Factor reallocation and structural transformation implications of grain subsidies in China

Abstract

Since agriculture has contributed significantly to China’s economic growth miracle, it is important to understand the contributions and determinants of agriculture related to different agricultural policies in structural transformation in China. However, as one of the most important agricultural policies in China, the effects of the grain subsidy policy on factor reallocation, economic growth, as well as agricultural and non-agricultural production have not been investigated systematically and comprehensively. The absence of using an economy-wide model to estimate the impacts of the grain subsidy policy in China leaves a vacuum in the policy-advising space. This research develops a dynamic single-country, multi-regional computable general equilibrium model of the Chinese economy to evaluate the historical impacts of the grain subsidy policy. Our results reveal that grain subsidies impede the efficiency of factor reallocation and economic structural transformation in China. However, grain subsidies promote grain production growth and temporarily reduce rural-urban income disparity. In order to achieve the long-term sustainable increase in rural income and to mitigate the rural-urban income gap, China needs to further develop its labor-intensive industries (e.g., services) to accommodate the large number of rural labor transfers. Moreover, the large-scale agricultural production and technology improvement in agriculture are the effective measures to ensure food security in China.