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GTAP Resource #1525

"Growing Together or Growing Apart? A Village Level Study of the Impact of the Doha Round on Rural China"
by Kuiper, Marijke and Frank van Tongeren


Abstract
Objective

Trade liberalization has fueled rapid economic growth in China in the past decades. Expansion of manufacturing industries located in the coastal areas fueled growth but also resulted in a growing income disparity that may hamper future growth. Expansion of manufacturing sector is partly based on labor supplied by rural-urban migrants. Developments in the urban (coastal) areas therefore affect households remaining in rural villages, through reduced labor availability and remittances. In addition, trade liberalization like the Doha round directly affects village economies through changes in relative prices.

The aim of this study is to analyze the potential impact of the Doha round at village level. Adjustment responses of different household types and the resulting interactions are central to the analysis. This study complements earlier studies by zooming in on the differential impact of trade liberalization on household within a village. A new methodology that accounts for family-farm production specifics in village setting gives us a unique perspective on the impacts of the Doha round



Methodology

The macro analysis of trade liberalization uses a GTAP model. We optimistically assume that implementation of any forthcoming liberalization commitments from the Doha round will start in the year 2005. We therefore construct a projected database that incorporates macro economic assumptions as well as the implementation of some important policy events affecting China. The Doha experiments are stylized representations of the most important proposals tabled during the preparation phase for the Cancun ministerial meeting in September 2003.

To link the aggregate Doha analysis to the village model we have to ascertain how changes in border prices are transmitted to the rural economy. A study of market integration of three main staple crops shows well-integrated regional and national markets with prices at village level responding to changes at national level. These well-integrated commodity markets allow us to translate relative price changes derived from the macro level analysis to the village level.

The village has been selected to be representative of rice producing villages in the plain areas of Jiangxi Province, one of the poorer provinces in China. Four groups of households are distinguished, using ownership of draught power (cattle or tractor) and access to outside village employment as grouping criteria. The resulting groups represent households with differential capacity for earning a living from agriculture and from (transitory) migration.

Although commodity markets are already integrated, land and labor markets are found to be imperfect in the case study village. Households thus face household-specific shadow prices for these commodities, affecting their production and consumption decisions. We accounts for this nonseparability by modeling household-specific production activities. The result is a hybrid rural household-general equilibrium model at village level, allowing the analysis of household response consistent with the existing rural household literature, while consistently modeling interactions using a general equilibrium framework.



Preliminary findings

Macro level simulations of the Doha round find continued expansion of labor intensive manufacturing and food processing industries. Hence our preliminary analysis concentrates on the impact of an increase in rural-urban migration. The two household groups with access to outside province employment faced an increase in remittance income as well as a reduction in available labor for agricultural production. In response to these changes they increase production of capital intensive livestock production while shifting from two season (intensive) rice production to one season rice production, thus reducing their demand for agricultural labor.

The other two households are initially unaffected by not having access to outside province employment. The increase in income of the other two households, however, increases their consumption, including locally produced commodities. This provides a positive feedback throughout the economy, from which all four household groups benefit.

Local rental of cattle and tractors provides a second important link between the households. The shift to less labor intensive one-season rice by households with access to migration reduces demand for traction. This decreases village prices, tightening the cash constraint of the household owning draught power but without access to migration. This household group responds by shifting to a less capital and more labor intensive production, thus moving in the opposite direction of the households involved in migration.



Preliminary conclusions

In terms of welfare impacts an increase in migration mainly benefits households directly involved. The households without access to migration benefit indirectly through increased demand for locally produced goods. Although all households experience a net gain, the two households with migration gain significantly more. These households being richer in the base run, the increase in migration leads to an increase in income inequality. Increased migration opportunities thus results in households growing apart.

The increase in migration has opposing effects on agricultural production. Households with access to migration move to less labor intensive production, while households without access to migration move to more labor intensive production. Due to their larger size, the production changes of households with migration dominate, resulting in a reduced export of rice and increased export of livestock at village level.

The preliminary analyses clearly illustrate the advantages of using a village equilibrium model that allows for household-specific production. Opposite movements in production, reflecting different household endowments, temper the village level production response. The impact of differential household endowments would have been missed with a sector level modeling of production. The analysis also highlights the importance of local links in transmitting shocks throughout the village economy, although the village is well integrated in commodity markets.

Given the relatively standard data needed for the model, the most important limitation for applying this methodology elsewhere is the amount of detail at village level, which comes at the cost of coverage. A relevant question is whether the results of the case study village are representative for villages outside Jiangxi province. An interesting avenue for answering this question it to use the model as a laboratory for understanding mechanisms and for formulating testable hypotheses on the impact of trade on household incomes and production decisions. Using data collected in other villages, these hypotheses could then be tested to see whether the findings from the village equilibrium model can be generalized.


Resource Details (Export Citation) GTAP Keywords
Category: 2004 Conference Paper
Status: Published
By/In: Presented at the 7th Annual Conference on Global Economic Analysis, Washington DC, USA
Date: 2004
Version: draft version 1
Created: Kuiper, M. (5/4/2004)
Updated: Kuiper, M. (5/4/2004)
Visits: 2,026
No keywords have been specified.


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