5. Impact of incentives on the development of forest plantation resources in China - Jintao Xu^[34], Nuyun Li^[35] and Yiying Cao^[36]

INTRODUCTION^[37]

The People’s Republic of China (PRC) is the world’s most populous country with more than 1.3 billion people. The population growth rate is about 0.5 percent. About 64 percent of the people live in rural areas.

China’s land area is about 9.33 million km² extending over a wide array of climatic zones including tropical, subtropical, warm-temperate, temperate and cool-temperate zones. Annual precipitation similarly ranges from 2 000 mm in the southeast to 100-200 mm in the northwest. These geographical and climatic variations give rise to China’s tremendous biodiversity. To protect this diversity, 1 276 protected areas covering 123 million ha had been established by the end of 2000, accounting for about 12.4 percent of the total land area. Among these protected areas are 909 forest areas, which cover 103 million ha (SFA 2001a).

The country’s land area is categorized as cropland (10.4 percent), permanent pasture (42.9 percent), forest and woodland (16.6 percent) and others (30.1 percent). About 95 million ha are cultivated, mainly in the Northeast Plain, North China Plain, Middle-Lower Yangtze Plain, Pearl River Delta Plain and Sichuan Basin.

The country is composed of 23 provinces, five autonomous regions (Inner Mongolia, Ningxia, Xinjiang, Guangxi and Tibet), two special administrative regions (Hong Kong and Macao) and four municipalities. Under each province and autonomous region, the next levels of administration are prefectures and cities. Further down in the administrative hierarchy are counties, townships and villages.

For over 20 years, China’s economy has grown between seven and ten percent per year. The growth, market liberalization and economic reforms have lifted some 300 million people out of poverty (Ziegler 1997, cited in Lu et al. 2002). The reforms promote efficiency through the expansion of markets, improved allocation of resources and greater roles for the private sector. Today, private enterprises are estimated to account for 33 percent of the GDP, almost on par with the 37 percent state-corporation contribution (Kynge 2000, cited in Lu et al. 2002). Reforms have been greatest in rural areas where farmers have been allowed greater freedom to work for themselves on leased land, and are permitted to keep the rewards of their labour.

Forests and forestry in China

According to the fifth national forest resources inventory (1994-1998), China’s forests cover an area of 153.63 million ha, which includes bamboo and economic forests (for example, fruit, rubber and oil seed trees).^[38] The stocking volume is estimated at 11.27 billion m³. About 263 million ha, or 27 percent of the total land area, are set aside for forestry. Against most measures, China is forest-deficient and has only 0.1 ha of forest per capita, considerably less than the world average of 0.6 ha (FAO 1997).

China’s forest product output has been falling short against increasing demands. China is one of the world’s largest timber importers, and the only major net timber importer among developing countries (WWF 2002). In 2000, imports of timber and related products reached US$14.25 billion, with US$7.61 billion for timber products and US$6.64 billion for pulp and paper. Forest products are now the largest imported commodity in China.

Regional variations

In terms of area and volume, forest resources are concentrated in state-owned forests in nine provinces or autonomous regions. These provinces account for just under half of the forest area and a significant 66 percent of the standing forest volume. Another 38 percent of the forest area and 18 percent of the volume are located in ten southern collective forest^[39] provinces and autonomous regions (Table 1).

Table 1: Regional distribution of forest resources (million m³ and million ha)

Source: SFA (2000a)

* Anhui, Fujian, Guangdong, Guangxi, Guizhou, Hainan, Hubei, Hunan, Jiangxi and Zhejiang.

** Beijing, Hebei, Henan, Jiangsu, Liaoning, Ningxia, Shandong, Shanghai, Shanxi and Tianjin.

*** Inner Mongolia, Jilin, Heilongjiang in Northeast China; Yunnan and Sichuan in Southwest; Sha’anxi, Gansu, Qinghai and Xinjiang in Northwest.

Economic contribution

In economic terms, forestry accounts for less than one percent of the GDP, but is an essential source of energy for 40 percent of the rural population and supplies virtually all the timber to the construction sector. In global terms, China’s output of forest products is ranked amongst the top in many product categories. For instance, China is the third largest producer of sawnwood in the world, and accounts for over 30 percent of total bamboo-based production and for 40 percent of rosin, an important chemical raw material for industry (Zhang et al. 1998).

Since the 1980s, China’s forest product industry, including the production of wood-based panels, forest chemical industry and paper, has experienced rapid expansion. In 1999 alone, the production of logs reached 48 million m³, that of wood-based panels exceeded 15 million m³ and the production of paper and paperboard reached 22 million tonnes (STB 2000).

Forest tenure system

Official forest land in China is either owned by the state or collectives. This system of forest land ownership is a result of China’s late 1950s collectivization movement, which basically eliminated private forest lands^[41]. Ownership was shifted from households to collectives, and later to communes. Today, after two decades of rural tenure reform, the legal status of the village collectives as owners of the forest land remains but most of the collective forests are managed and used by rural households through contractual arrangements. Initiated in 1978, the process of decollectivization turned the formerly uniform collective forest sector into a non-state forest sector with diverse components - forest farms still under village collective management; forests managed jointly by collectives, farmers and/or state forest entities; forest parcels managed by farmers; and forest parcels managed by private companies. In contrast, state-owned forests continue to be under the jurisdiction of the state forest enterprises and forest farms.

The state forests held 68 percent of the total standing volume, but collectives owned 58 percent of the forest land (Table 2). Collectives dominated the area and volume of plantation forests, while state forests are primarily composed of old-growth natural forests.

Table 2: Forest resources and ownership in 1998 (in million ha and million m³)

Source: SFA (2000), cited in Lu et al. (2002), p. 21.

The relative importance of collective forests has been growing over time. Between 1950 and 1980, state forests were major suppliers of timber. Since the early 1980s, however, state forest output has declined significantly. Between 1984 and 1988, the Northeastern State Forest Region recorded an annual loss of 277 000 ha in forest areas (Zhang 1998). Deforestation is the direct result of overharvesting and a lack of investment in forest regeneration. The role of the collective sector in forest management increased mainly because of its success in developing plantation forests. Table 3 illustrates the change in forest area by ownership types between 1973 and 1998. Table 4 highlights the increase of plantations held by collectives between 1984 and 1998.

Table 3: Forest area change by ownership type, 1973-1998 (in million ha)

Source: SFA (2000b)
NA = not available

Table 4: Plantation development, 1984-1998 (in million ha and million m³)

Source: SFA (2000b)

EFFORTS TO INCREASE FOREST RESOURCES AND PLANTATIONS

Since the foundation of the PRC, the government has placed great emphasis on forestry development and invested significant sums in forest resource expansion through afforestation and natural forest regeneration. As a result, China’s forest area and volume has steadily expanded over time (Table 5).

Today, China has the largest plantation area in the world with 46.7 million ha, accounting for 30.4 percent of the total forested land (SFA 2000a). In terms of volume, plantations account for one billion m³, or nine percent of the total standing stock. Moreover, the government is seeking to raise the forest cover to 19.4 percent, 24.4 percent and 26 percent of the total land area by 2010, 2030 and 2050, respectively (SEPA 1999). More recently, the government’s decision to implement a logging ban in large areas of natural forests has highlighted the urgency to shift to plantations. To achieve the pronounced targets, the government is increasingly looking towards the non-state sector as a major stakeholder in forestry.

Table 5: Forest resources expansion from 1973 to 1998 (in million ha and million m³)

Source: SFA (2000b)

*The data for 1994 to 1998 were assessed by the new criterion that crown density (canopy) of forest is at least 20 percent. In previous years, forests were associated with crown density of at least 30 percent. Figures exclude forest resources in Taiwan Province of China.

As a result of government measures to promote private tree planting, by 1985 households were estimated to be responsible for over 50 percent of the increase in forest area (Li et al. 1988). The private sector is set to play a major role in plantation establishment for the government to meet its 2010 target.

ASSESSING THE DEVELOPMENT OF FOREST PLANTATION

Afforestation

The Government of China attaches great importance to forest resource protection and development. While the protection of old-growth forests - mainly under state enterprises’ jurisdiction - has not been satisfactory, plantation development has been more successful, in particular over the past two decades.

Clarifying forest plantation statistics

China has an afforestation performance reporting and verification system. Data on annual areas afforested are collected by local governments and forwarded through the various administrative levels to the central authority. The data comprise planting targets, allocated funds, and actual areas planted. The forest authority might verify achievements in the field based on indicators such as survival rate in the first year and preserving rate in the third year. The preserving rate is used to calculate the afforestation area for the national forestry statistics. Before 1985, the areas with a preserving rate of 40 percent and above were counted as plantations. Since 1985, the quality of afforestation has improved and the preserving rate indicator increased from 40 to 85 percent (SFA 2001a). Existing silviculture statistics illustrate that before 1976 the preserved plantation area was only 28 percent of the reported afforestation area (MoF 1980). In addition, based on the third forest inventory (conducted from 1984 to 1988), the preserved plantation area was below 30 percent for the 30 years before the inventory. Later inventories no longer provide this information, but the China Forestry Yearbook started providing statistics with regard to the preserving rate of afforestation projects, based on the re-investigation by the central forest authority. Available data indicate that preserved areas increased sharply in the 1980s to 91 percent in 1988, and further to 95 percent in 1990, ranging between 85 and 90 percent in the 1990s.

Therefore, the data reported in the official statistics have been adjusted accordingly (Figure 1). The top line in the figure shows the reported annual afforestation area from 1949 to 2000. The middle line represents the estimated real afforestation area. The bottom line indicates the share of state-owned enterprises in the official statistics. The (reported) afforestation by the state-owned sector has been smaller relative to the area (reported) by the collective sector. The average annual gross increase in plantation areas from 1949 to 1982 was about one million ha. The average annual gross increase after 1982 was over four million ha. Figure 2 presents the accumulative afforested area.

Source: SFA (2001b)

Note: The criterion for land area to be counted as plantation area was a preserving rate larger than 45 percent before 1985, and 85 percent after 1985. Under the 85 percent preserving rate, the afforestation area in the 1980s should demonstrate a smoother trend in the reported area.

Figure 1: Annual afforestation rate, 1949-2000

Sources: China forestry statistics, various issues; China forestry yearbook, various issues.

Note: In the official statistics, the criterion for land area to be counted as plantation area for the period before 1985 is a preserving rate greater than 40 percent; after 1985 it is 85 percent.

Figure 2: Accumulative afforestation area, 1949-2000

Net increase in plantation area

Since 1949, about 100 million ha of plantations have been established. According to the fifth national forest resource inventory, completed in 1998, China had 46.7 million ha of plantations. This means that approximately half of the area planted was lost to other land uses or replanted. The mean annual loss was around one million ha. Between the fourth and fifth inventories, 6.69 million ha were lost due to harvesting without replanting and various forms of forest conversion (legal and illegal) (Table 6). The annual loss during this period was about 1.34 million ha. This indicates that plantation forests have been increasingly converted and degraded, owing to economic growth and increased domestic demands.

On the other hand, afforestation efforts have obviously outpaced deforestation. There was a net increase of 8.82 million ha between the second to third inventories at an annual rate of 1.56 million ha, 3.24 million ha between the third and fourth inventories (0.65 million ha annually), and 12.42 million ha between the fourth and fifth inventories (2.48 million ha) annually. The annual rate of net increase in plantation area has accelerated in recent years (SFA 2000a).

Table 6: Change in the area of total plantation forests* (million ha)

Source: SFA (2000b)
* Total plantation forests include plantations, economic forests and bamboo forests.

Based on the fifth inventory, between the fourth and fifth inventories, an area of 1.75 million ha of plantation forests degraded to open forests, shrubs, or barren land, and 1.66 million ha were converted to other types of land use. The estimated total plantation area lost was 6.69 million ha, or 1.34 million ha per year.

Reforestation

Reforestation was unable to match the speed of deforestation and afforestation. Over the last

50 years, the average annual replanted area was around 0.4 million ha, far short of the average one million ha of plantations deforested, and considerably below total deforestation of natural forest and plantations. By the late 1990s, the reforestation rate reached only half of the total area of plantations lost each year (SFA 2000a).

EVOLVING ROLE OF NON-STATE SECTOR IN PLANTATION FORESTS

Historically, the state sector managed mostly the good quality, old-growth forests while the collectives were left with the poorer quality forests and extensive areas of barren land designated for forest use. The state forests were to supply timber to support the nation’s industrialization, while the collective forests were more for conservation purposes. In the more recent past, collective forest management has increasingly responded to economic incentives, such as those created by higher government investment, tenure change and market liberalization. The investment was used to create employment for farmers who participated in government-initiated plantation projects, although the projects were on land managed by farm households. Tenure change (towards household-based forest management systems) ensured farmers a specified share of revenue from forest production, which used to be insignificant or even prohibited in the pre-reform era. When the demand for timber increased, farmers responded by planting trees (Yin 1994, 1998; Yin and Newman 1997). Under imperfect market conditions or when forest regulations are restrictive, collective forest farmers tend to shift from timber forests to economic forests and bamboo forests, but maintain the rate of forest area expansion.

In considering the impacts of incentives on the performance of afforestation efforts in China, plantation development can be divided into the period before rural reforms (1949-1978), the period after the launching of the reforms (1978-1987) and the period since 1987. This division reflects the transition of China’s tightly controlled forestry sector under the planned economy (1949-1978), to a period of decentralization and market-oriented reform mainly in collective forestry (1978-1987), and finally to a period of initiating and implementing large-scale afforestation projects. The first two periods saw the sector undergo institutional changes, while maintaining the national goal of increasing timber supply. The third period started with a shift from timber production and timber self-sufficiency goals to an increased emphasis on the provision of environmental services.

1949-1978: Era of planned economy (insignificant private sector role)

(Milestones: 1950-1952: land reform; 1953-1961: collectivization and Great Leap Forward; 1966-1976: Cultural Revolution)

The first and most important reform introduced at the time of the founding of the PRC was the Land Reform Act of 1950, which permitted the government to nationalize all forestry enterprises and confiscate feudal forest lands in mountainous areas for distribution to farmers. Along with their new parcels of forests, farmers received ownership certificates. Effectively, two systems of forest ownership were established: state-owned forest land and individually owned mountain forest land. The transfer of forest land ownership and management rights to households resulted in significant productivity increases (Chen 1983; Liu 1998).

Only three years after the Land Reform Act, China proclaimed its policy of collectivization. In forest areas and mountainous regions, the era of cooperatives began in 1953 and “people’s communes” were organized in 1958. This resulted in a dramatic shift in farmers’ attitudes, when the household-based production system, under which farmers owned forests and were free to keep the fruits of their labour, gave way to collective ownership and the introduction of distribution systems according to labour provided and needs. Forest farms managed by communes, production brigades and teams^[43] began to emerge, and private forests were confiscated. Even though communes - or team-managed forest farms - experienced rapid development throughout the 1970s, numerous problems arose. A major stumbling block was the unclear land titles to mountain forest lands. Furthermore, the replacement of merit-based payments with salaried work in production teams seriously blunted farmers’ enthusiasm for increasing production. The planned economic structure impeded advances in productivity, hampered efforts to increase investment in new forests, delayed economic diversification and generally resulted in poor economic performance (Lu et al. 2002).^[44]

The collectivization of forest land in rural areas, nevertheless, was not implemented without efficiency considerations by the government. Economics of scale were deemed very important. Resource allocation through central authorities was viewed to be more efficient and was expected to generate higher productivity than a market-based system. Small-scale, individually operated cropland and forest farms were also seen as obstacles to the efficient management of the central planning system. These expectations warranted the conversion of private cropland and forest farms into relatively large-scale and homogeneous production units. The efficiency gain was to materialize through:

• A centralized wood-distribution system that linked wood producers to wood processors and other designated users through the state-owned wood storage and shipping facilities located throughout the country; and

• A centralized pricing system that was to eliminate profits enjoyed by wood producers and provide inexpensive raw materials to the processing industry and urban users instead.

Fund allocations for the sustainable production of raw materials were inadequate. In the state-owned forests, due to emphasis on timber extraction from old-growth forests and a lack of regeneration, degradation became a problem. In the collective areas, funding for reforestation and afforestation was the responsibility of the government. Farmers were constantly requested to provide free labour for afforestation activities and infrastructure projects (for example, road construction and irrigation). By and large, the quality of afforestation was poor.

Due to the general failure of collectivization and the Great Leap Forward strategy, the government relaxed the control over forest resources. In 1961, around ten percent of the collectively owned forests were redistributed to farmers as self-keeping forest plots, mainly to provide subsistence resources. Farmers were allowed to use the land to grow trees and benefit from their work directly.

This modest decollectivization was short-lived. In 1966, the Cultural Revolution began and rights to the self-keeping forest and agricultural plots were withdrawn. The communal system again played the dominant role in organizing rural production.

1978-1987: Decentralization and establishment of household-based forestry

(Milestones: Household Production Responsibility System, Three Fix Policy in 1981, market opening in 1985 and marketing restrictions in 1987)

The 1978 to 1987 period saw dramatic changes in rural China. When the Household Production Responsibility System (HPRS) replaced the old collective production system, agricultural production accelerated. The reform had a profound impact on collective forestry, as the forestry sector started adopting the forest production responsibility system in the southern collective forest area in 1981. By 1986, about 70 percent of the collective forests were contracted to farmers for management (SFA 2001c). The market was opened and timber production rose in tandem with prices. Plantation development appeared to multiply during the decollectivization of forests. With lower standards (40 percent of preserving rate), the plantation area almost doubled from 1980 to 1984. From 1985 onwards (with the higher preserving rate), annual plantings averaged nearly five million ha.

The Three Fix Policy (1981)

In March 1981, the State Council issued its “Resolution on Issues Concerning Forest Protection and Development”, also known as its Three Fix Policy, marking the beginning of a long legislative and policy process aimed at encouraging private sector participation by providing increasingly secure resource rights (SFA 2001c). The Three Fix Policy sought to transfer responsibility of forest planting and management to households by:

• Clarifying rights to forests, with an emphasis on mountainous areas;

• Delimiting private plots; and

• Establishing a forestry production responsibility system.

This reform represented an extension of the HPRS used successfully in agriculture (Lu et al. 2002). The Three Fix Policy re-established a household-based forestry sector that occupied 70 percent of the former collective forests, to a certain degree. Since 1981, institutional changes occurred continuously in the collective forest area. From the household-based system emerged various forms of non-state/non-collective forest entities (for example, rural forest cooperatives, shareholding groups, joint-venture forest firms and private forest farms).

Forestry Law (1984)

The key legal document guiding forest resource management is the Forestry Law, which was first issued in 1984 and amended in 1998. According to this law, forest resources were divided into state and collective forests. The former were owned by the state and managed by state forest enterprises (including state forest industry bureaus and forest farms), while the latter were owned and managed by rural collectives. While the state and collectives retained ownerships, the law re-enforced the earlier Three Fix Policy by allowing private use rights to trees (Lu et al. 2002).

Liberalizing timber markets - an iterative process

Prior to 1978, the state dominated the domestic forest product market. About one-quarter of all timber production was organized under a centrally planned system called the Unified Procurement System (UPS), administered by the Ministry of Forestry at that time, and the remainder was used locally. Under the UPS, state and collective farms sold forest products to state-processing enterprises at prices set centrally. Although prices were linked to costs of production, they did not take account of most forest management requirements and were consequently well below market prices (Lu et al. 2002).

Since 1978, the market was gradually liberalized and private producers were increasingly permitted to sell some or all of their outputs freely. In 1985, the UPS was officially abolished and the timber market was fully opened in the southern collective forest area. However, the government re-imposed controls in 1987 following rapid deforestation, including a monopsony of state-owned local timber companies over timber procurement, and new harvesting and shipping quotas.

Despite the control of timber procurement, restrictions on sales of timber end products were continuously being lifted. Until 1980, the central government was allocated 81 percent of the total wood production (Zhang et al, 1998; Waggener 1998). By 1993, it was responsible for only ten percent of timber purchases, much of which were designated for military use, disaster relief, coal industry and railway construction (Zhang et al. 1998; Waggener 1998). Nevertheless, regulations on logging and shipping remained restrictive.

The establishment of the household-based forest management system through the Three Fix Policy transformed plantation development significantly. Although afforestation remained a government initiative, farmers were no longer passive participants. Local forest authorities looking for land for planting trees often had to sign contracts with actual landholders, that is, farmers. The land rights empowered farmers to negotiate for compensation payments. Farmers’ rights to benefit were better recognized, and incentives to support the afforestation initiatives also increased - major advancements relative to the years before the reform.

In summary, the 1978 to 1987 period was characterized by significant forest land tenure reform and policy changes. The extension of rural HPRS into forestry gave birth to household-based forestry in China’s collective forest areas. Government control over collective forestry was transformed into a system that accepted farmers’ rights to invest in and manage the forests, and benefit from their efforts. Marketing controls were also removed but soon re-imposed to counter massive deforestation. In the meantime, government initiatives, directed at increasing forest resources through the establishment of protection forests, began to take shape. Due to the transfer of forest tenure rights, farmers responded with better performance in tree planting. Investment remained mainly from government initiatives. The preserving rate reached new heights.

1988-2000: Major forestry projects and shift from production to environmental forest management objectives

(Milestones: Direct financial transfer to loan-based financing in 1988; National Afforestation Project, ten major afforestation projects, auctions of the “Four Wastelands”, amendment of Forest Law in 1998, National Forest Protection Programme and land conversion since 1998)

Change from direct financial transfer to loan-based financing (1988)

Private sector investment and local initiatives had been growing since the late 1970s, along with decentralization. This trend called for further reforms of fiscal policies to facilitate the development of local and private initiatives. The performance and efficiency of government-funded direct investment projects became an escalating concern. Consequently, in 1988, the fiscal policy was revised. A large portion of the government’s direct financing was shifted to loan-based financing. Direct transfers were gradually replaced by subsidized loans. As a result, the share of direct central government investment declined (Figure 3).

Source: SFA (2001b)

Figure 3: Share of central government investment in afforestation

The reform of the fiscal system was accompanied by several waves of downsizing of government bodies. The roles of government agencies transformed from direct project implementation to planning and monitoring. The power of the national forestry authority was significantly reduced. Funding previously controlled by the Ministry of Forestry (MoF) was allocated to the newly founded Forestry Investment Corporation (which later became the National Development Bank). The MoF retained only limited funds to support national-level projects (for example, the Three-North Shelterbelt Development Programme) and special-purpose activities (for example, fire management, pest and disease control). This reform dramatically shrank the central government’s share of direct afforestation investment. Most of the central government funding was shifted to provide interest subsidies and other forms of indirect investment. This decline of government financing was reversed in the late 1990s with the implementation of national programmes, such as the Natural Forest Protection Programme (NFPP) and the Conversion of Steep Cropland to Forests and Grassland Programme (Land Conversion Programme [LCP]) (Figure 3).

Auctions of the “Four Wastelands” (1993)

The government’s decision to permit the auctioning of barren forest lands (referred to as the “Four Wastelands”) to private operators for afforestation was a key prerequisite for its subsequent Forest Law Amendment of 1998. The Four Wastelands included uncultivated barren hills (sloping land), valleys, riverbanks and wilderness. Together, these areas covered about 5.6 percent of China’s total land area. Through the auctions, farmers were able to compete for long-term (70-100 years) utilization and management (though not ownership) rights over barren land, rather than to depend on administrative allocation. Moreover, the policy re-invigorated efforts to clarify use rights (Lu et al. 2002).

By 1996, 3.7 million ha of “wasteland” had been auctioned. Since the passing of the Forest Law Amendment, the practice of selling forest land through a public bidding process has been extended to lands with immature, middle-aged and mature forests (Lu et al. 2002).

The transferability of forest land use rights provided critical flexibility in resource allocation and boosted productivity by allowing less-able and labour-constrained farmers to sell their rights to others with the necessary skills and resources. This flexibility had been particularly important in regions experiencing significant outmigration since it permitted farmers to sell forest land to those with extra capacity. Transferability of forest land use rights also helped to mitigate the high risk and transaction costs from existing marketing constraints (for example, logging quotas, shipping permits and high taxes), and therefore improve farmers’ economic returns of forest investments. In some cases, rights were being sold back to collectives and state forest farms.

Liberalization of timber trade

In 1981, China’s timber imports started to increase to partially release pressure on the natural forest. In recent years, import tariffs have been reduced in line with commitments under the Asian-Pacific Economic Cooperation (APEC) Forum and the World Trade Organization (WTO). Timber imports have also been promoted to fill the shortfall in supply created by the NFPP. Prior to January 1999, tariffs on timber and other forest products ranged from one to 22 percent, and a total of 14 different rates were applied. Since then, tariffs have been eliminated for some roundwood, sawntimber and lumber products and where tariffs are still charged the average rate has fallen to 12.3 percent (Sun 2001).

Amendment of the Forestry Law in 1998

The amendments of the Forestry Law in 1998 stipulate that timber forests, economic forests, fuelwood forests and their use rights are transferable, although forest conversion is prohibited. Resource rights may last for up to 70 years, and are renewable. The revised law provides a range of government financial incentives for private investment in management (for example, inexpensive loans, tax breaks) and the Forest Environmental Benefit Compensation Funds to encourage forest protection (Lu et al. 2002)

Afforestation programmes throughout the 1980s and 1990s

Alongside various legislative initiatives, the government initiated a number of programmes (Table 7). Since 1978, China has invested in several programmes to expand its protection-oriented forest resources. The National Afforestation Project (NAP), financed by a World Bank Loan of US$300 million and domestic funding equivalent to US$200 million, provided new technologies and management schemes. The NAP contributed to China’s plantation efforts in many ways and assisted in adopting an engineering afforestation approach (Rozelle et al. 2000). By 1999, the programmes had established a total of 38.39 million ha of plantations.

Traditionally, programmes were implemented in a top-down manner. Recent programmes have attempted to generate greater private sector involvement. This shift is notable in the two large-scale forestry programmes: the NFPP and LCP. In the LCP, private resource tenure is encouraged and people planting trees on barren lands are awarded rights to these resources.

Table 7: Main afforestation programmes since 1978

Sources: Lu et al. (2002); SFA (2001a)

Natural Forest Protection Programme (adapted from Lu et al. 2002)

In the wake of widespread flooding of the Yangtze and Yellow rivers in 1998, the State Forestry Administration (SFA) proposed the NFPP to protect over 95 million ha of natural forest by 2010. The central aim of the programme is to protect valuable forest environmental services, most notably watershed protection. The programme has two major components: natural forest protection and afforestation.

Most funds are being channelled to the upper reaches of the Yangtze and Yellow rivers, where 61 million ha of natural forests will be conserved. In some areas, logging bans have been imposed, while in others harvesting is restricted. On average, annual timber production is being reduced by 12.39 million m³ between 2000 and 2010. This compares with total production of 64 million m³ in 1997. In addition, 8.67 million ha will be planted. The ultimate aim is to raise forest cover from its current 16.6 percent of the land area to 21.24 percent by 2010, well above the targeted forest cover of 19.4 percent set out prior to the NFPP.

In addition to its work in the upper catchments of the Yangtze and Yellow rivers, forest harvesting in the northeast and Inner Mongolia is also being restricted and 33 million ha of natural forest are to be conserved. In total, reforestation of 30.97 million ha in 17 provinces is to be achieved by 2010.

The State Council approved the programme in 2000 and has committed 96 billion yuan^[45] over ten years. As timber production shifts from natural to planted forests, private entities will become a growing force in the sector. According to the NFPP, the government will “vigorously encourage private involvement in contracting for forest protection and management, and gradually set up a new model of Natural Forest Protection Programme implementation which is market-economy-oriented and participated with multidisciplinary stakeholders, including private sectors” (SFA 2001a).

It is hoped that the NFPP will have important positive environmental impacts. The social and economic costs will be substantial, however, including job losses and reduced local revenues in timber-dependent areas. Costs to rural communities are also extensive but largely overlooked. Collective forests in the NFPP area are affected by the logging bans and the owners have yet to be properly compensated. This has exacerbated the problem of tenure insecurity and will further discourage the private sector to invest in forestry.

Conversion of Steep Cropland into Forests and Grasslands

As an important element of China’s Western Development Strategy, the Conversion of Steep Cropland into Forests and Grasslands (also known as the “Grain for Green” Programme because of its components that subsidize land conversion with food) is a major initiative to integrate water and soil conservation with agricultural restructuring, poverty reduction and sustainable development. It focuses on the upper reaches of the Yangtze River, and the upper and middle reaches of the Yellow River.

With the approval of the State Council in 2000, pilot projects of the Grain for Green Programme were launched in 174 counties in 13 provinces. Funds allocated for the programme up until 2001 totalled 3.65 billion yuan. The implementation of the LCP was supported by the following measures (Xu and Cao 2002):

• Free grain for farmers converting their croplands: at present, the standard grain subsidy is 150 kg of unprocessed grains per mu^[46] per year in the upper reaches of the Yangtze River, and 100 kg in the upper reaches of the Yellow River.

• Cash payments for farmers converting their croplands: 20 yuan/mu/year.

• Free seedlings for farmers converting their croplands: the standard quantity is 50 yuan/mu.

• “Converting one to two or three or even more”: farmers are responsible for growing trees and grass not only on their former agricultural land, but also on one mu or more of barren hills and wastelands that are suitable for afforestation.

• Implementing and monitoring an accountable compensation system.

• Free grain and seedlings for five years if economic plots are established and for eight years if timber trees are planted. The support period may be lengthened if necessary.

According to official statistics, the entire area of cropland with a slope of more than 25? in the country is about six million ha, of which more than 70 percent is located in the western region. Recent assessments during the pilot projects, however, indicate that the actual area of reclaimed and cultivated sloping land is far larger than that originally reported. The total area of converted croplands and afforested barren lands reached 17.4 million mu and 15 million mu respectively in three years (Xu and Cao 2002). Goals were met; and in some cases, they were exceeded.

In general, farmers welcomed the programme support, as the value of compensation was more than agricultural yields in most cases. Encouraged, the central government decided to extend the programme across the whole country. The total target for land conversion by 2010 was doubled to 220 million mu as was the programme budget. With the exception of Shanghai, Hong Kong and Macao, all provinces participated in the programme.

Contribution of the non-state sector to forest resources

Due to its dominance in plantation development, the collective forest sector (recently divided into collectives, cooperatives, households) contributed considerably to the recovery of China’s forest resources. Between the first (1973-1976) to the fifth (1994-1998) inventories, the plantation area increased from over 17 million ha to over 29 ha (Figure 4) and the stock volume of plantation forests increased from 160 million to 1 010 million m³ (Figure 5).

Source: SFA (2000b)

Figure 4: Area of plantations, 1973-1998 (million ha)

Source: SFA (2000b)

Figure 5: Volume of plantations 1973-1998 (million m³)

SUMMARY OF INCENTIVES

A variety of incentives have contributed to the development of plantation forests in China, especially in the non-state forest sector (for example, collective forests, newly developed joint ventures, rural forest cooperatives, private forests). They include financial support, services, and incentives created by institutional changes (Table 8).

Direct investment includes afforestation grants from the central government, subsidies in the form of reduced interest rates, food, seeds and seedlings, and loans. Historically, afforestation activities were directly funded through government grants and rural labour was provided as a free input. Since the late 1970s, levying free labour became increasingly difficult, and adversely affected afforestation efforts, most prominently in the Three North Shelterbelt Forest Programme. Nevertheless, strong government commitment, coupled with an increase in investments, remains the most important contributing factor for the growth of plantation forests in China.

Table 8: Categories of incentives affecting plantation development in China

*SOE = State-owned enterprises

Institutional changes such as tenure reforms are also very important. However, due to the existing restrictions on harvesting and marketing, the reforms could easily lead to deforestation and forest conversion, as past experiences have illustrated. The restrictions also reduced the incentives for plantation development by inhibiting the private sector from investing in forest plantations using loan funds borrowed at commercial interest rates. Even if private sector incentives were in place, a functioning local financial market was not: the national banks were seriously affected by bad loans and have become more profit oriented through the reforms. Government subsidies were provided to reduce the loans of forest farmers and local enterprises. More funds became available for afforestation as a result of the shift in the government’s fiscal policy. The increase in government investment in the late 1990s was due to the implementation of the NFPP and LCP (see Table 9).

Table 9: Investment in afforestation (in million yuan)

Source: SFA (2001b)

¹ Total silviculture investment
² Direct afforestation investment
³ Investigation and planning
⁴ Research and development
⁵ Fire control
⁶ Pest and disease control

IMPACT OF EXTRA-SECTORAL POLICIES

China’s forest sector has been influenced by a number of important extra-sectoral policies, such as rural reforms and decollectivization, food policies, urban reforms and market liberalization policies.

Rural reforms and decollectivization in China started in the late 1970s. The reforms established rural household-based agricultural production systems, which triggered substantial production increases in agriculture. The benefits gained through decollectivization encouraged similar changes in tenurial arrangements in forestry.

To achieve food self-sufficiency, the government protected prices for agricultural goods. In combination with various incentives, this policy instrument kept grain production attractive for many years in the rural areas. Liberalizing markets for other agricultural products (for example, fruits, fish, livestock and vegetables) helped these sectors to grow in an unprecedented way, which in turn increased competition for land.

Urban industrial reforms started in 1984. The reforms opened markets for industrial products, and stimulated economic activities that required labour. Employment opportunities in the industrialized areas triggered rural outmigration and drew nearly 100 million people to the cities. The increase in off-farm employment opportunities partially relieved pressure on forest lands and forest resources.

Market liberalization had the most significant effect on final forest products. Government control over commercial forest products declined from 80 percent in the early 1980s to ten percent in the mid-1990s. Forest product imports were also liberalized gradually and filled gaps in the domestic supply. Combined with the impact of reduced marketing constraints in key forest regions, the forest industry in coastal areas and the non-traditional forestry areas (i.e. northern plain) are growing faster and reshaping the forest landscape.

REMAINING CONSTRAINTS

Restrictive harvesting quota scheme

The government imposes very restrictive harvesting regulations across all forest ownerships. The basic principle is that production should not exceed growth. The central authority determines separate annual harvesting quotas for each province, based on forest conditions and expected annual growth. According to the quotas, forestry workstations at the township level issue logging permits to villages and farmers. Permits are also required for cross-county and interprovincial transportation of logs and other forest products

The current harvesting quota system diminishes the attractiveness of forest-use rights since farmers can only partially reap the benefits from adopting more productive management practices and adjusting to market demands. Even if they can raise productivity and shorten rotations, they may not be allowed to harvest trees (Hu 1995).

Tenure insecurity

Tenure reform has advanced considerably in the forestry sector, but insecurity remains a major threat to forest management. Land-use conflicts are common. Even when land titles are clear, use rights are subject to frequent adjustments to accommodate population change and land zoning. Another contentious issue is customary rights of local communities over forests and mountain land. Furthermore, frequent policy changes have been the main cause for insecurity, as witnessed when logging was banned in collective forests under the NFPP without any proper compensation (Lu et al. 2002).

High taxes and fees

Forest taxation is a major impediment to private sector investment in forest management (Lu et al. 2002). Taxes, charges and fees can be as high as 70 percent of timber selling prices. Forest authorities endorse such high rates because they view forestry as a source of government revenue to pay the salaries of staff who are needed to implement various government programmes (Sun 2002). The negative impacts of the forestry taxation system include reduced income, a decline in the value of the leased forest land and stands, constraints on forest industrialization, increased illegal harvesting and corruption, and increased rural-urban inequalities. The low financial returns expected from afforestation, also severely undermine the motivation of private investors. In some counties, private investments in tree planting have completely ceased (Lu et al. 2002).

Rationalizing tax and fee structures has to be accompanied by significant administrative reforms, and the devolution of forest administration to local organizations and the private sector, to reduce the high cost of government staffing.

IMPACTS OF INSTITUTIONAL CHANGE AND VARIOUS INCENTIVES

Increasing forest resources has been a top priority on the Chinese government agenda, especially since the 1990s. The government has augmented resource allocations to support the forestry sector’s efforts in afforestation and reforestation. Numerous institutional innovations have been tested with apparent mixed results, although rigorous empirical research on the impacts of government policies, initiatives and reforms remains sparse. A few exceptions are the recent reviews by Rozelle et al. (2000), Yin (1994; 1998), Yin and Newman (1997) and Zhang et al. (2000).

Rozelle et al. (2000) found that over the last 20 years, the structure of the forest in Yunnan Province changed significantly. There was a decline in old-growth forests, from 28 to 25 percent. The area of plantations and monoculture forests rose sharply, from 39 to 43 percent of the total forest area. Most notably, forests producing non-timber products expanded from less than one percent in the 1970s to 5.2 percent in 1996, with most of the growth occurring since the early 1990s.

Zhang et al. (2000) found that higher timber prices promoted investment in managed forests and led to a decrease in rain forest area in Hainan. This indicates that increased hardwood prices had, in the past, caused an increase in the “mining” of rain forests. Higher prices for tropical agricultural crops complemented rain forest conservation but reduced investments in plantation development - implying competition between plantations and tropical food crops. On the other hand, Zhang et al. (2000) found that the area of managed forest in Hainan had actually increased with growing population pressure. Managed forests increased alongside improvements in economic welfare, indicating that a combination of demand-side effects, infrastructure development and stricter law enforcement had promoted plantation development. Finally, decollectivization stimulated investments in plantations and promoted the loss of natural forest before the 1980s (although this trend may have been reversed subsequently).

Yin (1994; 1998) and Yin and Newman (1997) found significant regional differences in the development of plantation forests between traditional collective forest regions and the agricultural regions (mostly in the northern plain). In the 1980s, while both regions were experiencing similar decollectivization, the northern agricultural area was subject to much less forestry regulation, such as for logging, marketing and taxation. Consequently, the north had much better achievements in increasing forest cover.

SUMMARY

There is no systematic documentation and analysis of the impacts of government policies on plantation forests. Primary data and a limited number of empirical studies indicate that the improved performance of plantation forests in the last two decades in the non-state sector could largely be attributed to strong government commitment and associated resources made available to support the initiatives. Decentralization in China’s collective forest and plain areas increased private investments. Government subsidies and improved services (for example, fire management, pest and disease control and technical assistance) facilitated the implementation of afforestation and reduced costs, offsetting to a certain extent underlying constraints to private sector involvement in plantation development. As a result, private investments in afforestation multiplied, and the proportion of plantations in collective forest areas increased. This underlined the shift of China’s forest resource distribution in favour of the southern collective forest areas. Nevertheless, major constraints (for example, high taxes, logging quotas and tenure insecurity) remain. It is still uncertain whether current incentives will lead to a sustainable increase in afforested areas. In the near term, plantation development will probably continue to depend on direct government initiatives in tree planting.

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