Market integration and grain policy reform: A case study of the rice market in South China

After the success of China's de-collectivization in the early 1980s, the cost for the government to maintain its control over surplus grain became prohibitive. But reforms for grain distribution repeatedly failed, forming two similar policy cycles between 1985 and 1997. Liberalizing grain trade seemed to be causing prices to increase after the subsidized government stocks were depleted. And policy makers mistakenly reacted to the price increases by resuming control of grain surpluses, actually fueling food inflation. Driven by the vicissitudes of the government inventories, the trade-off made by the policy makers between the costs and the perceived need to control grain surpluses shifted policy preference between free trade and provincial self-sufficiency.; Two complementary econometric approaches for spatial price analysis, the Engle-Granger Cointegration Test and the Parity Bounds Model have been applied to the time series of rice retail prices, collected from nine provinces in South China between 1987–1997. Test results indicated that spatial integration of the rice market in South China has been fragile or unstable for individual market pairs. The overall market tended to be more spatially integrated when price levels (nominal) were rising, but it tended to be more segmented when price levels were falling.; Grain market integration was primarily improved by the rise of peasant marketing but it was usually harmed when government trade flows expanded, because government grain stocks were valued in artificial pricing mechanism rather than by market prices. The results of the spatial integration tests are consistent with the fluctuations of government trade flows caused by the two policy reform cycles between 1985 and 1997.; As the government lost its cost advantage in grain marketing to the peasants in the 1990s, it became more difficult for the government to control the grain surpluses. Keeping the government prices below the market value was politically troublesome for policy makers, but raising prices closer to market value meant intolerable costs for the government. As a result, policy makers again banned the peasants on grain marketing in 1998, however, this decision only trapped China's grain policy even deeper in a deadlock.