The urban-rural income gap in China: Implications for global food markets

China's central government is preoccupied with supplying cheap domestic grain to urban residents, and it strives for both regional and national self-sufficiency in grain. As long as the government forces farmers to produce grain and restricts labor mobility, farm incomes will be kept low. Labor is an abundant resource in rural China, and it suffers from low marginal productivity and being underpriced. Low labor productivity in agriculture has become a significant problem in China. The current task faced by China's government is to adopt a practical agricultural development policy that is based on the existence of abundant farm labor. Since the economic reforms in 1978, some policies affecting labor mobility have gradually been abolished or loosened up. For example, a market-based housing system has appeared in some regions, and the official distribution channel is no longer the only feasible way to obtain housing in the larger cities of China. An urban household registration (i.e. an urban hukou) can now be purchased by rural residents. Because of the obstacles to permanent rural out-migration, recent urbanization has been characterized by increases in the temporary 'floating' population in the cities. However, the labor market reforms are not complete. In China, grain production is relatively land intensive compared to many other agricultural products (e.g., cotton, sugar, fruits, tobacco, and vegetables) that are more labor intensive. Thus, the comparative advantage of grain production in China is questionable, but production is distorted toward grain through current policy. For many countries during the process of economic growth, the nation's comparative advantage in agriculture declines, and this is expected to happen in China (Anderson). In the long run, China will most likely develop an increasing grain deficit because of the combined factors of rising domestic incomes, a growing population, and a declining sown acreage. This paper has argued that the size of the long-run deficit will also depend on policy developments related to labor markets and mandatory grain procurement.