Agricultural reform from an institutional perspective

What was wrong with pre-reform agricultural institutions?

In the pre-reform period, the Chinese government adopted a heavy-industry oriented development strategy to catch up with and overtake the major capitalist economies in a short period. Under this strategy, economic institutions were framed to mobilise resources for heavy-industrial development. Control of foreign exchange, depressed interest rates and mandatory resource allocations were examples of policy measures introduced to facilitate this development strategy.

Agriculture was seen as the major supplier of resources required for industrial development. To facilitate resource flows from agriculture to industry, a set of agricultural institutions was established exhibiting three major features – an inward-looking approach, the unified purchase and marketing system and the collectivisation of agricultural production.

An inward-looking approach was the only possible choice for the government at that time. After the Communists took power in 1949 and the Kuomintang were driven to the tiny Taiwan, Western countries led by the United States adopted a policy that economically and politically blockaded mainland China. The Soviet Union and Eastern Europe was the only bloc with which China could trade, and at the time it was pursuing the same development strategy.

The inward-looking approach was also driven by the chosen development strategy. China was a large, densely populated developing country at the beginning of the 1950s. China would never be able, within a short period, to develop its heavy industry so as to participate in the international division of labour, as its comparative advantage clearly lay in labour-intensive manufacturing. To achieve its development objective, the government essentially had to cut off linkages between China and the world economy.