Grain rationing in China

The grain rationing system was imposed by the People's Republic of China in the 1950s to control the production of food and to boost industrialization. Urban families were given grain coupons, meaning that they could buy a certain amount of grain at a low state-imposed price. Any quantity exceeding the coupon quota would have to be purchased at market price. Urban households in China therefore face a kinked budget constraint line. With this system urban households were able to buy grain at a cheaper price, and at the same time rural areas, once they fulfilled the sate-imposed quotas, were allowed to sell the excess supply at market price.

Historical setting

Since the birth of the People’s Republic of China (PRC) in 1949, China has undergone several economic transformations. Gradual reforms have transformed agricultural production in rural areas, which have shifted from private farming to collectivization and lastly back to household production. China’s economic history can be traced to two main policy regimes. The first, from the 1950s until 1978, was characterized by central planning and the period after 1978, in which decentralization took over.

In the planned period, the government aimed to boost industrialization and growth in urban areas, enforcing policies to secure enough food from the rural areas. The state held a monopoly, and therefore set both agricultural an industrial prices. Low food prices (prices set below market price) determined low wages in the countryside, which in turn allowed the state to achieve higher gains in the urban industries and to reinvest them. One may say that as much as possible was 'extracted’ from the countryside in order to finance industrialization in the urban areas.

In the 1950s, communes were established in rural areas and the government imposed the ‘procurement planning’, which required peasants to deliver a certain amount of food to the state at state-imposed prices. However demand exceeded supply and the agricultural sector produces very inefficiently. The government tried to solve this problem by introducing a grain rationing system, combining rationing of consumers and compulsory purchases from producers. The gradual development of a free market put an end to the rationing system and introduced dual prices. This is where the price-scissors phenomena emerged.

Grain Rationing System

Figures assume that there are only two sectors (rural and urban) producing two goods (manufactures and food) and that the supply of the two goods is fixed. The amount of food that a peasant household will sell in exchange for manufactured goods can also be shown.

To solve the price scissors problem, China imposed production quotas on rural households and urban wages were set low in order to maintain the urban demand for food low. In the 1950s, the grain rationing system was put in place, in which urban families were given grain coupons. The amount that the urban households could purchase was the relative price between grain and other goods, and was determined by the state. Any consumption that exceeded this could be purchased, but at the market price.

References

• Oi, J., C. (1999). Two Decades of Rural Reform in China: An Overview and Assessment. The China Quarterly, 159, 616-628.
• Knight, J. (1995). Price Scissors and Intersectoral Resource Transfers: Who Paid for Industrialization in China? Oxford Economic Papers, 47(1), 117-135
• Oi, J., C. (1986). Peasant Grain Marketing and State Procurement: China's Grain Contracting System. The China Quarterly, 106, 272-290.