Debate over Property Rights in China

China has famously lacked well-defined and legally protected private property rights. To some extent this lacuna is due to the general weakness of the “rule of law”. Rights such as freedom of speech that exist on paper in the Chinese constitution or in particular laws are readily ignored or violated by government officials. Trials are often dominated by state (or local state) interests and a truly independent judiciary has yet to develop. But the lack of firmly established property rights also follows in part from the legal framework, itself, as well as from the state of play of institutional development outside the legal system. Property rights, a fter all, are comprised of many different kinds and degrees of control over property, including full ownership, a variety of rights of use, access, decision and/or disposal, as defined by laws, c ustom, contracts or internal organisational rules.1 All of this has been changing in China along with economic growth and transition to a market economy, the development of a middle class, the proliferation of ownership forms and the general enrichment of social and cultural life.

Famously also, however, China’s economy has forged ahead at record breaking tempo without having “solved” the property rights issue in the sense of establishing clear and unambiguous rights of private ownership of productive property. Nobody, for instance, could quite identify the ownership régime of the “township and village enterprises” (TVEs) that made up the highly

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d ynamic rural industrial sector in the 1980s and 1990s. Were TVEs collectively owned, or de facto private partnerships masquerading as collective to avoid the political penalties that used to p unish the private sector; or some kind of joint venture b etween collective and private parties? The “fuzzy” nature of their property rights status, classically discussed by Weitzman and Xu (1993), did not seem to impede their economic dynamism, but rather enhanced it.

A debate has occurred in the literature over the explanation for China’s economic dynamism, especially in comparison with the experience of the Eastern European and former Soviet Union (EEFSU) countries. On one side are many scholars who, knowing something about the country’s political economy and history, credit in part one or another aspect of China’s relatively gradualist, experimentalist approach to reform and restructuring. These include Robert Ash, Fang Cai, Keith Griffin, Gary Jefferson, Aziz Khan, Larry Lau, Justin Lin, Barry Naughton, Peter Nolan, Jean Oi, Tom Rawski, Andrew Walder, Weitzman and Xu, and others. A general insight that unites these disparate scholars and viewpoints is that successful market economies are always nested within a framework of institutions, including those that define, protect and limit the rights associated with property ownership; and that such an institutional environment inevitably requires time to evolve. This view leads to an interest in the way such institutions come about, their context-specific nature, and the ways in which countries and even localities may differ with respect to the exact shape of such institutions.

In addition to the TVEs, the most famous example of a gradualist, experimental institutional arrangement in China is the “dual track system”, under which China in the 1980s permitted state enterprises to sell at market prices output produced above their plan quotas (which were sold to the state at lower fixed prices). Corruption predictably bloomed under the dual track system, but it also carried market incentives into the state sector, instilled entrepreneurial instincts there and accomplished a kind of de facto price reform. There are many other examples of the mixed and experimental nature of Chinese reform. Nolan and Wang (1999), arguing against the idea of a universal model of property rights that works under all circumstances, describe how the reform of large state enterprises in China has been “developing new institutional forms that do not neatly fit into existing patterns” and conclude that “China is experimentally changing its institutions through a combination of central policy, local initiative and interaction with international investment”. In agriculture, d es pite the dismantling of the collectives 20 years ago, the state has retained a strong role. One of its objectives in doing so is to f urther a collection of social goals tied to agriculture, including i mproving regional balance, raising farmer incomes, promoting modernisation and improving environmental outcomes, which private small-scale agriculture by itself could not achieve. The state also remains the major provider of services to this sector where many services have a public goods character (Waldron, Brown and Longworth 2006).

On the other side of the debate are those who are impatient with gradualism and experimentation and who contend that the incomplete formation of markets and private property has i mpeded China’s development, whatever the speed of growth. Wing Thye Woo and Jeffrey Sachs essentially argue that China’s success is owed to a combination of surplus labour and whatever privatisation was allowed to happen (Sachs and Woo 1997; Sachs and Woo 2003). They contend that China’s institutional experiments with dual-track pricing, fuzzy property rights in township and village enterprises, etc, were “the product of political c onstraints and not of economic optimisation, and hence were non-viable beyond the short-run”. Of course, no one has ever a rgued that China’s successful experimentation constituted “ economic optimisation”. The claim rather is that it constituted a flexible and adaptable institutional environment in support of rapid economic growth. Moreover, the “short run” of viability has now lasted three decades, bringing to mind J M Keynes’ most f amous quip.

The stylised view of the property rights issue sees the inviolability of private property as a sine qua non of development. The benefits of such a secure régime pertain to the basic issue of efficiency, to the incentive to invest, innovate and take risks, and to equity considerations. The efficiency argument goes back at least to the “Coase theorem”, in which clarity of property rights are a precondition for efficient allocation, regardless of how legal p roperty entitlements are initially distributed.2 Ironically, this d emonstration was for Coase “only a hypothetical norm of comparison” that provided a baseline for his argument that transactions costs are in fact ubiquitous and do have a strong impact on economic institutions.

The incentive argument rests on the importance of the secure expectation that the profit of investment, innovation or risktaking will be retained by the investor, innovator or risk taker. Of course, nowhere is this literally true. Income and output cannot be entirely explained by the proximate acts that generate them. The public infrastructure, hard and soft, the public education of workers and customers, the safety of staff and workers from crime, etc, are all crucial to the results, and all such indirect r esources must be paid for by means of taxes that intervene b etween productive effort or commitment of resources and the reward of income. Not only are the profits of private activity subject to public incursion even in the highly conservative US, but private property itself is far from inviolable, as illustrated by the 2005 Supreme Court decision, Kelo vs City of New London. This decision validated the expropriation of private property by a city intent on turning it over to private development. The majority opinion, written by Justice Stevens, stated that “[p]romoting economic development is a traditional and long accepted function of government” and that the Fifth Amendment’s requirement of a “public purpose” for condemning private property could be satisfied by the creation of jobs in a depressed city. In her dissent, Justice O’Connor complained, “Now…nothing is to prevent the State from replacing any Motel 6 with a Ritz-Carlton, any home with a shopping mall, or any farm with a factory”. Justice O’Connor’s opinion could almost have been mistaken for a complaint about the ubiquitous “land grabs” from Chinese farmers by local governments intent on development. More about these below.

The above example speaks directly to the equity issue. In China (as elsewhere), the strength of property right protection tends to

december 27, 2008

Property Rights in Agriculture

One aspect of property rights has been particularly discussed in China, and that is the landownership rights of farmers. As pointed out above, most farmers have had leasehold rights that last for

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25-30 years. They cannot sell or buy land, but they can buy and sell the use of it. Moreover, despite leases land has sometimes been redistributed among villagers when demographic changes occur, which has kept the per capita distribution of land highly equal (more on this below). Studies of villagers’ reactions to this practice have found that it is not unpopular (Kung 2000). This is not a simple issue. There are arguments to be made on both sides of it (People’s Daily Online 2008).

On the side of strengthening private landownership rights is the growing tendency of local governments to confiscate farmers’ land at nominal or greatly under-market prices in order to make it available for industrialisation or development in an over-heated real estate market. China has been undergoing an epidemic of land seizures by local governments. An estimated 66 million farmers had their land expropriated up to mid-2004, many with grossly inadequate compensation (Yu Jianrong, Oriental Outlook, 9 September 2004). Such landless farmers are often among C hina’s poorest (Asia Times Online, 9 March 2006). The process is described by Xiaolin Guo (2001):

By law, the village collective has the right to use (jingying) and supervise (guanli) the use of land, but it has no right to transfer land for compensatory use. The state, on the other hand, “may, in accordance with the law, expropriate land which is under collective ownership, if it is in the public interest”. In this assignment of property rights, land development proceeds in two steps: land expropriation (tudi zhengyong) by the government from villages, and land transaction (tudi churang) between the government and potential land users. The latter procedure only involves a transfer of the user’s right priced a ccording to the market value. Land expropriation is, in a sense, a p rocedure by which all rights formerly held by the village collective are relinquished to the local government.

Although authorities have vowed to crack down on exploitation of arable land by local governments for development of villas, golf courses, and race tracks, the process of land g rabbing has continued with little abatement, especially in the coastal provinces of Zhejiang, Shandong, Jiangsu, Hebei and Guangdong.

China’s laws evidently stop short of requiring fair compensation when land is taken. The Land Administration Law requires that compensation to the former landholders be six to ten times the value of the land’s average annual output for the three years preceding the transaction. In the case studied by Guo (2001), the villagers were paid between 9,000 and 10,500 yuan per mu.4 The land rights were then sold by the local government for 2,00,000 yuan per mu.

The land issue is crucial for the rural majority of Chinese. When the rural communes were dismantled in the early 1980s, their land was distributed to villagers on an equal per capita b asis. This egalitarianism was still evident two decades later when the concentration ratio (or pseudo-Gini coefficient) for land distribution was virtually zero, meaning that farmland was equally accessible to all income classes.5 Khan and Riskin (2005) have found that farmland has been distributed extraordinarily equally and remained so from 1988 through 2002 (see the table on page 40).6 These data indicate that in 2002, inequality among different income classes in access to land was essentially absent. This was a major factor in making income from family farming

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“Concentration ratio”

land that had protected the equality of its distribution now prevents farmers from benefiting from the rising economic value of their land. Equality of land access is now threatened as increasing numbers of farmers are alienated from the land (Kung and Liu 1997; Guo 2001; Ho 2001).

The ability to engage in this kind of inequitable practice would be weakened if farmers’ control of their land were more secure and they were able to resist expropriation or negotiate fair prices for their land. There would also be a social benefit in the heightened resistance to the alienation of farmland, whose social value as such is greater than its market value. That is, the market price of agricultural staples does not incorporate the social value of food security to a fifth of humankind. The argument here is not that no land should be lost to agriculture, but that the trade-off should be made at prices that more closely reflect the true social value of agriculture relative to, say, real estate speculation or toxic chemical production.

There is also an argument to be made that the mobility of C hina’s surplus rural labour force and the incentive to consolidate land into larger and more efficient farms would be enhanced by farmers’ ability to sell their land at higher prices.

The universality of access has not only been an impediment to the development of a class of landless rural labourers, it has also provided a working substitute for a non-existent rural social insurance system. Migrant workers who lose their jobs can and do return home to survive on their land until the next job is found. Aged or injured farmers can get by in part by leasing out their land. The disappearance of the equalising and social security f eatures of China’s current land tenure arrangements, without provision of alternatives, would be a step backward in terms of human development. Clearly that is happening as the inherited equality of landownership gives way before the soaring commercial value of land and the growing power of market incentives, and ever more farmers are deprived of their land.

Policy to address the property rights issue concerning land should take both aspects of this complicated issue into account. That is, greater protection of farmers’ property rights vis-a-vis local governments is important, but so is protection of the role of land access as the rural population’s sole means of social security and as a bulwark against the impoverishment that can stem from landlessness. In October 2008 the government moved to liberalise the market for farmland use (People’s Daily Online 2008) by

continue to be vested. And it is the legal expropriation of the collective’s ownership of the land by the l ocal government that has been the first step toward depriving the farmers of its use.

Intellectual Property

The subject of intellectual property rights (IPR) and China’s m anner of dealing with them has of course figured prominently as a bone of contention in US-China relations. Foreign, especially American, complaints against the Chinese IPR protection régime include “inadequate IPR laws on the books, inadequate and e xpensive enforcement of existing laws, lack of Chinese government cooperation and transparent administrative and judicial procedures, local protectionism, lack of IPR awareness and e ducation among the general population, and lack of training and experience among judicial and administrative enforcement personnel” (Clarke 1999).

The very concept of IPR and its protection is a relatively new one in China. The establishment of a legal and administrative IPR system began only around 1980 and a perusal of the latest official White Paper on IPR protection (Government of China 2005) indicates the great progress that has occurred since then in establishing such a system. Of course, the opening up of China’s economy and the multiplication of temptations to engage in copyright and software piracy especially has progressed at least as quickly.

However, the discussion of the issue vis-a-vis China has tended to focus on US complaints about China’s transgressions, based upon a global model of IPR protection that is under increasing criticism on both theoretical and practical grounds. This discussion includes a conceptual debate about the appropriate nature of IPR and extent of its protection and over the possible conflicts b etween it and development, efficiency, competition, public health and the public interest more broadly conceived. There has thus been debate over whether the TRIPS agreement (Agreement on Trade-Related Aspects of Intellectual Property Rights under the World Trade Organisation) privileges powerful corporate i nterests in the developed world over the interests of poor countries and people, unfairly restricts competition and efficiency, and illegitimately extends IP rights into the realm of living

o rganisms (Harvard University 2004).7 Alternative methods of encouraging innovation and creativity have been proposed that do not con tradict the public goods character of information.8

december 27, 2008

Environment and Property Rights

The 2008 winter Olympic games drew the world’s attention to the extraordinary air pollution plaguing Beijing (along with other major cities), stark evidence that China’s rapid economic growth has come at the expense of the natural environment. Not only are resource depletion and degradation monumental problems in much of the country, but the health consequences of pollution are truly calamitous with tens of thousands of premature deaths a nnually ascribed to air pollution alone.10

A very heavy social cost is being paid by the Chinese people in the form of environmental destruction, resource depletion, loss of biodiversity and pollution. China has become the highest e mitter of SO2 in the world and the first or second highest emitter of greenhouse gases. A recent conservative estimate by the World Bank put the cost of air pollution in premature death and m orbidity at 3.8% of GDP. Over half the water in the seven main rivers of China is deemed unfit for human consumption. The cost of groundwater depletion and use of polluted water by industry are estimated at 1% of GDP, and this excludes the cost to human health.

The severity of the air and water problems has diminished the attention paid to other serious environmental concerns, such as loss of biodiversity and desertification. China is blessed with exceptionally rich biodiversity, but this is being compromised by a frightening rate of disappearance of species. The Swiss-based World Conservation Union has listed almost 800 species as being under threat in China. Desertification is an economic problem but also a social one, as its progress destroys soil fertility and thus the livelihoods of Chinese farmers and herders. A government survey conducted in the 1990s showed that the total area of land-turned-desert had reached about 1.7 million square k ilometres, or 17.6% of the country’s territory. Historical

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d eforestation, intensive cultivation that exposes soil to erosion, and the blunders of the collective era when millions of acres of grasslands and hillsides were inappropriately ploughed for cultivation, have all contributed to this disaster in the making. In a country already short of arable land, conservation of land is a major imperative.

Environmental degradation had begun in China under private ownership in the decades and centuries before the mid-1950s, continued and grew worse under state and collective ownership from then until roughly 1980, and continues to worsen under the changing mixed ownership array of the past quarter century. No ownership system is by itself sufficient to end such degradation. But property rights questions are inevitably involved. Sometimes the problem has been lack of better-defined private property. For instance, the initial de-collectivisation of pastoral lands in the early 1980s privatised the animals but not the grazing land, which produced a classic “tragedy of the commons” experience until the land, too, was divided among households. Even then, difficult and expensive problems of monitoring and enforcement emerged. A similar problem arose regarding deforestation after the land reform of the early 1980s, which dismantled collective control of tree cutting and made trees fair game for farmers lacking fuel and building materials.

This huge external cost of environmental degradation and resource depletion represents in its classic form the kind of market failure that opens space for public policy, including the crafting of a property rights approach that is fully responsive to the needs of public health and environmental conservation. The fact that these problems loom so large in contemporary China11 implies that the space for public policy is quite substantial there. It encompasses, for instance, the many cases in which villagers have publicly protested the establishment of local chemical factories whose effluents have poisoned their water supply, sickened them and destroyed their land. My impression is that both private and collective factories have been involved, and perhaps even local state factories. The basic issue here is the imposition of appropriate restrictions on the nature of whatever kinds of property rights might be present.

The growing popularity in China of the use of market-based incentives (such as use of tradable pollution permits) to control pollution also has property rights implications. The right to pollute, and restrictions put on it by law or regulation, are parts of a defined property rights régime, whose structure should favour resource conservation and a reduction in pollution. One way to proceed is for government to set a maximum pollution target below existing levels, distribute to enterprises only enough pollution permits to reach this target, and leave it to the market to a llocate the permits among enterprises. The property owner’s i njunction under this scheme is: thou shall not pollute without a permit! Under optimum conditions, this approach would minimise the cost of achieving the desired reduction in pollution. However, there is a question whether the institutional conditions needed to make effective use of this method – including an u nderstanding of basic market principles among environmental officials, the existence of strong information databases and effective monitoring capabilities – exist in China as yet (UNDP Beijing

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Notes

1 See Royal Swedish Academy of Sciences (1991); also Oi and Walder (1999).

2 “Coase showed that every given distribution of property rights among individuals tends to be reallocated through contracts if it is to the mutual advantage of the parties and not prevented by transaction costs, and that institutional arrangements other than contracts emerge if they imply lower transaction costs” (Royal Swedish Academy 1991).

3 In Kelos vs City of New London, the National Association for the Advancement of Coloured People (NAACP) and Justice Clarence Thomas shared a rare moment of agreement in arguing that urban renewal in the US has often victimised the poor, minorities and the elderly. See Charles Lane, “Justices Affirm Property Seizures”, Washington Post, 24 June 2005.

4 A mu is one-sixth of an acre. 5 See Khan and Riskin (2005). The pseudo-Gini or concentration ratio measures the distribution of a source of income or, in this case, an asset over all income earners. 6 The numbers in the table are “concentration ratios” or “pseudo-Ginis”, which express the distribution of land over all rural income recipients (not just landholders). A value of zero means that all income classes have equal access to land. A negative value (as in 2002 for “unadjusted land”) signifies that lower income people actually held more land than higher income ones. The explanation for this particular case probably lies in the fact that farms in the poorer upland and northwest regions tend to be larger than in richer, more fertile areas.

7 Stiglitz (2004, 2006, 2006a).

8 See the collection of papers of the Task Force on Intellectual Property of the Initiative for Policy Dialogue at Columbia University, available at http://www0.gsb.columbia.edu/ipd/programs/ item.cfm?prid=128&iyid=5&itid=777&list=papers.

9 See World Health Organisation (2002) a report outlining in very basic and general terms the various options available to the government for provision of cost-controlled ARVs. The valuable China AIDS News information service reports that “WHO ‘essential drug’ ARVs [are] not available in China” and that, although China has the right u nder the WTO TRIPS agreement to override p atents on first-line treatments by issuing compulsory licences, it has not done so. See China AIDS Info (2008).

References

Royal Swedish Academy of Sciences (1991): Press r elease on award of Nobel Price in Economics to Ronald Coase.

Sachs, J and W T Woo (2003): “China’s Economic Growth after WTO Membership”, Journal of C hinese Economic and Business Studies, 1(1).

Sachs, J D and W T Woo (1997): “Understanding C hina’s Economic Performance”, Harvard Institute of Economic Research (Paper No 1793).

Smil, V (1993): China’s Environmental Crisis, Armonk, NY: M E Sharpe, Inc.

– (2004): China’s Past, China’s Future: Energy, Food, Environment, Routledge.

Stiglitz, J (2004): “Towards a Pro-Development and Balanced Intellectual Property Regime”, Keynote address at Ministerial Conference on Intellectual Property for Least Developed Countries World Intel lectual Property Organisation (WIPO), Seoul, Korea.

UNDP Beijing (2002): China Human Development R eport 2002: Making Green Development a Choice (Oxford and London: Oxford University Press).

Waldron, S, C Brown et al (2006): “State Sector Reform and Agriculture in China”, China Quarterly, (186).

Weitzman, M and C Xu (1993): “Chinese Village Township Enterprises as Vaguely Defined Cooperatives”, Centre for Economic Performance Discussion Paper (155).

Wong, C (2007): “Can the Retreat from Equality be Reversed? An Assessment of Redistributive Fiscal Policies from Deng Xiaoping to Wen Jiabao”, P aying for Progress in China edited by V Shue and C Wong (London and New York: Routledge).

World Bank (1997): Clear Water, Blue Skies: China’s Environment in the New Century (Washington, DC: The World Bank).

World Health Organisation (2002): “Cost Containment Mechanisms for Essential Medicines, i ncluding Anti-retrovirals” in China edited by G Velásquez, C Correa and R Weissman, Beijing.

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