The circulation of agricultural products and all industrial and commercial activities tool surplus funds form agriculture and relocated there funds into industry. This loss of rural funds contributed to the poverty of the farmers, which lowered agricultural investment, which further slowed down China's agricultural production.
Another major reason for the low productivity that China saw between the 1950's and 1970's was due to the labour arrangements that existed at this time. Before reform began, China did not have labour markets in the conventional sense. There was absolutely no labour mobility and all wages were centrally fixed. China's government adopted the strategy of mutually exclusive rural and urban labour markets. Rural people could not work in the cities and also were given no social security benefits (Meng, 3). The reason for this was due to the nature of china's traditional farming techniques. Farming was labour intensive, with small-size plots. This technique meant that that the marginal rate of technical substitution between land and labour was relatively high. Therefore, it's possible for the agricultural sector to absorb the abundant labour supply and avoid unemployment. As a result, China's government left rural residents out of the development of social security arrangements. Another reason why rural-urban migration was prevented also exists. China had very low grain output in the early 1950's. Preventing rural-urban migration had the advantage of keeping people in the country side to increase agricultural production as well as limiting the number of people in urban areas who needed agricultural products. These two reasons are both responsible for China's highly restrictive labour mobility policies in the pre-reform era (Meng, 4).
The abundance of people in rural areas due to restricted rural-urban migration reduced the average productivity of labour because the amount of arable land per farmer declined considerably (Meng, 12).
