metadata: authors: 0: author: Anderson, Kym
1: author: Huang, Jikun
2: author: Ianchovichina, Elena
count: China
docna: 0: docna: Long-run impacts of China's WTO
            accession on farm-nonfarm income inequality and rural poverty
docty: Policy Research Working Paper
subtopic: Poverty Reduction Strategies,International Trade and Trade Rules,Food Security,World Trade Organization,Inequality
teratopic: International Economics and Trade
abstracts: cdata!: Many fear China's accession to the
            World Trade Organization (WTO) will impoverish its rural
            people by way of greater import competition in its
            agricultural markets. Anderson, Huang, and Ianchovichina
            explore that possibility bearing in mind that, even if
            producer prices of some (land-intensive) farm products fall,
            prices of other (labor-intensive) farm products could rise.
            Also, the removal of restrictions on exports of textiles and
            clothing could boost town and village enterprises, so demand
            for unskilled labor for nonfarm work in rural areas may grow
            even if demand for farm labor in aggregate falls. New
            estimates, from the global economywide numerical simulation
            model known as GTAP, of the likely changes in agricultural
            and other product prices as a result of WTO accession are
            drawn on to examine empirically the factor reward
            implications of China's WTO accession. The results
            suggest farm-nonfarm and Western-Eastern income inequality
            may well rise in China but rural-urban income inequality
            need not. The authors conclude with some policy suggestions
            for alleviating any pockets of farm household poverty that
            may emerge as a result of WTO accession.
geo_reg_key: 517198,119225,517191
repnme: repnme: Long-run impacts of China's WTO
            accession on farm-nonfarm income inequality and rural poverty
display_title: Long-run impacts of China's WTO
            accession on farm-nonfarm income inequality and rural poverty
listing_relative_url: /research/2003/05/2384815/long-run-impacts-chinas-wto-accession-farm-nonfarm-income-inequality-rural-poverty
topicv3: Agriculture and Food Security m1326205 435,Poverty m1326687 695,Trade m1326924 698,Income Inequality m1503891 2668,World Trade Organization Accession
            m1504273 2568
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: International Economics and Trade
origu: Economic Policy & Debt Unit (PRMED)
no_of_pages: 40
model_extractions: POLICY RESEARCH WORKING PAPER 3052

# Abstract

Many fear China's accession to the World Trade Organization (WTO) will impoverish its rural people by way of greater import competition **in** its agricultural markets. Anderson, Huang, and lanchovichina explore that possibility bearing in mind that, even if producer prices of some (land-intensive) farm products fall, prices of other (labor-intensive) farm products could rise. Also, the removal of restrictions on exports of textiles and clothing could boost town and village enterprises, so demand for unskilled labor for nonfarm work in rural areas may grow even if demand for farm labor in aggregate falls. New estimates, from the global economywide numerical simulation model known as GTAP, of the likely changes **in** agricultural and other product prices as a result of WTO accession are drawn on to examine empirically the factor reward implications of China's WTO accession. The results suggest farmnonfarm and Western-Eastern income inequality may well rise in China but rural-urban income inequality need not. The authors conclude with some policy suggestions for alleviating any pockets of farm household poverty that may emerge as a result of WTO accession.

This paper-a product of the Economic Policy Division, Poverty Reduction and Economic Management Network-is part of a larger effort in the network to assess the impact of China's WTO accession. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Sarah Lipscomb, room MC4-404, telephone 202-458-7266, fax 202-522-2530, email address slipscomb@worldbank.org. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at k.anderson@adelaide.edu.au, jikhuang@public.bta.net.cn, or eianchovichina@worldbank.org. May 2003. (33 pages)

> _The PolPcy Research Workong Paper Sebyes dremtnates the fCndcigs of work in proass to encourage the exchange of ideas about development Issues. An objective of the series is toget the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretathons, and conclusions expre-ssed in tb s paper are entirely those of the authors. They do not necessanly represent the viewo of the World Bank, its Executive Directors, or the countnes they represent._

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# Long-Run Impacts of China's WTO Accession on Farm-Nonfarm Income and Rural Inequality Poverty*

Kym Anderson,t Jikun Huang,l and Elena Ianchovichina§

**Key words:** WTO accession, China's economic reform, rural-urban income inequality **JEL codes:** F14, **019,** 053

The paper was presented at the World Bank's Conference on China's WTO Accession, Policy Reform, and Poverty Alleviation, Beijing, 28-29 June 2002, the 5th Conference on Global Economic Analysis, Taipei, 5-7 June 2002, the AARES Pre-Conference Workshop on WTO: Issues for Developing Countries, Canberra, 12 February 2002, and the Intemational Agncultural Trade Research Consortium's conference on Globalization, Biotechnology, and Trade, Tucson, 14-16 December 2001. Thanks are due to the World Bank and Australian Research Council for financial support, and to Will Martin, Tom Hertel, Scott Rozelle, and other participants in the World Bank's project for helpful comments on earlier versions of this paper.

t School of Economics and Centre for Intemational Economic Studies, University of Adelaide, Adelaide SA 5005 Australia, phone (+61 8) 8303 4712, fax (+61 8) 8223 1460, kym.andersonaadelaide.edu.au.

I Center for Chinese Agricultural Policy, Chinese Academy of Sciences, Beijing, China, phone (+86 10) 6488 9440, fax (+86 10) 6485 6533, Jikhuangnpublic.bta.net.cn.

§ Poverty Reduction and Economic Management, Economic Policy, World Bank, Washington, D.C., USA, Phone (+1 202) 458 8910,Fax (+1 202) 522 2530, eianchovichina(iworldbank.orz.
# **Long-run Impacts of China's WTO Accession on FarmNonfarm Income Inequality and Rural Poverty**

## **Kym Anderson, Jikun Huang and Elena lanchovichina**

After fifteen years of negotiations, China acceded to<sup>the WTOat theend of 2001.During those</sup> negotiations, China was continually opening up its<sup>economy.However,substantial economic</sup> policy reform is still needed before the transition from<sup>plan to marketis complete.Someof those</sup> remaining reforms will be introduced over the next<sup>fewyearstofulfillthelegalobligations</sup> China has committed to in its WTO Protocol of Accession.

Keeping the momentum of growth-enhancing trade<sup>reformgoingrequiresconvincing</sup> sceptics that there will not be significant losers. Yet<sup>suchreformnecessarily involvesstructural</sup> adjustments by households, firms and bureaucracies.<sup>Whiletheeconomyasawholecangain</sup> substantially from those adjustments,' losses and even<sup>hardshipcanresultforsomehouseholds</sup> unless complementary domestic policies are in place<sup>tofacilitateadjustmentand/orcompensate</sup> losers. That underscores the importance of first analyzing<sup>thelikelydistributional consequences</sup> of the reforms themselves, and then considering what<sup>complementarypoliciesareneededto</sup> provide adequate safety nets for potential losers. Of<sup>particularconcern inChina'scase isthat</sup> farm incomes may fall, exacerbating the rise since the<sup>mid-1980sinfarm-nonfarmandinland-</sup> coastal aggregate income inequality and possibly<sup>reversingthedeclinesince thelate 1970sin</sup> rural poverty (see Kanbur and Zhang 2001).

The policy changes still to be made to fulfill WTO obligations<sup>willaffectallareasof</sup> China's economy. Numerous commentators predict<sup>a dramaticeffectonagriculture andhence</sup> rural areas, because the reforms in China over much<sup>ofthepastquarter-centurybypassedthe</sup> country's trade policies for key farm products. Before<sup>accedingtoWTO,Chinawas requiredby</sup> its trading partners to commit to major changes in<sup>those farmtradepolicies by2005 -protection</sup> cuts that appear far greater, and faster, than any<sup>otherdeveloping countrywasrequiredto</sup> commit to in the Uruguay Round Agreement on<sup>Agriculture.With one-quarterofrural</sup> households in China living on less than $1 a day<sup>in1999(c.f.1 per centof urban households)</sup> 2
such that more than three-quarters of all poor Chinese people live in rural areas, concerns about the impact of WTO accession on poverty alleviation are understandable.

Meeting the commnitments in agriculture will directly affect China's farm sector plus its food, feed and fiber processors, as well as consumers of food and beverages. lImports of numerous land-intensive farm products may increase, and most observers presume that will put downward pressure on prices received by China's farmers. However, reduced protectionism may boost output and exports of some labor-intensive farm products in which China still has a comparative advantage.2 In addition, farm households will be affected indirectly by many of the other commitments China has made in its WTO Accession Protocol. Especially important will be the arrangements for phasing out the 'voluntary' export restraints on China's textile and clothing trade, and the reductions in protection of the motor vehicles and parts industry. So too will be the myriad commitments affecting the services sector, including state trading enterprises. Those changes, together with the promised increase in a wide range of agricultural imports, will allow China to exploit more fully its strong comparative advantage in unskilled labor-intensive products - both farm and non-farm (Anderson 1990, 1992; Huang et al. 2000).

To assess the long run impact on farmer incomes and on rural areas of the remaining reforms required to meet China's commitments to the WTO membership, it is necessary to see those changes in the context of on-going economic growth and structural change. This paper therefore begins with a brief summary of rural developments since the initial reforms began in the late 1970s, of recent policies affecting rural households, and of pertinent reforms still to be delivered as part of China's WTO commitments. With that background, the paper then provides some indication of the likely effects on the welfare of different factor markets and hence different types of households of the reforms to be implemented between 2002 and 2007. Even the direction, let alone the magnitude, of some of the effects cannot be discerned from theory (Winters 2000; McCulloch, Winters and Cirera 2C01), so we use the numerical simulation model known as GTAP to address these issues. The paper concludes by drawing out implications for Chinese policy makers wishing to pre-empt any increases in food insecurity or rural poverty.

> l Although national gains from trade are not guaranteed while there are major domestic policy distortions in place, such as in the labor market. See, for example, Krishna and Yavas (2002).

> 2 The difficulties China has had in exporting food products to, for example, Japan, Korea and the United Kingdom in the past year or so because of those countries' quarantine/SPS measures should ease following WTO accession, or at least be challengeable under WTO Dispute Settlement provisions. They are ignored in the empirical analysis below, as is the possibility that China itself may use quarantine measures to limit its imports of farm products.

3
# **The setting**

_Rural developments since the late_<sup>_1970s_</sup> The unilateral decision in December<sup>1978to openup theChinese economywasa major stimulus</sup> to economic growth: the pre-reform<sup>rate of per capitaGDP growth of 3.1per cent per year more</sup> than doubled, and has remained<sup>above 7per cent forthe past two decades(finalrow of Table1).</sup> Rapid economic growth is normally<sup>accompaniedbya relativedeclineinthe farmsector,but in</sup> China that was initially tempered<sup>by the introductionof the farm household responsibilitysystem</sup> (which led to the replacement<sup>of collectivefarmswithindividuallymanagedholdings), and by</sup> the raising of prices received by<sup>farmers.So begantheprocessof movingawayfrom thetaxing</sup> of agriculture relative to other<sup>sectors-a processfollowedby mostof theadvancedeconomies</sup> in the early stages of their industrialization<sup>(Anderson and Hayami1986;Lindert1991).</sup> Agriculture grew nearly as rapidly<sup>asindustryfrom1979to1984.However,theone-off</sup> efficiency effects of moving to<sup>the household responsibility system and raising relative pricesfor</sup> farm products were mostly reaped<sup>bythemid-1980s,afterwhichagriculture grewatonlyone-</sup> third the pace of industry and<sup>less thanhalf thatof theservicesectorasindustrializationboomed</sup> on the eastern seaboard (Table<sup>1).Employment,outputand exportsof rural township and village</sup> enterprises, meanwhile, have boomed<sup>(Table2). Despitethat, migrationof farm workersto rural</sup> industrial and service activities (not<sup>tomention thetemporary migrationto urban jobs suchas in</sup> construction), the average farm<sup>size andthe shareof farm householdincomefrom farming have</sup> fallen steadily since the late 1970s<sup>(finaltwocolumnsof Table2).Table3showstheslowdown</sup> in the decline in agriculture's<sup>sharesof GDP and employmentinthe1980s,anditssubsequent</sup> acceleration in the 1990s.

Income growth has boosted the<sup>demandfor foodsthatarehighinproteinandnutrients</sup> relative to those high in carbohydrates,<sup>whichhasstimulatedmajorstructuralchanges within</sup> agriculture as farmers responded<sup>to changesin domestic demand.For example,livestock and fish</sup> increased their share of agricultural<sup>outputfrom less thatone-fifthinthe late 1970stotwo-fifths</sup> by the late 1990s (Table 3), while<sup>within the crop sub-sector,fruitand vegetableproduction grew</sup> two to three times as fast as grain<sup>output(Table1). The prices and marketing of grainand oilseed</sup> products have continued to be highly<sup>regulated,whereas markets forhorticultural,livestockand</sup> fish products have been greatly<sup>liberalized.Thishasaccentuatedthegrowth inoutputofthe</sup> latter group relative to grain and<sup>oilseedoutputsincethe mid-1980s(Table1).Meanwhile,the</sup> 4
> direct consumption of grain by rural as well as urban households has virtually ceased growing

> (Table 4) -- a consequence not only of incomes rising but also of population growth slowing to

> less than 1 percent per year and of cuts in the implicit consumption subsidy for foodgrains.

The use of grain for animal feeds continues to grow. To date that has been supplied almost completely by rising domestic production, such that the trend level of grain self sufficiency has remained close to 100 per cent. Table 5 shows that there are nonetheless. considerable changes from year to year in grain exports and imports. It also shows that, overall, China has remained a net exporter of food and feed, with meat, fish, fruit and vegetables providing most of the growth in net export earnings. However, soybean imports grew substantially when the government (in anticipation of WTO accession) lowered the tariff from 114 per cent to 3 per cent in 2000.

_Recent and prospective policies affecting rural areas_ As in most developing countries,<sup>3</sup> agriculture in China was squeezed at early stages of industrialization with gross fiscal contributions to the sector being more than outweighed by implicit taxation in the form of depressed prices for farm products, neglect of public infrastructure in rural relative to urban areas, and capital outflows via the financial system (Huang and Ma 1998). Then price and other market reforms associated with China's policy shift from a socialist to a market-oriented economy began to be introduced, starting with non-strategic commodities such as vegetables, fruit, fish, livestock, and oil and sugar crops. The aims of the early reforms were to raise farm level prices and gradually deregulate the market. As the right to private trading was extended to include surplus output of all categories of agricultural products after contractual obligations to the state were fulfilled, the foundations of the state marketing system began to be undermined (Rozelle et al. 1997). Despite periodic stop-go cycles in the reform process, the proportion of retail commodities sold at market prices has kept rising. According to Lardy (2001), the share for agriculture was just 6 per cent in 1978 but had risen to 40 per cent by 1985, 79 per cent by 1995 and 83 per cent by 1999.

What have these policies meant for nominal rates of agricultural protection in China (the percentage by which domestic prices exceed prices at the country's border)? Table 6 shows new estimates of nomninal protection rates for key agricultural commodities for some recent years. It

> 3 See Sah and Stiglitz (1992) and Anderson (1995).

_5_
suggests rice, meat, fish and fruit<sup>andvegetables have beenpricedatlessthanborderprices</sup> while other grains, oilseeds, sugar,<sup>cottonandmilkhavebeenpriced atone-fifth totwo-fifths</sup> above border prices. Maize and cotton<sup>also enjoyedexportsubsidiesin2001(amounting to one-</sup> third and one-tenth of f.o.b. prices,<sup>respectively).</sup> Table 6 also shows what China has<sup>committedto in its WTO Protocol of Accession:tariff</sup> rate quota will apply to grains, sugar<sup>and cottonfor which out-of-quotatariffsare quitehigh,but</sup> otherwise, after the phase-in period,<sup>the tariffsrangebetweenjust1and15percent-</sup> representing substantial liberalizations<sup>over 2001levels.As well,producersof majorcropsmay</sup> continue to be affected by commodity-specific<sup>policiesof government procurementof a portion</sup> of the crop at lower than market<sup>prices(asinthepast-seeSicular1988)orathigherthan</sup> market prices (as in 1998 - see Huang<sup>1998and Lu1999).</sup> What will those reforms mean for agricultural<sup>trade?Many analystshavebeenexpecting</sup> China to become ever-more dependent<sup>onagriculturalimportsinthecourseof theeconomy's</sup> rapid industrialization over the past<sup>two-plusdecades.Someextremists(e.g.,Brown1995)have</sup> even suggested China could seriously<sup>depriveother developing countries of food. Yet as reported</sup> above, net food import growth has<sup>notyet happened,atleastnotina sustainedway,andChina</sup> has continued to be a net exporter of<sup>meat,fish,fruitand vegetables.Indeedon occasionsin the</sup> latter 1990s, China also was a net<sup>exporterof grainandcotton (Table5).Howmuchof thatis</sup> due to government policies that constrained<sup>domesticdemand,including occasionalexport</sup> subsidies, is a moot point.

In its WTO Protocol of Accession,<sup>Chinahasagreedtohavenoagriculturalexport</sup> subsidies, and to limit its domestic<sup>supporttofarmersto8.5%ofthevalueofproduction</sup> (compared with 10% for other developing<sup>countries).Theimportmarketaccesscommitments</sup> China has made to WTO members<sup>look substantialon paper.Tariff ratequotaswill be retained</sup> only on wheat, rice, maize, edible oils,<sup>sugar, cotton andwool,domestic productionof whichin</sup> aggregate comprises only about one-sixth<sup>of China's agriculturalGDP.The quota volumesare to</sup> grow over the next three years<sup>atannualratesrangingfrom5to19percent.Afurther</sup> commitment by China is that state trading<sup>monopolies willdisappear(exceptfortobacco):even</sup> though some state trading enterprises<sup>willcontinuetooperate,therewillbe competitionfrom</sup> private firms in the importing and<sup>exportingoffarmproducts,atleast within thetariff-rate-</sup> quotas.

6
Farmers and the rural sector more broadly will be affected also by China's commitment to provide improved and WTO-bound market access for industrial products. Mineral and manufacturing tariffs will be bound and generally reduced on a broad basis, with many tariffs falling to 10% or less. Tariffs will be cut on accession and further cuts will be phased in by 2005 (with just a few exceptions). Furthermore, for industrial products, China will reduce significantly its non-tariff measures and eliminate all quotas, tendering and import licensing on non-farm merchandise by no later than 2005. Quotas on Chinese imports of automobiles and parts will grow by 15% annually from a level of around US$6 billion in 2000, and these quotas will be eliminated by 2005. For textiles and clothing, however, the current 'voluntary' export restraints will not be completely phased out until the end of 2008. Substantial commitments to open up services markets in China also have been made.

Over the 1990s the average scheduled tariff rates for manufacturing initially exceeded but fell more than for agriculture, and by 2005 the manufacturing average will be well below that for agriculture (a simple average of 7 per cent, versus 17 per cent for agriculture). That does not give a true indication of the extent of change in protection that is taking place, though, because in the 1990s many manufactures have been entering China at reduced or zero tariffs via duty drawbacks, to encourage foreign investment in processing of imported intermediate goods for subsequent export. Some agricultural products also have entered at less than the scheduled rate, including through smuggling.

What all this means for incentives for each industry is difficult to discern precisely, but it provides better information than has been available to date for analysing empirically the economic effects of the reforms associated with China's WTO accession, including the impact on factor rewards and prices from which inferences about income distributional effects can be made. We do this bearing in mind the marked differences in per capita incomes between eastern, central and western provinces, and between urban and rural areas (as shown in Tables 7 and 8, and in Kanbur and Zhang 2001).

7
# **Applying the GTAP model**

Version _5_ of the computable general equilibrium<sup>modelof the globaleconomyknownas GTAP</sup> is used here.<sup>4</sup> Being an economy-wide<sup>model, GTAPdescribesboththeverticalandhorizontal</sup> linkages between all product markets within<sup>the model's individualcountriesand regionsas well</sup> as between countries and regions via their<sup>bilateraltradeflows.For present purposesthe1997</sup> data base is aggregated to 25 sectors and<sup>20 regionsand projectedforward first to 2001and then</sup> to 2007, using World Bank projections of<sup>population,income,andfactorendowments(see</sup> Appendix Table A). The initial base case<sup>assumesChinaretainsits protection policiesasof 1995</sup> and Taiwan retains its protection as of 1997,<sup>butthatallothercountriesfullyimplement their</sup> Uruguay Round obligations on schedule<sup>before2005.China'stradepolicychanges between</sup> 1995 and 2001 are assumed to have been<sup>in anticipationof therequirementsof,andhencepart</sup> of, China's WTO accession. These<sup>areanalyzedindetailin lanchovichinaandMartin(2002),</sup> together with the effects of implementing<sup>overthenextfewyearstheremainderofChina's</sup> commitments as recorded in its WTO<sup>Protocolof Accession. 5Inthispaperwefocus on just the</sup> additional reform commitments to be implemented<sup>after 2001(relative tothe revisedbase case in</sup> which China's reforms only up to 2001 are<sup>inplace andtherearenofurther reformsto 2007).</sup> For key agricultural import policies these<sup>remaining reformcommitmentsareassumed to shift</sup> nominal rates of protection (NRPs) from<sup>column3 tocolumn6of Table6.Aswell,theexport</sup> subsidies in place in 2001 (34 per cent for<sup>maize,10 percent forcotton)are tobe eliminated,and</sup> we assume no new farm production subsidies<sup>areintroduced.6Thechoicesofnewagricultural</sup> NRPs fall into three categories: no change if<sup>they werenegativein2001(rice, meats, vegetables</sup> and fruits), a move to part-way between<sup>thein-quotaandout-of-quotatariffsif theTRQsbite</sup>

> 4 The GTAP (Global Trade Analysis Project) model is<sup>amulti-regional,static,appliedgeneralequilibriummodel</sup> based on neo-classical microeconomic theory<sup>includingfullemploymentofallfactorsofproduction,constant</sup> returns to scale and perfect competition.<sup>SeeHertel(1997)for comprehensivedocumentation. The Version5 data</sup> base is described at www.gtaP.ore. The model<sup>issolved withGEMPACKsoftware,describedinHarrisonand</sup> Pearson (1996).

**5** A particularly important feature of<sup>their analysisis theinclusion ofChina'sdutyexemptionsinthebasescenario,</sup> because otherwise the model would overstate<sup>the gainsfrom tariff reductions.Tariff cuts arefrom 2001appliedrates</sup> to post-accession bound rates (or zero if the<sup>latterexceedthe former).Inthisapplicationthe aggregate trade balance</sup> and government tax revenue are both assumed<sup>toremainafixedshareof GDP.The2001tradedataarefrom</sup> COMTRADE, and the 2001 applied tariffs<sup>for Chinaare fromCDS ConsultingCo.(2002).</sup>

6 Three non-farm reforms of importance<sup>areworthyofmention.The'voluntary' export restraintonChina'stextile</sup> and clothing exports to the U.S. and EU,<sup>expressedinthebase scenarioas taxesonthoseexports,areremoved;</sup> restructuring of the motor vehicles and<sup>partsindustry followingWTOaccessionismodelledasa20percent</sup> productivity boost to vehicle assembly, following<sup>Francois(2002);andliberalizationof China'sservicestradealso</sup> follows Francois (2002).

8
(wheat, coarse grains, cotton), and otherwise a move to the new in-quota tariffs (oilseeds, sugar, milk). Sensitivity of the results concerning the first two categories are explored in the qualifications section, however.

If this reform were to require a movement of unskilled labor out of farm activities, three impediments need to be kept in mind. One is that those farm workers would be less than perfect substitutes for those already in non-farm pursuits. Econometric work by Sicular and Zhao (2002a) suggested that restraints on mobility could be approximated via a CET function with an elasticity of transformation of 1.3.7 We have therefore incorporated that in the GTAP model for China. Another impediment to off-farm migration is that urban social welfare benefits such as subsidies to housing, food, education and health care are not available to non-urban people, except by purchasing a residence permit, or _hukou_ (Zhao 1999). And the third impediment is that farm workers who permanently cut their ties with the rural sector may lose entitlement to retums from their family's land, and even the direct support and assistance of family members (IHussain 2001). These latter two impediments have contributed to the persistence of a very large gap in farm versus non-farm returns to unskilled labor. After adjusting for differences in work effort, the analysis by Shi Xinzheng (2002) allows us to estimate that roughly one-third of the gap between urban and rural unskilled wages can be explained by the registration variable and differences in the cost of living.<sup>8</sup> We have assumed that gap will persist even if workers do move off the farm in the initial simulation (although the sensitivity of the results to that assumption is explored in the qualifications section).

The closure adopted here is a long-run one in which, in addition to the above assumptions about farm labor, nonfarm labor is mobile between nonfarm sectors, capital is mobile between sectors, and agricultural land is mobile between industries within the agricultural sector. This closure differs from the short -run closure used by Chen and Ravallion (2002), where a large number of households is examined, based on current occupational classes. With these modifications to the GTAP model, what results emerge from implementing after 2001 the remainder of China's commitments to WTO members? Eere we focus on comparing farm versus non-farm results. This is not quite the same as rural versus urban, given the large and growing

> 7 In a subsequent analysis, Sicular and Zhao (2002b) provide estimates of 2.67 for the "push" elasticity<sup>of</sup> transformation from changes in agricultural returns to changes in the supply of labor out of agriculture but only 0.6 from changes in non-agricultural returns. Ianchovichina and Martin (2002) conducted sensitivity analysis on the implications of changes in these parameters.

9
amount of non-farm rural activities<sup>(Table2),but it isthebest wecan dowith theGTAP model</sup> which does not distinguish activities<sup>by locationwithina country.9</sup>

# **What results can we anticipate?**

In a recent paper, Carter and Estrin<sup>(2001)developamodelwithtwosectors,agricultureand</sup> non-agriculture, that assumes capital<sup>is sector-specificand laborisintersectorally mobile.They</sup> assume the trade reform from China's<sup>WTOaccessionwilllower therelativepriceof non-farm</sup> goods (larger tariff cuts for non-farm<sup>thanfarm products).Ifthe economystarted from</sup> equilibrium in the labor market,<sup>thatprice changewouldlowerlabor'swageintermsof farm</sup> goods and would cause labor to<sup>migratefromnon-farm to farmactivities. If,however,the</sup> economy starts from a situation in<sup>whichfarm workersfaceimpedimentstomigratingto non-</sup> farm employment, the wage in the<sup>non-farmsectorwould have exceededthatinagriculture.In</sup> that case, a fall in the relative<sup>priceofnon-farm products wouldlowerthenon-farmwage</sup> without changing the low farm wage (if<sup>bothareagainmeasured in termsof agriculturalgoods).</sup> If the government were to simultaneously<sup>removethebarriertoout-migrationoffarmlabor,</sup> another welfare gain would accrue<sup>to theoveralleconomy. Farmworkerswouldbenefitfrom</sup> trade reform alone in so far as they<sup>consumenon-farmproducts whosepriceis lowerafterthat</sup> policy change. They would benefit<sup>evenmoreif therestrainton their migration wereto be lifted.</sup> Non-farm workers, however, would<sup>sufferwagecutsintermsof farmproductsfromeachof</sup> those two policy changes, cuts that<sup>may offsetthefallinthe priceof non-farmproducts they</sup> consume. Carter and Estrin therefore<sup>concludethatChina'srural-urbanincomeinequality(at</sup> least for laborers) would be reduced<sup>from furthertradeliberalization andmore soif thecurrent</sup> policies that inhibit off-farm migration<sup>were relaxed.</sup> Neat though the Carter/Estrin analysis<sup>is,itignoresthedifferencesbetween skilled,</sup> unskilled non-farm and unskilled<sup>farmworkers.Also,itsassumptionthattheincentiveto</sup> produce non-farm relative to farm<sup>productswillfallfollowingWTOaccessionneedstobe</sup> tested, since there will be some positive<sup>and somenegativechangestothepriceof bothsetsof</sup> highly tradable products. Furthermore,<sup>thedemandfordifficult-to-tradeproductswill rise</sup> following the income gains from trade<sup>reform, and their cost of productionwillchange. Doesthe</sup>

> 8 Of this, 28 percent is explained<sup>by the registrationdummy variable,and 6.5 percent by differencesin living costs.</sup> 9 For a more-detailed breakdown<sup>showing bothfarmandnon-farmruralhouseholds,seeHertel,ZhaiandWang</sup> (2002).

10
Carter and Estrin conclusion, that WTO accession will reduce rural-urban income inequality, hold up when account is taken of these facts in a detailed empirical model such as GTAP? And how would poverty be affected, bearing in mind that there are considerable differences between the production structures and per capita incomes of western, central and eastern provinces (Table 7), rural incomes are only one-third of urban ones (Table 8), and 85 per cent of rural households in the bottom quartile of the income distribution are agricultural (Sicular and Zhao 2002a)?

# What do the iresunlts show?

Our analysis begins with the core accession scenario, and then is followed by three variations on that core scenario.

_The core WTO accession scenario_ To begin with the bottom line of the main scenario before revealing the details, the core empirical results suggest increases in farm-nonfarm income inequality. The main reason for this is that opposite to the conclusion of Carter and Estrin the GTAP model suggests the relative producer prices of farm products will fall more than the prices of labor intensive non-farm products following the completion of WTO accession reforms (Table 9). Relative prices are lower for labor intensive non-farmn products compared with what they would be without those remaining reforms -- despite the removal of the 'voluntary' export restraint on sales of those products to the U.S. and European Union - for three reasons: because the demand for labor on farms is lower which lowers the cost of unskilled labor in manufacturing, because import taxes on the intermediate inputs used in those manufacturing activities are lower due to the accession process, and because the real exchange rate effect of the tariff reductions lowers the cost of nontraded goods and other factors used as inputs in production.

The lower cost structure in unskilled labor intensive manufacturing activities by 2097 causes the quantity of unskilled non-farm labor demanded to be greater (by 0.8 per cent); but lower farm product prices mean the quantity of unskilled farm labor demanded is less (by 1.7 per cent). A consequence of the reform is a 0.7 per cent fall in the real wage for unskilled farm labor, and a rise in real wages for unskilled non-farm labor of 1.2 per cent (after adjusting for the 11
change in the aggregate cost of living).'<sup>0Farmersare alsomadeworseoff by thelower demand</sup> for farm land, the return from which<sup>is5.5percentlowerin2007followingWTOaccession</sup> reforms. Meanwhile, the real wages<sup>of skilled laborincreaseby 0.8per cent,and the rewardsto</sup> non-farm capital are 1.3 per cent higher.<sup>Together theseresultssuggesttheownersof non-farm</sup> capital gain almost the same in proportional<sup>termsas unskilledlaborers innon-farm employment,</sup> but the latter do better than skilled<sup>workers. Hence on balanceincome inequalitymayimprove</sup> slightly among non-farm households dependent<sup>mainly on laborincome.1l</sup> However, income distribution can<sup>beexpectedtoworsenasbetweenfarmandnon-farm</sup> households, although the degree depends<sup>on the proportionof farmhousehold incomeearnedoff</sup> the farm. With only 1.7 per cent of<sup>(orabout6million)unskilledfarm workers leaving</sup> agriculture for non-farm work (because<sup>of theassumedimpedimentstoout-migration),and with</sup> land returns depressed by 5.5 per cent<sup>inaddition to farmlabor returnsbeing 0.7per cent lower,</sup> the gap between farm and non-farm<sup>incomesevenwithinruralareas,and certainly between rural</sup> and urban areas, looks set to rise slightly<sup>unless remedial policy actionis forthcoming.For farm</sup> households entirely dependent on earnings<sup>fromagriculture(typeA in Table10),incomewould</sup> fall 1.6 per cent on average. This would<sup>differ little acrossthe threeregionsidentifiedin Table7,</sup> since product shares for farm output<sup>-whenfish productsare ignored -arereasonably similarin</sup> western, central and eastern provinces.12<sup>For farrn households earning 30 per cent of their income</sup> from nonfarm unskilled work, however,<sup>that income fall is only half as large (0.8per cent);and</sup> for farm households earning 60 per<sup>centof their incomefromnonfarmunskilledwork,their</sup> incomes would not decline at all (types<sup>Band C in Table10 --see rows 7 and 8).</sup> Sectoral details of the GTAP results<sup>aresummarizedin Table9.Realconsumerpricesare</sup> lowered most by WTO accession for<sup>motorvehicles,oilseedsand sugar(andfor beveragesand</sup> tobacco, although if China was using<sup>importtaxeson thoseitems as a formof consumptiontax</sup> and their decline were to be matched<sup>byanincreaseindomesticsalestaxation, thoseprice</sup>

> 10 The present version of the GTAP model<sup>hasonlyoneaggregatehousehold,soit cannotdistinguishbetween the</sup> different consumption bundles and<sup>factorendowmnentsofdifferent typesofhouseholds. Throughout,realprice</sup> changes refer to the change in price<sup>relativetotheconsumer price index change,giventheconsumptionbundleof</sup> the aggregate household.

> " Wages of skilled workers might<sup>increasemorethansuggestedhereaswedo notcapturetheendogenous</sup> productivity growth resulting from the<sup>substantial liberalizationof the servicesectors.</sup>

> 2 However, if we look at northern and<sup>southernprovincesinChina,differences could be largesincewheat,maize,</sup> soybean and cotton are planted primarily<sup>innorthern China, whilerice,horticulture,livestock andfish areraised</sup> mostly in southern China.

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> declines may not materialize). They are also lowered for textile products and to a lesser extent clothing. Among the farm products, consumer prices are raised slightly for livestock products, somewhat more for grains, and significantly for cotton (plant-based fibres). Producer prices are down more for farm products than for most other products except autos though, and farm output is down for all but cotton and meat. Moreover, feedgrain exports shrink by three-quarters and cotton exports by half with the abolition of export subsidies. The difference in the effects on production and consumption shown in Table 9 reveal that China's food, feed and fibre selfsufficiency will be reduced at least slightly by these reforms. But the extent is really quite minor: the trade balance column in Table 9 suggests that for all agricultural and food products, net imports would be greater because of the remaining accession reforms by only $3.96 billion per year by 2007 (in 1997 US dollars), which represents only 1 per cent of total imports.

> The above results depend as always on the assumptions in the model. To check the sensitivity of some of those assumptions, three alternative scenarios were run to compare their results with those in the base accession scenario: greater agricultural protection cuts; removing negative agricultural protection; and removing the wedge between farm and non-farm wages.

_Alternative scenario 1: greater agricultural protection cuts_

> What if the grain, sugar and cotton NRPs were to drop to the in-quota tariff levels shown in Table 6, for example? An additional GTAP simulation was run and the differences for factor rewards are not huge in aggregate but they would be in the direction of worsening income inequality: unskilled farm wages would fall 0.9 instead of 0.7 per cent and rewards to farm land would fall 6.4 instead of _5.5_ per cent on the one hand, while on the other non-farm wages would rise 1.4 instead of 1.2 per cent for the unskilled and 1.0 instead of 0.8 per cent for skilled workers (Table 10). These changes would attract only another million workers from farms, given the assumed impediments of off-farm migration. But while agricultural incomes would be lower, farm household income would not fall if at least 60 per cent of its income came from wages of non-farm unskilled labor (see row 8 of Table 10). Domestic production of grains, sugar and cotton would be less though, and domestic consumption greater, so self-sufficiency in those products would be slightly lower. Even so, net imports of all food and agricultural products would be greater by only $1.5 billion per year by 2007 ($5.43 instead of $3.96 billion). Such an import increase would be within the tariff rate quotas for those items with the possible exception

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of maize (depending on the extent<sup>to which otherfeedgrainsthatare not TRQ-restricted,such as</sup> barley, are substitutable for maize).<sup>Nationaleconomicwelfarewouldbeonly veryslightly</sup> greater in this case as compared<sup>with the corescenario(see bottom row of Table10).</sup> _Alternative scenario 2: removing_<sup>_negative agricultural protection_</sup> If the negative NRPs for rice,<sup>meats, vegetablesandfruits wereto be raisedto zero,the income</sup> distributional effects would<sup>gointheoppositedirectiontothoseinthepreviousalternative</sup> scenario (less inequality between<sup>farm andnon-farmhouseholds).Thechangesarenotgreat</sup> though, even though these products<sup>accountfornearly40 percentofthevalueoffoodand</sup> agricultural output in China.<sup>Ascan be seen by comparingcolumns1, 2and 3 of Table10,they</sup> would involve about as much<sup>improvementinincome distributionasthepreviousalternative</sup> scenario would worsen it. This<sup>caseinvolvesa 3 percentlargernationaleconomicwelfaregain</sup> than the core case (bottom row of<sup>Table10).</sup> _Alternative scenario 3: removing_<sup>_the wedge between farm and non-farnwages_</sup> If one expected all off-farm migrants<sup>to go to</sup><sup>_rural_rather than urbannon-farm jobs, andif those</sup> migrants were just as adept at<sup>suchnon-farm work(e.g.,becausetheyareyoung or evenjust</sup> school-leavers and hence no different<sup>from other new entrantsto unskilled ruralnon-farmwork),</sup> the assumption above of a one-third<sup>wedge betweenfarm and non-farmwagesfor the unskilled</sup> could be dropped.'<sup>3</sup> Rerunning<sup>the modelwithoutthat assumed wedge has significantimpacts on</sup> the estimated number of farm<sup>workersmovingtonon-farmemploymentandon theindustry</sup> composition of China's economy.<sup>Approximately28 millionpeople would leave their farm jobs as</sup> a result of accession if that<sup>barriertofarm out-migration wasremoved,compared withthe</sup> estimated 6 or 7 million people<sup>mentioned abovewhen the</sup><sup>_hukou_system remains in place.</sup> The impact on industry composition<sup>of removingthat labor marketdistortionissubstantial'.</sup> WTO accession will have a much<sup>strongerpositiveimpact on China's manufacturingandservice</sup> sectors if the _hukou_ system is<sup>abolished.Thiswillallowmore productionof metals,automobiles</sup> and electronic equipment, and<sup>moreservices.Thatis possiblein thisscenariobecausefactor usein</sup> farming and hence agricultural<sup>outputareless,whichalsomeansmoreimportsoffoodand</sup> agricultural products are needed<sup>($10.2 billion by 2007instead of the $3.96in the core scenario).</sup>

> 3 Evidence of increased flexibility<sup>in China'slabor markets in recent times is presentedin Lohmar(2001).</sup>

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The consequences for income distribution are dramatic. Table 10 shows that this greater offfarm migration of workers would cause earnings of farm workers (mostly self-employed farmers) to rise because of WTO accession by 16.8 per cent, instead of falling by 0.7 per cent as in the core accession scenario. Even though the reduced demand for land would cause its rental value to fall more (9.7 instead of _5.5_ per cent), the farmers' overall earnings from agriculture would be 6.8 per cent greater in this scenario - in stark contrast to the core scenario where they fall. True, the earnings of all other factor owners fall in this scenario, particularly unskilled nonfarm labor (by 3.8 per cent). However, given that farmers are among the country's poorest households, this scenario suggests that WTO accession would reduce income inequality and poverty if the labor market distortion associated with the _hukou_ system were to be reformned. It also suggests that the boost to national economic welfare in aggregate could be greater if WTO accession were to be accompanied by labor market reform: $11 billion per year instead of just the $9.6 billion in the core accession scenario.

> Co¢ndilUAonM asd polcy iMmplczftioms

> The assumption in GTAP that all households are identical in their consumption patterns is of

> course a fiction. They differ as between urban and rural areas, between farm and non-farm households within rural areas, and within each of those groupings according to region and income level. Post-simulation analysis at that level of detail for the short run is provided in Chen and Ravallion (2002). But even without that detail, it is possible to draw some broad conclusions

> about the long run implications of WTO accession for agriculture and for income distribution.

Our initial analysis assuming no reform of the _hukou_ system affecting labor market suggests rural non-farm incomes will rise on average absolutely and possibly even relative to urban incomes in the case of households depending just on labor income (assuming urban laborers are more skilled). However, some farm households facing increased import competition may be worse off in this case, ceteris paribus, if they are:

- unable to send household members to jobs in expanding industrial and service industries;

- are too poorly served with infrastructure to attract such activities to their own region;

- are unable to diversify into producing farm goods whose relative price has risen; and/or

- do not have relatives able to repatriate non-farm earnings to them.

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Thus in the core scenario the incidence of rural non-farm poverty will fall mainly<sup>because</sup> of the growth in wages for unskilled workers in rural non-farm activities, while<sup>poverty may well</sup> increase in agriculturally based hinterland provinces a long way from<sup>markets andinregions</sup> poorly served with the necessary infrastructure to attract investment in such<sup>expanding activities</sup> as textiles and clothing.

The first alternative scenario shows that this situation would be exacerbated<sup>slightlyif the</sup> TRQ-protected items (grains, sugar and cotton) were to become<sup>evenless protected thanwe</sup> initially assumed. By way of contrast, the second alternative scenario suggests<sup>thesituation could</sup> be made slightly less extreme by removing the negative<sup>protectionaffectingrice,meats,</sup> vegetables and fruits. But both of these alternatives only involve<sup>small changestothe</sup> magnitudes of effects, rather than altering the sign of those effects, and both<sup>add onlyasmall</sup> amount to the aggregate gains from trade liberalization.

What the third alternative scenario makes clear, by way of contrast, is that<sup>thesignof the</sup> effects could be switched to favor the poorer farm households<sup>-albeitattheexpenseofthe</sup> richer non-farm ones - if the remaining WTO accession were to be<sup>accompaniedby reformof</sup> the _hukou_ system that allowed some members of those households<sup>toobtainhigher-paying non-</sup> farm employment and repatriate earnings back to their farm<sup>family.'4Andthiscasewould</sup> involve a national economic welfare gain that is one-sixth above<sup>that in the core scenariowithout</sup> labor market reform.

National self-sufficiency in food, feed and fiber will fall somewhat,<sup>particularlyas</sup> demand for livestock products grows with income gains<sup>from tradereformandasproductionof</sup> natural fibre-based textiles and clothing expand. But overall,<sup>mostoftheseself-sufficiency</sup> effects of the remaining reforns that are required following<sup>WTO accessionarerelativelyvery</sup> small in magnitude.'<sup>5</sup> They would be largest in the third alternative<sup>casewherelabor market</sup> distortions are also removed. That is not to say food security<sup>wouldfallin that casethough.It is</sup> changes in incomes of the poor, and hence in their capacity<sup>topurchasefood,thataffectfood</sup> 14 These alternative results for the long run complement the findings of Chen and Ravallion (2002) for the short-run. What they underscore is that whether a particular group gains or loses from<sup>a</sup> shock<sup>suchasWTO accessionin the</sup> long run depends heavily on their sources of household income and their capacity<sup>to adapttothechangedeconomic</sup> circumstances.

> **15** They are especially small when compared with the changes that are taking<sup>placein the courseof normaleconomic</sup> growth, as shown retrospectively in Tables 1-5 above and prospectively<sup>in earlieranalysesbyAndersonetal.</sup> (1997a, b) and in lanchovichina and Martin (2002).

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> security, and in that third alternative scenario the poorest aggregate group (farm households that had been heavily dependent on agriculture) would gain most.

What else should be done if the labor market were not to be reformed? If in that case some farmers' incomes are to worsen relative to those of non-farm households, and if there is concern about the fall in agricultural self-sufficiency, it does not follow that trade reform should be abandoned. Rather, first-best ways of dealing with those concerns should be sought (and with any transitory unemployment that might follow reformn). The most efficient policy responses are likely to involve investments in rural human capital, rural infrastructure and R&D (Fan, Zhang and Zhang 2002), improvements in the land tenure system and rural financial markets, reductions in informal taxes/levies on farmers by local governments, and changes in grain marketing.

First, the government might consider further investments in basic rural education and health services to reduce the adverse effect of trade reform on poverty incidence and perceived food security. Better education and health for farmers' children not only boosts their farm productivity should they choose to stay on the farm after finishing school; it also increases their capacity to find more-lucrative off-farm work and to adjust to non-agricultural employment and living (Schultz 1975; Zhang et al., 2002). In addition to those longer-term benefits, there could also be an immediate poverty alleviating effect if the government were to cut basic school fees and make up the shortfall with a bigger direct grant to rural primary and middle schools.

Second, improvements in rural infrastructure such as roads and rail mean that a larger share of the price eventually received at the end of the marketing chain for farm products can be passed back to farmers. Such improvements also lower the barrier for off-farm work by members of farm households, making it easier for them to take advantage of expanding employment opportunities in rural townships.

Third, agricultural R&D can ease both urban and rural poverty (see Fan, Fang and Zhang 2001; Hazell and Haddad 2001). A boost in agricultural productivity could significantly offset the 2-8 per cent drop in agricultural production that is estimated in the core scenario to result from WTO accession. An important policy issue here is whether China should deny itself the use of GMOs in food production. Since our results suggest China would be exporting less food postWTO accession and beyond, there is less sense in banning food GMOs in China if such a ban were to be imposed simply because of fears of otherwise being denied access into food markets abroad (Anderson and Yao 2002; Huang et al., 2002).

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Fourth, improvements in the land tenure system<sup>would notonly increasetheincentiveto</sup> invest more in land but would also enhance the collateral of<sup>farm households.If accompaniedby</sup> improvements in rural financial markets, investments<sup>byfarmersbackintoagriculturewould</sup> rise. They would rise further if returns were increased<sup>via reductionsininformaltaxes/levieson</sup> farmers by local governments.

And fifth, the government might reduce its regulation<sup>of grain marketingand in particular</sup> cease compulsory procurement from farmers at less than<sup>marketpricesand reducethe provision</sup> of grain to urban consumers at less than market prices.<sup>De-empahsisingtheGovernors'grain</sup> responsibility system (provincial self-sufficiency)<sup>wouldallowmoreexploitationof comparative</sup> advantage within China too.

If all that was considered insufficient support<sup>for incomes of thepoorest farm households,</sup> short-term adjustment assistance via infra-marginal<sup>(andhencenotoutput-inducing)producer</sup> price subsidies could be provided so as to boost their<sup>farm incomeswithout boostingfarm output</sup> (in an equal but opposite way to that used to tax<sup>farmers in earlierdecades-seeSicular1988).</sup> Such an intervention could well be deemed WTO-consistent<sup>becauseof itsdecouplednature, and</sup> in any case if it was just targeted to poor farmers<sup>it is unlikelytoever exceed8.5per cent of the</sup> value of China's output of the product concerned (its<sup>_deminimis_exemptionlimitfor product-</sup> specific support under Article 6.4 of the WTO' s Agreement<sup>on Agriculture).</sup> Finally, now that China is in the WTO it has<sup>the opportunityto takepart innew roundsof</sup> multilateral trade negotiations, whereby it can seek<sup>increased marketaccessforitsexportsof</sup> farm (and other) products abroad. While not taken<sup>into accountinthepresentpaper,if WTO</sup> membership enhances China's chances of expanding<sup>its accesstoagriculturalmorethan other</sup> markets abroad in the future, that would be a positive<sup>benefitofWTOaccessionforChina's</sup> farmers and rural areas. Martin (2002) points out<sup>that Chinesefarm exportsface particularlyhigh</sup> barriers abroad, so this potential benefit is non-trivial<sup>inprinciple(althoughin practiceitmay be</sup> difficult to secure, especially if the main barriers<sup>areSPSmeasures).'6Thatpropositionwas</sup> tested recently by Yu and Frandsen (2002), also<sup>usingtheGTAPmodel.Theyfindthat</sup> reductions in barriers to agricultural imports and<sup>indomesticsupporttofarmersinOECD</sup> countries reduces the extent to which China's farm output<sup>wouldfall with WTO accessionandin</sup> 18
some cases leads to outputs expanding instead of contracting. As a consequence, China's agricultural imports are reduced slightly and its agricultural exports are greater. These changes are reflected in Table 11: it shows that not only would China's food self-sufficiency be higher with than without agricultural protection in the EU, US and Japan, but that the difference is in most cases more than enough to offset the fall in self sufficiency that is estimated to result from China's WTO accession. Such reform in the OECD would clearly benefit farm households in China, providing a further pro-poor consequence of trade reform.

> 16 There is also the question of how China's membership will alter the relative strengths of liberal versus protectionist forces in the next WTO rouna. **f** multilateral farm trade negotiations. Mathews (2002) argues that China's accession is likely to affect both sides, so the net effect is difficult to discern a priori.

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