How to Make Pro-Poor Policy Work? Lessons from China s Rural Reform 1

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1 How to Make Pro-Poor Policy Work? Lessons from China s Rural Reform 1 Xiaobo Zhang International Food Policy Research Institute (IFPRI) and Zhejiang University 2033 K Street, NW Washington, DC 20006, USA Tel: ; x.zhang@cgiar.org Xiaopeng Luo Guizhou University and Zhejiang University, China The commitment by both the international community and developing countries to achieve the Millennium Development Goals (MDGs) has in particular underscored the importance of understanding policy reform. A common critique of the MDGs has been that while they provide worthy goals, they do not show countries how to reach them. Sachs et al. (2004) and the United Nations (UN) (2005) emphasize the financial cost of reducing various constraints to reaching the MDGs. The challenge for a country is to discover their binding constraints and to design development strategies to achieve their goals. Unfortunately, neither Sachs et al. (2004) nor the UN (2005) provide a plan which can be directly applied to a specific country; rather, they provide a framework and guidelines. Therefore, an understanding of how policy reform occurs, and the drivers and constraints to the reform process can provide guidance for countries to make progress towards the MDGs. This paper will briefly review the theory on policy formation and policy change before using the example of China to understand how policy changes occurs in practice. From the outside, we can only observe the decisions made by China which led to the 1 The author grately appreciates the excellent research assistance from Marc Rockmore. 1

2 greatest poverty reduction in history. However, this outsider view misses such key questions as: Who will propose the policy change? When is the best time to push for the reforms? How to make the change happen? This paper will analyze China s rural reform from an insider point of view by mainly drawing a recent essay by Du Runsheng, the former director of the Rural Department of the Research Center for Rural Development, State Council. 2 One author of the paper was also personally involved in the rural reform with Mr. Du. Conceptual Framework Before discussing China s example, it is useful to briefly provide a background on the theory of policy formation. This literature has been largely influenced by North (2001) who viewed development as arising from incremental steps by many decentralized agents which shape the formal rules and informal norms and hence the overall economies. As a result, the key changes needed may occur on the margins rather than through the comprehensive systemic application of state interventions (Scott, 1998). The key question is how to make the progressive changes occur. I will briefly review several key terms before turning to the case of rural reform in China. Agent of change. Agents make choices based upon their moral codes and subjective perceptions (mental models) of the external environment. The agent of change can be multilevel individuals and collectives. At the level of persons, leadership has been widely regarded as a key driver of change. Strong leaders, through their vision and choices, may influence the rate and direction of change by modifying the underlying understandings and shared perceptions of institutions and countries. The vision inherent 2 The essay The Course of China s Rural Reform was published by International Food Policy Research Institute (IFPRI) as an occasional paper in

3 in strong leadership may provide other agents such as individuals or corporate bodies--- bureaucracies, policy elites---with the motivation and opportunity to initiate change. While strong leadership is often associated with successful change (for instance in South Korea), it should be aware that not all strong leaders result in positive reform (North Korea). Society is composed of various vested interests. Each interest group has its own perceived payoffs and risks from proposed policy changes. The purpose of reforms is to reduce the resistance of vested interest groups and make the change happen. Successful reform strategies must change the perceived risks and payoffs for a proposed policy change. Changes at the collective level are more difficult than at the individual level because a collective action involves a high transaction cost of negotiation among different interest groups. Facing a major change, different groups often perceive different risks and payoffs. Therefore, how to reduce the perceived risk of policy change becomes critically important. Process. As a rule, organizations and institutions share implicit understandings. The process by which individuals and institutions construct and modify the implicit understandings and shared perceptions which guide institutions. This occurs either by refining them when problems occur (so-called single-loop learning ) or by changing the underlying assumptions and patterns (double-loop learning) (Argyis and Schon, 1996). External Environment. The institutional and governance structures are the external environment of policy makers. In less democratic and institutionally weak countries, decisions may originate from a relatively small group of individuals-the leader and the immediate circle of advisors. The multitude of actors in democratic countries, however, 3

4 may lead to very different learning processes because they put more constraints on the options available to policy makers. Hall s (1993) examination of economic policymaking in Britain suggests that in democracies, the range of relevant actors in large policy change can be quite large. The overall effect on change may depend on the aggregate interactions. Ideologies and culture provide a shared framework under which people can connect to each other at lower transaction cost (Denzau and North, 1994). These often change slowly, but at times of high tension--periods Weber characterized as transitional authority periods in which charisma was important--their creation and spread may be rapid. Mao and communism gained ground in China in for example as did African Socialism throughout the continent in the 1960 s. People with similar backgrounds in ideology and culture can better communicate ideas and share their learning experience. A major shift in ideology, such as Marxism in the nineteen century, may have a great impact on social change. Therefore, ideologies and culture must be taken into account when analyzing the choices of punctuated policies. The Course of China s Rural Reform Having briefly touched upon some key concepts, we will now turn to the case of China. Are there any lessons which we can learn from China s rural reform as how to make pro-poor policy work? Although the Chinese experience has been widely studied (Lin, 1992; Lau, Qian and Roland, 1997; Fan, Zhang, and Zhang, 2004), many myths remain regarding the internal processes and logic that drove the reform It is generally noted that crises often beget policy reform (Drazen and Grilli, 1993; Bruno and Easterly, 1996; Rodrik, 1996). China s rural reforms occurred immediately 4

5 following the calamity of the Cultural Revolution and the Great Famine (Yang, 1998). By the end of Cultural Revolution in 1976, China was in food crisis. The annual per capita grain production was less than 300 kilograms and over 30% of the eight million rural residents were impoverished and without enough food to eat. The crisis created a pressure for policy makers to make changes to improve the food production efficiency. Referring to the previous discussion, the external environment which guide the policy making process greatly changed. The dual shocks of the Cultural Revolution and the Great Famine may have provided the opportunity for innovative thinkers to propose and test new ideas which extended beyond the commonly accepted policies of the leaders of China. In 1978, in Fengyang County, Anhui, some villages contracted collective land to farmers. The practice greatly boosted production yield and solved hunger problem instantaneously. As a matter of fact, the new innovation occurred in a county which suffered the most severe famine in the late 1950s and early 1960s. To a large extent, the bold move was to avoid repeating the suffering of hunger as the memory of the Great Famine was still vivid. At the outset of reform, the socialist ideology, or at least the language, still dominated policy debate. The conservative section of the party, although realizing the need for change, was afraid that any drastic changes might undermine the whole system. They equated socialism with collective farming, so giving the cultivation rights back to individual farmers, so called household responsibility system (HRS), was unthinkable for most policy makers under the mindset of that time. 5

6 One cause of sticking to obsolete ideology by many senior officials at the beginning of the reform is lack of knowledge about the changes taking place outside of China. So to overcome the fear for change based on ignorance, in the late seventies and early eighties, most cabinet level government officials were sent to visit the US and other western countries. 3 After observing the far better performance of market economies, many of them started giving second thoughts on central planning, a key element in the old belief system This kind of changes in mindset have broadened the choice set of policy options. However, the fears for radical policy change is not just coming from old belief system but also coming from perceptions of losing specific political and economic interests. Because there is no way to prove if any perceived risks are true or false before the policy change, the perceived risks by those who have veto power in policy process could block important pro-poor policy changes even their fears were completely groundless. Looking back to the history of China s reform, a very interesting fact found from the experience of China s de-collectivization is that many risks perceived by the people who were against Household Responsibility System at the early stage of the reforms later turned out not true. In fact, many people who originally opposed this policy reform actually benefited more than the poor peasants who strongly supported the reform. This fact has important implication for pro-poor policy reform because it shows that pro-poor policy changes, even Pareto improving, are likely to be blocked by powerful interest groups if these groups perceive false risks for the proposed changes. In other words, the unbalanced political power against the poor people in policy changes 3 An interview with Zhang Jinfu, in a documentary Li Xiannian by CCTV,

7 could block pro-poor policy reforms due to falsely perceived risks by strong interest groups. The resistance to pro-poor policy changes from advantaged groups caused by their perception of false risks would be reinforced if they invested major political capital in blocking the policies. After that, whether risks true or not are no longer the issue, because, for political reason, it will be very difficult for them to reverse their position even they now realize that the proposed policy would not harm them. Therefore, in addition to shaking ideology or changing the mindset of the senior leaders and members of the CCP, the Chinese reform leaders also demonstrated great wisdom in overcoming the resistance caused by perceived risks from advantaged interest groups (Du Runsheng, 2006). First, the reform did not call the dissolution of the commune system immediately. Rather it was proposed as a production responsibility system within the status quo. In doing so, it made hard for the conservatives to oppose the new HRS. Second, the reform started with experiments in an isolated region before scaling up. In 1979, when HRS was proposed, most province leaders opposed the idea. Mr. Du Runsheng proposed an idea of experimenting HRS in remote food-deficit areas. If they succeeded feeding themselves, that would be great. When the report was sent to Deng Xiaopeng, he commented Hardships regions are allowed to carry out the HRS. If it turns out to be mistaken and they come back in, it s nothing special. Rich regions that have enough to eat not need to start right away. (p. 4, 2006). Third, the reform leaders allowed different areas to choose their own forms of responsibility system to suit local conditions. Meantime, Deng Xiaoping, the most 7

8 powerful leader in the communist party, suppressed the debate over Household Responsibility System (HRS) within the party. This decision created an unprecedented circumstance in China: the regional leaders were encouraged to try policies that were based on fundamentally different values. The experiment of HRS turned to be an instant success. The impoverished area solved their food problem in one year. The hard evidence gradually overcome the perceived risks about expanding the HRS to more developed provinces. Like a contagious disease, the HRS became a dominat policy allover China within three years. China s subsequent reforms follow the same strategy of experimentation. Because of the great uncertainty on the consequences of economic transformation, the government adopted a rather pragmatic attitude ( cross the river by touching the stone ) through a series of trial and error and experimentation. When facing choices never seen before, it is extremely risky for agents to make a dramatic choice. Under this circumstance, experimentation can be a useful tool to search for more information to update the hypotheses in mind. Even failures can be helpful because they can help eliminate unfavorable options. Moreover, experimentation can help control the possible disastrous consequence of wrong choices. A wrong choice at the large scale may be irreversible, and therefore may undermine political stability and weaken the learning capacity. Conclusions How to help poor countries to escape from poverty traps and to achieve the Millennium Development Goals is a daunting challenge. The standard one-size-fits-all type of development strategies is widely recognized as not working well in igniting 8

9 sustained economic growth. Many successful economies have adopted seemingly heterodox approaches to find local solutions to lift the barriers to development. China is one of them. In the late 1970s, China was one of the poorest countries in the world. The leadership at the time seized the opportunity of food crisis to push for economic reforms. Because of strong ideology and vested interests, the potential resistance to reform was enormous. However, reformers adopted various pragmatic measures to ease the resistance and move reforms forward. Regional experimentation and policy competition were the most effective approaches. Regional experiments and competition yield information to help understand what works and what s not. The incremental reform process started in limited area allows people and regional leaders in other areas to learn, to overcome the resistance caused by perceived risk, and to better understand the possible payoffs. Pro-poor policy change is a process of collective learning. Having a strong and wise leadership that is capable of leading this learning process is crucial for poor countries adapting to changing external environment. In poor countries, policy makers often face various constraints to learn due to lack of capacity. For example, a heavily indebted country does not have much policy space to initiate any change independently. Although China s institutional context may be rather specific, the principles of the rural reform strategies may be helpful for other developing countries to better make pro-poor policy changes and achieve the Millennium Development Goals. 9

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