A local fiscal bias, grain self-sufficiency policies, and rural production efficiency in China

The exclusion of agriculture tax revenues from local budgets has created a local fiscal bias that favor the rural industrial sector in China. This is hypothesized to have resulted in the agricultural infrastructure being less efficiently managed than the rural industrial infrastructure in the 1980s. Furthermore, central policies of grain self-sufficiency during the same time period are hypothesized to have resulted in the over-production of gram at relatively high cost. Provinces are defined as having a comparative advantage in either rural industrial production or agricultural production. Regressions are run using provincial level data for 1986--1992 to determine if provinces specialize in production according to their comparative advantage. The results are inconclusive and suggest evidence of either allocative inefficiency or technical inefficiency or both. An empirical model for a multiple output stochastic frontier and a specification for technical inefficiency is used to disentangle allocative from technical inefficiency in rural production. The effects of management of the agricultural infrastructure on production are modeled in the technical inefficiency specification. The findings suggest that agricultural infrastructure is less efficiently managed than rural industrial infrastructure. In addition, allocative inefficiency is detected and generally implies the over-production of grain. The finding that over-production is comparatively high in industrial provinces supports the hypothesis that grain self-sufficiency policies are an important cause. Consequently, fiscal reforms of the local tax base would raise technical efficiencies. Policies that promote specialization in production according to comparative advantage would improve allocative efficiencies.