Structural Change, Urban Bias and the Political Economy of Rural Land Policy in China

Abdulaziz Shifa (Syracuse University)
Wei Xiao (Southwestern University of Finance and Economics)

Abstract: Despite China's pro-market reforms in many areas, the rural land policy still features a very restrictive property right. While peasants have the right to farm their plots (which are allotted to them by village administrations), their rights to sell and/or rent the plots are severely restricted. These restrictions have been argued to entail enormous efficiency costs, adversely affecting the welfare of hundreds of millions of rural residents. However, the political incentives to remove the ownership restrictions have been lacking. In this paper, we present a political economy model of rural land policy taking into account some key characteristics of China's context. Our model features structural transformation under a political regime that caters predominantly to the interest of urban residents. We assume a government facing conflicting incentives on whether to remove restrictions on ownership of rural land. By providing further incentives for rural-urban migration, removing the restrictions releases labor to the urban sector, expands the modern sector and, as a result, increases the leader's rent base. On the other hand, the possibly large increase in labor supply following land reform increases the risk of urban unrest due to wage depression (or unemployment) in the urban sector. To take into account the two conflicting motives of the government, we consider a two-sector economy where the government's rent base depends on the size of the urban sector. Our analysis sheds light particularly on how the rapid transformation of China's economy toward more urbanization and higher productivity of the urban sector could affect the government's incentive toward the choice of rural land property right. The model shows that while a higher urbanization increases the government's incentive to remove the ownership restrictions, improvements in productivity of the urban sector have a counteracting effect.

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