The Land System and China’s Rural Industrialization

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1		Xie Dongshui	--	4064	2022-07-07 06:09:00	\|
2	format correct	Vivi Li	-63 word(s)	4001	2022-07-08 04:49:38	\| \|
3	format correct	Vivi Li	+ 5 word(s)	4006	2022-07-11 09:51:22	\|

This entry is adapted from the peer-reviewed paper 10.3390/land11070960

China’s rural industrialization, which flourished in the 1980s, has suddenly declined since the mid-1990s. Using the empirical tests of China’s provincial panel data from 1987 to 1997, it is found that from the 1980s to the mid-1990s, the government relaxed the regulation of collective construction land and allowed its transfer, which was the institutional basis for the rapid rise of China’s rural industrialization with township and village enterprises (TVEs) as the main form. Furthermore, the government’s policy of prohibiting the circulation of collective construction land from the mid-1990s as the breakthrough point was taken, and the “Land Administration Law of China” promulgated in 1998 as a quasi-natural experiment to examine the causal relationship between restricting the circulation of collective construction land and the decline of TVEs was used. It is found that the restrictions on the circulation of collective construction land caused by the implementation of the law significantly hindered the development of TVEs. After the implementation of the Land Administration Law, in areas affected more by the law, the development scale of their TVEs shrunk even more.

rural industrialization township and village enterprises land system collective construction land

1. Introduction

Promoting rural industrialization, vigorously establishing and developing rural industrial enterprises are regarded as important ways to absorb agricultural surplus labor, increase farmers’ income and promote rural economic development ^[1]^[2]. As the world’s largest developing country, China has embarked on a rapid rural industrialization path since 1978. Rural industrialization with township and village enterprises (TVEs) as the mainstay has risen rapidly and has become the most dynamic part of China’s economic reform at that time. In 1978 and 1996, the number of people employed in TVEs increased from 28 million to 135 million, with an average annual growth rate of 9%; the ratio of added value to GDP of TVEs increased from less than 6% in 1978 to 26% in 1996 ^[3]. However, unexpectedly, this rapid development of TVEs came to an abrupt end in the mid-1990s. From the mid-1990s, the development of TVEs began to slow down sharply, their profit margins and ability to absorb labor continually declined. By the end of the 1990s, TVEs almost completely declined, becoming a short-lived economic phenomenon. With the decline of TVEs, the rural economy was gradually declining, and the gap between urban and rural areas was constantly widening. Then why did the once prosperous TVEs go into decline? What are the determinants behind its transition from prosperity to decline? This entry attempts to provide a logically consistent explanation for these issues from the perspective of institutional change of rural collective construction land.

Theoretically speaking, TVEs have obvious economic disadvantages. On the one hand, TVEs are mostly located in rural areas, with high transportation and information costs, and do not have the economies of scale for industrial production. On the other hand, the property rights of TVEs mostly belong to collective property rights, with the typical characteristics of “ambiguous property rights” ^[4]. In this case, existing literature mainly starts from the external environment faced by TVEs to explain their prosperity in practice. To sum up, first, from the perspective of economic structure, it is believed that the success of TVEs is closely related to the industrial structure dominated by heavy industry formed in China since 1949. Under this industrial structure, state-owned enterprises mainly produce heavy industrial products, while there is a serious shortage of light industrial products. It is through the production of light industrial products that TVEs fill the gap in the industrial structure and emerge ^[3]. The second is based on the theory of ambiguous property rights, explaining that the ambiguous property rights of the collective nature of TVEs can well adapt to the environment of imperfect market and imperfect legal system at the beginning of China’s reform and opening up, so as to achieve prosperity and development ^[4]^[5]. Third, from a cultural perspective, it is emphasized that the rapid development of early TVEs is a product of Chinese culture and the unique quality of cooperation and altruism of Chinese people ^[6]. In addition, there is another paper that emphasizes that local government behavior plays an important role in the development of TVEs in China. It is believed that local government support is an important reason for the prosperity of TVEs ^[7]^[8]^[9]. However, after the reform of the tax-sharing system in 1994, the enthusiasm of local governments to run enterprises declined, which led to the gradual decline of TVEs since 1994 ^[10]^[11].

The above paper discusses the external conditions for the prosperity of TVEs from the perspectives of political, economic and social environment, providing important clues for researchers to understand the mystery of the rise and fall of TVEs. However, these external environments are not enough to constitute all the conditions for the development of TVEs. Moreover, they mainly focus on exploring the reasons for the prosperity of TVEs, and lack of attention to why the TVEs declined after the mid-1990s. In fact, the first prerequisite for starting a business and establishing a factory is to have a piece of land. If there is no land system as a guarantee, the essential land resources cannot be obtained. Even if other political, economic and social conditions are in place, TVEs cannot emerge smoothly. In this sense, in order to fully analyze the rise and fall of TVEs, researchers need to deeply explore the land use system of TVEs.

Based on the above analysis, this entry attempts to explain the reasons behind the rise and fall of China’s TVEs from a perspective different from the existing literature, that is, the change of the rural collective construction land system. This entry holds that the rapid rise and development of TVEs in the 1980s benefited from the national policy during this period, which opens up farmers’ rights to use collective land for industry development, allowing rural collective construction land to directly enter the non-agricultural land market ^[12]^[13]^[14]. This land system arrangement greatly reduces the land cost of rural industrial investment, creates the most basic conditions for the rise of TVEs, and becomes a vital factor in promoting rural industrialization. However, since the mid-1990s, the state has imposed strict controls on the use of collective construction land, and no longer allowed collective construction land to enter the market directly ^[15]^[16]. In particular, the “Land Administration Law of China” (Land Administration Law) revised in 1998 clearly stipulates that “no right to the use of land owned by peasant collectives may be assigned, transferred or leased for non-agricultural construction”. This means that farmers can no longer rely on the property rights of their own land to develop non-agricultural industries as in the past, which has led to the decline of rural industrialization in the main form of TVEs.

Based on the actual data in China, drawing on the methods of existing literature to construct an empirical model ^[9]^[17]^[18], this entry conducts rigorous empirical tests of the above theoretical logic. First of all, with the background of the national deregulation of rural collective construction land from the 1980s to mid-1990s, researchers use China’s provincial panel data from 1987 to 1997 to verify the impact of the circulation of collective construction land on the expansion of TVEs. It is found that the circulation of collective construction land significantly promoted the rise and expansion of TVEs. Then, researchers take the Land Administration Law as a quasi-natural experiment to examine the relationship between the change of the state’s control policy on collective construction land; that is, the implementation of a strict policy of restricting the circulation of collective construction land and the decline of TVEs. It is found that prohibiting collective construction land from directly entering the market has a significant hindering effect on the development of TVEs. In areas affected more by the law, there is a greater reduction in the development of their TVEs.

2. Institutional Background

According to China’s land use system, rural land is divided into agricultural land and collective construction land. The institutional changes of these two types of land have played an important role in China’s rural economic development. Since 1978, China’s rural areas have implemented the household responsibility system. Thus, there was a change from a system in which the land was collectively owned and managed by the collective during the people’s commune period to a system in which the land is contracted to peasant families on the premise of maintaining the collective ownership system, and thus, preceding the reform of the rural land system. Influenced by the reform, Chinese farmers created two achievements on collective land. First, on agricultural land, the achievement of rapid agricultural production growth and farmers’ income was created, by transforming the land from collective ownership and unified management to collective ownership and contracted management by farmers ^[19]. Second, on rural collective construction land, farmers used collective construction land to establish TVEs, creating the achievement that rural industries occupy half of the China’s industry ^[12]^[14]. However, unfortunately, the institutional arrangements in land behind these two achievements experiences different fates in the subsequent development process.

In terms of agricultural land, since the reform of the household responsibility system was implemented in 1978, the Chinese government has been actively promoting and improving the reform of the system of property rights on agricultural land. Through the evolution of a series of policies and regulations, the current law has given farmers the long-term unchangeable usufruct of agricultural land, and has provided farmers with a guaranteed right to transfer their agricultural land freely. Thus, an increasingly clear system of property rights on agricultural land is established ^[18]^[20]^[21]^[22].

In terms of rural collective construction land, from the Land Administration Law in 1986 to the revision of the new Land Administration Law in 1998, the national legislation on the use and circulation of rural collective construction land has gone from deregulation to overall tightening ^[13]^[14]^[15]. This institutional evolution of collective construction land has had a profound impact on the rise and fall of TVEs.

Since 1978, with the implementation of the household responsibility system, the state has begun to relax the control of collective construction land, cancel the policy of prohibiting the free circulation of collective construction land, and allow farmers to set up industrial enterprises on collective construction land ^[13]^[14]^[16]. The landmark event of this stage was the passing of the Land Administration Law in 1986. Article 2 of the law stipulates that “the right to use state-owned land and collectively owned land can be transferred in accordance with the law”. Article 36 of the law stipulates that “enterprises owned by the whole people or jointly owned by urban collectives and agricultural collective economic organizations, which need to use collectively owned land, can be requisitioned in accordance with the regulations on land requisition for national construction, and the agricultural collective economic organizations can also use the right of land use as a condition for joint operation in accordance with an agreement”. The loose institutional environment for collective construction land greatly promotes the circulation of collective construction land and creates conditions for farmers to set up TVEs on collective construction land.

In a broad sense, TVEs refer to rural industrial enterprises located within townships ^[2]^[11]. In terms of ownership, most TVEs are collectively owned. However, with the adjustment of policies, individual, private enterprises and foreign-owned, joint ventures, have also developed. Although these enterprises differ greatly in the nature of ownership, they have one thing in common, that is, they are all established in rural areas and built on rural collective construction land. In the use of land, collectively owned enterprises are set up by peasants using their own land without compensation. Rural individual enterprises are generally opened on their own homesteads, and the land is free of charge. There are also those with large operating scales and insufficient homesteads, so they turn to renting collective land for a fee. As for private enterprises and foreign-funded enterprises, some of their land sources are enterprises renting land with compensation from collectives, and some are the collectives who use the land use rights as shares to establish joint ventures between the village collective and external capital ^[12]^[16]. In short, no matter what kind of ownership nature of TVEs, their common feature is that the development of enterprises is inextricably linked to the use and circulation of rural collective construction land.

Theoretically speaking, as a vital factor of production, land is not only the space carrier for the establishment of industrial enterprises, but also the economic resource that the expansion of industrial enterprises must rely on and utilize. In this sense, the first prerequisite for the establishment of an industrial enterprise is land ^[12]. In China from the 1980s to the early 1990s, land was divided into two main bodies—rural collective land and urban state-owned land. Since the capital construction of the state-owned sector was completely controlled by the government at that time, the use of land had to be approved by the government first. Neither the urban collective sector nor private units owned land, so it could not be easily expanded ^[13]. The only exception is rural collective land. As mentioned above, it is during the period from the 1980s to the early 1990s that the state opened up channels for farmers to use collective construction land for non-agricultural construction. Farmers are allowed to set up enterprises on the collective construction land, which not only creates conditions for the rise of TVEs in the rural areas, but also constitutes an important advantage of the development of TVEs ^[12]^[14]^[23]^[24].

It is worth noting that there is serious heterogeneity and imbalance in the development of TVEs among regions. TVEs in the suburbs of big cities, transportation centers and coastal areas with higher levels of rural infrastructure develop very rapidly, while those in inland and remote areas with high transportation costs and difficult transportation often develop relatively slowly or even no TVEs at all ^[3]. How can researchers understand the regional differences in the development of TVEs? The essential clue to answering this question is still the system of collective construction land for farmland. As mentioned above, one of the advantages of TVEs’ development is the availability and low cost of its land. In theory, companies must pay rent to use land. TVEs, however, are either set up on their own land by rural collectives, which pay no rent to others or themselves ^[12], or by individuals, private or foreign enterprises, who pay very low rent to the collective. In this sense, land rent is actually converted into a part of the profits of TVEs ^[12].

Furthermore, in terms of the theory of differential rent, the economic value of land in areas with perfect transportation infrastructure construction, close proximity to big cities and low transportation cost is higher, and the corresponding differential rent is higher. Specifically for TVEs in the vicinity of transportation centers and urban suburbs, they can benefit more from the diffusion of capital, technology and information in the city, so their differential rent is naturally relatively higher. However, under the system for the use of rural collective construction land at that time, TVEs did not pay or paid a much lower price than their real differential rents, so the rent actually turned into the profit of TVEs ^[12]. In this way, the higher the level of transportation infrastructure, the higher the differential rent, and the higher the degree of collective construction land circulation. Therefore, the more likely that the differential rent is converted into the profits of TVEs, the more profitable it is to set up TVEs in these areas. Then, more TVEs gather in these areas with high level of transportation infrastructure.

The above explains the reasons for the rapid rise of TVEs in the 1980s and early 1990s. However, unexpectedly, from the mid-1990s, the development of TVEs began to slow down rapidly. In order to understand the decline of TVEs, it is also necessary to examine the rural collective land system. Since the mid-1990s, the policy of collective construction land has undergone important changes. The state has changed from allowing and encouraging farmers to set up enterprises on collective construction land to a policy of strictly restricting the use and circulation of collective construction land. In particular, the promulgation and implementation of the new Land Administration Law in 1998 became a turning point in the change of China’s rural collective construction land system. Article 43 of the law stipulates that “all units and individuals that need land for construction purposes shall, in accordance with law, apply for the use of State-owned land”. Article 63 of the law stipulates that “no right to the use of land owned by peasant collectives may be assigned, transferred or leased for non-agricultural construction”. At the same time, this law also established that “the state applies a system of control over the purposes of use of land”. It is stipulated that the state should formulate an overall plan for land use, strictly restrict the conversion of agricultural land into construction land, and control the total amount of construction land.

Under these regulations, rural collective construction land cannot directly enter the market. The only legal way to convert agricultural land into non-agricultural construction land is to implement land acquisition. The local government expropriates land from farmers and transfers ownership from rural collectives to the state. After the land is expropriated, the local government transfers the land use rights to the land use units on behalf of the state ^[15]^[16]. This makes the local government monopolize the supply of construction land and become the only implementer of agricultural land conversion. Thus, the channel for rural collective construction land to directly enter the non-agricultural construction market is blocked, so that the rural collective construction land loses the function of market-oriented allocation, farmers and rural areas also lose the right to use and transfer collective construction land ^[13]^[14]. As the peasants are deprived of the right to use collective construction land for non-agricultural construction, the utilization space of rural collective construction land has been greatly reduced, and the entry threshold for farmers to develop non-agricultural industries on collective land has also been greatly improved. As a result, they lose the opportunity to use collective construction land to develop non-agricultural industries, and can no longer independently participate in rural industrialization with property rights on their own land as in the past ^[23].

3. The Land System and China’s Rural Industrialization

Rural industrialization with TVEs as the main form once rose rapidly in China in the 1980s, became the main force of China’s rural economy and an important part of the national economy, but this development momentum suddenly fell into trouble from the mid-1990s. Why did China’s rural industrialization rise rapidly from the 1980s to the mid-1990s, but then suddenly declined after the mid-1990s? This entry explains the problem from the perspective of China’s rural collective construction land system. Compared with qualitative analysis, case study and survey research, this entry uses econometric method to establish an economic mathematical model on the basis of economic theory. Moreover, by collecting relevant data for model estimation, the quantitative relationship between economic variables is obtained. In addition, this entry uses an econometric model to effectively overcome the endogeneity problem, identify the reasons behind the economic phenomenon and draw relatively rigorous and robust conclusions.

Based on China’s provincial panel data from 1987 to 1997, researchers empirically test the effect of the circulation of collective construction land on the scale expansion of TVEs under the background of China’s loose collective construction land policy from the 1980s to mid-1990s. It is found that allowing the circulation of collective construction land and giving farmers the right to use collective construction land to engage in non-agricultural construction constitutes the institutional basis for the rapid rise of China’s rural industrialization, and significantly promotes the development of TVEs. However, after entering the mid-1990s, the state has changed the relatively loose policy of collective construction land, and turned to a policy of strictly restricting the circulation of collective construction land. In particular, the Land Administration Law promulgated in 1998 explicitly prohibits the direct entry of collective construction land into the non-agricultural land market, and became a turning point in the change of China’s rural collective construction land system. In this context, researchers further take the law as a quasi-natural experiment to examine the relationship between the government’s strict policy of restricting the circulation of collective construction land and the decline of TVEs based on China’s provincial panel data from 1987 to 2008. It is found that the prohibition of direct access to the market for collective construction land has a significant impediment to the development of TVEs. That is, in areas affected more by the Land Administration Law of 1998, the development scale of their TVEs shrunk even more.

This entry enriches the existing literature in two aspects. First, in the research of rural land system, the existing literature mainly focuses on the characteristics of rural land property rights, and focuses on analyzing the impact of land property right system on labor migration decisions, farmers’ production enthusiasm and land use efficiency ^[15]^[16]^[18]^[25], while relatively little attention has been paid to the relationship between land system and rural industrialization. This entry links the rural collective construction land system with the rise and fall of TVEs, and expands the research dimension of the system. Second, in the research of TVEs, the existing literature mainly discusses the reasons for the rapid prosperity of TVEs from the external development environment they faced, such as industrial structure, cultural tradition, government intervention, etc. ^[6]^[10]^[11]. However, these studies mainly explore the reasons for the prosperity of TVEs, but cannot explain why TVEs declined after the mid-1990s. This entry analyzes the transition process of China’s rural collective construction land system from allowing transfer to prohibiting transfer, and links it with the rise and fall of TVEs, providing a complete explanation of the logic chain for understanding the rise and fall of TVEs.

The analysis of this entry provides policy implications for developing countries on how to promote rural economic development and revitalize the rural areas. According to the conclusion of this entry, allowing the circulation of collective construction land and giving farmers the right to use collective construction land to engage in non-agricultural construction is an important way to promote the development of TVEs, while in reality, many developing countries have implemented strict control policies on collective construction land for a long time, prohibiting rural collective construction land from directly entering the non-agricultural construction market. Moreover, the conversion of agricultural land into non-agricultural construction land must be realized through the implementation of government land acquisition, that is, the supply of construction land is monopolized by the government. Farmers are deprived of the right to use collective construction land to engage in non-agricultural construction. On the one hand, farmers’ development opportunities in rural areas are hindered, which aggravates the shrinking of non-agricultural economic activities in rural areas, resulting in the decline of rural areas and the widening of urban–rural income gap. On the other hand, due to the closure of the channel for rural collective construction land to legally enter the non-agricultural construction market, the utilization of a large number of collective construction land has become disorderly, which reduces the utilization efficiency of collective construction land.

Therefore, for many developing countries, in order to revitalize rural areas and activate the vitality of the rural non-agricultural economy, an important means is to further deepen the reform of the rural collective construction system. That is to say, it is necessary to break various restrictions on the circulation of collective land and allow rural collective construction land to directly enter the non-agricultural construction market. Moreover, it is also essential to give farmers the complete rights of land transfer, so that they can become the main body of land transfer and enjoy the opportunity to use collective construction land to develop non-agricultural industries. In this way, the vitality of rural collective land will be fully released, and the efficiency of land resource utilization will be improved. Then, it will stimulate the enthusiasm of farmers to participate in rural industrialization independently, and promote rural revitalization and rural non-agricultural economic development.

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Dongshui Xie

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1. Introduction

2. Institutional Background

3. The Land System and China’s Rural Industrialization

References