Incentves matter: Chinese peasant file

As I have noted before Venezuelan President Hugo Chavez has threatened to nationalise farms, in an effort to tackle food shortages. Perhaps he should take note of the effects of agricultural reforms in China before doing so. As John McMillan describes in his book, Games, Strategies, and Managers, the lives of some 800 million peasants in China were radically changed when Deng Xiaoping abolished the commune system and introduced the "household responsibility system". The incentives under the two schemes are very different.

Under the commune system, peasants were organised into production teams. The members of each team were assigned work points. These points were an attempt to measure both how many hours and how effectively that particular team member had worked. Each members income was dependent on the number of work points accumulated. Income was not perfectly related to effort, however, because it was impossible to observe how conscientiously each individual worked. Moreover, there was a tendency to spread the commune's earnings across the individual commune members: those with larger families were given more income, regardless of effort. Thus the link between individual effort and reward was weak.

On the other hand, under the responsibility system each peasant family is given a long-term lease of a plot of land. There is a requirement that the household deliver a certain quota of produce to the government each year but any production over and above this quota may kept by the household. The household is free to consume it themselves, sell it to the government, or sell it in the newly instituted rural markets. With the exception of the special case of rice, they may decide for themselves what crops to sow and what animals to raise. The peasants know that, after the quota is exceeded, they own the entire extra output resulting from any extra effort they choose to make.

The results of this change in terms of productivity are interesting, and the thing Hugo Chavez should take note of. By productivity we mean the amount of output for a given set of inputs; the efficiency with which the input are used. As McMillan describes it,

Through the Maoist period ... productivity fluctuated randomly, though the net effect was negative - by 1977, according to these estimates, productivity had declined to about 90% of its 1952 (precommune- system) level (despite technological advances such as improved rice strains during that period). In 1978 and 1979, under Deng, the government increased the prices paid for agricultural outputs, while leaving the structure of the commune system unchanged. [...] productivity increased, showing that the commune system was not completely devoid of efficiency: the communes could respond to the incentive of higher prices. Then, from 1980 to 1984, the commune system was gradually replaced by the responsibility system: the [data] shows the productivity growth as the peasants began to respond to the strengthened individual incentives. In marked contrast to the apparently random alternations between positive and negative growth in the pre-1978 picture, productivity increased in each year from 1978 on, with the most spectacular growth, 11%, occurring in 1984. Output increased by 67% between 1978 and 1985. In part this was caused by an increase in inputs. But mainly it was due to the strengthened incentives: productivity increased by nearly 50%. The effective quality of labor was much higher under the responsibility system than in the communes. Individual workers in the commune had an incentive to shirk, since they were paid only a fraction of the return from the effort they exerted. Chinese agriculture provides, therefore, a dramatic experiment in the effectiveness of incentives. [p.97-8]