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Rural Reform: New Starting Points and Historical Breakthroughs



The year 2004 saw significant progress in China’s rural reform. Solutions to the problems of agriculture, the rural areas and farmers were made top of the agenda of the whole Party, and the improvement of agriculture, especially the increase of grain production, was made a key task of macro control. The government’s support for the development of grain production and the increase of farmers’ incomes has led to a good situation rarely seen for years, an eye-catching achievement of the entire national economy, which also laid a solid foundation for the effective implementation of macro control. In 2004, China's grain production saw a significant turn for the better, with the national grain output hitting 469.45 billion kg, 38.75 billion kg more than in the previous year and the biggest annual growth rate since 1949. Farmers’ incomes also achieved a big increase, with the per capita net income standing at 2,930 yuan, 300 yuan more than in 2003. This actual growth exceeded 6 percent, the highest since 1997.


The year 2004 was also a turning point in China’s rural reform, which made the biggest progress in the entire reform work of the country. Solutions to the problems of agriculture, the rural areas and farmers were made key tasks at the Fourth Plenum of the 16th Central Committee of the Communist Party of China (CPC), convened in 2004. Guided by the new CPC central leadership’s concept of development, which advocates industry boosting agriculture and cities promoting the countryside for coordinated development and the building of a harmonious society, historical breakthroughs were made in the rural reform in 2004.


First, essential breakthroughs were made in the reform of the rural taxation system, with tax reduction and exemption being implemented in an orderly way. In early 2004, the Central Government released its “Document No.1,” which announced a significant adjustment of the country’s agricultural policies, and a decisive move was taken to gear the grain circulation system to the market. Second, the strategy of “industry nurturing agriculture” was established, to seek new breakthroughs in rural development. Third, the government has adopted a people-oriented concept of development, to promote the fair and coordinated development of the cities and the countryside. The story of Premier Wen Jiabao’s helping a migrant worker get back his wage in arrears has triggered a series of changes in the protection of the rights and interests of migrant workers: from simply demanding the wages in default to the introduction of institutional protection. Initial progress has been made in reforming the supply system of public service products, which is reflected in the new cooperative medical care system in rural areas.


All these are based on the changes of the governance concept of the new central collective leadership, and the changes in the national strategy to seek coordinated development of the economy and society. The tax reform and other policies and measures aimed at supporting and strengthening the development of agriculture are specific and practical; the bold resolution, quick implementation and wide scope of benefit of these policies have not been seen for years. The motive force behind agricultural development and the spurring of the initiative of farmers come from the reform, and the increase in farmers’ incomes and the progress of rural social undertakings also benefit from the reform.


However, China’s agriculture and rural development are still in a crucial period of tackling difficulties, and the present foundations of grain production and farmers’ incomes are not solid enough. Despite the great progress in rural reform, deep-rooted conflicts remain and restrict the development of agriculture and the rural areas, and the institutional obstacles that have long impacted agricultural development have not yet been eliminated. In order to further consolidate and maintain the good situation in the rural areas, we must continue to deepen the reform and carry forward innovation in the fields of systems and mechanisms.


    Section 1  A Historical Breakthrough in Rural Tax Reform, and Orderly Promotion of Reform for

Reduction of and Exemption from Rural Taxes


1.   Breakthroughs in rural tax reform


China’s rural tax reform was launched in 2000, and was pushed forward steadily from pilot regions to a wider scope. The main content of the reform is the abolition of township planning fees, education fees, administrative funds and charges, livestock tax, and abolishing compulsory labor. In addition the agricultural tax and tax on special products have been adjusted, and the method of collecting village public funds in proportion to the villagers’ incomes in the previous year has been changed. Now, farmers only need to submit three payments, namely, regular and additional agricultural tax, money raised for village affairs that have been discussed and agreed by the villagers, and money collected for village projects aimed at fighting drought, floods and insects and other joint production activities organized by the village.


Substantial progress was made in 2004 regarding rural tax reform. The “Opinions of the CPC Central Committee and the State Council on the Policies to Promote Income Increase of Farmers,” known to farmers as the “Document No. 1,” stipulates that agricultural tax be reduced by steps, and the tax on special agricultural products be repealed, except for that on tobacco. On March 5, 2004, Premier Wen Jiabao announced in his Report on the Work of the Government delivered at the Second Session of the 10th National People’s Congress that “Beginning this year, the agricultural tax rate will be reduced by more than 1 percentage point per year on average, and agricultural taxes will be rescinded in five years.”


On the following April 6, approved by the State Council, the Ministry of Finance, the Ministry of Agriculture and the State Administration of Taxation jointly issued the “Notice on the Problems Regarding the Reduction of Agricultural Tax Rate and the Pilot Reform of Agricultural Tax Exemption in Major Grain Production Bases in 2004,” and decided to slash the agricultural tax rate in 2004, and conduct pilot reform of agricultural tax exemption in Jilin and Heilongjiang, two of China’s main grain-producing provinces. In line with the notice, the agricultural tax rate in the Inner Mongolia Autonomous Region and 10 other major grain-producing provinces -- Hebei, Liaoning, Jiangsu, Anhui, Jiangxi, Shandong, Henan, Hubei, Hunan and Sichuan -- was lowered by 3 percentage points, and the money saved was used mainly to encourage grain production. The agricultural tax rate in other regions was cut by 1 percentage point. Coastal regions and regions with favorable conditions are encouraged to conduct pilot reform of agricultural tax exemption. Regions where animal husbandry tax is levied are required to lower the tax rate according to the practice for agricultural tax. The revenue decrease in local budgets brought about by such practices will be offset by the transfer payments from the central revenue.


Along with the implementation of the above policies and the continuous preferential financial support for rural areas, substantial progress was made in rural tax reform in 2004. By the end of that year, 22 provinces, municipalities directly under the Central Government and autonomous regions had announced the termination of agricultural tax, benefiting 150 million farmers, and other regions had also slashed their agricultural tax rates by different margins. The agricultural tax cutting and exemption meant that 26.8 billion yuan was saved for farmers, together with 3.3 billion yuan of tax exempted from special agricultural products except for tobacco, the total amount exceeding some 30 billion yuan. This tax reform lightened the burden on Chinese farmers by 30 percent on average.


Agricultural tax was one of the earliest taxes levied in China, with a history of more than 2,500 years. Throughout history it helped to foster the formation and growth of the secondary and tertiary industries. But it has also been one of the major burdens on Chinese farmers. Until the latest reform, China was one of the few countries that still levied agricultural tax. The repeal of this tax signifies that the traditional small-scale peasant economy and the traditional ways of administration based on it have undergone or are undergoing fundamental changes.


For decades, different taxation systems were applied to the urban and rural areas, respectively, with the tax burden heavier on farmers than on urbanites. The significance of the abolition of agricultural taxes lies in the fact that this unequal treatment has ended, promoting the balanced development of the urban and the rural areas. In addition, agricultural tax reform is a reflection of the new government’s determination to place the people’s livelihood on the top of its agenda, base its governance on the people’s interests, and formulate policies that substantially benefit farmers.


The lifting of taxes on grain not only lightens the burden on farmers, it is also a sign that the government wants to give further encouragement to grain production. The strategic significance of this move is its guarantee of state grain security.


2.   Auxiliary reforms are urgently needed, along with the advance of rural tax reform

The year 2004 was the first year of tax reform. The progress of reform requires simultaneous reform of relevant sectors, as follows:


(1)    Stepping up the reform of governments at town and township levels


The existing towns and townships should be merged or abolished, based on their scales and economic conditions, and similar work should be conducted with the organs under the township governments, including reducing staff and controlling expenditure. In this way, the tax reform achievements may be consolidated and the rebounding of burdens onto farmers prevented.


However, the reform of the organizations of political power at the grassroots level cannot simply be restricted to township merger, abolition of offices and staff reduction. To reform is not to shirk the responsibilities of the government. Judgment of the efficiency of reform should be based not on the number of institutions cancelled and employees dismissed, but on the improvement of the supply of public services to farmers. The reform of grassroots township governments should be combined with the establishment and improvement of the rural public financial and service systems. After the agricultural tax is repealed, the capital needs of the government organs at the grassroots level and the rural public services shall be met by the transfer payments of government revenues at all levels, so as to ensure the normal operations and supply of services of grassroots governments.


China has carried out structural reforms on several occasions since it introduced the reform and opening-up policies in the late 1970s, but the government organs at county and township levels have kept expanding. The personnel increase trend shows that the problem mainly lies in the county-level institutions. Statistics from 2002 show that among all institutions that practiced independent accounting, civil servants at county and township levels numbered 19.07 million, accounting for 64.5 percent of the national total, among whom 17.12 million, or 57.9 percent, belonged to county-level institutions and 1.95 million, or 6.6 percent, belonged to township institutions. The county-level institutions reported the biggest growth of personnel expenditure. The offices at township governments that could find a corresponding supervisory organ in the higher administrative departments tended to expand most rapidly. It is thus clear that it is far from being enough to simply streamline town and township organs. There should be an overall plan based on the structural reform of township governments and the adjustment of the administrative framework, and the reform of the top-down administrative system should be accelerated (Li Jiange and Han Jun, “Analysis of Present-day Agriculture and the Rural Economic Situation, and Some Policy Suggestions,” Investigation and Research Report, Development Research Center of the State Council, No. 203, January 6, 2005).


The Survey of China’s Reform in 2004, conducted by the China Institute for Reform and Development (CIRD, showed that 49 percent of the scholars and experts surveyed suggested turning township governments into organs of the respective county governments, 36.1 percent of them suggested direct election of township officials, and only 11.6 percent called for streamlining them. (CIRD, “What to Do Next -- Report on the Survey of China’s Reform in 2004,” Re-tracking Journal, Issue 6, 2004. The CIRD survey statistics referred to in this book are all from this report unless otherwise indicated.)


The reform of rural institutions should not simply follow the market orientation. Instead, careful identification of these units should be conducted first. For instance, those that actually play the role of law enforcement, administration and management should be treated as administrative organs, and those engaging in business should be closed down. The entities and logistic services run by the institutions should be separated from their supervisors, the main body of investment and property rights should be made clear, they should assume sole responsibility for their own profits or losses with independent operation and self-accumulation, and try to change their status and become non-governmental businesses.


(2)    Reforming the administrative system of compulsory education in rural areas


The present administrative system of compulsory education in rural areas was adopted in the middle and late 1980s, involving overall planning by the government, and the localities taking the responsibility of running schools of different levels. However, along with the improvement of the market economy system, such an administrative system is becoming less and less suitable for the reform and development of education, especially the nine-year compulsory education in the rural areas. It is imperative to establish a socialist administrative system with Chinese characteristics regarding compulsory education in the rural areas.


The tax reform affects compulsory education in the rural areas. Before the tax reform, the funds mainly came from additional education fees and education fund collections. Now, these sources are closed. So, how to ensure that the input into education will not fall below the previous level will be a focal concern of further reform.


Rural education has been in a difficult position for many years. On the surface, it seems that the reason for this is lack of capital at the county level. But a deep analysis will find that the real reason lies in the irrational input mechanism. According to statistics, the national expenditure on education, including input from parents and various donations and investments, amounted to 548 billion yuan in 2002. Ministry of Education statistics show that 76.9 percent of the money went to the cities, leaving only 23.1 percent for the rural areas.


To earnestly implement the central government’s instruction to make rural education the top priority of educational work, it is essential to increase the transfer payments from central and provincial-level revenues in line with the requirements for the establishment of a public financial system. The central revenue will subsidize the counties that are unable to provide funds for minimum compulsory education. The provincial-level governments should also help to narrow the gap between rich and poor counties within their jurisdiction.


Taking into account the nation’s present economic situation and overall financial conditions, China has the ability to do more, and to act more quickly, to exempt children who receive rural compulsory education from paying tuition, textbook and miscellaneous fees in rural areas. In 2005, the children from poor families in poverty-stricken regions in central and western China should all be freed from paying such fees, and the provinces with developed economies may make their own decisions on exempting students undergoing compulsory education from these fees.


(3)    Building and improving the system of public finances


The reform of county and township fiscal administration systems must be quickened, to keep pace with the tax reform. At present, most of the debt-bearing counties and townships are in the underdeveloped central and western regions. The reasons are quite complicated: 1) financial expenditure is put in inappropriate areas, and so the money invested can not be recalled; 2) administrative fees constitute a big part of the financial expenditure; 3) the financial and capital management lacks supervision, and is sluggish; and 4) many county and township governments borrow money to construct projects or pay taxes.


The irrational fiscal system is to blame for such a situation. A major factor is the incompatibility between the power over financial affairs and the duties and responsibilities. Many duties and responsibilities are delegated to townships regarding the development of the social economy, grassroots stability, infrastructure construction, nine-year compulsory education, and culture, sports and public health undertakings. However, the townships do not have corresponding financial power, since their incomes are all turned over to higher organs, their expenditures are determined and approved by the county revenue, which makes the township revenue merely a cashier of the latter rather than a financial organ in the proper sense. A similar situation is also faced by the counties.


The solution to all these problems lies in institutional changes. In a market economy, the public financial system should balance the above changes. The government should perform its function of policy-making and re-distribution to realize a stable economy by way of progressive taxation, as well as by providing subsidies and allowances for public education, health service, social welfare and housing, and other public products and services. Regarding the fiscal administration system, the central revenue should increase its transfer payments to introduce a public finance system.


We must be aware of the fact that because of the imperfect system of sharing taxes between the local and central authorities, we cannot expect to solve the fundamental problem of finances merely through reforming the grassroots township fiscal system. In order to remove the resistance and difficulties and make rural tax reform a success, we must continue to improve the fiscal system with the financial management responsibilities transferred to various levels, on the basis of a public fiscal system. Only under a complete public fiscal system, with a standard revenue-sharing system established among governments at different levels, and the financial operations of the county (municipality) and township (town) governments regulated, can it be ensured that the governments do not transfer their financial burdens onto farmers.


(4)    Building and improving a permanent mechanism to prevent the rebound of burdens on farmers


A restraint mechanism should be put in place to prevent such a rebound. A working system with the chief Party and government officials taking charge of and being responsible for the entire work of burden alleviation, as well as a special responsibility system with the person in charge also being held responsible, should be adhered to and improved. The system in which the departments concerned work in cooperation, with a proper division of labor will be continued. Supervision over the alleviation work should be strengthened, with a stable contingent of supervisors built up.

The alleviation of farmer’s burdens should be turned into practical actions to establish and adhere to the scientific viewpoint of development, and establish a correct concept of governance. In addition, governments at all levels should work out relevant review methods in relation to the burden-relief work. Efforts should be made to earnestly implement and spread the practice of publicity regarding the tax rates and fees charged to farmers, once-for-all tuition to be paid by rural primary and middle-school students, the limits on newspaper and periodical subscription by township and village organizations and rural primary and middle schools, and the system of investigating and affixing responsibility for cases involving increasing the burden on farmers. Relevant supervision and management systems should be improved regarding the monitoring, complaint reporting, supervision of the alleviation work, and the investigation and settlement of cases of violation. The formulation of and amendments to laws and regulations governing farmers’ burdens should be accelerated.


The rectification of problems complained of by farmers should be continued. The charging of operational service fees should be put under control, and the pricing of water and power in rural areas should be reformed, with charging by gauge adopted and unreasonable overcharging prohibited. Irrational charges slapped on migrant workers should be straightened out and educational charges made by rural primary and middle schools should also be standardized.


The money and labor apportioned for village affairs must be put under strict control. The discussion procedure and scope regarding village affairs as well as maximum limits of charges should be strictly adhered to, and unreasonable charges and usage of money and forced purchase of labor should be banned, otherwise the precedent of additional charges may be set. However, farmers are encouraged to volunteer to work on village projects to improve their production and living conditions.


The supervision and punishment of violations of regulations and discipline should be tightened up. Routine control, regular and random examinations of law enforcement, and the investigation and settlement of cases of violations reported by farmers should be conducted in a combined way. Comprehensive improvements should be made in the key areas where many problems concerning farmers’ burdens have been revealed, and the experiences in this regard should be summed up to benefit the overall work.


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