INVERSE RELATIONSHIP BETWEEN PRODUCTIVITY AND FARM SIZE: THE CASE OF CHINA

I. INTRODUCTION In the development literature, it is alleged that farm size (e.g., land area) and productivity (e.g., total farm output divided by land area) are inversely related in developing countries (Sen 1962). (1) Although Chayanov (1926) is credited with being the first to suggest this relationship for prewar Russian agriculture, Sen (1962) is considered the earliest modern reference on the subject. If the inverse relationship does exist, then policies such as "small but efficient" come into play, and land redistribution to break up large farms may be proposed. The Kerala Land Reforms Act of 1963 imposes a ceiling of 15 acres for land owned by individuals and joint farming families in the Indian state of Kerala. In China's agriculture, results from investigating the relationship between farm productivity and farm size are of interest to policy makers. Many Chinese farms are tiny and their small size limits mechanization. A rapidly growing Chinese nonfarm economy has attracted large numbers of rural labor into the major cities, which has provided opportunities for land consolidation in rural areas to reduce fragmentation and to increase farm size through land rental markets (Deininger and Jin 2005). If, indeed, small farms are more efficient than their larger counterparts, efforts to promote consolidation should not be pursued. (2) A recent resolution of the Central Committee of the Communist Party of China quelled speculations that land privatization, or other radical forms of land reform, was on the immediate agenda. (3) Meanwhile, the resolution asserted both the importance to exploit the scale economies of modern agricultural technologies and an increasing role of land rental markets, which are in line with recommendations made by Deininger and Binswanger (1999). With the notable exceptions of Benjamin and Brandt (1997, 2002), few studies have examined the relationship between productivity and farm size in China's agriculture. (4) Since the implementation of the Household Responsibility System (HRS) during 1978-1984, most arable land in rural China is owned collectively by rural communities and distributed by village councils to local families for farming (Dong 1996). Following the initiative in the 1982 Chinese Constitution, the Agriculture Law, approved in 1993 and amended in 2002, stresses collective ownership by rural communities over rural land and the allocation of rights of use to land area to rural households. The objective of this article is to examine the empirical relationship between farm productivity and farm size in China's agriculture over 1995-1999 when farmers were gaining better access to modern farming technologies and equipment. We conclude that the inverse relationship between farm productivity and farm size can be attributed to measurement error arising from improper measurement of farmland, for example, failure to account for land quality. This article contributes to the literature in the following areas. First, although China's land tenure system is unique, it is not uncommon to observe similar collectively held land ownership in developing or transition countries, for example, in Vietnam (Deininger and Jin 2008), Central Europe (Rozelle and Swinnen 2004), and in certain countries in Africa (Deininger and Feder 2001). Hence, conclusions from this study may provide useful insights to land policy and land reforms in other economies. Second, we exploit the fact that an objective of rural village councils is to ensure local families to meet basic nutritional needs (Burgess 2007; Deininger and Binswanger 1999) and the variation in the number of dependents and hukou registration in rural households (note that it is possible for a rural household to have members with urban hukou registration) to motivate an instrumental variable estimation. Although our use of instrumental variable estimation is similar to that in Benjamin (1995), the mechanism we hypothesized is new to the literature. …