Recovering from the Famine -- The Readjustment Period (1962-65)
Introduction of the New Policy Environment
Agricultural policies during 1962-65 became more pragmatic as a result of the
“Leap’s” disaster. They acknowledged the importance of “material” (as opposed to
ideological) incentives to agricultural productivity and output growth. Two sets of
policy change can be identified. The first was aimed to improve the overall incentives
facing the agricultural sector in general. This involved the reduction of tax and quotas,
or the specified amount of farm products sold to the state, prices paid to purchase
these products, and also the provision of “incentive goods” (i.e., goods desired by the
peasants like bicycle and radio or even modest items such as matches and soap)
through the Unified Purchase system.
The second set of changes was aimed to improve peasants’ work incentives
within the context of “team farming”. While the people’s commune continued to exist,
it was the production team – the lowest level or tier of the commune structure – that
became the primary unit of work organization and accounting. As we have seen from
previous lectures, the team is similar in size to the elementary cooperatives. Such a
devolution of managerial responsibility was seen by the CCP as crucial because the
commune was simply too large and therefore unwieldy for organizing day-to-day
farm operations, which, in the prevailing Chinese context, were still largely
performed by human and animal power.
Consistent with this change was the abolition of the narrowly spread wage
system which existed briefly during the Leap, as the CCP found that people did care
about the relationship between effort and reward. In this context, Mao’s attempt to
change human nature – i.e., to make them selfless – may be regarded as unsuccessful.
In the process of decentralizing farm operations once again (remember this also
happened in 1956-57 in some cooperatives), the contract or “responsibility” system
known to the Chinese peasants as sanbao yijiang 三包一奬 re-emerged, but only to
be suppressed once again.
To further reinvigorate peasants’ production incentives, private plots – a small
yard in front of a family’s house designated for growing vegetables and raising a few
yard animals – were reinstated, alongside the reopening of local free markets.
Here are the main points.
1. Tax and quotas
 Were reduced by 8.85 million metric tons in 1961 and another 2.1 mmt in 1962.
Using the 1960 output of 143.5 mmt as a benchmark, the reduction amounted to
6.2% in the first year or a total of more than 7% for the two years combined.
2. Procurement Prices (prices paid by the government to the farmers)
 Procurement prices for grain increased sharply in 1961 and 1966, with smaller
adjustments made in between. In 1961, average price for 6 major grain crops
(wheat, rice paddy, millet, sorghum, corn, and soybeans) increased by 25%, with
an additional 17% increase in 1966. Together, these amounted to a massive 46%
over the 1960 base prices.
 In addition to paying the peasants more for what they sold to the government, the
government also fixed the base purchase quotas for 3 years beginning from 1966
(yiding sannian 一定三年)s is important because the peasants sold their grains to
the government (via the commune organization) in two parts: the base-quota,
which is typically of a lower price, and the above-quota, which commands a
higher price. Fixing the base quota has the effect of encouraging the peasants to
produce more and accordingly sell more to the government at the above-quota
price, or so it was intended. For example, half of the above-quota sales would
receive a 30-50% price bonus, whereas the other half was rewarded with chemical
fertilizers (a rare good very useful for raising crop yields) under the
encouragement sales program (jiangshou jihua) 奬售計劃 see below).
3. Incentive (goods) programs
 Like the price measure, the state intended to increase the returns to agriculture (in
particular grain production) by tying the provision of both critical farm inputs
such as chemical fertilizers and a variety of “incentive goods” to grain deliveries
or sales to the government. This measure was used widely in the early 1960s most
widely during 1962-1963 and applied to 169 farm products by the Chinese
government.
 By using this measure, the government also hoped to stabilize the grain sown area.
It was necessary to do so because prices of commercials crops were higher and
thus may lure some peasants to devote more resources toward cultivating crops of
higher values.
 The incentive goods used included: grain (for the commercial crop producers),
cotton cloth, chemical fertilizers, sugar, cigarettes, knitted goods, kerosene, rubber
galoshes, tea and soap. EX: For every 50 kg. of grain sold above the base quota,
10 feet (or 3.3. meters) of cotton cloth and a pair of rubber galoshes would be
awarded. Incentive goods were important because they were desired by the
peasants but were unavailable in the market (the majority of goods were still
rationed by plan in those days).
 While the scope of material incentive program was reduced during the mid-1960s
as incentive goods became more widely available, it continued on a modest scale
throughout the Cultural Revolution (after 1966)
4. Institutional Change
 Retreat from high-level collectivization:
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
Organization (of work) and decision making over resource allocation shifted
downwards from the commune to the team

Size had also undergone adjustments: communes “downsized” from > 5,000
to 1,800, brigades from 250 to 190, and teams from 39 to 24

Intention was to make teams similar in size to EACs, which consisted of
roughly 20-30 households, and 40-60 laborers

Production team now became the primary unit of work organization and
accounting and regained control over resource use and income distribution
 Work organization and incentives

In some places the “responsibility system” (known as sanbao yijiang 三包一
奬) that contracted output with different work groups (of roughly 6-8
households) under the same production team re-emerged. To avoid conflict
between households, these small work groups (called xiaozu 小組) were
allowed to be formed on the basis of voluntary association, many of them
were relatives.

As with the case in the cooperatives, each of these small groups or
independent work units were assigned a few delineated plots based on
laboring capacity, alongside a fixed amount/mix of draft animals and farm
implements

The “contract” involved fixing the output on the one hand, and the amount of
work points (or labor input) and non-labor costs of production (e.g., fertilizers,
seeds, etc.). As with previous arrangements in the cooperatives, the
contractual arrangements also stipulated the conditions under which reward
(over-fulfillment) and penalty (under-fulfillment) applied. Typically, output
quota was set in such a way that it allowed room for awarding the well
performed work units.

Output was assessed on each delineated plot based on soil fertility, irrigation
facilities, crop types, seasons, etc. – a process known as "fixing the output"
(dingchan 定產), e.g., 600 catties for a particular plot. In delivering this
amount, the group would be credited a pre-agreed amount of “labor days” (e.g.,
30). Dividing the promised delivery (of 600 catties) by the labor input (30
labor days) we get one labor-day = 20 catties of grain. Suppose one labor-day
was set = 10 points (maximum for a day’s work), a work group earns one
point for every 2 catty of grain it produced.
5. Re-emergence of Household Farming
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 Although the team was the primary unit of farm production and owned the
productive resources (land, draft animals, farm implements, etc.), it was in fact the
farm household that was made directly responsible for output on the delineated
plots. That was because the small work group secretly subdivided the contracted
land among themselves so that the subdivided plots were actually farmed on a
household basis, much like the “field responsibility system” in the late 1950s.
 Peasants liked it because of the strong link between effort (responsibility) and
material rewards. Some argue that their preference was all the stronger after the
GLF, as the needs to quickly restore agricultural production were more pressing.
This explains why the system spread quickly during the readjustment period.

Ironically, provinces that had suffered most from the Leap – Sichuan, Anhui,
Henan, Hebei, Shandong, Guangdong, and Gansu – were found to have higher
incidence of adopting household farming. These were precisely the provinces
where the so-called "five winds" wufeng 五風(winds of "communism"
gongchanfeng 共產風, of "exaggeration" fukuafeng 浮跨風, of "blind
instructions"xiazhihui 瞎指揮風"forced commandism"qiangbi minglingfeng 強迫
命令風, and of "cadres' privileged lifestyle"ganbu teshuhua zuofeng 幹部特殊化
作風) had strongly prevailed.
 Despite its popularity among the peasants, this household contracting system had
led to suspicions that it was de facto capitalist farming, and as such was criticized
severely by the CCP. In their attempts to avoid political backlash, some provinces
tried to disguise the capitalist nature of this farming system by using socialist
terminology, like zerentian 責任田 or "responsibility fields". An example was
Anhui, where 85% of the teams had adopted the household-based farming system
(HFS) by 1962
 But as the system gained popularity, the provincial authority grew uneasy, fearing
that it may be criticized as: "anti-collective" and individualistic farming (dangan
單幹), which was analogous to “walking the ‘capitalist road’"; violated the
socialist collective ownership and the principle of distribution according to labor;
and polarized income inequalities between households of varying labor
capabilities.
 But peasants in Anhui insisted on keeping it as they had suffered so much from
the Leap …….And Anhui had recovered more quickly than the rest of the nation
(3.8% growth in 1962 vs. 2.8% for the nation). Peasants in Anhui praised the HFS
as "life-saving fields" (jiuming tian 救命田)
 By 1962 this HFS had already spread to more than 10 provinces, and, where it
was implemented, was well received by both local cadres and peasants alike. By
then the state decided that the peasants had gone way too far and must therefore
be corrected. The criticisms of household farming were however met with strong
local resistance. Peasants pleaded and vowed to deliver more grain to the state if
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only they were allowed to keep the system. Although HFS received the blessing
from Deng Zihui, who headed the Central Rural Work Unit, it was nonetheless
harshly criticized by the Party…….result was that 90% of the household farms
were crushed in the year 1963 alone, with the remainder suppressed within the
next couple of years. This spelled the end of what may be regarded as the
“honeymoon” period insofar as the choice of farm institutions is concerned,
although the larger macro-framework within which agriculture operated remained
more favorable than it was the case during the Leap. But as we shall see soon,
1966 marked another decade of change in a direction that once again stalled the
development of agriculture. Between 1966 and 1976, peasant incomes and farm
output had become basically stagnant.
Chinese Agriculture during the Cultural Revolution – the Policy Environment
Introduction
The emphasis placed upon the importance of a “friendly” policy environment
towards agriculture and of work incentives only lasted briefly. With the government’s
determination to suppress the development of family-based farming in those
provinces where some production teams had already switched to it, the liberal
atmosphere that prevailed between the early and mid-1960s became tighten again
after 1966. That shift was not fortuitous, and must be seen in the context of the
tumultuous Cultural Revolution that was already in the brewing. In agriculture, Mao
emphasized the “learn from Dazhai 大寨” campaign (Dazhai was a production
brigade in the very poor Shanxi Province), of which we will talk about in greater
detail later. In this lecture, I will explain why there was a change in the political
climate only five years after the Leap ended, what exactly the change was about, and
finally its consequences.
We saw from the previous lecture that during 1961-1966 the Chinese
government used what may be regarded as a “softer” version of economic planning,
i.e., it relied on a set of relative prices determined by the planner to influence the
composition of crops and their output. For example, if the planner wants farmers to
deliver more cotton, he could set a higher price for this product relative to that of
grain. By assigning a purchase price to each crop, the planner could influence
farmers’ cropping behavior to a large extent. Thus, even though a market in the real
sense did not exist, the Chinese government could still mimic the market by setting
prices to achieve the pattern of resource allocation it desired. This is what I meant by
using the planning system in a “softer” or less commanding manner.
By contrast, after 1966 the Chinese government changed its policy. Instead of
using relative prices to guide farmers’ cropping decisions, the former simply
stipulated that a minimum amount of acreage be sown to a certain crop. This decree,
which came from Beijing, was passed on to the provincial authorities, who in turn
passed it down to the counties, communes, and eventually to the production teams.
Achieving the planned composition this way is called quantity planning, as opposed
to price planning. A major difference between the two, of course, is that the latter
takes into account the importance or role of incentives underlying a farmer’s crop
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choice, whereas implicit in the former is certain degree of coercion and expected
compliance.
In addition to this change were respectively the restriction of private plots and
the intermittent closing of the rural trade fairs. All of these measures were taken with
the aim to attain local self-sufficiency in food grain production. The following will
first spell out what the idea of self-sufficiency means, why Chairman Mao liked it,
how policies were changed to help achieve this goal and their consequences.
Idea of Self-sufficiency
 Before 1958, the state encouraged regions with comparative advantage in
economic crops and animal husbandry to specialize
 Comparative advantage was based on the physical productivity of land (soil
characteristics, climatic conditions, etc.)
 Regions specializing in non-cereal or grain crops production would be supplied
with grain crops by the government
 Specialization was disrupted first during the Great Leap but restored during the
readjustment period, when increase in specialization was considered an important
source of productivity and output growth, but was abandoned again after 1965 in
favor of a policy emphasizing the self-sufficiency of food grains production
 This forced rural areas to reallocate their cropping patterns and composition, with
negative welfare consequences
Why the change?
 Idea of self-sufficiency already incipient in the people's commune (remember the
commune was supposed to have everything – from farms to factories, schools,
clinics, and so forth).
 Despite the Leap’s failure, Mao remained antagonistic to specialized production
based on comparative advantage. In particular, Mao did not like the idea that
China had to import food grains from the West
 China’s shift from a net-exporter to a net-importer of grain coincided with the end
of the Leap (i.e., China used to be a net exporter of grain, but was forced to import
grain toward the end of the Leap because of food shortages).
 By the mid-1960s, Mao argued that China should seek self-sufficiency in grain
production on a nationwide basis for reasons due to national security; it would be
dangerous for any part of China to depend on grain supplied by other provinces
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 Mao’s view on grain self-sufficiency had allegedly existed for a long time but was
largely ignored after the Leap’s failure, now it was brought back on the political
agenda again

In a March 1966 speech the Chairman took up the issue again with great urgency,
arguing against the dependence of north China on grain from the south
 His criticisms were more effective this time because:

He was slowly but gradually regaining his predominance over China's policy
making

The concept of local self-sufficiency was an important element of a military
strategy postulated on a war fought by decentralized, self-sufficient regional
forces

Mao was concerned with a possible spillover of the war in Southeast Asia at
the time

In addition, clashes with the Soviet military across the Sino-Soviet border in
1968 and the fear of a possible soviet invasion in the North also prompted this
strategy

In a nutshell, Mao’s ideological preference was supported by real, pragmatic
concerns over China’s national security this time, and between national
security and economic efficiency the former had greater appeal at that time
Changing Policy Instruments
 An immediate consequence of the government’s decision to be more selfsufficient in grain production was to reduce its role in redistributing commercial
and grain crops between areas specializing in these crops (i.e., buying from the
cotton-producing area and selling to grain-producing another, and vice versa).
This could be achieved by reducing the purchased quotas (or share of procurement)
and agricultural tax.
 Inter-provincial transfers of grain were thus substantially curtailed
 Reductions in procurement however forced regions with differing factor
endowment to produce crops unsuitable to local soil characteristics and climatic
conditions, thereby reducing allocative efficiency.
 In addition, agricultural tax policy had also been changed to reinforce local selfsufficiency

The 1950s, for example, saw a gradual tendency to allow tax to be paid either
in cash or crops (e.g., cotton) other than grain, a policy designed to facilitate
specialized production. (Imagine if a cotton-producer had to pay his tax in
grain. Since he does not grow any grain, he had to buy from the market, if the
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policy does not allow him to pay his tax in cash or cotton. Transaction costs
are necessarily higher under this restrictive circumstance.)

But by the late 1960s and into the 1970s the state insisted on paying tax in
grain only. But because grain could not be purchased in the market, this forced
farmers in the commercial crops regions to reallocate part of their acreage to
grain production – a move that increased the degree of self-sufficiency. How
much to reallocate depended on the size of the tax. Unfortunately, agricultural
tax had become rather sizeable by the early 1970s – amounting to one-third of
the total grain procurement, the magnitude of such reallocations was not trivial.
Consequences
 The comparative advantage doctrine tells us that, where two or more parties with
differences in comparative advantage are prohibited from engaging in
specialization and exchange, their overall welfare, resulting from a decline in
allocative efficiency, would be reduced.
 In the non-cereal/grain specialized areas, for example, consumption of non-cereal
foods per capita would be reduced, as self-sufficiency in grain implied drastic
reductions in meat production. (In northwest China, e.g., comparative advantage
lay in meat production and other animal products; grain yields there were less than
1/10 of national average.)
 By the same token, grain-surplus areas also suffered, as they were forced to
reallocate more land to producing sugar and oil-bearing crops (e. g., sunflower
seeds), etc., whose yields were much lower than those in the specialized areas.
 Result of self-sufficiency in grain production was that economic crops had
become more dispersed spatially instead of concentrated in a few regions with
climatic conditions, soil characteristics more suitable for the commercial crops.
 Moreover, given that policy of local self-sufficiency in grain production occurred
at a time of rapid rural population growth, it intensified the cropping index, and
resulted in overuse of land in some regions (i.e., that the land was cropped more
intensively, leaving no time to fallow)
 What is worse was that over-utilization of land resources resulted in diminishing
marginal returns, leading to increasing costs of production. The following farm
survey results show that:

2,162 teams – grain yields increased by 35% between 1965-1976 but costs of
production increased by 54%

21,296 teams – costs of production for 6 major grain crops were 11.6 yuan per
50 kilograms of output while purchase price was only 10.74/50 kilograms; net
losses were 7.4% of costs
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
For the nation as a whole, costs as a share of farm output were more or less
constant during the 1950s, rose after 1965, and peaked at 35.7% in 1977

Similar case was found for cotton……………………
 However, as the basic accounting unit, the production team did not incur
operating losses when costs exceeded income. WHY? Because lower revenue or
losses would be translated into:

Lower value of the labor-day (VLD) and hence lower distributed income
(remember VLD is obtained by dividing the net revenue of the production
team with the total amount of work points distributed to the team members. A
reduction in the numerator would result in a lower VLD.) For instance, VLD
was found to have decreased by 20% to only 0.56 yuan by the late 1970s,
whereas it used to be as high as one yuan in the mid-1960s.

Lower internal (re-)investments by the commune or lower-level(s) authorities,
e.g., in irrigation systems, the purchase of farm machinery and so on.
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