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

annually in response to the farm passing an inspection; seedlings are provided only in the first year. The
program is designed so that there are only two levels of compensation nationwide, which reflect inherent
differences in regional average yields. The compensation level is 1,500 kilograms per hectare per year in
the Yellow River basin and 2,250 kilograms per hectare per year in the Yangtze River basin. In
cash-equivalent terms, the sum of the three types of compensation given to farmers in the upper and
middle reaches of the Yellow River basin amounts to 3,150 yuan per hectare during the first year of
conversion and 2,400 yuan per year per hectare in following years.⁸ For the upper reaches of the
Yangtze River, the program pays farmers 4,200 yuan per hectare in the first year and 3,450 yuan per year
per hectare thereafter.

While preventing soil erosion is Grain for Green’s primary objective, poverty alleviation is
another stated goal (State Forestry Administration, 2003). According to interviews that we have
conducted over the past several years, many local governments consider access to the nation’s Grain for
Green program as an opportunity to promote transformation of their counties’ local economic structures.
A survey of investment projects between 1998 and 2003 in 2,459 sample villages across six provinces in
China showed that the Grain for Green program was the third most common project being implemented
after road, bridge and irrigation projects (Zhang et al. forthcoming).

The program can potentially affect household wealth, both directly and indirectly. Grain for
Green directly affects household incomes through the grain and cash compensation, which can be used
for other productive activities and for consumption. How much compensation influences wealth depends
on the level of that compensation relative to a household’s opportunity cost. Previous studies of the

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