Implicit Contracts and the Grey Market for Fertilizer in China

Abstract

common occurrence in many countries is that policy outcomes differ from theofficial objectives of the policy directives. A good example can be found in China.In 1994, the fertilizer market in China underwent a significant change. In response tostrong complaints from farmers in a number of regions about shortages and substantialprice increases, the central government set the markup rate for fertilizer as it moved fromfertilizer plants to farmers and granted the Agricultural Means of Production Corporations(AMPCs) a monopoly role as the supplier of fertilizer.The results of the 1994 policy reforms were not as expected. Controls on maximumretail prices failed to produce the desired effect and prices for agricultural inputscontinued to increase by large margins. In both 1995 and 1996, the actual fertilizer pricegreatly exceeded the government-mandated price (Xiao, 1998).Nor did enterprises fully follow the controls in other respects. Some broke the allowedlimit of 10 percent for products to be sold directly by fertilizer producers, and sometrading agencies overcharged by adding more transport and handling expenses than wereallowed (Zhou, 1996; Zhang and Ji, 1995; MOA,1996). In addition, although the AMPCwas to be the sole trader, the private traders in many provinces continued to play asignificant role – the market share of the private traders ranged from approximately