When the party leadership began to evaluate progress in the agricultural sector in the light of its campaign to move the nation toward the ambitious targets of the Four Modernizations (see Glossary), it noted disappointing failures along with some impressive gains. Furthermore, even though per capita grain production increased from the depressed levels of the early 1960s, output stagnated in the 1975-77 period, so that in 1978 per capita production was still not above average levels of the 1950s. Production of other major crops grew even more slowly. The leadership decided in 1978 to thoroughly revamp the rural economic system.

Top government and party leaders decided to dismantle the people's commune system and restructure it into a new rural system- -the township-collective-household system--consisting of five parts: local government, party, state and collective economic entities, and households. Whereas the commune system integrated politics, administration, and economics into one unit, the new system was designed to have separate institutions handle specific functions. Townships, the basic unit of government in pre-commune days, were reconstructed to handle government and administrative functions. Party committees were to concentrate on party affairs. Economic collectives were organized to manage economic affairs. Households were encouraged to sign contracts with economic collectives.

The reform of the commune system fundamentally changed the way farmers were motivated to work. Nonmaterial incentive policies, such as intergroup competitions for red flags, were downplayed. Egalitarian distribution of grain rations declined, and the work payment system in effect on and off since the 1950s was scrapped (see Economic Policies, 1949-80 , ch. 5). Rural cadres adopted an entirely new scheme to motivate farmers, called baogan (household production responsibility) system. Under baogan, economic cooperatives assigned specific plots of land to a family to cultivate for up to fifteen years. For each piece of land, the economic cooperative specified the quantity of output that had to be delivered to procurement stations. The contract also outlined household obligations, such as contributions to capital accumulation and welfare funds the number of days to be contributed to maintenance of water control systems and debt repayment schedules. Output raised in excess of state and collective obligations was the reward to the household. Families could consume the surplus or sell it in rural markets as they wished. Baogan permitted families to raise income through hard work, good management, wise use of technology, and reduction of production costs.

While the overall level of investment within the agricultural sector did not change much during the reform period, substantial changes took place in investment patterns. National leaders called for greater investment in agriculture, but actual state expenditures declined in the first part of the 1980s. Wh 1000 hereas communes had invested considerable sums in agrÍÍÍÍÍÍÍÍiculture, the rate of investment from the newly formed economic cooperatives was far below the rate before the reform. The revitalization and extension of the rural banking system (the Agricultural Bank and rural credit cooperatives) and favorable lending policies did provide a small but steady source of investment funds for the sector. The major change, however, was that after 1978 farm families were allowed to invest funds, and their investment in small tractors, rural industry, and housing was substantial. In 1983 rural households invested -Y21 billion (for the value of the yuan--see Glossary) in housing compared with -Y11 billion from state sources.

Mao Zedong's policy of self-reliance was relaxed, and his dictum "grow grain everywhere" was abandoned. Farm households began to produce crops and animals best suited for their natural conditions. Excellent cotton growing land in Shandong Province that had grown grain during the Cultural Revolution returned to growing cotton. Areas sown with grain crops declined, and areas sown with cotton, oilseeds, and other cash crops expanded. Reform policies also reduced major administrative barriers that had limited labor and capital from moving beyond commune boundaries. Households with insufficient labor or little inclination to farm were able to transfer land contracts to families that were interested in cultivation and animal husbandry. Rural workers were permitted to shift from crop cultivation to commercial, service, construction, and industrial activities in rural townships. Capital in rural areas was permitted to move across administrative boundaries, and individuals invested not only in their own farm production but also in business ventures outside their own villages.

The rural marketing system changed substantially in the postMao period. The system of mandatory sales of farm produce to local state purchasing stations ended, as did state rationing of food grains, cooking oil, and cotton cloth to consumers. Households with marketable surpluses had several options: goods could be consumed on the farm, sold in local markets, or sold to state stations according to signed purchase contracts. Rural markets disbanded during the Cultural Revolution were reopened, and the number of markets rose from 33,000 in 1978 to 61,000 in 1985. Total trade in these markets increased from -Y12.5 billion in 1978 to -Y63.2 billion in 1985. Consumers purchased food and daily necessities in stores run by the state, cooperatives, and private entrepreneurs and in local free markets. Coincident with these reforms, the state raised procurement prices to improve incentives and increase production by farmers. From 1966 to 1982, wheat and rice procurement prices rose by 66 percent, while oilseed prices increased 85 percent. To avoid urban discontent over high prices, the state absorbed the increasing additional costs, and retail prices for these goods remained constant.

The new policies quickly began to produce results. The gross value of agricultural output nearly doubled from 1978 to 1985. Production of grain, oilseeds, cotton, and livestock increased rapidly in this period (see Production , this ch.). Per capita net income of peasant households rose dramatically from -Y134 in 1978 to -Y397 in 1985, but income inequality increased. The demise of collective institutions, however, brought decreases in health, education, and welfare services. Less attention was paid to maintaining the environment, and some water, soil, and forest resources were wasted. Despite this, mid-1980s observers opined that prospects were good for an overall rise in rural prosperity.

Reforms in the late 1970s and early 1980s also swept away policies and administrative rules restricting business activity. Old commune production and brigade enterprises were reorganized, and a host of new firms were founded by economic cooperatives and citizens. Busi 45c ness activity included manufacturing, mining, transportation, catering, construction, and services. By the mid1980s the value generated by these enterprises surpassed the value of output from raising crops and livestock.

Data as of July 1987