The successful Chinese agricultural reforms from the late 1970s included decollectivisation and price increases (McMillan, Whalley and Zhu 1989, Fan 1991, Lin 1992a, Huang Yiping 1993).

The household responsibility system reform is very important for the agricultural sector and is now regarded by farmers as the ‘second revolution’ (Garnaut and Ma, chapter 1). Decollectivisation produced great productivity growth and output gains and also encouraged and called for further reforms in both the agricultural and non-agricultural sectors.

Because the government did not change significantly the mechanisms determining prices and production structure (which remained important parts of economic plans) when it de-collectivised the farming institutions and increased procurement prices, significant diversification of agricultural production did not happen during 1978–84. Productivity gains and efficiency improvements from institutional reform were therefore reflected in the rapid output growth of a narrow range of agricultural products. Grain output, for instance, grew by 7.8 per cent per annum during 1981–4, leading to a temporary grain surplus (Gao and Xiang 1992, Huang Yiping 1993). In many grain-producing regions in 1983 and 1984, market prices for grain fell to levels very close to or even lower than state procurement prices and many farmers found it difficult to sell grain. Gains from the institutional change had been fully exploited and farmers could benefit no more from the ‘second revolution’ if they continued to concentrate on a small group of agricultural commodities.

The successful institutional reforms in the early 1980s, therefore, called for the ‘third revolution’ in the Chinese countryside – introducing free markets and linking domestic and international markets.