Recently, China's township and village enterprises (TVEs) have been receiving increasing attention in academic discussion (Byrd and Lin, 1990). The gross value of output by TVEs has been growing at an annual rate of around 30% since 1980 and has surpassed that of state-owned enterprises since 1994. In 1995, the gross value of output produced by TVEs accounted for 36% of total industrial output (CSY, 1996, pp. 389, 401).
The TVEs deserve an extensive study not only because of their rapid growth rate but also because of their unique nature. The latter probably is more important academically to development economists. While the rural industry also exists in some other developing economies, noticeably in South Korea and Taiwan, China's TVEs are unique because of their special community ties. Many previous studies about China's TVEs focus on their unconventionally defined property rights (Chang and Wen, 1997). These studies debate whether the TVEs are owned by the township and village governments or by communities (Weitzman and Xu, 1994; Chang and Wang, 1995). Because of the TVEs' unique community ties, China's rural industrialization possesses some interesting features that have been overlooked in the previous economic literature.
One of the interesting features is the policy to subsidize local agriculture with profits made by TVEs (yi gong bu nong zhengce or SLAWP). Notice that our discussion refers only to TVEs that are truly collectively owned by members of a township or a village, not to some de facto private rural enterprises. (The de facto private rural enterprises are not subject to the SLAWP policy.) Although agricultural subsidies also exist in most developed countries, they are quite different from the SLAWP policy in China. First, agricultural subsidies in developed countries did not exist until the late period of industrialization, but the SLAWP policy in China took place at the very beginning of the rural industrialization process. Second, agricultural subsidies in developed countries are usually a national policy carried out by the state. In China, the SLAWP policy is more a community behavior, quite often voluntarily carried out by communities.
The SLAWP policy is an interesting phenomenon from the economic and institutional evolution out of China's dual economy. The [TABULAR DATA FOR TABLE 1 OMITTED] classical dual economy model is typically a case of dichotomy that has two separate and often conflicting sectors located separately in urban and rural areas. Yet, in this Chinese model of dual economy, agriculture and industry are located in the same rural communities and have attempted to accommodate each other at an early development stage with the help of the SLAWP policy. This paper discusses the SLAWP policy and explores its nature and significance in the context of China's rural industrialization.
II. THE SLAWP POLICY
The SLAWP policy has a long history. Since the 1960s, industrial enterprises owned by then Communes and Production Brigades started to contribute a part of their pre- and after- tax profits to the farming sector in their own community. The practice became more common as these Commune and Brigade Enterprises (CBEs) later transformed into TVEs after the Commune system was dismantled in the early 1980s. During the period 1978-1987, TVEs contributed 72.8 billion yuan out of their after-tax profits to agriculture in the forms of direct income transfers to farmers, financing of various rural operations, and investment in rural infrastructures (Table 1). According to Huang et al. (1988), the cumulative sum of capital contributed by TVEs and used in farming production amounted to 13.5 billion yuan during the period 1978-1985. This amount equals half the total state-financed investment in basic agricultural construction during the same time period.
China's State Council issued Decree No. 59 in 1990, which stipulates that TVEs have the obligation to subsidize the farming sector, although the decree also sets a ceiling for the subsidy. …