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2008-01-31 | Discussion Paper

Household Income Growth, Diversification and the Implicit Costs of Reform: The Case of China’s State Forest Sector

Xu, Jintao. 2008. “Household Income Growth, Diversification and the Implicit Costs of Reform: The Case of China’s State Forest Sector” Environmental Economics Program in China-working paper
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As with other components of its receding planned economy, China’s state forestry sector faces growing pressure to reform, restructure and liberalize, with policymakers considering the tradeoffs between the shorter-term social welfare impacts versus the longer-term goals of economic and environmental sustainability.

Timber production for the state sector is conducted primarily by state forest bureaus, which are huge state-owned enterprises often serving as key economic and political actors in the regions where they operate. Set up in the 1950s to harvest the nationalized natural forests in the northeast and southwest, these bureaus each manage hundreds of thousands of hectares of forest area and employed upwards of a million workers throughout the 1980s and 1990s (Yin, 1998; ZGLYTJNJ, various years).1 State forest bureaus currently manage 17% of China’s total forested area, containing 24% of the country’s total forest volume. (Note: all forests managed by SFB are classified as natural forests, about half of China’s total natural forests.) Furthermore, as with other state-owned enterprises these bureaus have been responsible for providing most social services for the communities they support, many of which came into existence due to the establishment of these bureaus. As such, reforms to this sector have important implications for both natural resource management and human welfare in China.

Up through the late-1980s to mid-1990s, the revenues generated from timber production and processing from natural forests have generally been sufficient to cover the operating expenses and social welfare responsibilities of these bureaus, in many cases via unsustainable harvesting practices (Xu et al., 2007). However, by the mid-1980s the results of these practices were being felt, and pressure to reform China’s state-owned forestry sector began to mount due to what State Forestry Administration (SFA) leaders called the “two crises”: ecological degradation and economic loss-making. Despite these concerns, substantive reforms to the state forestry sector did not begin until 1998; severe floods in that year, suspected to have been caused or exacerbated by over-logging in state forestry areas, pushed SFA leaders to implement the Natural Forest Protection Program. Under it, state forestbureaus face strict logging quotas and have been given subsidies and performance targets in terms of afforestation/reforestation and forest conservation activities. Bureaus have also been expected to thin and restructure their labor force away from harvesting and processing towards afforestation/reforestation, conservation and forest management activities; official sources indicate that more than a third of the workforce has been permanently released as part of the program (ZGLYTJNJ, 2004).

Although the NFPP has involved significant restructuring of the state forestry sector labor force, SFA leaders have been loath to conduct more substantive reforms, and the centralized system of management and finance remains in place. This has been due largely to concerns about the impact that further reforms would have on the livelihoods of local communities and households dependent on forest bureaus. These concerns have been accentuated, furthermore, by significant informational asymmetries that exist between forest bureaus and the SFA. Forest bureaus have used this to press for continuation of subsidies, based on arguments that reform and privatization will result in significant adverse human welfare impacts. Thus, lack of information on how important state forest bureau income is for bureau workers and households has limited SFA leaders’ ability to gauge the true costs of continued reform. Understanding the changes that have taken place in household income structure and dependence on the state forestry sector over the past several years, and particularly within the context of the dramatic changes brought about by the Natural Forest Protection Program, would provide policymakers with valuable insights into the relative costs of decentralization and privatization of the state forestry sector.

Using a 2005 household survey, this paper helps to fill this gap by providing a detailed, descriptive analysis of the changes in average per-capita income, its composition and distribution for the population of households dependent on state forest bureaus in the three key northeastern provinces of Heilongjiang, Jilin and Inner Mongolia. Contrary to the concerns of SFA leaders, we find that household dependence on state forestry bureaus has declined during the NFPP; average per-capita income for this population of households has improved and households have been able to successfully diversify their income sources into both agricultural activities and the off-farm wage sector. At the same time, however, significant variation in these patterns both regionally and in terms of household type suggests that further reforms will need to be accompanied by a package of subsidies and incentives targeted at vulnerable households and communities to reduce potential adverse welfare impacts of restructuring. The remainder of the paper is organized as follows. Section I provides background regarding the Natural Forest Protection Program and the reform process of the state forestry sector. Section II then uses the survey data to provide a descriptive analysis of the changes that have taken place in household income composition and source dependence. Section III provides estimates of the distributional changes that have occurred, decomposed by region, household type and income source. Section IV concludes.