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areas. Rural financial organizations may reduce transaction costs by adopting informal financial approaches, creating an all-around operation that covers rural finance, postal savings offices, and farming material sales. They can also learn from international experience in introducing technologies such as mobile phone banking.

      Developing a New Rural Financial System

      The purpose of reforming and developing rural finance is to provide farmers with equal access to investment, financing, and development opportunities. The ultimate objective of establishing a harmonious society is to enable all citizens of the PRC to share the benefits of rapid economic development. The proposed new socialist countryside is intended to allow vast rural areas and farmers to benefit from development. Thus, rural financial services should engage in and promote industrialization, urbanization, and the building of a new socialist countryside.

      Since 1978, farmers have participated in the PRC’s economic development and have benefited from rapid growth. In fact, farmers were the first group to benefit from reform. In the early 1980s, the launch of the household contract responsibility system brought benefits to almost every rural household. Later, development priorities gradually shifted from agriculture to nonagriculture sectors. The emergence of township and village enterprises in coastal areas enabled farmers to go from subsistence to prosperity. However, farmers in the central and western parts of the PRC lagged behind. Later, with the opening of the labor market, many farmers migrated from central and western PRC to coastal regions and urban areas. The transformation of farmers to migrant workers provided them with another opportunity to participate in economic development.

      Industrialization: From Farmers to Migrant Workers

      Even in the command economy, the importance of agriculture made it one of the central government’s top priorities. However, farmers failed to reap real benefits. Price controls were created to support industrial development, farmers and agriculture were exploited, and financial resources were mostly monopolized by the state. In addition, farmers were bound to the land and could leave neither their land nor their hometown. A series of institutional arrangements was erected to achieve these objectives.

       The emergence of township and village enterprises in coastal areas enabled farmers to go from subsistence to prosperity

      After over 2 decades of rapid growth, a solid industrial foundation has created the capacity to support agriculture. However, the industrial support of agriculture is intended not to place farmers back on the land but to improve their lives with limited fiscal subsidies. A more important aspect of such support is to create more jobs for farmers, enabling them to become migrant workers.

      Industry can support agriculture either by transferring funds from industry to agriculture or by transferring farmers from agriculture to industry. The experience of township and village enterprises in the central and western PRC in the late 1980s and early 1990s showed that industrialization in these regions resulted in large numbers of nonperforming loans in the finance sector. This mistake should not be repeated. Therefore, farmers must be transferred from agriculture to industry, which means transferring farmers from rural areas in the central and western PRC to coastal regions and urban areas. Estimates show that about 300 million people will have been released from agriculture by 2020. Assuming that one-third of the resulting migrant population concentrates in coastal regions, these regions will attract about 100 million new migrant workers in the next 10 years, enabling the PRC to continue with labor-intensive industries but also posing new challenges.

       The change of status from migrant worker to new urban resident can directly improve farmer’s welfare

      This does not mean that rural areas do not need more investment, but it does mean that the investment should be focused. First, fiscal transfer payments and new investment should focus on providing public services, including basic education, skills training, a minimum standard of living, and assistance for the destitute. The provision of such public services can help some farmers to access jobs and to avoid sliding into poverty because of illness or disaster. Second, farmers engaged in the handicraft industry or in peddling should be exempt from taxes and fees, to encourage capable farmers to start their own businesses. Finally, financial institutions should provide credit to farmers with a certain acreage of farmland or particular animals.

      Urbanization: From Rural Migrant Workers to Urban Residents

      Transforming farmers into migrant workers is not the ultimate goal, and it is necessary to enable migrant workers to become new citizens or new residents of urban areas. This is urbanization. For a long time, the PRC’s urbanization has lagged far behind industrialization. Less than 40% of the PRC’s labor force has urban hukou (a residential certificate), but 60% of the labor force is engaged in nonagriculture sectors. Inadequate urbanization impedes the transfer of the labor force from agriculture to industry while also constraining the development of consumer and service sectors in migrant workers’ places of origin. This is an important cause of tepid consumption.

      The change of status from migrant worker to new urban resident can directly improve farmers’ welfare. Migrant workers with such status can at least join in the social security network provided by local governments and share in public resources such as education and medical services. The change of status also can fundamentally change the migratory habits of a population on the move, from individual to family-based migration. Such a change will have positive effects on consumption and the development of the service and real estate sectors.

      Presently, the PRC’s urbanization has three shortcomings. First, the residential system that has been in place for nearly half a century was intended to prevent farmers’ free migration and relieve burdens on cities. It is a system that sacrifices farmers’ interests to support industrial development in cities. Second, the current land system forbids collateralization and sales of land, which reduces farmers’ ability to raise funds and to migrate. Finally, the reforms of the residential and land systems promote the development of urban belts in the coastal regions, concentrating economic activity but preventing concentration of population in urban areas. At present, the Pearl River Delta, the Yangtze River Delta, and the Bohai Rim account for one-third of the national gross domestic product, and with the expansion of urban belts, the proportion will probably increase to around 50% or 60% by 2020. The size is comparable to that of urban belts in the United States and Japan. The development of urban belts makes possible large-scale labor transfer from the agriculture sector to the industrial sector, and from the central and western regions to the coastal regions.

      Building a New Countryside: From Traditional to New Farmers

      Industrialization and urbanization should become an organic part and an important development phase in establishing a new countryside. Given the PRC’s vast territory and the sharp differences in economic development among different regions, the building of a new countryside is bound to start first in more-developed regions. Customarily, we use the word sannong to describe countryside-related issues, but such a generalization risks blurring the policy focus. Roughly categorized, the issues of agriculture, rural areas, and farmers occur in three different regions of the PRC, requiring the adoption of individual strategies suited to the characteristics of these regions.

      In most coastal regions, the core sannong issue is the transformation of rural areas. Most coastal regions have gone through the industrialization phase, so they have a high proportion of nonagricultural labor and well-developed small townships. The building of a new countryside in these areas should focus on urbanization. An appropriate mechanism of land turnover should be created to encourage farmers to voluntarily leave their land and become new urban dwellers. The building of a new countryside has entered this final phase in certain mature regions where farmers not dependent on land represent a certain percentage of the total population.

      In the central regions, the core sannong issue is about agriculture. Again, the key to building a new countryside is to encourage more farmers to move out of the agriculture sector and become migrant workers or new city dwellers—urbanization. At the same

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