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Analysis on rationalizing Chinese landless farmers' compensation
University of Nevada, Reno Analysis on Rationalizing Chinese Landless Farmers’ Compensation A thesis submitted in partial fulfillment of the requirements for the degree of Master of Science in Economics by Zishi Zhao Dr. Shunfeng Song / Thesis Advisor August 2007 UMI Number: 1446448 1446448 2007 UMI Microform Copyright All rights reserved. This microform edition is protected against unauthorized copying under Title 17, United States Code. ProQuest Information and Learning Company 300 North Zeeb Road P.O. Box 1346 Ann Arbor, MI 48106-1346 by ProQuest Information and Learning Company. i Abstract While Chinese urbanization has accelerated since the early 1990s, the worsened living condition of landless farmers has been largely attributed to the unfairness of the compensating standards. By building two econometric models that separately analyze the amount of compensation given for land eminent domain and market value of the land, this thesis concludes that the compensation amount is between only 2.81 and 6.36 percent of the land market value. Furthermore, it suggests that privatizing land ownership is a better solution to protect farmers via comparing the pros and cons of centralized ownership and private ownership. ii Table of Contents 1. Introduction…………………………………………………………………… 1 2. Land Administration System Evolution since 1949………… ……………… 9 2.1 Collecting and Reallocating Lands (1949-1953)…… …………………… 10 2.1.1 Realizing the Promise…………………………………………… 10 2.1.2 Independent Groups…………………………………………… 11 2.2 Collectivization and People’s Commune (1953-1978)………… …… 13 2.2.1 Junior and Senior Corporation Communes……………………… 13 2.2.2 People’s Commune……………………………………………… 15 2.2.3 Evaluation……………………………………………………… 17 2.3 Reversion to Private Property Rights (1978-Present)…………………… 18 3. Land-to-lease System and Its Compensation Policy………………………… 20 3.1 The Land-to-System and Its Disadvantages …………………… ……… 20 3.1.1 Blue Print……………………………………………………… 20 3.1.2 Fundamental Problem…………………………………………… 21 3.2 Compensation: Rules and Practices…… ………………………… …… 26 3.2.1 Compensation Policies………………………………………… 26 3.2.2 In reality, Practicing Compensation Policies……………………. 38 4. Quantitative Analysis………………………………… ………… ………… 45 4.1 Capozza and Helsley’s Model on Land Price…… ………………………. 45 4.2 Land Eminent Domain and Market Transaction Analyses……………… 49 4.2.1 Data Dscription………………………………………………… 49 4.2.2 Data Analysis of Land Eminent Domain……………………… 50 4.2.3 Data Analysis of Market Land Transactions……………………. 56 4.3 Comparison……………………………………………………………… 61 5. Land Ownership Reform in the Future ………………………………………. 65 5.1 Improving the Land-to-lease System and Its Problems………………… 65 5.2 Privatizing Land Ownership and Its Problems……………………………. 68 6. Conclusions………………………………………………………………….… 73 References…………………………………………………………………………. 77 iii List of Tables Table 2.1 The Growth of Independent Groups, Junior and Senior Communes…… 13 Table 3.1 Area Under Cultivation…………………………… ………………… 30 Table 3.2 Areas Under Cultivation by Region…………………………………… 31 Table 3.3 Compensating Standards on Land……………………………………… 32 Table 3.4 Supplementary Expenses for Farmers’ Resettlement………………….… 32 Table 3.5 The Replacement Value for the Crops….……………………………… 33 Table 3.6 Other Materials Attached to the Land ………………………………… 33 Table 3.7 Hangzhou Municipality General Compensating Standards on Land Eminent Domain (2003)…………………………………………… 36 Table 3.8 Recent Land Eminent Domain Cases and the Compensations …………. 38 Table 4.1Data Description of Eminent Domain Cases…………………………… 51 Table 4.2Basic Characteristics of Land Eminent Domain Cases………………… 51 Table 4.3 Variable Definitions and Expected Signs of Eminent Domain………… 54 Table 4.4 Regression Results for Eminent Domain………………………………… 54 Table 4.5 Data Description of Market Transaction Cases………………………… 57 Table 4.6 Characteristics of the Land Market Transaction Cases………………… 57 Table 4.7 Variable definitions and Expected Signs of Market Transaction ……… 59 Table 4.8 Regression Result for Land Transaction………………………………… 60 Table 4.9 Estimated Compensations, Market Prices and Comparisons in Different Conditions…………………………………………………… 64 1 1. Introduction China has been undergoing economic reform since 1978 under the leadership of Deng Xiao Ping, who successfully persuaded communists to make the ideological transitions to accept a market economy. Private ownership began to emerge in urban areas and farmers did not have to hand in all their outcomes, and these new policies greatly encouraged people’s willingness to produce. Only ten years later, China basically solved the problem of starvation, serving 22 percent of the world population by using 7 percent of the world’s farmlands. After entering the 21 st century, China’s economic growth still exceeds 9 percent. By the end of 2006, the Chinese nominal GDP reached 2.25 trillion US dollars, surpassing France and Britain in one year and ranking the fourth after United States, Japan and Germany, and its real GDP in consideration of the real purchasing ability of currency has been over 6 trillion US dollars, only less than United States. As the most populous state and the third largest country in territorial terms, China has become one of the main economic entities in the world. By taking advantage of globalization, it is estimated that China’s rapid economic growth will continue. On one hand, China has made full use of its inexpensive labor force and built itself as a world factory. “Made in China” became a brand that most frequently appears in western supermarkets. An article of News Week on May 9 th , 2005 tells that among 6,000 of Wal-mart’s worldwide suppliers, over 5,000 of them come from China. On the other hand, Chinese success has attracted more foreign 2 investors to come; they are bringing technology, experiences, and the most FDI in the world. In other words, time has been saved because globalization provides this country an opportunity to take advantages of foreign outcomes, which cost many decades to generate. Steven Roach, the chief economist of Morgan Stanley, forecasts that the Chinese GDP will keep increasing at over 9 percent for another decade. However, under the booming economy there is an increasing social disharmony between rich and poor people. Generally speaking, people in rural areas gained few benefits from GDP growth, their living conditions did not improve much in the past decade, and some were even worsened. An example can easily illustrate this income difference: by the end of 2005, the nominal GDP per capita in Shanghai had reached 7189 US dollars (Xu, 2007), indicating that people can enjoy the same living standards as Italians and South Koreans; in contrast, in certain western areas, some rural people seldom earn more than 12.5 USD each year 1 . Although China is still far from being a developed country, the Gini Coefficient, an index used to measure the fairness of income distribution, has increased from 0.33 in 1980 to 0.496 in 2006 (Liu, 2007), indicating the Chinese income gap is more serious than in many western countries. This is because the Chinese GDP increase is mainly attributable to industrial growth in urban areas, while rural development is much slower and rural people have a higher birth rate due to the difference in birth control policy 2 . Since 1953, a policy of depressing price has been implemented by means of monopolizing 1 Data from CCTV program “Western Report”, October 21 st , 2003. 2 Though some cities have allowed parents to have two children, most still insist single-child policy, while generally each family can have at most two children in rural China. 3 main agricultural product purchases, in order to transfer more and more capital from the agricultural sector to the industrial sector (Qu, Heerink and Wang, 1995). Recently, after famine has basically disappeared, agricultural prices began to be protected, but cities and villages were treated significantly differently in investments, education and social welfare. Moreover, since the 1990s, Chinese urbanization has speed up, and over 100 million mu 3 of farmlands in suburban areas have been acquired by the government to build economic development districts and real estates. As a result, from 1997 to 2003 Chinese farmlands decreased from 1.951 billion mu to 1.851 billion mu (Fang, 2005) and at least 20 million peasants lost their land. In the future, following the Guidelines for National Land Usage Plan, agricultural land used for nonagricultural purposes will exceed 54.5 million mu from 2000 to 2030, which means the number of landless farmers will undergo further dramatic increase (Hong, 2004). Unlike the United States, which clearly defines eminent domain and restricts government to use this power (Lin, 2007), Chinese land eminent domain practice has become a frequently seen phenomena. So why would the Chinese government freely force farmers to give up land? The reason is Chinese farmers do not have property rights. Although private rights prevail in urban China, the property rights of farmlands are collected by thousands of “villagers’ committees” whose leaders are often appointed by the government, while under current laws and regulations farmers only have the use right, which is to plant and harvest the land for a certain period (usually 3 1 mu is approximately equal to 0.1647 acre 4 thirty years). Because of this, the Chinese land system is called a “land-to-lease system”. After the government has acquired farmlands, landless farmers must immediately start to look for new employment, and research shows that most landless farmers’ lives are worse than before land eminent domain (Han, 2005). It is well known that in the first industrial revolution, British peasants were forced to give up their lands and enter cities, which provided industries with plenty of labor, and they gradually became urban workers. But the situation is quite different in China: after the “baby boom” in 1950s and 1960s, the birth rate has been strictly controlled since 1983, which means that today middle-aged people make up a large portion of population, so there is a surplus in the labor market. Another factor that is adverse for farmers’ migration is, in the central planning era, state-owned enterprises employed all urban laborers to reach the aim of “zero unemployment”, but those enterprises have shelved unnecessary employees in order to increase profits since China began to adopt a market economy. In other words, nowadays the cities are suffering an unemployment burden from inside, and there is little they can do to absorb incoming labor. Also, there are some other disadvantages that work against landless farmers’ improvements. First of all, the expropriated lands are often fertile, in good locations, and probably will appreciate in the future, but the compensations are much less than fair, and this is one of the most important parts that the author will analyze in the following chapters. Secondly, due to fast urbanization and the unequal positions between the government and farmers, the annual amount of land expropriated is growing, which has resulted in more landless 5 farmers. It is estimated that land eminent domain is producing more than 8.7 million farmers that have lost lands annually (Yang and Cao, 2004), but the nation cannot create so many jobs immediately. The third disadvantage is Chinese rural society is highly built on kinship, and many farmers have few relationships in the outer world. For example, it is very common to see most of the farmers in a village have the same family name. As a result, once the farmlands of a whole village are acquired, many people who used to help each other have the same difficulties in finding support. Lastly, very few farmers are well educated, and it is very hard for them to find jobs other than farming. In China, almost 90 percent of peasants have never entered high school (Yan, 2007). Basically, they have devoted most of their lives to planting crops, and few have a second occupation. Also, the local government pays little attention to farmers’ occupational training. Hence, if farmers were forced to give up lands, they could not start their careers in other fields and they suddenly feel helpless about their future. Land eminent domain will trigger a profound effect for farmers. After giving up their land, farmers will lose at least the following four rights. 1. Property rights. Farmland is the producing input for peasants. By planting on land, farmers can enjoy the rights to land tenure, disposal, and profits (Hong, 2004), so land is one of their most important properties. If they give up the soil, they permanently lose the rights to plant, harvest or transfer their lands. 2. The right of enjoying a stable life. As we have mentioned before, there are few [...]... organization of the thesis is as follows Section two reviews the land administration system evolution after 1949 and provides descriptions of the current 8 system Section three especially focuses on the fundamental problem in the collectivity-owned land system, and takes a municipality as an example to compare the policy and practice of compensation distribution Section four presents a quantitative analysis. .. the land The compensation for land itself should range from six to ten times the average annual value of production based on the calculation of the previous three years prior to the land acquisition; the compensation for farmers’ resettlement should be no more than fifteen times the average annual value of production… If the total compensation regulated above is still not enough to keep the landless farmers... eminent domain compensation is dependent upon the annual value of agricultural production Possibly, the values of outcome may be influenced by farmland conditions, climates, levels of local development, and price levels Consequently, compensations may vary from place to place, and local governments, especially those metropolitan governments, have flexibility to decide compensations In this section, we will... give up the farmland, the compensation is the value of average annual output multiplied by a given number of years (no more than 30) But most landless farmers cannot get as much as theoretical compensation amount because of various reasons So, how much compensation is fair? How could the Chinese Government better protect farmers? To answer this question we must suggest reasonable improvements to government... farmers living in previous condition, province governments could increase compensation amount within thirty times the average annual value of production” 7 That is to say, the compensation is no more than the value of thirty years of agricultural product Thirdly, the laws have clarified the responsibilities of court, local government and construction firms and forbidden land speculation Articles 73 to 83... colonial era To be 21 more specific, according to the treaty between Chinese government of Qing Dynasty and British government in 1898, Chinese had to lease Xin Jie (91 percent of Hong Kong territory) to Britain for 99 years In other words, Hong Kong was nominally owned by China, which could explain why the British-controlled Hong Kong government never sold any ownership to individuals Hence, the Hong... realize that 5 China Election and Governance Website, 23 September 2003 [document online]; available from ; Internet; accessed 23 December 2005 25 they have provided with confusing information The former law bans any unauthorized forms of land transaction In other words, it only allows land transactions conducted by the government, while the latter one allows whoever has land... ownership to individuals Hence, the Hong Kong’s land-to-lease system is not a good example to learn from Hong Kong was a part of a Chinese territory rented to Britain, not an independent country, and it has neither complete land ownership nor unattached policies Adopting its land system was done only because among all the successful economic entities, Hong Kong’s idea was the best to fit the characteristics... 20 3 Land-to-lease System and Its Compensation Policy The Household Contract Responsibility System, which is considered a land-to-lease system as far as land ownership is concerned, has made historical contributions to agricultural output growth However, it is not a perfect system, and some serious problems began to emerge after a few years This chapter will focus on the drawbacks of the land-to-lease... second occupation For most of them, farmland is the only resource to get outcomes, serve family and guarantee a stable life The loss of land means they will have to move and start searching for new jobs 3 Right of working If we consider working as a right, farmers would lose this right after they became landless Their contributions are mainly evaluated by how much they can harvest, and the contributions . Analysis on Rationalizing Chinese Landless Farmers’ Compensation A thesis submitted in partial fulfillment of the requirements for the degree of Master of Science in Economics. 3.2 Compensation: Rules and Practices…… ………………………… …… 26 3.2.1 Compensation Policies………………………………………… 26 3.2.2 In reality, Practicing Compensation Policies……………………. 38 4. Quantitative Analysis ………………………………. Table 4.9 Estimated Compensations, Market Prices and Comparisons in Different Conditions…………………………………………………… 64 1 1. Introduction China has been undergoing economic reform since 1978