Chinese Macroeconomic Linkages Of Agriculture

A. Methodology, Content, and ConclusionsDue to the fact that the changing agriculture in China is becomingincreasingly open, having more and more extensive, closer and closerlinkages with the national economy (and even the world economy), theoperation of agriculture in China, at least in logic, cannot be approachedthrough close, static, micro, and partial equilibrium analysis based on thetraditionally so-called "partial equilibrium island assumption" and/or"water-tight compartment assumption". In stead, an open, dynamic,macro, and general-equilibrium approach should be developed, to treatagriculture as an important, organic part of the national economy (or evenof the world economy).For this reason, a "link model" is developed, in which agriculture islinked to the macro economy, using methods of macroeconomics,agricultural economics and econometrics. The link model comes fromtwo sub-models: the agricultural model and the macro-economic model.The agricultural model deals with the operation of agriculture fromagricultural production, consumption, investment, imports and exports,employment, and production price and consumption price levels, etc. Themacro-model, which is developed on the basis of the system of nationalaccounting, however, deals with the operation of the macro-economyfrom 9 aspects: production, income distribution, consumption, investment,foreign trade, price levels, social employment, revenues and expenditures,and money and banking. After the completion of the two sub-models,relevant equations of the agricultural model are embedded onto relevantmodules of the macro-economic model, forming a link model ofagriculture and the macro economy of China. Based on the "link model",a number of policy simulations are conducted with regard to interest rate,the exchange rate, agricultural tax and agricultural prices. The mainconclusions are as follows:Firstly, strong macro-economic linkages exist between agriculture and thenational economy. On the one hand, changes in macro economic factorssuch as interest rate and the exchange rate of RMB can strongly affect themacro economy and, through certain intrinsic economic mechanisms,exert effects on the agricultural sector as well. On the other hand, changesin agricultural economic factors—agricultural tax rate, the price level ofagricultural products, for instances, may directly affect the agriculturalsector and, through certain intrinsic economic mechanisms, exerciseeffects on the macro economy.Secondly, compared to the effects of the change in interest rate, theeffects of the change of the real exchange rate of RMB are strong andlasting; thus, any appreciation of RMB requires utmost care. Though theeffects of an appreciation of RMB in the short run are largely centered inthe increase in deficits in current account balance, the long-run negativeimpacts on agriculture and the national economy are considerable andincreasing, especially on the variables as output, employment, householdincome, household consumption, and fixed assets investment. Therefore,the appreciation of RMB requires utmost care, even if only its negativeimpacts on agriculture and the macro economy are taken intoconsideration.Thirdly, agricultural tax reduction is conducive not only to agriculture,but also to the national economy as a whole; rural tax reformcharacterized by agricultural tax reduction should not stop half way, oreven return to the old agricultural tax system. A reduction in agriculturaltax has expansive effects on agriculture and the macro economy,especially on output, employment, household income, investment,consumption and exports and imports. In addition, agricultural taxreduction will not cause a decrease but lead to an increase in fiscalrevenue because of its expansive effects on agriculture and the nationaleconomy as a whole. The effects, however, are mainly of short duration,and decrease rapidly. This indicates that, to maintain relevant effects,persistent reductions in agricultural tax are required till the agriculturaltax is cancelled forever. Rural tax reform...