Land Use in China: The Impact of the Economic Revolution

In many parts of the country, rural people have not benefited from these changes. Here we will look at the main legal issues involved in the effects on ChiPRC Land Administration Lawna's farmers that the transformation of the countryside is having. Especially, the insecurity of land tenure rights is an acute problem. Under the pressure of local economic incentives to develop the land, legal protections for farmers' rights are undermined and their livelihoods are threatened.

The Scope of the Problem: Developing the Countryside

The Ministry of Land and Resources (MLR) is the government ministry charged with management of land use and the administrative body that oversees the planning and protection of land, mineral and marine resources in China.

In policy and strategy papers, MLR doesn't make light of the critical nature of the land use problem, the disappearance of farmland and the sundry land problems accompanying the spread of urbanization. In a 2002 MLR report,¹ the ministry states that China's figure for per capita arable land is 0.11 hectares, which is one-third of the global average. The report adds that several hundred thousand hectares of farmland are disappearing each year to urbanization and industrial development. A 2003 MLR report offers different figures on the disappearance of cultivated land.² Cultivated land per capita in 2003 decreased to 0.095 hectares from 0.098 in 2002. As with government forecasts on the toll taken by environmental pollution, MLR sees the arable land shortage as a major obstacle to the sustainability of China's rapid economic development.

Rapidly expanding urban areas have absorbed most of the capital from new domestic and foreign investment, and urban economic growth has far outstripped growth in the countryside. Since the mid-1990s, China's spectacular economic growth has benefited urban areas and coastal provinces the most. Concomitantly, land prices in urban areas have skyrocketed. Under Chinese law, all urban land is owned by the state, while all rural land is owned by village collectives. Under the law, only state-owned land can be used for commercial and industrial development. As such, local officials eager to cash in on the economic boom must first acquire rural land from collectives, and then sell the land use right to developers. China's arable land area is shrinking as municipal and other local government officials convert collectively owned rural land to state-owned land.

The expansion of urban space onto requisitioned village collectives' land is a very recent phenomenon. Only in the past ten years has urban expansion been rapid, and accompanied by rising urban land prices. Prior to the mid-1990s, it is generally true that economic reforms worked quite effectively to spread the wealth of the reform period for the benefit of the poor in rural China and that farmers' incomes rose with introduction of more market-oriented economic policies.

Poverty Reduction and Local Economic Initiatives

Capital accumulation achieved through more liberal economic policies has lifted millions of rural Chinese out of poverty. Using an official Chinese government benchmark of poverty, Stern found that the numbers of rural poor fell from 250 million in 1978 to 34 million by 1999.³ Much of this poverty reduction can be attributed to the implementation of market mechanisms in the agricultural economy. At the beginning of the reform period in 1978, the Household Responsibility System, which broke up the collectivization of agriculture, allowed agricultural households much more economic freedom and agricultural productivity rose dramatically. The Household Responsibility System was pioneered in Anhui province, and formally adopted countrywide in 1981 as the country's land tenure system. Later, from the mid-1980s, the growth of township and village enterprises boosted rural, non-farm incomes and functioned as new sources of capital in non-urban areas.

Today, market economics has largely taken over rural economic decision-making, with farmers' ability to freely determine what and how much to grow greatly improving their livelihood.

At the same time, there is an economic war going on at the local level in China today, and especially on the fringes of expanding urban areas. With the decentralization of most economic and fiscal planning to local officials, and especially those at the administrative level of the county, many formerly centralized government functions have been left to the local level to manage, or have disappeared altogether. National tax revenues have also fallen dramatically over the course of the reform period. At the start of the reform period, national tax revenue was about 30% of GDP, fell to a low of 10-12% in the late 1990s, and rebounded slightly to 17% in 2002.⁴ With declining tax revenues, and a reduction in transfers of funds from higher levels of government, local governments have had to find alternative sources of income. Land use sales to developers, in addition to the imposition of an array of rent-seeking measures on the peasantry, have been a prime method of boosting local revenue. Although local conditions vary markedly across China, in some localities land use sales account for as much as 60% of local revenue.

The conversion of agricultural land for industrial and commercial use has been restricted since 1994 (per the Basic Farmland Protection Regulations). Also, since April 2004, there has theoretically been a total ban on commercial development of farmland excepting some infrastructure projects. The ban reportedly will be lifted November 1 2004.⁵

In addition, the State Council recently issued the Decision on In-depth Reform of Land Management,⁶ which aims to strengthen land management regulation. Premier Wen Jiabao recently stated that "land management should be further tightened since the achievements scored in land management are still in the primary stage, and misuse of land has not been eradicated".⁷ The central government is keenly aware of the potential social catastrophe posed by the conversion of arable land much needed to feed China's population to industrial or commercial uses that serve mainly to create wealth for local elites, and to the social instability caused by wide disparities in wealth between urban and rural areas. However, as with many other issues in China today, enforcing the central government's writ at the local level on the land issue remains a stiff challenge.

The Legal Framework for Land Administration

The principal piece of legislation governing land use is the PRC Land Administration Law.⁸ This law was originally issued in 1986, and revised in 1998 and 1999, with the latter including the issuance of implementing regulations. The main thrust of the revised land administration law is to protect arable land and strengthen land administration. The law reiterates the fact that all urban land is owned by the state, and all land in rural or suburban areas is owned by peasants' collectives (including housing lots, private plots of cropland,⁹ and private uplands) (Article 8).

All land in the PRC is divided into three types: agricultural land (including arable land, grasslands, forests, and water bodies used for irrigation and aquaculture); construction land (which includes land used for building construction, residential areas, public facilities, industrial purposes and mining, transportation, water projects, tourism development, and military facilities); and non-utilized land (Article 4). The law states that only state-owned land may be used for commercial development (which falls under the classification of construction land) (Article 43).

Land Use Plans

The most important stipulations that attempt to bring coherence to the land use issue are in the "Master Land Use Plan" section (Articles 17-30). Here it is stipulated that each level of government must formulate a master land use plan for urban and rural areas that reflects national economic and social development plans, and which conforms to the plan at the next higher administrative level. In Article 18, it is stated that the total construction land area that is included in a local government's master plan must not exceed a target set at the next higher level of the people's government in their master plan. Additionally, the master land use plan at the level of the province, autonomous region or municipality directly under the central government must ensure that the total amount of agricultural land in their area of administration is not reduced.

How this is supposed to work relies on a method of non-utilized land being brought under cultivation in direct proportion to the amount of arable land legally converted into construction land. Article 31 under the section on "Protection of Arable Land" fully commits the state to the protection of arable land. It is stated that if, once approved, arable land is converted to construction land, the work unit that has occupied the arable land is responsible for bringing exactly the same amount of new arable land under cultivation. If this isn't possible (because new land suitable for agriculture does not exist), then the work unit must pay compensation for this and the fees will be used to enlarge cultivation to new areas.

Additionally, the amount of basic cropland in each province, autonomous region or municipality directly administered by the central government is fixed at 80% of the total arable land in its administrative area (Article 34).

Most commentators are not very confident that land use plans are effective in determining local land policies. "Even though a local level is supposed to have the approval of the next higher level, they can always get away from the approved plan through a variety of schemes. China badly needs an enforceable land use plan, but how to enforce a plan is a key issue that hasn't come about yet (in planned legislative revisions)," says Li Ping, staff attorney and Beijing Representative at the Rural Development Institute.

State Council Approval Thresholds

One of the major revisions introduced by the 1998 Land Administration Law is the move to fixed size thresholds that determine when State Council approval is needed for conversion of agricultural land to construction land. Article 45 of the law states that State Council approval is needed if the land to be converted is: 1) basic cropland; 2) more than 35 hectares of arable land that is not basic cropland; or 3) more than 70 hectares of other land. The definition of "basic cropland" includes land used for cultivation of grains, cotton or (vegetable) oil production centres, vegetable production bases, and agricultural research centres.

Under the previous regime, approval for conversion of arable land to industrial or construction uses was left up to local discretion to a much greater degree. The prior land law from 1986 included a system whereby approval thresholds for conversion of arable land to industrial purposes was based on double criteria of land sizes and "levels of competence" of the local authorities. The competency level was tied to a threshold size of land: State Council approval was required if more than 1,000 mu (66.7 hectares) of cultivated land, or 2,000 mu (133.4 hectares) was involved. The amended land law not only abolished the competency requirement and lowered the threshold triggering State Council approval, it also required State Council approval for requisitioning of any basic cropland.

Using State-owned Land for Development

Although the amended land law thus imposed stricter requirements for the conversion of agricultural land for commercial development, certain provisions in the law have been used to develop farmland.

Article 2 of the law states that the state may requisition collectively owned land "in the public interest according to law". The main clauses in the law that allow legal allocation of land for construction projects without the necessity of a grant and compensation process include cases where state-owned land (i.e., both land classified as "urban" and land originally owned by peasant collectives that is requisitioned by the state (Article 43)) is to be used by state authorities, cases where land is to be used for urban infrastructure facilities or public welfare projects and land for "other purposes" prescribed by laws or administrative regulations (Article 54). Article 58 of the Land Administration Law further states that the local administrative authority in charge of land may recover state-owned leaseholds upon approval of the people's government that originally approved the use of land if the land is required in the "public interest". Article 65 makes a similar provision for village collective economic organizations. These organizations may recover leaseholds (with approval from the people's government that originally approved the use of the land) if the land is required for the construction of village public facilities or welfare projects, or for additional reasons including that the land has not been used per the originally approved usage.

Compensation Standards

A pending planned revision to the Land Administration Law will include as one of its key areas a re-evaluation of compensation standards given to farmers whose land has been taken. For land sold for high prices to developers, very low compensation is offered to farmers who have lost the land. This is one of the main sources of rural grievances in land use issues. And the compensation levels are legally defined.

The rationale for compensation (as payment for displacement caused by the necessity of introducing new economic development projects at the local level) is that communities will use the funds to create new employment opportunities. New employment opportunities would ideally compensate the community for the loss of land. During the heyday of the township-village enterprise scheme (beginning in the mid-1980s), a lot of compensation money was ploughed into new TVE businesses (with varying degrees of success, as many of these businesses failed). The extremely low levels of compensation that are paid currently in land requisitions, however, have made the original rationale meaningless.

The Land Administration Law's Stipulations and the Reality

Per Article 47 of the Land Administration Law, compensation is divided into three areas in the case of arable land: compensation for the land; compensation for young crops and attachments; and compensation for resettlement. The land compensation fee is defined as six to ten times the average annual yield value of the arable land over the prior three years. Compensation for resettlement depends on the number of residents involved. The standard resettlement allowance for each person to be resettled is four to six times the average annual yield referred to above. Compensation for young crops and attachments is left up to the discretion of provincial-level governments, "with reference" to the other two standards.

The reliance on yield values, not land values, in determining compensation levels has resulted in exceptionally low compensation being paid. The Rural Development Institute's Li gives a common scenario: "Compensation is at most 17 times the yield of the land (one year yield as compensation for standing crops, six to ten times the yield as compensation for loss of land, plus four to six times the yield as the resettlement subsidy). Currently, the annual yield of the best farmland, in places like the Pearl River delta where two crops of grain per year are possible, is about Rmb1,000 per mu. So, the total compensation would be Rmb17,000. Local governments can sell the use rights to this land at such a high price as to render this amount absurd. In suburban Beijing, for example, the current land price is close to Rmb1 million per mu. Obviously, then, the compensation level is a big problem, but it is legal under the Land Administration Law."

Additionally, many households dispossessed of their land don't see any compensation at all, as land readjustments are done concurrently with land expropriations. Per the 1999 implementing regulations of the Land Administration Law, the collective retains the compensation fees for loss of land (the largest of the three parts of the compensation scheme under the Land Administration Law). As Li explains: "This rule of compensation distribution, while perhaps issued with good intentions to strengthen a collective's economic power, has in fact facilitated cadres at the collective level to pocket this part of compensation as a personal gain, because a system that supposedly makes collective-level cadres accountable is not transparent. After the land is taken, the cadres may institute a land readjustment. If a land taking affects, for example, 50 mu of land in a 100 mu village (with 100 villagers, each having rights to use 1 mu of land), the cadres will pocket the land-loss compensation for the 50 mu and then readjust the land, spreading the pain among all villagers, at a reduction of 0.5 mu per person."

One study found that revenue from land takings is spread between county/township governments and collective-level governments in the ratio of 60-70:25-30%, with only 5-10% retained by the farmers who've actually lost their land.¹⁰ The situation is confused and dynamic, because of the diversity of local economic conditions and the fact that there is no statutorily defined amount of revenue that must be sent up the administrative hierarchy.

BeijingInitiatives

Raising compensation levels is already on the national agenda. New legislation from the Ministry of Land and Resources to be issued at the end of October 2004 will impose a minimum land requisition cost, but details were lacking at the time this article went to press.¹¹ Although the compensation issue is high on the reform agenda for the pending revisions to the Land Administration Law, some positive steps on this issue have already been made in local Beijing regulations.

The Beijing Municipality, Compensation and Resettlement Procedures for Land Requisition for Construction were issued on April 29 2004 and became effective July 1 2004. These procedures for the first time speak of a minimum compensation standard, as opposed to the maximum as outlined above in the Land Administration Law. In Article 5 and Article 9 of the Beijing procedures, reference is made to minimum compensation standards. Article 5 states: "The compensation fee for requisitioned land shall not be lower than the minimum standard in Beijing." Article 9 elaborates: "The municipal land administration authority shall set the minimum standard for compensation fees for land requisition for each township, taking into consideration such factors as the living standard of the farmers whose land is requisitioned, the agricultural output value, land location as well as compensation fee for resettlement stipulated by these Procedures." Article 9 further states that the minimum compensation fee shall be adjusted according to "social and economic development".

The Beijing procedures also stipulate that a written agreement (arrived at through negotiation) between the requisitioning unit and the rural collective economic institutions or villagers' committees will govern the compensation and resettlement amounts and the method and duration of the payments (Article 10).

Per Article 48 of the Land Administration Law, after a compensation and resettlement plan has been determined, the local government makes a public announcement and listens to the opinion of the village collective economic organizations and peasants who are affected. This quizzical statement, whether by design or the ambiguity of the language, seems to present local people with a requisition plan that is a fait accompli. Only after the plan has been decided are they consulted. But Article 10 of the Beijing procedures calls for an empowered village-level voice into the terms for the requisition. Article 10 also states that before entering an agreement, the collective or villagers' committee shall form a written resolution on the material terms of the agreement at a village representatives' meeting. However, as Gao Zhongzhi, a lawyer with Beijing Tianyuan Law Firm who has worked as a consultant on World Bank-sponsored land law projects in China, points out, "the procedures fail to require that the villagers' resolution on the resettlement and compensation agreement be delivered to the government for consideration". Hence, it doesn't seem to carry much weight in informing the government, or requisitioning unit, of villagers' concerns or opinions.

What is the Collective? Getting Funds to Farmers

The above stipulations are improvements. But a major problem remains over how compensation is distributed and how to hold local-level cadres or officials accountable for actually paying compensation that is required by law, and what redress local villagers have if compensation payments, however small, are not made. Article 13 of the Beijing procedures states that the compensation fee to be paid will be deposited in an account that will be supervised by the land administration authority, and payments will be made "according to law". Article 49 of the Land Administration Law states that seizing or misappropriating compensations fees is forbidden, and that payment details will be announced by village collective economic organizations. But there is no clear way to seek redress at the local level if compensation fees are not paid.

This points to a major problem in empowering villagers to assert their rights: how they can overcome local interests who supposedly speak for them. China's land laws make numerous references to local-level collectives or economic organizations, but in practice only cadres or officials are allowed to handle land requisitions issues on villagers' behalf. As Gao Zhongzhi states: "What does `collective' actually mean? In the whole process of land requisitions, farmers are excluded and only village cadres have the final say in the negotiation and decision-making process. They come to stand for a collective but in fact usually represent their own interests first."¹²

One of the main areas of attention in planned revisions to the Land Administration Law is the compensation issue. Many observers see the main problem as one of how to get compensation payments made directly to farmers. How will the distribution of compensation be done fairly between the collective and the individual farmers? And what effective measures will be introduced to hold collective leaders accountable for funds gained in land transactions? These difficult questions will hopefully be legislated soon.

Land Tenure and Land Readjustments

In China today, where fiscal and economic policy decentralization has resulted in a wide variation in local conditions, a common theme in many parts of the country is the uncertainty of agricultural land tenure rights and the use of periodic land distribution readjustments by local officials to generate revenue from sales of the rights to readjusted land. Asserting tenure rights in the face of pressure from local officials who seek to use the land for other purposes is a major theme of rural grievances.

The Legislative Basis for Tenure Rights

The main laws governing land tenure are the Land Administration Law and the Rural Land Contracting Law (RLCL). The RLCL was promulgated in August 2002 by the National People's Congress.

Against the backdrop of both of these laws is Rural Work Document No. 1, issued in 1984 by the Communist Party Central Committee. This document granted land use rights to farmers for 15 years. In 1994, a Central Committee directive stated that land use rights would be extended for an additional 30 years from the expiry of the 1984 directive's term. Theoretically then, farmers are guaranteed secure land use rights until 2029.

The Land Administration Law reiterated these stipulations. In Article 14, the law states: "Land owned by peasants' collectives shall be contracted for operation by the members of the collective economic organization for plantation, forestry, animal husbandry and fishery production. The term of contract operation of land shall be 30 years. The owner and the contractor shall enter into an agreement for contract operation that shall stipulate the rights and obligations of both parties." Further, Article 14 goes on to state: "If, during the term of an agreement for contract operations of land, appropriate adjustments are made to the land contract by individual contract operators, consent of not less than two-thirds of the members of the village council or not less than two-thirds of the village representatives must be obtained."

The RLCL is a landmark piece of legislation that focuses on the issue of land use and farmers' rights to tenure. The genesis of the RLCL is directly related to the readjustment issue. Article 27 of the RLCL states that no land readjustment is permitted within the 30-year tenure period, except for special circumstances when small readjustments are permitted. Article 27 refers especially to "natural disasters or other special circumstances", without defining the latter.

Land Readjustments, Big and Small

Since the institution of the Household Responsibility System, land readjustments have been seen as necessary mechanisms to reallocate land use rights at the local level to account for demographic changes, reallocate land use rights to maximize the efficiency of agricultural work and fairly distribute access to farmland. Readjustments have been characterized as large or small. The former entails a complete reallocation of village land by the management of the collective, while the latter would only affect a few households and can occur more frequently.

There is considerable rural opposition to large-scale readjustments. But, as observers note, the loopholes in both the Land Administration Law and the RLCL have allowed local governments to institute land readjustments as the best method to obtain land that can be sold to developers. As Li Ping says: "The RLCL is a very good law that can raise farmers' resort to a solid tenure system, except for the ambiguity of Article 27. Local officials and collective cadres can easily make use of this clause (on special circumstances allowing readjustments) to continue land readjustments in a business-as-usual way. Without narrowly defining such special circumstances through provincial implementing regulations (the RLCL authorizes each province to adopt its own implementing regulations), it would give considerable room to local governments, especially at the township level, and collective cadres, to decide how to handle the readjustment issue. It is noteworthy that the original draft version of this law had no provision for any circumstance allowing land readjustments, but the final law exhibits a compromise that allows small readjustments to take place."

Li goes on to explain that readjustments are not viewed favourably by the central government, but that it is very difficult to prevent them given the shortcomings of the law and the discretion allowed to local officials. "Provincial government reactions to the central government's no readjustment rule are mixed. In many areas that we have surveyed, there have been no readjustments since the second round of contracting commenced in the late 1990s. However, in Jiangsi province where we conducted fieldwork last year, the provincial officials we met said it isn't possible to implement a no readjustment policy; how can you handle population changes, for example? (The readjustment policy) depends on local-level attitudes and interpretations of the law. Moreover, in a way, it is a demonstration of the final vestige of collective-level cadres' power, and is the last option for them (to exercise their power and raise revenue). Formerly, they had power over planting schedules, what to plant, farmers' movements and agricultural taxes. Now the land issue is the last bastion of their power."

Gao Zhongzhi echoes this sentiment on the power of local-level cadres to exploit the loopholes in the law. "Even though it's clear that legally you must have 30-year tenure, once the tenure is broken or the land is taken, then the methods for recourse that can be legally applied are fuzzy. Also, local officials always know what the law says, but it doesn't stop what goes on."

Land Requisitions: What is the Public Interest?

Another aspect of the legal language that allows local officials' considerable interpretive power in the readjustment issue is land expropriation "in the public interest". This phrase is used in both the Land Administration Law (in Article 2, as mentioned above) and in the PRC Constitution (Article 10). Both documents allow the state to take land when it serves such an interest.

There is wide awareness in government and among legal scholars and practitioners of the need to clearly define the public interest so as to limit the abuse that the use of the term now allows. A recent commentator has observed that the Constitution's allowance for property expropriation based on the public interest is premised on the fact that it is done in accordance with the law.¹³ Hence, the two concepts of the law and the public interest are linked. But a legal definition of the public interest does not exist.

A recent Communist Party Central Committee and State Council document, Opinions on a Number of Policies for Promoting Increase in Peasant Incomes, issued December 31 2003, has called for a clear definition of the public interest as it is used in land acquisitions, and for implementation of strict land use plans (in Section 7, paragraph 17, "Deepen rural reform, provide system guarantees for increasing peasants' income and lightening their burdens"). How this will be done is unclear.

In the US, case law precedents have been used to progressively define different areas of the concept of the public interest. In Western legal traditions, two different phrases are used: taking land (or property) for public use (as used in the Fifth Amendment to the US Constitution, which implies its necessity to meet an immediate, specific need) and similar action taken for the public interest. US courts often see cases where local governments have pushed the concept of public use to legally questionable limits, and have used their compulsory acquisition powers to acquire land and give it to private business to develop. The public interest is seen as a broader term not tied to a particular case of use or a particular cause, but in support of public or civic welfare. In China, both ideas seem to be conflated in the single use of the term public interest. There is considerable debate now about how the two terms should be defined in Chinese law. Unlike in some other jurisdictions, there is no case law precedent system in China.

In China, as Gao says, there has been some progress on legally defining the public interest but the definition remains largely ambiguous. "The Ministry of Land and Resources has in fact issued a catalogue that lists different allocated land use rights, and when the public interest is involved. All of the situations covered involved state-owned land. On collective, rural land it is a different story. We don't have adherence to a specific public interest definition," he says.

Creating Secure Tenure Rights in Rural China

Creating secure tenure rights in rural China is an urgent legal, social, political and economic problem. In addition to the legal shortfalls of the existing laws that leave rural people at the mercy of local-level officials, many other areas could be discussed. These include enhancing the rule of law at the local level in a decentralized China, creating economic incentives that reduce rent-seeking behaviour by local officials, enhancing the latent possibilities for further market reforms in rural China, for example in creation of effective land markets, and the establishment of effective and meaningful land use plans that rely on local-level contributions.

Positive Inducements, Beneficial Consequences

The twin issues of the positive economic results of creating secure tenancy rights in rural areas and local governments' economic incentives to requisition and develop land seem to be the most important in understanding how land use will evolve in China.

Many researchers looking at rural development issues around the world have found that secure tenure rights for farmers lead to greater long-term investment by farmers in their land to boost productivity, diversify their crop holdings to better meet market opportunities and engender land transfer and trade mechanisms. Secure land use rights generate much expanded capital formation opportunities, boost rural incomes and remove one of the main sources of rural instability.

Opposition to large-scale readjustments, discussed above, relates to a number of practical issues surrounding the insecurity of tenure rights. One of the most important outcomes of tenure insecurity is the low productivity of lands used by farmers who haven't had the time or seen the point of investing in productivity-enhancing inputs. Prosterman and Schwarzwalder found in fieldwork in two provinces that institution of complete bans on land readjustments at the local level were viewed highly favourably by local farmers and that these farmers had made considerable long-term investments in the land that they used to enhance its productivity.¹⁴

Some areas of China where rural tenancies are secure have seen such results. The Rural Development Institute's Li states: "If local governments fully implement the RLCL, giving farmers very secure land rights, then in most cases the farmers will invest in land and raise production and diversify into higher-value crops. Also, if you have secure land rights and no readjustments, then land markets will emerge. In Guizhou, for example, there has been no readjustment for ten years and land markets are much more active than the national average."

Additionally, of course, is the issue of rural stability and its impact on investment and economic development. All foreign investors with a serious commitment to China look at the longer term in their choice of an investment destination, and how predictable commercial transactions are at the local level. Arguably, tenure security is closely related to sustained economic development over the longer term, and hence foreign investors' best interests are served in areas where tenure rights are maintained. It is to these areas that foreign investment will flow in the coming years as China's economy develops and becomes more integrated with world markets.

There is an interesting political dimension to rural tenure security that warrants further study and that might complement and contribute to the stability of sustained economic development and tenure rights. A recent study has found that in the general absence of land rental markets and non-farm labour markets in rural areas, the impetus for reallocation of land has come in part from equity-oriented or efficiency-oriented reasons for reallocation.¹⁵ Additionally, however, as was discussed above, reallocations have been tied into rent-seeking behaviour by local elites. Interestingly, the researchers found that the existence of village elections had a direct bearing on tenure security and the frequency of reallocations of land. Brandt, Rozelle and Turner did in fact find, in their comparative survey of 215 villages in eight provinces around China that there is a direct relation between the frequency of reallocations and the existence of regular village elections (i.e., the occasion of elections reduced the time between reallocations). At the same time, elections resulted in significantly smaller reallocations. By inference, then, regular village elections result in stronger tenure rights for farmers.¹⁶ Village elections, it would seem reasonable to conclude, would form effective checks on rent-seeking behaviour by local leaders, as they would have to be more responsive to the needs of villagers to maintain their authority. These findings form an interesting starting point from which to explore further the relationship between the methods of exercising local power and the ways that legal guarantees to farmers on tenure can be effectively realized. This isn't to suggest that a type of village democracy is the solution to the ills of farmers, but rather that incentives governing local behaviour might be responsive to different relations of power.

Structuring Incentives: Economic Rationale and the Law

The incentives that local leaders have to reallocate land and sell land use rights to developers versus the efficacy of legal restraints on their behaviour is a carrot and stick debate over economic development weighed against conceptions of fairness and justice that should be applied to all members of society and form a check to predatory behaviour that violates these ideals.

As the discussion here has highlighted, there are different problems with the laws governing land use and security of tenure. These include, crucially, vagueness over legal concepts such as the public interest. But local officials have not violated any laws when they claim that development is in the public interest, and further this is a debate in any society in the world. Local governments in any country have a responsibility to encourage investment and economic development, and where to strike a balance between different ideas about how this should be done is a recurrent theme.

In China, the problem arises from the fact that local officials are heavily incentivized to expropriate village land as state land and sell the rights to developers because of the wide disparity between land values in rural and urban areas. In many developed market economies, it might be argued, most economic actors don't follow the rules merely because it is the right thing to do and is more fair to other people, but rather because in developed markets market practices and legal checks have evolved to a degree of harmony over a much longer time than in China, and they largely ensure that legal behaviour usually makes the most economic sense.

John Bruce, who has worked on many land use and tenure studies in China over the years as the senior legal counsel at the World Bank, states this point clearly. "In the case of the requisitioning of land, there are tremendous incentives for local governments to use requisitioning power very broadly. There are very compelling incentives to expand (urban boundaries) into rural land even if some other economic factors don't make this the sensible thing to do. In a market economy, there is usually a gradual decrease in land values as one moves outward from the urban centre; in China, there is a tenure boundary between urban land that is owned by the state, and rural land owned by collectives. In terms of the value of these lands, it's as if you fell off a cliff. The tremendous disparity in land values leads to big problems in how decisions are made. This problem hardly existed 15 years ago, but with the dramatic growth in urban land values, it is now a very serious problem."

As Bruce says, the huge incentives to acquire land (as state-owned land) has led to the incredible growth over the last few years of municipal land banks. Many municipalities have acquired large amounts of land in advance of any immediate need for use because of the explosive growth in urban land prices, which they can capitalize on when the time is right.

Another important point is that this method of boosting municipal finances only works as a one-time charge. Given the absence of a municipal land tax in China, no subsequent revenue accrues from use or sales of use rights to developers. This fact creates pressure to push urban boundaries outwards to absorb more land and sustain public revenues. To create a sustainable revenue system, China will likely have to introduce a land tax, either as rent (in the case of leases) or as a proper land tax (if land ownership is mooted).

As was discussed at the beginning of this article, the preservation of agricultural land is a keen government concern. But the financial incentives to expand urban boundaries and for officials to keep revenue flowing put heavy pressure on arable land. The ongoing development at the urban fringe flies in the face of the government's avowed priority of preserving arable land.

As Bruce explains, the main solution in the long run is not controlling the actions of local officials through reactionary regulatory threats, but creating a greater parity in value between tenure in urban and rural areas. Further, as mentioned above, rural tenure could be made more marketable, and perhaps converted to a more broadly based land use right, not only a contract to farm the land. A potentially big change could come about if rural communities were allowed to make their land available for industrial and other purposes on their own initiative, without having to convert the land to state land.

If it is how the law structures incentives that is the key, not how the law punishes people, property rights systems are crucial. Such rights can form the underlying basis of the economy and how it develops. In many jurisdictions, property rights are at the heart of economic law. China's turbulent history has led governments to prioritize other issues. Now China's rapid economic development is engendering a rethink of property rights law and its impact on economic evolution. The government, legal scholars and practitioners in China are fully engaged in this debate.

To some observers, like the World Bank's Bruce, existing approaches to solving China's rural tenure problem have merit, but other approaches must also be examined. "Having 30-year tenure rights is very positive, and functions similarly to property rights if the local government honours them. Still, though, it leaves a bureaucracy in place to administer land, so you will always have a back and forth between actors. It is good, but not the end of the story." Enhancing the ownership rights and freedom of action of rural collectives is not the end of the story, either. Although allowing collectives to determine land use plans would make a big difference in rural development, considerable preparation and education would undoubtedly be required. As in any country, it is easy to envision scenarios where private interests would use the opportunity to form deals with village leadership that would not necessarily be to the benefit of the village interests as a whole.

Further, the expropriation issue doesn't disappear when property rights become stronger. In fact, it might be the reverse. As Bruce states: "Governments' taking land is the largest source of insecure tenure anywhere in the world. Even if you have strong property rights, if the law on expropriation doesn't protect those rights, you haven't made it very far. In revising, for example, the Land Administration Law in China, the drafters will have to have a hard look at expropriation conditions and compensation. They are in fact doing this."

How incentives are structured for local governments, officials and farmers in the coming years of economic change and legislative reform will largely determine the stability of rural China. Legislators contemplating reform of land and tenure laws face the daunting task of keeping up with the evolving economic structures and relations that are changing the countryside, and at the same time fairly addressing the interests of diverse actors in issuing new laws that are always a compromise of competing interests.

Endnotes

1 "China's Management and Legal Systems for Land Resources (2002)," available at http://www.mlr.gov.cn/project/querystat/multdocview_eng.jsp?ICID=eng12.

2 "Communique on Land and Resources of China 2003," available at

http://www.mlr.gov.cn/english/communique_2003.htm.

3 Nicholas Stern, "Reform, Poverty Reduction and the New Agenda in China," speeches delivered at Beijing and Qinghua Universities, June 2001. Collected in World Bank Research Papers, available at http://econ.worldbank.org. The Chinese government's poverty threshold definition is about US$0.70 per day in income (defined at 1993 purchasing power parity), and is much lower than that used by the World Bank; by World Bank metrics (at about US$1 per day in income), the number of rural poor in China was about 98 million in 1999 (Stern, p. 115).

4 Roy Prosterman and Brian Schwarzwalder, "Rural China: Special Report," CLSA Asia-Pacific Markets Report, September 2003. Prosterman and Schwarzwalder cite the statistics from Albert Nyberg and Scott Rozelle, Accelerating China's Rural Transformation, World Bank, 1999.

5 "China to Lift Ban on Developing Farmland," Asian Wall Street Journal,

October 26 2004. In addition to destroying arable land, the government has targeted excessive commercial and industrial development as a prime contributor to an overheating economy. In 2004, the government has restricted redundant investments in especially the steel, electrolytic aluminium and concrete industries. To curtail such investments, the State Council issued the Screening of Fixed Asset Investment Projects Circular. For a translation see China Law & Practice, June 2004, 18(5), pp. 51-57.

6 State Council, October 21 2004 (GuoFa[2004]28).

7 Teleconference on strict land management, October 28 2004.

8 For a translation of the law, see China Law & Practice, November 1998, 12(9), pp. 27-50. Also see the discussions in ibid by Chan (pp. 21-22) and Xu & Schaub (pp. 23-26).

9 In the PRC, "private plots" are publicly owned but privately used land. They are allotted to farmers for de facto permanent use, but are not private property. Private plots originated in the land reforms of the early 1950s. The plots are very small amounts of land used as a household's vegetable or garden plot.

10 Xiaolin Guo, "Land Expropriation and Rural Conflicts in China," The China Quarterly, June 2001, pp. 422-439.

11 "State raises farmland conversion cost," South China Morning Post,

October 25 2004.

12 It should be borne in mind here that we are speaking of the most glaring problems with rural tenure insecurity and the tendency for village or collective leaders to be unaccountable to local people over their decision-making. In fact, the situation varies widely across in China. In the case of administrative villages that are founded on "natural" villages (i.e., villages that have been continuously inhabited by generations of peasants bound by more traditional clan or lineage-based networks), there may exist considerable cohesion in the community and village leaders do in fact pay close attention to villagers' concerns. In others, where administrative villages are formed from an agglomeration of many existing natural villages, the situation is likely to be much less accountable and the dynamics of the exercise of village leadership perhaps much more politicized and less responsive to local needs.

13 Yuan Shuhong, "Defining the `public interest'," China Daily, August 17 2004. The author goes on to describe some prominent land abuse cases where the local governments have used the public interest as the pretext for land seizures.

14 Prosterman and Schwarzwalder, op cit., pp. 32-33.

15 Loren Brandt, Scott Rozelle and Matthew A. Turner, "Local Government Behavior, Bureaucratic Incentives, and Tenure Security in Rural China," University of Toronto, Department of Economics Working Paper, October 2002.

16 Ibid, p. 26.