Innovation and Economic Development in Rural China

Jikun HuangChina Center for Agricultural Policy and

School of Advanced Agricultural SciencesPeking University

1. Introduction

China’s rural has changed dramatically since late 1970s, rural development is one of the miracle development stories in the world. Agriculture grew at 4.6 annually in the past three and half decades, which was much higher than 1% of annual population growth rate over the same period. While per capita water availability in China is only one fourth of world average and arable land accounts for only 8% of world total, China supported about 20% of the world's population with 96% of overall food self-sufficient in 2014. Agricultural growth has also been accompanied with significant structural change in agricultural production and food consumption. Growth in agricultural income and off-farm employment have stimulated overall of farmers’ income and rapid rural poverty reduction. The number of extreme poverty population fell from 250 million in 1978 to less than 15 million in 2007 in rural China, which reduced rural poverty rate from 32% to less than 3% over the same period. Even under the new poverty line (RMB 2300/day in 2010 price, or a slight more than $2/day in PPP), rural poverty population had also decreased from 165 million in 2010 to about 70 million in 2014 ((NSBC, 2015). China was the first developing country to meet the Millennium Development Goals (MDGs) target of reducing the population living in poverty by half ahead of the 2015 deadline.

While past accomplishments are impressive, there are still great challenges ahead. Natural resource scarcity, environmental degradation, rising wage and production costs, and increasing food demand, all these will challenge China’s food security, competitive of agricultural, and sustainable agricultural development (Huang, 2013). Meantime, accompanied with rapid economic growth and average income rise are the growing concerns on income disparity between rural and urban, among regions, and among households within the same region (NSBC, 2015).

To have a better understanding the past experiences and lessons as well as the ways forward, there are a number of questions that are needed to be examined. For example, what are major innovations and experiences/lessons in China’s rural development? What have been their roles in improving China’s ability to meet its growing demand for food in the past? How have the rural innovations affected farmer’s income and rural poverty reduction? What are the main challenges which China’s agricultural and rural development are facing? How to formulate more innovated reforms and appropriate policies to facilitate the sustainable agricultural and rural development in the future?

Overall goals of this paper are to try to provide some insights on the development of agricultural and rural economy in the past with the special attention to the questions raised above, and provide policy implications for the innovated and sustainable agricultural and rural development in the future. To meet these goals, the rest of the paper is organized as follows. The next section describes China’s agricultural

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development and experience with focused on institutional innovation, technological innovation, innovated market reform, and investment in rural. Section 3 presents rural transformation and its roles on raising farmer income and rural poverty reduction, and addresses the roles of innovated institutions, policies and investments (IPIs) and their sequence of IPIs to foster inclusive rural transformation. Section 4 discusses the current and future challenges of agricultural and rural development. The last section summarizes and concludes this paper with several policy recommendations.

2. China’s agricultural growth and major innovations

2.1 Major achievements

Compared to the early and mid- 1970s, when the value of gross domestic product of agriculture rose by 2.7% annually, the annual growth rate more than tripled to 7.1% during the initial reform period of 1979–1984 (Table 1). Although during the later reform periods (1985–1995 and 1996–2000) the annual growth rates slowed to around 4% in real terms, this is still extraordinarily high rates of agricultural growth over such a sustained period.

Table 1. Average annual growth rate (%) of agriculture and economy in China, 1980-2014.

　Pre-reform Reform period

1970-78 1979-84 1985-95 1996-00 2001-05 2006-10 2011-2014

1978-2014Average

GDP: 4.9 9.2 9.7 8.2 9.9 11.1 8.0 9.4Agriculture 2.7 7.1 4.0 3.4 4.3 4.5 4.1 4.6Industry 6.8 8.2 12.8 9.6 11.4 11.9 8.5 10.8Service / 11.6 9.7 8.3 10.1 11.9 8.4 10.0

Grain 2.8 4.7 1.7 -0.7 1.1 2.5 2.0 1.9Cotton -0.4 19.3 -0.3 -1.9 5.3 -0.9 -2.1 3.2Edible oils 2.1 8.9 17.2 8.0 2.0 -2.7 9.8 8.8Fruits 6.6 8.0 12.5 8.2 29.2 6.0 12.8 12.6Meat 4.4 8.5 10.0 7.3 5.1 -3.1 7.7 6.6Fishery 5 7.4 12.6 6.8 3.9 3.6 11.0 8.3

Population 1.80 1.40 1.37 0.91 0.63 0.51 0.50 1.0

Per capita GDP 3.1 7.4 8.3 7.2 9.0 10.6 7.5 8.3

Notes: Figure for GDP (in real terms) in 1970–78 is the growth rate of national income in real terms. Growth rates are computed using regression method. Trade growth is based on current value in US dollars. All original data are from NBSC, Statistical Yearbook of China, various issues

The growth in crop production has occurred in all commodities. Between 1978 and 2014, grain production increased by 1.9%, nearly double of population growth (Table 1). Far more fundamental than rises in grain production, China’s crop economy has steadily been remaking itself from a grain-first sector to one producing higher-valued cash crops and horticultural goods. The average annual growth rate for cotton, edible oils, and fruits reached 3.2%, 8.8% and 12.6%, respectively, in 1978-2014.

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Livestock and aquaculture products have been growing even faster than the output growth in the crop sector. Livestock production rose by an average of 6.6% annually in 1978-2014 (Table 1). Fisheries subsector has also been one of the fastest-growing components of agriculture, rising more than 8% per year during 1978-2014.

Accompanied with agricultural growth is significant production structural change and therefore improvement of food consumption patterns in China. Economic growth, urbanization and market development have changed Chinese food consumption level and its structure, which has also resulted significant changes in agricultural production structure. Within crop sector, the area share of cash crops (or non-grain crops) increased from 20% in 1978 to 32% in 2014; Over the same period, the share of animal products (livestock and fishery) in total agricultural output values raised from 17% to 38% (NSBC, 2015).

2.2 Major driving forces and innovations

Several factors have contributed to China’s agricultural growth in the past. Rural institutional innovation, science and technology innovations, innovated market reform and trade liberalization, and investment in agriculture and rural are four major driving factors that have facilitated China’s successful agricultural growth. These four driving forces are also major innovations in China’s agricultural development in the past three and half decades.

Institutional innovations

Rural economic reform was initiated in 1978 through implementation of the household responsibility system (HRS). This rural reform dismantled the People’s communes and contracted cultivated land to individual households in each village, mostly on the basis of number of people and/or labour in the household. Although the control and income rights after HRS belonged to individuals, the ownership of land remained collective. The first term of the land contract was arranged for 15 years and the other 30 years extension starting in the late 1990s.

The effects of HRS on agricultural productivity, the equitable distribution of land to farmers and rural poverty alleviation have been obvious and well documented. Most studied show that HRS accounted for about 40% to 50% of the total rise in output during in 1978-1984 (Fan, 1991; Lin, 1992; Huang and Rozelle, 1996). Researchers also have documented empirical impacts that go beyond output. McMillan et al. (1989) document that the early reforms in China also raised total factor productivity, accounting for 90 percent of the rise (23 percent) between 1978 and 1984. Jin et al. (2002) show that the reform had a large effect on productivity, contributing greatly to a rise in TFP that exceeds 7 percent annually. The significant positive impacts of HRS on agricultural production with the equitable distribution of land were major reasons for massive reduction of rural poverty in the early reform period.

The major policy efforts on land institutions have been made on stabilizing HRS and fascinating land consolidation since the late 1990s, including the recent proposed new land institutional arrangement, San-quan-fen-zhi (separating three rights: village collective land owner rights, individual household land contract rights, and land operational rights). Stabilizing HRS provides incentives for farmers to invest in agriculture and land, stimulates land transfer among farmers and raises farm size, and improves agricultural productivity and farmers’ income. Our recent survey shows that

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about one third of the households contracted land has been transferred among farmers (Huang and Ding, 2016). To further consolidate land, a new innovation in land institution is proposed by separating farmers’ contract rights from use rights so that the land use rights can be transferred through rental market and meantime the contract rights are held by the original contracted farmers. This is believed to be the other most important land institutional innovation in China because it can achieve both equity of land distribution and efficient use of the current cultivated land.

Technology innovations

China has a strong agricultural science & technology (S&T) innovation system. China’s agricultural research and development (R&D) system is the largest in terms of staff in the world and covers nearly every disciplines in agriculture and related fields. By 2010 we estimate that China had at least 68 thousands research staff working in the public agricultural R&D system. Despite of experienced a twisting path of reform in technology extension, China also has developed the largest agricultural extension system in the world with about 700 thousands staff members in recent years. The extension system is public dominated but decentralized at local level. While at one time China’s agricultural R&D was underfunded, investment has increased significantly since the late 1990s. In contrast, the private sector is much smaller, but growth rates of investment have been high in the past decade and has started to play increasing roles in agricultural technology innovations.

Science & technology innovation is a primary source of agricultural productivity growth in the long run. China was one of the first developing countries to develop and extend Green Revolution technology in rice in 1960s. Hybrid rice was developed by China’s scientists in the late 1970s. Technological innovations in wheat, maize, cash crops and animal have also been impressive since 1990s. The empirical studies show that the average annual growth rates of total factor productivity (TFP) in grain sector increased from 1.5% in 1985 to 2.4% in 1995-2004; Annual growth rates of TFP in cash crops and livestock even exceeded 3.5% over the same periods (Table 2). Table 2 also shows that nearly all growths in TFP were from technological changes. Since the mid-1990s, China has also relied on innovation from plant biotechnology. Bt cotton is one of most successful stories in the use of genetically modified technologies in the developing world, a technological change that has benefited millions of farmers (Huang et al., 2002 and 2005).

Gradual market reform

China’s Gradual market reform is a unique and an innovated reform that has facilitated China’s smooth transformation from the previous planned economy to the market oriented economy. Unlike in the transitional economies in Europe, leaders in China did not move to dismantle the planned economy in the initial stages of reform in favor of liberalized markets. Market liberalization was started for the non-strategic products (e.g., vegetable and fruits) in the middle 1980s, then gradually moved to animal products (e.g., fish and meats), and finally the reform had been implemented for sugar crops, edible oils, cotton and grain – the strategically important products. Although grain market liberalization was start and stop due to the large fluctuations in grain production and price in different periods, by the late 1990s the government almost phased out its direct market intervention. However, the rising concerns on farmers’ income and national grain security have induced direct market interventions

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in rice, wheat, maize and cotton after the middle 2000s, which will be elaborated more later.

China’s trade liberalization has also started open door policy started much earlier and gradually implemented since early 1990s. The initial reform was through relaxing trade restrictions and market access, then followed by tariff reduction. Simple average import tariff for all agricultural products was reduced from 42.2% in 1992 to 23.6% in 1998, 21% in 2001 when China jointed WTO, and 17% in 2004. China also made significant commitments and major concessions in terms of domestic supports and export subsidies.

Table 2. Average annual growth rates of total factor productivity (TFP), technical efficient (TE) and technological change (TC) for major commodities in China, 1995-2004.

Annual growth rate (%)TFP TE TC

Major grainsEarly indica rice 2.82 0.00 2.82Late indica rice 2.92 0.21 2.71Japonica rice 2.52 0.15 2.37Wheat 2.16 1.06 1.10Maize 1.70 -0.23 1.94Soybean 2.27 -0.08 2.35

Some cash cropsCotton 4.16 -3.47 7.63Eggplant 2.24 -3.14 5.37Cucumber 5.15 -1.27 6.42Tomato 3.23 -0.50 3.73

Major livestockPig

Farm backyard 3.72 1.01 2.72Small-scale 5.35 -0.72 6.07Large-scale 4.40 -0.38 4.78

Beef 4.41 0.01 4.40Dairy cow

Small scale 0.48 -6.09 6.58Large scale 1.31 -3.26 4.57

Source: Jin, Ma, Huang and Rozelle (2008)

The roles of market reforms on resource allocation, agricultural production structure and farmers’ income have been well documented. Farmers have been gaining from increased allocative efficiency based on market prices (deBrauw et al., 2004; Huang and Rozelle, 1996). Regional market prices have been increasingly transmitted across space and over time. By the early 2000s, almost all markets (e.g., 92% for rice, 98% for soybean and 99% for maize) moved together in an integrated way (Table 3). China’s open door process is also a process of integrating China’s market price into international price. By the middle 2000s, most of agricultural commodity prices in China almost equalled to the import prices at the board. The export of labour-intensive products (e.g., horticulture) and the import of land-intensive commodities (e.g., soybeans, cotton, edible oil, and sugar) has been rising. In sum, market reforms

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have improved efficiency of farm resource allocation and production structural change based on China’s competitive advantage, reduced agricultural input prices, and increased farm-gate prices. All these stimulate agricultural growth and increase farmers’ income.

Table 3. Market integration (Dickey-Fuller test): percentage of market pairs that have integrated price series, 1989-2003.

1989–1995 1996–2000 2001-2003

Maize 28 89 99

Soybean 28 95 98

Japonica rice 25 60 92

Source: Huang, Rozelle and Chang, 2004; and Huang and Rozelle (2006).

Investing in agriculture

Increasing investment in agriculture has established a fundamental base for steady growth of China’s agriculture in the past. China is one of a few large countries that have continued to increase its investment by the state in agriculture in recent decades. Most significant investment has been occurred in water control (e.g., irrigation and flood control), road and rural market infrastructure, land improvement, and agricultural technology. Now, more than half of cultivated land is irrigated. Massive investment into rural road and agricultural wholesale markets fosters integrated market that links hundreds of million small farms with retails and consumers. Investment in the low-middle yield crop land to improve soil quality has also significantly raised aggregate agricultural production capacity. Investing in agricultural R&D, as we mentioned early, is the most successful story of investing in agriculture.

3. China’s inclusive rural transformation and innovations

3.1 Paths of rural transformation: China and other developing countries in Asia

China has experienced more rapid rural transformation (RT) than many developing countries in Asia (Figure 1). Such rural transformation was started with the adoption of new crop varieties and increasing access to water and modern inputs such as chemical fertilizer and pesticides in crop production, with particularly focused on grain or staple food (Stage 1 of RT, Table 4). Increases in grain production and improving household food security were due to agricultural productivity growth, which was, in turn, led by the emergence of the production of higher-valued and labour-intensive cash crops, livestock and fishery products, or agricultural diversification (Stage 2 of RT, Table 4).

A rapid rural transformation was also observed in off-farm employment in China (State 3, Table 4). While nearly all village labours worked in farming in the late 1970s, now more than 70% of rural labour had off-farm employment in China. By 2014, it is reported that there were 294 million rural labours (or about 51% of rural labour forces) who worked more 6 months in off-farm employment (NSBC, 2015). Off-farm employment has also expanded in many Asian countries. But except for Vietnam, speed of expansion is much slower than that in China (Huang, 2016)

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because China’s economy has relatively higher ability to absorb rural surplus labours during its industrialization.

Figure 1. Share of gross value of non-cereal products (%) by country in 1980-2010

CHN IDN VNM LAO IND PAK BGD PHL KHM0

20

40

60

80

100

1981-90 1991-2000 2001-2010

Shar

e of

gro

ss v

alue

of

non-

cere

al p

rodu

cts

(%)

Bangladesh (BGD), China (CHN), India (IND), Indonesia (IDN), Cambodia (KHM), Philippines (PHL), Vietnam (VNM), Laos (LAO) and Pakistan (PAK). Source: FAO database, 2015.

3.2 Rural transformation and poverty reduction

It is interesting to note that the speed of rural transformation is positively correlated with the extent of rural poverty reduction. Here we use “average annual change in the share of gross value of non-cereal products in agriculture” as an indicator for the speed of rural transformation. A slope downward fitting line shows that more rapid RT is associated with more reduction of rural poverty rate (Figure 2). China, Vietnam, and Indonesia located in the fourth quadrant with coordinated point (0.30, -1.90) are the countries that had experienced fast RT and also fast rural poverty reduction. On the contrary, the Philippines, Pakistan and Bangladesh are the countries that had both slow RT and slow poverty reduction rate. India and Laos with moderate RT and moderate rural poverty reduction are in-between the above two groups of countries. Cambodia with adverse RT but fast (or moderate) rural poverty reduction is a case that that needs further investigation. However, the relatively large poverty reduction in Cambodia may be largely due to its fast structural transformation in the whole economy (Huang, 2016).

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Figure 2. Rural transformation and rural poverty reduction in the period indicated.

Notes: The simple means for “average annual change in share of gross value of non-cereal products” and “average annual change in rural poverty rate” of nine countries are 0.30 (as indicated by vertical dotted line) and -1.90 (as indicated by horizontal dotted line) respectively.

Sources: Huang (2016), based on the data from WB, WDI ( 2015).

One common nature of rural transformation is the rise of agricultural productivity (Huang, 2016). In general, the higher growth of TFP is corresponding with the fast rural transformation and the larger reduction of rural poverty rate. These relationships are not difficult to understand. Most of the poor in China and the other developing countries in Asia live in rural areas and are heavily dependent on agriculture for their livelihoods. The rise of agricultural productivity can reduce rural poverty through several channels. For example, higher TFP increases agricultural output and farmers’ income in a more opened economy, results in land saving that facilitates farmers to diversify their agricultural production, increases the demand for unskilled labour in agriculture, and also enable farmers’ to work more in off-farm activities.

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Rural transformation through expansion of off-farm employment during the middle and later periods of rural transformation (Stage 3, Table 4) is particular important for raising farmers’ income and further poverty reduction. Recent studies have showed that the rates of rural poverty deduction are generally in accordance with the extent of off-farm labour participation among the developing countries in Asia (Haggblade et al., 2010; Misra, 2014; OECD, 20115; Huang et al., 2008).

Table 4. Paths of rural transformation, IPIs and sequence of IPIs. Stag

ePaths of transformation Additional IPIs in each stage and sequence

1 Primary on staple food production

Institutions (e.g., land), water infrastructure, and technology

2 Agri. diversification Plus: market reform, road and market infrastructure

3 Rising non-farm employment

3.1 Farming and part time non-farm employment

Plus: support local SMEs (labor intensive- industrialization in rural area)

3.2 Increasing specialization on farming or non-farm employment

Plus: accelerate urbanization; labor and land rental market; food safety

3.3 Agri. mechanization and more off-farm employment

Plus: supports for land consolidation, farm mechanization, sustainable agriculture

4 Rural urbanization and integrated urban-rural development

Plus: eliminate discrimination between rural and urban and among regions in all aspects; targeting poverty reduction

3.3 China’s inclusive rural transformation and innovations

China is a typical case of classical rural transformation with the following major experiences and innovations.

China’s agricultural transformation increases farmers’ incomes and facilitates structural transformation. The rise in farmers’ income provides capital accumulations for industrialization. The successful agricultural transformation lowers agricultural commodity prices and provides more diversified agricultural products, which accelerates the development of agriculture-related industries (usually labour-intensive industries such as agricultural input manufacture, food processing, food marketing chain, an textile). The agricultural transformation resulted from increase in labour productivity can also supplies large number of cheap labour force for the expansion of industry and service sectors in both rural and urban areas.

The expansion of labor-intensive industry and service sectors, urbanization and economic structure transformation provide huge employment opportunities for rural labour force. Rising rural labour non-farm employment increases farmers’ income and reduces the rural poverty population, and therefore stimulates inclusive rural transformation.

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In each stage of China’s rural development, there are a number of institutions, policies and investment programs (IPIs) that are implemented to promote and stimulate rural transformation (Table 4). Each of them plays its vital roles in agricultural and rural development in different stages.

There are appropriate institutions, policies and investment programs that are associated with different stages of rural transformation. That is, the sequences of these IPIs are important (Table 4).

4. Major challenges in agricultural and rural development

Although China's agricultural and rural development have recorded remarkable achievements in the past, they are also facing unprecedented challenges now. The intensified agriculture with high-input and high-output in the past has resulted in huge stress on the limited natural resource and rural environment, which will threaten the sustainable development of agriculture in the future. In the recent years, the rising rural labour wage significantly raised the cost of agricultural production and lowered China’s agricultural competitive in the international market. Imports of many food products are increasing. Over the past decade, due to rising concerns on grain production security and farmers' income, the government has implemented a number of policies, including market and price interventions. However, the market/price intervention policy ought to be ended as it is difficult to sustain.

Challenges in sustainable agricultural development

Rising serious of water and land resource shortages and degradation challenges sustainable development of agriculture. Rising demand for irrigation water will be accompanied with the falling pressure of water supply for agriculture as water demand from urbanization and ecological civilization construction will rise, and climate change will exacerbate the water shortage. In addition, although the declining trend of cultivated land has slowed down due to the strict regulations on alternative uses of cultivated land (e.g., 1.8 billion mu red line for cultivated land by 2020), cultivated land quality has been falling in many rural area. Overuse of modern inputs (e.g., fertilizers, pesticides and agricultural films, etc.) and industrialization leads to soil degradation and environmental pollution, which will affect China's food security, ecological security and the sustainable development of agriculture in the future.

Challenges in agricultural competitiveness with rising rural labour wage

Rising production cost in agriculture due to the recent rapid growth of rural labour wage has significantly lowered the competitive of China's agricultural products in the international markets. Over the past decade, rural labour wages (or opportunity cost for agriculture) increased by about 8% annually. With rising agricultural prices, the land rent cost has also increased significantly in recent years (with about 10% annual growth rate).

Challenges in rising food import pressure when domestic prices remain high

The gaps between domestic and international market prices for many agricultural commodities have been increasing since 2010, which results in increasing food import pressure in China. There are many reasons for rising these price gaps. The falling agricultural price in international market in recent years is an external cause. RMB (or yuan) appreciation during 2010-2016 also slightly contributes to the rising gap (about

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4%). But the most significant causes are the rising cost of agricultural production and government market interventions.

To promote production of grain and other major agricultural production and ensure higher growth of income in rural than urban, government has implemented market intervention and price supporting policies. The minimum price procurement policy has been implemented for rice since 2004 and wheat since 2006. The temporary storage program aimed to raise domestic price had also implemented for maize in 2008-2015, soybean in 2008-2013 (changed to target price in Inter Mongolia and Northeast China), rapeseed in 2008-2014, cotton in 2011-2013 (changed to target price in Xinjiang thereafter). These policies raise the corresponding crop prices and their imports increase. To avoid the price falling due to the increased supply from domestic production and import, government has to keep buying from farmers and build up massive stock, particular for maize. Rising domestic agricultural prices have also seriously hurt downstream processing industries in food, feed, and textile.

Challenges in future agricultural technology innovation

While the agricultural technology change has been one of major driving forces for agricultural output growth and a primary source of agricultural productivity rise, China’s agricultural science and technology innovation potential is facing new challenges. China’s agricultural R&D sector is a public dominated system, and its incentive mechanism does not appropriately respond to the new and changing demands of farmers for technologies (e.g., labour and other input saving technologies) under the market economy. Moreover, public R&D focuses not only on basic and strategic research, it is also doing a lot of applied research and development of technologies that can be undertaken by the private sector.

Challenges in ensuring food security and food safety

Challenges in ensuring the national food security and food safety are expected to rise over time. Over the next 10 years or so China is likely to shift from the middle income country to high income one. During this transition, consumers demand for food quantity, quality and safety will be simultaneously and significantly increased. Limited by the domestic water and land constraints and challenges in agricultural R&D system discussed above, the growth of domestic agricultural production for many commodities is expected to fall behind the growth of demand. Gradually rising imports of feed grain, cotton, edible oils, sugar, meats, and milk sugar are projected in the coming two decades. Moreover, in a food supply chain that composes of hundreds of millions of small-scale farmers and a millions of circulation/marketing and processing enterprises/individuals, ensuring food traceability and food safety from production to the table is an extremely difficult task.

Challenges in reducing income inequality

Although average income per capita in both rural and urban has increased significantly since the reform started in 1978 and income ratio between urban and rural has also been reduced slightly from the peak of 3.33 in 2009 to 2.73 in 2015, the absolute income gap between urban and rural has been increasing significantly. Moreover, income gaps among regions or among households within a region are expanding.

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Challenges in eliminating remaining poverty and ensuring food and nutritional security for the low income households in the less developed regions

Although China has been very impressive in reducing rural poverty and ensuring the national aggregate food security in the past, the country still has a large number of rural poverty and malnutrition population, particular in the less developed regions. According to the national data, there were still about 70 million population by end of 2014 in rural China. Based on a poverty line of $2.5 in PPP, World Bank estimates that among 1.2 billion poor people in the world in 2014, about 150 million were in China (13%). FAO estimates that 151 million of the world's 900 million undernourished people in 2012-2014 were from China, most were in rural areas. In addition, although China food nutrition status has been significantly improved, micronutrient problem is still challenge, especially for rural children in the western poverty-stricken areas.

5. Conclusions and policy recommendations 5.1 Major conclusions and discussions

The more than thirty years of China's agricultural development witnessed the reform achievements and policy impacts. We believe that the past successful story of China’s agricultural development largely resulted from the following four major driving forces: institutional innovation (land), technology innovation, innovated market reform, and investing in agriculture and rural. After the HRS reform, China launched a series of gradual and comprehensive reforms. These reforms have greatly improved the incentives for farmers, raised land and labour productivity. Technology change has significantly increased agricultural total factor productivity. Agricultural market reform before the middle 2000s and trade liberalization laid a solid foundation for market price formation, which improved the efficiency of resource allocation and facilitated agricultural structural transformation as well as raised farmers' income. Increasing investment in agriculture and rural, particular in water conservancy infrastructure, farm land and technology, consolidated the foundation for agricultural development and agricultural production capacity. These four major driving forces are the main experiences and innovations that China has in its more than 30 years of reforms, which should have important implications not only for China's future agricultural development and policy, but also to some other developing countries that are seeking for similar development and reforms.

Increasing farmers' income and massive reduction of rural poverty are mainly due to the continuing growth of China's agriculture and successful rural transformation. The rapid agricultural growth in the early reform period is the most important factor in reducing rural poverty in that period. Steady growth of agriculture after the early reform period facilitated rural transformation and income increase from agriculture, and meantime also promoted the structural transformation for the whole economy. On the other hand, labour-intensive economic structural transformation provided farmers with hundreds of millions of non-farm employment opportunities, which substantially increased the farmers' non-agricultural income and continued contributing to the rural poverty reduction. China's rural transformation and overall structural transformation are supplement each other, is a typical classic inclusive rural transformation. There are a series of institutional arrangements, technological changes, market reforms, and investment programs to support rural transformation in each stage, and there is

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sequence of these supporting measures. China's agricultural development and inclusive rural transformation should also have important policy implications for China in the future and many developing countries in the rest of world.

However, China has entered a new stage of development, agricultural and rural development is also facing a series of challenges. The previous challenges are intensified, especially the resource, environmental and ecological degradations, which will threaten the future sustainable agricultural development. In recent years, rising costs of agricultural production, enlarging price protection of major commodities, rising agricultural imports, the emerging huge government grain stocks, lack of responses of public technology innovation system to market and farmers’ demand for technology, all call for re-visiting the recent policies and looking for reforms in the coming years. In addition, the progress in narrowing the income gap between urban and rural is slow, fostering equitable development to reducing unequitable income distribution is still a long way to go. To promote the sustainable agricultural development, largely increase farmers' income, significantly narrow the income gap between urban and rural, eliminate rural poverty (by 2020), and continue inclusive rural transformation in the new era, all need new thoughts on the future development strategy, reform and policy.

5.2 Development strategy priorities

Put the sustainable development as the national strategic priority for agricultural development. Be careful in trade-off between the short run agricultural growth and long run development goal. Earnestly implement the new development idea on “Cang-liang-yu-di” and “Cang-liang-yu-ji:” Make effective uses of natural resources within China and in the rest of world to ensure sustainability of domestic and global natural resources.

Put the ensuring staple food and nutrition security and food safety as the national strategic priority for food security. Except for rice and wheat, evaluation indicator for food security should be changed from the current self-sufficient level to the supply capacity. Make full uses of domestic and international markets for the national food supply. At the same time pay much more attention to undernourished people, nutrition security, and food safety.

5.3 Major policy recommendations

We believe that the four major driving forces of China’s agricultural development, as we mentioned early, will continue to be the major driving forces for China’s agricultural development in the future. New institutional and technological innovations as well as investing in rural are the effective ways to reduce agricultural production costs and increase the competitive of China’s agriculture. Market reform is the fundamental measure to eliminate the large price gaps between domestic and international markets, to avoid excessive/unsustainable food storage held by government, and to improve the efficiency of resource allocation and agricultural structural change. At the same time, further accelerate the inclusive rural transformation and promote rural prosperity in the future. To this end, we recommend the following policies.

Continue to promote institutional innovations in agriculture and rural development. In the new era, institutional innovations should focus on three

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major production factors: labor, land and capital. These include but not limit to: 1) Accelerate the market integration of production factors between urban and rural, which will substantially increase rural labor off-farm employment, fostering rural land consolidation to more efficient farmers, increase land and labor productivity, promote mechanization, and reduce labor inputs and total production costs; 2) Speed up land title certifications process to stabilize land tenure and implementation of "San-quan-fen-zhi”, which will further stimulate land consolidations and agricultural productivity; 3) Create a system of rural land mortgage to enable farmers accessing to more credit; 4) Speed up agricultural operational innovations such as appropriate land size of family farms, farmers’ cooperatives, and market custom service for farm field activities. All these will improve agricultural productivity and lower production costs.

Use agricultural technology innovation as the core for raising agricultural productivity and sustainability. These include but not limit to: 1) Reform the existing public agricultural S&T system and incentive mechanism, establish a new system that has a clear divisions of functions between the public and private R&D sectors so that they are complementary in fostering agricultural technology innovation; 2) Enhance the protection of intellectual property rights and provide preferential taxation policy for private engagement in agricultural R&D; 3) Further reform incentive and evaluation system of public R&D sector in order to ensure they will largely and timely respond to farmers’ demand for technologies; 4) Further increase government spending on agricultural R&D and public extension service, adjust the investment priorities to focus more on the technologies related to land saving, water saving, labor saving, chemical input (e.g., pesticide and fertilizer) saving, promote R&D and commercialization of modern biotechnology (e.g., GM crops), and mainstream the grassland related R&D into agricultural technology innovation system.

Phase out the current market intervention measures, re-establish the market based agricultural price formulation mechanism. The recent phasing out the temperate storage program for all crops is encourage and in right direction of reform, but further reforms are still needed in other areas. These include but not limit to: 1) Need to consider how to gradually phase out the minimum purchase price policy of rice and wheat; 2) Speed up the implementation of “Jia-bu-fen-li” policy (separating policy functions of agricultural price and farmer income support) so that government’s support can be largely decoupled from production; 3) A more careful design of target price policy for the selected crops, the main goals of this target price policy should be aimed at "counter-cyclical" and reducing market price risk rather than income support; 4) After eliminating price intervention policies, initiate income support or income transfer program for low income farmers if agricultural market prices fall significantly.

Further raise the growth rate of investment in agriculture and rural areas. Much more government budget should be invested to raise agricultural productivity (e.g., agricultural R&D and extension service, irrigation and water conservancy, etc), agricultural market infrastructure, rural public goods and service provision, rural living and production environments, ecological improvement, food safety, and the nutrition improvement for the poor.

Speed up the inclusive rural transformation and promote the prosperity of the rural economy. On promoting the more inclusive rural transformation, it is worth to note that appropriate institutional innovation, technological change,

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market reform and investment programs and their sequence matter. Meantime, at this stage of China’s rural transformation, policies should focus more on integrated urban and rural development, eliminating rural poverty, and income growth for the regions and individuals that have been left behind.

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Jin, Songqing, Jikun Huang, Ruifa Hu and Scott Rozelle. 2002. The Creation and Spread of Technology and Total Factor Productivity in China’s Agriculture. American Journal of Agricultural Economics, Vol. 84, No.4(2002): 916-930.

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