facts remain that Chinese farmers are the far weaker party in negotiations, their counterparts are established developers and the government. Partly due to ignorance of laws and partly due to traditions, many of the land transfers in China have taken oral form instead of written form, and few poor farmers clearly understand the terms that developers ask them to agree to. The 2008 Plenum even explicitly proposed the article “rural land transfer should do no harm to farmer’s land contracting rights and interests” to address this information asymmetry.

If a free land market is out of the picture, what other alternatives will be provided to fulfill the “land transfer market” promise? To get a glimpse of the latest progress, we may look at an experiment that is being carried out in Zhejiang and Chongqing. This land transfer system for house sites, by the name of “dipiao,” or “land ticket” basically says the following: If a farmer settled in the city feels that he can’t make a better use of his house site back home, he can reclaim it – that is, turn the house site back to farmland - and ask the government to take it over. When the government approves of the land’s qualification as “farmland,” the land will be included into a land transfer market, and the migrant worker will receive a “land ticket.”

This additional farmland quota would then be transformed into a construction land quota, which would be sold by the government to the highest bidder at a public auction. Among the sales revenue, 85 percent will go to the farmer and 15 percent to the collective organization. The purpose of the land ticket system is to increase the supply of construction land for urban areas while preserving the amount of farmland. Even though the land ownership has not been privatized, rural land resources can still be transferred to the hands of more efficient land users, while providing income for its original users.

During such experiments, rather than feeling excited about making profits in a freer market, farmers often needed to be “encouraged” to sell their land operating rights. This has much to do with the traditional view with land as a guarantee of livelihood, a result of historical policy instability: not only was the land the only thing a farmer can count on during ancient times, but with the frequent policy flip-flops since the 1950s, farmers have also come to conclude that a land in the hand is better than two contracts in the bush. As rapid urbanization demands that more paddy fields be turned into shopping malls, Chinese policymakers believe that farmers will benefit much more if they can redevelop their confidence in a trustworthy land market supervised by the government.

Such a land transfer market will also address the problem that China’s “population urbanization” is lagging much behind its “geographic urbanization.” In 2011, China’s population of migrant workers, people who are registered in a rural household but spend most of their time in a city for a living, reached 250 million in 2011, a 100 percent increase from 2006. As the current Xi Jinping-Li Keqiang administration sets out to change China’s decades-long household registration (hukou) system, it is expected that migrant workers will be entitled to more rights as urban citizens. With their land turned into cash, it will be easier for migrant workers to start a living in cities.

Political observers and land scholars in China look forward to future moves by the Central Committee that will clarify the rural land reform policies for the coming years. Three main expectations include: more securitization forms of land property rights, similar to the land ticket, more mortgage options related to land contract rights, and the marketization of house site transactions. These expectations are based on some noteworthy moves by the administration in the last few years, including the nationwide land rights confirmation (quequan) process that was initiated in 2011 and the aforementioned reform in the household registration system.

We know from basic economics that repeated government intervention often creates sustained inefficiencies. As China’s millennium-long “small farmer” tradition and its more recent struggling with a collective land ownership clash with the insatiable demand for land during its urbanization, the government seems the best protector of farmer interests at least in the current phase.

The ongoing rural land reform in China involves dealing with individual interests and historical inefficiencies as well as ideological obstacles. Eliminating the motivation for corruption and ensuring the rights of farmers require more than melodramatic resistance through violence or foolhardy, simplistic solutions like “everybody get your share.” While the pace of current reforms may not live up to everyone’s expectations, the cautious attitude of the leadership is understandable, given the wise words of China’s former Premier Wen Jiabao: “Any small problem multiplied by 1.3 billion will end up being a very big problem, and a very big aggregate divided by 1.3 billion will come to a very tiny figure.”•