For the third year in a row the Chinese government has made economic development in rural areas a top economic issue for the National People’s Congress when it meets later this month. The general approach has been to see income problems in rural areas as political and social problems rather than as economic problems that have economic solutions and international trade implications.

The new efforts are officially described as “building a new socialist countryside.” While that may be an appropriate description for a Communist government’s programs, the programs on education, health care and public works are similar to efforts in other countries over the past 60 years. The new programs skirt around the issue of land ownership that has led to increased unrest in the countryside.

The leaders of the national government understand the need to maintain legitimacy among rural people. This has been a key issue for centuries. According to the Public Security Ministry, in 2005 there were 87,000 riots and protests in China, with most of them occurring in the countryside. The latest government estimates of per capita income for 2005 show farmers at about $400 per year compared to $1,300 for urban workers.

The rural population is estimated at 750 million people, 58 percent of the population of 1.3 billion. The rural labor force is estimated at 500 million with 300 million of those in the agricultural labor force. The total labor force in China is estimated 750 million with 2/3 thirds of the labor force is in the rural areas, and 40 percent of the labor force involved in production agriculture. Ongoing efforts to bring industries to rural areas have not been sufficient to close the gap in rural/urban incomes.

The differences in average incomes and growth of incomes between rural and urban areas are directly related to productivity of labor. Increases in investments in capital assets have occurred primarily in urban areas and along the coast with easy access to international trade. Increases in per capita incomes have followed the increases in productivity resulting from the increased capital investment. This is no different than what has occurred in Korea in past years and is now happening in India.

The options for increasing productivity and incomes for Chinese farmers are the same as in other countries: increase land area per farmer, increase yields per acre, produce more high valued products or reduce inputs. In most cases several changes occur simultaneously. All of these economic changes conflict with current government political and social policy goals.

Some farmers have increased incomes by shifting away from grain crops to fruit and vegetable crops, including crops for export to the U.S. That shift in production is opposite of the government goal of increasing grain production as a way to maintain self sufficiency in grain products. Field tests on biotech rice have shown increased yields and decreased pesticide costs, but the government has resisted allowing full implementation due to pressure from environmental groups and the political benefits of exporting small amounts of non-biotech rice. Consolidation of farms is resisted by limiting legal migration from rural areas to urban areas.

Some of the rural unrest has been caused by the most basic of all economic instincts of farmers to want to control the land they farm. Under the Chinese constitution villages collectively hold the farmland, and individual farmers have leases on the land, but only limited control of the land. Land is sold for development by village leaders and little or none of the money is directed back to the farmers who held the leases on the land. Urban dwellers cannot own land, but they can own the houses, apartments and commercial buildings that sit on the land. This has allowed people in urban areas to benefit from the increases in the value of property.

A report from the Economic Research Service of USDA by Fred Gale and Robert Collender titled “New Directions in China’s Agricultural Lending” reveals how many Chinese farmers view efforts to improve income by increasing credit availability. Their analysis of borrowing for 2003 concluded, “It is likely that less than half of ‘agricultural’ loans actually financed expenditures supporting agricultural production.” The money was probably used for house construction, education, health care or non-farm businesses.

Unless the Chinese government decides to address the fundamental economic issues associated with agriculture, it has little choice but to continue stop-gap efforts like “building a new socialist countryside.” The failure to allow economic conditions in rural areas that support productivity growth at the farm level will continue to distort Chinese exports and imports. The slow growth in consumer demand in rural areas means that efficient industries in urban areas have to depend on export markets rather than serve growing domestic markets. Farmers who live near ports can shift toward fruit and vegetable production for exports, but farmers more removed from export market access, will continue to grow traditional grain crops rather than switch to fruits and vegetables for a growing local market.

Until the Chinese government makes economic policy changes in rural areas they will continue to face charges of distorting markets in international trade. Domestic economic policies and trade policies have become so intertwined that newly rapidly developing countries like China, India and Brazil must learn how to balance domestic and trade policies to avoid the friction that China has created and will likely continue to create in international trade policy.