1. BACKGROUND

　　China is a large, rural country, but it is a country that is undergoing a fundamental transformation. The development of the rural economy and increasing efficiency of agriculture is of great importance in ensuring the rise of rural incomes, the maintenance of food security and the steady development of the national economy as a whole. With the rapid development of the industry in recent years, the share of agriculture's contribution to the national economy has declined steadily. However, the share of the population in rural areas has remained high. Since agriculture is inherently less competitive, and because it provides a number of important services in the process of development (for example, poverty alleviation; the provision of high quality food and labor into the economy as whole), the rural economy deserves special consideration from policy makers.

　　Thanks to several decades of achievements, China already produces more food that it can consume, at levels of consumption enjoyed by most developed countries. Some parts of the rural economy have been the base for rapid industrialization and continue to be the source of exports. The rural economy has and will continue to be the sources of vast quantities of high quality, hardworking labor on which China's industrialization and construction is being built. In light of these past contributions, starting from the late 1990s, China's agriculture and rural development began to enter a new phase of development. The new period of development, while embodying a lot of potential for new growth, has its own set of problems. In trying to guide the rural economy into this new phase of development, leaders are going to need a new set of objectives, institutional arrangements and policy tools. In the 21st century, for China to be successful in development the attention of policy markers to agricultural and rural issues must become more concentrated and the investment in the sector must increase. Given this new environment and phase of development, we address the major subject of study placed before us: how can China manage the rural economy in order to raise farm income, guide the transformation of the rural economy to support the modernization of the overall nation while at the same time ensuring China's food security

　　1.1 The Government's Commitment to Rural Development

　　In beginning to address this set of questions, there should be no doubt about one issue: the national leadership in China—perhaps to a degree never before—is committed to the development of the rural economy and improving the livelihood of China's rural population. As a way to show this commitment, China's new leaders put forward their version of a new approach to development. The key phrase that characterizes their strategy is that they want to manage a balanced rural development. In their strategic transformation, they regard the problems of the three sub-section of the rural economy—those of agriculture; those of rural development; and those of the income of farmers—as problems of the first and foremost importance in building a well-off society. To implement this strategy, the top leadership has adopted a series of new policy initiatives. In particular, during the 16th National Congress of the Communist Party of China (CPC), leaders set the major tasks of developing the urban and rural economic and social development in a unified and planned way. The stress their overall goals are to build a modern agriculture, develop the rural economy and increase the income of farmers. In 2003, the new government adopted a series of concrete measures designed to meet the goals, including a.) the elimination of China's dual economic structure, b.) the reform of rural taxes and fees; c.) the liberalization of China's grain distribution system; and d.) increased investments targeted at increasing of the income of farmers.

　　Although there are many goals that are embodied in this overall strategy, the actions of the government, especially in a number of their main documents, demonstrates the importance of raising rural incomes. For example, in February 2004, the CPC central committee and the State Council jointly issued Document No.1, "Proposals on Policies of Increasing the Income of Farmers." Subsequent documents make it clear that all avenues of economic development will be used (including technology; rural-urban integration; investment; etc.) to raise rural incomes. It is not just a matter of economic priority; it is being done for political reasons. A goal is set to try to eliminate the dualism in China's economy and the metric of success will be to arrest the widening of the income gaps between urban and rural areas. In his government work report to the Second Session of the 10th National People's Congress, Premier Wen Jiabao reaffirmed that the problems of agriculture, rural development and rural income were the center of the government's attention during the current government's time in office.

　　The new government has adopted the following measures to resolve the problems of agriculture, rural development and rural income:

　　(1) Raising the comprehensive grain production capacity to ensure food security.

　　The government remains interested in maintaining production of grains in the agricultural economy. Due to a fall in relative profitability, China's grain output has been dropping in recent years. In order to motivate the farmers to grow more grain, protect and raise the comprehensive grain production capacity, the central government has adopted a series of measures to stabilize the general situation of grain production and supply. They include a number of strict controls on cultivated land protection. In addition, the government has begun subsidizing farmers to encourage the expansion of grain-sown area and higher yields. In addition, priority is being given in investments into the areas that specialize in grain growing, regions that produce 70% of China's total grain output. Investments are in the form of both direct subsidies and are used to encourage the adoption of new seed varieties and the procurement of farm machinery. Direct subsidies have reached 10 billion yuan. In addition to increasing the output of grain, they also hope to increase the income of farmers. Ultimately, it is hoped that this policy will add to national food security.

　　(2) Promoting off-farm activities

　　Conditioned on the production of sufficient quantity of grain, the government wants to further promote the creation of jobs for farmers as a way to increase their income. Above all, leaders advocate reforming rural industries and promotion of urbanization as a way to encourage greater employment. Measures to reduce barriers for rural workers to enter the cities and the provision of job training are priorities. In addition, there also are additional investments that will try to help increase the employment opportunities in on- and off-farm agricultural enterprises.

　　(3) Continuing tax reform

　　The central government has given prominence to reducing the tax burden of farmers. Above all, the government waives all agricultural and specialty taxes except those on tobacco. The project reduction in tax payments will amount to 4.8 billion yuan. The government also will continue to lower the agricultural tax rate in the coming years. The plan is to reduce taxes by at least one percentage point per year until the entire agricultural tax is eliminated, which will be an additional reduction of 7 billion yuan. Since there will also be a reduction in the revenues of local governments from the tax measures, the central government earmarked 39.6 billion yuan as transfer payments.

　　(4) Deepening the reforms of grain markets, land requisition and the rural financial system

　　Document No. 1 issued by the central authorities committed to totally lifting any remaining control over grain purchasing and marketing by the state. According to the measures, all types of trading firms are allowed to trade grain and all barriers against trade are not allowed. These measures are being taken as an attempt to improve markets and protect the interests of farmers.

　　The central authority also calls for acceleration of the reform of land requisition system and follows the principle of protecting the rights and interests of farmers. Several measures are advocated, including controlling the amount of land that can be requisitioned and strengthening land use planning. The new regulations strictly distinguish between land for public welfare projects and land for business purposes. In doing so, it is hoped that the government's land requisition procedures and compensatory mechanism are improved so fair and timely arrangements can be made for farmers that have lost their land.

　　The reform of the rural financial system is one of the most difficult and most crucial steps towards the future of China's rural development. The goal is to improve rural financial markets. One objective is to keep the state's financial institutions from retreating from rural areas and to improve the access by farmers to banking services. In order to strengthen financial support to farming households and rural medium-sized and small enterprises, the document calls for acceleration of the reform and innovation of the rural financial system. Directions have been made to rural financial institutions to increase lending to farm households and enterprises.

　　(5) Increasing investment in agriculture and rural development.

　　The government work report in 2004 called on the governments at all levels to increase investment in agriculture and rural development. In 2003, the central government earmarked more than 120 billion yuan for supporting agriculture; investments were supposed to have increased by at least 30 billion yuan in 2004, a rise of more than 20%. In 2004, leaders targeted investments for the support the reform of taxes and fees, rural education, health training, ecological building, and into a number of large and medium-sized infrastructure projects. A separate initiative invests in treasury bonds in order to support small projects to improve the infrastructure of rural areas. The document also calls for increases in poverty alleviation efforts.

　　(6) Promoting farm organization to improve access to markets

　　Document No. 1 also gives prominence to the creation of farmer profession associations (FPAs). In particular, it contains measures "… to encourage the development of all types of FPAs as well as households that seek to engage in the procurement of agricultural output and marketing of agricultural inputs." The document called for new legislation to help establish a new legal basis for the development of FPAs in rural areas. In addition, investments were provided to aid their startup, especially of those FPAs that were engaged in activities that supplied information, technology, training, quality standards, certification and marketing services to rural households. The Ministry of Finance also was supposed to provide support to banks to support FPAs in their investment efforts in production, marketing and processing activities.

　　1.2 China's New Stage of Agricultural and Rural Development

　　China is moving into a new, modern-phase of rural development. Although there are still traces of the traditional economy, the domestic and international environment within which China's rural economy is emerging is more and more appearing like modernization is beginning. In the process of development, although its share in the national economy will drop, it will be taking on increasing importance in the overall development of China's economy. In short, four changes demonstrate that China's agriculture and the rural development is entering a new stage.

　　(1) Major changes in the nature of China's supply and demand of agricultural products

　　In contrast to almost any time in China's history, the supply of food in the nation exceeds demand. The ability of the nation's grain producers has reached 500 million tons, Agricultural output on a per capita basis is rising. For example, in 2002, per capita meat output reached 40.8 kg and the per capita aquatic products output reached 35.6kg, well above the world's average. In addition, in recent years, starting from the late 1990s, there has been successive number of good harvests. Until at least recently, grain in China's storage facilities was sufficient. In short, total grain supply exceeds demand, as the agricultural product market has become a buyer's market.

　　Hence, China is entering a new stage. Instead of trying to meet minimum nutrition needs (although food security is still an objective), today China's farm sector is being increasingly asked to meet a number of different objectives: higher quality, higher efficiencies and producing in a sustainable way. As this happens, China will increasingly have an opportunity to restructure the agricultural economy. It will allow leaders to move the focus of its attention from grain to other tasks that will allow higher quality food to be produced more efficiently.

　　(2) Major shift in employment and the rise of off-farm jobs

　　As the pace of industrialization and urbanization has picked up and agricultural productivity has risen, China's rural economy is beginning to shift its focus beyond the traditional borders of rural life. During the past 20 years, more than 150 million people have found jobs off the farm and the growth of income in rural China is almost completely due to the rise in off farm employment. The job is not done, however. There are still more than 100 million people in the rural areas that are engaged in relatively low productive, farming tasks. Given a chance, these people will opt, like others in rural China, to move across different regions and enter into China's cities to seek jobs. This major shift in the focus of future employment is sure to bring about a series of changes in other areas.

　　(3) Major shifts towards urbanization

　　China is also urbanizing and the distinction between rural and urban is gradually beginning to fade. Historically, China's industrialization created a dual economic and social structure. Farms were isolated from factories. Those living in rural areas were separate from those living in cities. As labor and commodity markets emerge, the line between rural and urban is starting to become less evident. The ties between agriculture and industry and between town and country have been strengthened. In many cases, there is an increasing interaction and symbiotic relationship between the development of cities and rural areas. Since the forces of macroeconomic policy are such that in the end a modern China will be mostly an industrialized, urban nation, many of the solutions of rural problems actually lie in urban areas. But, there are remaining constraints. The central government realizes that there are still fiscal, taxation , policy and other biases against agriculture and rural areas.

　　(4) Major shift towards market integration, domestic and global

　　After China became a WTO member, the nation is becoming increasingly integrated into world markets. The nation's accession brings both opportunities and challenges to China's agriculture. From a long-term point of view, integration with international market will allow China to exploit its comparative advantages. Indeed, even before WTO, China's farmers have begun to import capital and technology and export a wide range of high-valued, labor-intensive agricultural products. At the same time, China is beginning to import more land-intensive products. Although these products are those that China should be importing, for those farmers that specialize in the production of these commodities, there will be a period in which they will bear the cost of world market integration. Moreover, if China is to begin to import land-intensive products, in the traditional sense of food security, there could be a conflict.

　　At the same time, China's domestic markets are integrating rapidly. With the rise of millions of traders and improved infrastructure and communications, China has built a network of domestic markets that are among the most efficient and integrated in the world. In short, there are few economies in the world with a less distorted agriculture. While this is something that leaders should feel proud of, it also means that changes in prices due to shifts in trade and other agricultural policies will affect almost all farmers in the economy, whether in the rich coastal areas or in more remote regions of the nation.

　　Hence, China is in a new stage of development. Its producers are more than capable of producing enough food for the nation. There is great potential for export. With food productivity high and prices falling (as they will as supply exceeds demand), the top objective of most rural households is to move into the off farm sector. The distinction between urban and rural also is disappearing. Finally, the flow of goods and services and people are not only moving in an integrated way around China, but also into and out of the world market. In face of the above major changes in agricultural and rural development, China must be well prepared in the change of governmental functions, policy readjustments and technical innovation so as to satisfy the development requirements in the new stage. In short, a new development strategy is needed to bring agriculture and rural areas onto the path of sustainable development.

　　1.3 Need for New Approaches

　　Within the new stage of the rural economy, a new approach to government and increased effort in investment are needed in order to meet the overall goal of a more balanced development that will raise farmer incomes, improve food security and protect the environment. First, reforms are needed in the organization of government. A new framework is needed for managing fiscal and other governmental matters, including the development of a plan to manage the environment and to generally meet the needs of China's modernizing and increasingly market-oriented economy. The new institutions need to instill a new ethic into government; officials need to change their role, becoming facilitators of economic growth, equity and environmental protection, rather than direct actors. Reforms are also needed to encourage the emergence of new partnerships with rural citizens. Because of the rise of markets, China needs to promote voluntary, independent FPAs and new arrangements with private enterprises that can help in the process of development and assist government in taking care of those who are in danger of being left behind. In particular, the rural social organizations lack legal status. The spirit of Document No. 1 that encourages the development of FPAs is a good opportunity to push the emergence of these organizations. It is, therefore, necessary to produce supportive policies while accelerating legislative procedures and providing financial support.

　　Second, a concentrated effort is needed to improve the resource base of the rural economy. It is a government responsibility to prioritize and mobilize investments into those projects that have public goods characteristics and to encourage private firms and individuals to make productive investments that will raise incomes and provide employment. In such an environment the state and its partners have much to do to help farmers increase their resource base. There are a number of concrete steps:

　　• Evidence shows that agriculture is more and more depending on the advancement of science and technology. It has to rely on the advancement of science and technology if China is to produce more agricultural products with the limited water and land resources and in order to reduce cost and raise competitiveness. The nation needs to intensify investment in research as well as make fundamental reforms to the agricultural research system, cutting redundancies to increase efficiency and creating the conditions for the private sector to invest in agricultural research.

　　• China's most abundant resource, the labor of its rural population, needs to be the target of a sustained drive to increase the value of its human capital with investments into education, rural health and other areas. Above all investment in rural education is needed and elementary and middle school should be made free, like it is in all other modern nations in the world. Increased investments need also to be made to the health system. Investing in clinics and other rural health systems are a priority. The progress that has been made in the extension of a public-supported rural health insurance should be built upon. It has been welcome but needs to be made more flexible.

　　• Land and water also require large investments and new institutional arrangements that can increase the productivity and incomes of households; at the same time rental markets for cultivated land are needed to allow those left behind in farming a way to access greater quantities of China's most scarce resource. Finally, the rural sector needs a healthy and effective financial system to intermediate capital from those who want to save to those who have an opportunity to invest.

　　• Investment also is needed for an independent effort in food safety and environmental protection. As markets change, both domestically and internationally, farmers are going to have to begin to improve the quality of their food from a food hygiene point of view, an effort that needs to result in food that meets health standards. Traditional practices, such as, irrational application of fertilizers and farm chemicals have become important factors standing in the way of a sustainable development. Society also is beginning to demand that the environment be given priority. In past it may have been possible for leaders to ignore harm to the environment in the name of meeting the nation's basic needs. This is no longer true, since maintaining a clean environment is crucial to improving life in the rural economy and meeting the food needs of the nation. Therefore, it is necessary to work out a set of new laws, regulations, management rules and standards that will ensure the food farmers produce is safe and the practices that they use to produce the food does not harm the environment. Implementation is as important as the rules themselves. Finally, it is also necessary to spread the production of organic and green food. In areas where the ecology already has been seriously damaged, new and continued investment efforts are required to restore the ecology and reduce economic losses.

　　In short, if the government can create new institutions to transform the government's role in development, foster a new partnership with the people and improve the nation's resource base rural incomes can rise and the rural economy will be a force in China's modernization drive. If appropriate decisions are made, the policies will not affect national food security and many policies will enhance the security of households. There are few inherent conflicts with environmental concerns and those with which there are can be offset by the adoption of appropriate complementary policies. Although complicated, these are essential components for successful implementation of the Five Balanced Development Strategies, a strategy that will provide for higher rural incomes, food security and a better environment.

　　2. RURAL DEVELOPMENT: INTERNATIONAL TRENDS AND INTERNATIONAL PERSPECTIVES ON CHINA'S SITUATION

　　Almost everywhere in the world, rural landowners, farmers, inhabitants of smaller towns and cities, and natural resource-based industries are facing a common set of new challenges. These include:

　　• the growing significance of global accords and influences that affect local action and opportunities

　　• tug-of-wars among competing demands for use of scarce resources such as water, and between different approaches to agricultural and natural resource development and conservation

　　• layered incentive systems and regulatory frameworks that work against sustainable development and, often, against sustainable rural livelihoods

　　• the need to protect environments, and enhance ecological services and biological diversity, sometimes at the expense of economic opportunities

　　• dangers associated with new technologies, loss of farmer's rights, and need for equitable compensation, adequate access to rural credit, plus safety nets.

　　Alarm bells are ringing in both poor nations and rich about the consequences on rural people, on ecological security, and on both quality and quantity of food and natural resource production. Yet there is also a spirit of rural innovation that draws upon both continuity and change factors.

　　China's situation is to some extent unique, but the country clearly will be influenced by international trends on rural development. And people elsewhere in the world carry their views and biases about the changes taking place in the Chinese rural areas. These perspectives are important in that they may influence international consumer behavior, China's success in various international negotiations, and, perhaps, foreign investment in rural areas of China.

　　This section provides a brief summary of the dynamics facing virtually all agricultural countries, plus an overview of a half dozen major international trends influencing agriculture and rural development. These are trends occurring, or influencing both rich and poorer nations. And in the latter part of the section, several of the international perspectives about China's rural development are introduced, with brief discussion on why China should recognize their potential impacts.

　　2.1 Conceptualizing Rural Development in the World Today

　　Since the start of the Industrial Revolution and colonial times, agricultural change has been driven by the pull towards cities; the emergence of new livelihoods; and, in some cases, by famine, war and landlessness resulting from population growth, civil conflict, land consolidation by legal and illegal means; and, of course, by opening of agricultural lands in forests, wetlands or other natural areas. The two key outcomes have been: (1) drastic reduction in the fraction of people engaged in agriculture once industrialization begins within a country; and (2) agricultural land use characterized by areas with intensified production and by larger areas with lower inputs, often of marginal productivity. The pressures and tensions on rural people in both rich and poor countries have led to many situations where it seems the only constant is change. Rural governance models have great difficulty in addressing local and regional needs, especially in an era when problems are becoming more complex and interconnected, and where factors such as global trade have become significant. The net result is that rural people can feel disenfranchised, forgotten, or the victim of policies forged far away and sometimes without their best interests in mind.

　　The view toward agricultural and rural development in the modern world has changed dramatically in the past several decades, evolving to a view that China can learn from (but which, in fact, is fairly close to what leaders have been doing already). The new view of development differs drastically from the past. Traditionally, agriculture was thought of an inferior partner in development. Since the size of the sector falls during development, it was logically considered that it could be ignored. Why do leaders want to invest in a sector shrinking? Some thinkers urged policy makers to treat agriculture like a black box, from which resources could be costless extracted. All investment was supposed to be targeted at the industry and the cities. As a low productivity sector, it did not deserve investment.

　　Unfortunately, countries that took this path seriously soon found out that while such a strategy may work in the initial years of development, in the longer run it slowed development and often ended up in failure. Neglect of agriculture meant that a large part of the population was left out of the development process. If those in the low productive part of the economy were not invested in, they found it difficult to shift to the developing parts of the economy. Dual economies grew apart. It was found that in many cases, production in agriculture fell and food prices rose. Many households fell into isolated subsistence. When their situation deteriorated more, in many nations farmers finally reached a point in which the most rational action was to rebel against the government and those wealthier inhabitants in the cities. When this happened, of course, the stability that is required for growth disappears and development stagnates and can even go into reverse. There are many examples of countries that encountered these difficulties, such as, Argentina, Mexico, Nigeria and even to some extent the Former Soviet Union.

　　The Five Roles of Agriculture

　　Modern development economists mostly agree that the role of agriculture and rural development is absolutely an integral part to process of nation building and healthy development. Agriculture plays five roles in an economy:

　　(a) supplying high quality labor to factories, constructions sites and the service sector;

　　(b) producing low cost food which will keep wages down for workers in the industrial sector;

　　(c) producing fiber and other crops that can be inputs to production in other parts of the economy;

　　(d) supplying commodities that can be exported and earn foreign exchange which can help finance imports of key technology packages and capital equipment;

　　(e) raising rural incomes, which has several important functions:

　　• directly improve the welfare of those left behind in rural areas during the first wave of migration into the cities;

　　• provide means of investment for rural residents that will allow them to invest in their future—in education; in migration to the city; in small businesses both on- and off-the-farm;

　　• increase demand for products being produced by industry and the service sector.

　　If it is accepted that having a high quality population that is able to produce abundant quantities of low-priced food and other agricultural economies (as well as having a rural sector that does not believe it is disenfranchised), then the strategy that a government needs to take in fostering the rural economy should be clear. An economic environment needs to be set up that will allow rural people to mobilize the resources and make the investments from which they can begin the long process of shifting from the rural to urban economy. This means there has to be a responsive government. The needs of rural people in different parts of a nation at different times of the development process vary widely. In some places (such as suburbs and locations in rapidly developing parts of the economy), there needs to a sustained effort to build up villages and make them into places that villagers will live in while the city grows up around them. In other places, a supportive environment is needed as people begin to move to the cities. There will be those left behind. The social services need to be there so their lives can go on even while their children and grandchildren are settling elsewhere. When farms are small and households are poor, organizations are needed to help farmers take advantages of the new opportunities that markets offer and not be taken advantage of. In short, government is needed that will play an enabling role and develop partnerships with the people to help them fit into the modernization process that is going on around them.

　　Large volumes of investment also are needed. Especially in the later stages of development (such as the time that China is nearing), investment is needed so agriculture and the rural economy can play its role better. Investment in education, training, health and social services are needed to increase the productivity of the labor force when they arrive in the factories. Investment is needed in agriculture to improve productivity to keep food prices low, allow farmers to adopt new technologies and farming practice as markets change, and to raise incomes of those that are still in farming. Investment is needed in technology, land, water and other key inputs. Rural financial organizations need to be available and responsive to the needs of rural people so they will not be constrained from making the moves that can help them improve their lives.

　　New Development Challenges in the 21st Century

　　Finally, while the role of agriculture in development is a way of thinking that is largely agreed on by most development economists, it should be recognized that development in today's world is unlike the world in the past. Counties that are developing in the 21st century are confronting a number of challenges that in many ways exceed in complexity those that were faced and overcome by recent successful nations, such as, Japan and South Korea. For example, when Japan was in its period of rapid transformation in the pre- and post-World War II periods, it aggressively used trade barriers and other pricing measures to raise the returns to farming and increase the value of the assets of rural residents; South Korea implemented similar policies in the 1960s and 1970s. Even though there is little doubt that leaders in these East Asian nations pursued the policies at a high cost to society, such trade and pricing practices—along with other investments—helped to keep rural incomes and asset values high and contributed to the reduction in poverty and rise in rural incomes during the periods of rapid industrialization. When rural households were endowed with greater incomes and wealth, undoubtedly they were better able to make the investments that allowed them and their children to continue an active and productivity-enhancing role in the process of industrialization and urbanization through the 1950s, 1960s and 1970s in the case of Japan and through the 1980s and 1990s in the case of South Korea.

　　It is important to note that the trade and other agricultural protectionist policies in that were used by countries in the past were implemented singularly without the aid of free commodity markets and without changing the fundamental structure of the farms—either in terms of operational or ownership size or in terms of production patterns. By contrast, countries that are going through the early stages of development now are in a different world. Trade agreements and new technologies have committed nations to making their transitions to modernization in an environment in which producers and consumers, including those that work and live in poor rural areas will need to gain access to factors of production and make their incomes mainly through markets at prices that are at or near competitive international levels. In facing such challenges, unlike before, nations are going to have to ensure that those in the rural economy can gain access to the means of production through markets: therefore, land markets have to work and policies that can assure that (e.g., good land security and titling) are needed. Rural financial markets are needed in order to let farmers have access to capital to change the structure of the farmers as domestic and world markets change. The key question is whether or not a majority of rural households will be able to use the resources at their disposal—mainly land and labor—to generate rising levels of income and savings from farming and other rural-based enterprises that can be used to finance these countries' industrial transformation. This makes rural development in today's world an even greater challenge than in the past.

　　But, when policies can be developed appropriately and sufficient investments are made, agriculture and the rural economy will no longer be considered a constraint to development. On the contrary, having a large population in a healthy rural economy can be an asset. It is a source of labor and food and other services that will fuel China's growth process into the 21st century. Rural communities can be places of opportunity for individuals and places in which it is desirable to live. Hence, the reforms needed to remake rural governments, establish the partnerships and invest in the resources of the sector can be very profitable indeed.

　　2.2 Six Trends Concerning Agriculture and Rural Development

　　The following points are a selection from, and partial consolidation among the many trends currently affecting agriculture and rural development in various parts of the world. They are not set out in any particular order.

　　Declining net returns to agricultural producers.

　　While the future of agriculture has never been brighter, given the rising trade opportunities and new technologies on the horizon, creating a strong agricultural sector will be a challenge. Since 1900, world food prices have fallen in returns. Food prices today are lower than they were 30 years ago by more than 20 percent. There is no reason to believe that this trend will not continue. In an environment in which it is difficult to isolate oneself from world trends, it is absolutely necessary that a nation gives its farmers access to the best technology and allows it to make decisions in a flexible, non-distorted economy.

　　Growing complexity of agriculture and trade relationships.

　　WTO bargaining has stumbled on agricultural issues, and it will be a major achievement if a new agreement is reached that addresses over-subsidized production, market access, and newer issues associated with environment, intellectual property rights, and problems with non-tariff trade barriers. Developing countries will play an important role in pushing the reforms forward and those countries that have non-distorted and competitive agricultural economies will benefit from further liberalization.

　　Much of the growing complexity surrounding trade and agriculture is associated with detailed rules for ensuring food quality, including regional agreements such as NAFTA. Certification is emerging as an important way to highlight attributes such as sustainable production methods, healthy content of food, and other factors likely to be of interest to consumers. The most contentious debate concerns mandatory labeling of genetically modified food products. This is an issue of both domestic and international concern.

　　Proliferation of novel foods and other rural products

　　The greater understanding of biological diversity at all levels—ecosystem to genes, and the development of new products and production techniques using this knowledge is leading to revolutionary possibilities for agriculture. Biotechnology is a challenge to everyone—farmers, regulators and consumers. While several countries, including the USA and China have embraced food biotechnology, others have not. The science trend, however, is very clear—more products, some of greater utility to consumers in either rich countries or poor, will be developed.

　　Integrated management of agriculture

　　Growing demands on limited supplies of land and water, the need for pollution reduction and conservation strategies, and the benefits of attention to post-harvest technology, and better transportation networks are among the drivers for integrated planning and management. By considering impacts of each activity on others within the same region or ecological unit, synergies can be identified, and harmful impacts reduced or eliminated. The greatest pressures on agriculture are to use less water while achieving higher levels of production, with less environmental impact and, often, with more diverse crops. Farming systems that can deliver these results can be remarkably successful, and many different models have emerged. Advanced water technology used in the Israeli desert, integrated river basin management in Europe and Australia, ecological farm systems such as those of Costa Rica, Indonesia, parts of China and organic farmers are a few examples. Integrated management depends upon ecosystem knowledge, addressing weaknesses in the food supply chain (for example, crop storage losses, inadequate transportation), and mechanisms for cross-sectoral cooperation.

　　Other issues

　　There is a growing significance of off-farm benefits and costs in rural landscapes. Biodiversity conservation strategies, carbon sequestration in agricultural and forest areas and in wetlands, protection of ecological services such as water supply to downstream cities, and values of sports fisheries and other recreational benefits of the countryside all carry a price tag. Changing patterns of rural governance to more effectively meet the evolving needs of rural residents and communities also are occurring. For example, countries are experimenting with massive decentralization of management and authority as the means to put greater control into the hands of farmers. Co-management of natural resources, empowerment of county-level government, micro-credit programs, participatory crop insurance programs, and investment in local education, health and extension services are prime examples.

　　2.3 International Perspectives on China's Agriculture and Rural Development

　　In general, China's leaders should be aware that what China does is known and studied by the world's businessmen, policy makers, scholars and those concerned with the state of today's world. While the international news media will often play up some of the negative things happening in China, there are many experiences that China's agricultural and rural development are providing to the world:

　　(1) The move to de-collectivize agriculture and implement the Household Responsibility System (HRS) changed China and arguably the world. Its unparalleled effect on productivity not only started China's development, it also inspired the changes that occurred a decade later in the rest of the world. Today, the legacy of HRS is that every single one of China's 200 million farm families has land. There is no landless class. Such a dynamic is unique in the world and in a large way is responsible for the reduction of poverty in China in the 1980s that saw more than 200 million individuals move above the poverty line.

　　(2) China's commitment and ability to produce and extend agriculture technology to its farmers is envied by many in the world. China developed semi-dwarf varieties before the International Rice Research Institute. China is home to hybrid rice. There is more genetically modified cotton grown in China that in the rest of the world combined. China invests more in plant biotechnology than all other developing countries combined and is developing technologies and products that can help small farmers in poor countries alleviate constraints, raise their productivity and improve their health.

　　(3) Besides technology, the overall support of agriculture that has allowed it farmers to produce yields that among the highest in the world is studied by many nations. In the past, China has invested considerable resources into water control and agricultural extension. In recent years, the investments in roads and communications have benefited farmers. Although China is still a developing country, its food production capacity is at the level of most developed nations. It has been a net exporter of food since 1983.

　　(4) The management of agricultural markets and nature of investments is gaining increasing scrutiny. While most nations have investment policies that distort prices of inputs and outputs, those in China have been held to a minimum. The government has steadily taken government out of the marketing business and allowed the private sector to play the key role in moving commodities around the country. As a result, China's agricultural markets have become among the best in the world. They are as efficient, according to some measures, as those in the US. Integration is almost perfect. Transaction costs are falling. Subsidies have been held to a minimum and producers are making efficient and rapid responses to market signals. Few countries can boast of a more effective environment within which agricultural policies can be implemented.

　　(5) The movement of China's labor force into the off farm labor markets has been noted by the world as the largest peace time movement of humanity in the history of the world. Movement initially went into China's township and village enterprises (TVEs), an institution that has only even existed in China. As markets matured and reforms expanded to the cities, labor has been shifting into the cities. With competition from the cities and other rural areas, millions of TVEs have been privatized (arguably there have been more cases of privatization in rural China that in the rest of the world combined over the past decade). These newly privatized firms along with tens of millions of small self-employed firms have made it so almost 90 percent of China's rural households have a member off the farm.

　　The world looks at these experiences in awe. China's rural development has become a model for many nations to follow. However, the rest of world also understands that China is still a relatively poor country and that the process required to make China into a fully modern country will take at least as great of an effort as in the past. In short, the world has been watching and learning in the past; it will continue to watch in the coming In the same way that leaders were bold in the past and achieved remarkable results, today's leaders need to be equally bold.

　　3. ISSUES

　　In this section, we raise seven issues that the task forces have identified as critical ones facing the current leadership:

　　• Redefining food security policy;

　　• Stimulating the shift of rural labor into the off farm sector;

　　• Fiscal reform;

　　• Redefining rural governance;

　　• Addressing the major rural environmental problems;

　　• Managing ecological restoration, nature conservation and alternative livelihoods; and

　　• Sustainable Management of Water and Land Resources

　　In the case of each issue, we describe its background, analyze the issues and discuss alternative policy solutions.

　　3.1 Food Security and Environmental Safety

　　3.1.1 Background

　　Through decades of effort, gradually during the recent several years, it can be seen that China has fundamentally solved its problem of national food security and largely has it in its control to maintain food security with little cost to the nation's economy. Although the population has more than doubled since the 1950s to reach nearly 1.3 billion, China is able to provide its people with adequate food and this has won extensive approval of the international community. China has not only been able to feed more than 20% of the world's population, but also has become a net food exporter since the early 1980s. In 1997, it became a net grain exporter. Moreover, China's foreign exchange reserves have become the second largest in the world. During this period, it also succeeded in reducing the number of the rural poor, from 250 million in 1978 to 28 million by 2002. In 2000, per capita caloric intake averaged 3040 kilocalories a day, 14% higher than the average level of other developing countries and 8% higher than the world average. Research has also shown that with continued investment, China can maintain this position. Therefore, taken together, the record demonstrates that national food security is basically assured. As such, agriculture is playing an important role in laying a solid foundation for the healthy and sustainable development of the rural economy, in particular, and for the national economy, more generally. Having sufficient food supplies also is important for political stability. Hence, from this point of view, it is safe to say that China is not only one of the developing countries where food and grain supply is the most secure, but also it has made tremendous contributions to food security in the world.

　　There are still remaining challenges, given the trends towards increasing openness and rising competition globally. However, despite these rising pressures, China's economists have shown that even if the nation totally liberalizes trade (that is, it expands its trade agreements far beyond what it has committed to under its WTO accession agreement), China could still maintain a fairly high rate of self-sufficiency in many of its agricultural commodities in the future. Specifically, if China is able to continue to increase investment in agricultural science and technology and more effectively utilize its cultivated land and water resources, its self-sufficiency rate for all cereals could be kept at about 90% by 2020. Rice could be more than self-sufficient (104-108%); wheat self-sufficiency rate could reach 93-98%. It is true that it would have to import more than 50 million tons of maize, about one-third of the total demand in 2020, but this should not pose a threat to the nation's food security. Maize is almost exclusively used for feed. Moreover, international markets can easily supply this quantity of maize as it represents less than 10% of the total estimated volume of international grain trade during that year. At the same time, the self-sufficiency rates of many commodities would rise to more than 100% as agricultural products such as aquatic products, fruits, vegetables and flowers and other labor-intensive agricultural products would continue to be increasingly exported.

　　Consequently, it is safe to say that currently there are no factors posing major threats to China's food and grain security. National food or grain security is determined by production capacity, purchasing power, and the ability of a nation to access sources of trade. Currently, China has grown in all these capabilities. In 2003 China's food and grain exports and net export (export minus import) reached a historical high. The main reason that grain production fell in recent years is due to the extraordinarily high level of state grain reserves in late 1990s. As these grain reserves were sold onto domestic markets, the sales led to price reductions for several years. By early 2003, however, national grain supply and demand finally reached a basic equilibrium point and grain prices began to stabilize. Although prices rose in late 2003 and nearly 2004, this should really be considered as a normal response to market forces. In fact, prices in China even at their peak in 2004 were below price levels (in real terms) in 1995, 1988 and 1980. Moreover, China's domestic prices actually rose less than international market prices. Finally, the response of farmers in 2004 and the rising production shows the responsiveness of farmers and the power of market forces.

　　3.1.2 Problems and Issues

　　In recent years, despite the analysis that shows that the recent rises in prices is quite natural and should not be cause for concern, some policy makers and scholars have raised the grain security again. From 1999 to 2003, China's cultivated land was reduced by nearly 100 million mu (about 6.7 million hectares). Since September 2003, the grain prices began to assume an upward trend. Some officials and experts stated that based on the price rises China was facing a serious grain security problem. However, a careful analysis shows that factors that would suggest that there was serious grain insecurity are not serious. Research shows that the reduction of cultivated land was not due to economic factors, but, in fact, was caused mainly by the nation's Grain for Green program (a conservation set-aside program that pays farmers to convert cultivated land on steep slopes into forests and grasslands). Despite the fact that 2003's grain output continued to drop, the state grain reserve was still kept at a proper level. It is true that in some cases there were temporary local grain supply problems, but they can almost all be linked to China's inefficient state-controlled grain storage and release system. Even with these local price hikes, the rises in prices were moderate on a historic level, staying below the level of national prices in the mid-1990s.

　　According to research, it can be shown that cultivate land return to forests is the main reason for the reduction of cultivated land over the past five years. Importantly, however, despite the reductions in cultivated areas, it also can be shown that the reduction for Grain for Green is not what caused the price rises and also did not lead to any appreciable imports. This is important, given the fact that the country has returned more than 7 million hectares of cultivated land reclaimed back into forests and grassland. When examining the share of total cultivated area reduction that was due to Grain for Green, the proportion of this part of land in the total reduction of cultivated land rose from 47% in 1999 to 80% in 2003. There was also land converted for built up area purposes, however, this area did not rise in an absolute sense and fell in a relative sense.

　　So how much of the price rise is due to land conversion. A study by the Center for Chinese Agricultural Policy of the Chinese Academy of Sciences shows that over the past three years, although a considerable amount of cultivated land has been used for ecological and construction purposes, it did not have any big impact on grain production and prices. This is true for several reasons. First, during the 1980s and 1990s, although more than 2 million hectares of land was converted from cultivated area to built up area, there was even more that was converted into cultivated area. Second, although the quality of the newly cultivated area was somewhat lower than that converted to built-up area, the overall net impact on production capacity (that is the increase in quantity of area and decrease in quality) can be shown to be positive. In other words far from what some argue that land conversions have hurt China's food security, in fact, China's output potential between 1985 and 2000 actually rose by around 2 percent.

　　In addition, and just as important, the implementation of Grain for Green has had almost not effect on domestic grain supply, market prices or international trade. First, it should be realized that in most areas, Grain for Green has succeeded in converted fragile land into forests and this has had a positive effect on the environment, mainly be reducing erosion. Any one visiting the upper reaches of the Yangtse River Valley today will notice the siltation run-off in the river system is much improved. Research also shows that farmers are better off after the program. Despite the success, there also have been reports of implementation problems. These should be of concern to officials as they consider the future of the program. Food security, however, should not be a factor in this decision. Research by the Chinese Academy of Sciences has shown that Grain for Green has not had a large impact on the price of grain domestically. It also has not led to any significant rise in imports. China's Grain for Green area, although large, had extremely low yields, making the overall reduction in output low. In addition, there are also forces that lead to rising yields on the rest of the fields of farmers.

　　Given these facts, the main issues for food security should be:

　　(1) The core of China's food security policy should focus on household food security, mainly being concerned with the ability of poor families to access food. At present, China has more than 120 million people living under the poverty line as defined by the World Bank and this poses a threat to a certain extent to food security at the household level. What merits attention is that at the beginning of the 21st century, there are still about 100 million people suffering from hunger and malnutrition (FAO, 2002). Such household food security should have more attention from policy makers. It should be recognized that the policies to implement household food security are exactly those that are needed to raise farmer incomes and alleviate poverty.

　　(2) Food quality and safety. According to some estimates, nearly a quarter of the top soil of China's cultivated land is polluted to varying degrees with a number of different toxic pollutants. The main reason for this is from the residues left by farm chemicals, especially pesticides that have been increasingly used by farmers. Other studies show that about 10% of China's grain crop, 24% of its livestock products, and 48% of the vegetables produced has quality and safety problems. The animal epidemics have become increasingly of concerns to leaders.

　　(3) State grain reserve is weak and ineffective. Although the state grain reserve management system has improved in many aspects over the past years (due to policies, such as, separating commercial purchases from the operation of state reserves), it remains one of the weakest links in the country's grain security system. The state grain reserve policy targets are not clear. No one knows who is holding what quantities. Information on rules is absent and not transparent. All these disrupt markets and can cause price instability. Despite have the largest grain stocks in the world, China's grain prices over the past 20 years are more variable that world market prices.

　　(4) Grain security in the past characterized by a high self-sufficiency rates and was achieved at both a high economic and environmental cost. By economic cost, research shows that due to China's trade policies, the price of grain commodities were higher than those on international markets. In short, China failed to take advantage of its comparative advantage in producing labor-intensive, high-valued commodities. At the same time, there has been a direct conflict between policies to ensure grain security (such as grain delivery quotas) and policies targeted at raising the income of farming families (such as structural adjustment policies). New research also shows that environmental problems, such as deteriorating soil quality are associated with food security problems and in the long run may be counterproductive.

　　3.1.3 Policy review and options

　　In order to ensure grain security, the government produced many policies in support of grain production in 2004, including the 10 billion yuan "direct grain production subsidy." The current plan is to expand the scope and size of grain subsidies in the future. Policy makers have also implemented a strictly control on cultivated land conversions, even banning the use of cultivated land for off-farm purposes and reducing the scale of China's Grain for Green program. Different from a number of other macroeconomic control policies, these restrictions on the use of land will have direct and negative effects on local economic growth and could lead to greater poverty.

　　The current policies, we believe, ignore the facts and may want to be reconsidered. China has established a solid foundation in its agricultural system. Using its current resource base, as long as current rates of agricultural productivity continue on the basis of continued investment in agricultural technology, water and the rest of the economy, China is grain and food secure at the national level. China is also able to ensure a high level food security in the years to come. It is therefore necessary for the government to review its grain security policy and establish a new framework.

　　3.1.4 Policy options

　　The major policy recommendations on food security are:

　　(1) Shift in emphasis from grain security to food grain security

　　In order to maintain the spirit of China's food and grain security policies without imposing excessively costly and ineffective restrictions, the national government should redefine its food security goals in terms of rice and wheat.

　　(2) Shift in emphasis from aggregate national food security to household food security

　　High priority should be given to poverty reduction efforts that will seek to raise the average incomes of the poor and protect them against negative income shocks.

　　(3) Emphasizing long-term productivity growth instead of short-term subsidy program

　　China's food grain security will rely mostly on raising long-run productivity. Subsidy programs such as the "Grain direct subsidy program" that was implemented in early 2004 will be very costly, will not be appreciated by households in the long run, will reduce the government's fiscal resources for public services, and have much less effect on national grain security than investment in R&D, extension, education, health, irrigation and other rural infrastructure. China should not follow other countries and should build a productive, undistorted agriculture that raises the income levels of its producers and provides the nation with a high degree of food security.

　　(4) Balancing land uses between agriculture and non-agriculture

　　Efforts are needed to ensure that land use policies do not impede the ability to continue fast industrial growth. Employment, income and productivity growth are all associated with the conversion of land from low-productivity agriculture to high productivity industry and services. Good land use planning is needed. However, land use policies should not be homogeneous nationwide and priority should be given to fast growing industrializing regions. Grain for Green should not be slowed for food security.

　　(5) Changing national grain reserve management practices

　　Leaders need to undertake grain market reform and change the management practices of the grain reserve system. Rules for storage, purchases and sales of grain reserves need to be clear. No nation that wants to run a modern and efficient agricultural economy can keep its stocks secret nor have an opaque reserve system.

　　(6) Improving China's food quality regulation and monitoring system

　　To ensure food quality and safety, international standards should be consulted to modify China's Food Sanitation Law or set up new regulations. Many countries are willing to share information on their food safety and quality assurance programs.

　　3.2 Farmer's Income and Rural Labor Migration

　　3.2.1 Background: Recent trends in rural labor migration and rural income

　　Since the mid 1990s, off-farm work has emerged as the main source of income growth for rural households. The role of off farm work in raising rural incomes is very significant. Between 1980 and 2000, rural household income per capita rose by 4% per year. The importance of off farm employment is even more significant when viewed from the household's perspective. When households are able to place one more member into an off farm job household income, on average, rises by 56%. By 2003 one-half of China's rural labor force earned at least part of their income from off farm jobs; more than 85% of households had at least one person working off the farm.

　　Off farm employment is the primary engine of poverty reduction and in recent years has begun to aid in the reduction of rural income inequality. Economic growth and access to off farm employment were by far the greatest sources of poverty alleviation during the 1980s and 1990s. The increase in participation of young men and women from poor, rural areas demonstrates the pervasiveness of the penetration of labor markets into poor areas. For example, the participation rates of 16-25 year old men and women from poor areas in wage earning activities rose from about 15% in 1990 to nearly 70% in 2000.

　　Migration has become the most common way for rural laborers to get a job off the farm. More than 100 million migrants now reside and work outside of their home villages. More than 75% of 16 to 20 year olds work off the farm in cities far away from their homes. A veritable flood of young and relatively well-educated workers has been flowing towards China's cities and into industrial and service sector jobs in recent years. Self-employment opportunities in the rural economy also have risen rapidly during the past two decades, and the quality of these micro-enterprises has steadily improved. The firms, although household-based and extremely labor intensive, provide employment for more than 80 million rural residents in more than 50 million households.

　　In summary, the development of labor markets in rural China has steadily improved. Currently China's labor markets are helping to facilitate the shifts of the population from rural to urban and from agricultural to off-farm sectors.

　　3.2.2 Issues and constraints

　　In general, rapid economic growth has been responsible for the strong expansion of off farm employment for rural workers. China's continued rural transformation will, above all, depend on the demand for labor generated by the industrial and service sectors. Importantly, the sectors that have been instrumental in job creation are mostly in the private sector and are becoming more market oriented. At the same time, improved policy and institutional situation, such as allowing for labor mobility and secured land tenure rights have also facilitated the health development of labor market in China. However, further shift of rural labor to the urban and off-farm sectors depends largely overcoming the following constraints:

　　(1) Not enough jobs and poor human capital. These are the main constraints to future growth of off farm employment. While much of the expansion on off-farm employments were generated by demand from industrial sector due to rapid growth, further increase in employment opportunities depend on continued growth of labor intensive sectors, such as small enterprises and service sector. It is obvious that current job creation is far less than enough to absorb increased rural labor force. The past experiences also show that education has been the significant factor that helping rural labor to enter into off-farm sector. At the same time, the return to education is increasing overtime. However, the level of rural education and/or the quality of rural human capital is still very poor. This, to a great extent, has been constraining rural people to move into city and off-farm sectors.

　　(2) Remaining discrimination against the rural migrant population. While the dual urban-rural household registration system does not act directly as a barrier, the lack of basic services for rural migrants is undoubtedly slowing China's transformation. Migrants still face discrimination in entering urban school systems despite recent changes in regulations. Private clinics that are affordable for rural migrants are heavily regulated, frequently to the point to which they are driven underground. Housing policies in the cities have not promoted the emergence of a low-cost housing sector—either for sale or rent. There is little private housing available to migrants and their families—especially in the larger, faster growing municipalities. Health insurance, unemployment insurance and social security are still unavailable to rural workers.

　　3.2.3 Policy review

　　The above-mentioned issues and constraints are partially the failure of government policies and pose the challenge for policies in the future. In the past, much progress has been made in the management of China's industrial structure in job creation. However, many policies of the past and present distort the relative demand for labor and capital. For example, an inordinate proportion of loans from the nation's banking system are targeted for capital-intensive industries that provide relatively little employment, while many medium and small enterprises are unable to obtain enough financing.

　　The quality of rural education is poor. This is partially due to the poorly developed education and training system and partially due to low level of funding rural education. There is almost no country in the world in which primary education is not free. China's rural households, especially in poor areas, spend up to half of per capita income on elementary school fees and more than per capita income on middle school. In many cases they are unable to afford high school and college, in the rare cases that students are able to gain entry. The main problem, of course, is lack of funding. Part of this problem is structural. In China, local governments still bear an unusually large part of the burden for financing primary and secondary school education. In nearly all other modern nations the national government provides basic educational services. With the rise of migration in China local governments will have increasingly less incentive to provide high quality education, since those that get educated will almost certainly leave the local economy,.

　　3.2.4 Policy options

　　Unfortunately (but realistically), there are few new policy ideas for those interested in tearing down barriers to the continued expansion of off farm employment. Most fundamentally increased off farm employment depends on new jobs and enhancing human capital. As such, the list, while short, still provides one of the most powerful engines of change for China's rural economy and for driving the engine of modernization into the future:

　　(1) Financial and fiscal policies are needed to promote labor-intensive manufacturing and service provision in order to create more jobs.

　　(2) Self-employment accounts for more than 80 million jobs and gets almost no support from the government. Increased policy support encouraging the expansion and upgrading of self employment would be a source of employment and potential growth pole

　　(3) More funding should be provided to rural education and training, especially in poor rural areas.

　　(4) Urban development policies should also take into consideration of migrant's need, such as providing equal and affordable health, education as well as housing and other services to rural migrant.

　　3.3 Rural Public Goods Supply and Investment

　　3.3.1 Background

　　In viewing the current rural public finance situation, China's fiscal and financial systems pose one of the biggest problems. Studies show that there are problems both on the revenue and expenditure sides and on the way the public goods and services are financed. Despite various attempts in reforming China's rural fiscal systems in the past decade or so, the problems still persist. Over 70% of counties and townships are in chronic deficit. Local governments are under increasing pressure in meeting policy goals with far less than sufficient funds. The recent Tax for Fee Reforms, although well intended, do not seem to be able to solve rural China's fiscal problems. Tax for Fee is an attempt to reduce the tax burden of farmers in a system that is already characterized by deficient revenue generation and public service spending at all levels. Studies have shown that not only are savings to farm households minimal (only around 30 yuan per household), when collections fall, public services fall. Fiscal resources in poor deficit areas are already insufficient to meet investment requirements. While there are many adverse consequences of the indiscriminant fee collection, the root cause may be the system's own design.

　　3.3.2 Problems and Issues

　　Persistent fiscal gaps, or shortfalls between required expenditures and fiscal capacity, have several adverse effects. One is that many rural governments are unable to provide the level and quality of social services mandated by national policy. The major problems are reflected in the following sectors:

　　(1) Investments. Deferred investment is an immediate victim of fiscal shortfall. As officials struggle to meet wages and other immediate needs from diminishing revenues, these needs are displacing development-oriented investments. Even if budgetary officials are directed to allocate funds to fixed investment, the funds are often diverted or borrowed, and, if not returned, the investment is not just delayed but also permanently deferred.

　　(2) Rural Education. Although efforts have been made to increase spending on education, the goal still has not been met. Imploring local governments to increase education funding more rapidly than the growth in financial revenue has gone largely unheeded, and meeting this target appears improbable. Insufficient fiscal revenues have undermined the quality of education as measured by a number of human capital indicators. However, when funds do arrive, the outcome is dramatic. In areas where funds cannot be raised, education and health services have disappeared or declined in quality, resulting in the large-scale out-migration of teachers, doctors, and other professionals.

　　(3) Rural Health. Ministry of Public Health goals call for 8 percent of rural budgets to be spent on health care. National officials have mandated improved facilities, expanded coverage, and minimum training for doctors. Rules describe what is expected of county and township leaders for establishing ideal rural health systems. However, like education, the actual resources allocated to achieve national objectives fall far short of needs. The national government allocates only 2.4 percent of its recurrent budget for health care services, and only 1.2 percent of the capital construction fund. The situation is more severe in poor areas.

　　(4) Increased dependence on extra-budgetary Revenue Sources. To meet the revenue requirements in order to provide public goods and services, county and township governments attempt to increase revenue from off-budget sources. Without legal taxing authority or ability to borrow, counties and townships have developed off-budget sources, primarily extra-budgetary funds (EBFs) and self-raised funds (SRFs). Although the growth of off-budget revenues has eased fiscal pressures for many localities, it has also produced adverse consequences. It has hastened the decline of the formal fiscal system by providing an alternative tax source that is 100 percent retained. It has created a tax system beyond the reach of the formal fiscal system that is ad hoc, nontransparent, and regressive; the lack of legitimacy may be a greater source of rural discontent than the total burden. Perhaps the most egregious consequence of off-budget financing is the tendency of county and township governments to give policy and regulatory agencies control over the assets they regulate or operate (or the resources they are charged with protecting). Officials then encourage agency officials to use these assets to generate income for staff salaries and other expenses. This is a pervasive issue and again surfaces in subsequent discussions of natural-resource management and agricultural extension. There have been efforts to control this, but the reactions of local government have almost been as quick as any action from above.

　　3.3.3 Policy options

　　It is recognized that the current tax system, which remains heavily industry-based, can distort investment incentives and induce local governments to promote industrial development even in areas without a comparative advantage in manufacturing. These elements of the tax system have been shown by China's own economists to slow development. The 1994 tax reform increased the tax collection power of the central government, which would allow more equitable redistribution. However, while more revenues have flowed into central coffers (reducing local revenues), little has been shifted to poorer or deficit areas, and the new tax policy continues to favour relatively affluent areas, exacerbating rather than alleviating the rural fiscal crisis. Increased pressure at counties and townships to generate revenues to meet the system's unfunded mandates leads to excessive fee collection. This leads to the new round of Tax for Fee Reform.

　　However, it is believed that China's rural fiscal reforms need to go beyond Tax for Fee Reform and consider the way expenditures are managed. There is a lack of proper review of the public goods and services that are needed in rural China. Policy goals need to be realistic and priorities should be established for their provision. Each level of government needs to be handed clear responsibilities for the provision of a subset of the public goods. The resources needed to provide the public goods also need to be clearly defined. Leaders need to insure that sufficient resources are available to support the expenditures needed to meet their mandates. In the process, expenditures also need to be reorganized.

　　In reviewing the past attempt of reforms, there is a need for a more radical and complete reform. Although the Fiscal Reforms are complicated and are going to entail fundamental reorganization, their implementation may be China's greatest policy priority. While increased transfers to eliminate unfunded mandates is key to the solution of the rural fiscal crisis, the reforms also need to completely restructure local government and fundamentally reorganize public finance. Even though such reforms in China will be disruptive, they need to be implemented in a comprehensive way. To minimize the disruption for the nation as a whole, we believe rural fiscal reforms can begin with regional experimentation.

　　3.3.4 Options for investment

　　There is considerable evidence that China is at a cross roads in agricultural development as the country has moved from taxing to subsidizing agriculture. How to design an agricultural support policy to achieve long-term sustained, equitable and sustainable growth is a hotly debated topic among Chinese policymakers and researchers. Based on the evidence from both China and India, we offer the following policy suggestions to achieve the stated national objectives:

　　(1) More public spending in rural sectors. Empirical evidence has shown that investment in rural areas can yield large returns. Therefore, the government should continue its efforts to increase overall investment in rural areas. Rural investment accounted for only 19 percent of total government expenditures in 1997, but rural residents account for 69 percent of China's total population. Moreover, almost 50 percent of national GDP was produced by the rural sector (agriculture and rural township and village enterprises) in 1997. Government's rural spending as a percentage of rural GDP is only about 5 percent compared with 11.6 percent for the whole economy. China has implemented an urban and industry biased investment policy for the past several decades. As a result, the rural-urban income gap is large and has increased over time. Any policies that discriminate against the rural sector will aggravate the existing disparity and should be discontinued.

　　(2) More investment instead of more subsidies. The India case study clearly indicates that initial subsidies on inputs and output may help small farmers adopt new technologies and access markets. But as time passes, these subsidies become increasingly large and very difficult to remove. These subsidies including those on fertilizer, irrigation, power, and credit amounted to about 2% of the national GDP, and 8-10% of agricultural GDP in 2000. These subsidies are in direct competition with long term capital investment in roads, rural education, and agricultural research. China has already reached the initial stage of the agricultural transformation even though China did not provide direct subsidies in either inputs or output. Therefore, China should not follow India's path to subsidize its agriculture. Instead, the government should use its limited public resources for improving human and physical conditions of rural areas to enable farmers to engage in high-value production or migrate to non-farm activities.

　　(3) Correcting government regional biased policy. In addition to biased regional investment policy, predatory price policy on natural resources by the government has been the major culprit in worsening regional inequality. For the past several decades, particularly under the previous centrally planned economy, natural resources such as minerals, oil, gas, and even land have been owned by the central government. These resources were shipped to the Eastern regions at low prices or even free of charge, thereby transferring rents to the coastal areas. The Western provinces, although rich in these resources, benefited very little from the exploitation of these resources. Even worse is the latest reform of these state-owned enterprises, which left millions of laid off workers and degraded environments under the responsibility of local governments. In particular, the central government should re-direct its public resources towards the western region. The western region shows the highest returns to all kinds of public investments targeted to reducing rural poverty and regional inequality. This is consistent with the national strategy to develop western China. Investment in agricultural research, education, and rural infrastructure there should be the government's top priorities. Among all, the most critical is universal and free primary (ideally 9 years) education funded by the central government.

　　(4) Reforming the fiscal system for more equitable regional growth. China is highly decentralized in its government spending. Local governments account for more than 70% of total government spending. The central government plays a limited role in equalizing regional development through its financial transfers. Most of the transfers from central government to local governments are tax rebates. This mode of transfer is seriously biased against the Western provinces. In fact, this may be one of the major factors underlying the increased regional inequality after 1988 when China introduced its new financial responsibility system. Under this system, every province signs a contract with the government with regard to each other's obligations and responsibilities. This system gives each province more incentive to develop its economy through retention of more revenue. However, poor provinces suffer because their tax bases are low. As a result, inequality in per capita government fiscal resources has increased dramatically. For example, the gap in per capita expenditure between the richest and poorest provinces has increased from 6 times in 1990 to 19 times in 1999.

　　3.4 Rural Governance and Rural Organizations

　　As the economy changes the form of governance also frequently needs to change. In China's rural areas, some of the institutions that were developed and worked for rural development earlier may not be so suitable for needs of China's emerging market-oriented economy. The biggest problem is that farmers are poorly organized. Few groups of farm households have effective ties with the market. There are few cooperative organizations. As a result, farmers often find that they have difficulty to sell their products, obtain market information and monitor the quality of products. It is in this light; that we believe better governance is needed in order to guarantee a stable rural development.

　　3.4.1 Current status

　　At present, there are a number of different types of organizations in China's rural areas: grassroots government units (or quasi government units), rural economic cooperatives, farmer professional associations (FPAs) and rural grassroots organizations. While there are differences among organizations, even of a particular type, they do share certain characteristics.

　　(1) Rural grassroots governments basically control and manage most rural activities in today's economy. Rural governance mainly manifests itself in the form of top-down management. With the reform of rural governance in recent years, however, the original functions of grassroots governments (such as enterprise development, taxation and family planning) have gradually become less important.

　　(2) Rural economic cooperatives, although called cooperatives, today mostly are weak and are not based on international principals of cooperatives. The current model that is practiced in many plus attempts to organize farm households around an enterprise. This form, however, has a number of institutional drawbacks and has not been successful in most cases in resolving conflict between farm households and the market.

　　(3) FPAs are groups of farmers that in some cases seek to function more like a cooperative. Unfortunately, for several reasons FPAs have been slow to develop. Their levels of technical expertise and the services that they can offer farmers also are not very advanced.

　　(4) There are almost no grassroots NGOs in China. In other nations, NGOs often represent farmers to help them become engaged in poverty relief, natural resource protection, pollution monitoring and the protection of the rights of rural women and children. In China, even for the few that do exist, they mostly are ineffective.

　　Preliminary statistics show that there are only around 10,000 rural economic cooperative organizations and FPAs and that these account for around 70% of the groups that are registered with county-level civil affairs bureaus. It is estimated that about 1-2% of the farming households participate in rural organizations, which includes rural economic cooperative organizations, FPAs and rural grassroots organizations.

　　3.4.2 Problems and constraints

　　(1) New rural governance institutions have not emerged. The changes in the functions of the rural grassroots governments have led to changes in the relations between the government and farmers. The government should gradually shed its role as an active participant that directly engages in business and other economic activities. It should begin to perform a new role that emphasizes regulation on one hand and attempt to facilitate the performance of others when there are problems that are encountered. In other words, they should be providing services to facilitate the activities of farmers instead of trying to control them.

　　In today's rural economy, China's rural areas need to establish three kinds of partnerships. First, a partnership needed to be established between the grassroots government and farm households. Second, a partnership is needed between the public service departments of government and the private sector. Third, a partnership is needed farmers and all types of rural economic cooperatives, FPAs and rural grassroots organizations. These partnerships will help farmer function better in China's market-oriented economy.

　　(2) Current rural organizations are inadequately designed. The first problem is that there are too few rural organizations in China. As a result, participation by farm households is low. Most are in the eastern part of the country. For those that do exist, the organization structure often is inadequate. For example, the organizations are understaffed. They have little to offer in the way of social services to farmers. They suffer from inadequate financial strength. Finally, most rural organizations have little human capital capacity and lack self-discipline. As such, the organization frequently cannot perform their functions.

　　One of the biggest flaws is the lack of independence of rural organizations. Most rural organizations are subject to strong interference by local governments. In many cases, government officials often fill the leading posts in the organization. When government officials are in charge of business operations or the extension of new technologies, government departments often monopolize all of the activities. In some cases, rural organizations become de facto appendages of the local governments. When this happens, they often will acquire administrative functions and lose their NGO nature.

　　(3) Rural organizations have little financial or technical support. Rural organizations (especially in the case of rural grassroots organizations) have a great deal of difficulty, in general, to get started. Development rarely is spontaneous. Frequently such organization needs a catalyst from the outside. Specifically, for rural organization to begin, they often require financial and technical support from external organizations (such as local governments, NGOs and international organizations). These external organizations are needed to help rural organizations organize themselves and establish a system of management and methods. The outside organization are also needed to set up rules and regulations and even to provide part of initial start up and operating funds. In some cases, outside organization are needed to provide technical services. It is important in choosing among candidates to serve as catalyst organization that they do not have their own economic interests in the rural areas that they are trying to work in. Examples of successful rural grassroots organizations that have been set up with outside help are the farmer organic agriculture associations, fishing associations and ecological tourism enterprises that have been established in the Dongting Lake area in Hunan Province with the help of the World Natural Fund for Nature (WWF). The exact nature of the catalyst organization is not set. International, national and regional NGOs can all have an important role to play in promoting the development of rural organizations.

　　3.4.3 Current policy

　　Since the mid-1990s, Chinese government has promoted rural organizations with a series of new laws and regulations and in recent years that support has become increasingly strong. For example, in 1996 the General Offices of the CPC central committee and the State Council issued a circular "On Strengthening the Management of Social Groups and Non-governmental Non-Enterprise Units." In 1998 the State Council issued the "Interim Regulations on the Registration and Management of Non-Governmental Non-Enterprise Units" and the "Regulations on the Registration and Management of Social Groups." In 1999 the General Offices of the CPC central committee and the State Council issued a circular "On Further Strengthening the Management of Civil Societies." In 2002 the government revised the "Agricultural Law," clearly putting forward the idea of promoting the production and marketing organizations that were to be set up for the benefits of farm households. In March 2004 the State Council issued the "Regulations on the Management of Funds," providing the policy support for the development of funds. Finally, most recently, Document No. 1 from the central authorities in 2004 encouraged the formation of FPAs and urged the active effort of officials to promote legislation to accelerate the development of FPAs. As the government organization that has been given the most direct responsibility in promoting rural organizations and is the unit in charge of rural civil societies, the Ministry of Civil Affairs issued the "Guidelines for the Development, Registration and Management of Rural Grassroots Specialized Economic Associations."

　　While these policy pronouncements have been helpful and have helped establish the fact that the central leadership supports the emergence of rural organization, it is easy to see that there are still big gaps in the legislation, the organizations that are supposed to promote rural organization and the financing mechanisms that are supposed to help build rural organizations. Above all, legislatively, the country has not established the legal basis for rural organizations. Rural economic cooperative organizations and FPAs cannot be granted the status of a legal entity. This means that they can not sign contracts, guarantee or take out loans, or undertake many of the business functions that are so vital for such organizations. In addition, the financial "thresholds" for forming civil societies is too high. For example, local groups need to have 30,000 yuan in financial assets in order to have their organizations registered with the civil affairs departments. Civil societies face other rules that have restricted their development.

　　Institutionally, several different parties often regulate rural organizations. On the one hand, there frequently is a government bureau that oversees their activities. On the other hand, they often have to also report to the civil affairs department. Unfortunately, neither of these bodies is usually able to meet the needs of rural organizations. The functional governmental departments often are unwilling to promote the development rural organizations and also frequently are unable to provide adequate policy guidance and technical support. Civil affairs bureaus often only provide registration services and nothing more. In other words, although there are two oversight bodies neither provides the organizational impetus, the marketing or technical information or the funding to get the organizations started. In some cases, some rural civil societies seek to operate outside the system, while making it hard for the government to exercise control, also keeps the civil societies from receiving any effective guidance or management.

　　Financially, although the government has encouraged banks to help fund FPAs and other rural organizations, few do. There are few programs that support the development of rural organizations. The enterprises and companies associated with FPAs rarely can get access to the promised tax reductions and exemptions.

　　3.4.4 Policy options

　　(1) In terms of approach to foster rural organizations, there needs to be a fundamental shift in attitude towards them. It is necessary to raise the level of rural organizations to become a key and integral part of China's new economy. They need to become an established part of the new system of rural governance. They need to be encouraged to enter into new types of rural partnership relations. They needs to be new partnerships and these partnerships need to be given the full approval of the nation's top leaders. First, a partnership is needed between the grassroots government and farm households. Second, a partnership is needed between the public service departments of government and the private sector. Third, a partnership is needed for farmers and all types of rural economic cooperatives, FPAs and rural grassroots organizations. These partnerships will help farmers' function better in China's market-oriented economy. Reform should proceed in a gradual process, beginning from the separation of the government's economic functions from those of the provision of public welfare services and social functions.

　　(2) In terms of legislature, it is essential to give the legal status to rural economic cooperative organizations, FPAs and other rural grassroots organizations. New rules need to lower the financial barriers for becoming a rural organization. The approvals needed should be eliminated or simplified. Rural organizations need to be allowed to take control of their own financing, technology adoption, production, marketing and quality control. Likewise, FPAs and rural economic cooperatives need to be allowed to pursue their own agendas. Priority should be given to the development of economic cooperative organizations and to accelerate the pace of legislation that will enable their emergence.

　　(3) Institutionally, it is necessary to promote a fundamental change in the mechanism that keeps government departments in control of rural grassroots organizations. Rural civil societies need to be encouraged to emerge but not controlled. Support is needed in terms of training and capacity building. Registration and other approval procedures need to be minimized to remove the institutional barriers to the building of rural civil societies.

　　(4) In terms of financing and technical support, it is necessary to grant tax concessions for organizations engaging in public welfare provision. Such policies will encourage other organizations and individuals to support the new civil societies financially. Restriction for the sources of support should also be held to a minimum. Rural civil societies need the support of all entities from domestic and foreign NGOs to foreign government aid agencies. These organizations should be allowed and encouraged to carry out experiments and projects in areas such as poverty relief, natural resource and environmental protection. Aid is also needed in the training of community personnel, the provision of financial support and supply of technical service to rural organization so as to raise their capabilities.

　　3.5 Rural Environmental Problems

　　As agriculture and the rural sector enter a new stage of development, it will produce a new challenge for those charged with managing the natural resources and environment in rural areas. Policy makers have to deal with rising problems in the areas of water, air, land, food safety and ecological conservation.

　　3.5.1 Major rural environmental problems

　　(1) Water pollution

　　To ensure yields of agriculture products at a high level, farmers have used high levels of farm chemicals. In 1980, total nitrogen fertilizer use by farmers reached 9.34 million tons; in 1990 it reached 16.38 million tons; and in 2000, it rose further to 21.62 million tons. The intensity of chemical fertilizer use in China today is more than double of world average on a per hectare basis.

　　Overuse of chemical fertilizer and pesticides has resulted in serious non-point source pollution. There have been many bodies of water—lakes, canals and rivers—that have become eutrofied. For instance, more than half of the nitrogen and phosphates in Taihu Lake are from non-point source pollution. According to SEPA's statistical data, 75% of all lakes in China are eutrophicated.

　　The increasingly intensified livestock industry is a new point pollution source. Since livestock production is more concentrated around cities, its impacts on cities and towns are greater. In 1995, total livestock waste exceeded 2.5 billion tons, a level that is 3.9 times of the level of industrial solid wastes. Almost none of China's livestock waste is treated before being flushed in water bodies.

　　In recent years the sewage from residential concentrations of populations in towns and villages are also becoming a source of water pollution, especially in China's eastern coastal region. COD effluents from cities, towns and villages total about 8 million tons per year, which is almost 35% higher than industrial effluents. The growth of municipal waste is growing at more than 10% per year.

　　(2) Air pollution

　　In order to implement China's food security policies during the past four decades vast areas of grassland and forestland have been cultivated as farmland. Often times after ploughing the cultivated land is susceptible to wind erosion. In many cases, the grassland that is left has been over-grazed. One of the adverse environmental consequences has been the sand storms that have been created from the poorly managed grassland. The frequency and intensity of stand storms have been increasing. For example, during the forty years between 1950 and 1990, the annual frequency of stand storms was 1.77. In 2002, however, there were 12 sand storms. When sand storms occur, air pollution becomes severe. For example, in Beijing the API (air pollution index) is greater than 500 during the sand storm.

　　Another air pollution source is from burning the straw after the harvest. During recent years, after harvesting their crops in many areas farmers burn the left over straw in the field. Straw burning causes quite severe air pollution. For example, in 2000 the air pollution created by straw burning dramatically decreased visibility in Shijiazhuang City. The airport of Shijiazhuang City had to be closed for more than 48 hours. Every year, there are about 400 million tons crop straws that need to be disposed of.

　　(3) Land degradation

　　After many years of intensive use, farmland quality is decreasing. The fertility of the soil in most of regions is deteriorating. For example, the quantity of farmland with humus soil below 0.6% now takes up 12% of total farmland. The share of total arable land that is short of phosphate is 59% and that share of land short of potash is 23%.

　　Due to overgrazing on China's grassland, there is more than 130 million hectares that have been degraded. Each year the amount of degraded grassland in China is increasing by 2 million hectares.

　　During the past several decades the opening up of cultivated farm land on marginal, upland areas has resulted in rising soil erosion. There is more than 1.8 million square kilometers of land area that has been affected by water-induced erosion. This accounts for 18.6% of China's total territory. This type of land was increasing until Grain for Green started in 2000.

　　Soil contamination also is a problem. Each day there is about 350 thousand kilograms of solid waste produced by industries and municipal residents in rural areas. In 1995 nearly one million tons agriculture plastic film was used , covering more than 6.5 million hectares farmland. In some cases if not used properly, this can affect the quality of the soil. Other soil contamination is from industrial wastewater irrigation, which comes from township and village enterprises and urban industries.

　　(4) Food safety

　　The amount of pesticides used on crops annually is more than 1.2 million tons. About 9 million hectares farmland have been affected by abnormally high levels of pesticides. Pesticide residue of agriculture products is perhaps even a more severe problem. Although there are mandatory labeling requirements for agriculture few crops adhere to them. A relatively high proportion of products have not been able to meet the standards set by the government. Until today only a small proportion of all agricultural products are either green food or organic food. In recent years there have been an increasing number of contamination incidents that can be attributed to pesticide use. The cost of rising pesticide residues also is born by exporters. Many of China's agriculture products regularly are being inspected and rejected when they are exported to other countries. For example, in 1998 Japan increased the number of pesticide-related tests on rice along from 56 to114.

　　(5) Invasive species and biodiversity loss

　　Expansion and intensification of agriculture activities also destroy many natural habitats for animals and plants. In some cases cultivated land was expanding to nature reserves. There are 640 endangered species in the list of CITES, among them China has 156. Invasive species along with imported products are becoming an increasingly serious problem. Invasive species have a strong negative impact on China's ecosystem.

　　There are also other problems, although in some cases improvement is occurring. For example, township and village enterprises still are major polluters in some areas but officials have made progress in recent years.

　　3.5.2 Root causes

　　While the real causes of rural environmental problems are complex, we can identify several of the most important ones. First, rural environmental management capacity is weak. Currently there are fewer than 6% of townships that have environmental management bodies. The average number of staff members of a township level environmental management office is less than 3 per office. Of these, ,less than half directly work on rural environmental management issues. Even at the county level, the average number of staff numbers for a county (that averages more than 500,000 people) is 12.87 persons. Among them, less than half are governmental civil servants; the rest are contract staff members and, as such, are relatively less permanent. When doing their work, township and county level environmental management organizations are poorly equipped, sometimes to the point that they have no way to monitor rural environmental pollution and degradation.

　　Second, there is a severe lack of coordination between agricultural and environmental policies. It is safe to say that a large share of officials still do not understand that agriculture is one of the most severe sources of environmental pollution and ecological degradation. China actually now is the biggest producer, importer and user of farm chemicals in the world. While the reasons for such high use are not unique to China and are complicated, the nation's policy of encouraging pesticide production leads to low pesticide prices and relatively high use. When leaders implement their pro-food security policies, environmental security often is ignored. For example, in 2003 China's grain products reached 430 million tons. To ensure food security to have 400kg per capita, Ministry of Agriculture sets up a plan with target of producing more than 550 million tons of grain by 2010. While perhaps laudable in its own right, the plan has never been reviewed. It is unclear, as a consequence, if China even can meet the goals. According to Environmental Impact Assessment (EIA) Law, however, such a regional agricultural development plan should be assessed.

　　There also are other causes of rural environmental problems, such as the promotion of technologies that intensify agricultural practices. Poverty can lead to environmental degradation.

　　3.5.3 Policy options

　　For better dealing with the relationship between food security and environmental security and in order to better coordinate between agricultural and environmental policy, the following options are suggested:

　　(1) Invest in rural environmental management capacity

　　The weakness of China's human capital in being able to manage the rural environment has directly resulted in a serious set of rural environmental problems. Hence, it is necessary to make provisions to enhance rural environmental management capacity. The central government should take responsibility for a greater share of the rural environmental responsibilities from county and township governments. The central government is less conflicted. Central governments also can delegate certain rural environmental tasks to lower-level environmental authorities. Sufficient financial resources are needed. It is also necessary to train local environmental staff and to equip them adequately so they can perform their jobs. It is urgent that EIA is needed.

　　(2) To increase the share of grain that is imported

　　Beside leading to greater efficiencies and lower food prices for consumers, grain imports also indirectly convey ecological and environment benefits. Importing grain means less use of water resources, less use of farm chemicals and less soil erosion. If the nation is willing to import additional quantities of grain, and expand the Grain for Green program, the nation can generate great environmental benefits.

　　After its accession to the WTO, China is gradually beginning to be integrated into the world's economy. Farmers are beginning to export agricultural commodities globally. Enlarging the export of goods and services obviously will help fuel China's economy development. The shift from resource intensive agriculture production to labor intensive agriculture and manufacturing will increase rural employment, and importing resource-intensive products is that same thing as importing ecological and environmental services.

　　(3) To shift the rural economic structure to become more labor-intensive

　　The higher proportion of labor costs and lower proportion of resource costs in some types of production meant that such production likely will lead to lower environmental pollution and less resource damage. Hence, government should strongly encourage farmers to move from agriculture to off farm jobs and the service sector. Shifting from grain growing to horticulture, livestock feeding, fruits planting as well as labor-intensive planting also should be encouraged, although in some cases intensive farm chemicals can be used. When this happens counter measures are needed.

　　(4) To encourage domestic consumption and to enlarge exports of organic and green foods

　　Ecological or sustainable agriculture is a farming system that commits to use solid environmental-friendly practices. Among other things, practices include such technologies as high efficiency use of water resources use with little or no use of farm chemicals. Certificated Organic Food and Green Food are high valued products that are friendly to the ecology of agriculture. Govenment needs to encourage domestic consumption of organic products and to expand their exports.

　　3.6 Ecological Restoration, Nature Conservation and Alternative Livelihoods

　　China has become a leader in the developing world in ecological restoration and nature conservation. Several of the main programs are of global significance and have already improved the ecology stemmed the deterioration of biodiversity. While such programs are needed from an ecological perspective, it is still unclear if all of the projects are sustainable in economic terms. The danger is that there are some groups of farmers in ecological restoration areas and nature conservancy sites that have not benefited in terms of incomes—either due to the loss of cropland, or due to some other problems associated with the project. In order to ensure that the massive effort that China is putting in now into the ecology, especially in forested areas, is successful and sustainable, it is important to make sure that the long run livelihoods of farmers affected by the programs are improved and that the programs are implemented as originally designed.

　　3.6.1 Background

　　Severe floods happened in Central Yangtze, Songhua River and Nen River in 1998, which caused serious damage and casualty. The ecological degradation including natural forest loss, slope land reclamation and wetland shrinkage was realized to be the main causes for flood disaster gravitations. Since 1998, leaders in China have run several large-scale ecological restoration programs, including the National Ecological Restoration Programs includes: a logging ban in certain areas of the country through the Natural Forest Protection Program (NFPP), a cultivated land conversion program (Grain for Grain), a program to restore several major lakes by setting aside cultivated area (the Lake Restoration Program), a Grassland Grazing Ban, and a Fishing Ban (along Yangtze River).Several are of global significance.

　　In terms of investment into poor, remote regions, in many cases these have become one of the most important mechanisms for investment. There is no doubt that few other programs have had as dramatic effects on rural development. China's central government invested massive amounts of funding into these programs since 1998. By 2004, more than 100 billion RMB had been allocated to the programs. Of the total, Grain for Green was the largest, accounting for about 50 billion RMB. Governments also invested 40 billion RMB into the NFPP and 10.9 billion into the Lake Restoration Program. One of the unique features of Grain for Green is that part of the investments have been allocated as direct payments to farmers in order to compensate them for set-aside cultivated land and to assist them in either planting new forests or grasslands (in the case of Grain for Green) or rebuilding their houses (in the case of the Lake Restoration Program).

　　The size of the projects in terms of their involvement of people and land are also large. There are more than 60 million rural households involved in Grain for Grain. Most of the households, which are located primarily in the upper and middle reaches of the Yangtze and Yellow River Basin, are actively involved in the conversion of more than 7 million hectares of cultivated area into forests or grassland. There are 620 thousand people affected by the Lake Restoration Program. Near 500 thousand hectares are being converted into permanent or temporary wetlands, rivers or lakes. Because of these programs, cultivated areas nationally have fallen over the past 6 years. Indeed, these programs account for more than 50% of the total reduction in cultivated land since 1999. It should be noted, however, that although a large quantity of cultivated land was retired, most of the set aside land was extremely low quality in terms of its agricultural production potential, having yields that were less 1 ton per hectare, only a small fraction of the national average.

　　In many respects it can be argued that these programs have enhanced food security at both the national and household levels. Setting aside China's land in Grain for Green and reducing logging through the NFPP will undoubtedly have a positive effect on reducing floods and improving the hydrology of China's two largest river basins. In the long run, this will contribute to stable and rising food production at the national level. The biggest and most direct effects will be on household food security. For example, the government provides payments for farmers in the Grain for Green program. In many areas it also helps them plant trees and grasslands that can be productive in the coming years. It has been shown by research that Grain for Green in fact has helped increase incomes on average and enhanced the asset holdings of farmers.

　　If more could be done for farmers to assist their shift into alternative enterprises, such as livestock production, migration or self-employment, the longer run prospects would be even greater. There has been some concern that there has also been a negative effect of Grain for Green on national output. In fact, with such low yields on the converted land, the Center for Chinese Agricultural Policy has shown that the impact has been minimal. Not only have the direct effects been less than what many have projected, but in response farmers in Grain for Green areas have also responded by making the rest of the cultivated land more productive. Therefore, the overall impact on national grain prices and imports has been small. The draw down on grain stocks as a funding mechanism for Grain for Green should not be a measure of its effect. Since incomes of farmers in the Grain for Green program only rose marginally, there is no reason to believe that their grain consumption rose; these families would have consumed the same amount of grain if there had been a Grain for Green program or not.

　　Protected areas in China, especially those created by the Natural Reserve Program increased rapidly in recent years. Today, protected areas account for 17% of China's national land area. About 13% of national land area is inside official nature reserves. About 40% of nature reserves are located in Western China; about 25% of them are located in areas that are classified as poverty regions. Although having increased amount of protected areas and nature reserves have positive ecological benefits, there is increasing concern that there are conflicts with the goals of increasing rural incomes and in developing local communities.

　　3.6.2 Problems and issues

　　(1) Alternative Livelihood

　　In terms of economic benefit, most rural residents including farmers, forest workers, herdsmen and fishermen have welcomed the national policies for ecological restoration and conservation. For example, according to research, especially those in the Grain for Green program, incomes have not fallen and asset levels have risen. However, not all individuals have benefited. There also have been effects on communities. In short, despite the successes, governments still face a variety of challenges to make sure both the ecology and the economy benefit in the end. Some example of ongoing problems:

　　• About 8% farmers have seen their living standards fall due to Grain for Green program. It is clear now that Grain for Green expanded too fast in 2003, and in some cases farmers have not received their payments. The subsides of grain and cash could not fully delivered to farmers in time, which makes some farmers' livelihood even more difficult;

　　• Some 0.25 million farmers lost their previous cropland in Lake Restoration Program in Central Yangtze, including Hunan, Hubei, Jiangxi and Anhui provinces, some of them are facing living difficulties. It is unclear if their compensation has been sufficient to offset their loss;

　　• More than 1 million forest workers lost their jobs after logging ban in 1998. Although there have been large amounts of funds that have been targeted at trying to offset the negative effects of the logging ban, most have gone to forest bureaus and enterprises. In some cases little has gone to workers. In other cases, the farmers with timber holdings in logging ban areas suffered both directly and indirectly and have largely gone uncompensated.

　　• The sector-oriented and ill-coordinated Protected Areas increase steadily, which leads to a few farmers being forced to re-allocate, and more farmers near the Protected Area being disfranchised of farmers' use of resources they used before. Furthermore, the protected areas (especially natural reserves) rapid increase caused wide concerns of societies and some conflicts with local communities.

　　(2) Food security and conservation and restorations

　　There is some doubt in the minds of leaders about whether or not current policies on food security and cropland protection are consistent with the nation's ecological restoration programs.

　　• The total grain subsided to farmers was about 30 million tons in Grain for Green Program, which increased food security for farmers in Western China. The total loss of grain production was about 15-25 million tons due to the cropland conversion in the program. So, a significant decrease of national grain storage happened in past several years, which is believed the main reason for decrease of Grain for Green Program in 2004.

　　• Food security has become national policy issue; some people believe that former promises cannot be kept for those in the Grain for Grain Program.

　　• The current land protection policy is very strict and it is unclear if additional areas will be allowed for ecological protection of forests, grasslands or lakes.

　　(3) Future policies

　　There are also questions about how well future policies are being designed to ensure the ecological benefits continue (that is, that the same problems to not reoccur) and that rural households continue to receive support that will allow them to continue to develop and improve their livelihoods in the coming years.. In short, there are some continuing questions about the national strategy for ecological restoration and rural development in these ecologically sensitive areas.

　　• The NFPP is scheduled to end in 2010 and there is no clear plan for deregulation after the ban. The Lake Restoration Programme ended in 2002 and subsidies have ended. The Grain for Green Programme has been slowed. The annual amount of areas for cropland shifting reduced from 3.33 million ha in 2003 to 0.67 million ha in 2004. Although this is probably a needed adjustment, farmers and local leaders are concerned that it is signaling a more fundamental shift in policy and even are wondering if the government will keep its former promises. In short, it is unclear what actions are needed to continue to maintain and improve the ecological gains from the current areas that have been converted from cultivated land to forests and grasslands while maintaining, and indeed improving, the incomes of those involved in the program.

　　• There is no clear plan for deregulating the logging ban. When will logging be allowed? Where? What areas should be granted priorities? How can a plan be put into place to allow for the resumption of rational logging while also protecting the environment?

　　• There also are other policies that are not very well coordinated, such as those for Protected Areas. The livelihoods and rights of farmers inside and near protected areas are not always considered.

　　3.6.3 Options – alternative livelihood for farmers

　　The natural conservation and ecological restoration should be re-considered in the aspects of scale, time, location and approaches.

　　(1) Re-design the above-mentioned programmes in sustainable ways esp. in fragile areas of the western part in reduced scale. Central government allocates reasonable amount funding and grain to ecological restoration programmes, and maintains and/or sustains the ecological gains of existing Programmes to prevent possible cropland reclamation in fragile regions. The governments at all levels combine ecological restoration with poverty alleviation and provide a reasonable welfare to farmers in poverty. Make Grain for Green payments in cash rather than in kind; and increase monitoring. Integrated population policy and compensation policy into eco-restoration program.: eg. family planing compensation and alternative livelihood. (IRBM Task Force will provide specific recommendations dealing with the ecological restoration in Yangtze Basin).

　　(2) Promote off-farm employment and alternative livelihood of farmers in ecological restoration and natural conservation regions. （ARD Task Force report will deal with off-farm employment in details）

　　(3) Design a new and comprehensive protected areas system and ensure people benefit, and not suffer, from the living close to protected areas. Involve the ecological restored areas in the protected area category and legally protect them (detailed to see Protect Area Task Force report and recommendations)

　　(4) Involve more active participatory approaches in ecological restoration and nature conservation in order to let farmer's associations to participate in the decision-making, planning and monitoring processes.

　　3.7 Sustainable Management of Water and Land Resources

　　3.7.1 Background

　　Water and land resources are basic resources for the survival of human beings, and critical resources for the overall social and economic development in China. As China's development is still resource-based, labor intensive and environmental constrained, water and land resources are facing enormous pressures from population growth and rapid economic development. Therefore, the careful management of water and land resources in China in the 21st Century will be one of the major determinants of sustainability. In other words, if China is to achieve a sustainable development path, it will need to figure out how to get society to save resources.

　　The major user of water and land resources, agriculture in China is the nation's most fundamental sector. Besides its role in rural development and rising farm incomes, one of the task's of the sector is to produce sufficient, low-cost food in order to ensure national food security. This is quite a task for China since it has the largest population in the world. However, in many ways, agriculture is inferior to other industries, for example, in its low share in GDP. Agriculture is the largest consumer of land and water resources and virtually dependent on these resources. Therefore, maintaining a healthy stock of land and water resources for agriculture is part of the nation's means to meet its national food security. If the nation can make more efficient use of land and water resources in agriculture, it will give the nation room for urbanization and industrialization. Hence, it is obvious that agriculture will play a key role in establishing a resource-saving society.

　　While the resources are important for the nation, it should also be pointed out that water and land resources in vast rural areas of China support the livelihoods of 900 million people, 70% of total national population. As legitimate owners of these resources, rural people are ultimate decision-makers and beneficiaries. In the end, their way of living and producing with these resources will determine the sustainability of water and land resources for China's future..

　　3.7.2 Issues and gaps

　　There are several critical issues in the interplay of water and land resources and agro-rural development. These issues include: a) inherited scarcity and depletion by over-exploitation; b) inherited low quality and degradation by irrational use; c) uncertainties of water and land resource availability and regional variation in the context of global climate change; d) decreasing share of water and land that are available for agricultural-rural development; and e) low efficiency of water and land use.

　　(1) Land

　　China's per capita arable land is only about 1/3 of the world average. Productive land is only 1/3 of the national total. The rest of the land is poor quality. Its productivity is low. Much of China's land was subject to land degradation, such as desertification, salinization and soil erosion (56 million ha). In addition, there has been 8.67 million ha lost to pollution and acid rain. Land reserve for reclamation in the future is limited only to 7.53 million ha .

　　Although duing the past 50 years the trends in net cultivated land vary over time (and are difficult to determine due to data problems), China has had a net loss of arable land since 1958. In particular there was a sharp decline in the early 1980s. While satellite data show net land recovered between 1985 and 2000, looking at the whole period since 1978 shows that there was a net loss. The process between 1978 and 1998, however, was slow, losing farmland at the rate of 0.185 million hectare per year. According to data from the land office, between 1998 and 2000, the rate of land conversion increased to 0.58 million ha/yr, three times of the period of the previous 20 years.

　　An even more recent survey of cultivated shows that there has been an accelerating loss of arable land since 2000, although the nature of the conversions in recent years is different. From 2000 to 2003, the net loss of arable land in China was 5.47 million ha, a rate much higher than in any previous period. While this alarmed some people, it should be recognized that the increase in the rate of change is almost all due to the nation's land set-aside program, Grain for Green. Hence, the loss of this land needs to be balanced against the benefits that it is providing. Additionally, much of the reductions of grain production from Grain for Green and other land reductions over the past 20 years have been mostly leveraged by reclamation of new arable lands and rising yield increase per unit area.

　　Based on the experiences from developed countries, further loss of arable land to urbanization and other off-farm uses is inevitable. For example, in Changshu, a city in southern Jiangsu province, per capita farmland decreased from 0.073 ha in 1980 to 0.061 ha in 1999. Experts estimate that cultivated land will continue to fall (to 0.051 ha) by 2015. Ecologists believe that although the impact of the loss of land on grain production has been relatively low so far, because China's land resources are so scarce, as much land as possible needs to be saved for agriculture for the future.

　　Numerous studies show that global climate change and environmental deterioration also pose threats to land quantity, quality and productivity. Taken together, this means an uncertain future for available land resources to ensure long-term food security.

　　(2) Water

　　Water constraints for food production are even more challenging than those for land. China's per capita water resource is only 2200 tons, 1/4 of the world average. Great spatial and temporal variation causes disasters of drought and flood, effecting agriculture production. In the north of Yangtze River, there is 64% of the total cropland, but only 17% of total water resource. In contrast, in the south, there is only 36% of China's total cropland with 83% of water resources.

　　The importance of the water when supplied to land as irrigation can not be overstated. China's irrigated farmland accounts for 21% of the world. Despite having land resources far below the world average, per capita irrigated land equals the world average. Moreover, although the share of farmland that is irrigated is only 41%, its productivity is higher than the rest of the non-irrigated land in many aspects. For example, irrigated land produces 70% of national cotton, 90% of its vegetable and 65% of its grain. Unfortunately from the point of view of agricultural productivity, the quantity of water that is supplying water to sustain China's irrigation systems faces great challenges.

　　There are several particularly great challenges. First, the share of water allocated to agriculture is falling. It has been shown that water resources for agriculture decreased from 97.1% in 1949 to 68.8% in 2000. Although much of this decline is to be expected and is a trend that happens in every country in the world, especially developed ones such as those in the OECD, experts predict that trend will continue into the future. By the year 2050, the share of water for agriculture will fall to 54%.

　　Second, the efficiency of water use is low. While efficiency in industry also is poor that in agriculture is arguably worse and exacerbate overall water scarcity. For example, water consumption as a share of GDP water in China is 4 times of that in the world averagely. The efficiency of water use in agriculture is only around half of what it is in OECD countries.

　　Third, water resource availability is very likely uncertain in the future because of the impact of global climate change. Globally, climate change is expected to increase the population that is affected by water shortages (from 1.7 billion in 2000 to 5 billion by 2025). Climate will become more variable and there will be a rise in extreme events, such as the rise in the frequency and intensity of drought. Such changes add more uncertainties and increase the difficulties involved with water management in the agricultural sector. They also will aggravate spatial disparity between land and water, as well as temporal disparity between the growing and rainy seasons. Although climate change is likely to have a more marginal effect on municipal and industrial demand, it will almost certainly affect irrigation withdrawals and could affect the nature of the food economy. For example, the productive northeastern China plain used to be called "China's grain basket," contributing about 50% of grain that was sold on China's markets. This is not the case today. Severe droughts in recent years greatly compromised grain production in this region.

　　Fourth, China's water resources are also being affected by increasing water pollution. A number of scholars have documented that the nation's cultivated land is being affected by the discharge of polluted water. Irrigation using polluted water not only produces unhealthy food, but also can affect the productivity of cultivated area in the long term, putting agricultural sustainability in jeopardy. The problems of the use of polluted water, in fact, may just be beginning. As water becomes scarce and there begins to be more competition between agriculture and nonagricultural uses, a common response to provide increasing quantities of poor quality water to the agricultural sector.

　　(3) Gaps

　　Chinese government attaches greatest importance to the wise use and management of water and land resources. At the national level, there are laws, regulations, plans and other preferential policies for land and water management, such as the Water Law, Law of Soil and Water Conservation, the Land Administration Law, Regulations on the Protection of Basic Farmland.

　　Under the influence of these laws and regulations and due to the fact that most users and regulators understand the importance of taking care of land and water, line ministries such as Ministry of Water Resources (MWR), Ministry of Agriculture, Ministry of Land and Resources, together with local authorities and farmers have in most cases been trying to carefully manage land and water resources. And, in many cases, they have been successful as their changing behavior demonstrates. For example, the MWR is moving towards adopting a new program targeted at the integrated management of water to prevent floods and other disasters. There are many examples of successful water-saving experiments in cities such as Zhangye in northwest Gansu Province. These successes have been generated by a combination of macro policy control, the use of market-driven regulatory measures and community participation. In some cases, experiments have succeeded because of the development of water rights and use of market-based policy tools. Another city in Hebei province showed that they could increase water efficiency by 40% by simply adopting a set of price-based incentive mechanisms. There are also good examples in agriculture, in which water-saving technology has improved water efficiency at the farm level. Experiments show that water use efficiency of drip irrigation facilities are twice that of conventional methods of irrigation.

　　Despite these successes, China's management of water is still far from adequate to address challenges that rising water and land scarcity posed for agricultural rural development. There are serious gaps in the policies that have been set up to increase efficiency, the nature of the institutions that manage water and our knowledge of the problems. These gaps need to be narrowed before China can become a "resource-saving society."

　　(1) Policy gaps: Land and water resources are public goods with both natural and commercial properties. Existing laws, regulations and policies are sometimes provisional and incomplete. There is a lack of overall planning of resource management for all regions and sectors, absence of regionally- and sectorally-differentiated policies, frequent mis-coordination between the objectives of policies and their implementation, lack of coordination amongst different stake-holders of resources, and a serious absence of monitoring and enforcement. In addition, policy makers make poor use of incentives to guide the action of land and water users. Few policies adopt market-based regulatory approaches.

　　(2) Institutional gaps: There is almost no integrated approach in the management of resources among sectors. Policies are made on basis of ministries and there is no clear cut among their roles. The problem exists among ministries, between central and local governments, between local authorities and communities, and between government and market.

　　(3) Knowledge gaps: There also is a lack of analysis on integrated resource carrying capacity in the context of projected development goals. In other words, leaders often set goals and it is not clear whether or not the goals can even be met with existing resources. Much of the problem is due to the absence of analysis about the interaction between land and water availability. For example, because there is a lack of baseline analysis of water and land needs, it is not even known whether or not China's resources are sufficient to sustain minimum agricultural production for food security. Scientists also do not know things such as the overall need for cost-effective water-saving technologies.

　　3.7.3 Policy Options: Developing a "Resource-Saving Agriculture"

　　Having analyzed the issues and policy gaps of water and land resource management and their interactions with agricultural-rural development, discussion of only one specific policy option is relevant: the need to establish a resource-saving agriculture. This also coincides and resembles the initiative that has already been raised by Premier Wen "to strengthen water resource management, increase water use efficiency, establish water-saving society …"

　　The concept of resource-saving economy and/or society was proposed in early 1990s at the time when China's economy was beginning to be perceptively impeded by severe shortages of land, water, mineral resources and energy. These shortages were appearing after 10 years of economic reform and rapid development. Since that time, remarkable progress has been made. Despite the progress, China's resource crisis is still continuing. Hence, the efforts so far, although laudable, are far from adequate. The magnitude and speed of today's development requires a more complementary and concerted approach that will need the cooperation of all parts of society to use and manage resources wisely. The reform and transition of the last 25 years, fortunately, has created an enabling environment that will allow us to begin to realize the concept of resource-saving society.

　　The core set of components of a resource-saving agriculture consists of: a) an increasing awareness of all stake-holders, particularly local authorities and farmers; b) increased knowledge to support the development of policies, particularly regarding the carrying capacity of land and water resources, and the technologies needed for implementation; c) policy reform; d) institutional arrangements to meet several objectives, including, those that can strengthen macro-control of land and water resources as public goods; regulations to create an enabling market environment for establishing rights to resource rights and payments for good stewardship; and policies to consolidate farmer's resource rights and promote the participation of farmers in all activities.

　　The establishment of a resource-saving agriculture needs a package of interrelated actions: the creation of new avenues of government macro-control, the harnessing of market forces, and the establishment of farmer rights aimed at increasing resource use efficiency through various measures. In the creation of a roadmap to a resource-saving society, the effort should start from the creation a base of knowledge, specifically the carrying capacity of land and water. To meet this goal, we propose the development of a unitary development plan (UDP) at national, regional and/or local levels that can be formulated. Demonstrations and experiments can further promote overall implementation.

　　List of Authors

　　Lead Experts

　　SUN Honglie, Chinese Academy of Sciences (CAS)

　　HANSON, Arthur, International Institute of Sustainable Development, Canada

　　Drafting group (in order of surname)

　　HUANG Jikun, Institute of Geographic Sciences and Natural Resource Research, CAS

　　HU Tao, Research Center for Environment Economics and Policy, SEPA

　　LI Lifeng, Yangtze Programme, WWF China

　　LIU Jian, Bureau of Science and Technology for Resource and Environment, CAS

　　ROZELLE, Scott, University of California at Davis, USA

　　WANG Yi (Chief editor), Research Center for Eco-Environmental Sciences, CAS

　　YU Xiubo, Institute of Geographic Sciences and Natural Resource Research, CAS

　　ZHANG Linxiu, Institute of Geographic Sciences and Natural Resource Research, CAS