With more than 700 million residents living in rural areas, China is still a predominantly rural country. Despite substantial improvements in standards of living, the Chinese countryside is largely lagging behind. Rural-urban disparities in income and services and subsequent migration trends pose great challenges to sound development. The Chinese government’s recent strategy, “Building a New Socialist Countryside”, and related governance and fiscal reforms, represent an innovative approach to tackling these challenges and have brought substantial investments in rural areas.
This report analyses the key socio-economic forces at work in China’s rural areas and discusses the current government strategy for rural development. It argues that in order to bridge rural-urban divides the current policy approach needs to go beyond agriculture and that food-security targets need to be balanced with wider rural development objectives. This will entail a greater focus on investment rather than redistributive measures.
Action is needed to: optimise land use and strengthen land-related rights; improve rural service delivery in education, health care, and business and financial services; develop a stronger strategy of rural economic diversification, drawing on the potential of rural China’s rich natural and cultural amenities; and address serious environmental challenges with a view to the local-level implementation of national laws.
Realising the potential of rural China through a more comprehensive, co-ordinated and better funded rural development policy will require important governance reforms at all levels. Experience across OECD countries, as well as many successful cases and policy experiments in China, show that if these conditions are met, the Chinese countryside can increasingly become a source of balanced national development and growth.
What is the profile of rural China?
With a rural population of 737 million in 2006, accounting for 56% of the national total, China is still a predominantly rural country. Until mid-2008, outmigration flows have increased substantially and the number of rural migrant workers reached 132.1 million in 2006. While migration has multiple demographic, social and economic impacts on rural areas, it contributes to their economic development and to the diversification of income sources. Additional income repatriated by migrants raises household income per capita by between 8.5 and 13.1%.
Average rural income increased constantly (Figure 1) and rural poverty rates fell dramatically during the last three decades. However, disparities widened compared with urban areas, as well as across different rural regions. The ratio of nominal urban to rural income per person climbed to a record level of 3.3 in 2007. The levels of rural per capita income are highly disparate across provinces, as availability of non-agricultural jobs in rural areas and agricultural labour productivity differ strongly. Most vulnerable are rural areas dependent on agriculture, which often feature the highest rates of poverty (see Figure 2).
Despite recent improvements, large territorial divides still exist in the provision of public services. There are strong differences in access to education between rural and urban populations, and across provinces. An average schooling period for the rural population over 15 years of age is 7 years, compared to 10 years for the urban population. The provision of health care services is also challenging: while the permanent urban population (with the exception of migrants) is covered by medical insurance, the vast majority of the rural population is not and medical treatment often involves high costs, debts or a withdrawal from treatment. China has made significant progress in providing rural areas with basic services and infrastructure such as transport and electricity, but providing drinking water to the rural population remains a major challenge: By the end of 2005, about 312 million rural people did not have access to safe water supply. Access to credit and other financial services is also largely unequal, with a net transfer of financial resources from rural to urban areas. This represents a key obstacle to the economic development of many rural regions.
Even if agriculture remains key, the rural economy has been going through an important transformation with falling shares of agriculture in rural employment and income (Figure 3). Despite impressive growth of agricultural production and ongoing restructuring, agricultural labour productivity remains low. The rapid growth of rural enterprises has supported a structural transformation of China's rural economy. Their number expanded from 1.5 million in 1978 to 23 million in 2006, creating 119 million new jobs in this period. Rural enterprises showed an extraordinarily strong performance at the beginning of the 1990s, a significant slow-down in the second half of the 1990s, and a steady improvement in the first half of the 2000s with the annual growth rates of value added, exports and profits approaching 20%. Among the top ten provinces by rural enterprises' output value, eight are located in the coastal region.
The unexploited potential for further economic diversification is enormous: China is one of the most environmentally diverse countries in the world and has a particularly rich cultural heritage to be discovered in rural areas. Moreover, renewable energy resources are abundant and supported by the government, but are still significantly under-utilised. However, this potential is at risk, as rapid economic growth has put a considerable pressure on the environment. Water scarcity, water pollution, soil erosion and desertification create serious problems in various parts of rural China.
How has the approach to rural policy evolved?
The Chinese government broadened the scope of rural policy with its most recent policy approach, "Building a New Socialist Countryside" (NSC). It particularly targets agricultural productivity, land use, rural income, local governance reforms and public service delivery, aiming to solve the "three rural" (or sannong) issues which concern agriculture, rural communities and farmers. Starting with the reform period in 1978, China's policy for rural areas has been evolving towards a more market-based approach and involved a relaxation of agricultural controls and a less centralised production system called household production responsibility system (HPRS). A large part of China's success in raising rural incomes originates from a series of reforms in agriculture in the late 1970s and early 1980s. Related reforms contributed to a stronger diversification of economic activities and to a more autonomous rural governance system.
Public expenditure for rural areas has been increasing in line with a stronger focus on territorial imbalances. Expenditure on rural areas almost doubled in nominal terms between 2004 and 2007, with the largest part being provided through agricultural policy measures (55% of the total in 2007), followed by rural infrastructure (23%) and social development which combines support for rural education, health care, rural poverty alleviation and rural social security (20%).
What challenges emerge in multi-level governance?
Coherence and effectiveness of rural policy suffer from a complex institutional and governance framework, as well as sector by sector fragmentation. Despite the important role played by the Central Committee of the Communist Party of China (CCCPC) and two related Leading Groups, horizontal co-ordination in actual policy design remains modest as there is no single institution or formal mechanism in charge of integrating the most important NSC policies. These difficulties are reproduced at lower levels of government. Conflicts of interest emerge among different levels, between sectoral agencies and within the complex 'dualism' of Party and government bodies.
A dysfunctional intergovernmental transfer system and the unintended effects of recent reforms hamper the distribution of resources. Although a comprehensive rural tax and fee reform (RTFR) succeeded in responding to farmers' complaints about fiscal burdens, it also reduced local governments' possibilities to generate self-raised funds. Fiscal transfer payments have increased, but so have responsibilities of local governments, resulting in gaps between expenditure and financial resources. Disparities in fiscal expenditure across rural governments are stark. Moreover, many richer local governments are collecting considerable off-budget revenues, mainly from land-related transactions, but also from proceeds generated by, often illicit, local debt. These dysfunctionalities may also be linked to the weak representation of rural interests in people's congresses.
The implementation of central directives becomes particularly challenging through four main local governance weaknesses: i) Modest administrative capacity of local officials, who tend to be selected through non-competitive processes; ii) Low accountability, as governmental structures are often not yet developed enough to effectively monitor and evaluate policies besides top-down mechanisms; iii) Weak rule of law, as local courts have a weak institutional status; iv) Although increasingly recognised, there is limited scope in practice for citizen representation and participation as elected village institutions are subordinate to townships and the Party's 'core' leadership.
What are priorities for rural policy?
Key policy challenges for rural development could be addressed in the fields of land use, service delivery, economic diversification, and environmental protection.
• Land use: Progress is needed to implement laws on farmland rights which could facilitate the realisation of important economic potential for rural areas. Residential land rights should be clearly specified and made fully marketable and mortgageable. Moreover, recent policy improvements on land expropriation have to be fully embodied into law, permitting farmers to directly negotiate on compensation and clearly defining the scope of "public interest".
• Service delivery: A more coherent and better funded strategy for rural services should aim to bridge rural-urban and rural-rural divides. In addition to fiscal improvements across levels of government, more flexible, place-tailored investments seem to be necessary, considering local feedbacks and continuous innovation and benefitting from the opportunities offered by information and communication technology (ICT), particularly for remote regions. The strategy should be open to market opportunities and the role of non-governmental service providers, such as rural co-operatives and financial institutions.
• Economic diversification: Changes on both the demand and supply side require to look beyond agriculture for the future of rural China. Important opportunities exist for rural-urban linkages in business and services, given rural areas' assets such as culture, landscapes and biodiversity. Emerging sectors which hold great promises include rural tourism, renewable energy production and high-value added typical food, agricultural and forest products.
• Environmental protection: Sustainable development and economic diversification depend on a sound environmental policy. It is crucial to address the challenges rural China is facing in terms of the protection of natural amenities and better management of biodiversity protection. Efforts should be continued to reduce water pollution and increase water use efficiency in agriculture. Also, pollution caused by rural enterprises could be reduced by better monitoring, inspection and enforcement.
How to make rural governance more effective?
Addressing key rural policy challenges requires as a precondition a more effective and inclusive rural multi-level governance system that, targets: horizontal co-ordination, the inter-governmental fiscal system, local governance and the judicial system:
• Horizontal co-ordination: A more integrated, strategic approach to rural development at the central level of government might include the strengthening and formalisation of cross-sectoral co-ordination, oversight and financial assignments. Experience in OECD countries with, co-ordination mechanisms defined by law, the creation of integrated ministries, or 'rural proofing' mechanisms could be helpful.
• Intergovernmental fiscal system: Further reform is needed within the intergovernmental fiscal system in order to include, revised expenditure assignments, increased local revenues, and a more effective transfer system. The central government should provide sub-national authorities with appropriate resources to meet their obligations, and limit central spending to activities of national relevance. A comprehensive 'rural budget' at the central level that included central and sub-national expenditure might be considered, as well as a more transparent local taxation system linked to actual investment and submitted to citizens' scrutiny. Block transfers reflecting NSC objectives should be increased and accompanied by investments in technical assistance and monitoring and evaluation systems.
• Local governance: The use of place-based policies that tailor central directives to local circumstances should be enhanced and coupled to improved local administrative capacity and accountability. Better representation and participation of citizens is also needed. Priorities should include improved human resource management (HRM) that are linked to stricter entry procedures and more competitive and flexible salaries. The representation of rural citizens' interest could be supported through a more balanced rural-urban representation in people's congresses and enhanced public participation mechanisms for accessing information, as well as more participation in village self-governance and social organisations.
• Judicial system: Judicial independence and the authority of courts have to be further enhanced, both vis-à-vis Party bodies and local governments. In this regard, the implementation of two reforms could strengthen rule of law in the countryside: First, enhance the quality of the most basic level jurisdictions, mostly located in the countryside. Judges need to be clearly differentiated from other local civil servants and their salaries re-evaluated. Second, enforce the coherent implementation of laws across the territory. The legal system needs to be fully consistent, both horizontally and vertically, to ensure that rural citizens have their cases litigated according to the law.
Readers can access the full version of OECD Rural Policy Reviews: China through one of the following options:
Or visit: www.oecd.org/gov/ruraldevelopment
For more information about the OECD Rural Policy Review of China and the series of OECD Rural Policy Reviews, please contact: