**Policy, Research, and Externt4 Affairs**

**Agricultural Policies**

WPS 471 This paper -a product of the Agricultural Policies Division, Agriculture and Rural Development - Department is part of an cftort to investigate rural credit markets, f.arm investmecnt, and agricultural productivity in C'hinia. That research is part of a larger effort in PRE to deternine how financial intermediation affects economic activities. Copies are available free from the World Bank, 1818 li Street NW, Washington DC 20433. Please contact Cicely Spooner, room N8-039, extension 3(064 (35 pages).

After 20 years oi colleclivization, China's agricultural sector was reformned in the last decade. Individual fami/household units replaced collective production. Households were given individual leases on forner commune land first for 3-5 years, but now for 15 years, and even longer for tree crops.

Household data on1 four areas in China in 1987-88 revealed pattems of spending on1 productive assets, durable consumer goods, and housing.

Using a model of household production and investment decisions, Feder, Lau, Lin, and Luo analyzed data on several factors that had been thoughit to inhibit investment in farm capital and encourage residential or other nonfarm investments: the typically small size of farms together with increasing retunis !o scale in production; inadequate credit; and farmers' perceptions of insecurity because of possible policy shifts during the life of their leases on state-owned land or the likelihood of being assigned other lands when the contract matures.

What were the policy implications of the study results?

tion with issues of farm size and consolidation are unwarranted. The production gains from consolidation would be limited and the costs substantial.

Where farms are tiny, farm size is a problem -- but coercing consolidation or recollectivization would be harmful. It would be preferable to introduce institutional mechanisms and procedures to facilitate market-induced land transactions. More mobility of labor would also help.

Concems about the inadequacy of investment finance for agricultural households are not yet justified in areas where the supply of such production inputs as fertilizer is unsatisfactory. But once the input supply system improves, limited credit will become a constraint - and the rural credit system, which is geared to rural industry and commerce, will have to be reoriented.

Radical revision of the land tenure system is not called for as the land Ieasing system seems not to be hampering investment. But likely crosion of investment incentives will be averted if leases are extended before they mature, reassuring farmers about the government's longterm commitment to the present system.

If the four study sites reflect the situation elsewhere in China, policymakers' preoccupa-

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