Conservation Payments, Liquidity Constraints and Off-Farm Labor: Impact of the Grain for Green Program on Rural Households in China

I. Introduction

In the past decade, an increasing number of incentive-based conservation programs have been
launched in the economies of developing countries, including Costa Rica, Columbia, Mexico and China
(e.g., Alix-Garcia, et al., 2003, Hyde, 2003, Pagiola, et al., 2002). Often called payments for
environmental service (PES), incentive-based programs provide financial incentives to those who
“supply” environmental services, including farmers who agree to set aside environmentally sensitive
land or adopt farming technologies that generate environmental services such as conservation of wildlife
habitat, sequestration of carbon and protection of watershed functions.

Since rural farmers often are suppliers of these environmental services, programs often have
been designed with dual goals—to generate environmental services and to achieve economic
development (Pagiola and Platais, 2005). A PES program can potentially increase the income of rural
farmers directly and indirectly through compensation payments. For example, farmers who agree to set
aside previously cultivated land for conservation purposes can increase their incomes if the payments
they receive exceed the opportunity cost associated with retiring their land. In addition, farmers can use
the compensation to finance other productive activities, both on and off the farm. Depending on the
program design, these schemes can induce a reallocation of factor endowments and thus shift or
diversify income-earning activities. PES programs can therefore indirectly induce fundamental structural
changes in household income-earning activities.

The programs may be unsuccessful, however, if they cannot induce farmers to transform their
income-generating activities. Payments are typically made for only a fixed term and can be terminated

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