Building Institutions for Markets: Experiences and Lessons from China's Rural Forest Sector

Through the lens of institutional economics, this paper reviews the reform and development experience in China's rural forest sector and discusses lessons that can be learned by China and other countries. We find that the impacts of the reforms, characterized by changes in forest tenures and market settings, hinge on how they are implemented. If farmers are granted not only land use rights but also liberalized market access, as shown in the northern farm region and the production of non-timber forest products, the incentive structure will be improved, and thus forest production will grow and producers and consumers will benefit. If the reforms are implemented in such a way as to cause market control and distortions, as witnessed in the southern traditional timber production region, the incentive structure will improve little. The chances for production increase will thus be diminished, making it difficult for producers and consumers to enhance their welfare. While tenure arrangements have evolved across the country in the 1990s, timber production in the south remains subject to allowable quota, cutting permit, government procurement, and heavy taxation. We wonder what the land use and tree ownership rights mean without the right to access market freely and fairly, and how practical it is to substitute government efforts for private initiatives in a successful forestry program. The time has come for Chinese policymakers to address these problems.