Decollectivization and the Loss Of Income

Prior to the early 1980s, when decollectivization was completed in most parts of China, villages were known as brigades, the second of a threetier administrative hierarchy in the commune system. Brigade income was derived from brigade-level enterprises, from limited funds sent from the commune, and from income submitted by the production teams from the sale of the collective agricultural harvest. The harvest was owned by the production team, the level below the brigade. Revenue belonged to the production team, which paid one portion of its income to

[8] I elaborate on this point in State and Peasant.

the individual peasants who worked the collective land and sent another portion of its income to the brigade and commune.

Decollectivization and the institution of the household responsibility system changed the unit of accounting from the collective to the individual household. Ownership of the harvest was transferred from the collective to the individual producer. With the agricultural reforms, ownership, for the first time, meant rights not only to the income but also to the residual and its disposition. Peasants were free to do as they pleased with their harvest after they had met the basic obligations to the state. This change, together with the dramatic rise in agricultural procurement prices, improved incentives for grain production and increased peasant incomes in the early 1980s.

But the reassignment of property rights had an adverse effect on village (brigade) government because it eliminated agriculture as the source of village income. Villages that failed to develop alternative sources of revenue were left with little or no funds in their collective coffers. Property rights over the income from agricultural production were reallocated from the collective to the individual household. When the household became the basic production and accounting unit, the relationship between collective and household was reversed: the collective village government became dependent on its members for a share of the harvest. Peasants still paid an agricultural tax and sold a set amount of grain to the state, but their payments were made at township stations and were remitted to the upper levels, not to the village government.

Unlike the townships and the counties, villages were not considered an official level of government, nor were they considered a fiscal accounting unit. They did not participate in any kind of revenue sharing with the upper levels, nor did they receive a budget allocation from those levels. Their officials were considered local, not state, cadres and were therefore paid from village funds. The villages paid taxes, but they had no rights to any tax revenues. Decollectivization thus created a critical fiscal situation for them.

Villages with a primarily agricultural economy had few sources of revenue. They could collect rent from collectively owned property, but this excluded most crop land up until the 1990s.^[9] Only orchards, fishponds, forest land, and village-owned enterprises were subject to contracting fees that yielded revenue.

[9] In the early 1990s some villages began to auction off fields to those willing to pay the highest rent. See James Kung, "Property Rights in Chinese Agriculture."

The primary source of revenue for many village coffers was ad hoc surcharges, known as tiliu (retained funds), levied by the village on its members.^[10] The tiliu was levied on a per capita basis and was usually taken as a percentage of income.^[11] The tiliu extractions officially were not supposed to exceed 5 percent of a peasant household's income, but in practice they often did. For example, in one area where levies should have totaled about 12-13 yuan per person, they actually amounted to 30 yuan.^[12]

Peasants, particularly those in poor areas, were understandably resentful of these local extractions. The degree of their discontent became evident in the 1990s when peasants in some localities staged protests against "increases in the peasants' burden."^[13] The taxes that local officials in poor areas in Guizhou levied for the construction of roads and for irrigation were necessary, but from the perspective of the already poor peasants any increase in taxes and fees was much more of a burden than it was in richer areas where the cushion was much greater.^[14]

The fiscal crisis faced by villages was heightened by the center's decision to shift the burden of infrastructural investment to the localities. Figure 1 shows that central-level agricultural investment dropped from over 9 percent of total central investment in 1980 to only 3 percent in 1988, in spite of the center's verbal support and emphasis on grain production.^[15] The center expected localities to support agriculture with profits from rural industry, under the "using industry to subsidize agriculture" (yigong bunong) policy.^[16] But only some had the resources to do so.

Industrially developed villages have plowed substantial investments into agriculture, even if the rates are lower than they were during the Maoist period. For example, in highly industrialized Wuxi, 1.1 billion

[10] The tiliu consists of about ten items, including funds for education, roads, "five guaranteed households" (those who have no one else to provide for them), health, and so on. The amounts are set by the county for each item. These funds are considered extrabudgetary. China Interviews (hereafter cited as CI) 8791.

[11] There seems to be substantial variation in how the tiliu was calculated.

[12] Special funds (zhuanxiang jizi), which are not included in the tiliu limit, are also often collected. Although technically these are not tiliu, peasants still refer to them that way. The villages do not have to report this revenue to the upper levels; however, the finance bureau has tried to be stricter about regulating these funds by requiring biannual accounting. Cl 8791.

[13] Examples are noted in Sheryl WuDunn, "China Is Sowing Discontent with 'Taxes' on the Peasants," New York Times, 19 May 1993, pp. Al, A6; and Anthony Blass, Carl Goldstein, and Lincoln Kaye, "Get off Our Backs." For analysis of peasant protests, see Kevin O'Brien and Lianjiang Li, "Villagers and Popular Resistance."

[14] Examples of the hardships caused are vividly described in Sheryl WuDunn, "As China Leaps Ahead, the Poor Slip Behind," New York Times, 23 May 1993, p. E3.

[15] Zhongguo nongye nianjian, 1989, p. 9.

[16] "Yindao nongcun," pp. 20-25.

Figure 1. 
Agricultural investment as percentage of total investment,
1952-1991 (Source:  Zhongguo xiangzhen qiye nianjian, 1992,  p. 158)

yuan of profits were taken from rural industry to support farming between 1979 and 1986. This amount was four times that of central state investment. ^[17]

For the nation as a whole, however, the percentage of profits designated at the local levels to support agriculture has decreased.^[18] In spite of a growing collective economy, collective investment of capital in agriculture as a percentage of total collective investment in fixed assets declined from close to 40 percent in 1982 to less than 10 percent in 1988.^[19] Contrary to the mandates of state policy, the decline was particularly sharp in the use of rural enterprise funds. There was more than a 70 percent decline in the amount used for agriculture between 1979 and 1988.

[17] "Rural Industry Provides Base for Economic Growth," China Daily, 5 August 1987, p. 1, in JPRS-CAR-87-045, 9 September 1987, p. .

[18] Zhongguo tongji nianjian, 1987, p. 205; and Zhongguo tongji nianjian, 1988, p. 287.

[19] "Yindao nongcun."

Disaggregating these figures, one finds that from 1979 to 1983, when the communes still existed, subsidies for agriculture averaged a little more than 3.3 billion yuan per year. But from 1984 to 1988, after the communes were disbanded and township enterprises began to develop rapidly, such subsidies averaged only 1.5 billion yuan per year.^[20]

For the poor agricultural regions, where the collective has little income, the shift to local funding has been devastating. These areas either wait for what little central-level investments exist or thrust the costs of maintaining the agricultural infrastructure onto the shoulders of the local population, through corvée labor (yiwu gong) and various surcharges levied at the township and village levels.^[21] This basic lack of revenue lies at the root of the growing "peasant burdens" that have received substantial press coverage as the cause of discontent. These are seldom issues in the rich areas, where the collectives often pay such costs for the peasants from industrial profits. ^[22]

Village Industry and Rights to Revenue

Decollectivization negatively affected fiscal flows for village government, but this institutional change is at the crux of why village cadres who wanted to survive and get ahead sought to develop village industry. It is easy to understand why the rights of the village to income from its enterprises made this an attractive strategy to pursue. What needs to be explained is how these collectively owned enterprises could be lucrative to village coffers when they were contracted out for individual management, as they all were, in the process of decollectivization. The answer lies in the details and actual operation of the contracting system.

Enterprise Contracting

The term contracting (chengbao) is used for both the contracting of collectively owned land to individual farm families and the contracting of collectively owned enterprises, but the rights entailed in the two types of contracting are different. In the contracting of enterprises, the contrac-

[20] "Yindao nongcun."

[21] Albert Park, et al., show the negative impact of the fiscal reforms and the diversion of resources from agriculture in poor areas of Shaanxi province. "Distributional Consequences."

[22] Most peasants are responsible for corvée labor, but they can use money to buy themselves out of the obligation. The collective often pays the tiliu in industrialized villages.

tor pays taxes to the state and the contract fee (rent) and perhaps a management fee or surcharge to the village, as the owner of the enterprise. On paper, it appears similar to the contracting of land—peasants pay a tax and sell quotas of grain to the state for the right to use the land. This similarity has no doubt led some to conclude that when collectively owned enterprises are contracted, a semiprivate form of ownership results. In practice, the rights and limitations governing the contractors of enterprises and village government are much less clear than they appear on paper.

Separating Management Rights and Rights to the Residual

Contracting implies both management and residual rights, the latter being the rights to decide the disposition of profits. When it contracts land from the collective, a peasant household has both. Only the right to sell or transfer the land remains with the village. When a peasant contracts an enterprise, however, only day-to-day management rights are transferred to the contractor. Crucial rights to the residual—the profits—and the disposition of revenues remain with the village authorities.^[23] Retaining these rights enables local authorities to limit management autonomy and use of enterprise profits.^[24] Key decisions about personnel, investment, and product line must be approved by the village. The contractor is merely an employee of the collective—that is, the village.

Johnson identifies "administrative guidance" as an important part of Japan's growth strategy during the 1960s and 1970s, when its economy grew rapidly and successfully. The Japanese government induced independently owned firms to conform to certain strategies of growth through the preferential allocation of inputs. In China, continued ownership of enterprises by the village gave village government not only influence but the ability to intervene directly in the internal affairs of those enterprises, even after they were contracted out to individual management.

Village officials controlled enterprise revenues either directly or indirectly. Profits that were not extracted were strictly regulated. Rules stipulated how the retained profits were to be used. Strict formulas limited

[23] The right of alienation (i.e., the right to sell) also remains with the village.

[24] Christine Wong makes a similar point. See "Interpreting Rural Industrial Growth."

the amounts to be used for worker benefits (fuli) and bonuses, designating the majority of the profits for reinvestment. Some regulations specified that 50 percent of after-tax profits had to be plowed back into the factory to expand production, and only 20 percent could be used for bonuses and benefits.^[25] Interviews with factory managers reveal that in some areas 70 percent of a factory's retained profits had to be used for reinvestment.^[26] Local regulations further mandated that the remaining 30 percent of the profits that went to the collective had to subsidize agriculture and provide for village welfare (see chapter 3).^[27]

Those who contracted to run the enterprises were dependent on the village officials. There was competitive bidding, but local officials decided who would be given a contract. Trust, reputation, and loyalty were as important as promises of high returns. Factory managers who made good suggestions and ran factories effectively received large bonuses, and some became quite powerful (and wealthy). These managers had a stake in the economic performance of their enterprises, but the lack of rights to the surplus revenues prevented them from becoming an independent elite with their own resource base. Local officials remained in a position to drive the engine of change and development.

Remuneration and Rent

The contractor's remuneration was determined by which of the three major types of rental arrangements was in force: (1) a fixed rent; (2) a floating rate calculated as a percentage of profits; or (3) the factory manager responsibility system.^[28]

[25] Nationwide, the average percentage of reinvested profits in 1985 was 46.3. In 1986 this increased to 49.8. Zhongguo tongji nianjian, 1987, p. . Whether factories in fact followed the local guidelines is another issue. For an account of the illegal use of profits, see "Survey of 107 Small- and Medium-Sized Enterprises Shows That Improper Use of Retained Profits Affects Enterprises' Staying Power," Jiangxi ribao, 20 November 1987, translated inJPRS-CAR-88-05, 18 February 1988, pp. 21-22.

[26] CI 72388.

[27] This is sometimes paid to the village and sometimes to the township. In Nanjiao, outside Tianjin, village industry paid only to the township, which then distributed funds to all of its villages. Local officials argued that this ensured a fairer distribution. The township in this area also took care of those villagers who had no one else to provide for them. CI 71886.

[28] The precise method varied among villages and over time. For accounts of the process in the early years of reform see Thomas Bernstein, "Local Political Authorities," whichgives details of one county in Shandong and one county in Anhui; and on contracts in villages in the Pearl River Delta see Graham Johnson, "Fate of the Communal Economy."

A fixed rent was the type most commonly used during the early stages of the reforms, when local officials had little idea of the profitability of their enterprises. Villages simply set a profit target and allowed the contractor to keep the over-quota profits. But as the reforms took hold and villages came to understand how successful some of their enterprises could be under private management, local officials developed more sophisticated ways to reap income.

Some governments turned to the floating rent or percentage system, where all profits up to a set amount were divided between the legal owner—the village—and the contractor according to a set ratio.^[29] For example, prior to 1985, a village outside Shenyang contracted its enterprises on a fixed-rent basis, regardless of profits. In 1985, however, when profits rose, the village adopted a floating rent. It set the ratio at either 7:3 or 8:2, with the collective getting the larger share. When the profits were expected to be particularly high, the latter ratio was used.^[30]

Others adopted the factory manager responsibility system (changzhang ziren zhi), wherein the enterprise was contracted technically to both management and workers—the factory as a collective entity. Because it was difficult to deal with all members of the collective, the factory manager, along with his top staff, acted as the principal contractors and legal representatives of the collective. These individuals had primary responsibility for meeting the village-set quotas. This was essentially a work responsibility system that enabled the village to control the distribution of profits and make the major decisions.

Under the factory responsibility system there was no preset remuneration. The factory manager and his staff were awarded a bonus by the village government if the factory met the preset targets. The bonuses given to factory managers were limited, but the amounts varied substantially. In the latter part of the 1980s, some Shandong villages limited a factory manager's salary to an amount no more than 20 percent above that received by the highest-paid worker.^[31] During the same period in other Shandong villages, the factory manager/contractor was allowed to make three to four times the salary of the average worker.^[32] In the late 1980s,

[29] For village enterprises, the enterprise management committee set the ratio and determined the percentage of over-quota profits; at the township level, this was done by the economic commission.

[30] CI 72986.

[31] CI 6488.

[32] CI 72388.

factory managers in Daqiuzhuang, outside Tianjin, earned as much as 10,000-20,000 yuan per year.^[33]

Regardless of the precise terms of the contract, rents were subject to renegotiation. Contracts could be declared null and void at any time; unlike contracts in the Western legal context, they seem to have been nonbinding. Contractors were sometimes left with no legal recourse, even though in theory they were protected by law. This was especially the case for those enterprises that became unexpectedly profitable.^[34] But even when the contracts were honored, local authorities had ad hoc access to enterprise revenues because the rights to the residual income remained with the village.

It was this continued access of village governments to nontax revenues that made collectively owned firms more attractive than private ones. Because villages were not entitled to keep any state taxes, private firms were of little fiscal use. Village authorities could (and no doubt some did) resort to predatory rent-seeking behavior, but that likely had detrimental effects on growth.