China's Agricultural Subsidies And Their Effects In The Transitional Period

China's reform beginning late 1970s marked that China has entered a period of economic transition. After 30 years of sustainable and rapid development, China has entered a stage of development as " promoting agriculture through industry and enhancing rural through urban areas." To achieve "industry-supported agriculture" through a variety of incentive policies, including agricultural subsidies, is the basic policy orientation and development trend of solving "three rural issues" and of coordinating urban and rural development.Agricultural subsidy is an important component of the government's agricultural incentives. The overall objective of subsidies is to use price leverage through government intervention in agricultural products or capital goods markets or using direct payments to enhance agricultural producers' earnings, to boost the overall level of output in agriculture, and to realize the coordinated development of three industries. This narrow conception represents international prevailing view, and is useful for analysis and assessment of international agricultural trade environment. However, in a broader sense, agricultural subsidy has a great significance in improving the social status and welfare standards of farmers, achieving environmental protection, and promoting social harmony. Provided that its micro-economic and macro-social efficiency are fully in line with the ideology of public finance in serving economy and providing equal services.To analyze agricultural subsidy policy, and its effects, we need consider institutional circumstances under specific history stages. In a quite long period of the past, China's agricultural operation model has been characterized by public ownership under a planned economy. Therefore, the level of agricultural marketization was low, and the government economic behavior towards agriculture mainly focused on collective agricultural development by adjusting investment and taxation policy. As a result, China's government farm subsidies had shown an obvious characteristic of "unified" supply. Its direct stimulating effect, with regard to either farmers or the development of agricultural productivity, was limited.Since China's reform and opening up began, farm land policy has transferred from "household responsibility system" to family-run regime, and market economy factors have been generally introduced into the "three rural" areas. At the same time, industrial economy has been booming, and China entered the middle stage of industrialization. China's economic power has been rising significantly, and government farm subsidies have been strengthening with variety of policy tools along with market economy system. From the middle 1990s, China's market-oriented level has been improved dramatically while the public finance framework has been built to adapt to the market economy. Those also determined the fundamental changes of the purpose of agricultural subsidies. Agriculture's full support to industry ended, and its low level self-loop was replaced. Instead, industrial development began to subsidize agriculture, promote rural farm development and upgrading, broaden income sources of farmers, and safeguard the interests of farmers. China's accession to the World Trade Organization (WTO) has also created a more open economic environment, and challenged China's agricultural subsidies under its planned economy. Agricultural subsidies policies must be consistent with international norms and domestic market-oriented agricultural development requirements. Any subsidies, which against the laws of market or involved in market intervention must be gradually abandoned, while efficiency and equity will also be taken seriously.Thus, during the economic transformation and institutional transition period, China's agricultural subsidy policies have resulted from complicated backgrounds with realistic factors. As an important part of government public policy, agricultural subsidy policy, from its formulation, implementation to evaluation, has been involved in government decision-making mechanism as well as political regime. The areas and object definition of policy implementation and the object-interaction between policies are relying on government financial system. The effects of policy implementation have countless mutual containment and reinforcing linkages with farmers, agricultural industry, economic growth, international trade and even environmental protection, social welfare at both micro and macro level. Based on these ideas and concepts, using a research background of the evolution of China's policy on agricultural subsidies and their effects in the transition period, taking a typical case study of Shandong Province, this thesis will exploit in depth the logical starting point of China's agricultural subsidy policy, and the interaction mechanism between agricultural subsidies and institutional environment. The author will also examine the effects of agricultural subsidy policy by conducting an empirical analysis, and provide policy recommendations and theoretical references with regard to proper amendment on China's agricultural subsidy policies and the future path during the transition period.This research has combined the methodology of historical research and reality analysis, as well as normative analysis and empirical study. The main methods are as follows:1. Literature Research. Foreign theoretical societies have a long history in academic research of agricultural subsidies, and have created a theoretical accumulation. This paper has collected a large number of foreign literatures and valuable experience from different states. Proper classification and theoretical induction together with Chinese characteristics will serve to make a more valuable point of view, and to improve China's theory of agricultural subsidies in the transition period.2. Case Analysis. In this paper, case analysis was mainly used in the empirical studies part. By selecting Shandong Province as a case study, the author started field studies and practical survey, and collected detailed research data. From the large and small caliber of financial agricultural subsidies, the paper took both horizontal and vertical comparative analysis of all kinds of relevant subsidies data, identified the policy effects and problems generated by agricultural subsidies, and found out key reasons at both institutional and policy level behind the phenomenon and problems.3. Empirical analysis. First of all, a general agricultural production function was built with the assumption that agricultural subsidies entirely come from the financial allocation or non-agricultural sector. By applying the above to the agricultural production function, this paper analyzed the agricultural subsidy rate on the equilibrium of agricultural production, capital stock, and agricultural consumption. By means of graph, mathematical derivation and model, the paper analyzed and tested the effects and means of various agricultural subsidies, such as welfare effects, growth effects, income effects, price effects and structural effects. This paper conducted comprehensive and deep analysis on agricultural subsidies from the perspectives of quality, quantity, and extent. This has also provided empirical analysis on correcting previous methods used for agricultural subsidies and on selecting future scientific approaches for agricultural subsidies.Specifically, the main innovative achievements reflected in this paper include:First, a general framework of theoretical analysis has been built for analysis of China's agricultural subsidies and their effects in the transitional period. The analysis process is divided into three levels:building the logical starting point for agricultural subsidy policy, institutional foundation of policy-making in agricultural subsidies, and effects evaluation on agricultural subsidies policy implementation. This analysis model may serve to help break through the limited theoretical analysis existed in previous research with regard to China's agricultural subsidies, and to make a systematic analysis from the quality, quantity and other different angles. It also helps to design the standardization system of China's agricultural subsidies in the future evolution path. Second, some theoretical models were established to make a comprehensive and systematic dynamic study of the effects of agricultural subsidies. Unlike most current theoretical analysis, which paid too much attention to responsive and utilitarian level of policy research in the post-WTO era, this research focuses on the depth of scientific decision-making based upon a long-term, sustainable development, reflecting both economic growth and humanistic care. The comprehensive, systematic in-depth dynamic study has been taken place. From both micro and macro levels, a more scientific and rational policy of agricultural subsidies in the elastic has been developed.Third, the research scope of agricultural subsidy effects has been expanded. In the past, too much emphasis was made on analysis of economic effects of agricultural subsidies. This paper expanded the study of the policy effects into the resource allocation effects, social welfare effects, coordinated development effects of industry, price and output stability effects, and eco-environmental effects of agricultural subsidies. This is consistent with the characteristics of the operation of agricultural subsidies within the framework of public finance, and is helpful to achieve the major goal of building agriculture, promoting economic growth, strengthening its international competitiveness, and building a harmonious society by using scientific concept of development.Finally, it is a strong and typical empirical study to be conducted by selecting Shandong Province, a major agricultural province in China, as a sample. In-depth micro-level study, instead of the macro level in the past, have provided strong evidence and evaluation on the effects of subsidies on crop varieties, livestock varieties, and farm machinery purchase. More scientific and standardized policy-making in the future will have a more solid empirical basis.The research conclusion shows that China's agricultural subsidies not only has the effect of a positive correlation for agricultural development, but also has developed best ever in an unprecedented scale with many aspects of intensity, species and coverage of subsidize, and has adopted a new way of subsidy which cut down the number of intermediate links, improved the efficiency, and effectively played the role of agricultural incentives in recent years. At the same time, with increasing intensity of subsidies, there have been some problems need to be further addressed in the course of operation. In fact, although China's current size and scope of agricultural subsidies have occured significant expansion, there are still more need to be done to enhance the subsidy policy. In order to realize full implementation of the national policy of supporting agriculture and benefiting farmers, the intensity of agricultural subsidies should be increased from various levels. In the future, to better solve the current "three rural" problems and to promote further development based on practical experiences, long-term considerations should be taken to establish and improve the system of agricultural subsidy policy and network management system. This system should be open and transparent, fast and convenient, formal and efficient, and represent a long-term mechanism of various types of agricultural subsidy.