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THE SECOND ECONOMY OF RURAL CHINA

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TITLE: THE SECOND ECONOMY OF RURAL CHINAAUTHOR: Anita Chan and Jonathan UngerCONTRACTOR: The University of California, BerkeleyPRINCIPAL INVESTIGATOR: Gregory GrossmanCOUNCIL CONTRACT NUMBER 620-5DATE: October 1986The work leading to this report was supported by funds providedby the National Council for Soviet and East European Research;It is one of several papers originally prepared for a Conferenceon the Soviet Second Economy held in January 1980 at the KennanInstitute for Advanced Russian Studies, in Washington, D. C.Anita ChanandJonathan UngerThe Second Economy of Rural ChinaSummaryDrawing chiefly on interviews with emigrants from villages in ruralChina, this study focuses on the participants of peasants in the secondeconomy. By defining the second economy rather broadly as any economicactivities, legal or illegal, that fall outside of the state plan, theauthors underscore the fact that the Chinese peasant economy is charac-terized by significant enclaves of legal private activity --in parti-cular, the private plots and the free markets. Moreover, the very il-legality of a wide range of economic activity in the peasant economy islargely a function of pendulum swings in government policy which repeat-edly push second economy operations underground and then pull them backagain out into the open.The body of the discussion of second economy activity is divided intosix sections: agricultural collectives and the state plan; private pro-duction; marketing; village-owned factories; procurements; and second eco-nomy workers. A common theme emerging from the discussion is the inter-action between peasants and government policy, with two aspects of peasantbehavior standing out in particular: their constant efforts to evadegovernment regulations which conflict with their self-interest, and theirresponse to the incentives set up by the official government pricing struc-ture. In the agricultural collectives, for example, second economy acti-vity chiefly, takes the form of a collective effort by each production teamto conceal its grain output from the authorities, thereby evading a pro-curement program which forces the peasants to supply the cities with basicfoodstuffs at fixed low prices. At the same time, the government pricingstructure, whereby most of the collective grain is sold cheaply while pri-vately grown vegetables can obtain much better prices, provides an incentiveto peasants to reduce their effort on collective production in favor of theirlegal private plots. Likewise, with respect to the marketing of farm pro-duce, the pricing structure is such that state prices are almost invariablylower than free market prices, resulting in an incentive structure whichcontravens the government's desire to channel more produce into the first econ-omy. In this particular instance, the government's response has been ascalculating as that of the peasants: since petro-fertilizer is in shortsupply and is rationed to production teams as part of their annual plans,the government offers fetilizer coupons as bait to induce teams to sell moreof their surplus grain to the state.While much of their discussion focuses on the friction between the state- 2 -sector and the legal private sector, the authors also found some evidenceof explicitly illegal private activity -- for example, the smuggling ofproduce across county lines for speculative purposes and black marketingin 'Class I commodities', such as grain, where distribution and sales aresupposed to be completely controlled by the state. According to the au-thors, however, such illegal activities are more common in the poorer dis-tricts, and therefore would appear to be more attributable to the circum-stance of poverty and the corresponding need to make ends meet, ratherthan to pure and selfish greed. In substantiation of this view, it isobserved that the authorities tend to be more tolerant of illicit or eva-sive activity in the poorer districts. In addition, some forms of illicitactivity -- in particular, the informal procurement of scarce materials,capital goods and spare parts -- are permitted, by the authorities in recog-nition of their usefulness in circumventing the rigidities of the officialsupply system.In concluding their discussion, the authors address the issue of whetherthe rural second economy in China is rooted in official corruption. In gene-ral, while peasants do complain of political abuses of power by local of-ficials and of on-the-job 'perks' that some local officials consider theirdue, the evidence available to the authors provides no indication that cor-uption is a major fact of rural life. Rather, to the extent that local'cadres connive in or tacitly approve of second economy activities, it isout of the recognition that they are necessary elements of the rural eco-nomy which provide needed supplements to diets and incomes.(Summary prepared not by the authors.)THE SECOND ECONOMY OF RURAL CHINAAnita Chan and Jonathan UngerMuch research has been done on the second economies ofthe U.S.S.R. and Eastern Europe, but little on that in China.Yet in China, too, a vast amount of economic activitycontravenes state regulations. Some of the anecdotes told byemigrants from China are quite similar to stories toldof Eastern European countries. The fundamental similaritiesin all of those countries' planned economies and politicalstructures inevitably have bred many of the same techniquesfor circumventing the state's rules.Writers on Russia and Eastern Europe frequently stressthe illegal or corrupt aspects of second economy endeavors.But our survey of rural China's various second economyoperations will show the difficulty of defining most of theseactivities strictly in such terms. For much of the secondeconomy, there are no hard and fast lines of demarcationbetween legal and illegal. This is true, too, of the Sovietmarketing system (Katsenelinboigen 1977). In both countriesthere exists a grey area of semi-legality midway along a widespectrum. These semi-legal economic operations are notstrictly in accord with the rules but are usually toleratedby the authorities as economically beneficial.When the Chinese government has objected to any of thesesemi-legal 'grey' activities it was either because anactivity (i) irritatingly interfered with the first economy'soperations or (ii) was conducted for purely personal profitand thus purportedly endangered the Party's egalitariansocialist goals. The distinction between these two kinds ofgovernmental objections


THE SECOND ECONOMY OF RURAL CHINA

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