The causes of tenure security in rural China and its effect on investments

Abstract: This paper analyses the causes and effects of tenure security in rural China. Using original survey data gathered in Hebei province in the summer of 2009, it begins by assessing the causes of tenure security among China’s rural landholders. It finds that within the sample, possession of a contract and faith in the legal system have the most pronounced effect on determining tenure security. Contrary to expectations, however, it finds little evidence to support the arguments that widespread actions that abridge land-use rights – administrative reallocations and expropriations – heavily factor into individuals’ perceptions of tenure security. While these results are quite surprising with respect to expropriation, the findings support assertions that legal reform implemented under the Rural Land Contracting Law has been effective in significantly reducing the prevalence of reallocations in rural China. As such, these findings cast doubt on the effectiveness of a number of past studies that have conceptualised tenure security in China as a function of the size or frequency of administrative reallocations while supporting the usage of alternative measurements under China’s evolving institutional setting. Building on the analysis of the causes of tenure security, this paper then sets about examining the role tenure security plays in facilitating agricultural investments in rural China. While it supports previous findings that tenure security increases the time spent applying organic fertiliser to a plot, the marginal effect suggests that such practices have largely diminished in importance among Hebei’s agricultural sector. As such, the findings also cast doubt on the practicality of previous research investigating tenure security’s role in such investments. Quite surprisingly, the paper finds no evidence in the original model to suggest that tenure security induces long-term fixed investments in wells. Using alternative specifications, however, the results suggest that extending land-use rights beyond their current 30 year period may play a significant role in increasing the level of productivity-enhancing investments in China’s agricultural sector. As expected, the paper finds that the high degree of land fragmentation within rural China plays a significant role in reducing investments, though it argues that any policy aimed at facilitating land consolidation must do so in a way that takes into account the potentially high social costs that may be encountered. Finally, the paper supports assertions that the benefits of tenure security may not be fully captured where complementary institutions are not in place or inadequate. To that end, it finds that the ability to fully and freely circulate land-use rights within land markets may play a significant role in increasing the benefits from tenure security.