3. Rural Reform: A Review of Changes in Economic Institutions

This mainly refers to the work of Coase (1937, 1960), Alchian and Demsetz (1972), Cheung (1969a, b), North and Thomas (1973, 1981, 1990) etc. Most of this literature has been translated into Chinese by Sheng and Chen (1990), Liu and Hu (1990) and North (1991). The article by Yang et al. (1993) introduces the recent developments in property rights economics and its mathematical models as well as his own work in this area. For criticism by the school of “imperfect information” on the inadequacy of above-mentioned school of “transaction cost” the other school in the new institution economics, see the article of Bardhan (1989).

The concept of “transaction cost” proposed by Coase (1937, 1960) challenges some of the seemingly self-evident assumptions of neoclassical economics, the central point of which is that the cost of maintaining a fully competitive market is zero. As a result, just as Schultz (1953) sharply criticizes, “economists often leaves people with an impression that as long the market, enterprises, and families are there, the economic system will operate and work.

Furubotn and Pejovich (1972) point out that although the property right is exclusive, but we cannot count on this point and hope it to be an unrestricted right. Because most of the restrictions are imposed by the government, the theory on property rights cannot be completed without covering the government.

The Coase Theorem seems to emphasize the importance of private mediation of disputes over rights, but this is only based on the assumption of zero transaction cost. When the cost is positive, although the property rights arrangement is essential, the institutional and ideological arrangements related to its enforcement are even more so. Sheng and Chen (1990) divide the Coase Theorem into two parts, the first theorem and the second theorem, which helps us understand this point.

The discussion of the origin of property rights always involves the topic of government. Cooter and Ulen (1988) built a model to illustrate this point.

Alchian (1965: 243).

Cooter and Ulen (1988). This is also the argument of Buchanan and Tullok (1962). But there are other ways to analyze government behavior, see Justin Yifu Lin’s quote (Lin 1989: 23–24).

Demsetz (1988: 18–19).

Demsetz (1988: 19).

North and Thomas (1973).

North and Thomas (1981, 1990).

North and Thomas (1981: 25).

“The existence of government is the key to economic growth, but the government is also the source of the man-made economic recession” (North and Thomas 1981: 20). This amazing wrap-up of North means every nation has a fair share of opportunities for either growth or recession.

Habermas (1989: 14–26).

Huang (1993) comments that as a historian, Habermas reproduces the history of early Western Europe; but as a moral-political philosopher, he tries to generalize his concepts to comment on the reality and regulate the world accordingly.

For example, Rowe (1984), Rankin (1986), and Strand (1987) found the public sphere composed of the urban bourgeoisie, local gentry, and citizens in Hankou before 1889, in Zhejiang in the second half of the nineteenth century, and Beijing in the 1920s. However, Wakeman (1993) found evidence from their own writings to show that these “public spheres” are different from those in early Western Europe.

Mann (1984: 185–213).

For example, not a single government does not wish to collect more tax. However, not even the most autocratic power in history managed to levy a tax as high as the 50% of today’s North Europe.

Task Force of Development Research Institute (1988).

Quoted from Bo (1993, Vol. 2: 746).

Demsetz (1988).

Almost the entire history of the people’s commune supports this argument. Most of the most ridiculous actions took place between 1958 and 1959. See Bo (1993, Vol. 2: Chapters 26 and 27).

Song (1982) is the first scholar to provide an analytical framework to understand this issue, which was published by the China Rural Development Research Group (CRDRG) (1985, Vol. 1).

Lippit (1974).

Mark Elvin believes that traditional China was trapped in a “high-level equilibrium trap”. When illustrating the concept by graphing, he points out that the pressure from the increasing population consumed the surplus beyond the essential subsistence needs of the people (1973: 313).

See Wang and Zhang (1993), Gao and Xiang (1992), and Cui (1988). However, there is a record showing a 30% tax rate after the Land Reform in South China (Yang 1959: 56–57, 155–156), and see Huang (1993: 170–171).

The tax rate in the Ming and Qing Dynasties accounted for 2–4% of land output (Wang 1973). The same by the Kuomintang government in North China before the War Against Japanese Aggression was 2–5% of the income of farmers (Huang 1985: 290–292). During the Japanese puppet period, the rural tax rate climbed up rapidly, it rose sharply from the 1941 rate of 6–8% for North China; the figure for some sub-Yangtze regions was recorded to be up to 50% (Huang 1993: 172). For the same period, the actual tax rate for the regions under the Kuomintang’s rule was about 20% and that in the Shaanxi-Gansu-Ningxia Border Area was about 13% (Selden 1971: 181–183).

Bo (1993, Vol. 1: Chapter 12).

Cui (1988).

We used to call the mandatory unified low-price purchase by the government as a “hidden tax” (Comprehensive Task Force of Development Research Institute 1988). Now “hidden rent” seems to be a more appropriate name.

Du (1985: 10–18).

Therefore, as Alchian says, different hardness of property rights perhaps can reflect a totally different relationship between property rights and the government.

In 1951, the CPC Shanxi Provincial Committee submitted a report proposing to weaken and even abrogate the farmers’ private ownership system, meanwhile to expand the socialist elements in the agricultural mutual aid groups, and to convert them into collectivized agricultural organizations. LIU Shaoqi criticized the report and said that it represented a dangerous imaginative agricultural socialism. However, Mao Zedong endorsed the proposal, criticized Liu’s view, and launched the Agricultural Cooperative Movement. According to Bo Yibo, there were altogether three debates on the question of rural areas at the top decision-making level between 1950 and 1955 (1993, Vol. 1: 184–203).

Zhou (1988), see Li (1990: 711).

Lu and Wang (1981), Du (1985), CRDRG (1985) all identified from field investigations and underscored the uncertainties of agricultural production and the difficulty of labor measurement, and explained why accordingly organizations in the form of families (households) enjoyed very low supervision costs, and did not affect efficiency even with inadequate measurement and supervision, while the collective production organizations failed. Lin (1988) proposed a model for the Agriculture Production Team, analyzing that under the production team system, the managers chose a lower level of supervision because of the supervision difficulties, while the workers chose to be lazy because of inadequate measurement and unreasonable compensation. Therefore, the failure of the production team system can be explained by insufficient incentive for the workers’ efforts.

With very few exceptions, for instance, the cadres of the Dazhai Brigade, Xiyang County, Shanxi Province, became government leaders during the Cultural Revolution.

. This is to say, the efficiency of the institution can be measured and used to evaluate the outcome of policy and institutional changes, but it cannot fully explain the driving mechanism and process of such changes.

This is the idea expressed by the Impossibility Theorem (Arrow 1963).

The benefit index of government-controlled rural economy is the weighted average of agricultural tax, agricultural and sideline products purchase (including the spread in rents and taxes in unified government procurement), foreign exchanges earned by agro-products, savings of farmers in government banks, and farmers’ recognition of the institution and political support (indirectly measured by the growth rate of agriculture total output value and the per capita net income of farmers from the collective business operation). The cost index is the weighted average of the government fiscal fund for supporting agriculture, subsidies for sales of agricultural production materials, government administrative expenses, overhead of collective economy, government banks’ loans to rural areas, and ideological investment to win farmers’ support (measured by the net income of farmers from family sideline business). See Tables 3.2 and 3.3 and their notes for data and interpretation.

See Column 4 in Appendix Table 3.3 and divided by the market price index in column 13 to eliminate the price effect.

Quoted from Lin (1990: 17).

The data is shown in Columns 6, 9, and 2 of Appendix Table 3.3.

Ashton et al. (1984), Lin (1990). The number of deaths in this famine was more than that of other natural disasters in China in the twentieth century. The abnormal deaths even exceeded that in the 1920s famine of the former Soviet Union after the collectivization movement (MacFaquhar and Fairbank 1987: Chapter 8).

A Chinese saying goes, “Food is of paramount importance.” Here the food does not mean the food per se or agriculture. It means that after the government controls the people’s livelihood, the last boundary of the legitimacy of the government is the subsistence of the people.

Between 1961 and 1962, 80% of communes and production brigades in Anhui adopted the household responsibility system, the figure was 74% for Linxia Prefecture in Gansu, 70% for Xinchang County in Zhejiang and Jiangbei County in Sichuan, 42.3% for Longsheng County in Guangxi, 42% for Liancheng County in Fujian and 40% for the entire Guizhou, the national coverage of the household responsibility contracting system was about 20%. In the meantime, the CPC’s Central Committee debated over whether or not to legalize the household responsibility system, and in the end, Mao Zedong’s opinion to criticize the play solo (namely household responsibility) practice won the debate. See Bo (1993, Vol. 2: 1078–1090) and see Du (1985: 14–15).

See the calculation by Wen (1989).

The principle of “production team-based three-level ownership” attempted to protect the property rights of production teams on the premise of administrative obedience. However, from the perspective of the exclusivity of property rights, it is full of contradictions. Yet, in the policy environment of rural China at that time, the contradictions in the policy often provided a legal basis for different forces to compete for the right to subsistence. In this example, the commune and production brigade could underscore the “three-level ownership” while the production team could underscore “production team-based.”

Qiu (1988).

Huang (1993) found that even the Yangtze River Delta—the richest rural areas in China, after decades of collectivization, were still trapped in “growth without development”, which means despite increasing agriculture output and yields, per capita income did not increased. He refers to this phenomenon as “collectivist involution” (16–17).

In 1958, the number of rural laborers working in small-scale industries (mainly coal mining and steel-making) reached a peak of over 60 million (Bo 1993, Vol. 2: 708), which seriously compromised the autumn harvest of the year (ibid.: 714).

This is not to say that there was no problem with the enthusiasm of the members under the people’s commune system, but rather to emphasize the correlation between the initiative of the workers and the institutional arrangement, especially the supervisor incentives and the exiting right.

Anyone having visited the farmers’ private plots will agree with this. The yield of the private plots is estimated to be 5–7 times that of the collective field. See Comprehensive Task Force of Development Research Institute (1988: 5).

In 1957, the net income of farmers from family sideline production accounted for 29.4% (NJZ 1983: 523). Since there are no data from 1958 to 1961, the figure for this column in Appendix Table 3.2 is calculated using the annual average growth rate of this period, and it presents an upward trend. A more reliable estimate is that the income of the farmer’s family sideline business declined from 1958 to 1959, but came back quickly after 1960.

The family operations within the collective economy may have a complex impact on overall productivity. On the one hand, the higher efficiency of family operations may push up the total efficiency; on the other, with partial exiting right, farmers could be even lazier in collective labor and thus drag down the total efficiency.

For data, see estimates from Wen (1989) and the graphs developed by Lin (1990: 37) using the data from Wen (1989).

This concept explains why after the 1960s when farmers still had no right to exit, the Great Famine of 1959–1961 did not happen again. Lin (1990) uses the abolishment of the farmer’s exiting right to explain the Great Famine of 1959–1961. He proposes that co-operative agriculture can also be successful, but the success can only be obtained under the precondition that the members of the co-operatives reach a tacit agreement to discipline themselves. This kind of self-enforcing contract can only sustain if the members have the right to exit when other members violate the contract. Lin uses this viewpoint to explain why the productivity of co-operatives increased from 1952 to 1957 when farmers had the right to withdraw, but the efficiency collapsed and became stagnant after the right was abolished. Also, see the collection of articles by James Kung, W. Bentley MacLeod, and Dong and Dow, published in the Journal of Comparative Economics 17 (1993) on discussion of this paper.

The author believes that this is the root cause for many abnormal ridiculous phenomena in 1958–1959.

Production brigade cadres have some chance of being promoted to a clerk at the commune or county level, and a limited few of them may even get an urban Hukou or become government cadres. Competition for transferring from agricultural to non-agricultural status is extremely fierce nationwide, which constitutes a focus of the political fight at the brigade.

In one Cui Zhiyuan’s his papers, he emphasizes the differences between “residual claim” and “residual control” (Cui 1993). He points out that due to insufficient information and incomplete contracts, the “residual claim” cannot be clearly defined in advance. Therefore, what is important is to control the production process of the surplus (residual), which is usually the result of multi-party co-operation. He uses “joint ownership” to interpret the organizational characteristics of Chinese township enterprises.

For instance, in 1962, Liu Shaoqi estimated that rural grass-roots cadres were severely corrupted. He even proposed to dispatch tens of thousands of government cadres to each county to take over the rural grass-roots administration (Bo 1993, Vol. 2: 1118–1136).

In the “Four Clean-ups” Movement, a serious disagreement between Mao Zedong and Liu Shaoqi was how to deal with the corrupt rural cadres. Liu advocated clean-up by severe punishment, but Mao asked to set free those with embezzlement of only several hundred RMB, and guides the lancehead towards the “the capitalist leadership” at the upper level. Later, in his talk with American journalist Edgar Snow, Mao says that Liu’s mistake in “being a leftist in form but rightist in nature” was one of the reasons to make him determined to get rid of Liu (Bo 1993, Vol. 2).

Extensive literature can be cited on the development history of production brigade/team-based enterprises. Systematic studies can be found in the work by the China Rural Development Research Group, CRDRG (1985) members such as Sun and Bai (1983), Li (1990: 422–451), and Byrd and Gelb (1988), Huang (1993: especially Chapter 12). In addition, the former Development Research Institute of the Rural Development Research Center of the State Council and the Rural Sample Survey Group have been conducting a continuous sample survey of large township enterprises in ten provinces since 1986, which provides most systematic data for this field. For the introduction and analysis of this survey, see Li (1990: 265–288), Li (1990: 625–646), Qiu (1987, 1988) and Li (1990: 816–840), all published in the compilation by Li (1990: 265–288, 293–322, 482–511, 625–646, 744–768, 816–840).

For the output value of enterprises under the people’s commune system, see ZTN (1983: 215); for the output value of industrial enterprises under brigades, see National Statistics Bureau (1991); for the statistics of total agricultural output value, see National Statistics Bureau (1991).

Today’s urban citizens commend township enterprise for rising from elsewhere, for leader of the rural communities, the rise was from their home base.

To say that the production brigade/team-based enterprises are the results of government policy is only a compliment after these enterprises become successful. Nearly all the founders of these early enterprises were condemned for “damaging government plans”. In terms of resource utilization, these enterprises have long been discriminated by the system and policies.

Less than 10% of the funding for the establishment of these businesses was from government fiscal appropriations and low-interest government loans. The main part was from collective savings (accumulation) (23.6%), and credits (61.13%) guaranteed by the collective. See Li (1990: 265–288), published by Li (1990: 265–288, same below).

Of the early founders of rural enterprises, 55% were cadres of communes and brigades and teams, and 21% were craftsmen.

In the 1970s, the government’s fiscal expenditure on agricultural aid was 10.86 billion yuan per year, an increase of 82.02% over the 1960s. See Appendix Table 3.2.

See columns 5 and 11 of Appendix Table 3.3 for the nominal value.

For example, within the CPC, the pragmatists and Maoists had the potential to replace each other in the leadership.

When analyzing the international situation in December 1977, Deng Xiaoping predicts that it was possible for China to stay in peace for a longer time, because the United States adopted a conservative global strategy after the failure in Southeast Asia, and the Soviet Union was not ready (Deng 1983: 74). Few people have explored the impact of this more conciliatory international situation on China’s decentralization reform policy adopted since then. But this is a very important point if we look at the economic institution evolution. For instance, in the seventeenth century, Britain’s taxation right was controlled by the Parliament composed of merchants and middle and upper-class landlords. Their interest was to restrict the king’s power and to put an end to restrictions so as to protect private property rights and competition. However, in Spain and France, the royal family held unrestricted taxation rights and earned royalties by transferring monopolies to the guilds. One reason for this difference is that England, as an island country, faced less threat from invasion than continental Europe, and did not have good reasons to centralize property rights and taxation rights, nor did they have reasons to establish a mega central government (North and Thomas 1981: 155–156).

Yang et al. (1992) points out several forms of government infringement of property rights during the people’s commune period.

The total factor agricultural productivity index in 1972 was only 72.22% of that in 1952, 5.8 percentage points lower than that in 1961, see Wen (1989).

Wen (1989).

The three principles of contracting production to the household proposed by farmers demonstrate their considerations about dealing with the government and the collective. This also shows that the household production contracting system is a tri-party contract involving the government, the collective, and the farmers.

See the field investigation report of the CRDRG (Zhou 1993).

The unified planning and unified distribution still remain there for production teams adopting the household production contracting system. The farmers contract the output and perform production, and get a share of the beyond -quota output as an incentive. Contracting the land to households saves the measurement and supervision cost for the contracted output and extra output, with the precondition to satisfy the hand-into the government and the withholding by the collective unit.

See the CRDRG (1981).

For example, in Xiaogang Production Team, the first in Anhui Province to implement the production-based HRS, the HRS was completed under the leadership of its chief surnamed Yan. See Chen Xiwen and Ma Suyuan’s field investigation report (CRDRG 1984, Vol. 1).

“The land is there; you can see it every day. The robber cannot take it away. Thieves cannot steal it. Men die, but the land remains.” “Money will be used up but land never.” These views of farmers’ on the land in the southern Jiangsu province were recorded by FEI Xiaotong in the 1930s (FEI 1939: 182). Understanding this, you will understand why the farmer revolution occurred and why private plots was effective.

Such incidents between 1977 and 1982 were seldom publicly reported. This is because reporting was not allowed, also because farmers were not willing to share the details of the secrets with outsiders. However, from some local government circulars and investigation reports, we may indirectly see such phenomena. Examples include the Circular in 1980 by Fengyang County, Anhui Province, and the Investigation Report in 1980 by the Policy Research Office of Qinghai Provincial Party Committee. For both, see CRDRG (1981: 222–330, 322–333).

Because if one household in a village of 30 households is about to have a new-born, and if the benefit it can possibly get is 1, the other 29 households might face a loss of one 29th. But it takes organization costs for these other 29 households to joint hands.

Based on this view, Chayanov (1986) believes that the differentiation of farmers in rural Soviet Union was not a differentiation between different classes, but simply it was because of the economic differences of rural families during different stages of the family life cycle.

The resolution on agricultural issues by the famous Third Plenary Session of the Eleventh Central Committee explicitly prohibits the HRS. The statement was kept in the revised resolutions of the Fourth Plenary Session one year later. Both documents were published in the China Agriculture Yearbook (1980: 56–62).

In 1980, the total agricultural accumulation was 36.074 billion yuan. If excluding the government’s expenses on rural areas, the net outflow of agriculture was 27.862 billion yuan (Feng and Li 1993), accounting for 12.78% of the 218 billion yuan total agricultural output value (ZTN 1983: 13) (The figure for 1977 and 1978 is 15.73% and 14.05% respectively). This is already lower than the figure in 1955 (12.83%) and only slightly higher than in 1952 (11.49%, same source above).

At that time, the purchase prices of agricultural and sideline products increased, but the sales prices to the urban residents remained unchanged. The government financed the gap. This growing expenditure in the 1980s is not included in the government’s rural expense index in Fig. 3.1 and Appendix Table 3.3, because it reflects the relationship between the government and urban residents.

In the early and late 1950s, DENG Zihui and PENG Dehuai were leaders of the Central Committee and the State Council respectively. However, they both lost their say in policy issues because of their differences with Chairman MAO Zedong on rural issues.

Demsetz (1988: 104).

That the socialist property rights reform is very likely to move towards radicalism may have a lot to do with this.

Taking Anhui for example, the Xiaogang Village HRS model caused a huge debate in Fengyang County. Finally, the Standing Committee of the Anhui Provincial Party Committee made a field visit to the village and decided to give it the green light.

The gradualistic character of China’s reform is not only manifested in the continuity in time, but also in the uneven spatial distribution.

The decentralization reform was criticized by some famous economists in China after 1989. The representative work is an article published by Wu Jinglian in December 1989. This article systematically criticizes erroneous economic reform measures by the former State Council leader. One important mistake was to confuse “administrative empowerment” with “economic empowerment”, which led to segmented markets, decentralized macro control and “Vassal Economy”. Written in an academic and consultative style, the articles carries great ethical courage to challenge super authoritative persons although it is now impossible for the criticized to make openly any response to such criticism. (The author’s note says that “This article was based on the author’s reports delivered on June 9, 1987, July 1, 1988, and January 11, 1989, at the Central Party School” [Wu 1989: 51].) After the publication, many domestic and overseas Chinese language newspapers continued to attack the “Vassal Economy”. The representative work with opposite view is the article by Li Xianglu published in 1990 in the American Intellectuals magazine. He believes that the reform of the bureaucratic system has to start in a piecemeal manner because there is no way to rely on the bureaucracy for central planning to mobilize and promote reform. Only the decentralized policy can launch the socialized mechanism for the reform within the system of totalitarianism. The experience of the rural reform shows that, we luckily had the “wrong economic reform measures” of decentralization; otherwise we might still live under the people’s commune system today.

In 1961, the HRS in Anhui obtained the approval of Zeng Xisheng, the First Party Secretary of the Province, and the acquiescence of the central leaders, including Mao Zedong. However, after the famine was over, Zeng was criticized and dismissed because of this policy (Bo 1993, Vol. 2).

Lieberthal and Oksenberg (1988: 29, 152).

The 7000-people conference held in 1962 was an exception, which summarized the bad lessons of 1959–1961 at various decision-making levels.

The heated debate even extended from the venue to the eating table. Chi Huaqing, the First Party Secretary of Guizhou, who supported the HRS, once said during the meal to Yang Yichen, the First Party Secretary of Heilongjiang, who was against the HRS, “You go your sunny big road, I will take my single-log bridge”. Unexpectedly, this remarks provided the idea for the solution with coexistence of multiple modes.

This is the Central Document No. 75 in 1980. For background for the formulation of this new policy document, see Du Runsheng’s speech at the meeting to formulate this policy document attended by First Party Secretaries of All Provinces, Municipalities & Autonomous Regions (Du 1985: 1–9) and the article by Wu (1980).

See Ji (1993) for the importance of procedures in the process of reform.

Historical experience shows that if the government still dominates the rural society, then the reduced government rent and tax can be raised again after the economic recovery, and the empowered authority can be reclaimed for various reasons.

This argument also applies to the analysis of other rent-seeking behaviors in the reform process. Many people condemn rent-seeking but completely ignore the role of rent-seeking in institutional innovation.

For the notice of the CPCCC on rural work in 1984, see Ma (1992: 133).

The policies and legal documents mentioned here can be found in the Chinese Agricultural Yearbook. Yang et al. (1992) made an excellent review of these rural reform policies and laws of this period in English. Except that their measurement of the policy system environment is totally based on the documents, which seems to me could be improved because the documents sometimes lag behind the reality and sometimes are not fully implemented. Therefore, the documents are not fully equal to the factual institutional constraints.

The local political establishment of developed regions, under the Contracted Fiscal Responsibility System, provided fullest protection to their township enterprise and worked hard to obtain the recognition from the central policy. What they did was consistent with what the less developed areas did to protect the HRS.

For example, if each rural household, on the average, decides to reserve an additional of 100 kg of grains, the supply to the national market will be reduced by 18 billion kg. This fact constitutes the basic driving force for the reform of the grain purchase and sale system since 1985.

A recent evidence is that between 1990 and 1991, certain officials of Beijing initiated a new version of rural socialist education movement, which ended up nowhere.

Coase (1992) stresses that the institutional structure of production is what he and other institutional economists are studying.

Quote from Du and Yuan (1993).

The early HRS system did not exclude the possibility of land reallocation due to population changes, which caused the endogenous instability of land contracting. Meitan, Guizhou was the first place to carry out institutional innovation to eliminate such rights. The Meitan approach is to provide low-interest loans by the local government to support farmers to develop barren hills and slopes so as to accommodate the demand of the increased population. The author once saw this as the most important institutional innovation since the HRS because it solved a long-standing dilemma between population and land use (Zhou and Liu 1988). This approach aroused much interest and has been followed by many other places (Du and Yuan 1993).

Such as the experience of Pingdu County, Shandong Province. See the investigation report of the Land System Research Group of the Rural Department of the Development Research Center of the State Council (print version, 1990).

Du and Yuan (1993).

These actual changes are mutually dependent and mutually promoting with the farmers’ call for “policy consistency” and the government’s promise. The latter ask to prevent property rights from being created or changed again by top-down political means, while the former express the need to adjust the property right contract based on the changing transaction environment. What is important is that after the late 1980s, institutionalization and legalization of the new structure of rural property rights have been put on the agenda of the reform. This, of course, does not mean to write down the most perfect forms of property rights into the law and task is finished, but rather it means to record, in a legal form, the property rights that have been established through transactions, to adopt more measures to effectively protect the property rights and increase infringement costs, and then based on that, to formulate procedures for amending property rights contract between the parties.

The author once estimated the rural asset structure in 1985. At that time, the rural households private property uncounted into private firms was about 700 billion yuan, plus the total assets of 22 billion yuan from various individual’s enterprises, the total was 722 billion yuan. At that time, the valuation of agricultural land was based on nominal interest rates rather than real interest rates, so the land prices were undervalued. Based on real interest rates, the value of agricultural land would be about 5 trillion yuan, and the total rural asset would be about 6 trillion yuan. Therefore, the private property of farmers accounted for about 12% of total rural assets that year (see Comprehensive Research Task Force of the Institute of Development Studies 1988: 65–80). Since then, the private property of farmers has increased by nearly three times, with an average annual growth rate of 16.97%, 12 percentage points faster than the average annual growth rate of public property.

Because he doesn’t get the private property for nothing, he makes efforts to completes the hand-into the government and the collective, and undertake risks and responsibilities to obtain such property. In this sense, the private property of Chinese farmers today is different from what was formed by the Land Reform. Since the private property is not a gift from the government through large-scale political movements, the government is not entitled to change the contract arbitrarily.

Or, in the words of Alchian and Demsetz (1972), the hardness of rural property rights is gradually increased with the growth of its protective structure.

Many people are accustomed to the idea that institutions or rules are free of charge. For example, Bater (1990) provides a game theory model to illustrate the order for the property rights relationship between cattle farmers in the upper reaches of the Nile. In this model, the two cattle-raising households, in the absence of an arbitrator, always rationally choose the strategy of attacking the other family. The consequence of this resource-wasting “prisoner’s gaming” doesn’t get changed until a third party is introduced to punish attacks. The problem with Bater’s model is that this third party does not consume any resources, yet in real life, it is impossible for institutions, order, and norms to be free.

For rural total output value, see ZTN (1993: 333); for price, see ZTN (1993: 238); for farmers per capita net income, see ZTN (1993: 312). For labor data, see ZTN (1985: 224) and ZTN (1993: 330).