Tenure Security and Investment Effects of Forest Tenure Reform in China

Abstract

Tenure security in land is considered crucial in order to stimulate investment and create economic growth, for three reasons; higher expected returns from investment, better functioning land markets allowing land transfers to more efficient producers, and better access to credit (Demsetz, 1967; Besley, 1995; Brasselle et al., 2002). Land allocation has played a special role in China as a key resource that has been shared based on strong equity principles in rural areas where land has been the main resource pillar of the economy (Carter and Yao, 1998; Jacoby et al., 2002). Various forms of collective and individual management have been tested with varying success, but a breakthrough came with the Household Responsibility System from the late 1970s which has stimulated strong economic growth since the 1980s. This reform primarily focused on agricultural land which was allocated to individual households and enhanced private production incentives. A similar reform, the ‘Three Fixes’ policy, was started for forest land from 1981, and by 1986 nearly 70 percent of the collectively-owned forest land had been transferred to individual household management (Xu and Jiang, 2009). The experiences from this reform were mixed and less positive in southern China, causing a partial reversal of the reform. However, the subsequent relatively poor performance of the forestry sector leading to low generation of revenues and poor forest management led to a second forest tenure reform after year 2000, again with a stronger emphasis on forest management by individual households.