Once again, for the 10th consecutive year, Chinese Government Document No1, focused on rural development. The document addresses most of the issues, including how to protect the interests of migrant workers, how to boost rural construction, how to improve agricultural yields, how to push for continuing urbanization and, more importantly, how to boost standard of living and income for farmers. There is also an interesting mention on how to develop rural financial services and environment protection. In the past, I have discussed all these issues in various forums and below I offer some of my views on a three of them: economic growth, urbanisation and preservation of rural land. In my view, these are three impossible goals to meet at the same time, almost impossible, anyway.
In macro economy, there is a concept called “the impossible trinity”, which states that it is not possible for a country to have 1) fixed exchange rate; 2) free capital flow and 3) sovereign monetary policy. In other words, a country can only choose any two of those three variables and the third will have to follow mathematically. Graphically, this idea is represented by a triangle, whereby an individual nations can only choose one of the three sides, as shown below.
In the case of China, one can think that the country has chosen to lie, more or less, on side C, that is it has chosen to have a fixed exchange rate (or almost fixed) an independent sovereign policy, but cannot at the same time have full free flow of capital. Other countries, in Europe, for example, have chosen to lie on Side B, thus allowing free capital flow, maintain control of monetary policy, but let their currency free float in the markets. Of course, this still remains a theoretical model and there can be “compromises” to allow “a little bit” of currency fluctuation and “a little bit” of capital flow and, perhaps, this is the place where China is, in practice, at the moment.
Document No.1, which sets many goals, is, I believe, driven by good intention, a genuine desire to finally make Chinese rural sector profitable and allow farmers to gain a fairer share of the country’s spectacular growth. Indeed, if we look at the evolution of personal income for both rural and urban residents, it is clear that the farmers where the early beneficiaries of Reforms and Opening up and urban-rural ratio decreased from 2.6x in 1978 to a low of 1.8 in 1988, and then increased to about 3.2x in 2004 and has since remained pretty much constant.
However, the current economic development model adopted by China has largely been based on rural-urban migration: that is, it has encouraged farmers to move to the city and earn better wages. This has often been accompanied by a change of hukou, resulting in the farmer’s loss of land and gain of land for the collective which had, in turn, handed over this ‘land credit’ to city. The local city government has then been able to convert the newly obtain rural land into commercial area, in turn contributing to the development of real estate and related boost of local GDP. In other words, up to today, the Chinese development model has pursued a path of GDP growth, Urbanisation accompanied by a steady decrease in rural land.
Going forward, Chinese policy makers have spelt out three main concepts on which to base development: Urbanisation, Economic Growth and Preservation of rural land. These three legs, unfortunately, belong to a new category of Impossible Trinity; just, this is not about monetary policies and exchange rates. I, therefore, introduce the concept of “Urbanisation-GDP-land Trinity”, shown below. China can only choose any of the two and give up the control of the third.
Why is this Trinity impossible? In the past, when preservation of land resources was not a priority, China decided to lie on Side A, choosing urbanisation and GDP growth as the main targets and rural land has decreased. In the future, if really 1.8bn mu of land are to be preserved, it should choose lie on a different side of the triangle. For example, we can pursue a policy of land-preservation and urbanisation: this means allowing farmers to move to the city without giving up their land. If this happens, on one hand there is a slight increase in GDP arising from the higher wages earned by the newly migrated farmers. However, with no new land to re-convert, the vast majority of GDP input factor (land + real estate development) would vanish. China would lie on Side B. Alternatively, China can choose both land preservation and GDP growth, side C. This will mean to introduce policies that allow farming to become a profitable industry, with advancement in technologies, more efficient land allocation, perhaps the development of profit-driven cooperatives and so on. Doing that would dramatically decrease the flow of rural-urban migrants, as they would see no immediate and, even less, lasting benefits to leave a potentially profitable industry (rural) to become second-tier citizens, away from their families, with unstable jobs, in unknown megalopolis.
Of course, like in the macroeconomic Trinity, China still has some room to do “a little bit of urbanisation”, “a little bit of GDP” and “a little bit of land preservation”! The triangle is not perfect and there may be points inside that find a compromise amongst the three variables, but still something has to give
The question is therefore: do we focus on urbanisation at the expenses of GDP growth or on GDP at the expenses of Urbanisation? I believe side C is the better choice.
Another way of asking the same question is, do we let farmers income catch up with that of urban citizens but let local Government finances in disarray, or we continue along the same path of developing cities and infrastructure with debt, at the expenses of laobaixing? In China there is a sentence that says“国进民退“ (the country advances, the people stay behind)， maybe we can change it to “国进农退”(the country advances, the farmers stay behind)！