AS CHINA's urban economy grows ever more beleaguered, hopes are now being pinned on the vast rural hinterland as the next source of growth. City folk, who have stuffed their homes with washing-machines, air-conditioners and video-recorders, now face an uncertain future and are reluctant to spend. Housing, health and education costs are all set to rise; above all, millions face the prospect of losing their job. The countryside, on the other hand, is home to 70% of China's 1.2 billion people. Farmers, on average, earn two-fifths of the typical city-dweller. So an increase in rural incomes could have a dramatic effect on overall consumption; enough, argue some economists, to refire China's faltering engines of growth.
It depends how things are done. China's leaders certainly like the idea and have already begun to invest more in roads and electricity in rural areas. But they have another motive. Complaints about low rural incomes are intensified when local governments impose more and more arbitrary taxes and fees on hard-pressed farmers, especially in places where those farmers are paid for their produce by the governments with IOUs. Anger is mounting. Thousands of farmers in central Hunan province were reported to have clashed with police on January 8th, leaving one dead and many injured, in a protest over taxes. Since a breakdown of order in the countryside would challenge the authority of the Communist Party, increasing rural incomes has become a political imperative.
The stable supply and distribution of maize, rice and wheat have always been an imperial obsession. That is why Deng Xiaoping's reforms, which began in the countryside 20 years ago, were so remarkable. He let farm collectives be broken up and allowed households to decide what they should grow. Private markets were sanctioned and, by the end of the 1980s, grain rationing and the system of vouchers used for buying grain were all but gone.
The state, however, continued to play a role. In 1992 grain prices soared, partly on expectations of higher inflation. Private traders bought up large supplies, much of which was stockpiled. The government intervened, at great cost, by selling its grain reserves to keep prices down. After that, international concern about China's ability to feed itself only redoubled the state's conviction that it must play the central role. It made provincial governors individually accountable for ensuring that each province grew as much grain as it consumed. And it raised the prices at which state offices guaranteed to buy grain, in order to foster farmers' “enthusiasm”.
The cost of such a strategy is now becoming painfully clear. High, guaranteed prices helped produce recent record harvests of nearly 500m tonnes. The government has been forced to sell millions of tonnes of grain abroad for about one-third less than it cost, but the offices are still flooded with grain. Urban consumers are becoming increasingly choosy about quality, and much of the stored grain is rotting away or being eaten by rats. Some 15% of last year's bumper harvest is reckoned to be sitting outside, for lack of silos.
This is hardly an efficient transfer of wealth to the countryside. The grain offices employ 4m people and are a financial black hole. Like other state bodies, grain administrators have squandered money through corruption and ill-advised investments. Claims in the official press that the state's grain policy has cost $25 billion since 1992 are an underestimate. Losses last year were probably $2 billion a month.
A new approach is now being pushed by Zhu Rongji, the prime minister. He has decreed that private traders will be forbidden to buy grain from farmers, giving the state the monopoly. The state will buy all the grain that farmers wish to sell: they are to get a “quota” price for that part of their harvest they are obliged to offer to the state, and a lower, fixed “protected” price for any of the remainder. At the same time, the grain offices will be overhauled. They have been ordered to cut 3m staff by 2000 and forbidden to resell grain at less than the procurement price.
The changes may help cut corruption and inefficiency at the grain offices. But even some Chinese experts are sceptical. Lu Feng, an economist at Beijing University, despairs that the new policy, by redoubling state intervention, threatens to redouble the expensive absurdities of the old one.
It is not hard to see why. American officials reckon that the state grain system controls about 70% of all grain sold on the wider market. This represents about half of all grain produced; the rest is consumed by farmers and their animals, or sold locally. The government's new plans would entail additional purchases each year of more than 50m tonnes. That figure, Mr Lu believes, will certainly rise as higher prices result in more production.
The government seems to be vaguely aware of this: on January 12th it announced it would spend $2 billion on new grain silos. But it seems not to have calculated the cost of its subsidies on China's food-processing industry, which is supposed to have world-beating potential. Late last year China's poultry farmers were paying $120-130 a tonne for domestic maize, while competitors in Thailand were buying American maize for less than $100.
The new policy is already beginning to have an effect. Prices paid by feed mills and city residents have started to rise, though the higher prices are usually blamed on last summer's floods. Will farmers' incomes also rise? That is far from guaranteed. Some grain offices ordered to make a profit will be tempted to underpay the farmers who supply them; some with brimming silos will simply refuse to buy grain.
Moreover, many of the 3m officials who are to be sacked are sure to find ways of profiteering, perhaps with their former colleagues. And though it will certainly prove impossible to quash private traders completely, their distribution channels—at present the only reasonably efficient way for many farmers to get their produce to market—will suffer greatly. Some of the hard lessons of state intervention will have to be learnt all over again before rural China's engine of growth can sputter into life.