Despite reforms to the hukou household registration system and the very large rural-urban migration experienced in China, rural households are still experiencing a risk of losing their land allocation if they migrate. We argue that this risk leads to an inefficient rental market with low rents and is an impediment to migration, with consequent over-employment in agriculture and low productivity.
China is entering a new phase of development, focused on new technology, more openness through the Belt and Road initiative, and poverty reduction. In 1978, China was one of the poorest countries in the world on a per capita basis; it is now a middle-income country, and it is likely that the majority of its current population will have the experience of living in a high-income country. This phenomenal growth began with the Household Responsibility System, which gave incentives to farmers to increase their productivity and to release labour from the farms. Combined with a simultaneous reduction in barriers to migration to the cities, the reforms led to the urbanization of agricultural labour and to industrialization fuelled by low-wage migrant labour. The ensuing Great Migration supplied labour to industry and led to the most phenomenal reduction in global poverty ever experienced in such a short period of time (see, for example, Meng et al, 2010, and Gardner, 2017).
Chinese leaders have recognised the need for more structural reforms. Reforming the financial sector and the state-owned enterprises has featured high on their list of priorities. Yet, we believe there is another necessary reform, one that appears at first sight to be of the old-fashioned kind that led to the Great Migration: land policy reform and further reductions in the barriers to migration. Consider the following facts. Labour productivity in rural areas in China is a much smaller fraction of urban productivity than in other industrial countries (see Brandt and Zhu, 2010). Agricultural productivity made gains in the first few years of reform but failed to continue closing the gap when industrialization began in the 1980s. Agriculture in China still employs about 20% of the workforce, well above the 1-4% levels present in countries like Germany and Japan. Rural poverty in China is still very high and it is a stated objective of the Chinese government to eliminate it in the next 4-5 years. At the same time, there are plans to move quickly to the hi-tech post-industrialization phase that characterizes Japan and Germany.
These facts indicate that mechanization of agriculture, productivity, and rural wages (and yields from own cultivation) are below the levels expected of a country entering the post-industrialization phase, and migration out of agriculture is lower than expected given the relative productivities of urban and rural employment. In our recent paper (Ngai, Pissarides and Wang, 2017), we argue that these facts can be explained by the restrictions still embedded in the hukou system of household registration. A simple reform, as we explain below, could move China closer to the industrialized countries with which it competes.
Introduced in 1958 as a kind of internal passport restricting migration, the hukou system was gradually relaxed beginning in the early 1980s. But despite these reforms, the majority of citizens still have an agricultural hukou issued in their rural area of origin, and despite the granting of urban hukou to some migrants, the majority of urban non-agricultural hukou belong to the original (pre-industrialization) urban residents. The official policy with respect to the registration system is that rural residents receive from the state a small plot of land, which they can cultivate. Hukou holders of each area receive social benefits provided by the local government that issues the hukou—most importantly education for their children and health care. Migrants (i.e., agricultural hukou holders in urban areas) have no access to any services, unless they return to their village.
How does this system impact labour allocations in practice? In order to see how the registration system could lead to a relatively higher agricultural share and lower productivity from agriculture, consider the extreme case in which agricultural land can be used only by the family of the original grantee and social services in urban locations are not available to migrants at all. This case effectively reduces the potential rewards from migration. Since rural migrants pay for social services, their real incomes in cities are less than the real incomes of urban hukou holders. The situation with the land allocation is more complicated but it acts to keep land plots small and gives rise to additional disincentives to migration. Because rural residents can use land only within the family, they cannot merge several small plots together to form large plots. Capital investment in small plots is uneconomical and production is labour intensive, so productivity remains low. If the rural worker decides to migrate because returns in the city are higher, he is faced with either leaving his family behind to cultivate the land or forfeiting his land allocation. Neither is a good option because family separation creates social problems and the land allocation is a net asset to him, which is then lost. Both of these act as barriers to migration. There are several stories in the literature of families splitting up, with children remaining in the village to attend school because it is too expensive in the city, and the like. The outcome is that migration is lower than it would be in a free market, while agricultural employment is too high and productivity in agriculture is too low, both because of insufficient capital investment and because of excess labour.
Land is normally allocated to villagers for a thirty-year period. Suppose a reform took place that guaranteed this land tenure, regardless of what the villager decided to do with it. He could cultivate it, lend it to relatives, or rent it out at market rates. There will be villagers who will want to stay in the village and cultivate their land. But the migrants now have the option of renting out their land and collecting rent when they are in the city. They can use the rent to pay for the social services that the urban authorities do not grant them. The result will be the creation of larger land plots, as some farmers will rent several plots and merge them into one, and the migrating villagers will collect a market return from their allocation (see also a recent discussion in The Economist, 2018). This reform enables more mechanization of agriculture, higher productivity and wages, and removes the migration barriers to cities. Rural poverty is reduced and China’s rural/urban gap closes.
Other reforms could yield similar results. For example, Tao and Xu (2007) suggested that migrating farmers could be given the choice of giving up their land and acquiring the urban hukou of their host city, which would enable them to claim free local services for their family, or they could keep the land with a guaranteed tenure. Families that move to the city with no intention of returning to their village may prefer the former option. It would be a once-and-for-all removal of the migration barrier embedded in the hukou system. But migrants who might want to return to their village in later life might prefer the tenure guarantee. The guarantee gives them a source of income that they can use to settle in the city.
Following the reforms of the 1980s, the Chinese authorities relaxed gradually the hukou restrictions and their policy towards land. Important reforms took place in 1998 and 2003, strengthening land tenure rights. But several surveys from Chinese regions still find that villagers fear that if they rent out their land that village leaders will take it from them and reallocate it (see, for example, Deininger et al, 2014, Feng et al, 2014, and Kimura et al, 2011). Recently, beginning with the 2003 Act, a rental market has started to develop. But it is still far from perfect, as rents are low and villagers are still concerned about reallocations (Wang, Riedinger and Jin, 2015). As we show in our paper, the land reallocation risk when the farmer rents his farm out and migrates to the city shows up as a risk premium on rents. The rents are lower by a fraction that is proportional to the probability that the village leader takes the land away from the migrant. The lower rents imply that the rental income collected by the migrant when he is working in the city is below market returns, acting as a barrier to migration.
The migration barriers implicit in the land policies of village leaders and the social policies of urban authorities are responsible for an oversized and inefficient agricultural employment, and ultimately for the underutilization of China’s rural labour force and lower rural incomes.
[Liwa Rachel Ngai, the Department of Economics at the London School of Economics and Political Science (LSE); Chris Pissarides, the London School of Economics and Political Science (LSE) and the University of Cyprus; Jin Wang, the Institute for Emerging Market Studies at the Hong Kong University of Science and Technology.]
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