Why is land so important in china

Second, they usually return to their village of origin after a few years of migration. Indeed, a set of policies was put in place to prevent rural people from definitively settling in urban areas, constraining urbanization in a unique way.

This "paradox of China's growing under-urbanization" Chang and Brada, , owes much to the Chinese household registration system, or hukou. Since the s, the hukou has classified the Chinese population according to two dimensions: activity and residence Naughton, Regarding activity, households can have either agricultural or non-agricultural status.

Agricultural households are entitled to usage rights on plots of land while non-agricultural households have subsidized access to urban benefits regarding education, healthcare, employment and housing. The place of residence defines where these benefits can be obtained. In the s and s, the hukou was a cornerstone of collectivization and economic planning, and it made individual migration impossible. After , the dismantling of rural People's Communes , along with the implementation of a temporary residence permit and an identity card, conferred a legal status on rural workers in cities , while the end of grain rationing in progressively alleviated constraints on migration.

Yet, the remaining rights and duties associated with the hukou render urban life extremely difficult and costly for rural workers. In addition, it is still extremely difficult for an agricultural worker to obtain an urban hukou and applications are subject to quotas at the municipal level.

Besides hukou, the land rights further limit rural outmigration. Since farmers cannot sell their land or use it as collateral, it is hard for those without capital to leave agriculture and start an off-farm activity. Furthermore, outmigrants are at risk of losing some of their plots because collective authorities have the right to redistribute the land allocations of absent farmers to the villagers currently present, or even to seize it for their own benefit.

This insecurity over land rights hinders migration, as migrant workers fear the loss of their land and thus tend to shorten their time away de la Rupelle, Deng, Li and Vendryes, Development consequences China's regulatory institutions for land and migration shape its development: rural people tend to migrate less and for shorter periods, households are deterred from leaving agriculture, and the pace of urbanization is relatively slow.

The transfer of the labour force from the agricultural sector to modern urban activities is allowed to take place without uncontrolled urbanization or a sudden drop in agricultural production. The hukou also segments the labour market, as agricultural hukou holders working in cities do not have the same rights as their urban counterparts. This has contributed to limiting wage growth and to maintaining the competitiveness of export-orientated sectors Chan, forthcoming.

Regarding rural issues, the system of collective land ownership, with periodic redistributions, plays an insurance role for migrant workers who only have limited access to formal social insurance or credit markets Murphy, Although agriculture is not very profitable, access to land guarantees at least a subsistence income for rural households.

For example, in the aftermath of the financial crisis, many redundant migrant workers simply went back to their rural homes Kong, Meng and Zhang, These institutions, through restricting outmigration and the rights of rural migrants, also have negative consequences on rural development. First, as rural industrialization has slowed since the mids and also because rural credit markets remain underdeveloped, migration constitutes a crucial route to enable access to off-farm jobs and capital Murphy, Second, returning migrants become key agents for rural development, bringing not only money but also skills and networks Murphy, Third, because rural outmigrants are limited to "3-D" jobs dirty, dangerous and difficult and cannot access urban public schooling, existing and potential migrants tend to reduce their investment in children's education Chan, forthcoming.

Fourth, insecurity over land rights hinders productive investment in agriculture Vendryes, Finally, and perhaps most importantly, conflicts over agricultural land and the "second-class" status of rural populations have aroused deep feelings of injustice and social unrest Ding, ; Chan, forthcoming Such tensions relate to a much larger problem faced by agriculture: the multifaceted pressure on land.

China's very rapid development has dramatically raised the stakes regarding land usage. Industrial and commercial pressures, as well as ecological concerns, are challenging agricultural development, even though agricultural production is a key political objective. This industrial and urban development has generated a huge demand for land, constituting an important pressure on agricultural land, especially on the fringes of the most developed urban areas. The development of satellite imagery in the s has allowed land use changes to be closely monitored, unsurprisingly revealing that the built-up area has significantly increased.

Estimates are that China's total area of built-up land has grown by a quarter between and Deng, Huang, Rozelle and Uchida, This trend has tended to reduce the arable land area and has created intense social tensions because farmers do not have the right to change the land use of their allocated agricultural plots themselves.

Only the state has the formal right to own non-agricultural land, and so a change in land use implies a change in land ownership Ding, At the root of the issue is the fact that the compensation offered to farmers whose plots are seized is often far below the benefits associated with the land use change Ding, , a phenomenon that is responsible for the recent multiplication of conflicts in rural areas.

The legal response to the conflicts over land seizures and fair compensation has so far been quite insufficient. The Land Management Law requires such seizures to be in the "public interest" article 2 , and the Law on Land Contract in Rural Areas compels authorities to give a "fair compensation" to expropriated farmers article Yet, both laws are not sufficiently specific, leaving the door wide open for many types of local misuse.

This is today probably the single most important problem for the social and economic sustainability of China's agricultural development. On the opposite side, growing ecological concerns have encouraged authorities to take measures to protect soils, especially to mitigate agricultural land loss due to erosion and desertification.

Data show that such concerns have a very real basis, for example, over the period , it is estimated that land resources degradation led to a net loss in agricultural land of From the beginning of the s onwards, important policies have been implemented to address this phenomenon.

The Water and Soil Conservation Law of prohibited the exploitation of land with a slope above 25 degrees. The NFPP has led to an increase of 1. Contrary to the NFPP, household participation in the SLCP is voluntary, and farmers who convert plots to forest or grassland receive significant compensation. State compensation offered for the conversion of agricultural land to forest or farmland, mainly through the SLCP, is also significant, high enough to attract the voluntary consent of over 32 million households between the years to Qu et al.

Results have been satisfying: nine million hectares had been converted under the SLCP by the end of The ecological results have also been encouraging, erosion has been reduced, soil quality has increased and water resources have been protected.

However, this success comes at the cost of an increasing pressure on agricultural soils, as plots are reconverted to forest and grassland. Decreasing farmland and state reaction Industrial and urban development, along with programmes motivated by ecological concerns, are together significantly increasing the pressure on land availability.

As land availability decreases, the value of land for non-agricultural, commercial or industrial use rises. Studies based on the aforementioned satellite imagery concur with the notion that agricultural land is facing strong pressures. Even though the overall area of farmland may not have decreased, this is only because agricultural areas have been shifted away from urban activities and moved onto less productive soils. In fact, studies Deng et al.

However, many of the more recent studies Vendryes, show that the decrease in agricultural land area has accelerated since the beginning of the 21st century, despite the exploitation of new resources in marginal agricultural regions. It is therefore likely that future losses in land quality will no longer be compensated by increases in quantity. Due to concerns regarding this issue, in the mids Chinese authorities initiated a policy of farmland protection to limit the decrease in exploited arable land acreage Vendryes, In , the Regulations on the Protection of Basic Farmland aimed to identify "basic farmland", i.

In , the scope of these regulations was extended to include all farmland under the revised Land Management Law, which set a compulsory objective of no net decrease in farmland. Finally, in the Ministry of Land and Resources set a minimum limit for arable land in China of 1. However, in terms of actual land resources, China is already edging dangerously close to this "red line". Agricultural production today During the nineteenth century, China experienced famines and food crises at such a regular frequency that geographers in the s named it the "land of famine" Mallory, One century later, China seems far removed from such a description.

Different from the baseline model, this part of the paper assumes that the land is no longer owned by the government but by private individuals i. Therefore, the economic structure in Figure 1 will also change, and the land providers i. Based on historical and international experience, the land market under nonpublic ownership system will quickly form a monopoly market through land annexation, and the land will eventually be controlled by a small minority Niu and Ding, ; Xie and Li, ; Van der Ploeg et al.

The market equilibrium now is determined by Eqns 1 — 5 , 8 — 9 , 11 — 14 and 16 — Table 3 shows the comparison of results between the steady-state values of major macroeconomic variables under the nonpublic land ownership system and the baseline model under the public land ownership system. The numerical simulation results of the above counterfactual analysis are also consistent with our theoretical predictions. Under the nonpublic land ownership system, the important production factor land is monopolized by the household sector.

For example, the cost of industrial land in India is quite high, which hinders its industrialization process Yao and Liu, On the other hand, land rental income is no longer owned by government sectors but by household sectors, which inhibits the government's ability to finance infrastructure construction, thus reducing infrastructure investment and weakening economic growth. The decline in GDP has also lowered the level of consumption in the household sector, which in turn has led to a sharp decline in social welfare [11].

In this model, there are two core reasons why the public land ownership system is more conducive to economic growth and household welfare than the nonpublic land ownership system. First, land factor tends to form monopoly markets, and monopoly will generally lead to distortion of resource allocation. Second, infrastructure, as a public good, plays an important role in economic growth. When the land rent goes to the government, the government can use it for infrastructure investment to reduce the marginal cost of production and drive enterprise investment.

However, when the land rent goes to the private sector, the private sector will not invest in infrastructure but only care about the private investment income. As a result, the lack of infrastructure leads to an increase in marginal costs, which in turn inhibits private investment [12].

A reasonable conjecture is that under the nonpublic land ownership system, the government can raise taxes or issue bonds to finance infrastructure construction to make up for the shortage of infrastructure investment. In response to this point of view, we conducted another counterfactual analysis: under the nonpublic land ownership system, the government increased tax rates to achieve equal level of GDP as the baseline model under the public land ownership system.

Numerical simulation shows that the tax rate needs to be increased to The comparison of other macroeconomic variables is shown in Table 4. In addition, compared with the baseline model under the public land ownership system, the policy of raising taxes to finance infrastructure construction for growth has lower fiscal efficiency and infrastructure investment efficiency.

Generally speaking, tax is distortionary and raising tax rate may incur certain welfare losses. This is also the inevitable result of excessive and inefficient infrastructure investment crowding out resident consumption. Further analysis indicates that under the nonpublic land ownership system, although the policy of increasing tax rate to promote growth can bring about a long-term steady-state GDP increase, its promoting effect on household welfare per capita consumption level under the steady-state condition is not linear or monotonous.

That said, comparing Table 3 with Table 4 , we find that it is still desirable for the government to raise tax rates to finance infrastructure construction under the nonpublic land ownership system when there is insufficient infrastructure stock capital, as this is conducive to the increase of GDP and the improvement of household welfare in the long run. Therefore, for most developing countries whose basic system of nonpublic land ownership cannot be changed for the time being, using financial means to promote infrastructure investment is the right policy choice when the infrastructure stock capital is insufficient.

The above analysis shows that public land ownership system is more conducive to China's economic development than nonpublic land ownership system, but this does not mean that the current land policy is optimal. The following part will discuss the optimal land policy design under the public land ownership system. The current land supply structure distorts China's real economy. The limited supply of commercial and residential land and high land prices have pushed up house prices, rents and commercial operating costs, inhibiting the development of residents' consumption ability and related service industries, thus inhibiting China's economic growth Chen and Qiu, ; Chen and Liu, ; China's Economic Growth Frontier Research Group, ; Lu et al.

Thus, expanding the supply of commercial and residential land and reducing the cost of land in the service sector can promote better economic development from the following aspects. First of all, it will promote the overall economic growth by promoting the development of the service industry, thus improving the overall consumption and welfare level of residents.

Although expanding the supply of commercial and residential land and reducing the cost of related land factors will greatly reduce the income of land transfer fees, it will promote economic growth and thus lead to the increase of other tax revenues, thus increasing the overall government income level. Moreover, the above adjustment of land supply mode can also improve the aggregate demand structure and cut inefficient investment, thus improving the overall efficiency of the economy.

The relation between adjustment of land supply and optimization of aggregate demand structure can also be analyzed through numerical simulation.

Previous studies have pointed out that China's macro-economic aggregate demand structure is unbalanced to a certain extent, with a high investment rate and a low household consumption rate, and the investment-consumption structure deviates from the optimal value Huang and Wang, ; Chen et al. This paper also supports this conclusion with its analysis.

The numerical simulation results show that expanding the supply of commercial and residential land and reducing the cost of land factors in the service sector promote overall economic growth and improve the welfare of residents, and the increase of residents' consumption is larger than that of enterprise and infrastructure investment. In other words, the current aggregate demand structure is unbalanced, and improving the land supply mode can improve the aggregate demand structure, so that investment does not need to increase too much to drive a larger increase in consumption.

On the one hand, this will lead to a rapid decline in the marginal output of land; on the other hand, it will greatly weaken the government's financial capacity and affect infrastructure investment, thus causing a significant decline in GDP and household welfare level. Figure 4 shows the numerical simulation results that can help determine the optimal land policy: under the public land ownership system, the steady-state GDP of different land policies i.

In the process of industrialization in the past few decades, the industrial sector accounted for a high proportion, while the nonindustrial sector accounted for a relatively low proportion.

A logical conjecture is that as China's industrialization comes to an end and the share of nonindustrial sectors continues to increase, the distortion of the real economy by the current land policy will become more and more serious.

Therefore, we will gradually adjust the parameters reflecting the relative scale of nonindustrial sectors from the benchmark calibration value of 0.

Just as we predicted, as the proportion of the industrial sector continues to decline, the distortion of the real economy by the current land policy will become more and more obvious. Another issue worthy of attention is that as China's infrastructure becomes more and more well-developed, the output elasticity of infrastructure may decrease in the future. In fact, some studies believe that some western provinces of China have already seen excessive investment in infrastructure Shi and Huang, Figure 6 shows that steady GDP and household welfare level are positively correlated with the output elasticity of infrastructure.

When the output elasticity of infrastructure is reduced from 0. In order to test whether the conclusions of this paper on the comparison of economic growth between public and nonpublic land ownership systems and the optimal land policy are stable and reliable, we have carried out a robustness analysis on the parameter calibration of the baseline model and model assumptions. Please refer to the Appendix for relevant analysis. The results show that the main conclusions of this paper are robust.

Specifically, we examined 10 cases of parameter calibration that deviated from the baseline model and two cases of where the degree of private land monopoly under the nonpublic land ownership system was lowered. Under these 12 circumstances, the counterfactual analysis results of the nonpublic land ownership system in this paper are very stable: the nonpublic land ownership system is not conducive to China's economic growth. Under the nonpublic land ownership system, high land price will increase the production cost of the industrial sector, while the lack of infrastructure will further lower private investment and economic growth, resulting in a sharp drop in total output and household welfare.

Therefore, China should reduce the price of land in nonindustrial sectors to promote better economic development. The land system with Chinese characteristics is an important factor to explain China's high economic growth, and the adjustment of land supply mode is also closely related to future economic development. The analysis of this paper showed that: under the nonpublic land ownership system, high land price will increase the production cost of the industrial sector, which, coupled with the lack of infrastructure, will greatly inhibit the enterprise investment and economic growth, thus greatly reducing the total output and household welfare.

There are two core reasons that public land ownership system is more conducive to economic growth and household welfare than nonpublic land ownership system. First, the factor of land tends to form a monopoly market, and monopoly will generally lead to distortion of efficiency. The degree of an industrial land market monopoly under the nonpublic land ownership system will increase, resulting in greater distortion of efficiency and household welfare.

Second, infrastructure, a public good, plays an important role in economic growth. When land rent flows to the government, the government can use it for infrastructure investment. With the proportion of the industrial sector in China's economy reduced and the elasticity of infrastructure output in decline, the current land supply model will have an increasingly obvious effect on economic growth.

China should expand the supply of commercial and residential land and reduce the price of land in service sectors including real estate. The policy recommendations in this paper are clear; on the one hand, the public land ownership system is China's institutional advantage, therefore a nonpublic land ownership system is not recommended; On the other hand, the institutional advantages of the current public land ownership system have not been brought into full play.

The adjustment of the land supply mode with the expansion of commercial and residential land supply should become an important part of the structural reform on the supply side. From a realistic point of view, real estate bubble in the first and second tier cities is obvious. High housing prices have seriously distorted the investment behavior of enterprises, while the rapid rise in production cost and urban living cost caused by the rapid rise in land price have also greatly hindered the urbanization of the population and the development of service industries.

Therefore, the comprehensive expansion of commercial and residential land supply and the reduction of commercial and residential land prices are crucial to the establishment of a long-term mechanism for real estate and the further development of population urbanization and service industry [13].

That said, some of the conclusions and policy recommendations of this article are based on the analysis of a long-term economic growth. When implementing these policy recommendations, it is necessary to ensure a smooth transition of the economy through some policy measures in the short term.

A comprehensive reduction in the price of commercial and residential land may have a certain impact on local finance in the short term. Therefore, a smooth transition can be achieved through some specific financial system reform measures, such as centralize the decision-making of part of infrastructure construction, education and other matters to the central government, so as to gradually realize a better match of central and local governmental and financial powers. In addition, when formulating specific policies to expand the supply of commercial and residential land, it is also necessary to prevent market players from hoarding land and real estate properties and to discourage speculation, so as to make sure that the fundamental starting point for policy formulation is the effective reduction of land cost.

The model in this paper can be expanded in many aspects to further study on the impact of land system on China's economic growth and structural transformation. First, the model in this paper is a closed economy model, which can be used to build an open economy model. In this way, another channel for public land ownership system to promote China's economic growth can be elaborated: manufacturing enterprises obtain land at a cheap price, which lowers the marginal cost of China's manufacturing products and enhances its international competitiveness, which in turn is conducive to the expansion of exports and production scale.

Second, the labor market is also very important. Third, in order to simplify the model, we used relatively exogenous government financial behavior expenditure and tax in this paper, and more detailed results may be obtained by internalizing the government behavior. Fourth, the industrial structure in this model is exogenous, and the land system with Chinese characteristics may have an impact on the dynamic changes of China's industrial structure.

This is also a very interesting issue worth studying, but a more complex macro model of structural changes is needed. We will analyze these issues in future in-depth research. Economic structure under the public land ownership system. Economic structure under the nonpublic land ownership system. Impact of different land policies on GDP under public land ownership system. Correlation among output elasticity of infrastructure, GDP and household welfare under current land supply mode.

Adjustment of land supply mode and optimization of aggregate demand structure. Impact of different land policies on GDP when output elasticity of infrastructure declines to 0. Macroeconomics under the nonpublic land ownership system: raising tax rate to fund infrastructure construction for growth.

The macro economy under the nonpublic land ownership system: robustness test of counterfactual analysis. Deininger analyzed international data and pointed out that the degree of land concentration in a country may be negatively related to its economic growth.

The study this issue, we can either carry out empirical research based on international data, or theoretical research based on theoretical model and counterfactual analysis. This article falls into the second category. Colonial countries are generally vast and sparsely populated, with relatively abundant land resources. As mentioned earlier, the labor factor is not considered in the production function in order to simplify the model and analysis in this paper. In fact, such treatment is equivalent to regarding labor supply as fixed and the labor income is included in the production profits.

It can also be assumed here that each intermediate product sector has a monopolistic competitive market structure, and that the products produced by numerous small manufacturers in a monopolistic competitive relationship which can be assumed as constant elasticity of substitution are finally aggregated into the intermediate products of the sector.

Under such assumptions, the main conclusions of this paper remain unchanged. Some literature on infrastructure maintain that infrastructure itself can directly benefit residents. This paper adopts the research paradigm of mainstream literature, and instead of making such assumption, it believes that infrastructure will ultimately affect distribution and residents' consumption by influencing the production of various sectors, thus indirectly affecting household welfare.

As discussed below, we will examine the situation where the tax rate can be adjusted by the government, where tax distortion will appear. In addition, this paper assumes that government expenditure g is a relatively exogenous stable variable in the long run, so we do not consider the situation where government finances infrastructure by reducing general government expenditure.

In this model, the household welfare is defined as the per capita consumption level in the steady state. Of course, it can also be defined as the utility level of residents in the steady state, but this needs a specific form of utility function. Since the utility function is monotonically increasing, so no matter what form of utility function is adopted, the conclusion on welfare in this paper holds true in the qualitative level. In the baseline model, rent income has become an important source of financing for infrastructure, a special public good, which is related to the Henry George Theorem Arnott and Stiglitz, Henry George Theorem states that under certain conditions, government rent income can be used as the only source of funds for public goods, and there is no need for the government to levy other distortionary taxes.

This innovation has the potential to increase the equity and efficiency of land conversions. Small farm size and low productivity can be ameliorated by letting farmers transfer farmland to others for agricultural production. Rural land transfer has been permitted since the s and has increasingly gained government support over the years. In , the Land Contract Law of China confirmed the right for farmers to transfer land use rights.

As Figure 2 shows, the total amount of land transfer increased from five percent of arable land in to An important driving force for this increase is that migrant farmers want to work in cities while keeping their land at home. The majority of land transfers happen between farmers.

For example, migrant farmers may let friends or relatives farm their land. These kinds of transfers often rely on informal agreements, and usually involve zero or very low payments.

Although not land rental per se, these informal transfers lay the ground for the future development of the rental market by consolidating small plots and making them attractive to large-scale farms.

Currently, land transfers to firms represent An important factor is that property rights of rural land are insecure and unclear. This is manifested in inaccurate land borders and sizes, incomplete land use right certificates, and limited HRS tenure see first text box. The Chinese government just extended HRS tenure to , and is in the process of issuing land use right certificates with more accurate land position and size information.

This effort is expected to boost the land rental market in the future. Private land ownership is banned in China. The tenure of contract rights was 15 years in , renewed for 30 years in , and again by 30 years i.

The percentage of urban population in China increased from 19 percent in to 57 percent in China Statistical Year Book , and is continuing its upward trend.

Despite significant demand for farmland acres to be converted for urban development, China has successfully maintained the quantity of its arable land in recent years China Agricultural Development Report This is due to policies that compensate arable land lost to development by creating arable land somewhere else, often by converting farmhouses to arable land. The fact that returning rural construction land to cropland can generate valuable permits for urban development somewhere else creates additional opportunity cost for facilities for animal production.

This opportunity cost is first felt by municipal governments who depend on selling development rights for revenue.