Chinese economy post-Mao : a compendium of papers

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Chinese economy post-Mao : a compendium of papers
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Economic conditions -- China -- 1976-2000   ( lcsh )
Economic policy -- China -- 1976-   ( lcsh )
Economic conditions -- China -- 1949-   ( lcsh )
Economic policy -- China -- 1976-2000   ( lcsh )
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bibliography   ( marcgt )
statistics   ( marcgt )
federal government publication   ( marcgt )
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CIS Microfiche Accession Numbers: CIS 78 J842-26
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V. 1, Nov. 9, 1978.
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Reuse of record except for individual research requires license from Congressional Information Service, Inc.
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At head of title: 95th Congress, 2d session. Joint committee print.
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submitted to the Joint Economic Committee, Congress of the United States.

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95th Congress JOINT COMMITTEE PRINT 2d Session f









CHINESE ECONOMY POST-MAO





A COMPENDIUM OF PAPERS

SU193irrrm Iro TM

JOINT ECONOMIC COMMITTEE

CONGRESS OF THE UNITED STATES


Volume 1. Policy and Performance














NOVEMBER 9, 1978








Printed for the use of the Joint Economic Committee


U.S. GOVERNMENT PRINTING OFFICE 27-427 WASHINGTON : 1978


For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402













JOINT ECONOMIC COMMITTEE (Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.) RICHARD BOLLI N U, M.Nissouri, Chairman LLOYD BENTSEN, Texas, Vice Chairman HOUSE OF REPRESENTATIVES SENATE
HENRY S. REUSS, Wisconsin JOHN SPARKMA-N, Alalhama
WILLIAM S.. MOO RIIEADI, Pennsylvania WXILLIAM P ROX MN I R E- Wisconsin
LEE H1. IIAMI LTON, Indiana ABRAHA.M RIBICOFF, Connectictt
G3ILLIS WV. LONG, Louisiana EDWARD M. KE.NNED)Y, MassachuseiQ.tts
PARREN J. MITCHELL, Maryland GEORGEMcGOVERN, South Dakota
CLARENCE J. BROWN, Ohio JACOB3 K. JAVITS. New York
GARRY BROW)'N, M ichiganm WILLI-A V. ROTH, JR., Delaware
MARGARET M. HfECKLE-1R, Mscuets JAMNES, A. McCLURE, Idaho
JOHN Il. ROUS SELOT, Ca 'lifornia 0RIt IN (i. I ATCH1, Utah
JOHN R. STARK, itcutv Director
Louis C Ki 1AUTHTOFF 11, Assistant Dirtcfor RICIHAJD F. KAU-FMAN\, Asstant Dir ctor-Ge ,wrai (Cou'nsel

ECONOMISTS
LLOYD C. ATMIMON KENT 11. HUGHES PAU-L 11. MANCHES-:TER
WILLIAM R. BUECHNER L. DOUGI.As LEE DEBORAHki NOREILLI MATZ
TH-OMAs F. DERNIBURG PHILIP MC(MARTIN 'M%. CATHERINE MILLER
WILLIAMA Di MORGAN GEORGE R. TYLER

MINORITY
ROBERT 11. TEN CHARLES IL BRADFORD, Counsel STEPHEN J. ENTIN
MARK R. PLici.Nsxi












LETTERS OF TRANSMITTAL


OCToBit 31, 1978.
To the Allembers of the Joinut E conomic Comm ittee:
Transmitted herewith for use by the Joint Economic (Commit tee, the Cono-ress, and the interested public is a Sur-Vey "'nd anar xI ical study of the economy of the People's Republic of China entif led "Chinese Economy Post-Mao." This is a compilation of invited pipei's designed to nmeet the interests of the committee and the Congn:.,s In an up-to-date body of factual data and interpretative comment on the state of the domestic economy of China, including the record of' its recent experience in economic development and its relations with the outside world.
Early in the Great Proletarian Cultural Re-volution the Joint Economic Committee released a pioneering, two volume assessment entitled "An Economic Profile of Mainland China" (1967). As the People's Republic of China began to relate more with the world community through its membership in the United Nations and in opening relations with the United States it seemed appropriate to supplement the earlier study by an updated volume that also reflected these changing relations of China with the outside world. Therefore the "People's Republic of China: An Economic Assessment" was released by the committee in 1972.
In the wake of U.S. withdrawal from~ Indochina, it was especially timely that we review all aspects of our policy with the People's Republic of China. Many Members were fortunate enough to travel to China and talk with the Chinese leaders first hand. The comprehensive volume released in 1975, "China: An Economic Reassessment" proved highly useful in those meetings.
With the deaths of Mao Tse-Tung and Chou En-iai, two giants of the Chinese Communist revolution left the scene. The new leaders Hua Kuo-feng and Teng Hsiao-ping initiated a new period of Chinese economic policy and development.
China, the largest nation in the world, is a major factor' in world stability. Certainly, the Chinese economy is a, subject of primary concern, and we have an obvious and compelling need of knowledge on the subject. This extensive compilation was organized in the hope that it will serve this need. It covers all of the major aspects of the Chinese economy and should provide a valuable source book for further committee studies on the subject, use by other committees and Members in trips and studies, for other government agencies and the general public.
Our earlier volumes provided a factual basis for better understanding of the economy of China. We hope this volume will not only update these earlier efforts, but provide a current reassessment. The sources (111)





IV

of information on China are still limited but better than during the earlier studies.
It is hoped that this volume, drawing on research at universe ties, research institutions and in the Federal Government, will serve as an aid and a stimulus to all scholars working on this subject. The committee is deeply indebted to the scholars from Government and academia who gave so generously of their time and expertise to the committee. They are listed in the executive director's memorandum to me, and I would like to take this opportunity on behalf of the committee to express our gratitude for their invaluable efforts without which this study would not have been possible.
Finally, we -wish to take this opportunity to express our gratitude to the Congressional Research Service for making available the services of John P. Hardt, who helped to plan the scope of the research and coordinated the contributions for the present study, with assistance from Ronda Bresnick.
It is understood that the views contained in this study are not necessarilv those of the Joint Economic Committee nor of individual members.
RICHARD BOLLING,
CUiman, Joint Economic Committee.

OCTOBER 24, 1978.
Hon. RICHARDBOLLING,
Chairman, Joint Economic Committee, U.S. Congress, Washington, D.C.
DEAR MR. CHAIRMAN: Transmitted herewith is a volume of materials on the economy of the People's Republic of China entitled "Chinese Economy Post-Mao." The study has been prepared in the form of a symposium containing a series of selected papers contributed by invited specialists who are recognized authorities on China. The specialists in question have been drawn from the ranks of the universities here and abroad, private research institutions and the several departments of the Federal Government and the Library of Congress. The papers they have submitted, in response to our request, cover a broad range of topics dealing with the recent performance of Chinese economy. Included are economic policy, the defense burden, agriculture, transportation, industry, population, the environment, technology transfer, international trade, financing, and foreign trade.
The Joint Economic Committee undertook an earlier study, the two-volume "Economic Profile of Mainland China," to provide a basic body of information on the economy of Communist China. In 1972 the committee released a compendium entitled "People's Republic of China: An Economic Assessment." This was followed in 1975 with "China: An Economic Reassessment."
The current study is intended to supplement the earlier studies by a presentation of information and analysis that has become available to the various Government ao encies during the last several years.
It is hoped, furthermore, that the facts and ideas presented in this survey of available information will help to shed light, on the alternatives facing the United States in ordering our relations with the People's Republic of China within the foreseeable future. The shape of





V

these relations is certain to be significant both for the internal development of China and critical to the issue of war and peace in the world.
The contributors to the study have been most considerate of our needs and generous in giving of their time and expertise to pro vide not only basic information but indispensable analytical perspective on this important subject. The individual scholars who have participated in the preparation of the present study are: William B. Abnett Nicholas R. Lardy
John S. Aird Jim Lewek
Arthur G. Ashbrook, Jr. Philip T. Lincoln Jr.
Martha Avery Stanley Lubman
Richard E. Batsavage Kathleen M. McGlynn
Nai-Ruenn Chen Cheryl McQueen
William Clarke Leo A. Orleans
Gordon Cole Helen Raffel
Jack Craig Adi Schnytzer
John L. Davie Jon Sigurdson
Robert F. Dernberger Vaclav Smil
Alexander Eckstein Frederic M. Surls
David Fasenfest Robert E. Teal
Robert Michael Field Marina Thorborg
Carol Fogarty K. P. Wang
Henry J. Groen William W. Whitson
James A. Kilpatrick Thomas B. Wiens
Hedija H. Kravalis
In addition, the committee received the wholehearted cooperation from the following agencies of the Government, private research institutions, and universities:
Bureau of East-West Trade, Department of Commerce.
Bureau of the Mines, Department of the Interior.
Congressional Research Service, Library of Congress.
Economic Research Service, Department of Agriculture.
Foreign Demographic Analysis Division, Department of
Commerce.
Heller, Ehrman, White and McAuliffe, Attorneys at Law.
Intelligence and Research Division, Department of State.
Research Division, Library of Congress.
Department of Geography, University of Manitoba, Canada.
Mathematica.
Scandinavian Institute of Asian Studies, Denmark.
St. Anthony's College, Oxford, England.
University of Uppsala, Sweden.
Department of Economics, Yale University.
It should be clearly understood that the views expressed in these papers are those of the individual contributors and do not necessarily represent the positions of the respective executive departments, the Joint Economic Committee, individual members thereto, or the committee staff.
The Library of Congress made available the services of John P. Hardt, senior specialist in the Congressional Research Service, who helped to plan the scope of the research and to coordinate the contributions for the present study. Ronda Bresnick of the Congressional Research Service assisted Dr. Hardt in this task.





VI

We are indebted to Prof. Robert. F. Dernberger from the University of Michigan who conducted with Dr. Har(t several author workshops (luring the course of the preparation of the volumes that contributed to its quality and integration. Professor Dernberger also assiste(l in orgaizing and conducting critical workshops related to both volumes of this publication. The first volume is entitled "Chinese Economy Post-Mao: Volume I. Policy and Performance." And the second volume, to appear later, is entitled "Chinese Economy PostMao: Volume 2. Recomputation of Chinese National Accounts." This second volume is largely the coordinated effort of R. Michael Field of the Office of Economic Research, CIA, with support from K. C. Yeh of Rand Corp.
We are grateful to Mrs. Ruth Eckstein and the Cambridge University Press for permitting us to reprint a chapter from the last book of her late husband Prof. Alexander Eckstein of the University of Michigan, "China's Economic Revolution."
JOHN R. STARK,
Executive Director, Joint Economic Committee.














C O N TEN rIS

Page
Letters of transmittal------CHINESE ECONOMY POST-MAO
Summary-John P. Hardt ------------------------------------------ ix
VOLUME 1. POLICY AND PERFORMANCE
1. POLICY PERSPECTIVES
China's Post-Mao Economic Future-Robert F. Dernberger and David
Fasenfest --------------------------------------------------------3
Recent Chinese Economic Performance and Prospects for the Ten-Year
Plan-Nicholas R. Lardy-48 The Political Dynamics of the People's Republic of China-William W.
Whitson --------------------------------------------------------63
The Chinese Development Model-Alexander Eckstein ------------------80
Soviet Perceptions of China's Economic Development-Leo A. Orleans--- 115 Economic Modernization in Post-Mao China: Policies, Problems, and
Prospects-Nai-Ruenn Chen --------------------------------------165
China: Shift of Economic Gears in Mid-1970's-Arthur G. Ashbrook, Jr__ 204

II. MANUFACTURING AND EXTRACTIVE INDUSTRIES
Political Conflict and Industrial Growth in China: 1965-1977-Robert
Michael Field, Kathleen M. McGlynn, and William B. Abnett-------- 239 A Survey of China's Machine-Building Industry-Jack Craig, Jim Lewek, and Gordon Cole-284 China's Energetics: A System Analysis-Vaclav Smil -------------------323
China's Mineral Economy-K. P. Wang ------------------------------370
China's Electric Power Industry-William Clarke ----------------------403

III. POPULATION AND LABOR UTILIZATION
Population Growth in the People's Republic of China-John S. Aird .....-439 Technology and Science-Some Issues in China's Modernization-Jon Sigurdson ------------------------------------------------------476
Chinese Employment Policy in 1949-78 With Special Emphasis on Women in Rural Production-Marina Thorborg--535
IV. AGRICULTURE
Chinese Agricultural Production-Henry J. Groen and James A.
Kilpatrick------ -607
China's Grain Trade-Frederic M. Surls-653 The Evolution of Policy and Capabilities in China's Agricultural Technology-Thomas B. Wiens ----------------------------------------671
V. FOREIGN ECONOMIC RELATIONS
China's International Trade and Finance-Richard E. Batsavage and John L. Davie__-707 The Sino-American Commercial Relationship-Martha Avery and William
Clarke ---------------------------------------------------------742
Contracts, Practice and Law in Trade With China: Some ObservationsStanley Lubman ------------------------------------------------764
(Vii)






VIII

Stage
An Analysis of China's Hard Currency Exports: Recent Trends, Present
Problems, and Future Potential-Hedija H. Kravalis ---------------- 789
The Impact of Most-Favored-Nation Tariff Treatment on U.S. Imports
From the People's Republic of China-Philip T. Lincoln, Jr., and James
A. Kilpatrick_ -- 812
The Impact of U.S. Most-Favored-Nation Tariff Treatment on PRC Exports-Helen Raffel, Robert E. Teal, and Cheryl McQueen----------- 840
Chinese Relations With the Third World-Carol Fogarty_ -851 The Impact of Aid on Albanian Industrial Development-The Soviet
Union and China as Major Trading Partners-Adi Schnytzer ---------- 860












SUMMARY
By JOH-N P. HARDT

The post-Mao period seems to be dominated by a pragmatic economic policy which is exemplified by the drive for the "four modernizations": in agriculture, in industry, in national defense and in science and technology. The current goal, first enunciated by Chou En-lai in the 1960's, is to convert China into a powerful and prosperous nation by the year 2000. While Mao is still shown great respect, under the joint leadership of Hua Kuo-feng and Teng Hsiaoping (the man Chou selected to be his successor) Maoist ideology has been deemphasized and the adverse effects of the Cultural Revolution on education, on science and technology and, consequently, on economic growth, are now readily acknowledged. The current focus on economic modernization, technological change, professionalism and measured ties to the Western developed economies may now be seen at all levels of Chinese policy and life. Although the rapid, thoroughgoing pursuit of the letter and spirit of Chou's vision is a fact of post-Mao China, most authors remind us that we may be seeing yet another policy cycle which, under Mao, alternated from periods stressing ideology to periods emphasizing economic priority and pragmatism. No one can predict, for example, whether the policies of modernization will be able to survive the passing of 73-year-old Teng Hsiao-ping, generally regarded as the instigator and implementor of China's push for modernization. Trend or cycle, the Chinese economy and society are in the throes of significant and interesting changes.
This volume follows three earlier compendia on the Chinese economy: "Economic Profile of Mainland China" (1967); "People's Republic of China: An Economic Assessment" (1972); and "China: A Reassessment of the Economy" (1975).
Hearings related to some of those earlier volumes were also published. The current volume updates and expands the coverage of the earlier publications. The 37 contributors number more than any of the previous volumes. The participants represent academic institutions in the United States, Canada, the United Kingdom and Sweden, various departments of the U.S. Government and research institutions.
A companion volume to this entitled "Recomputation of Chinese National Accounts" will be published separately by the Joint Economic Committee.
This compendium is organized into five sections: Policy Perspectives; Manufacturing and Extractive Industries; Population and Labor Utilization; Agriculture; and Foreign Economic Relations. Some of the major questions addressed in the studies, with indications of some of the authors' responses are illustrated below:
Question 1. What are reasonable projections of China's economic future? Has the economy of the People's Republic of China settled down to a stable, continuous process of economic growth?
(IX)






X

all of the papers in this volume recognize the recor of p)ositive rates of growth in both agriculture and industry in China's economiic development over the past 28 years, which have created a significant economic base for the new leadership to build on in their attempt to modernize China's economy. More important, all recognize the tremendous potential for future growth anid een the more pessimistic of the papers that follow believe the new leadership's economic plans and policies will achieve a considerable degree of success, i.e., further increases in GNP per capita. Perhaps most important of all is that these economic plans and policies of the new leadership indicate domestic economic rationality and stability and a far greater reliance on normal commercial relations with the industralized countries of the non-Communist world than was true in the past. [Dernberger-Fasenfest, p. 47.]
By examining historical growth rates some conclusions on Chinese economic development have been drawn.
This growth tabulation clearly shows the general pattern of economic development, that is, the rapid increases in industrial output, while grain output barely keeps up with population. While the data are not accurate enough to put much weight on this distinction, the main point remains firm-grain output in China has been roughly matching population growth over the long haul.
Several important factors argue for substantial economic growth over the 8 remaining years of the recently announced 10-year plan:
1. The investment of one-quarter of GNP to rapidly build up the nation's
productive capacity.
2. The continued existence of rural capital construction projects with a
high payoff.
3. The renewed advances of industrial technology, bolstered by the IHua
regime's greater acceptance of foreign equipment and its revitalization of
domestic science andI higher education.
4. The continued restraint in the allocation of high-technology resources to
military industries.
5. The potential for further striking gains from foreign trade, via the route
of comparative advantage.
6. The continued rise of per capita consumption in a variety of small ways,
a trend that permits greater experimentation with material incentives.
7. The existence of an effective and low-cost administrative apparatus for
reducing population growth still further, thus reducing pressures to shift
resources from investment to consumption.
8. In general, the apparent settlement of leadership issues and the ascendancy of the economic modernizers at the expense of the militant ideologues.
Formidable as these progrowth forces seem, they do not guarantee a continuation of 5-percent GNP growth and 9-percent industrial growth through 1983. While the short-term potential for high growth rates is quite promising because of sizable "catch-up" possibilities, the longer term prospects are for a drifting down of the GNP and industrial rates as opposed to the increases envisioned in the new plan. [Ashbrook, pp. 227-228.]
The primary causes of China's declining economic performance since 1974 appear to be short term and political in character rather than long term and structural. The adverse influence of these short-term elements appears to have receded rapidly, due largely to the decisive actions taken by the new government since late 1976. However, even if we could confidently assume future political stability, the target rates of growth included in the 10-year plan remain quite ambitious . . The possibility of slightly better future performance cannot be ruled out since the 1964-74 decade included the cultural revolution that had a significantly adverse effect on industrial production and investment....
A return to economic performance similar to that of the 1964-74 decade, however, is dependent on two crucial conditions. First, there must be a stable political environment that is conducive to long-run economic planning. In the absence of automatic mechanisms for determining the allocation of resources, these decisions are made through a direct political process that is extremely vulnerable to disruption. If the political consensus that appears to underlie the 10-year plan should be shaken, there could be a renewed paralysis of the planning process, a deferral of investment decisions, and a decline in the rate of growth.
A second condition for the resumption of sustained growth is the deferral of modernization of China's military establishment. The underlying scarcity of resources and the envisaged increase in the flow of investment to improved social services and transportation infrastructure; to scientific and technical modernization; as well as to industry and agricultural implies that the share of resources






XI

allocated to the military cannot be) increased sill staflt allv. China's nlth tial (lefense is still to be modernized Iby the end( of the century. Bit'high resource costs and technical difficulties will mean that an ticross-t he-I oard miodfernijzat ion pi' igratin will have to be deferred well into the 1980's if goals in other sectw ~s are to h e miet. This will not preclude either a rising ah soluite level of defense e xpenditi~re or sigiiificant improvements in selected weapons sys-tems, b ut a systemiat ic modernization program will depend on a more olevi le industrial so etor. [Lardy, pp. 60-61L]
Question 2. How (10 the political dynamics post-Mao influence future ecoomi ~)1icy 'Will this changing political p~atternl change the character of the Chinese develolpmentT model formulated under Mao's rule?
Guided at home by a search for "moderate" policies, abroad the regime likewvise sought means for defining and maintaining an appropriate ''political distance'' between China and the three major As ian powers. In that endeavor, China's leaders clearly had fewer levers and resources at hand than they had at home. Abrupt changes in the perceived structure of power in Asia or the process whereby crises might be resolved could upset China's economic plans through the workings of the domestic political process. Radical opposition might use such change to mobilize a new coalition of power among impatient youn ger' military leaders, frustrated rural youth and idealists threatened by Teng's new class of professionals to demand still another turn of China's political cycle.
In the light of the past 25 years of change in China, the odds seemed to favor such a shift in Chinese political style before 1980, probably having the effect of constraining the authority of central leadership, increasing the role of the military both in Peking and in the provinces, accelerating military modernization with a consequent delay in the achievement of economic goals, and bring another round of domestic political instability. Unless foreign powers were willing to commit substantial political and economic resources, such changes on China's domestic political stage could not be influenced very much by any single power's Asian policies. Only Soviet determination to go to war with China or American determination to support China in such a war might overwhelm the otherwise independent dynamic of China's internal political system. [Whitson, pp. 78-79.]
Question 39. How do foreign perceptions of the performance and rationale for the Chinese economic model differ? How, specifically, has China's erst-while ally-the Soviet Union viewed the Chinese development?
According to Western perceptions, the future of Chinese economic developmentt remains uncertain but carries great potential.
**'in a post-Mao-Chou era, power struggles and policy disputes -inceluding economic policy differences-could become seriously a ggravated Theretfore, it may be particularly difficult to forecast the future course of China's economic policy. Nevertheless, barring a repetition of great leap forward-or cultural revolution-type measures of China's involvement in a, maj or international conflict, the country should be in position to sustain over the coming decade approximately the same average rate of economic growth as in the past 25 years. This would mean that by the end of this century China's gross domestic product could be quadrupled. In terms of total size it would still lag far behind the United States and the Soviet Union, but could easily be among the five largest economies in the world.
Nevertheless, just as in the past, it will be no easy task to sustain a 6-percent rate of growth. Based on past performance, this will require a rise in farm production of about 2 to 3 percent a year assuming (1) a continued commitment to basic self-sufficiency in food supply, and (2) a rate of population growth of not less than 1.5 to 2 percent a year. This will necessarily pose a major challenge to Chinese agriculture. Over time it will require very large investments in the farm sector anti its far-reaching technical transformation. It is far from clear whether such a major transformation can be accomplished within present patterns of economic organization and employment in agriculture. This range of issues will necessarily constitute one of the continuing problems facing the Chinese Communist leadership for the rest of this century and probably beyond.
The successor generation of China will also have to face up to the challenge of sustaining the revolution, its values and spirit, in the processes of production are bound to become more complex. Technical training requirements may also be expected to grow, thus posing a number of dilemmas. Will the educational system as reorganized after the cultural revolution be capable of training the advanced engineering, scientific, and technical manpower required for an industrial society.






X11

If not, can that system be reshaped in such a way 2Ls to continue producing "reds" and "experts?" Can status and income differences be fairly narrowly confined in the face of the growing specialization, division of labor, and functional differentiation associated with industrialization?
Another and closely related range of questions revolves around consumer aspirations. With a fairly rapidly rising product, can household purchasing power in the cities and in the countryside be kept stable or rise only quite slowly and gradually? Alternatively, will increasing product be gradually translated into increasing consumer appetites? Can consumerism be contained and the spirit of frugality and self-abnegation be preserved?
It is lso very unclear whether China can maintain a 10-percent rate of industrial growth for several decades with a preponderantly rural population. This of course will crucially depend on the pattern of industrialization, that is, the technologies used, the scale of plant, and the degree of capital intensity. It may also depend on whether it is possible to design a highly decentralized pattern of industrial development in China that would economize on transport and be partly regionally based. Such a pattern might slow down the rate of urbanization and at the same time alleviate some of the dilemmas posed above.
In essence, the fundamental challenge confronting China's leaders in the coming decades will be to maintain the tempo of economic growth, to build a strong and modernizing China, while preserving socialist values and not only socialist forms of organization. It remains to be seen whether China can become a modern industrial state without perpetuating the "new class" that has been gradually emerging since the 1950's and without following the "revisionist" road. If China's far-reaching experiment were to succeed, it would indeed be a historic contribution to the process of modern economic growth. [Eckstein, pp. 113-114.1
The Soviet view of Chinese economic development has been somewhat different from Western or Chinese perceptions.
Soviet Sinologists have to contend not only with a paucity of data (a problem familiar to all China specialists), but also with the ideological and political constraints, which limit their freedom ... [p. 116].
In reviewing their aid to China, the Soviets conclude that it is the assistance they provided in the 1950's which made it possible for China to experience early successes and which also turned the head of Mao and his entourage, fanned their great-power hegemonistic aspirations and served as fertile ground for nationalistic tendencies in the Chinese leadership . [p. 1331.
Undoubtedly the most important theme recurring in Soviet texts on China contends that militarization is the primary characteristic and the foremost priority of China's economy ... [p. 139].
. there seems to be little doubt that most Soviet economists believe that Peking neglects rural development, that state aid is available only in periods of crisis, that local self-sufficiency is a ridiculous policy and that military priorities are the cause of China's poor agricultural performance ... [p. 1441.
The Soviets describe the development of China's industry as complicated and contradictory, . [p. 1,48].
While Chinese industry (both national and local) bad experienced growth in the 1970's, Peking has not been able to solve many of the fundamental problems that affect industrial development, such as insufficient raw materials and energy, outdated indii-,trial facilities, and the shortage of qualified specialists ... [p. 148].
The simultaneous development of modern and traditional means of production runs counter to the Soviet passion for big ess [p. 1381.
Although Soviet and Western estimates of China's production figures may differ, there is actually little disagreement about the over-all strength and weaknesses of individual economic sectors or the specific problems facing the planners in Peking. The differences are in perspective, in emphasis, and in evaluations of the rationalit- 7' (or muddleheadedness) of China's economic policies ... [pp. 148-1491.
In discussing PRC's most recent drive for modernization, the Soviets say that the new policies are nothing more than "the adaptation of Maoism to altered conditions". . [p. 134].
"The Soviets themselves recognize and even publicly admit some of the problems and weaknesses in their research on the PRO . ." [but] "it is very important not to lose sight of the great improvement that has taken place . since the beginning of this decade .... . .. Unencumbered by political demands for conformity, free to pursue their research and arrive at independent conclusions, Soviet'8inologists should be able to move to the forefront of studies on modern China. If this day ever comes, it will behoove Western China-watchers to pay






XM

much closer attention to what their Soviet counterparts may start saying or writing about China." [Orleans, p. 164.1
Question 4. What is the Chinese policy on economic modernization? What are the prospects for the Chinese economy in this Post-Mao period?
China's economic modernization efforts mav be influenced bv a number of constraining factors. The speed of economic, growili during the baltti-ice of the century will depend largely on the ability to remove or minimize the impact of these constraints. Some of them are ideological, political, or institutional in nlatui-e while others represent bottlenecks in the economy.
On the ideological front, although the post-Mao leadership bas hown flexibility in interpreting the self-reliance principle, changes are likely to I)e gi-w-tual -Ind slow. Further, certain basic tenets are expected to remain inflexible. As long as the preelusion of foreign direct investment in China continues to be one of thc, e China deprives itself of the benefit that, as the experience of niany developing countries has shown, foreign ca ital could contribute to economic modernization. But a much broader ideological constraint lies in the likelihood of a, recurrence of the "two-line struggle." The development of China's economy under Mao showed a deep-seated conflict between ideology and the economic and technical realities of the country leading to a cyclical pattern of economic growth. The Rua government has launched an intense rectification campaign to purge the followers of the "gang of four" at all levels in an attempt to alleviate such a conflict. But it remains to be seen if economic success in the post-Mao era can continue for a prolonged period of time without giving rise to a group of "neo-radicals" to seriously challenge the pragmatic leadership and/or its economic policies.
The failure to stave off such a challenge could greatly jeopardize the political stability which would be absolutely essential to the success of China's modernization efforts. In the short run, political stability also depends on the cohesiveness of the various elements that have made up the post-Mao leadership. . .
Economically, the greatest bottleneck lies in the agricultural sector. The success of the four-modernizations program will hinge critically on the Chinese ability to exDand agricultural output considerably faster than population growth. . .
Certain other economic sectors, particularly electric power and transport, have developed into major bottlenecks brought about by years of relative neglect in investment allocation. The slow progress of these two sectors, considered as "vanguards" in the Chinese economy, is likely to constrain China's industrial growth in the immediate years ahead. To assure rapid industrial expansion in the 1980's will require power and transport to grow more rapidly than industry as a, whole.
In 1976, the five major powers combined accounted for 70 percent of the world's GNP. Of these five major powers' total GNP, China's share. in 1976 was only 6.7 percent; it produced less than one-fifth of the level of the world's largest producer, the United States, and some 60 percent of the level of fourth largest, Japan. A successful modernization drive in China could increase its share to 8 to 9 percent by 198' and 10 to 14 percent by the year 2000. With the most optimistic estimate, China's GNP would still rank last among the five major powers, by the end of the century, but could reach over half of the U.S. level and more than 70 percent of the Japanese or Soviet level. [Chen, pp. 200-203.]
Question 5. How did the interrelations of political and economic factors affect industrial growth in the decade or so prior to the establishment of current leadership policy?
. Whatever the initial goals of the Fourth 5-Year Plan, it is clear that the revisions gave increased priority to industrial support of agriculture and to expansion of exports. Thus, Peking had to defer grappling with the structural imbalances that were holding down the growth of industry.
These fundamental economic problems were soon complicated by a new wave of political trumoil. As Mao grew old and frail, the struggle for succession broke into the open. The campaign to criticize Lin Piao and Confucius (late 1973-74) quickly made itself felt throughout industry. Production dropped far below planned output and by midyear 1974 the situation was serious enough for the central committee to issue directive No. 2 1 which focused on economic (lifficul ties caused by the excesses of political campaign. The situation improved in the fall when Peking applied the brakes to the campaign to criticize Lin Piao and Confucius, but the rate of growth for the year was only 4.5 percent.





XIV

The year 1975 began on an upbeat, with Premier Chou En-lai making a key speech to the Fourth National People's Congress in January, calling for a vigorous modernization of the economy. During the first half of the year, the ind(lustrial sector responded well to positive actions taken by the Governmnent to restore order in the wake of the campaign to criticize Lin Piao and Confucius. Nevertheless, the lack of strong production claims from such critical sectors as electric power and iron and steel suggest that the rate of industrial growth tapered off during the year and that any gains were largely based on recovery in the most disrupted areas and enterprises ....
The prospects for real progress in 1976 were shattered by the death of Premier Chou En-lai in January, which led to the intensification of the struggle for suecession. The raging political storm did not have an immediate impact on industry. During the first quarter, output increased(l 13 percent over the corresponding period of 1975. But industry faltered during the second quarter, and collapsed in the third. The collapse was made worse by the devastating Tangshan earthquake in July which leveled the city of Tangshan, caused major damage in Tientsin and was felt as far away a, Peking. More than 650,000 people were reported killed and billions of dollars' worth of damagee was done; moreover, relief and reconstruction preempted normal production and construction activity in other areas of the country.
The death of Chairman Mao in September was quickly followed by the purge of the "Gang of Four" in early October. And later that month, the central committee issued central directive No. 19, which called for strong measures against slowdowns and absenteeism and for a careful accounting of funds available for investment. In spite of these positive actions, industrial production for the year as a whole grew only slightly more than 2 percent.
Peking hoped that 1977-the first year following the purge of the radicalswould show a healthy recovery and provide a firm basis for accelerated growth during the remainder of the Fifth 5-Year Plan period. . .
Di.-satisfaction with the pace of recovery probably figured in the decision in July to reappoint Teng Hsiao-ping to his post in the Government and party. And it is certainly reflected in State Planning Commission Chief Yu Ch'iu-li's statement in late October to party and state cadres that, although "the tide was turning" on the economic front, many difficulties remained.
The findings of the previous section show that politically stable Provinces tended to achieve moderate or strong industrial growth (luring the mid-1970's, and that politically unstable Provinces-with only one exception-failed to do so. Because the Cultural Revolution (1966-69) was also a period of political instability during which industrial output declined sharply .., the two periods are conmpared in this section.
Mao Tse-tung launched the Cultural Revolution because of his dissatisfaction with what he felt was the growing ossification of the party and Government 1)ureaucracies, and his belief that China's youth required a "revolutionary experience", to renew their faith in a revolution that had taken place before most of them were old enough to participate or even remember it. With the power struggle that broke out between the "radicals" (led by K'ang Sheng, Ch'en Po-ta, and Lin Piao) and the "moderates" (led by party bureaucrats Lin Shao-ch'iand Teng Hsiao-p'ing), the Cultural Revolution quickly became one of modern China's most chaotic periods. The Chinese Communist Party virtually disappeared as an institution, and the turmoil grew so great that PLA main-force units were ordered to restore order in many Provinces and to assume control of a dozen. The economic consequences of the Cultural Revolution were especially serious in the industrial sector, where fractional struggles in the factories and disruptions along the transportation routes caused production to decline precipitously and to remain below trend for 3 years. [Field, McGlynn, and Abnett, pp. 243-244 and 254-255.]
Question 6. How are key industries such as machine building performing to meet the needs of modernizing China?
Chinese leaders have frequently claimed that the machine-building industry is the key to technological transformation of the national economy. Indeed, the industry storms the foundation of China's military and industrial developmentencompassing a broad spectrum of manufacturing trades, ranging from production of ball bearings to ships, locomotives, power-generation equipment, and the like. As outlined in Chairman Hua's report to the Fifth National People's Congress of early 1978 China is launching an ambitious program to revitalize the economy through modernization of agriculture, industry, national defense, and science and






xv

technolog. The stated goal is to create a modern industrial econiv by the year 2000. Much of the burden of achieving this goal will fall on the inachine-builing in(lustr .. ..
The core of China's machine-building industry was formed through the massive material and technical assistance provided by the U.S.S.R. and E'at European countries that began in 1953. I)uring the first 5-year plan period (1953-57), out of the 166 major Soviet-aid projects in industry, nearly 100 were undertaken in the fiell of machine building. The U.S.S.R. sujpplie(l complete sets of equipment for plants and equipment, transportation equipment, agricultural imachinery, chemical industry equipment and machine tools. Many of the r maining projects supplied by the Soviets formed the 1)asis of China's military machine-I uihiing industry. In this important category were plants to produce aircraft, naval vessels electronic equipment, land armaments, and nuclear weapons. Aklitionnal agreements with the U.S.S.R. an(l East European countries in 1958- 59, nearly (loulV(.l the number of mo(lern industrial plants planned for the machine-building industry.
Orderly development of the machine-building industry became impossile after the Great Leap Forward was launched in 1958.
The machine-building industry retrenched with the rest of the economy from 1961-63. Production dropped sharply, capacity stood idle, and the regime pared down investment programs to a narrow range of essential industries. A new emphasis was given to the production of agricultural machinery, equipment for chemical fertilizer plants, and machinery for the petroleum industry. High priority moreover, was assigned to the military machine-building sector, particularly to electronics and those industries involved in the development of atomic energy, missiles, aircraft, and naval ships. By 1966 the general status of the machinebuilding industry had improved, production was well above the 1957 level. General improvement can be attributed to increasing imports of machinery and technology from Japan and Western Europe ...
Considerable dislocation in the machine-building industry occurred during the political turbulence of the Cultural Revolution (1966-69). Imports of equipment from the non-Communist world declined and technical exchanges were
terminated..
In spite of the disruptions of the Cultural Revolution, China achieved substantial increases in machine-building capacity during the late 1960's. Under the general slogan of "war preparation" the PRC engaged in a wide-ranging campaign to construct hundreds-and possibly thousands-of small, medium, and large-scale industrial projects throughout its remote interior regions ...
Reestablishing orderly economic planning, together with the additions to production capacity during the 1960's led to substantial increases in output (luring 1969-71. Production of military related equipment reached peak levels, and electronics emerged as a favored sector among military industrial planners. The small plant program, which had gained new respectability during the Cultural Revolution, reached boom proportions, while the construction of modern plants gained increased momentum. Self-reliance had become the watchword in the machine building industry, and new products of indigenous design began to emerge at a growing rate.
Evidence of a major debate between military and civilian planners over machinebuilding priorities surfaced in mid-1971. The "electronics versus steel" controversy, which signaled the debate, was quickly followed by the Lin Piao affair. Following the death of Lin, production of military armaments plummeted sharply from the peak levels of 1970-71. The marching orders for the industry during the fourth 5-year plan (1971-75) included increased support to agriculture and the basic industries such as mining, petroleum, chemicals, and electric power. Increased emphasis also was given to purchasing large quantities of Western equipment and manufacturing technology. [Craig, Lewek, and Cole, pp. 285 and 287-288.]
Qitestion 7. What kind of constraints and stimulants do mineral and energy supplies and uses exercise on Chinese economic growth?
China is one of the world's rich mineral areas fully capable of supporting a modern first-rank industrial economy. During 1977, PRC strengthened its position as a leading mineral producer. Its relative importance should grow significantly in the decade ahead, judging from the resource potential and the many developments already underway. As befits a large country with a huge population. China produces a great variety of minerals and metals-many outstanding by world standards. If all minerals were added together in terms of output value,






XV'

PRC would rank with the world's first five for crude minerals an(I only a little behind in terms of total value added for minerals and metals. [Wa-ng, p. 374.]
Electric power is another key sector.
There exists a widespread shortage of electric power in the People's Re public of China (PRC) today that is adversely affecting the economy and which must be corrected quickly if the program to modernize industry, agriculture, scecand technology, and national defense is to be successfully implemented. Electric power is a "vanguard" industry which in a developing country like China must advance at~ a pace 1.3 or 1-4 times that of industry generally.
The shortrun solution to the power shortage is being sought in the fall 1977 (directives of Chairman IHua calling for conservation, fuller utilization of existing generating capacity, and its more efficient operation. In the longer run China will place reliance on the continued development of b)0th hydroelectric and thermal power stations. No nuclear stations are currently operative, hut the Chinese will probably soon begin one. Although both large and small power stations will continue to be built, the greater emphasis will be placed on development of China's hydroelectric potential, the largest in the world. Currently, the PRC is the fourth largest producer of primary energy in the world after the -United States, the Soviet Union, and Saudi Arabia.
In 1977, the PRC's electric power' industry generated about 136 b~illionl kilowatthours of power or 6 to 7 percent that of the United States. This was enough to place China ninth in power output. Installed capacity on Decemb~er 31, 1977, was estimated to lbe 40,500 megawatts. The bulk of this capacity is found in the 192 known thermal and hydro stations of 30 megawatts capacity and over. Of these, 126 units are thermal stations and 66 are hydroelectric, some are currently under construction or are being expanded. Additional stations of this capacity or greater are thought to exist. About 62 peCrcent of the capacity is thermal, the balance hydroelectric.
To adequately support a 10-percent rate of industrial growth, the power industry would need to add about 5,300 megawatts to capacity this year, a 13-percent rate of growth, and about 12,700 megawatts in 1985 to provide capacities of 45,800 and 108,000 megawatts, respectively. The domestic power equipment mnanufacturing industry, while quite substantial, (does not appear capable of meeting this requirement. Thus, if a 10-percent industrial growth is to be achieved, Peking will have to import powerplants and equipment from abroad poss.-ibly expending as much as $300 million annually during the period 1978-85.
It does not appear that between now and1 1980 the electric power industry can accelerate growth to the level to support a 10-percent industrial rate of growth 1978-80. It does seem possible, however, that by 1981 acceleration of developments in industry could support such industrial growth. To achieve this the Chinese will need to:
(a) Invest heavily in the development of the coal industry;
(b) Improve rail transport and develop "mine mouth" thermal plants to
reduce coal hauling;
(c) Sharply reduce station construction times, especially on large hydro
plants;
(d) Develop higher capacity transmission systems;
(e) Accelerate the development of 600-megawatt boilers and
turbogenerators;
(f) Expand the domestic power equipment manufacturing industry; and
(g) Engage in a consistent and planned import of complete foreign powerplants and equipment. [Clarke, pp. 404-405.]
Chinese energetics presents a thoroughly intriguing, highly complex and, in not a few aspects, continuously puzzling case. In absolute terms, the country's fossil fuel and hydropower resources rank with-or even above-those of the United States and the Soviet Union. Globally, China has risen to the fourth place in primary energy production (following the United States, the Soviet Union and Saudi Arabia) and to the third place in consumption (behind the two superpowers) and, in the process, has become not only self-sufficient but also a minor fuel exporter. And yet, at the same time, China's energetics is definitely that of a rather poor, developing country where large segments of rural population still depend on plant fuel and animate power and whose per capita modern energy consumption ranks close to the hundredth place in the global array of some 175 countries and territories.
The future seems no less ambiguous. While the probabilities for retaining the eriergy self-sufficiency and expanding the crude oil and coal exports are very






XVII

high throughout the 1980's, the potential fuel and electricity requirements for the modernization of the Chinese economy are immense and its seems quite improbable that they could be filled satisfactorily with the sole reliance on doinesti( technology. And even under circumstances favoring a very fast expansion, the country's per capita energy consumption by the year 2000 would equal the levels attained by most of the Western societies already during the first two or three decades of this century....
...most of China's rural Population continues to live as (1o huindreds of millions of other poor peasants around the world-in solar-(1ominated ecosys-.4tms, largely independent on external subsidies. Even for the nation as ft wNhole- olar energy recently transformed by green plants still pred( omnates: a p Iro xiin ately 4.1 X 10 kcal of phytornass energy-as food, feed, fuel and raw inaterial-wNere used to support China's people and animals in 1974, while the total flow of foss.-il fuels and primary electricity amounted to less than 2.65 X 10 keal ....
,**Perhaps the best current interpretation of the Chinese coal resource figures is that the recoverable reserves are no less than 100 [billion MNetric tons] bmut and the total resources are at least 1,500 bmt....
*.Quality of coal is mostly very good and seams are of above average thickness and are predominantly horizontal or only slightly inclinedl. Iii suiii, China's coal resources are outstanding both in their quantity and quality ....
. Leaving aside the sizeable shale oil resources, whose oil content and recoverability are largely unknown, the best currently available geological evidence, compatible with production totals and growth rates, would indicate that China's crude oil reserves are certainly no less than 3 brut and most likely no more than 10 bmt. ..
---It is to the Northwest-remote, severely inhospitable, thinly populated (less than 7 percent of the total), unindustrialized (less than 5 percent of gross industrial output) and still only tenuously linked to the rest of the count rvwhere the Chinese will have to turn for their future fuel needs, a westward shift of energy centers comparable in its magnitude to the eastward shift of the Soviet energetics: Northwest has no less than half of China's ultimate coal resources and nearly half of her estimated recoverable onshore oil supplies. The only major way to postpone this costly and complicated shift would be to turn offshore first and to plunge into certainly no less expensive and difficult search and production of underseas hydrocarbons....
6 China's primary energy consumption, which was barely over 20 [million metric tons conventional energy] mmtce in 1949, grew nearly tenfold in a decade, topped, after years of politically induced stagnation, 300 mmtce in 1972 and is now exceeding 500 mmtce. In aggregate terms, China has thus become the world's third largest energy consumer, just ahead of Japan-and very far behind the Soviet Union and the United States. Per capita consumption, naturally, remains rather low: at around 500 kgce annually it is more than double of India's modern energy usage, but less than half of Mexico's figure-and an order of magnitude less than the consumption of developed nations; addition of the still important traditional fuels increases the aggregate value to some 500 mmtce in 1976 and the annual per capita usage to nearly 650 kgce....
* The most striking feature of the Chinese sectoral energy use is -the large share of the industrial consumption; even with power generation requirements classified separately, industry now draws about half of all China's primary energy, a sharp increase in comparison with the early 1959's. On the other hand, relative importance of residential and commercial uses has declined considerably since the late 1950's and, significantly, both the power generation and transportation shares, in spite of large absolute increases, have also diminished. Agriculture consumed about 46 times more commercial energy in 1976 than it did at the end of the First Five-Year Plan two decades ago-but in relative terms it is still no more than about six percent....
* Expansion of the Chinese primary energy production by -seven percent per year for another decade would have to be then termed a success: it would bring the output to just over 600 mntce in 1980 to some 830 mmntcc in 1985, meeting the likely domestic requirements arid leaving a small, though valuable, export surplus equal, in crude oil terms, to some 40 mint in 1980 and 60 minit in 1985....
. Coal industry is to double its output in the next ten years; this means an average exponential growth rate of seven percent per year and the total output in excess of one billion tons of raw coal in 1988. However, as both the Soviet Union and the United States have been finding out, the cost, the environmental problems and the logistics of producing more than half billion tons of coal annually is sharply curtailing any fast growth rates....
27-427-78-2






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. Crude oil production will have to be expanded considerabl--1ut exponential growth of no more than ten percent per year would exhaust the Chinese onshore reserves of around five 1hrnt ,v the mid-i1990's. Chinese are, of course, well aware of this fact, as exemplified y IIa's call to discover ten more Ta-ch'ings; even should the required reserves he in the ground, the Chinese investment to liscover and to develop them might 1e of the same order of -agnitule as the Soviet oil industry's expenditure during the pt twenty year. . .
S. Chinese planners also face difficult decisions regarding the future state of small-sa!e technologies which have plao(ed such a critical part in the rural industrialization. Their low quality output and inordinate energy cost (do) not make them v 1r suitale in more advanced stages of modernization-b ut their total, or near total, subsititution by centralized large-seale production would not je an appropriate solution in a capital-short country so Iadly equipped with good( roads and railway;.
RH In.WuY .hna .-. .
In sum, China's energy development strategy should he multifaceted(( and flexible. Taking into aecount the richness, location and quality of resources, ancient traditions of solar energetic and enormous regional disparities within the nation, it should strive to modernize the country-side without cut ting it completely off it< traditional renewal!e energies and without al)andoning appropriate smallscale, indu tries; it should aim for u Qastion 8. What are the likely ranges of population growth and how can Chinese policyy control demographic growth?
Almost 30 years have elapsed since Mao Tse-tung declared that China's large population was "a good thing" and that it could multiply "many times" without posing any difficulties for national developmnt. Now hirth control has been written into the constitution of the PRC, and Hua Kuno-feng has called for a reduction of the national population growth rate to less than 1 percent within
3 years . .
A)solute population totals for the three models as of January 1 and July 1 for the years 1953-80 and every fifth year to the end of the century are given in table 1. Perhaps the most striking implication of these figures is that China's population is close or may already have sur)pased the 1 billion mark. The low model reaches 1 billion in 1980, the high model exceeds that figure b)y 1977, and the intermediate model crosses the line bv the beginning of May 1978. The total of 900 million, now at least authorized for domestic use in China, should have been passed at least by the middle of 1974 and possibly as early as the end of 1971.
By the end of the century, the new mod(lels show a population of from 1' to 1Y2 billion people. The ) projections from 1978 onward assume no major catastrophies or other startling changes in fertility or mortality. Up to now, China's demographic determinants have not shown such a high degree of stability. There have been setbacks from time to time in the efforts to control both fertility and mortality which have been significant enough to affect national levels. There is no reason to suppose, as has often been mistakenly supposed in the past, that the course of Chinese history hereafter will be all smooth sailing. The projections of population growth during the remainder of the century are therefore not predictions but simply the implications of some rather artificial assumptions. They serve mainly to indicate the orders of magnitude that would be generated given hypothetical trends in fertility and mortality.. .
If China's demographic prospects fall within the range indicated by the low and high model projections presented here, it is obvious that there are significant differences between the two extremes by the year 2000. The size of the totals varies by about 17 percent of the mean value and the annual population growth rates range from 1.1 percent to 1.7 percent. However, either of these rates is sufficient to give continuing cause for concern in a country with finite resources at an early stage of economic development with an already large population. The pressure of population growth on the growth of food production may not be greatly reduced by the anticipated decline in natural increase rates if the expedients used to increase agricultural output yield diminishing returns. Unless the economy is more immune in the future than it has been in the past to political dislocations, population growth will continue to dissipate a significant portion of the gains from economic growth. The difficulties of funding productive employment for large increments to the labor force while mechanizing labor in both the nonagricultural






XIX

andl agricultural sectors will cont inue without much relief from demographic change., before 1990. Hence even the( rather spectacular shifts in fertility projec'ted( for these models (luring the next few yer (10 not, l)0rteT(1 aIn im~(IaeavIradieal remission in the p~robldems that hiave flit herto 1ui )o ed pwI by p)pulattion growth in the PRC. [Aird, pp. 440, 465-466, and 474.]
Quest ion 9. How may current regime policies affect the efficiency of the Chinese urban and rural labor force in the years ahead through teclmologric al change, modernization and1 education?
When we try to as.-ess, the changes in China it may always be usef ul to maintain a historical perspective as all changes may not lbe p~erma1:nent an(1 we can expect that China will experience political struggle between opposing views oni the roles of science andl technology an(1 how the sector should lbe controlled and organized. Is there tany risk that China will eventually move toward political changes such as have taken place in the Soviet Union and which the Chinese term revisionism? No doubt, the heavy emphasis on economic growth andl the use of the intellectual andl technological expertise in the country may make it dlifficullt to strike a stable balance.
The new technology andl science policy now emerging in China, may be an element which is at least partly antagonistic to the objective of reaching the socialist society conceived by Mao andl the reasons for this are several: First, to meet the technology requirements of the modern industry the emphasis must be on large systems with a high degree of vertical division of labor with apparent noneg-alitarian consequences for management in production enterprises as well as in the related R. & D. institutions. Second, trends toward further professionalism and inequality encourages importation of technology where technological and management solutions developed in capitalist countries must be adjusted to suit Chinese cond~it ions. Third, if this were desired, the integration and coordination of large scale technological projects and the sub)sequent applications in manufacturing will require professional expertise which must he highly trained and competent. All such people will spend much of their time in central agencies, ministries or offices in the bigger cities with little or at least less time than previously to move into manual labor. Fourth a large scale approach to industrialization also requires improved transportation and communications and new management systems which all lend some credibility to the argument that new forms of social control might (develop which are detrimental to the egalitarian interests of the masses of the Chinese populations....
So, it might be appropriate to pose the following question. The emphasis is on urban technological change-will it be possible for the Chinese leadership to maintain a fair balance between urban industry and rural agriculture? Herein we can find three different type problems with regard to changes in technology and science policy. First will the leadership be able to maintain the delicate but necessary balance in meeting the modernization objectives while reflecting the legitimate interests of the various groups in the Chinese society? Second, as the potentially privileged groups will make use of the new situation to further their own interests, in ways detrimental to the majority of the population in the rural areas will this nonprivileged majority create a counterforce in order to redress the balance? Should this be the case the present change in technology policy would create an unstable situation. Third, will the changes create a situation where privileged groups become established as a stable new class to the detriment of the overall, long-term development of China?
It must also be emphasized that the current situation in China is rapidly changing and the structure for encouraging innovations and change in technology and science -policy has not been fully worked out. . The current debate on science and technology, as reflected in the news media over the past couple of years, can thus only shed limited light on the future development of science and technology in China. [Sigurdson, pp. 533-534.]
Question 10. What special role does the female labor force play in the Chinese rural economy?
Policies toward women in China are one aspect of the overall attempt to transform the whole country. Every change in general policy has engendered a concomitant change in policy on women. After 1949 the policies that were developed for development in urban and rural areas showed marked differences. The differences were most clear cut in policy statements on employment of traditionally marginal groups in the labor force, such as the young, the old, and women. In





XX

contrast to employment of women in urban areas, at no time were women in rural areas officially encouraged to refrain from taking part in production. In rural areas, as policy on the employment of women developed in the early 1950's, women were urged to take part in agricultural production, and increase the number of days they did farm work ...
In contrast to the agricultural male population, women of poor peasant origin from the beginning played a crucial role in pro(dIuction teams, as compared to men of the same origin because they were the most -killed of their sex in farm work, since poverty forced them to (do farm work from childhood on andi often in low and despised jobs such as collecting manure.
Among the women they were usually the mnst politically reliable as well as the most experienced in forminv. In the male population, however, though the poor 1)peasant might be politically most trustworthy he usually was not the most knowledgeable...
The continued insistence that equal pay for eq al work must he enforced in the rural people's communes indicates that this principle is not yet universally applied in the Chinese countryside. In persective, 29 years is probably too short a period( to produce a general belief among Chinese that women are thei equal of men, when i(leas to the contrary have (dominated China for n ore than 2,000 years. [Thf)rborg, pp. 536-537 and 0554.]
Question 11. Will agricultural production trends be raised and cycles of output dampened as a result of current policy and practice?
In the near future there will probably be a sharp increase in grain production as the imported fertilizer plants come on stream and their output stabilizes at designed levels. In mid-1977 six of the plants were reported operating, but probably only one or two were producing at the designed capacity. Five or six more should be in operation this y-ear. A return to normal or better weather is another factor that is likely to cause production to jump in the next year or two. For the past 2 years, even though poor weather has constrained production, overall improvements to the agricultural system, such as irrigation, drainage, and land leveling, have continued . .
China's grain production plan for the medium term is extremely ambitious. The Government's output target for 1985 is 400 million tons, compared with 285 million tons in 1977 . .
Realistically, the Chinese are likely to fall somewhat short of the 1985 goal. A great and successful effort to achieve rapid growth in the medium term could nonetheless raise total and per capita output well above past levels. If the population growth rate continues to be kept under control, the Chinese might be willing to accept somewhat slower rates of growth in agriculture. Success in securing higher levels of agricultural production would assure the maintenance of at least subsistence consumption whatever the weather, and would help free the rest of the economy from the vicissitudes of the agricultural sector . .
In the longer term, as yields increase they may well eventually approach the levels that most more advanced countries enjoy today. Rice yields in China now average 3.5 tons per hectare of sown area; if they increased by 50 percent they would slightly surpass the 1975 fice yields of the United States and Greece, for example, although they would fall short of the 1974 yields of Italy, South Korea, and Spain, and well short of recent Japenese yields. In terms of rice yields, China is now in about the same position that South Korea and Taiwan reached in the early and mid-1960's, and that Japan reached earlier in this century . . With increasing modernization, Chinese yields are likely to move through the levels that Japan reached in the years following World War II, and that South Korea has achieved since the mid-1960's. [Groen and Kilpatrick, pp. 645-646.]
Question 12. Is the PRC of permanent and expanding importance in the world grain market? What type of grain and with which producingo- countries will the PRC likely trade?
The pattern of grain trade of the People's Republic of China (PRC) shifted abruptly in 1961 when China began a large grain import program. Although the PRC has continued to export rice, it has remained a net importer of grain despite slowly rising per capita grain production. During the 1970's, the annual variability of China's grain trade has increased considerably.
Grain imports have become less important in comparison with national grain production, but continue to provide an important part of grain supplies in the urban areas of northern China, as well as adding significantly to the total supply








of wheat, a preferred food-grain. During the 1970's, grain imports have followe(l fluctuations in per capita production of grains, suggesting that imports have been closely tied to state grain procurement from rural areas in northern China.
China's rice exports have covered a substantial part of the costs of grain imports and the net cost of grain import-, has fluctuated far less than the quantity of imports. The level of rice exports appears to be correlated with the cost of the grain import program and to a le.- ser extent with the level of per capita rice production. But available information does not provide a full explanation of the determinants of rice exports.
A survey of factors affecting grain import levels suggest that the growth of domestic demand for grains will increase in the future. Increased domestic feedgrain demand for urban livestock raising is also likely. PRC policy appear-', to favor self-sufficiency in grains, and imports of industrial goods and technology seem to have the highest priority in coming years. Therefore unless China is successful in increasing the growth rate of grain production and state procurements, pressures will build for higher grain import levels and other economic policy goals will be compromised.
The United States appears at present to be a residual supplier of grain and other agricultural products to the PRC. Until this changes, United States grain exports to China are likely to remain highly variable and substantial on an ongoing basis only if the PRC is unsuccessful in holding down grain import levels. [Surls, pp. 653-654.]
Quest-ion 13. What are China's technological options for improving agricultural performance?
A common strategic objective underlies the entire program of technological change in Chinese agriculture, specifically the increase in the extent of multiple cropping. In comparable environmental circumstances, where other countries are growing a single crop per year, China seeks two; where others grow two, China seeks three. The impact of this goal on the forms and direction of technological change in Chinese agriculture cannot be exaggerated:
Multiple-cropping dictates extreme earliness as an overriding objective of Chinese seed breeding, at a cost of potential yields and ease of borrowing from foreign breeding programs. Multiple-cropping makes an available supply of organic and chemical fertilizers, which is now becoming adequate by the standards of a modern, single-cropping system, inadequate to satisfy requirements of two or three crops, so that one or no crops can reach optimal yields. It also necessitates the absorption for the foreseeable future of large quantities of labor in low-productivity collection and processing of organic fertilizers, exacerbating the labor-productivity gap between agriculture and industry. Multiple-cropping increases the water requirement in Chinese agriculture, forcing further development of artificial irrigation in areas where rainfall or existing irrigation systems are adequate for only one or two crops, at a significant cost in capital, labor and land encroached on by the irrigation systems. Multiple-cropping creates the bottlenecks in labor and draft animal supply which make mechanization a prerequisite for further intensification, rather than a means of sustaining farm production with a decreased labor force as in other countries. It also forces the continued maintenance of a huge draf t animal stock, which reduces grain available for human consumption or meat production. Multiple-cropping, through its requirement of earliness, creates the need for dense planting, whereas other countries have tended to reduce labor and seed production requirements through sparser planting with no loss in yields.
In view of the severe cost of increasing the multiple-cropping rate, one would hope that the benefits clearly outweighed those of alternative strategies. Unfortunately, I have seen no evidence that the Chinese have considered any alternatives ,it least since the 1950's, even though changing technologies may have made earlier appraisals of limited relevance. Bv now, the efficacy of multiple-cropping has become a matter of doctrine, at least at the official level.
The most plausible alternative would not have been single cropping, except in the north, but rather a maintenance of the status quo ante, a system of doublecropping south of the Yangtse River (rice-rice in the warmer areas, winter wheatrice otherwise), and intensification of production within that constraint. Based on the experience of other countries and the costs and difficulties experienced in changing this system in China, this would have been the "natural" course of development, in the absence of forceful state intervention . .
Chairman Hua Kuo-feng has been more intimately involved in the promotion of technological change in Chinese agriculture than any other high level leader






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except Chen Yung-kuei, and this involvement has encompassed the failures of the (Great Leap technological policies as well as successes in irrigation and seed development work in recent years, yet his optimism about further potential is as striking as the 4-5 percent growth target he recently announced . .
As this incomplete summary should suggest, China's program for attaining its targeted growth rates is comprehensive and technically (and probably economically) sound; it responds simultaneously to the problem of accelerating the growth of the laggard regions and crops and that of enlarging potential at the technological frontiers. In its ambition and breadth of mobilization it is comparable to the Great Leap, but, as with the more narrowly-based programs of the last fifteen years, the potential sources of growth have been correctly identified and are not illusory. The open question, then, is not whether the program as stated is sufficient to meet the targets (even if we cannot quantify the potential contribution of each element of the program). Rather, it is whether China can mobilize and organize the resources to carry it out. [Wiens. pp. 700 and 702-703.]
Question 14. Is the current regime's interest in foreign economic relations likely to expand and stabilize? What are the specific prospects of Sino-American trade?
China's foreign trade, although a small component of gross national product, plays an important role in sustaining and modernizing the Chinese economy. A relatively small trade sector, of course, is expected of al vast and populous country such as China, which has extensive. domestic resources and a huge domestic market. Yet, the share of trade in China's ,GNP, only about 5 percent, is low by world standards reflecting the residual role assigned trade in the centrally planned economy and the conservative attitudes toward trade as a result of historical and more recent experiences.
Trade is the b alancing sector in the planning process with imports making up for the shortfalls in domestic production and providing goods that cannot be produced in sufficient quantity, or at all, in China. Exports are not viewed as an end in themselves )ut a< a means to pay for imports. Moreover, trade and financial policy has been very cautious, colored by Peking's view of the unhappy experiences with trade in both pre-1949 China and the period of Soviet cooperation in the 1950's. Self-reliance has. been the guiding principle although its interpretation has been the subject of some debate in China over the years . .
While exports will be the determining factors, imports will be the raison d'etre for China's trade expansion in the future. Purchases of foreign plant and equipment will be a major component of China's economic modernization (drive, industrial supplies will help sustain the growth in industrial production, and agricultural imports will compensate for shortfalls in the farm sector. Because imports will be tailored largely to export growth, they- will likely grow at roughly the same rate over the eight year period . . [Batsavage and Davie, pp. 707-708 and 728.]
Two central themes run consistently through the foreign trade policy of China. These are "self-reliance" and "trade on the basis of equality and mutual benefit." In self-reliance, Peking perserves independence by reducing reliance on foreign assistance and by limiting the foreign presence in China. . In equality of trade, Peking sees a way to supplement China's own resources without risk of entanglement while creating a useful channel for promoting understanding of China's socialism and other diplomatic objectives . . On the basis of these policies, China is now trading with over 150 countries and has entered into trade agreements with more more than 50 countries . .
China is now embarked on a massive program to modernize agriculture, industry, science and technology, and national defense in a way designed to propel the PRC into the front ranks of industrialized nations of the world by the turn of the century. To achieve these goals, substantial quantities of complete plants and related technology will have to be imported. But in the past these types of imports have caused ideological problems in the Peking leadership. . By 1973 it was safe for one leading trade official to link technological imports with selfreliance . .
The reality of that policy is seen in the purchase by China during the period 1972-1975 of some $2.7 billion in complete plant and associated technology.
After that period, policy shifted again, and brought a virtual halt to the import of complete plants which lasted until the arrest of the Gang of Four in October 1976. Since their ouster, the Hu Kua-feng leadership has stressed the importance of foreign trade in growth of Chinese economic development. Retrenchment of the economy during 1977 prevented as quick a return to large scale plant and tech-






XXIII

nology imports as had )een expecte(l in the W(st. Contracts will b (e negotiat'(d in 1978, 1)ut most new plants will contribute to the m Question 15. With increased modernization will the PRC be more willing to accept the normal legal practices of the world market?
. Although it remains highly unlikely that the Western legal tradition, which had taken hold in China before 1949, will exert a (liscernibly strong influence, pragmatism and the need to develop solutions to the problems of managing an increasingly more complex economy may impel Chinese planners to ehoos( 4('!ct ivel v from analogies derived from the experience of other nations, develop(,1 a- weil as devehcping.
It is too early to be confident that a lasting commitment has, been ma V to fashioning and using institutions for implementing policies that decrea(, the means of mass mobilization and increase the making and application of rules I)y officials charged with those tasks. Even if policy could change again, though, the present mood and current experimentation reflect an openness and flexil)ility that are striking by contrast to the policies that dominated the previous (ldca(le. [Lubman, pp. 765-766.1
Question 16. What are the PRC prospects for expanding exports to the industrial West to gain hard or convertible currency needed to finance imports?
This paper provides data covering recent exports of the People's Repulklic of China to twenty hard currency countries. This group of twenty includes all the major industrialized Western countries plus a few countries in Asia, which by virtue of geographic proximity are significant export markets for the PRC.....
At $5 billion, 1976 exports to The Twenty countries were about 140 percent greater than the 1,972 level.
At nearly $3 billion, China's exports of primary products (SITC 0-4) accounte(d for 58 percent of the total and were the largest group of commodities exported to The Twenty countries in 1976. Nearly one-half of these exports were food and live animal items (STIC 0) ...
China's hard currency export capabilities are relatively diversified, with the top fifty items accounting for only 64 percent of trade. There was, however, a relatively large concentration of exports among the top ten items, which comprised one-third of total hard currency earnings from The Twenty. After the top ten, all the remaining items in the top fifty ranking individually contributed on the average of one percent to total hard currency earnings.
The commodity composition of the top fifty items exported to the twenty varied only slightly over the three years between 1974 and 1976. In 1974, 63.1 percent of total hard currency was earned by the top fifty; in 1976, this percentage had risen slightly to 63.6 percent ...
textile fabrics (SITC 65) contributed the largest share to hard currency earnings in 1976 ...
Petroleum and petroleum products (SITC 33) ranked as the second largest hard currency export earner in both 1976 and 1974, and the largest in 1975 ...
Among food items, the most important have been swine, rice, and seafood (SITC 0013, 0422, and 0313).
The most important manufactured item exported by the PRC was basketwork (SITC 89922), followed by a wide variety of clothing items. Besides basketwork and clothing, the remaining manufactured item appearing on the top fifty was footwear (SITC 85102). (Kravalis, pp. 790, 793, and 794-795.)
Question 17. If Most-Favored-Nation (IFN) tariff privileges were extended to the PRC how might this development affect trade turnover in Sino-American trade?
This paper presents estimates of the amounts by which U.S. imports from the PRC would have exceeded their actual 1976 values had PRC products been assessed at U.S. Most-Favored-Nation (MFN) tariff rates in that year. Our estimates are derived from a detailed econometric analysis of the tariff sensitivity






XXIV

of China's top fifty 1976 hard-currency-earning exports, on a product by product 1)asis. Because we do not expect that the product composition of China's overall hard currency export capabilities will alter rapidly in the near term, we believe that the 30 percent MFN-induced rise in total U.S. imports from the PRC predicted by this model may be taken as applicable to the near future, should the United States grant MFN to China during the next few years. [Raffel, Teal, and McQueen, p. 840.]
There is another assessment on the potential impact of extending

MFN.
The following restates the principal conclusions of this study:
-The price elasticity of U.S. import demand for many of the types of products exported by the PRC is relatively low. Therefore, small changes in prices of these imported goods are likely to produce only limited consumer responses.
-A significant proportion of current PRC exports to the U.S. are subject to ad valorem tariff differentials. Some are assessed only specific duties, and the impact of MFN extension for these commodities would be small.
-Given the price inelasticity and number of products not subject to ad valorem tariff differentials, the impact of MFN extension on those products currently being traded would be limited-perhaps five to seven percent of the actual import level.
-Lack of MFN appears to have a substantial impact on certain commodities export, d by the PRC, principally light manufactures. These commodities are imported by the U.S., but at disproportionately low levels compared to the EC market. If U.S. imports of PRC products had been normalizedd" (i.e., equivalent to EC imports), the impact of MFN extension in 1975 at the normalized level would have been about 55 percent of the actual level of trade. In 1975, the difference between the normalized import level and the actual level for commodities with ad valorem differentials was approximately 90 percent of total imports. This suggests that the MFN impact in that year would have been between 50 and 90 perc: nt of th! actual value of import.
-In the future, the ratio of actual imp-)rts to "normalize imports (however defined) can be expected to rise; eventually a plateau may be reached. As trade increases, the significance of the lack of MFN should also increase, both in absolute value terms and as a percentag' of the shortfall between actual and "normaliz id" trade.
-The effect of MFN extension on U.S. domestic employment is likely to be small-fewer than 6,000 workers under the most pessimistic estimates. The apparel and light manufacturers (toys, sports g-ods, etc.) industries would be most affected. [Kilpatrick and Lincoln, pp. 827-828.]
Question 18. What special economic relations does the PRC have with the developing world? As a recipient of aid from the PRC and the USSR, how does the Albanian case illustrate the comparative effectiveness of Chinese aid?
Political turbulence in the People's Republic of China and the slowdown in domestic economic growth led to a decline in economic aid pledges to the Third World in 1975-77, to less than $200 million a year from the $500 million annual commitments of the first five years of the decade.
Aid disbursements, on the other hand, maintained a brisk pace at $220 million a year in 1975-77, as earlier commitments were carried out and as new countries were added to the list of recipients.
The number of Chinese technicians in the Third World rose to an all-time high of 24,000 in 1977.
China gets good marks for its economic aid program, which emphasizes smallscale development programs and tailors projects to the needs and resources of its Third World clients.
Chinese-LDC trade has become an important source of hard currency for China, at the same time providing new markets for Third World raw materials.
Military transfers, which are concentrated overwhelmingly in Pakistan, have been a small fraction of the Chinese aid program and are dwindling in the face of Soviet and Western competition. [Fogarty, p. 851.1
A study of the Albanian experience also suggests that a theory of aid which does not take account of ideological and political factors can never fully explain the impact of aid on a centrally-planned developing economy. The Albanian split with the Soviet Union provides the most dramatic illustration of this point.





XXV
From a practical point of view, it seems reas-oiialble to conclude that, while Albania has been able to maintain a reasonably 6tea(1v flow of external credit throughout the past thirty years, thc aid has nonetheless- acted as a constra, int on Albanian industrial policy in two important aspects. lFirst, the aidl received from Comecon assisted the development of light industry in Albania at the expense of heavy industry, notwithstanding the implied benefits for Albanian exports It also operated to the detriment of agriculture up to 1953, but this appears to have been a failure of PEA policy rather than a constraint impose ,d by donor motivation. Second, the aid provided by China seems to have been fully in accord with a Stalinist strategy, but the geographic problems involved in commodity transport between China and Albania and China's instability as an aid donor may account for Albanian difficulties in completing the construction of industrial p~rojlects within a planned time. [Schnytzer, pp. 878-879.]

PROSPECTS AND PROBLEMS
This volume on the economy of the People's Republic of China may be especially timely for American lpolicymakers, scholars andI the general public for several reasons:
1. The post-Mao leadership has given high priority to economic
modernization, professionalism, andl incentive systems in 1)1anning and management. The need of PRC's economy for Western prIodIucts and processes have created an opening for greater influence and a favorable environment for closer commercial ties between China and Japan, the United States and other W~estern industrial
economies.
2. The rapproachement between the United States and the
People's Republic of China has been followed by increasing p)olitical, commercial, scientific, social and other relations. Commercial relations have expanded (hue to China's stated needs for Western technology-including modern fertilizer plants to increase agricultural output. Expanding oil revenues and a more flexible attitude toward credit and other aspects of the Western market suggest wider future commercial ties. Since our continuiing ties with Taiwan and concerns on arms control are serious barriers to rapid improvement in political and military relations, for the immediate future improved economic intercourse may be the
most attractive avenue for improving Sino-American relations.
3. The leaders of the PRC have given priority to economic
modernization. Although purchases of foreign military technology and an expressed need for military industries modernization IS part of the current long run policy Western influence is still likely to be greatest in relations to China's economic needs. In spite of possible progress on birth control, the Malthtisian Spector still looms in China's future. Imports of grain and transfer of agricultural technology from the West, may be the critical longterm ingredient, although marginally significant in the short run.
4. Modest, but significant, improvements in the quantity andl
accuracy in published economic data, empirical evidlence'from exchanges, substantially increased 'Western access to the end users of the imports, have aided. the Western analyst in aippraising
China' s economic policy and performance.
It is difficult to separate elements of long-term trends from cyclical or variable factors in performance. However, it seems clear after over a quarter of a century of power that Chinese leaders aim to develop a modern, powerful, industrial state which would be capable of dealing on equal terms with superpowers and at the same time, providing





XXVI

adequately for its citizens' needs. The current Chinese developmentt plans, however, do not include the Stalinist type urgency to overtake and surpass the West in a short, definite time period-a goal the Chinese expressed during the Great Leap period.
Against this long-term aim of achieving an economic basis for superpower status, there appear to be political, ideological, and social policies which from time to time override the short-term progress of economic nation-building. Some of them may take on importance in the years immediately ahead and influence economic performance:
Political succession.-Inevitably, Hua and Teng, the successors
to Chairman Mao and Chou En-lai will be challenged. Successions elsewhere, ior example, after Lenin and Stalin, suggest that an unforeseen, unsettling struggle is more likely than orderly transfers of power.
Ideological revitalization. -There have been times such as the
Great Leap and Cultural Revolution periods when the requireinent for ideological revitalization conflicted with policies for economic performance. If this experience is repeated periodically, stable long-term growth prospects may be in jeopardy. To assume that no recurrence of these economically disturbing politicali(Ieological cycles is, on the one hand, to give very great weight to the unique force of Mao's personality and on the other hand, to deemphasize the broader base of support for the "Yenan"
revolutionary spirit in the Party and nation as a whole, which
Mao must have had.
Foreign threats or opportunities requiring more weapons and
militaryforces.-Concern with the Soviet Union may at any time lead to a major shift in Chinese weapons or force buildup. Also, despite present indications of military restraint, under different circumstances Peking might well become more actively involved
in supporting Asian Communist powers.
Indeed, some would argue that these political factors represent central, fundamental forces in Chinese society and that economic considerations are the external or variable factors. Whatever the primary and secondary forces may be in Chinese development, it has become clearer in each successive economic assessment that the PRC economy has attained a firmer base for claims of meeting not only domestic but the major international goals of the leadership. In spite of many current and likely future problems, we should not assume that the People's Republic of China will not be able to continue to meet its priority economic needs.























Part I. POLICY PERSPECTIVES















CHINA'S POST-MAO ECONOMIC FUTURE

By ROBERT F. DERNBERGER AND DAvi FASENFEST*

CONTENTS

Page
Past performance and the economic problems of the mid-1970's 8
Institutional reorganization of the economy ------------------------ 9
Disproportionate growth and the major economic problems of the
mid-1970's-- 11
The fixed parameters over the next decade----16 An alternative forecast of China's economic evolution (1975-85) --------- 20
Agriculture --------------------------------------------------- 21
Industry- -27 Consumption ------------------------------------------------- 30
Foreign trade ------------------------------------------------- 31
Emerging policy choices of the new leadership --------------------------35
Self-reliance- 36
Standard of living --------------------------------------------- 38
Modernization of the military ------------------------------------39
Foreign loans-31 The choice of trading partners--44 Conclusion- 46
A unique feature of China's emergence as a major world power has been the continued dominance of a relatively small leadership group whose members had gained prominence in the Chinese Communist movement during the 1920's and 1930's. The resulting control over policy formulation and implementation over such a long period by this relatively small group of leaders, their advancing age-most were born in the 19th century--and their failure to groom and share power with a younger generation of leaders, led many Western political analysists to contemplate and offer predictions on the outcome of the inevitable succession crises.' Actual developments in the mid-1970's dramatically set the stage for the succession crises with the death of the three most eminent leaders of the Chinese Communist Revolution-Mao Tsetung, Chu Teh, and Chou En-lai-in a single year.
Events over the year and half between the death of Mao (September 1976) and the convening of the Fifth National People's Congress (February 1978) have been both dramatic and unexpected. The attempt of the radical left leaders, who had acquired positions of power during the Cultural Revolution in the mid-1960's, to seize complete control was quickly thwarted by the arrest of "the Gang of Four" 2 and the widespread campaign to expose and remove their

*Robert Dernberger is a professor of economics at the University of Michigan. David Fasenfest is a graduate student in economics at the University of Michigan.
1 See, for example, Richard Wich, "The Tenth Party Congress: The Power Structure and The Succession Question," China Quarterly, No. 58, April-June 1974, pp. 231-248.
2 The "Gang of Four" is the designation given to the four major leaders of the radical left at the time of Mao's death: Yao Wen-yuan (Shanghai propagondist who gained prominence during the Cultural Revolution and became an editor of "Red Flag," the Party's official journal), Wang Hung-wen (also from Shanghai, leaped into prominence at the 10th Party Congress in 1973 and later became No. 2 in the Party heirarchy behind Hua Kuo-feng), Chiang Ching (Mao's wife, probably most militant of the Gang), and Chang Chunchiao (from Shanghai, Deputy Prime Minister to Chou En-lai, probably less partisan, but more politically potent than rest of gang).

(3)





4

followers at all levels of the political system. The advocates of a more moderate or pragmatic approach to the Socialist transformation of China's economy and society, on the other hand, have now been rehabilitated and restored to power. The speeches made, the resolutions adopted, and the officials elected at the Fifth National People's Congress all symbolize the extent to which the moderate or pragmatic wing of the Party has emerged victorious in the present stage of the succession crises.
The influence of the radical left in China, of course, is not eliminated by the arrest of the "Gang of Four", nor by the restoration of the moderates-pramatists to high-level positions of power. The repeated campaigns of the radical left in the past to transform Chinese society according to the thowrhts of MIao have obviously left their stamp on the values and behavior of a generation of Chinese. Moreover, although the extent of the vicorv of the molerates-pragmatists is quIte sur)prising, the real winner in the present stage of the succ sion crises is
Hua Kuo-felg. Not only was iua a relatively- unkown only a few
short years ago, he also cannot be readily identified as a member
of the mioderate-pro.!gmatic leadership faction.
His reputation as a provincial-level problem-solver in the agriculturalI sector and his loyalty to Mao undoubtedly led to his being selected as lhe chairman n of the national conference on thie Ta-chai type advanced county campaign for the modernization of China's
agriculture, held in the fall of 1 975. Shortly thereafter, and before Mao's death, he was surprisingly elevated to the very apex of the political system, presumably to serve as a caretaker to supervise
the succession c(I ses which would follow Mao's imminate and anticipated death. 11ua's sudden and unexpected appointment to this
critical position of poXwer may be partially explained by his lack of a national reputation, his lack of an independent power base, and his not being a well-known advocate for either of the groups who would be contending for power in the succession crises. The recent reaffirmation of his position as chairman of the parity by the 11th National Congress of the Chinese Communist Party and as chairman of the Government by the Fifth National People's Congress is interpreted by some observers as a sign of the continued instability in the current alinements and balance of power within the leadership. On the other
3 Although the terms used in this paragraph and throughout the remainder of the paper to identify the leadership groupings engaged in the "2-line struggle" for control of China's economic development policy are somewhat inprecise for the purpose of identifying particular individuals or economic policies, these terms are meaningful labels for the purpose of distinguishing between two major catagories of economic policies which have been advocated for the achievement of China's economic modernization. On the one hand. the moderate-pragmatic policies give greater priority to economic development as the short-run goal and Ps a prerequisite for achieving the socialist transformation of China. As a result. they place greater emphasis on the more traditional economic policies associated with efficiency, a rational division of labor, advanced technology and modern industry, and reliance on the skills of technicians and engineers. In other words, the advocates of these policies favor placing economics in command in the short-run and leaving the achievement of the goal of social transformation to the long run. Thus, the major constraint on the moderate-pragmatic policies is their short-run challenge to the ideological goals of Mao's socialist revolution.
The radicals, on the other hand, using the Soviet experiences as an example, realize that the moderatepragmatic economic policies may well involve the creation and entrenchment is Chinese society of social values and behavior that are antagonistic to the objectives of achieving a true socialist society-so much so that this objective is not only postponed but eventually eliminated. Thus, they see the necessity of advocating simultaneous and complementary economic development and social transformation. As a result, their economic policies involve a much greater tradeoff between the objectives of economic development and social transformations than do those of the moderates. The major constraint on the radicals is the reality of Chinese society today: beset by economic problems and, without Mao, an economic, political, and military leadership that is disinclined-because of these economic problems-to accept or support them. The above policy differences are largely a matter of emphasis or degree, not contradictory alternatives. Nonetheless, the dynamics of political realities over the past three decades in China led to the situation in which these two groups became rivals and were the major contenders for power in the succession crises.





5

hand, the evidence also sutiggests that he has not only survived the succession crises, but is emerging as a major new force in (hina's political leadership, representing a synthesis of the dialect ic conflict between the two line struggle of radicalism and nmo(1erate-,)ragmatism in the formulation of ('hina's economic policy over the past three decades
Whatever is true of tHua's own position, the contents of the majority of articles in the Chinese press over the past year, the new a)ppointments to high level positions in both the party and Government over that same period, the essence of the new constitutions of both the party and the Government, and a key )assae from ItIa's add iess to the Fifth National People's Congress all attest to the rather dramatic shift in the balance of power within the leadlershil) in favor of the moderate-pragmatic faction, with their first ort(der of business being China's economic development. According to Hua:
In order to make China a modern, powerful socialist country by the endl of the century, we must work and fight hard in the political, economic, cultural. miltarV and diplomatic spheres, but in the final anaysis what is of importance is the rapi development of our socialist economy.'
In its details, however, Hua's speech to the Fifth National People's Congress does not indicate the moderate or pragmatic point of view has had a significant impact on the program he presents for achieving the rapid development of China's economy. It is, of course, necessary to recognize Hua's speech as fundamentally a policy statement with a major political objective; an appeal to the Chinese to rally behind the new leadership in their attempts to achieve the economic modernization of China. Furthermore, the specifics of the program adopted by the Fifth National People's Congress to achieve this goal, the long-run economic plan for 1976-1985, were presented by other speakers to the Congress and have not been published. We are told, however, that this plan is the same as the plan which had been drawn up in 1975, that is, before Mao's death, the arrest of the "Gang of Four", and the restoration to power of the moderate-pragmatic leadership. Nonetheless, the targets of the plan, apparently unrevised in light of developments in the 2 ears since they were originally formulated, were formally presented to and adopted by the Congress. Thus, while neither Hua nor the new moderate-pragmatic leadership should be held responsible for the formulation of the economic program summarized in Hua's speech, the emphasis given the plan and its specific targets in the speech, its adoption by the Congress, and the whole discussion of China's economic problems and the policies for the solution of those problems presented by Hua does raise serious questions as to the extent to which the moderates-pragmatists are in control of China's future.
For example, Hua's speech places much of the blame for China's current economic problems on the policies and interference of the "Gang of Four", rather than recognizing them as fundamental, longrun economic problems inherent in China's past economic development and current economic environment. These problems will not be solved merely by the arrest of the Gang of Four and the restoration of the moderate-pragmatists to power.

4 Hua Kuo-feng. "Unite and Strive to Build a Modern, Powerful Socialist Country!" Report on the Work of the Government Delivered at the Fifth National People's Congress, Feb. 26, 1978, in "Peking Review," No. 10, Mar. 30, 1978, p. 18.





6

Secondly, the summary targets for 1985 emphasized in Hua,'s speech resemble those used in the past to mobilize labor in a mass campaign to accomplish a great leap, rather than the rational projection of what is feasible in light of the constraints imposed by China's fundamental economic problems. As mentioned above, these targets for 1985 were drawn up in 1975, but in light ef the economic developments in 1976 and 1977, much-of what was to be done in 10 years, is now to be accomplished in 7. For example, the target for grain output, 400 million tons, implies a rate of growth in grain output over the next 7 years of 4.8 percent a year and Hua claims that total agricultural output is to increase by between 4 and 5 percent a year. Not only have the Chinese been unable to obtain such rates of growth for any 3-year period in the past three decades, no other major grain producer in the world has been able to maintain rates of growth such as these over a continuous period of 7 years. For steel, the target is 60 million tons, but this implies the import, construction, and placing into production of a major new steel complex at the rate of about one a year for the next 7 years. In the next 7 years as a whole, the rate of industrial investment and production (more than the total of the entire past 28 years) imply a level of imports and industrial labor force such that the exports, transportation facilities, social overhead capital, energy, and middle4evel technical personnel requirements would exceed any realistic assessment of Chinese capabilities
Quite simply, the targets of the plan reported by Hua are those which are derived from the long-run, idealistic goals, held forth by Mao and Chou En-lal over the past 10 years: the overtaking of the most advanced industrial countries by the end of the century. Or, more specifically, the hope to achieve and surpass the world's highest yields in major agricultural ciops and the world's highest levels of output for major industrial products by the end of the century. This is an acceptable and meaningful long-run goal. It is not, however, the basis for operational and realistic short-run plans for the allocation of resources in the search of a pragmatic solution to China's immediate economic problems.
The pragmatic solution of these problems requires the Chinese leadership to make hard choices among the alternative allocations 6f investment for the achievement of alternative objectives. Over the past year, the many nationwide conferences that have been held and discussions in the Chinese press clearly reveal the nature of these choices the new leadership faces in choosing tradeoffs among the various sectors of the economy: consumption versus investment, the military versus civilian sector, agriculture versus industry, heavy industry versus light industry, exports versus domestic consumption, domestic education and research versus imported technology and expertise, et cetera. There are, of course, many alternative choices which must be made within each of these individual sectors as well. Yet, rather than recognize the importance of these choices for China's future economic development and the extent to which some of these choices have already been made, Hua's speech promises something for everyone: higher standards of living (in normal years, 90 percent
6 This argument is supported by the findings in several papers in this volume. See, especially, Nai-ruenn Chen, "Self-Reliance versus Learning from Abroad: China's Path to Economic Modernization"; William Clark, "Electric Power Industry"; Jon Segurdson, Urban-Rural Relationships: Technology and Manpower Policies"; and Hedija Kravalis, China Export Potential".





7

of the peasants are to receive an increase in income), the modernization of the military, a record-setting pace of agriculture development, an exceptional rate of growth in foreign trade with no mention of borrowing from abroad (there is also no mention of self-sufficiency), an educational and training program which will allow China to overtake the best scientific and technological standards in the west, and so on. These programs are said by Hua to be necessary in order to turn the plan into reality. This is true, but the task of the new moderatepragmatic leadership is the need to formulate operational economic programs and plans for the long-run achievement of economic modernization for China which are based on the reality of the economic constraints of China's economy, not derived from Mao's slogan that
this economic modernization was to be achieved by the end of the century.
Our purpose in this introductory paper is to present an alternative assessment to that contained in Hua's speech: an alternative to his assessment of the fundamental economic problem's faced by the new leadership, an alternative to his projection of the feasible course of China's economic development over the next decade, and an alternative analysis of the economic consequences of the policy choices the new leadership has made concerning the various objectives of economic modernization Hua presents.6 This alternative discussion of these problems should provide the reader with a meaningful overview of China's contemporary economic evolution and the necessary frame of reference for interpreting and integrating the arguments presented in the individual papers in the following sections of this volume and for evaluating the detailed collection of revised estimates for economic activity in China over the past 28 years to be published in volume IJ.7
Although this paper attempts to provide such a framework for interpreting and evaluating the other papers, it is important to note that no attempt has been made to have the individual authors of the other papers adopt any particular framework of analysis, point of view, or conclusion. For example, the emphasis in this paper is on the long-run trends and relationships in China's economic development and the analysis leads us to conclusions which can be interpreted as
Much of the discussion in this paper relies to a great extent on a much mcre detailed analysis of China's fundamental economic problems, projection of China's economic development over the 1980's, and the choices among the various investment and policy options the new leadership would face written by Robert F. Dernberger and published shortly after Mao's death. See Robert F. Dernberger, "China's Economic Future," Allen S. Whiting and Robert F. Dernberger, "China's Future" (New York: McGraw Hill, 1977). 7 The remaining papers in part I are also presented to provide a framework for interpreting and integrating the arguments and empirical evidence found in the other papers presented in the followving sections of volume I and those in volume II. Whereas this paper emphasizes long-run economic relationships and trends in China's economic development, the following two papers raise many of the same problems discussed in this paper, but analyze them from a somewhat different point of view. Nicholas Lardy, in his paper on "The Economic Options of Hua Kuo-feng," emphasizes economic developments over the past few -ears and the possible developments in the immediate or near future, that is, the next few years. William Whitson's paper on "Politics and China's Economy" emphasizes the political forces or considerations which have influenced economic policies and developments since Mao's death and which will have an important role in determining those policies and developments in the immediate or near future. The remaining four papers in part I cover a variety of topics, each of which contributes to a better understanding and interpretations of what follows in volume I and volume II. Alexander Eckstein summarizes the Chinese economic development objectives, strategies, and accomplishments over the past 25 years in their search for economic modernization in "The Chinese Development Model." How Soviet specialists have interpreted and evaluated Chinese economic development policies and performance is surveyed by Leo Orleans in "Soviet Perceptions of China's Economic Development". The extent to which a very significant dependence on foreign technology and trade will be a necessary consequence of the Chinese desire to rapidly achieve economic moderni-ation by the end of this century is indicated in Nai-rueln Chen's "Self Reliance versus Learning from Abroad: China's Path to Economic Modernization." Finally, a summary review of economic developments and policies during the mid-1970's is presented in Arthur Ashbrook's "China: A Shift of Economic Gears in the Mid-1970's."

27-427-78---3





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somewhat pessimistic. The following paper by Nicholas Lardy, assessing many of the same problems raised in this paper by analyzing the short-run developments within the more recent past, yields conclusions which tend to be much more optimistic. The individual authors of the papers in this volume were chosen on the basis of their expertise in the subject matter they were asked to investigate; not on the basis of theix point of view. Thus, different interpretations of China's economic development and policies in both the past and in the future can be found in the papers that follow. That is as it should be. In their campaign to develop their scientific and technical capabilities so as to catch tip with the West by the end of this century, the Chinese have adopted Mao's slogan to "allow 100 flowers to bloom, 100 blossoms to contend." That same motto holds true for our search for the truth concerning China's economic evolution in this and the papers that follow.
PAST PERFORMANCE AND THE ECONOMIC PROBLEMS OF THE MID-1970's
During a very few years after the Second World War, the Chinese Communists emerged from their guerrilla bases, rapidly seized control of large portions of Manchuria and North China, crossed the Yangtze, swept through the south, and in 1949 announced the creation of their new government for all China-the People's Republic of China. The economy they inherited included over 500 million people who were poorly fed, clothed, and. housed and who had a per capita GNP that was probably less than US$50. The economy's productive capacity had suffered severe damage (luring the Civil War. Moreover, after the Second World War the Russians had dismantled and removed over 50 percent of the industrial capital in China's largest industrial and railroad base, Manchuria,. Even in the 1930's I industrial output had accounted for only 10 percent of China's GNP, but in 1949 the absolute level of output in industry fell to only one-half its prewar peak. That same year was little better for agriculture: g rain and cotton outputs were, respectively, about 25 and 50 percent lower than the prewar peak levels.
In addition to commodities production being at a very low level, the. underdeveloped and partially destroyed transportation system made regional distribution of both goods needed for production and processed goods a serious problem. The rampant inflation that had been underway since 1936 had also seriously distorted business incentives (by leading to speculation, et cetera) and bad prevented the rational allocation of resources to meet China's basic needs (rational being the use of resources in their most effective and beneficial way, which by definition can occur only in a noninflationary economy). Moreover, with domestic shortages limiting China's export capacity, the state treasury's holdings of foreign exchange reserves having been removed by Chiang Kai-shek to Taiwan, and the small likelihood of foreign aid and assistance from a hostile Western world, China's capacity for alleviating those shortages by imports was severely limited.
The length and scope of this analysis do not permit a description of how skillfully fiscal and monetary policies were used in the reconstruction program that restored production to its peak levels of the prewar period by 1952. Those enterprises that had been owned by the Nation-





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alist government or by bureaucratic capitalists were taken over by the state, but private enterprise was allowed to remain in operation, as was a market system for the allocation of resources. The state budget was balanced, and revenues were usedl for investment in the public sector. State trading companies were created to dominate both internal andl external trade in key commodities,, but rationing was not yet introduced, nor were price controls. Furthermore, this remarkably successful rehabilitation program was carried out with limited Soviet aid while China was fighting the world's largest military power in the Korean war and at the same time carrying out a sweeping redistribution of economic, social, and political power by means of land reform in the countryside.
Between 1949 and 1952, the new government restored price stability, increasedl industrial output 2.5 fold and agricultural output by 50 percent, brought the balance of payments under control, and more than doubled'-imports, with producer goods accounting for over 90 percent of the total imports. Most important, GNP per capita, in real terms, in 1952 was 35 percent higher than it was in 1936.8

Institutional Reorganization of the Economy9
Having successfully consolidated their control over the population andl economy and revived production to roughly the levels obtained before the war, the Chinese launched their program of institutional change and economic development to achieve the transformation of China into a modern industrial power. The agricultural sector was reorganized into elementary producer's' cooperatives, into advanced cooperatives a few years later, andl finally into People's Communes in 1958. The communes were intended to replace the lowest level of government in political administration and were to be the essential decisionmaking and accounting unit in production in the rural areas. This experiment proved unsuccessful, however, and political administration was returned to the county governments and production and income distribution decisions were decentralized to the level of the team, approximately equal to the size of the earlier elementary producer's cooperatives, following the economic crises of 1959-61 .10 Although the team, consisting of 30 to 40 households, has remained the basic (lecisionmaking and accounting unit in Chinese agriculture, recent discussions in the Chinese press indicate that the radical goal of making the brigade, equivalent in size to the former advanced producers' cooperatives, and then the commune the decisiionmaking, and accounting unit remains as a longrun goal. In addition, with the spread of rural small -scale industry and farmland reconstruction projects operated by the commune, that high -level organizational unit is regaininlg some of its former role in determining the allocation of resources in the rural areas of China. Nonetheless, 8 State Statistical Bureau, "Ten Great Years," Foreign Languages Press, Perking, 1960.
9 For a discussion of the general economic model, i.e., institutional and functional, organization and policy priorities, pursued by the Chinese Communists in their economic development efforts over the past 25 years, see Alexander Ecksteiun's paper in this volume, "The Chinese Development Model."
10 For a more detailed discussion of these institutional changes in the agricultural sector, see the discussion in Robert F. Dernberger, "China's Economic Future," op .cit., and the sources cited in that article.





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Communists in the agricultural sector has been the change from household farming which had existed for centuries to collectivized farming by production teams and there is little evidence to indicate this institutional organization will be changed by the new leadership.1
State ownership in industry was already significant in 1952, accounting for over 50 percent of the gross value of industrial output, due to the takeover of enterprises owned and operated by the Nationalist government and the bureaucratic capitalists, that is, those capitalists with close ties to the Nationalist government. The remaining privately owned firms were soon subjected to numerous taxes, fines, and labor problems so that in a short time their owners took advantage of the state's offer to buy them out with bonds equal to half the value of the assets of the firm. By 1956, all private enterprises had been absorbed into the socialist sector, with the joint state-)private firms accounting for 30 percent of the gross value of industrial output. These joint state-private firms were completely taken over by the state (luring the 1960's.
Initially, ownership and control of the state enterprises were highly centralized under the economic ministries of the central government, with their input and output quotas being determined in the state's economic plan, Since the late 1950's, however, considerable decentralization has occurred; only key industries being directly under central government control, the largest of the remaining industrial enterprises being owned and operated by municipal and provincial governments. In the rural, small-scale industrial sector, the largest number of enterprises are o ned and operated by communes and brigades, that is, are in the collective sector, but the largest share of output in this sector is accounted for by those rural, smallscale industrial plants owned and operated by county governments, that is, those rural, small-scale plants in the State sector.
The production decisions of all these plants, regardless of the level of ownership and control, are incorporated into the state's economic plan and are subject to the next higher level of government's approval. Despite the considerable relaxation of this official centralized control over industry during various periods in the past, recent articles in the Chinese press make it clear that the new leadership intends to reassert the central governments control over the production planning and output allocation of the state enterprises at all levels, Nonetheless, the existing hierarchy of ownership and operation of the state enterprises and the rural, small-scale industries in the collective sector should remain as the organizational characteristic of China's industrial sector.
In the absence of a market system for the allocation of inputs and outputs and of a profit maximization criteria for plant management, these allocation decisions are determined by administrative decisions and included in the state economic plan. After a brief period in which
1 At the present time, these units-communes, brigades, and teams-in the cooperative sector are not interated into the detailed State economic plan. They determine their own production plans, are allocated inputs by the State, pay taxes and sell goods under negotiated contracts to the State, distribute income and provide education and health services to their members. Individual households are allocated small plcts and can consume or sell the output of these plots in rural markets that exist for that purpose. If sold on the market, however, key commodities must be offered first for sale to the State trading companies. State farms do exist and are the most mechanized farms in China. Nonetheless, they are not very important in terms of either total acreage or production. Recent statements in the Chinese press indicate the new leadership supports the individual household's private plot production activities and participation in trade on the rural fr markets. Re ent eports also hint at the possible expansion of state farms and, perhaps, even the incorporation of some of the collective units' economic activity within the State plan.






11

the Soviet system of highly centralized planning was tried, the Chinese implemented a much more decentralized system of planning which increases the participation of the masses at the lower levels of government and economic administration. Over the past decade or more, the state's economic plan has been a combination of decisions made at various levels, with considerable initiative coming from the lower levels. Nonetheless, the central government has always retained its right of final approval of the production and allocation decisions included in the economic plan. This system of decentralized planning has allowed for considerable flexibility and lower level initiative in economic problem solving; a unique feature of Chinese planning.
The central planners, of course, have not been passive partic' ants in the process of resource allocation, reacting to suggestions froniTel'oW by exercising their veto power when necessary or by making only marginal adjustments in the proposals they received. They directly control and operate the key industries, the transportation network, internal trade in key commodities, and all external trade. Most important, however, is their ability, through their control over the State budget and the banking system, to control financial flows in the economy and to transfer all profits of State enterprises above those retained earnings approved for working capital, workers' fringe benefits, and small investment projects, into investment and expenditure categories determined by the central planners. 12 This ability of the central planners to control the rate and direction of China's economic development will undoubtedly be significantly increased in the future. Recent reports in the Chinese press emphasize the need to reestablish greater central control over production and allocation decisions, that is, planning, in an effort to eliminate the inefficiencies and wastes resulting from the poor coordination and implementation of decentralized planning decisions over the past decade.
Disproportionate Growth and the Major Economic Problems of the Mid-1970's 11
Utilizing this reorganization of the economy, the Chinese Communists took an industrial sector, limited in size and considerably distorted in structure and location in 1949, and increased its output over the past quarter of a century by more than eightyfold. This remarkable
12 For the central government's ability to reallocate the profits of State enterprises by m cans of their cont rolt over the budgets ofthe lower levels of government, see Nicholas Richard Lardy, "Central Control andiRedistribution in China: Central-Provincial Fiscal Relations since 1949," unpublished Ph. D. dissertation, The University of Michigan, 1975. It should be pointed out that there is a difference of opinion in the literature concerning the consequences of China's budgetary process and the considerable decentralization that has occurred in the economy since 195 37. Some observers believe the effects of decentralized collection of budget revenue, revenue sharing, and local ownership and management of most enterprises led to the reappearance of cellular, or regional, autonomy over resource allocation in China. See Audrey Donnithome, "China's Cellular Economy: Some Economic Trends since the Cultural Revolution," China Quarterly, no. 52, pp. 605-619, and several other articles by the same authors. The summary of the opposing view that considerable control was retained by the central government, presented in this paper, does-we believe-represenqthe conclusions of most observers.
Is Unless otherwise noted, the statistical data used In this section of the paper Is taken from the such readily available sources as Nai-ruenn Chen, "Chinese Economic Statistics: A Handbook for Mainland China," Aldine, Chicago, 1967: State Statistical Bureau, "Ten Great Years," the statistics in the papers included in the previous compendium on China's economy 'released by the Joint Economic Committee. "China: A Reassessment of the Economy," U.S. Government Printing OfFice, 1975; or the most recent issue of statistical estimates for China's economy released by the National Foreign Assessment Center, CIA, "China: Economic Indicators," ER77-10508, October 1977. Unfortunately due to the deadlines scheduled for the submission of the papers to be included in this volume and the second volume to be issued later this year, It was not possible to Incorporate the economic data presented in these other papers In this introductory paper. Inasmuch as these estimates are used to illustrate general trends or relationships, not as accurate point estimates; the use of one set of estimates rather than another should not change the arguments presented in this paper.






12

pace of development, the doubling of output every 5 years or a 13 percent annual rate of increase 14 Was interrupted twice in the 1960's due to the excess capacity created by the dislocations of the "Great Leap Forward" in the early 1960's and due to the disruptions of the cultural revolution in 1967. Industrial growth was again disrupted due to the turmoil associated with the succession crises in the mid-1970's. Nonetheless, industrial growth over the past 25 years has been rather continuous and rapid, obtained by the greatly increased rate of investment and large share of total investment allocated to this sector. The input bottlenecks and. slow growth in other sectors due to this concentration of investment in and the resulting disproportionate growth of industrial production were problems the Chinese leadership had to accept as the price of rapid industrialization.
Their economic system, with a centralized budgetary system insuring State control over enterprise profits and a centralized supply system for key commodities providing plant managers their inputs and freeinLy them from the burden of marketing their output, enabled the State planners to create industrial capacity according to their own priorities, even though disproportionate growth may be a result of those priorities. Critical to this growth of industry, however, was the required supply of capital goods. Since the Chinese began with a small initial in(histrial base, they were forced to import most of their early requirements of machinery and equipment,',' one reason for putting a high priority on the rapid growth on the industrial sector rather than on agriculture. These imports, of course, had to be financed by exports of raw materials and processed agricultural products, especially textiles, or the products of those sectors which did not receive a high priority in the allocation of the available investment funds."
Therefore, changes in the structure of industry, and not just growth of total industrial production, was also important. Development of heavy industry, or the manufacture of producers goods for industry, was most crucial if China was to achieve greater self-reliance in its industrial development. As a result, the machine-building, energy, and metallurgy sectors increased at rates well above the average for industry as a whole." These increases in the industrial production of inputs for industry eventually led to serious problems of disproportionate development within industry itself, even within the producers goods sector, as well as throughout the economy as a whole.
For example, the emphasis on the expansion of the industrial production of inputs for industry came at the expanse of two other key producers goods industries; transportation equipment and producers goods for agriculture. Compared with the rate of industrial growth, the rate of track laid lagged behind and the rail network suffered from a shortage of locomotives resulting in significant increases in traffic density and weight hauled per train. The Chinese have begun producing diesel locomotives to take advantage of their petroleum resources, but this has not significantly altered a situation of increas14 An index of industrial production in 1957 and 1965-77 is estimated and discussed in Robert Michael Field and Kathleen M. McGlynn, "Chinese Industrial Production," part II, this volume. 15 See the discussion of the important role played by foreign trade in sustaining and developing the Chinese economy and the appendix tables for estimates of China's imports of producers goods in more recent years in Rich Batsavage and John Davie, China's International Trade and Finance," part V, this volume. 16 in the 1950's, Chinese imports of producers goods from the socialist bloc were financed, in part, by some short-term commercial credit and long-term loans. But the Chinese had repaid these debts by 1965-a remarkable record for an underdeveloped country engaged in a large-scale program of industrialization. '17 For a more detailed discussion of developments in these three key industries, see Robert F. Dernberger, 11 China's Economic Future," op. cit., pp. 97-99; also see the four papers in part II, this volume, on the Malhine-building industry, the energy sector, the mineral sector, and the electric power industry.






13

ing weight hauled per train. Motor transport has become a major provider of short-haul transport, but roads are still relatively poor and total annual truck production is fairly small. Although China's rapidly growing supplies of petroleum augurs well for the development of a modern transport system, the Chinese must still make large investment of capital in that sector which do not directly add to increases in output." These investments do, however, provide much of the necessary "social overhead capital" which facilitates the efficient operation of a modern economy. A good transportation network also increases production through efficiencies in input supply to producers and output distribution to end users.
One of the most important consequences of the concentration of investment fund in investments in those industries producing, inputs for other industries was the limitation of investment in agricultural producers goods. The Chinese planners recognized this problem, but their expectations that the reorganization of agricultural production into collective units of production and resulting mobilization of labor effort would lead to large increases in agricultural production proved to be erroneous.19 Yet, it wasn't until the agricultural crisis in 1959-60 that the Chinese began to significantly expand those industries manufacturing producers goods for agriculture, such as agricultural machinery and equipment and chemical fertilizers. As a result, China has made great strides since 1960 in increasing the horsepower of mechanical pumps utilized in irrigation and of tractors used in cultivation (both larger tractors and smaller "walking" tractors). The main contribution of this increase in mechanization in agriculture was not merely for the purpose of directly increasing output, but to release labor for a wide range of capital construction projects in the rural areas and to allow for increased multicropping and the increased cultivation of more labor intensive, but higher yield, crops.
The growth of the chemical fertilizer industry was the most sig nificant result of the reallocation of investment funds in favor of industries producing inputs for the agricultural sector. Historically, the Chinese have relied heavily on inputs of organic fertilizer and chemical fertilizer has become a significant input in agricultural production only recently. A significant share of this chemical fertilizer is imported, drawing upon China's scarce foreign exchange holdings. Most recently, however, the Chinese purchased 26 chemical fertilizer plants, which will soon be operating at full capacity, more than doubling the total
20
domestic production of 1974.
Although the change in investment priorities in the 1960's has helped to offset the earlier neglect of the production of industrial inputs for agriculture, China's needs in irrigation and drainage equipment, agricultural machinery and equipment, and chemical fertilizer
Is This is not to gay that the Chinese have been unable, through intensive use of the existing facilities and equipment, to facilitate the growth of output in the economy which actually occurred: the average annual rate of increase in industrial production of 13 percent between 1952 and the mid-1970's was equaled by the rate of growth in tons hauled by the modern transportation sector. Nonetheless, modern transportation is a serious constraint on the margin in that it severely limits the rate of growth in industrial output, the rational and efficient distribution of what is produced, and desired changes in the location and structure of industry. Furthermore, although the modern transportation sector did provide the services necessary to attain the rates of growth actually achieved in the past, it did so by depending on a considerable volume of imports of transportation equipment; one-third of China's total imports of machinery and equipment from the non-Communist countries and one-half China's total imports of machinery and equipment from the Soviet Union in 1961-1973. CIA, "Foreign Trade in Machinery and Equipment Since 1952 ," A (E R)75--60, January 1975.
19 See the discussion of agricultural developments in part IV, this volume. 20 For a more extended discussion of the argument on this paragraph, see Robert F. Dernberger, "China's Economic Future," op. cit., pp. 102-103.





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still far exceed domestic supplies. Thus, the continued ra id expansion of these industries remains a necessary condition for solyvine China's a oTicultural problem. Increases in the output of these products are very costly, that is, the marginal capital requirements for a unit increase in output are relatively high, and all indicators predict that even as the Chinese increase the use of these inputs, they will encounter declining increases in agricultural production. In other words, the costs will be relatively high and the returns may not be as great as is anticipated.
Until recently, many rural areas were unable to gain ready access to the inputs produced in the modern sector. This is due in part to the neglect of investments in the transportation system and in part to the traditional geographical location of industries which was not changed significantly between 1952 and 1973.11 Through altered patterns of urbanization and their control of rural to urban migrationin fact, their frequent reversal of this normal flow-the Chinese leadership has attempted to redress these problems. Yet, while the emergence of medium-sized industrial centers in the rural areas will reduce some of the demands on the transportation network, the development of these growing new urban centers will greatly increase the need for social overhead capital which does not directly contribute to in12
creases in production.
Finally, the unbalanced growth within industry has placed constraints on the growth of per capita consumption. Through a system of wage controls, the rationing of low-priced necessities, and setting of high prices for consumers durables, the Chinese leadership has been able to control the effective demand for consumers goods and most evidence seems to support the argument that the material standard of living, especially in terms of basic necessities, has not increased significantly since the mid-1950's. There has been, of course, a marked increase in the provision of public goods and services, such as health care, public housing, and education. The increased supplies of consumers durables, that is, bicycles, watches, and radios, has raised living standards somewhat, but these supplies seem to benefit primarily the industrial workers, a small portion of the total labor force. Nonetheless, the average family now en joys a decent standard of living and deviations from this average are limited.
On the other hand, the new leadership already has adopted policies to reinforce the reliance upon material incentives, and to be meaningful, these policies must be complemented by an increase in investment in consumers goods production. Many of the industries producing consumers goods, however, have experienced periods of excess capacity during the past due to an inability of the rate of growth of agricultural products used as inputs in the consumers goods industries to keep pace with the growth of capacity in that sector. Rapid growth in the output of the consumers goods industries, as well as rapid growth in the standard of living, therefore, depend on the rate of growth of Chinese agricultural production-the main bottleneck in China's economic development as a result of the disproportionate pectoral growth in the past.
21 Charles Robert Roll, Jr., and Kung-chia Yeh, "Balance in Coastal and Tnland Development in the ous Joint Economic Committee's compendium of papers on China, "China: A Reassessment of the "'nomy," 1975, p. 88.
22 For a more extended discussion of this argument, see Robert F. Dernberger, "China's Economic Future," op. cit., pp. 103-104.





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The Chinese leadership, aware of the consequences of placing priority on the development of the producers goods industries, which produced inputs for other industries, as a prerequisite to the development of the other industries, were divided between those, such as Liu Shao-chi, who argued that agriculture could be socialized into large cooperative units only after industrial development allowed for mechanized agriculture, and those, such as Mao Tse-tung, who argued that socialization of the relations of production should precede the mechanization of agriculture. The Maoist position was predicated on the belief that ever larger cooperative units would "unleash" sufficient productive powers through the mobilization of labor which would provide the increases in production necessary to satisfy both the input demand of the nonagricultural sectors of the economy and allow for increases in the standard of living as well. Thus, even without largescale investments, they believed institutional reorganization would solve their short-run production problems and mechanization would be obtained as a byproduct of the industrialization of the economy in the long run.
The Maoist position won out in the mid-1950's, but it was not long before the short-run contradictions of their position created serious problems for the Chinese. The rate of growth in the gross value of agricultural output fell during the mid-1950's and the annual level of the net grain supply transferred to the state was constant over the period 1956-57 .21 This situation restricted an increase in the supply of food to urban areas, limited the ability of the state to export agricultural goods to finance imports of investment goods, and reduced agricultural products available as inputs for the consumers goods industries. Various economic indicators for 1957 reflect this situation: A decline in nonagricultural employment, a decrease in exports, an increase of only 5.6 percent in the industrial production of consumer goods, and a decline in total capital construction. In fact, 1957's rate of growth for the economy as a whole was the lowest for any year since 1949.
In 1958, the Chinese leadership launched their communization movement and the "Great Leap Forward." Favorable weather and increases in labor force participation. and workdays of effort per laborer brought increases of 19 percent in grain output and 25 percent in the gross value of agricultural output in 195S. Bad weather and the delayed negative effects of this extreme socialization policy in agriculture brought on the agricultural crises of 1959-61. Output equal to the level achieved in 1958 could not be achieved again until 1965.", As pointed out above, this crises f orced the Chinese to reevaluate their development strategy and to recognize the need to solve the agricultural problem by changing their investment allocation priorities for development.
The results of this decision to change the allocation of investment in favor of the pli-oducers goods industries producing inputs for the agricultural sectors discussed above and a more detf iled discussion of
23 David Ladd Denny, "Rural Policies and the Distribution of Agricultural Products in China: 1950-1959," unpublished Ph. D. dissertation, University of Michigan, 1971, p. 41. 24 In the absence of official data for agricultural production during this period, there is some disagreement In the literature over the magnitude of the declines in output in 1959 and i960 and the length of the recovery perioo in the early 1960's. For a repre,%iitative set of estimates see appendix A in Arthur G. Ashbrook, Jr., "China: Shift of Economic Gears in Mid-1970's," this volume. See also the discussion of developments in this period in papers by Charles Liu, "P RC Agriculture: Performance and E merging Issues in the 1970's," and by James A. Kilpatrick and Henry J. Groen, "Chinese Agricultural. Production," in this volume.





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China's attempt to solve the agricultural problem in the 1960's and 1970's and the likelihood of their success in the future is discussed below. It can be noted here, however, that the results thus far have not been striking. Between 1964 and 1974, the average annual rate of increase of grain output was less than 3 percent and the Chinese have had to rely on sizable imports of grain to make up deficits in domestic supplies. Thus, agricultural development still remains the major constraint to overall economic development and increases in the standard of living; that is, it is the fundamental economic problem facing the -new leadership.
This brief review was not an attempt to provide a complete or detailed description of China's economic development over the past quarter century but rather a summary of the Chinese leadership's program to gain control of resources and use those resources to achieve rapid increases in heavy industrial production which also resulted in a relatively high overall growth rate and a significant restructuring of the economy. Yet, this successful record was qualified by their failure to follow a more balanced set of priorities, resulting in serious bottlenecks with regard to such other sectors as transportation, consumption, and agriculture; bottlenecks or major problems the new leadership must solve. This is not to say, however, that the pursuit of the traditional socialist priorities in the allocation of investment in the past was unwise. Although not solving all the problems of economic development, the Clilnese have created and maintained a substantial industrial base, while maintaining a somewhat stable and adequate standard of living for the population; a significant industrial base which the new leadership can build upon in their attempts to achieve the economic modernization of China.
THEFiXEDPARAMETERS OVER THENEXTI)ECADE
In their attempts to achieve the economic modernization of China, the new leadership. will work within the context of certain fixed parameters. There is probably no dimension of China's economic, social, or political situation that can be safely assumed as absolutely fixed. Nonetheless, several characteristics of the economy are likely to remain stable over the next decade, either because the Chinese decisionmakers will be unable to change them or because they will be unlikely to want to do so. The most important of these concern China's resource base and its economic and political system.
As aratied earlier, the fundamental obstacle to economic development in China is the need to solve the agricultural problem. Any solution must take as "relatively fixed" the available area of cultivatable land, its location, its inherent fertility, and the existing climatic conditions .15 Given these constraints, the Chinese peasants have been able to support almost one-fourth of the world's population with less than 8 percent of the world's cultivated area of land by means of relatively traditional, labor-intensive technology. The Chinese cannot expect to achieve a steady and significant rate of increase in agricultural output from a new lands policy. Rather, increases in output must come from hio her yields; the latter obtained by a spread of
25 Seethe discussion in the sections on "Resource Endownment" and on "Factors of Production and Modernization" in James A. Xilpatrick and Henry J. Groen, "Chinese Agricultural Production," this volume.





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double-cropping and irrigration, changes in cropping patterns, new seeds, modern input like chemical fertilizer, et cetera. The Chinese are attempting this transformation through the current program of significant technological change and intensive, rather than extensive investment in agriculture.
While the success of these programs is crucial to China's development, agricultural transformation is only a necessary, not a sufficient condition for modernization. To adequately develop an industrial base, a country must have access to raw materials and, given the very large size of the domestic market, the success of China's industrial program rests to a considerable extent on China's domestic resource base. The two most critical categories of raw materials for industrial use-namely energy and minerals-are evaluated here as indicative of China's very favorable position in terms of resource endowment.
For example, in terms of energy resources. China is among the front rank in coal, having high-quality and easily mined, but somewhat poorly distributed, reserves. China also has an extensive river system, with the third largest runoff in the world. Although these rivers' geographic -features allow for the development of considerable hydroelectric power capacity with "relatively" low construction costs, 73 percent of the hydropower potential is located in the southwest of China at a considerable distance from the centers of economic activity.27 In the north, silting and irregular flows create obstacles to the utilization of rivers for power supplies. Given China's coal deposits, however, over two-thirds of China's electric power is generated in thermal electric power stations.
The ratio of energy requirements to GNP growth is between one and two for most countries; a 1-percent increase in GNP will require an increase of between 1 and 2 percent in energy supplies. Despite the very favorable endowment in coal and hydropower potential, there have been limits to the rate at which the Chinese have been able to expand their utilization of these resources and the short-run solution to China's energy needs was facilitated by the exploitation of China's petroleum deposits. Until fairly recently, while China was thought to compare favorably to the United Staqtes and the U.S.S.R. in hydroelectric power and coal reserves, it was considered low in petroleum deposits. Recent developments and gological surveys have significantly changed that pessimistic outlook to one Of optimism *28 Nonetheless, the long-run solution of China's energy needs will rely on the development of the extensive hydropower capacity, which has been explicitly recognized by the new leadership. While these domestic energy resources are available for the long-run modernization of China's economy, however, the limits on their ability to develop ad ditional capacity rapidly in the short-run will place a constraint on the rate at which the Chinese can expand industrial production over the near future.9
26 For a detailed survey of China's energy and mineral reserves, see Vaclav Smil, "Energy Production," and Kung-ping Wvang,' "Mineral Output and Productivity," in this volume. 27 See William Clark, "Electric Power industry," this volume,' for a further discussion of this point. 28 The estimates of China's deposits of petroleum are undoubtedly subject to wide margins of error and are being modified as one new deposit after another is discovered. For one review of these estimates, see Selig' S. Harrison, "Time Bomb in Asia," Foreign Policy, No. 20, Fall, 1975. In that source, Harrison estimates that "Peking appears likely to reach the current production level of Saudi Arabia by 1988 or soon thereafter." Idie., p. 4. For knowledgeable and more uD-to-date estimates, see Vaclav Smil, "Energy Production," and Kung-ping Wang, "Mineral Output and Productivity," in this volume. 2) For a more detailed analysis of these energy constraints on China's future growth, see William Clark, P'Electric Power Industry," and Vaclav Smil, "Energy Production," in this volume





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China's mineral reserves seem more than adequate: there are large surpluses of antimony, mercury, molybdenum, tin, tungsten, fluorspar, and uranium; and smaller ones of lead, manganese, zinc, asbestos, and bauxite. In addition, China has sufficient deposits of aluminum, iron ore, graphite, and gypsum. China's most serious scarcities are in chrome (imported from Albania), nickel (imported), copper (aluminum presently substituted for copper in electrical uses), and phosphate for fertilizer production (imported) *30
This favorable endowment of energy and mineral resources means that China's industrialization and (drive for self-sufficiency will not suffer from serious raw-material constraints. Rather, the major problem will be China's ability to accumulate the producers goods necessary to process these resources, which has important implications both for the structure of that industrialization drive over the near f uture and for China's dependence on foreign trade.3
Undeniably, China's richest resource is the Chinese people. Tradiuional arguments that "surplus" population is a burden in developing
-countries may or may not be correct; it depends on the relevant economic circumstances. This argument, however, does not apply in ,China. Several past studies have all shown that China's reliance on the intensification of traditional means f or the expansion of agricultural output has resulted in serious labor shortages (luring the peak periods of production, such as planting, transplanting, and harvesting."2 Furthermore, due to the scale and level of the efforts to transform China's agriculture by means of rural f armland reconstruction, rural small-scale industries, new patterns of cropping and intcrcropping, more double cropping, et ceteira, these programs have significantly increased the rural labor-force participation rate and the annual workdays of effort per laborer of the agricultural work force (luring the past two decades. In short, the demands for increased labor efforts in the rural areas can best be (described as having led to a situation of "overfull" employment.
While China's present population is a valuable economic resource, China's leaders launched a campaign to reduce the birth rate during the 1960's, despite the excess demand for labor in their short-run attempts to increase agricultural production, in recognition that continued efforts to achieve productivity gains through increased labor inputs with a traditional labor-intensive technology would result in vey low marginalI productivities for labor. The long-run solution of their agrricultural problem, on the other hand, must involve the modernization of Chinese agriculture with both higher productivities of labor and lower demands for labor inputs; that is, a problem of "~surplus" population. Hence, the present attempt to bring the rate of population growth under control and even to reduce the rate of growth to remarkably low levels for a developing country. There is consider30 For ,reater details of China's mineral reserves, see Kung-ping Wang, "Mineral Output and ProducUvity,' this volume.
31 In this regard, China does suffer from a shortage of gold and silver, the major commodity reserve assets used in fareign trade. Not belicg a major producer of thuse precious metals, the Chinese are unable to mainIt-.ii sizable import deficits for any considerable lengths of time without relying on foreign loans. This can have, and has had, srorious implications for China's economic development program and foreign trade behavior when an unwillingniess to borrow abroad, coupled with a decline or lack of growth in export capacity, >eAs to a serious constraint on imports. The rapid development of petroleum production has helped to
afeit ti: constraint on China's development program, but it has not eliminated it.
SThese Ilibor shortages during peak work periods can amount to approximately one-fourth of the labor supply as Is indicated in the studies of John Lossing Buck for the 1930's, those of T. Hi. Shen for the 1940's and the severe labor shortage experienced by the Chinese during the Great Leap Forward in 1958.






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able debate among Western experts as to the validity of the Chinese claims of success in their birth-control program, but for our purposes in this paper, China's population over the 'next decade can be reasonably assumed as given, even though our estimate may be subject to a wide margin of error. Taking the results of John S. Aird's "intermediate model" projections, presented elsewhere in this volume, the rate of population growth will dlecline from 2 percent in the mid-1970's to a relatively stable level of about 1.3 percent by the mid-1980's; total population increasing from approximately 934 million in 1975 to 1, 114 million in 1985.31
One serious problem of China's large population (luring the next decade will be the balance between the supply and demand of foodstuffs. There is. currently a very small margin-if any-between increases in agricultural output and the rate of population growth. Even if the results of Aird's "intermediate model" projections are accepted and the Chinese will be successful in reducing the rate of population growth to the relatively low level of 1.3 percent by the mid-1980's, the Chinese will still encounter serious problems if they are unable to raise the rate of increase in agricultural production well above 2 to 3 percent. These higher rates. of growth in agricultural production, that is, higher than those experienced in the past, will be a prerequisite for the accomplishment of the new leadership's program for the rapid economic development of the economy during the next decade. These growing surpluses of agricultural products will be required to meet the needs of the hoped-for increases in per capita
consumption, the needs for increased supplies of agricultural products as inputs in the more rapidly growing industrial sector, and the needs of significantly higher levels of exports to provide the necessary foreign exchange to finance the rapDid growth in imports required by the large-scale investment program planned for the next decade.
The results of their efforts in the agricultural sector, of course, will have an effect upon the stability of China's political and economic system. On the other hand, the analysis of the possible evolution of China's economy over the next decade which follows explicitly assumes that the present economic and political system will remain fixed, including the moderate -pragmatic type policies being pursued by the new leadership. The Chinese Communists have proven their desire and ability over the past 25 years to feed the population and to maintain an adequate standard of living through good times and bad. Thus, it is believed unlikely that their efforts to achieve increases in agricultural output over the next decade, even if relatively unsuccessful, will generate forces which will lead to significant changes in the existing economic and political system. Furthermore, if the results of their economic policies did prove unsuccessful, a major feature of the'new more moderate-pragmatic leadership is its willingness to react quickly with policy changes for the purpose of restoring economic stability and growth.
In addition, the anticipDated growth rates of agricultural production over the next decade range between the more pessimistic forecasts presented in this paper (2 to 3 percent a year) and the much more

33 See John Aird, "Demographic Change in the PRC," this volume.






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optimistic targets presented by Hua Kuo-fengy in his speech to the Fifth National People's Congress (4 to 5 percent a year). The lower forecast would appear to present China's leaders with serious problems, yielding a total grain output in 1975 which is 67 million tons below the target presented by Hua. On the other hand, if the latter target were to be achieved, grain supplies per capita in 1985 will be about 30 percent higher than in 1975. While this swing of 67 million tons of grain is equivalent to one-fourth of China's total grain output in 1975, neither limit of this range of possible results would appear to provide a sufficient reason for expecting a change in China's economic and political system, or the new leadership group in command of that system.
While drastic changes in the economic and political system due to economic developments is highly unlikely, on the basis of China's history over the past 25 years one must raise the possibility that political conflicts among the leadership may not only be a source of disruption, but also lead to a signi6 cant change in leadership and in the economic and political system as well. The possibility of a capitalist restoration, of course, has steadily diminished since 1949, even though Mao and the radicals often accused the moderates-pragmatists' policies as leading to a capitalist restoration. As for a resurgence of a radical leadership, events have shown that possibility was considerably diIminished with the death of Mao, the major source of radical support and power. Equally important, the major radical leaders and their followers who had held positions of power in the party and Government have been removed and the more moderate and pragmatic leadership has greatly strengthened its control over the past year and a half. This control of the moderate-pragrmatic leadership is attested to by their ability to put "economics" in command and introduce a wholesale program of economics policies based on the need for greater efficiency and economic rationality. Tfhe greatest threat to the new leadership is not their political rivals, but the degree to which they will be able to achieve rapid rates of industrialization and a solution of China's agricultural problem.

AN ALTERNATIVE FORECAST OF CHINA'S ECONOMtIC EVOLUTION (1975-85)
As mentioned in the beginning of this paper, no details of the longrun economic plan, 1975-85, have been released; Hua's speech to the Fifth National People's Congress only referring to a 4 to 5 percent rate of growth in agricultural production, "over" 10 percent in industrial production. His discussion of the planned growth in light industry, heavy industry, the standard of living, and in foreign trade is presented in nonquantitative terms, but clearly indicates that these targets are equally ambitious; Hua describing them as "gigantic tasks." The forecasts presented here as an alternative forecast for 1985 are much more pessimistic. The reason for this is that they are derived on the basis of the actual developments in China's economy in the past, the fixed parameters the new leadership will be working with in the future, and the dictates of economic analyses and theories Western economists have formulated on the basis of the historical experience
-of economic development in the West.






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The Chinese, of course, would object to this approach as they have explicitly argued their owm economic development has proven these static-equilibrium, Western theories to be meaningless. We do not believe their past development has shown these theories to be wrong and, more important, we do not share their faith that they will be able to prove them wrong over the next decade. This is the essential distinction between our "pessimistic" forecasts and the "optimistic" targets for 1985 presented by Hua. Actual developments, of course, will undoubtedly show that the truth lies somewhere between these two extreme positions.
The most fundamental economic problem faced by the Chinese remains that of achieving a rate of growth in agricultural production well above the rate of population growth. This problem can be reduced to a simple question of the production possibilities in the agricultural sector. Failure to achieve and maintain a rate of o,,rowth well above 2 percent would mean the continuation of existing constraints on China's ability to maintain sustained economic growth and to obtain higher standards of living for the population, a problem that the new leadership has shown it is well aware of and desires to solve.
Agriculture
Even though the Chinese leadership now recognizes that the agricultural problem is the prime obstacle to the economic development of China and assigns its alleviation one of the highest priorities in their development program, the achievement of an average rate of growth in agricultural production of well over 2 percent will not be easy. Historically, China's agricultural development between the 14th and the 18th centuries did little more than keep pace with the 0.5percent growth in population. Furthermore, Dwight Perkins estimates growth was even lower in the 19th century (with declining per capita output) and less than 1 percent in the first half of the twentieth century (again, approximately equal to the rate of population growth) .3' Thus, traditional agriculture was able to keep pace with population growth, but at an average rate of growth far below 2 percent. Furthermore, Perkins estimates that approximately half of this increase in production resulted from increases in cultivated area. By the middle of the 20th century, this source of growth was no longer available, and further increases in output relied more heavily on attempts to increase yields, largely within the framework of traditional, labor-intensive teellmoloo,
Since 1949, annual output estimates do not reveal a significant trend, either upward or downward, in the approximately 2 to 3 percent annual rate of increase of agricultural output. Furthermore, neither increased multicropping-already at a relatively high level-nor mechanization-now at a relatively low level-would appear to offer the solution of China's agricultural problem. While there is
34 Dwight H. Perkins, "Agricultural Development in China, 1368-Mg," Aldine, Chicago, 1969. See particularly the discussion in chap. H. Much of the analysis in t4is sectio-a of the paper parallels the discussic-n in Dwight ff. Perkins, "Constraints Influencing China's Agricultural Performanrp." in the previous compendium of papers on China's economy issued by the Joint Economic Committee, "China: A Reassessment of the Economy 1975, pp. 350-365.
15 For a more detailed discussion of how the Chinese Communists have attempted to increase yields within the framework of their traditional, labor-intensive agriculture, see Thomas Wiens, "Evolution of Policy and Capabilities in Chinese Agriculture Technology," and James A. Kilpatrick and Henry J. Groen, "Chinese Agricultural Production," in this volume.






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still room for the expansion of double cropping in the north and triple cropping in the south, it would appear the Chinese leadership is placing far too great a reliance on this means for sustained increases in agrTicultural output. As for mechanization, any form of mechanization which simply displaced rural labor from agricultural production would not lead to increases in output, merely free labor to serve as inputs in other sectors. What is hoped, of course, is that the mechanization will relieve the pressures on the agricultural labor force during peak work periods, such as transplanting, harvesting, or threshing, makingr more labor available for other tasks, such as increased multicropping; the increased labor in these other tasks expected to increase output significantly. Thus, an increase in mechanization is now being pulrsuedl by the new leadership as one of the most urgent tasks in agriculture, even though, in and of itself, the increased mechanization will not directly lead to the increased output being sought.'(,
In recent years, one of the greatest sources of increased yields has been the adoption of better seed varieties for the traditional crops in conjunction with a program of increased applications of chemical fertilizer. Throughout the 1970's, the Chinese leadership has emphasized the importance of chemical fertilizer as a source of a ~rri cultural development, diverting signiificant resources to the expansion of its domestic production, its import, and the import of complete plants for its production. The costs of this program of obtaining greater supplies of chemical fertilizer, however, is only one of the problems involved in achieving higher yields through the greater appllication of chemical fertilizer. Transportation costs, limited storage facilities, and the loss of nitrogen content during transportation and storage have resulted in most of the new plants purclhased abroad being located in the interior; that is, in the major centers of agricultural production.
In addition, due to these same problems, the Chinese produced approximately one-half the production of nitrogen in small-scale rural industries. These rural, small-scale plants produce fertilizer that is considerably poorer in quality than that produced in the large, modern plants. It must be noted, however, that the higher potassium and phosphorous content of the organic fertilizer used on a very large-scale by the Chinese complements well the nitrogen in the chemical fertilizer produced in the rural, small-scale plants. It is mainly in the more sparsely populated, less accessible agricultural regions that the quality and quantity of chemical fertilizer produced will1 be critical to the achievement of the higher yields the leadership hopes to obtain.37
rThe Chinese peasants have accumulated a vast storehouse of knowledge over the past six centuries or more within the confines of their tradiit ional agricultural technology. Agricultural handbooks concerning new seeds and the use of chemical fertilizers for the various crops grown on different soils are available throughout the countryside.
36 See, "Farm Mechanization: Targets for 10,80," Peking Review, No. 8, Feb. 24,1i978. It is interesting to note that these targets were replaced by those for 1985 included in the longrun economic plan adopted by the National People's Congress less than a week after the above cited article was published. 37 See the discussion of these problems in James A. Kilpatrick and Henry J. Groen, "Chinese Agricultural Production," aind Charles Lini, "PRC Agriculture: Performance and Emerging Issiles in the i970's," in this 'T0iurne.






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Demonstration plots, discussion meetings, and technical teams sent to the countryside reinforce the dissemination of new information. None.. theless, contrary to their record in the past, it is most essential that the Chinese undertake a significant program of advanced basic research in the testing and selection of new seeds if they hope to modernize Chinese agriculture and achieve yields on a par with those in the most advanced countries by the end of the century."
Another major obstacle which the Chinese must confront if they are to solve their agricultural problem is the storage and control of water-essentiaI for achieving the potential yield response catalyzed by increased use of new seeds and increased applications of chemical fertilizer. Historically, water management was critical to Chinese agriculture's ability to support a large population with limited culti" vatable land. It was the existence of an extensive irrigation network, mostly in the southern regions, that allowed for extensive double cropping. By the 1930's, most cultivatable land with no serious problems of water supply had been irrigated. Since 1949, the Chinese, have increased the irrigated acreage significantly by utilizing flood control projects, wells, and electric pumps. They completed the irrigation network in south China, expanded the irrigation and rice double-cropping area northward into central China (north of the Yangtze River), and increased the irrigated acreage in the southwest and northeast.
The rice-growing areas of South China with adequate and dependable water supplies, therefore, are already irrigated and have been provided with new and rapidly growing supplies of chemical fertilizer., While the leadership has some concern over the lack of growth in this region in recent years, yields in China's rice bowl, Szechuan, compare favorably to those of the other rice-producing countries in Asia. Thus, where the Chinese have managed to develop the necessary complement of inputs, the results have been impressive and have been responsible for China's ability to maintain the average annual 2 to 3 percent rate of increase in agricultural production in tl e past.
The north China plain, China's traditional agricultural region and the home for over one-fifth of its total population, is primarily devoted to dry land wheat cultivation and suffers from inadequate and undependable supplies of water, resulting in low and unstable yields. High silt content of the Yellow River makes water control and irriga-!, tion projects costly, difficult, and often inefficient. Similarly, when rainfall is insufficient, droughts occur and the Yellow River may even dry up. In fact, conditions are so unstable that both flooding and drought can occur in the same year.
The Chinese have undertaken the Yellow River project, designed to regulate flooding by means of a series of storage dams closer to the river's source and to alleviate silting by implementing soil erosion control in the wastelands through which the river flows. In addition, attempts are being made to create facilities for the continuous removal of silt downriver. The costs of this project are tremendous and the returns in terms of increased irrigated land is estimated to be only about 7.5 percent of China's irrigated area in 1974. It is perhaps a
U For a detailed discussion of the weaknesses and shortcomings of the process by which innovations have. been adopted and implemented by the state in China's agriculture sector in the past, see Thomas Wiens, "Evolution of Policy and Capabilities in Chinese Agriculture Technology," in this volume.
27-427-78






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recognition of this that recent reports indicate the Chinese leadership has reduced the priority they formerly gave to the Yellow River project as a means for solving their agricultural problem in North China. To add to the irrigated area, the Chinese have been rapidly expanding the number of tube wells equipped with electric pumps for tapping the ground water under the north China plain."' These various projects, however, must be well coordinated and carried out on a very large scale, and their ability to achieve high and stable yields in north China is still constrained by the natural supply of water.
Some observers have argued that China has not been able to achieve more substantial increases in agricultural output due to unfavorable constraints imposed by the reliance on traditional agricultural production techniques and that past growth was largely the result of one-time shifts in inputs which will not be available for sustained growth in the future.40 Obviously aware of these arguments and of the implications they have for China's economic modernization in the 1970's, the Chinese adopted a major policy decision regarding the means for achieving sustained growth and higher yields .4' This large-scale, nationwide program involves the identification and emulation of modele" communes and countries that have been able to achieve rapid increases in yields. The unit actually selected as the original model for copying is the Tachai Brigade and the Tachai-type advanced county campaign presents a broad-ranging and interdependent package of policies which are to be copied as the "model" for the modernization of Chinese agriculture.
A brief summary of the major features of these model units which are to be transferred elsewhere indicates the bold and radical nature of the agricultural transformation being sought. While there is some questions as to the status of this campaign under the new leadership, Hua's speech still called upon the Chinese to pursue more vigorously the movement to "learn from Tachai" in their efforts to develop agriculture. This is not surprising, inasmuch as Hua is identified as a key figure in the adoption of the Tachai-type or advanced country model campaign for the modernization of Chinese agriculture. Thus, although it may be modified to some extent by the new leadership, the various ingredients of the campaign remain as the major focus of current Chinese efforts to solve their agricultural problem.
One area in which the new leadership has changed the nature of the campaign is in regard to its organizational and incentive objectives.39 According to the data collected by Dwight H. Perkins, there was no significant increase in irrigated ar'reage between the mid-i950's and the mid-l9iO's, and the share of total arable land that was irrigated in the muil-i950's was 31 percent, compared with 27 percent in the 1930's. Between the mid-i960's and mid-1970's, h )wever. the amount of irrigated acreage was increased by almost one-third and the share of irrigated land in total arab~e lani increa-,ed to over 40 percent. During this same period, the number of tube wells with power pumps increased thirteenfold. See table 6 in Perkins, "Constraints Influencing China's Agricultural Performance," in op. cit., p. 360.
40,See Perk-ins, "Constraints Tnfluencing China's Agricultural Performance," and Alva Lewis Erisinan, "China's Agriculture in the 1970's," in the previous compendium of papers on China's economy issued by the, Joint Feonomic Committee, "China: A Reassessment of the Economy," 1975. 41 This nationwide ca npaign, known as the Tachai-type or advanced county campaign, includes a great many different, but complementary, activities for achieving modernization of China's agriculture and producing high and stable yields throughout rural China. Furthermore, the emphasis given each of these wa'tiesAl has changed over time. The following discussion in the text in this paper summarizes those activit ies which are most fundamental to this campaign and which are still important policies of the new leadership for solving China's agricultural problem, what ever the current status of the campaign as a whole. For a discussir m of the evolution of the campaign, see Robert F. Dernberger, "China's Economic Future," op. cit., 1p. 13--138. it is interesting to note that the meeting of national representatives at Tachai Brigade in Shansi Province in the fall of 1975, convened by the State Council and which formally adopted the campaign as national policy, was chaired by Hua Kuo-feng.






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Originally, the campaign placed emphasis on the larger production units, suchi as the brigade, as the basic decisionmaking unit in agriculture and on collectivized activities and distribution. The new leadership, on the other hand, has explicitly recognized the needI to rely on the production team as the basic decisionmaking and accounting unit in agriculture and on task-related material rewards for the individual as the basic incentive system. The new leadership also has emphasized its support for the individual household's participation in subsidiary activities, including work on their private 'plot, and their right to participate in rural, free markets; insofar, of course, as this does not involve speculative behavior or cut into their work obligations for the collectivized activities of the team. In other words, the more radical aspects of the campaign have been removed in favor of greater moderation, but many other elements of the campaign remain.
For example, farmland throughout China is to be considerably remoulded into bigger and level fields to allow for the introduction of mechanization and irrigation. Local networks of water control and irrigation projects are to be completed, collecting water from any and all sources and -providing facilities for the storage of water and its distribution to the fields.4 Land reclamation projects are also important, including such innovations as the moving of spring runoff channels and rivers underground through tunnels of considerable length, allowing for the cultivation of crops in the former riverbeds. In addition, cropping patterns are being changed. Where water is available, wheat and corn are being replaced by higher yield crops such as rice, and intercropping is being widely introduced to allow more efficient use of the available sunlight and land, and to lengthen the annual period during which crop growth may take place.
Rural small-scale industries which rely on local financing, raw materials, and labor are being constructed to supply the cement, chemical fertilizer, electricity, and agricultural machinery required by this program of agricultural transformation. Mechanization is an important ingredient in the program as a means to increase the available supply of labor to help meet the large increase in the demand for labor resulting from the farmland construction, changes in cropping patterns, and the small scale industry undertaken as part of the program. Electrification is being carried out as a source of power for the mechanization of agriculture, to light up the threshing floor at night to allow for continuous threshing, and to mechanize food processing (for example, grain milling), which now places a heavy demand on rural labor.
Finally, -and very important, technical innovations are to be made in all aspects of the production process. Originally, these innovations were to be discovered and developed by the peasants themselves; the scientists and technical personnel were expected to go down to the rural areas and work with the masses. The new leadership, however, has put great emphasis on the need to develop China's scientific and
42 These projects were among the most impressive sights observed by one of the coauthors during his trip to China in 1975. Even though one would have to assume that the real wage and interest rates were close to zero (the opportunity costs of labor and capital were very small) to justify their construction in a trc ditional cost-benefit analysis, one could not help but admire the Red Flag Canal (which brought water to Lin County from a river a considerable distance away in another province), children in the mountains ehipping rocks for the construction of a large water storage tank, underground dams to trap the underground flow of
-water, and a network of aquaducts to distribute water from a pumping statioA throughout the communes' fields by means of gravity.







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technological capabilities by relying on the training of experts, of acquiring the most advanced knowledge available abroad, by developing the necessary facilities for basic research, and to test new innovations more carefully and adequately before they are introduced in actual production. In this way, the new leadership obviously believes they can better achieve those innovations which will lead to 'sustained growth in agricultural production.43
The results of these efforts on a few model communes during the 1970's have indeed been impressive. In fact, it was the observed results for these model communes which led the Chinese leadership to adopt this program calling for the nationwide emulation of what the model communes had (lone as the means of solving China's agricultural problem. Yet, their f ailure. to appreciate the extent to which locational (being near large cities, having good transportation facilities, et cetera), historical (being located in areas of traditionally high yields), or special (receiving considerable state aid) f actors explained these satisfactory results, it is very doubtful that other areas, that is, those with low and unstable yields, will be able to easily emulate the experience of these model areas. Most important is the key role played by the availability of water in the achievement of this hoped for transformation of China's traditional agriculture. Quite simply, there are a good many social, economic, and technical constraints which limit the. suitability of Tachai-type or advanced county campaign for serving asthe solution to China's agricultural problem; constraints which will at least significantly restrict the kinds of increases in yields which have, been observed in the model communes."4
In other words, the Chinese are unlikely to achieve a breakthrough during the next decade in their attempt to solve the agricultural problem. As a result, agricultural development will continue at the
pace of 2 to 3 percent, remaining as the major constraint on China's. overall economic growth and on significant increases in the standard of living of the Chinese people.4

43 See the speeches by Teng IHsiao-ping and Hua Kuo feng to the National Science Conference, attended, by approximately 6,000 representatives, held immediately after the Fifth National People's Congress in, March of 1978. These speeches can be found in Peking Review, No. 12, March 24, 1978 (Teng's speech) and No. 13. March 31, 1978 (Rua's speech). The document discussed and adopted by this conference was titled the Outline National Plan for the Development of Science and Technology, 1978-85. As is true of the longrun economic plan, 1975-85, this new policy adopted for the development of China's science and technology is merely the "rehabilitation" of a plan originally sponsored by Teng llsiao-ping in 1975. Due to pressures from radical leaders, then able to use MNao's critical support, these plans were shelved in 1975 and Tong llsiao-ping was removed from his positions of power.
44 There may appear to be an inconsistency in the argument in this section of the paper. On the one hand It is argued that the Chinese will find it increasingly difficult to utilize the means used in the past (that is, irrigation, double cropping, etc.) to obtain greater agricultural growth in the future and that the marginal productivity of current inputs (that is, fertilizer, et cetera) will decline as their level of use increases. In other words, the Tachai or Advanced County Camp~aign won't work as a means of achieving a breakthrough in China's agricultural problem. Yet, in the following paragraph in the text, we argue that agricultural growth in the future is likely to remain what it has been over the past decade or so. These arguments are made compatible for the following reasons. Although given increases in agricultural output will become more difficult (that is, more costly), the Chinese leadership has already decided to devote the resources necessary for obtaining increases in output on a much greater scale than in the past. Although the marginal produictivity of current inputs on each piece of land declines with increases in the level of inputs used, the grow th of agricultural output throughout China in the past was due, in part, to the inecase of these inputs in certain areas of China. Thus, diminishing returns should become an important problem in those areas, but Chinese agriculture contains many areas where the us3 of th se inputs still has a relatively high marginal productivity. Quite simply, although the expected retura~s obtained, on the average, from a given amount of investment and effort in Chinese agriculture in the future is smaller than in the past, the expected increase in the total scale of efforts and attempt to create a more balanced and complementary mix of inputs over a larger area should enable the Chinese to maintain a rate of growth in total agriculture approximately equal to that in the past.
45 The same conclusion was argued in the two articles on agriculture in the previous Joint Economic Committees. compendium of papers on the Chinese economy: Dwight HI. Perkins, "Constraints Influencing China's Agricultural Performance," and Alva Lewis Erisnian, in" China-: Agriculture in the 1970's China: A Rewsssillcnt of the Economy, 1975." It also is consistent with the agricultural papers presented in this volume: Ch"arles Liu, "P RO Agriculture: Performance and Emerging Issues ini the 1970's," and James A. K ilpatrick and Henry J. Groen, Chinese Agricultural Production."





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Industry
Increases in industrial production are obtained by increasing either the amount of physical capital, raw materials, and labor used for production or the productivity of these inputs. Since China is adequately endowed with raw materials and labor supply, the dominant ,constraint on its industrial development is the need to maintain its recent rate of investment in physical capital. The significant industrial growth since 1949 was made possible by a very high rate of investment .41 Despite the claims made in Hua's speech, that is, more total investment in 1978-85 than in the entire previous 28 years, the Chinese will have greater difficulty in maintaining both that high rate of investment and, more important, the rate of return on that investment in the coming years.
Although a host of arguments can lead to this conclusion, only the Signal reasons will be presented here. The damping of the rate of investment will result from the pressures tending to increase the rate of consumption. Because of rationing and the relatively stable real wages that have existed for the past few decades, considerable pent-up demand undoubtedly exists for higher standards of living. In recognition of this problem, the new leadership announced pay increases for aT)Droximately 60 percent of the industrial workers, that is, those i the lower wage scales, during the past year. But, if the Government is to continue to use material incentives, it will have to effect steady increases in wages in order to obtain increases in productivity. Since agricultural production is growing only slightly faster than population, rapid increases in manufactured consumer
-goods, especially durables such as bicycles, sewing machines, watches, radios, et cetera, may alleviate this problem somewhat but will not
-solve it.
The source of the demand for a higher standard of living is found in both the industrial and the ao bicultural sectors. Nonetheless, the fact that industrial workers already enjoy a relatively high standard ,of living has forced Peking to control strictly the rate of migration from the rural areas to the urban industrial centers. Although the recent drive to create rural, small-scale industries has reduced the rural-urban differences in income levels, it has not significantly altered the differences in income between industrial and agricultural workers .41 The relatively low standard of living of the average Chinese peasant, its slow rate of growth, the longstanding promise of equitable income distribution, and the necessity to sustain both the labor effort and political loyalty of the peasants will create a pressure that the Chinese leadership will be unable to deny to devote a greater share of the total GNP to consumption.
Whatever the rate of investment in the future, the growing importance of several alternative claims on investment will tend to reduce the share that has been allocated to industry-especially the
46 Gross domestic capital formation accounted for approximately one-fourth of gross domestic product during the 1950's; more tham half of this capital accumulation was in the industrial sector. Reliable data are not available for the 1960's or 1970's, but the Chinese undoubtedly maintained an investment rate above 20 percent and although agriculture has enjoyed a much higher priority since the 1950's, approximately 40 percent of total investment must still go to industry.
47 This refers to national averages and does not include those individual communes that have become ,quite prosperous and whose members enjoy a standard of living quite similar to that of industrial workers. Most of these prosperous communes are to be found in the neighborhood of large metropolitan centers; thus they have large markets close by in which to sell their subsidiary products.





28

producer goods sector-over the past 25 years. The higher priority of agriculture will result not only in a smaller share of _'M vestment for industry, but also in a much greater percentage of that share going to industries that produce inputs for agriculture-chemical fertilizer, agricultural machinery, irrig _' ation pumps, et cetera. A significant percentaLye of these Lroods are produced in rural, small-scale industries developed through" investment at- the local-especially the countylevel. However, this greater share of investment at the local level reduces the investment that might be made in the modem industrial sector by the central government.
Other budget items also reduce the investment funds available for the industrial sector. Amone these are increasing expenditures on public consumption and soci l overhead capital, such as hospital and medical facilities, educational facilities, and public housing projects. Although there has been rapid growth over the past 25 years, much still remains to be done .48 Transportation f acilities-including the rail, river, and highway network-will also have to be maintained, improved, and increased, not simply to keep pace with industrial development but to alleviate the existing problems as well. The lack of adequate transportation facilities has caused serious problems for the coordination of distribution and supply which can be expected to increase with continued industrial growth. With the share of investment thus reduced, the rate of growth of industrial production is also likely to decline in comparison with the rates of the past 25 years.
Finally, whatever the share of investment allocated to industry, the annual output per unit of investment will also decline because of the shift in favor of the more capital-intensive industries and the modernization of existing industries. Having developed its basic industries to the point where it is relatively self-sufficient in energy, basic machine tools, and metals, China requires in the future the development of industries with significantly higher capital-output ratios. According to a study of China's energy consumption in 1966-74, each 1 percent increase in GNP required a 1.42 percent increase in energy supplies, meaning a GNP elasticity of 1.42 .41 The provision of this supply will depend much more than it has previously on the extraction and processing of petroleum and the harnessing of hydroelectric power potential. Even the continued expansion of the coal industry will depend on the use of more modern mining and refining equipment for the more intensive exploitation of China's huge coal resources, rather than on the earlier labor-intensive methods.
In the machine-building and metal industries, the prospects are similar. Continued economic development wi th a higher number of continuous production runs, more production of standardized parts, higher quality and precision products, and more automation will increase the already existing demand for a greater amount and variety of task-specific, precision, complicated machinery, such as headless, precision grinders rather than basic surface grinder's. These machines
48 Much of this public consumption is provided for by local units in China, especially the commune and the factory. Nonetheless, investments at this level still reduce the potential for investments in the modern industrial sector.
49 CIA, China: "Energy Balance Projections," A(ER)75-75, November 1975, p. 14.





29

will be required not only to equip factories that will be constructed in the future but also to modernize most existing factories. Some of these machines are already produced in China in limited numbers, but the scale of production must be increased significantly.
A unique feature of Chinese industry is the creation of construction, maintenance and repair, and equipment-production facilities within each factory. A significant portion of the capital accumulation and modernization in the industrial sector is provided by these machine shops that produce their own equipment, which tends to be the more basic or standard pieces. The task of the modern machine-building sector will be to create a domestic supply capability for the more sophisticated machinery and equipment that China's economic development will require.
Among these needs for machinery and equipment are the demands of China's defense establishment, agricultural sector, transportation sector, and the rapidly growing chemical industry (fertilizer and synthetic fibers). Even if China hopes to maintain only a conventional, but modern, military force, it would require the production of the most modern and up-to-date aircraft, ships, and weaponry. Any attempt to develop and maintain even a limited missile system with nuclear capabilities would involve relatively high capital and skilled labor costs, not to mention research and development expenditures. The larLyer and more efficient of the agricultural machinery plants in the rural industrial sector are equipped with modern machinery and are introducing assembly-line serial production. Engines for larger pieces of agricultural machinery are produced in the modern, largescale industrial sector, where the capital-labor ratio is higher than the average ratio for all Chinese industry. The transportation sector has a great need for trucks and equipment used in building and repairing roads. The production of these goods-an area in which the Chinese have been beset by problems of effective operation-must also be greatly expanded. China's development of the transportation system also will lead to the production on a larger scale of diesel engines, tank cars (for petroleum), and sealed-container carriers (for aqueous ammonia).
In the metal industry, serious bottlenecks remain in the production of finished rolled steel-a very important product in an industrialized country --and of high-quality alloys. Furthermore, the attempt to increase the variety and quality of metal products will require the development of purification and beneficiation facilities for improving the quality of the raw materials (iron ore and coal).
The above discussion assumes the Chinese will attempt to increase not only the absolute level of production of these relatively capitalintensive industrial products, but also their share in total industrial production. This intent is reflected in Hua's speech and also in the rapid growth in the 1970's of imports of these types of machinery and equipment, chemical fertilizers, and metals, which due to the constraints on China's export capacity, resulted in a. serious balanceof-payments problem for China. This problem, reinforced by a basic





30

development policy which calls for the long run self-dependency of China's economy, resulted in Chinese purchases of complete plants for the chemical, metals, and petroleum industries, all of which are very capital-intensive industries.
The net effect of these tendencies in the rate, allocation, and productivity of investment on the rate of industrial growth is difficult to estimate. Undoubtedly, labor productivity will increase as a result of the new leadership's campaign to strengthen central control over the planning and management system in industry and to enforce stricter discipline and specialization within the labor force. The overall impact of these contrasting negative and positive changes, however, should be a reduction in the rate of China's industrial growth over the next decade compared with the very high rates of growth achieved in the past. Thus, the rate of growth of China's industrial sector may well fall to an average annual rate of 6 to 8 percent over the next decade.o
Consumption
Recent articles in the Chinese press and statements in Hua's speech clearly reveal the new leadership's intention to rely on material incentives as the major stimulus for increased labor productivity and to secure increases in the standard of living for the labor force out of the resulting increases in output to maintain morale. The Chinese have steadily increased the share of cultivated area devoted to food crops and reduced the share devoted to industrial crops. This shift in cropping patterns, along with the use of rationing to enforce the more equitable distribution of the limited supplies, has enabled the Chinese leadership to assure a level of approximately 2,000 calories of food consumption per day for the population. The continued slow growth mn foodstuffs production, however, will undoubtedly mean that the large-scale net import of foodstuffs will continue into the immediate future.5
Given these constraints on the domestic production and import capacity of foodstuffs, significant increases in the standard of living must be accompanied by increases in the share of total consumption accounted for by public consumption and manufactured consumer goods. Since 1960, there has been a slight reallocation of investment in industry from investment in the producers goods industries in favor of the consumers goods industries. Thus, while the rate of growth of output in the consumers goods industries is still lower than the rate of growth in the producers goods industries, the gap between these two rates of growth has been reduced. This gap in favor of the producers goods industries, given the priorities of the new leadership, will continue, but the rate of growth of light industrial production will considerably exceed the rate of increase in the standard of living.
10 See the papers by Wiliam Clark,. electricc Power Industry" and Jon Sigurdson, "Urban-Rural Relationships: Technology and Manpower Po'iies," in this volume, which present the reaons why energy constraints and shortIages of middle-level technical and engineering persomel will prevent the Chinese rom achieving industrial growth rates of 10 percent. Also see the paper by Robert Michael Field and Kathleen i. McGynn. "Chinese Industrial Production," this volume, for estimates of contemporary rates of growth and structural changes in the industrial sector.
0 The average level of these net foodlstu imports may well increase even slightly faster than population growth. depending on how rapidly the new ca-dership desires to increase the standard of living. Their evel, of course, will fluctuate from year to year, depending upon the size of the harvest in the given and in
-the previous year.






31

Although the ratio of the rates of growth in heavy industrial production to light industrial production wil I I decline to something like 1.5 to 1. both rates of growth will be somewhat less in the future than they have been in the past; that is, decline to 9 to 10 and 6 to 7 percent, respectively. The reasons for a decline in the rate of growth of output in the producers goods industry have been outlined above. As for the light industrial sector, output in that sector is heavily dependent on a cultural inputs and, hence, will be seriously constnained by the relatively slow rates of growth of agricultural output. Furthermore, to maintain necessary increases in the production of foodstuffs, foo(1crops will continue to be given priority over industrial crops in the use of cultivatable land. Therefore, the inability to significantly increase the production of these industrial and commercial crops can be expected to lead to Peking's continued reliance on the rationing of such products as textiles and edible oils and the dependence on imports to sustain the increased production of industrially produced consumer goods. f foreign Trade.

As long as the new Chinese leadership adheres to the present policy of self-dependency in foreign trade, that is, does not seek long-term foreign loans, the magnitude of the import requirements which follow from the very large-scale investment and industrial development program outlined in Hua's speech can only mean that foreign trade will remain as a very severe bottleneck to China's future economic development. Without foreign borrowing, China's import capacity is limited by export earnings and China's exports will continue to be dominated by the export of raw and processed agricultural products and raw materials. Not only does our forecast indicate that the rate of growth of China's agricultural production over the next decade will be relatively low, the domestic demands for that output will be increasing rapidly: that increase in demand coming from the increasing standard of living, the growth of the urban industrial labor force, and the growth of the consumers goods industries. As for raw materials, although well endowed inMiDerals, the Chinese must rapidly expand their exploitation of these resources for the purpose of satisfying their own needs of industrialization.
Quite simply, if the new leadership plans to achieve the targets for agricultural and industrial growth presented by Hua for 1985, the very attempt to achieve those targets will put tremendous pressure on the new leadership to seek foreign loans to remove this constraint on China's future growth. Yet, perhaps due to their experiences with the Russians during the 1950's and due also to its being a fundamental ideological principle over the past two decades, the Chinese leaderships has yet to change their policy of being unwilling to engage in long-term borrowing io finance their import needs. Western experts, and even the Chinese themselves, have offered the opinion that China's development of petroleum exports may be the means for alleviating the constraints placed on their import capacity. Indeed, petroleum exports have become an important and growing export commodity and will play an important role in their barter-trade -with Japan over the






32

next decade. Nonetheless, China's domestic needs for energy as a result of industrialization and both technical andl economic difficulties in obtaining ever-growing supplies of petroleum for export wrll limit the ability of this "liquid gold" to solve China's balance of payments over the next (lecade.5'
In any event, the rapidly growth in China's exports over the past (decade is included in the past trend of China's export capacity, which is used here to forecast the growth of China's exports in the future. In making this forecast, our pessimistic forecast, we assume the Chinese will not engage in borrowing long-term loan<; from abroad, although
even ith our pessimistic forecast there wvill be tremendous pressur-e on them to (10 so. On the other band, it is very difficult to imagine how they can realize the very optimistic forecast presented by Hua w ithouit long-term borrowing from abroad.
The~ pr1ocedure. used to obtain a forecast for the likely trend in China's exports between 1975 and] 1985 is really quite simple. The statistical relationship between the rate of growth of exports and rate of growN7th of China's GNP was quite stable over the past 25 years, as was the relationship between the rate of growth of exports and the rate of growth of agricultural production. Using either ratio and, our forecast for the rate of growth of China's GNP andl agricultural production over the next decade, the resulting -forecast of the growth of exports is the same: 5 to 6 percent.-" Thuls, assuming that there will be no chiancres in curr'en t policy regard ing foreign borrowing or investments arni in the desiredd level of self-dependency or foreign trade dependency, the likely rate of growth of both China's imports and exports over the next decade is approximately 5 to 6 percent. Whether or not they should or will be forced to change these policies is, of course, one of the most important policy questions facing the new leadership and is one of the major policy options they face which is discussed in the next section of this l)pper

A convenient summary of each of the above forecasts for the growth of China's economy over 1975-85 and their comparison with those included in Hua's speech to the Fifth National People's Congress is presented in table 1. The comparison readlily shows why those resulting from the analysis in this paper can be labeled "pessimistic" and those presented by Hua labeled "optimistic." Yet, it is important to recognize that even the set of more "pessimistic" estimates indicates the new leadership should be able to achieve considerable progress in the economic modernization of China by 1985.
52 See the papers by Hedija Eravalis, "China's Export Potential," and Kung-ping Wang, "Mineral Output and Productivity," this volume.
53 This forecast is also consistent with that implied in the paper by Hedija Kravalis, "China's Export Potential," in this volume.







33

TABLE 1.-FORECASTS OF ECONOMIC INDICATORS FOR CHINA'S ECONOMY, 1985

Our "pessimistic" forecast Hua's "optimistic" forecast
Annual rates Annual rates
Base year of growth, of growth,
absolute 1975 -85, A bsol ute 1975-85, Absolute
level, 1975 percent level, 1985 percent level, 1985

GNP (billions of 1976 U.S. dollars)--- 1 323 56. 5 606. 1 158.4 8 722.7
Agrcutue-----------------286. 1 6 2-3 9 110.2 164-5 17 133.7
Industry-------------------------- 2176.2 58.5 10396.1 1610-11 18478.2
Consumers goods----------------- 367.4 6 6-7 11126. 5
Producers goods---------- 3108. 8 69-10 12269. 6
Services ---------------------------- 260.7 75.1 99.8 76.2 110.8
Population (millions)------------------- 1935 5 1.8 13 1,114.0 '1 1. 8 13 1,114.0
Percapita GNP-----------345 64.7 544.0 156.5 649.0
Per capita consumption------------- 4207 6 4.7 4326.0 156.5 4389.0
Foreign trade (billions of U.S. dollars):
Exports-------------------------- 17.0 65-6 14120
Imports-------------------------- 17.4 65-6 1412.6.....................---SNational Foreign Assessment Center, CIA, "China: Economic Indicators, ER77-10508, October 1977.
2 Breakdown of value for GNP in 1975 into values for output in agricultre, industry and services obtained as follows: Value of GNP in 1970 (from source in footnote 1, above) used to determine value of output in agriculture and industry in 1970 on basis of shares of those sectors in GNP in 1970; these shares (0.32 for agriculture and 0.48 for industry) from Dwight H. Perkins, "Issues in the Estimation of China's National Product," in Alexander Eckstein, "Quantitative Measures of China's Economic Output," University of Michigan Press, forthcoming. The value for output in agriculture and industry in 1970 are projected forward to 1975 by means of the index of output in these sectors, 1970-75, in source in footnote 1, above. The value of output in the service sector in 1975 is the residual.
3 Value of output in industry in 1970, estimated by means described in footnote 2, above, is distributed to the consumers goods and producers goods sector on basis of share of those sectors in total industrial output in 1970; these shares (0.56 for producers goods and 0.44 for consumers goods) from Robert Michael Field, "Civilian Industrial Production in the People's Republic of China, 1949-74, "in previous Joint Economic Committee compendium of papers on China's economy, "China: A Reassessment of the Economy, 1975. "The values for output in the consumers goods and producers goods industries in 1970 are projected forward to 1975 by means of the index of output in these sectors, 1970-75, in source one above.
4 Per capita consumption assumed to be 60 percent of per capita GNP. See Alexander Eckstein, "The Chinese Develop-ment Model," this volume. Ecksteim makes this assumption for 1974.
*Derived on basis of estimates for absolute values for 1975 and 1985 in col. I and 31 respectively.
6 See text.
7Value of output in services sector assumed to grow an annual rate of growth equal to the average of the annual rate of .growth of population and output in industry.
8 Sum of values for agriculture, industry, and services.
9 Absolute level in 1975 projected forward at an annual rate of growth of 2.5 percent.
10 Sum of values for consumers goods and producers goods industries.
11 Absolute level in 1975 projected forward at an annual rate of growth of 6.5 percent.
12 Absolute value in 1975 projected forward at an annual rate of growth of 9.5 percent.
13"intermediate' model estimate for population in 1985 in John Aird, "Demographic Change in the PRO," this volume.
14 Absolute value in 1975 projected forward at an annual rate of growth of 5.5 percent.
1Derived on basis of estimates for absolute values for 1975 and 1985 in col. 1 and 5, respectively.
1 6 Rates of growth for 1978-85 presented in Hua Kuo-feng's speech to the Fifth Natiohal People's Congress, Feb. 26, 1978. (Peking Review, No. 10, Mar. 10, 1978.) The rate of growth for industry was to be over 10 percent.
17 Absolute value in 1975 projected forward at an annual rate of growth of 4.5 percent.
is Absolute value in 1975 projected forward at an annual rate of growth of 10.5 percent.


According to our "pessimistic" forecast, the Chinese should be able
to achieve a sustained rate of growth in the decade between the mid1970's and mid-1980's of 6.5 percent, China's GNP in the mid-1980's
being almost double the present level and approximately one-fourth
greater than that of Japan in 1975. Per capita GNP will grow at a
rate of almost 5 percent a year, exceeding 500 United States 1976
dollars by the mid-1980's, equivalent to two-thirds that of Taiwan in
1975. Equally significant, per capita consumption should increase by
more than 50 percent over this period, assuming the rate of investment
were to remain stable. The relatively high growth rates in industry
compared to those in agriculture means the radical shift in the structure of the economy over the previous 25 years will continue; industry
-accounting almost two-thirds, agriculture for only one-fifth of China's






34

GNP in 1985. Finally, andl most important, this successful program of industrialization wvill be obtained while the Chinese maintain their present policy in regard to self dependency, that is, no large-scale, long-term borrowing from abroad.5
This forecast, of course, is nothing but a reflection of the several crucial assumptions made in its derivation, but it is important to note that the forecast is labeled a. "pessimistic" one because of these a ssum ptions. The results, however, as vindicated above, depict a rather satisfactory result of the Chinese leaderships efforts over the next several years. Furthermore, while our results are more "Pessimistic" than those presented by Hua, in his "optimistic" speech to the FifthNtional People's Congress the difference is not all that great; Hua's forecasts yielding an overall annual rate of growth approximately 2 percentage points higher or a level of economic output in 1985 that is approximately 20 percent higher than our forecast. Although the most significant difference between the two forecasts is in the agricultural sector, Hua's target rate of growth almost twice as large aS that in our forecast, the resulting structure of the economy in 19815 is almost identical in both forecasts.
The principal distinction between these two forecasts, that is, what lies behind the different results, is between our more "pessimistic" and Hua's (and the Chinese planners) more "optimistic" assumptions. regarding three crucial parameters of these forecasts: Production po-sibilities, the rate and allocation of investment, and the policy of selfdependency. The relatively slow growth of agriculture and the reductions in the relatively high growth rates in industry included in our forecast are derived, in part, from the assumption of a downward trend in input productivity in the future compared to their levels in the past 25 years, that is, based on the "law" of diminishing returns.
The Chinese, on the other hand, expect to experience rapid shifts outward in the production possibilities frontier due to rapid innovations. The assumption we make in our forecast, we believe, is more solidly grounded in both economic reasoning and historical evidence, not only for China but for other economies as well. Tfhe two forecasts are both related to relatively short period of time and the considerable time lag, and investment required for the spi ead and implement ation of innovations that would be necessary would appear to rule out any short-run or sudden change in the quantitative relationships between inputs and outputs for an entire sector. Furthermore, the relative neglect by the Chinese of the basic research and development efforts that lead to these innovations for achieving higher input productivity has led to a significant shortage of middle-level technicians adegnesfrefcilyimplementing. the "borrowed" or imported innovations from abroad, also arguing against any sudden technological transformation of China's economy.
In industry, the new leadership obviously hopes to achieve the rapid outward shift in production possibilities by means of significant additions to their capital stock: 120 large-scale producers goods industrial and transportation projects in the development of 14 industrial bases.
44 As the reader will note, the forecasts for exports and imports in table i, because they were both assumed to grow at the same rate in 1975-85, include the continuation of a slight import surplus in commodity trade. The magnitude of the import surplus, however, could readily he financed by Chinese receipts in the noncommodity trade catagories in the balance of payments and short-term commercial credits which wereutliized by the Chinese in 1975 for this purpose.





35

Our forecast, however, is derived on the bases of the assumption the Chinese will d10 well to maintain the existing rate of investment and the share of that investment going to the producers goods industries. Hua's targets and his discuission of these industrial and transportation projects, on the other hand, implicitly indicate not only a significant increase in the rate of investment, but an equally signiificant reallocation of that investment in favor of the producer-, goods industries. While China's political and economic system would allow China's new leadership to increase the rate of investment and allocate that investment according to the planners priorities; their do~ing so to develop the 120 projects mentioned by IRua would seriously call into question his forecast's predictions concerning the relatively high rate of growth in the agricultural sector and the relatively high rate of growth w e have included with his forecast for per capita consumption. Finally, even if the Chinese are able to achieve the implied high rates of investment andI its reallocation in favor of heavy industry, the size and nature of these industrial and transportation projects would make it somewhat dou1btful the major portion of them could be completed and brought into production at an efficient level of operation by 1985; that is, their contribution to increased input productivity and total output could be included in the output targets presented by IHua.
Perhaps the most significant difference in assumptions behind the two sets of forecasts presented in table 1 concern China's policy of self-dependency. Our "pessimistic" forecast reflect the serious constraints placed on China's economic development over the next 7 years by the relatively slow growth in agricultural production (2 to 3 percent) which results in a relatively slow rate of growth in exports (5 to 6 percent), n an uwligest nrge in large-scale, long-term~
foreign borrowing. The continuation of this policy would, therefore, seriously limit the expansion of China's imports over the next 7 years; that is, seriously constrain the rate of investment and rate Of g growth of industrial production and/or increases in the standard of living of the labor force. As is indicated in table 1, Hua's speech does not include any quantitative forecast for the foreign trade sector, only stating, "there should be a big increase in foreign trade." Given the resource constraints emphasized in our "pessimistic" forecast, not only will the achievement of the targets presented by Hua require a very rapid increase in the level of imports, but an obvious need to rely on -La significant volume of long-run foreign loans for financing those imports.

EMERGING POLICY CHOICES OF THE NEW LEADERSHIP
The need for sizable, long-term foreign loans-that is, as a necessary but not a sufficient condition, for the realization of the investment program and output targets presented by Hua in his speech to the Fifth National People's Congress in February-is not based solely on the magnitude of that investment program or thi'e output tal gets themselves. As a result of the large number of nationwide conferences held in 1977 and 1978 to discuss the many economic policy problems

63 parallel and more detailed discussion of the economic policies actually being adopted by the new leadership since Mao's death, as well as the policies which will be made necessary both by the economic plan for 1985 and the objective of achieving China's economic modernization by the end of the century is presented in Nai-Ruenn Chen, "Self-Reliance vs. Learning from Abroad: China's Path to Economic -Modernization," this volume.





36

facing the new leadership and the many articles and press releases which have come out of China over the past year, the economic policy and strategy choices of the new leadership in several key areas have been made clear. These choices offer even greater evidence for the argument that China's program of economic modernization under the new leadership must rely on extensive boirowing from abroad if it is, to succeed.
Self-Reliance
Neither ilna's speech, nor the reports in the Chinese press, explicitly refer to a recognition of this need to abandon China's longstanding policy of self reliance in regard to foreign loans; a policy so entrenched over the past two decades that it almost can be designated as an ideological principle. Yet, Hua's speech did mark a major step in that direction. This major speech by the leader of the party and the Government, devoted largely to the new program for the modernization of China's economy, makes no mention of the principle of selfreliance. T his aspect of Hua's speech is very important as it is one of the most explicit indicators that the arrest of the Gang-of-Four was not just another in the series of periodic swings in the pendulum. since 1949 as a result of the continuous political infighting for positions of power. Rather, it represents the extent to which the moderatepragmatic approach to China's economic development problems has emerged victorious over the radical opposition, that is, Mao's. development strategy, in the two-line struggle of the entire past 28 years. Political infighting among groups and individuals for positions of power obviously will continue and some observers have already begun to speculate about. a possible confrontation between Hua Kuo-feng and Teng Hsiao-ping. As far as economic policy is concerned, however, the overwhelming victory of the moderates-pragmatists in the two-line struggle becomes cleared with each new sp-eech and press release.5
Although they have not yet publicly abandoned the policy of selfreliance in regard to long-term foreign borrowing, one of the first and most explicit decisions of the new leadership was the abandonment of the policy of self-reliance in regard to the import of foreign technology and producers goods. This step is not surprising inasmuch as the debate over China's reliance on these imports had been a key issue in the two-line struggle in economic policy. This is especially true after 1969 when China's dependence on imports, reduced to a remarkably low level as a result of the Cultural Revolution, increased Significantly under the influence of Chou En-lai and the core of moderatepragmatic leaders, including Teng Usiao-ping, who were rehabilitated under his guardianship.-" The ensuing very rapid increase in the level
56 To indicate the extent to which the victory of the moderate-pragmatic economic policies has been made complete, students applying to graduate school have been informed the questions concerning politics on the qualifying exams will cover Marxism-Leninism, political economy (that is, the labor theory of value), and the two-line struggle. There is no mention of the Thoughts cf Mao. Another example is the list of topics to be investigated by the new cconcmics section of the Academy of Science, all of which take up issues which Marxism-Leninism fails to answer, but which Mao provided answers for during the last 15 years of his life. 5" See the discussion of the changes in China's foreign-trade in the late 1960's and early 1970's which reflected outcomes of the two-line struggle over foreign trade policy during this period in Robert F. Dernberger, "Economic D~evelopment and Modernization in Contemporary China: The Attempt to Limit Dependence on the Transfer of Modern Industrial Technology from Abroad and to Control Its Corruption of the Maoist Social Revolution," in Frederic J. Fleron, Jr., ed., "Technology and Communist Culture," Praeger, New York, 1977, pp. 224-264.





37

of imports (chemical fertilizer, foodstuffs, machinery and equipment, and complete plants) was compounded by the unexpected rise in prices in the West, creating a serious balance-of-payments problem for the Chinese in 1974.58 These developments in the balance of payments, the changes in Sino-American relations which saw the United States soon become one of China's major trading partners, an(I the suggestion by Teng Hsiao-ping that the growing level of imports be financed by increased exports of Chinas' raw materials, including petroleum, played a significant role in the downfall of the rehabilitated moderatepragmatic leadership in 1975.
Following Mao's death and the purge of the radicaism for positions of power, however, the restored moderate-pragmatic leadership di(1 not take long in their open advocacy of abandoning a policy of selfreliance in the modernization of China's existing industrial capacityand in the rapid expansion of that capacity. Numerous sector-by-sector reviews and critical appraisals of the backwardness of the level of technoloy in China's industry placed the blame squarely on the radicals' implementation of the policy of self reliance. The means for correcting this situation and for attaining the most advanced levels of productivity and output in the industrialized countries by the end of the century was also made explicit; it would be necessary for the Chinese to rely heavily on imports of technology and machinery and equipment from abroad. The long-run objective, of course, remains the same-a self-dependent modern economy."9 But in the short run or over the foreseeable future, China's rate of foreign trade dependency can be expected to revert to the norms of the 1950's when the import of foreign technology and producers goods, including complete plants, represented one of the most intensive periods of technology transfer in the history of industrialization.
Given the size of China's economy, its relatively rich resource endowment, and the industrial base already developed over the past, 28 years, the above arguments do not predict the Chinese will rely on imports to supply 40 percent of their investment in machinery and equipment as -was true in the 1950's. On the other hand, their import dependency will obviously be significantly higher than the approximately 10-percent level experienced as a result of the selfreliance policies of the 1960's. No precise estimate can be made until more is learned concerning the exact levels and structure of the investment and output targets of the long-run economic plan for 19751985. Nonetheless, China's imports over the next 7 years should increase at a considerably faster rate than the 5- to 6-percent estimate included in the pessimistic estimates in table 1, which assumes imports will be financed from export earnings and the Chinese will not engage in long-term foreign borrowing, if the Chinese hope to be able to achieve the investment and output targets presented by Hua. They should increase considerably faster, not merely because of the very significant increases in investment and output in Hua's speech compared to those presented in our pessimistic estimates in table 1, but

69 For further details of these changes in China's foreign trade, see Rich Batsavage and John Davie, "China's International Trade and Finance," in this volume. SO For a review of the level of technology embodied in the existing capital stock in Chinese industries, on a sector by sector basis, see John B. Craig and James M. Lewek, "The Chinese Machine Building Industry," in this volume.





38

also due to the new leaderships' decision to rely to a much greater extent than in the past on imports for the realization of their investment and production plans.

Standard of Living
Other policy decisions by the new leadership will add even more pressure for rapid increases in the level of imports and the need to finance a portion of those imports by long-term loans. For example, it is becoming increasingly clear that the new leaderships' pledge to in.-rease the standard of living means much more than the mere repetition of a lonz-run objective. Although they still refer to the importance of mor l and normative incentives, much greater emphasis is being given to the implementation of a material incentive system which will elicit greater labor efTort and productivity from the labor force, another key issue debated in the two-line struggle over economic policy in the past. The reference in Hua's speech to the need to provide or an increase in income for 90 percent of the rural labor force in normal years and the incentive systems being discussed also suggest these increases in income are to & more widespread and continuous, than the one-time increase in wages for those industrial workers in the lower wage scales in 1977 to offset worker discontent.
The particular bonus and piece rate systems being discussed in the Chinese press are obviously intended to serve as examples of the types of systems being considered and to show how those systems have indeed led to increased produclUivity in the particular mines factories and communes that have introduced them. Yet, although the particular system to be advocated may not have been decided upon, all of the examples being discussed in the press share a common feature: the workers share in the increase in productivity and output that results. If the resulting increases in productivity and output are large enough, of course, those increases can provide for a sigmficant increase in the standard of living for the labor force and in the level of investment in industry. On the other hand, increased productivity and output in the mining and producers goods industries do not provide those products which contribute to a higher standard of living for the labor force. Public consumption (health services, education, transportation, housing, et cetera) and industrially produced consumers goods (bicycles, sewing machines, radios, watches, et cetera) will continue to increase their share of total consumption. If the material incentive system is to be meaningful, however, significant increases in the supply of foodstuffs and industrially process agricultural products (textiles) must be made available for consumption. Not only have these commodities been rationed at relatively stable per capita levels since the mid-1950's, but the arguments for believing the Chinese will be unable to achieve their planned rate of growth of between 4 and 5 percent in agricultural production have been presented earlier in this paper.
Thus, the success of their decision to reply on a material -,incentivesystem for obtaining increased labor effort and productivity will ultimately depend on the success the new leadership has in achieving fl)-eir output targets in agriculture. The attempt to achieve those targets, of course, will rely-to some extent, at least-on the continued and growing level of imports of current inputs, that is, chemical





39

fertilizer, and producers goods, that is, agricultural machinery, for the agricultural sector.80 Equally important, however, and more relevant to our argument in this section of the paper, if the rations of basic foodstuffs and textiles are increased so as to make the new material incentive systems more effective (the Chinese labor force already has considerable money savings which cannot be used to buy more food or textiles) and the rate of growth in agriculture turns out to be nearer our pessimistic forecast of 2 to 3 percent than Hua's optimistic 4 to 5 percent, the large-scale imports of agricultural products of the past should continue and perhaps increase somewhat in the future. Although there is no reason to believe these imports will grow as rapidly as the other catagories of imports, such as producers goods, they could increase rapidly during 1 or 2 years of poor agricultural production, which, given the history of Chinese agriculture over the past several centuries up to the very present, is likely to happen sometime during the next decade.
Modernization of the Military
Reliance of modern, sophisticated weapon systems or a manpower intensive, people's milita for China's military strategy was a third major policy issue in the two line struggle over the past two deca(IesM'ao and the radical leaders were openly critical of those who desired to rely on modern weapons systems, arguing that modern weapons systems were orientated to offensive military operations, whereas China's needs and objectives were primarily defense which could best rely on China's greatest asset and strength, the Chinese people. A review of China's military strategy and operations over the past 28 years does, in fact, suggest the defensive orientation of China's military; the radicals often being the dominant force in the two-line struggle within China's military, frequently succeeding in purging those leDders who openly argued for the modernization and professionalization of China's military. Nonetheless, given their experiences in China's military engagements over the past 28 years and the obvious military capabilities of their potential adversaries, China's present military leaders must certainly appreciate the role modern weapons systems will play in determining the outcome of armed conflict with those adversaries in the near future.
This appreciation would explain the crucial role played by the military in assuring the rapid transition following Mao's death which saw the elimination of the radical leaders in favor of the moderate-pragmatic leadership without an open armed conflict or civil war. In fact, the military undoubtedly is the most politically powerful interest group which will support the economic plans and policies of the new leadership. The reason for this is clear, for the modernization of China's military is directly linked with the modernization of China's economy--especially the development of China's technical and scientific capabilities, the achievement of greater productivity and quality control, and the expansion of such key industries as metals (high-grade metals and alloys), machine building (modern military equipment and armaments), chemicals, fuels, and transportation. To this extent, the economic objectives of the military and the new leadership are identi60 Tle first foreign industrial exhibition of agricultural machinery is to be held in Peking later this year; First proposed by the Japanese, the proposal was promptly accepted by the Chinese and mcst of the Western industrial countries, excluding the United States, have been invited to participate.
27-427-78-5





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cal; it is in the choice of alternative allocations of this expanded productive capacity that problems may arise, that is, whether that output should be devoted to increase the supply of producers goods for investment projects and the further expansion of China's industrial capacity or be allocated to the military as an unproductive end user.
As with the previous two key issues in the two-line struggle, the decision of the new leadership in regard to China's future military strategy also has become clear. Whether forced to accept the wishes of the military because of the latter's political power, deciding to because of the debt owed to the military for its support duringFthe period of transition, or merely because of an identity of their priorities the new leadership has decided to undertake the modernization of China's military. Exactly how this is to be done, however, is much less clear.
Whatever the exact nature of their military modernization program, it is bound to include the increased procurement of the conventional and advanced weapons and equipment which can be provided by the scientific and technological capabilities and industrial production capacity the Chinese acquire over the next 7 years as a result of their programs and policies for the modernization of China's economy. As stated by Hua in his speech to the Fifth National People's Congress, "the national defense industries should put their production to good account, diligently carry out research and trial production and then the production of more and better modern conventional and strategic weapons." Yet, given China's current capabilities and the pace at which their scientific and technological capabilities and industrial capacity can catch up with the most advanced level of the industrial nations of the West over the next decade, the modernization of China's military during that period must rely on a considerable import of weapons, armaments, equipment, and component parts. This reasoning is reflected in the visit to Western Europe of a Chinese military delegation which held discussions with their counterparts in the West concerning the availability of these potential im orts.
P
The outcome of these discussions and decisions is yet to be revealed. On the one hand, the system of trade controls created during the cold war still remains and places restrictions on the export to China of strategic materials and equipment which have possible military uses, a problem which may prove to be a serious obstacle to these imports inasmuch as the Chinese undoubtedly will be interested in the most advanced weapons systems and equipment available. On the other hand, given their other import needs, the extent to which the Chinese will be willing to devote their available foreign exchange for this "nonproductive" purpose is also unknown.
The argument here, however, does not rely on knowing what weapons systems and equipment and how much will be imported, only that China's new leadership has decided to modernize China's military and this will require the import of military weapons and equipment. This modernization program, of course, will also divert domestic resources and output from the investment and industrial expansion program spelled out in Hua's speech. In addition, these military weapons and equipment imports will lead to an even greater rate of increase in the level of imports than is already indicated on the basis of the investment and production targets announced in Hua's speech





41

and the p9licy decisions of the new leadership calling for greater rehance on imports of technology and commodities for t1le realization of those targets and calling for an increase in the standard of living of the labor force. ZForeign Loans
As mentioned earlier, Hua's speech does not include any explicit indication of a reversal of the policy of self-reliance in regard to foreign borrowing to finance the modernization of China's economy. Nor does his speech offer any clues as to the probable rate of increase in exports and imports in the long-run economic plan, 1975-85. Ilua only states that "there should be a big increase in foreign trade." This is Ole reason why no entries are included for the foreign trade sector under "Ilua's 'Optimistic' Forecast" in table 1. The section of Hua's speech devoted to foreign trade is not only very brief, it excludes any mention of imports. Rather, it emphasizes the need for the creation of a "number of bases" for supplying export products and the need to increase the share of industrial and mineral products in the expansion of exports that will be required.
On the basis on the above arguments, however, there is every reason to believe that the new leaderships' attempt to achieve the other targets in Hua's "optimistic" forecast presented in table 1, while also relying more heavily on imports of technology and producers goods in the expansion of industrial capacity than in the past two decades, attempting to rely on a material incentive system to achieve greater labor effort and increased labor productivity, and modernizing China's military, will result in a significantly more rapid rate of increase in imports and a higher foreign trade dependency ratio than is depicted in the "pessimistic" forecast in table 1 (5 to 6 percent and 4 to 5 percent, respectively). No accurate estimate of the probable rates of change in imports and exports which should be included in the foreign trade sector for Hua's "optimistic" forecast have been made. The following simple calculations are presented merely to suggest the nature of the balance of payments problems China's new leadership is likely to encounter as they attempt to achieve the plan targets they have adopted and the new policy decisions they have made, that is, the need to engage in long-term borrowing from abroad.
For examDle, if the rate of increase *in the level of imports were to be twice that in our "pessimistic" forecast, that is, 10 to 12 percent, instead of 5 to 6 percent, and, assuming the Chinese are able to achieve the target for the rate of increase in agricultural production in Hua's optimistic" forecast, the rate of increase in the level of exports were raised from the 5 to 6 percent in our "Pessimistic" forecast to 8 to 9 percent (our estimate for the rate of increase in GNP implied by the long-run economic plan), China's foreign trade dependency ratio would be increased by a mere one percentage point, that is, from 4 to 5 percent in 1975 to 5 to 6 percent in 1985. Thus, although these assum"-tions, and results are in keepm*g with the arguments presented above and would not appear to be unrealistic, they would also appear to be rather conservative. In addition, although presented only as an illustration of our argument and not as a prediction of what will actually occur over the next 7 years, they do illustrate the nature of the





42
problem the new leadership is likely to encounter during that period very well. Even these rather conservative assumptions, which only increase China's foreign trade dependency ratio by one percentage point, still yield a cumulative import surplus of more than 25 billion U.S. dollars over the next 7 years. Quite simply, if the new leadership implements the economic plans and policies described above, they will soon generate a sizable import surplus.
This projected import surplus, of course, need not be financed by means of long-term foreign loans. Before reaching the conclusion that they must rely on foreign loans for that purpose, it is necessary to show the new leadership would encounter serious difficulties in attempting to finance the projected imports surplus by other means. The first alternative source would be China's foreign exchange reserves, estimated to have been between 1 and 4 billion U.S. dollars in the early 1970's; that is, before the large import surpluses of the mid1970's.61 The import surplus in the mid-1970's was financed partially by means of these reserves and, in part, by normal, commercial credit of 5 years or less. Presumably the sizable export surpluses China built up in 1976 and 1977 were used to repay these short-term commercial loans and to rebuild China's foreign exchange reserves. Some of these reserves could be used to finance the projected future import surpluses, but the need to make payments on the short-term credits used to finance China's imports of complete plants purchased from the
West as of the end of 1974 will continue through 1982, and, if our projections of future imports are correct, China will require 5 billion U.S. dollars of foreign exchange reserves to maintain enough reserve, to have 3 months' cover for financing imports. It should be obvious, therefore, that while the available reserves may provide some financing for the projected future import surplus it will not be a sufficient source for the financing required.
A second possible source are the noncommodity receipts in China's balance of payments: Remittances from overseas Chinese to their relatives in China, expenditures of tourists in China, shipping and insurance services provided by the Chinese for their commodity trade, et cetera. Remittances from overseas Chinese, the largest items in this category, are estimated to have been approximately $100 million a year during the early 1970's62 and, despite the recent change in policy which now encourages tourism in China, it is unlikely this source of foreign exchange earnings will exceed 250 million U.S. dollars in any 1 year in the near future; that is, will be a significant means for financing the protective sizable surplus of imports over the next 7 years.
The most obvious potential means for financing the projected gowth in imports would be an equivalent increase in exports. One of the basic themes of the arguments in this paper, however, is the difficulty the Chinese will have in attempting to achieve a rate of growth in exports
5 See David L. Denny, "International Finance in the People's Republic of China," in the previous Joint Economic Committee compendium of papers on China's economy, "China: A Reassessment of the Economy," 1975, and Rich Batsavage and John Davie, "China's International Trade and Finance," in this volume.
62 See A. H. Vack and R. E. Batsavage, "The International Trade of the People's Republic of China," in the t1.172 Joist Economic Committee compendium of papers on China's economy, "People's Republic of China: An Economic Assessment."





43

faster than that included in our "pessimistic" forecast in table 1 (that is, the problems they will encounter in achieving rapid rate., of growth in agricultural production andl the rapid rates of growth in the domestic demand for that output due to the rapid expansion of industrial production, the industrial labor force, and the desired increase in the standard of living). Thus, our estimate for the potential growth in exports is based on the relatively stable relationship established between the rate of growth in exports and the rate of growth in domestic agricultural and industrial production over the past 28 years.3 Furthermore, our simplified numerical illustration of why the economic plann% and policies of the new leadership can be expected to require sizable borrowing abroad over the next 7 years, accepts I-ua's "op)timnistic" forecast for increases in agricultural production and adjusts our estimate for the rate of increase in exports upward by over 50 percen~t.
Nonetheless, the stable relationship of the past between exports and domestic agricultural and industrial production could be changed 1by a significant shift in favor of greater exports of China's raw materials, such as petroleum. There is reason for being cautious in this regard4, however. Given the economic plans and policies of the new leadership, the domestic demand for these raw materials should rise relatively rapidly over the next 7 years. Trhiis is especially true for oil, inasmuch as the Chinese u 'ndoubtedly will continue the shift to a greater reliance on the use of oil, diesel fuel, and gasoline as a source of energy.614 Because of this increasing demand, one estimate holds that even under the most favorable assumptions, China will be able to export annually over the next decade or so no more than one-tenth of the oil exported by OPEC in 1974; according to that study, a more reasonable estimate would be about one-twentieth."5 In fact, given the magnitudes of China.'s, industrialization program and the emphasis given to the development of an extensive and well-developed transportation network, China 's, reliance on exports of oil as a major source of foreign exchange coul(t even diminish over the next 7 years as domestic demand overtook the avail able supply.
On the supply side, growth rates of 20 to 25 percent in China's oil industry will be very difficult to maintain over the next 7 years."~ The attempt to tap China's oil reserves, both onshore and offshore, to maintain these past rates of growth will require drilling technology and equipment and the means for transporting the petroleum from the drill head to either the domestic user or the ocean sports (which also require facilities for loading oil tankers) which the Chinese have not yet acquired. Even if the technology, equipment, and skilled workers were to be obtained from abroad, adding to the demand for imports, these items are in scarce supply and would involve high costs, considerable timelags, and possibly the direct participation of foreign companies in China's development program.

IsThis estimate of China's export potential is consistent with the estimates of Hedija Kravalis in "China's Export Potential," in this volume.
'4 Between 1970 and 1974, oil increased its share in China's total energy supply from 14 to 22 percent. Is CIA, "China: Energy Balance Projections," A(ER)75-75, November 1975. 66 See Vaclay SilI, "Energy Production," and Kung-ping Wang, "Mineral Output and Productivity," in this volume.





44

Despite these words of caution, however, the exploitation of China's oil resources does provide the Chinese kNith an excellent export commodity-liquid gold-that is in great demand in those very countries that can supply the Chinese with the imports they will need in the next 7 years, that is, Japan and Western Europe. On the other hand, although these potential exports of raw materials may help alleviate some of China's balance-of-payment problems, the y will not provide the magnitude of foreign exchange earnings required for financing the import surplus implied by the economic plans, and policies of the new leadership.
One final source for financing the projected import surplus, of course, is the continuation of the present practice of relying on short-term commercial (5 years or less) credit for individual import transactions, that is) a certain amount -paid when the imports are received by China and the rest of the payments spread out periodically over the next few years .61 This source, however, can only be a temporary means for financing the projected growth in the gap between current imports and current exports implied in the economic plans and policies of the new leadership. In other words, the short-term debt would soon accumulate to the point where current exports could not cover the repayments scheduled by the debts used to finance imports in previous years and the Chinese would have to engage in long-term foreign borrowing for that purpose.
We cannot, of course, rule out the use of each of the above sources combined to finance a growing Chinese import surplus or the limitation of that import growth to the level made possible by these sources. Quite simply, actual event-, may see the Chinese leadership adapt their economic plans and policies in li 'ght of the constraints imposed by domestic resource and foreign exchange availability; constraints presently dictated by their policy of self-reliance in regard to foreign borrowing. Such a policy would merely mean the actual evolution of the economy over the next 7 years would be closer to our "pessimistic" forecast in table I (a forecast based on the assumption of a policy of self-reliance in regard to foreign borrowing) than to the forecast presented in Hua's speech. On the other hand, if the new leadership does attempt to realize its economic plans and -policies, that is, the results presented as Hua's "optimistic" forecast In table 1, over the next 7 years, we conclude the only possible way those plans and policies can be realized is by means of Clina's obtaining long-term foreign loans. The Choice of Trading Partners

While no attempt is made here to estimate the magnitude of China's potential long-term borrowing from abroad, those loans. undoubtedly will be tied to the financing of particular large-scale import transactions negotiated with groups of Western businessmen or countries. These large-scale import transactions will be an important feature of the projected rapid growth of imports, that is, those imports specifically obtained for the purpose of achieving the new leaderships plans for rapidly increasing China's technological capabilities and
67 For a detailed description of the short-term financing used to finance China's imports, see David L. Denny," International Finance in the People's Republic of China," in previous joint Economic Committee compendium of papers on China's economy, China: A Reassessment of the Economy," 1975.





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developing China's industrial capacity so as to catch u I ith the West by the end of the century. Thus, the source of these iowng-term loans will be determined by. the trading partners the Chinese rely upon for the purchase of these importS61
The Soviet Union was a major supplier of these producers goods during the 1950's, when China was rehabilitating and expanding basic industries which did not require the most sophisticated and advanced technology- Now and in the future, the Chinese will be able to produce these producers goods domestically; requiring instead producers goods which embody more advanced technology. The socialist countries, although able to meet some of China's technological needs in this regard, are themselves currently seeking imports of high-technology producers goods in the West. The comparative advantages of Western
suppliers is even gTeater in China's import needs for current inputs m agricultural production, that is chemical fertilizer, and for agricultural products.
Transport costs for trade with the socialist countries are also relatively high, especially when compared with the transport costs for trade with Japan, China's largest tradingDartner. In addition, China's export commodities prob bly accommodate Japan's needs more than they do the needs of any other industrial zed country. AS for China's import needs, Japan's export potential, current economic conditions, continuing accumulation of foreign exchange reserves, and the facility with which the Japanese transferred official recognition from the Republic of China to the People's Republic of China will all serve to insure that Japan will remain the major supplier of the technology, producers goods, and long-term loans required for the implementation of the new Chinese leaderships economic plans and
69
policies.
Although Japan's dominance of China's import trade should continue andeven increase over the next 7 years, the Chinese also can be expected to follow a policy of diversifying their foreign trade ties so as to avoid exclusive dependence on any single country or group of countries. This will lead China to develop trade ties with all countries and areas: the socialist countries (including the Soviet Union), the industrialized countries of North America and Western Europe, agricultural surplus countries in South America and Southeast Asia, and raw material suppliers among the ranks of the underdeveloped countries. This policy will also help to insure some role for the United States in China's growing import trade.
As f ar as Sino-Americaii trade ties over the next 7 years are concerned however, the United States will probably remain-as at the present time-the source of particular types of advanced technology and producers goods the Chinese cannot obtain from U.S. licensed firms in
61 An example of this phenonemon is the long-term trade agreement signed by the President of the JapanChina Economic Association (Japan) and China's Vice Minister for Foreign Trade in February. The agreement calls for 10 billion U.S. dollars in exports by each country to the other over the next 5 years; Japan to export 7 to 8 billion U.S. dollars of plants and technology and 2 to 3 billion U.S. dollars in construction materials, China to export 47 million tons of oil, 5 million tons of coking coal for steelmaking, and 3.5 to 4 million tons of steaming coal for power generation. Thus, basically the agreement would appear to be a barter agreement, but the Japanese exports of plant and technology will be made on a deferred payment bases. These are not to be paid for on the basis cf long-term loans, presumably out of deference to China's ideological opposition to long-term borrowing from abroad. Nonetheless, at the same time, the Japanese are said to have adopted two means for providing what amounts to long-term loans for financing China's growing imports from Japan: making sizable foreign-currency deposits with the Bank of China which the Chinese can utilized to pay for Japanese exports and the extension of credit by Japanese banking system and ImportExport Bank directly to Japanese exporters engaged in export trade with China. 49 See footnote, 68, above.





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third countries and residual supplies of agricultural products during peak periods of Chinese demand for these products. Several major obstacles will prevent the United States from playing a major role, that is, compared with Japan and Western Europe, in the projected rapid growth in Chinese imports over the next 7 years. Foremost among these obstacles-mostly political-are the following (a.) Considerations which make it very difficult for the United Statesunlike any other major industrial country-to grant de jure recognition to the People's Republic of China and withdraw that recogniion from the Republic of China; (b) considerations which have made it difficult for the United States to settle the issue of Chinese frozen assets in this country and American claims on assets and debts in China; (c) the considerations which have made it difficult for the United States to grant "most-favored-nation" tariff rights to Chinese exports in the normalization of commercial relations; (d) the system of legal controls in the United States on commercial trade with China; and (e) the difficulty which can be expected in any future attempt to remove U.S. controls on the extension of long-term credit for financing exports to China .70 None of these "difficulties" are insurmountable, but little or no progress has been made in solving them since the early 1970's and, as long as they remain, the United States will undoubtedly continue to follow Japan and then Western Europe as the major contributors to China's rapidly growing import trade over the next 7 years.
CONCLUSION
The discussion and arguments in this paper, as in a good many of the other papers in this volume, has emphasized the serious economic problems the new leadership faces in its attempt to modernize China's economy, and reach the front ranks of the industrialized world by the end of this century. Other papers in this volume present analyses and conclusions which are significantly more optimistic about China's economic future. Even those which emphasize the economic problems in China's future, such as this paper, also include arguments which would lead to a rather favorable interpretation of China's past record of economic development and possibilities for continued growth in the future, although nowhere near as optimistic as the prospects held forth in Hua's speech to the Fifth National People's Congress.
70 For a detailed discussion of these considerations which lead to these difficulties and of the difficulties which serve as obstacles to greater Sino-American trade, see Eugene A. Theroux, "Legal and Practical Problems in the China Trade," in the previous Joint Economic Committee compendium of papers on China's economy, "China: A Reassessment of the Economy." 1975, and Martha Avery and William Clark, "Sino-Arnerican Commercial Relations" and Stanley Lubman, "Legal Aspects of PRC Trade," in this volume. Two papers in this volume attempt to estimate the effect the granting of most-favored-nation tariff privileges to China's exports would have on Sino-American trade; see James Kilpatrick and Phillip Lincoln, "MFN and the China Trade," and Helen Raffel, "Tariff Restrictions and P RO Export Potential, in this volume. It should be noted that most of the papers in this volume deal with topics central to the economic problems and potential of China's economic development as would be viewed from within China itself; the papers in this volume referred to in this footnote are included because of the great concern with these problems of Sino-American trade by the American public and Government and these latter problems, especially MFN, are not nearly as crucial in determining China's economic future as they are in determining the future political relations between these two countries. For a discussion of the problems which are preventing the introduction of the necessary means of providing long-term financing of U.S. exports to China, see Frank Ching, "Rough Going Forecast for U.S. Proposals To Allow China Loans," The Asian Wall Street Journal, April 14, 1978.





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For example, all of the papers in this volume recognize the record of positive rates of growth in both agriculture and industry in China's economic development over the, past 28 years, which have created a significant economic base for the new leadership to build on in their attempt to modernize China's economy. More important, all recognize the tremendous potential for future growth and even the more pessimistic. of the papers that follow believe the new leadership's economic plans and policies will achieve a considerable degree of success; that is, further increases in GNP per capita. Perhaps most important of all is that these economic plans and policies of the new leadership indicate domestic economic rationality and stability and a far greater reliance on normal commercial relations with the industrialized countries of the non-Communist world than was true in the past.












RECENT CHINESE ECONOMIC PERFORMANCE AND
PROSPECTS FOR THE TEN-YEAR PLAN
By NICHOLAS R. LARDY*
CONTENTS

pag~v
Recent economic performance--------------------------------------- 50
Causes of the deln------------------------52
Evaluation and implications ------------------------------------------54
Summary and prospects-------------------------------------------- 60
In January 1975, Chou En-lai, in a major address to China's Fourth National People's Congress, called for the "comprehensive modernization of agrriculture, industry, national defense, and science and technology before the end of the century."'I In the 1976-85 decade, China was to build a "relatively comprehensive industrial and economic system" that would serve as the foundation for the more ambitious goals that were to be achieved by the year 2000. Yet, in the 3 years since Chou's speech, China's agricultural output has stagnated1, indlustrial output growth has fallen far below the average rate achieved in the previous decade, and China's foreign trade in real terms remains well below the level of 1974.
These unfavorable developments naturally call into question the very ambitious economic goals contained in the "Outline of the 10-Year Plan for the Development of the National Economy, 197685, that were announced to the Fifth National People's Congress by Hua Kuo-fengr in February 1978.2 The purpose of this paper is to review recent developments in light of China's record of economic development over the past 25 years and to analyze several alternative hypotheses that may explain the relatively poor economic performance over the past few years. This analysis highlights the critical problems that Chinese economic planners 'face in in Idustry, agriculture, and foreign trade and then assesses, on the basis of currently available evidence, the prospects for achieving the goals incorporated in the 10-year plan.
BACKGROUND
In longr-term, and comparative perspective there are at least three salient characteristics of post-1949 economic development in China: Exceptionally high rates of economic growth, rising rates of capital formation, and extremely modest dependence on foreign financial assistance.
*Nieholas R. Lardy is a member of the Department of Economics faculty at Yale University. I Chou E n-li, Report on the Work of the Government," Peking Review No. 4, 1975, p. 23.
3 Hua Kuo-feng, "'Unite and Strive To Build a Modern Powerful Socialist Country," Peking Review, No. 10, 1978, pp. 7-40.
(48)





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While advocates of the "growth is obsolete" view thrive in the West, the Chinese leadership has always believed that rapid economic growth provides the most effective mechanism to transform China into a modern state and to raise the standard of living of its people. Indeed, China's average annual rate of economic growth between 1952 (the year in which post-civil war economic recovery was basically completed) and 1974 was approximately 6 percent or about 4 percent in per capita terms.' At these rates total anN per capita output double in 12 and 18 years respectively. Most notably industrial growth under the Communist regime has been extraordinarily rapid, doubling on the average every 6 years.4 While agricultural growth has been much more modest it has more than kept pace with the growth of population, a remarkable achievement given China's high population density per unit of arable land.
This economic performance is most usefully judged in historical and comparative perspective. Although some other developing countries have grown as fast, only a few have sustained a 6-percent average rate of growth since World War II. China's economic performance is also impressive when it is compared with other large, densely populated Asian countries where per capita incomes were initially (late 1940's) comparable to those of China. In India, for example, another large continental country faced with the difficult problem of raising agricultural output on a relatively fixed. quantity of arable land, the average annual rate of per capita economic growth between 1950 and the early 1970's was only 1.1 percent,5 roughly one-third that of China's. Pakistan has done somewhat better, with a rate of per capita growth slightly over half that achieved by China.
In historical terms as well, post-1949 economic growth has been quite rapid. While there were isolated pockets of economic growth and modernization in China pri or to 1949, these were restricted to Small. foreign-dominated coastal enclaves such as Shanghai and the northeast (Manchuria) that had developed under Japanese occupation and control. The economy as a whole failed to exhibit any sustained growth of per capita output in the half century prior to 1949.6
A second notable characteristic of the Chinese economy since 1949 is the unprecedented rate of capital formation (the ratio of gross investment to gross output). Estimated at about 5 percent for the 1930's and much less for the civil war years, it rose to 10 percent by 1952 (the beginning of the first 5-year plan), to 20 percent by 1957 (the end of the first 5-year plan), to 25 percent or more in the early 1970's. 7 These are rates of capital formation which are unusually high for a country of China's low level of economic development. They are, for example, almost twice the rates achieved in India and Pakistan.
This high rate of investment has two important implications. First it is an antidote to the naive view that China's economic development strategyv under Mao was concerned primarily with the pursuit of
3 Dwight HI. Perkins, "Issues in the Estimation of China's National Product." Hlarvard Institute of Economic Research Discussion Paper No. 471, April 1976i.
Robert Michael Field, "Civilian Industrial Production in the People's Republic of China: 1949-74," in "China: A Reassessm-enit of the Ecoiiomy," p. 149.
5 John Mellor, "The New Economics of Growth: A Strategy for India and the Developing World." Ithaca, N.Y.: Cornell U niversity Press.
6 Dwight IEI. Perkins, "Growth and Changing Structure of China's 20th Century Economy," in "China's Modern Economy in Historical Perspective," ed. by Dwight Perkins. Stanford, Calif.: Stanford University Press, 1975, pp. 122-123.
7 Robert Michael Field, "Real Capital Formation in the People's Republic of China: 1952-73," unpublished manuscript, July 1976.






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'revolutionary ideals rather than economic progress. Clearly, revolu-tionary ideals have been important, but they have not usually over,ridden the overwhelming priority accorded to rapid economic growth. Secondly, these high rates of investment imply that the Chinese Government has been successful in deferring wage increases in the industrial sector in f avor of reinvesting profits to finance further industrial growth. This, in turn, has important implications that I will pursue below.
Finally, China's economic development has depended less on foreign financial aid than any other successful developing country since World War II. Even during the 1950's, Soviet loans in aggregate terms were relatively modest-about $1Y2 to $2 billion over a period of 10 years. Repayments began quickly and by 1955 repayments to the Soviets exceeded new loans. During the decade from 1955 to 1965 the Chinese repaid their loans from the proceeds of their trade surpluses.
At the same time that the Chinese began to repay their debt to the Soviet Union in the mid-1950's, they also initiated their own foreign economic assistance program. Since 1955 they have granted over $7 billion of economic and military aid-a substantial net capital outflow for a. country of China's relatively low level of economic development. Of this flow, over half has consisted of economic aid to other lessdleveloped countries. Although aid expenditures have declined considerably in recent years, since 1970 they have averaged about $400 million per year.8 In short, China is the only less-developed country that has not only relied minimally on foreign credits, but also has been able to sustain a rather successful foreign assistance program of its own.
Again, the comparison with India is instructive. India, since independence in 1947, has run an almost continuous foreign trade deficit. This deficit has been financed by foreign aid and capital inflows, primarily from the West, but in more recent years from the Soviet Union as well. Over the two decades from 1950 to 1970, India was, the recipient of over $13 billion of net resource transfers (defined as imports less exports).' India, in fact, has been the largest recipient of developmental aid and concessionary loans in the world. Despite this generous assistance, which financed 15 to 20 percent of India's capital investment during these two decades, India's rate of growth of gross national product in per capita terms has been about one-third that of the Chinese. In the view of some observers, the refinancing of India's cumulative external debt seems likely to become a regular featurii e of the itraonlmonetary scene.

IRECEN-,TTEcoNo--uic PERFORMANCE
In marked contrast with this favorable long-term record of economic grown and minimal reliance on foreign financial credits, China's economic performance in the past 4 years has been comparatively unfavorable. The rate of economic growth since 1974 has fallen f ar below the long-term average, and an unprecedented balance-of-trade deficit was incurred in 1974 and 1975. These developments have beset
I John Franklin Copper, "China's Foreign Aid in 1976," "Current Scene," vol. i5, Nos. 6 and 7 (JuneJuly, 1977), p. 13.
John Mellor, "The New Economics of Growth."






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the current leadership with the most profound set of economic prob)lems China has confronted in over a (decade. The paragraphs below will detail the extent of the econlomfic downturn and examine a number of hypotheses that have b~een suggested to account for the decline in economic performance o1 recent years.
Most significantly, agricultural output during the 2 years 1976-77 does not appear' to have risen significantly above the level of the 197475 harvests.'0 As a result, China's imports of f00(1 grains increased sharply to almost 7 million metric tons in 1977 and[ will remain above average this year. This, of course, has absorbed, a considIerablIe port ion of China's foreign exchange earnings andl has dIepressed1 China's
program toimport moer lant, machinery, an eqipment from the
West. Poor performance has not been limited to food grains. Output of major industrial crops such as soybeans and rapeseed has also grown relatively slowly while cotton output has (1eclined sh arply.
Ecinally important, China's rate of industrial growth has fallen to about one-half of the long-term rate of 12 percent that had been achieved between 1,952 and 1973." Industrial output grew by less than 5 percent in 1974 and then recovered to about 15 percent in 1975.11 In 1976, industrial growth came to a stand~still or perhaps even registered a decline of about 5 percent."~ Several provinces were -particularly affected, with decline of industrial output of 20 percent or more. 1977 was a year of rapid recovery with industrial output growth apparently app~roaching 14 percent.'14 As ta result the level of industrial ouput in 1977 was substantially less than it otherwise would have been, and industrial investment was significantly depressed, particularly in 1974 and 1976.
Finally the decline in China's economic performance over the past few years was reflected in the emergence of a large trade imbalance beginning in 1973 and a sharp decline in the rate of trade expansion. During 1974 the prices of industrial goods imported from the West rose sharply as a result of world-wide inflation.'" At the same time Western demand for many of China's traditional exports, particularly cotton texctiles, was shrinking. As a result a trade deficit of, $200 million in 1973 grew to about $800 'million in 1974.16 Beginning in 1975 the Chinese sharply curtailed the growth of imports while attempting to step up their exports. Consequently the trade deficit
10 China's food grain output (including soybeans and rotatoes in grain equivalent weight) was 274.9 million metric tons in 1974,' according to a statement of Yang Li-kung, Vice Minister of Agriculture at an FAC0 conference in Rome in November 1975. Data for the harvests since then are quite limited. The 1975 harvest appears to have been. 2310 million metric tons. See Wen-hul pao" (Hong Kong) Mar. 9, 1978, p. 7; and International Rice Research Institute, Rice Research and Production in China: An I RRI Team's View." Las Bafios, Philippines, 1978, p. 77. Estimates for 1976 and 1977 are subject to a higher margin of error, but the harvests appear to have been in the 275 to 285 million ton range in both years with the 1977 harvest somewhat below that of 1976.
1 i Robert M. Field, Nicholas R. Lardy, and John P. Emerson, "A Reconstruction of the Gross Valim-'of Industrial Output by Province in the People's Republic of China: 1949-73," Foreign Economic Report No. 7. Washington, D.C.: Department of Commerce, 1975, p.19. 12 The ,.974 growth is estimated from scattered provincial reports. The 1975 figure comes from Yii Ch'iuli's speech to the Fourth Session of the standing Committee of the Fourth National People's Congress oiu 23 October 1977 in Foreign Broadcast Information Service, "Daily Report, People's Republic of China," Oct. 25, 1977, p. E6.
13 This~j estimate is based on incomplete provincial reports and is subject to some error. 14 Fourteen percent was the preliminary estimate given in the close of 1977. No final figure was released in the first quarter of 1978, and Hua's speech made no specific mention of industrial growth in 1977". Until more information is released, this figure should be treated with caution. 'a Central Intelligence Agency, Office of Economic Research, "China: Real Trends in Trade with NonCommunist Countries since 1970," October 19i7.
16 The trade data cited here and in the remainder of this paragraph are taken from Central Intelligence Agency, Office of Economic Research, "China: International Trade, 1976-77," November, 1977 and from reports released by the Japanese External Trade Research Organization.






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was cut by three-fourths in 1975 and a surplus of about $2Y2 billion cumulated during 1976-77. Consequently, in sharp contrast to the 1970-74 period when imports (in constant prices) were growing by about 12 percent annually and constituted a dynamic sector of the economy, imports in 1977 (in constant prices) remained well below the level of 1974.
CAUSES OF THE DECLINE
Number of hypotheses have been advanced to explain the recent sharp reversal of economic performance. These hypotheses are worth examining in some detail since they not only reveal the char,acter of the critical problems that have confronted the post-Mao leadership, but also because they have somewhat different implications for the prospects for achieving the goals incorporated in the Ten Year Plan.
The most obvious hypothesis attributes China's recent poor economic performance to political developments, notably the sequence of events following the death of Chou En-lai in January 1976. These include the purge of the Vice Premier Teng Hsiao-p'ing in early April and the virulent attack on a set of economic policies which were attributed to Teng but appeared to differ only marginally from the overall strategy of economic development that had been enunciated by Chou at the Fourth National People's Congress in January 1975.17 In retrospect, however, it is clear that political events had begun to have an adverse effect on economic development as early as late 1973. The campaign against Lin Piao (the former Defense Minister who died while apparently attempting to escape to the Soviet Union) gave rise to deep factional cleavages in many industrial enterprises, leading to worker sabotage in some factories and widespread disruptions of the transport system. Although it was difficult to judge the effect of these activities on economic production, provincial data released in radio broadcasts made it possible to identify some of the most troublesome areas, most clearly Chekiang Province. Industrial output in Chekiang fell by over 10 percent in 1974, largely due to widespread disruption of production in Hanchow where several thousand People's Liberation Army troops were finally dispatched in 1975 to restore order.
While there was increased stability and recovery in 1975, 1976 was again marked by exceptional political disruption and uncertainty. During 1976, it became clear that the effect was not simply to close down 'factories for extended periods but also, more significantly, to undermine the consensus in support of the 10-year plan that had been formulated by the summer of 1975 and that was to have gone into effect in 1976. In the latter part of 1975, the followers of Madame Mao, as part of their attack on Teng Hsiao-p'ing, raised 'a series of objections to the plan. In retrospect it is clear that crucial aspects of the strategy embodied in the plan had come under sharp attack and were discussed throughout most of 1976. Not until after Madame Mao's followers had been arrested in the fall of 1976 and Teng llsiaop'ing was officially rehabilitated in the spring of 1977 did the economy begin to recover from the sharp decline that had been caused by the paralysis of the planning process, widespread work stoppages, and disruptions of the transport system.
17 These criticisms were contained in a series of articles published in the Shanghai journal "Hsdeh-hsi yd p'i-pan" (Studies and Criticism) in the spring of 1976.





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A second hypothesis suggests that the decline in performance, particularly in the industrial sector, is the result of a lOng-tem decline in labor productivity. Because industrial profits have been reinvested rather then being used to finance wagre increases, the average wage in manufacturing was constant for the the 20 years between 1957 and late 1977.18 Because wage policy (luring the First Five Year Plan period explicitly linked the growth of real wages to increases in labor productivity, it has become increasingly difficult to motivate workers without wage increases. As a result, while the long term xate of growth of labor productivity is high, there has been little improvement in the past few years. In short, this hypothesis suggests that ideology increasingly has become a less effective substitute for material incentives.
A third hypothesis suggests that growth has slowed because of the cumulative effect of misallocated investment resources. Without the guidance of scarcity-based market prices or the use of relatively sophisticated planning techniques, Chinese planners may have neglected significant sectors of the economy. Long-term misallocation, in this view, has now had widespread unfavorable repercussions throughout the economy, depressing the rate of growth below its long-term level. The sectors thought to be the most neglected are coal, electric power, and transport. The shortage of transport capacity, for example, is thought to have contributed to delays in production as crucial inputs are not being delivered according to schedule. The apparent unwill-ingness of the Government to modernize the coal industry has resulted in a very slow rate of growth of output. Shortages of coal have, in the Short run, depressed the rate of growth in other industries. And the longrun consequence is that in industry, petroleum-based energy
-sources are increasingly substituted for coal, reducing the amount of
-oil available for export.
A fourth hypothesis attributes the decline in the rate of growth to an ever increasing burden of agriculture on the rest of the economy.'" In this view the Government has been forced to allocate an increasing
-share of investment resources to agriculture simply to maintain a rate
-of growth of agricultural output sufficient to feed a population which is currently expanding by about 15 million persons per year. The economics of producing g adequate food on a fixed quantity of arable land (the amount of land under cultivation in China does not appear to have increased since 1957) are quite unfavorable. The gains mn
-output that could be achieved through the strategy of increased mobiliz ation of traditional resources within the confines of an unchanging agricultural technology were largely exhausted in the 1950's. In the early 1960's the leadership recognized that future agricultural growth would depend on the allocation of modern industrial inputs to the
-agricultural sector. But as more and more resources are applied to a relatively small fixed quantity of land, diminishing returns set in. Thus an ever growing quantity of chemical fertilizers, certain types of agricultural machinery, particularly irrigation equipment, is required to
-compensate for the fixed quantity of -arable land.
11 Nicholas R. Lardy, "Economic Growth and Distribution in China." Cambridge University Press, 1978, pp. 174-175.
to Robrt F. Dernberger. "China's Economic Future," in Allen S. Whiting and Robert F. Dernberger .8China's Future: Foreign Policy and Economic Development in the Post-Mao Era." New York: AlcG raw.Hill Book Co., 1977.





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The option of meeting incremental food requirements through imports is foreclosed not so much by the doctrine of self-reliance as by sheer economic necessity. Any attempt by a country comprising onefifth of the world's population to satisfy its annual incremental food requirements entirely through imports would, at least in the short run, exert substantial upward pressure on prices in world markets -. Thus the combination of diminishing returns and the need to remain largely self-sufficient in food grain supplies necessitates that the leadership allocate an ever growing share of resources to the less productive agricultural sector. Because the capital output ratio (the incremental quantity of investment necessary to generate a given increase in output) is much higher in agriculture than in industry, the allocationI of investment is shifting to a pattern that is less favorable for maintaining rapid economic growth.
A final hypothesis suggests,- that much of the decline in the performance of the economy can be traced to the (direct and indirect effects of the earthquake which struck Hopei Province in July 1976. As the veil of secrecy surrounding the earthquake is slowly raised it is clear that the loss of life and physical damage were enormous. LUpward of thireequarters of a million people were apparently killed and T'angshan, a major in(Iustrial city, was leveledl.

EVALUATION AND IMPLICATIONS
In my view, the major causes of the downturn in economic performance in recent Years appear to be transitory and potentially reversible. Political disruptions in 1974 and 1976, the Hopei earthquake in 1976, and poor' weather in both 1976 and 1977, rather than long-term structural causes, appear to be the most important explanatory variables. Thbis interpretation is, of course, subjective and given the paucity of economic data available, cannot be tested rigorously. The evidence and analysis supporting this interpretation is set forth below.
First, the pattern of provincial industrial development over the past few years suggests that political forces have outweighted longterm structural f actors as causes of the decline in industrial growth. Most important the slowdown in industrial growth has occurred primarily because of significant declines in the absolute level of industrial output in some provinces rather than an across the board slowing of the growth rate.2 On the basis of scattered reports, it would appear that a few provinces have been able to maintain rates of industrial growth approaching their long-run average rates. Such widely separated provinces as Heilungkiang and Kwangtung would appear to f all into this category. On~ the other hand, regions where political strife was most intense in 1974 and 1976 suffered absolute declines in industrial output. In Kweichow, for example, industrial output appears to have fallen by about one-third in 1974. After recovering in 1973, output again fell in 1976, perhaps by 40 percent or more. Industrial output in Cliuchou, an important industrial center in Hunan, fell by 31 percent in 1974. After recovering in 1975, output fell again in 1976. In Chekiang Province output fell significantly in 1974 an(1 then continued to fall in 1975 and again in 1976. It was not until 1977 that the level of industrial output in Chekiang recovered to the levels achieved in 1973-the previous peak level of output. Industrial- output
2The analysis presented below is based on provincial reports.





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also fell by about 16 percent in Hopei in 1976, although the cause was the July earthquake rather than political forces.
In short, over the past few years there has been sharply increased variation in the pattern of provincial industrial growth. This pattern suggests that the decline in the national rate of growth is the result of disruptions of growth that have been particularly severe in some regions, rather than the result of systematic forces, such as misallocation of investment funds, that would be expected to have a more uniform effect on provincial industrial growth.
Second, stagnation of agricultural output since 1974 also appears to reflect primarily short-run forces. China's agriculture most certainly has not encountered some biologically determined ceiling level of output and the prospects for sustained growth are quite favorable, particularlv compared to many other Asian countries at comparable levels of economic development. I believe the argument that China's acrrlculture has been subject to sharply diminishing returns tends to underestimate the importance of technical change that has occurred since the shift in agricultural development policy of the early 1960's. Rather stagnation appears to have been caused by a disruption in the flow into agriculture of modern inputs produced by the industrial sector, poor weather in 1976 and 1977, and perhaps by management problems that have reduced peasant incentives.
Since the mid-1960's, agricultural growth has become dependent on increased supplies of chemical fertilizers and farm machinery particularly power tillers and electric and diesel pumps for irrigation systems. Because of weaknesses in the industrial sector discussed above, there was a sharp decline in the growth of these inputs after 1974. Following several years of rapid development, the production of chemical fertilizers was basically unchanged in the 4 years between 1973 and 197621 The total supply of plant nutrients from inorganic sources has actuAlly declined because the quantity of imported fertilizers, af ter reaching &-peak in 1972, -has fallen, particularly since 1973. This, of course, was partially due to the policy of reducing imports after trade deficits were incurred in 1973-75. The growth of incremental supplies of other inputs to agriculture has also declined sharply. The inventory of powered irrigation equipment grew by 13 million horsepower in 1974 and 1975 but by only 7 million horsepower in 1976 and 1977. Numerous qualitative reports also suggest that agriclutural production has been set back because of shortage of electric power, fuels, et cetera. In summary, agricultural growth after 1974 has been impaired partly by failures in the industrial sector.
Pcof lv 66ther" in'; 1,976 -'and 1977. has A1so. depressed the growth of agricultural output below its long term rate. The influence of weather on Chinese agricultural output is extremely difficult to measure with the information that is freely available outside of China and this difficulty is compounded by the tendency of the Chinese to emphasize weather problems when there are short alls in harvests. Even after allowing for these considerations, it would appear that widespread flooding in 1976 and drought in 1977 depressed agricultural output significantly.
Finally, judging from Chinese press reports, in some regions there has been a tendency in recent years for higher level authorities within
21 Christine Pui Wah Wong, "Nutrient Supplies in the People's Republic of China," unpublished paper, March 1978, table 1A.
27-427-78-6





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the commune system to undermine the autonomy of China's. basic level of agriculture, the production team. In violation of previously established practices, higher levels appear to have appropriated both team manpower and funds for projects without seeking team a pproval. Because these projects in many cases appeared to have little or no benefits for the teams concerned, work incentives at the team level were reduced significantly.
These three causes of agricultural stagnation appear to be largely transitory. Over the long run the influence of weather will be less adverse than in 1976 and 1977. The flow of modern industrial sector inputs into agriculture began to grow again toward the end of 1977 and will almost certainly resume the pattern that was evident prior to 1974. The January 1978 speech of Yd Ch'iu-li, the Chairman of the State Planning Commission, clearly signaled a determination to restore the growth of production of chemical fertilizers, tractors and hand tillers, implements, and pumps.22 In addition to increased output of these products Yii's speech also called for improved quality and increased standardization of parts and components that will increase the efficiency with which these increased inputs are utilized. Finally with regard to incentives, a majo thrust of policy since late 1977 has been the restoration of teamalevel autonomy and increased work incentives as embodied in the phrase "more pay for more work, less pay for less work, and no pay for no work." The new state constitution also makes itclear that the ultimate goal of shifting the level of economic accounting to the brigade level has been deferred until "conditions are ripe." Yeh Chien-ying's report on the constitution specified that these conditions include a relatively even level of dIevelopment among a brigade's production teamsY .1I1f this policy is followed it will eliminate the major objection to the brigade as the basic level of economic accounting and income distribution.
The long-term prospects for agricultural growth in China appear quite favorable both because of the huge investments that already have been made in land infrastructure and because of the speed with which
high-yielding technologies are adopted.
Since China's. present cultivated area is about the same as in the mid-1950's, the growth of food grain output over the past two decades has been due largely to increased yields and intensity of agricultural cultivation that, in turn, have depended on improved water control
and earlier maturing and higher yielding seed varieties. China's plant breeding program, in both rice and wheat, has been quite successful in developing faster maturing varieties that have allowed increased multiple cropping and thus increased yields per unit of cultivated land. But yields per unit of sown area of rice, far and aw ay China's most import ant grain crop, remain far behind those achieved by other successful agricultural modernizers in Asia. This is partly because seed development has emphasized early maturation more than high yields and,
more importantly, because the level of fertilizer application remains f ar below optium levels. Levels of nitrogen nutrients, even when organic sources are taken into account, remain f ar below the levels
ForeigU C h'iu-Ii sp eech at the T hird National C onference on Agricultural Mechanization, January 26, 1978.
FrinBroadcast Information Service, "Daily Report, People's Republic of China" January 31, 1978, pp. E6-E25.
23 "The Constitution of the People's Republic of China" adopted March 5, 1978, Chapter one, Article 7. Peking Review No. 11, 1978 (March 17.,1978), p. 7.
24 Yeh Chien-ying, "Report on the Revision of the Constitution," Peking Review No. 11, 1978 (March 17, 1978) pp. 23-24.





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applied in Taiwan, South Korea, and Japan and Western plant scientists who have had an opportunity to make field observations have frequently noted symptoms of nitrogen difficiency in Chinese crops."
As the level of chemical fertilizer application increases and higher

o elding seeds are developed and diffused over a wider area, China's od grain production should grow significantly."' Chinese rice yields Of 3.4 tons per hectare in 1976, are only marginally greater than those achieved in Japan in the 1920's, before the widespread use of chemical fertilizers, and a little more than half present day Japanese rice yields. Careful historical research on Japanese agriculture '21 and evidence from elsewhere in Asia shows that land infrastructure is frequently the major obstacle to the achievement of output growth when improved seed varieties are diffused and fertilizer input levels are in,creased. Because China has already achieved a remarkably high degree ,of control of water in rice farming, they are well prepared to make maximum advantage from the increased levels of fertilizer availability that are planned over the next few years. Similarly, compared to other Asian countries where there are enormous obstacles to the diffusion of
21
high yielding seed varieties and improved farming practices, the Chinese have been remarkably successful in realizing the adoption of high-yielding technologies.10
The above evaluation of China's economic performance in recent years, if correct, has several important implications. First, the evaluation suggests that the recovery of industrial output in 1977 represents a return to the pre-1974 pattern of growth rather than a continuation of the fluctuating pattern of industrial performance observed over the past few years. Given political stability rapid growth should be sustained for several years. This view would also seem to be corroborated by a series of major conferences convened in China beginning in 1976. In addition to important conferences dealing with all of industry and agriculture, there have been significant specialized conferences dealing with important branches of industry such as coal, metallurgy, electric power, and railroads as well as functional conferences dealing with finance and banking, supply and marketing, and capital construction. These conferences, of course, culminated in the Ten Year Plan which was approved by the Fifth National People's Congress in February 1978.
The predominant theme of these conferences is the return to sustained and rapid economic growth. Renewed emphasis is to be given
o
to- rigorous cost accounting, improved enterprise management through strengthening the authority of plant managers, and centralized planning. The ability of the new regime to announce new policies suggests that the paralysis of the economic decisionmaking process, so evident in 1976, has come to an end. That is, the large meetings attended by
M See for example, "Plant Studies in the People's Republic of China: A Trip Report of the American Plant Studies Delegation." Washington, D.C.: National Academy of Sciences, 1975, pp. 29-30 and "Wheat in the People's Republic of China." Washington, D.C.: National Academy of Sciences, 1977, pp. 2, 6, 14. 26 International Rice Research Institute Rice Research and Production in China: an I RRI Team's View." Los Banos, Philippines, 1978, p. 4,3."'Wheat in the People's Repubiie of China," p. 121. 27 Yujiro Hayami, "A Century of Agricultural Growth in Japan: Its Relevance to Asian Development." Tokyo: University of Tokyo Press, 1975. p. 189.
28 James E. Nickum, "Hydraulic Engineering and Water Resources in tile People's Republic of China, Report of theU.S. Water Resources Delegation." Stanford, Calif.: U.S.-China Relations Program, 1977. p. 52. International Rice Research Institute, "Rice Research and Production in China." p. 14. 29 International Rice Research Institute. "Constraints to High Yields on Asian Rice Farms: An Interim Report." Los Banos, Philippines, 1977.
30 International Rice Research Institute, "Rice Research and Production in China," pp. 12-13.







several thousand representatives from throughout the country in 1977, were called primarily as a means of disseminating a new policy line that was already confirmed at the highest levels rather than serving as a forum for the actual resolution of policy problems. This has subsequently been confirmed by the pro forma approval of the plan at the Fifth Congress.
A secondI important implication of the optimistic projection for economic growth is that a number of important and previously divisivee economni(I policy issues have already been resolved. The most, crucial of these issues are wage policy and. the degree of reliance on imported foreign technology, It is frequently arguedl that the leadership faces a fundamental dilemma in any effort either to modify the, structure of wages in manufacturing to provide greater skill incentives, for example, or to raise the average wage level. On the one hand to increase the average wage and avoidl inflation would require a reallocation of investment away from capital goods andl toward manufacturedl consumer' goods.!. Thluls the wage increase would reduce the rate of investment. On the other handle to increase wages without increasing the supply of manufacturedl consumer goods andl cutting back on the rate of investment is a certain invitation to inflation. In this view the leadership is facedI with the unpleasant choice between reducing the rate of investment andl ultimately the rate of growth or abandoning their conservative monetary policy andl allowing a rate of inflation that would be unprecedlentedl in the last 25 years.
It is far more likely, however, that the modest realinement of the wage structure undertaken in late 1977, which included a 10-percent increase in thle wages of almost two-thirds of all staff and workers and a limited reintroduction of bonus systems, will have a substantial p)ositive feedback on labor productivity. This feedback would raise the rate of economic growth and thus allow the Chinese both to maintain a very high rate of investment and to step up production of manufactured consumer goods, thus avoiding inflation. In short, the wage increase is not necessarily a no-win situation for the leadership. It might reap a very substantial payoff from only a modest increase in the total wage bill.
It also appears that the Chinese have reached a consensus on the degree of reliance on imported foreign technology and the financial practices to be used to pay for imported plant and equipment. The formulation of China's Fourth 5-Year Plan (1971-75) was based on a fundamental liberalization of their approach to foreign trade-a shift from what might be generally (described as a strategy of minimization of imports to what appeared to be a strategy of minimizing reliance on. foreign credits. The consequence of this shift. in strategy was a sharp spurt in total trade volume--indeed, 1971-74 is the'.only period since 1955, when net Soviet credits were terminatedl, (luring which the rate of growth of foreign trade (measured in constant prices) exceeded the rate of growth of industrial output. From the point of view of the Chinese, the timing of this accelerated pace of foreign, trade, was however, most unfortunate. Changing world market cond itions, that is the combination of significant price inflation andl recession in the West, significantly reduced the demand for many of China's traditional exports, while at the same time forced the Chinese to impJort at substantially increased prices. Consequently China's terms of 'trade- (th e ratio of- the, prices of exported. goods to the prices of





59

imported aoods) fell sharply. Rather than drastically cutting the level of imports to maintain a balanced trade account, the Chinese chose to stretch its policy of minimal reliance on foreign credits in order to maintain a significant flow of imported plant and equipment. Evidence of this stretching came primarily in the form of Chinese acceptance of medium-term loans under the rubric of "deferred p yments" which allow the Chinese to stretch out the payments for import of complete plants ("turn key projects") over a 5-year period that begins
-only after the construction is completed. Consequently in 1974 and 1975 the Chinese accumulated a foreign trade deficit of about U.S. $1 billion.
1n addition to stretching its policy of minimal reliance on foreign credits in 1974-75, Chinese planners also attempted to shift the composition of reduced imports to avoid sharply reducing the quantity of imported plant, machinery, and equipment that are vital to achieving the modernization goals originally announced by Chou En4ai and recently reaffirmed by Hun Kuo-feng in his February 1978 speech. Specifically, although total imports fell in 1975, the value of imported plant, machinery, and equipment actually rose in 1975 to $2.2 billion. The modest fall (relative to the decline in the total import bill) in these imports to $1.8 billion in 1976, partly was due to a substantially improved harvest in 1974 and modest growth in 1975 that allowed Peking to curtail significantly the volume of imported food grains from an average of 7.3 million metric tons in 1973 and 1974 to 1.9 million metric tons in 1976. Thus at least through 1976 the Chinese attempted to maintain their imports of plant, machinery,. and equipment, a marked departure from previous recessions in which capital goods imports have fallen rapidly in response to worsening domestic economic performance.
Poor harvests in 1976 and 1977 are, however, now reversing this process and the value of imported capital goods is falling rapidly as agricultural import's grow. The value of imported agricultural products roughly doubled in 1977 to about $12 billion and seems certain to be maintained at this level in 1978. Consequently, imports of plant, machinery, and equipment declined sharply in 1977, perhaps to as low as $1 billion.
Despite these unfavorable circumstances, the Chinese seem determined to resume the pattern of foreign trade of 1970-74 when imports, particularly of capital goods, were growing rapidly. Thus the Chinese seem to have resolved. the divisive arguments on foreign trade strategy that marked much of 1976. A series of articles have appeared in the Chinese press to explain the necessity of selected imports of Western technology if they are to meet their very ambitious goals for economic growth. The emphasis in these articles appears to be more on the Maoist dictum of "keeping the.initiative in our own hands" rather than excluding imports or minimizing foreign trade. This suggests that while the Chinese for the time being are certainly not prepared to consider direct foreign investment or even joint ventures, that the main constraints on imports will be financial rather than ideological. This view seems to be supported by the increased number of Western firms that have been invited to Peking to discuss a broad range of capital goods exports to China, as we'll as a step up of industrial exchange activities.





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There is also evidence of a new positive attitude on the part of the Chinese toward export promotion which is rather different from that which prevailed in the past. The Chinese have adopted far more flexible attitudes with regard to provision for inspection of Chinese goods, the testing and labelling according to U.S. standards of pharmaceuticals exported to the United State _and meeting the stipulations of the U.S. Food and Drug Administration for food products exported to the United States in order to expand their export markets.
The long-term trade agreements signed in the first quarter of 1978 with both Japan and the European Common Maxket underline this Chinese commitment to accelerate the transfer of foreign technology to China. The accord with Japan is particularly significant since the Japanese will supply China with $7 to $8 billion of complete plants and $2 to $3 billion in construction materials and equipment during 1978-85. These imports of plant and technology will be concentrated in petroleum, coal mining, metallurgy, power generation, and transport. Over the period of the agreement, these imports will be financed by increased exports of raw materials to Japan-primarily of crude oil and coal. But the bulk of China's capital goods imports will be completed in the early years of the agreement whereas Chinese raw material exports are planned to begin at modest levels in 1978, grow moderately in 1979-81, and then increase sharply in 1982. Thus, the Chinese asked for and were granted deferred payments, which will be underwritten by the Japanese Export-Import Bank, to finance the imbalances that win occur in the early years of the agreement. Since there will be substantial trade with Japan in addition to that covered by the long-term agreement, total trade with Japan will grow rapidly and the supply of imported capital goods will increase sharply. The agreement with the European Economic Community, which collectively is China's second largest trading partner after Japan, does not specify the volume of anticipated trade. But numerous Chinese industrial trade delegations have been visiting Europe since 1977, suggesting that there will also be an upturn in trade beginning in 1978-79.
SUMMARY AND PROSPECTS
The primary causes of China's declining economic performance sine.e. 1974 appear to be short term and political in character rather than long term and structural. The adverse influence of these shortterm elements appears to have receded rapidly, due largely to the decisive actions taken by the new government since late 1976. However, even if we could confidently assume future political stability, the target rates of growth included in the 10-year plan remain quite ambitious.
The broad targets for 1978-85 are, however, only marginally higher than those achieved during the decade prior to the recent economic decline. Thus, the 10-year plan bears little resemblance with the wildly optimistic plans that were advanced during the Great Leap Forward in the late 1950's. The planned rate of development of industry, 10 percent per year, is the same as that achieved during the 1964-74 decade. The possibility of slightly better future performance cannot be ruled out since the 1964-74 decade included the Cultural Revolution that had a sio-nificantly adverse effect on industrial production and investment. The prospects for the coming years are also






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-enhanced by the more realistic assessments that have been made of lagging industrial branches such as coal. After years of minimizing investments in the coal industry, the new plan envisages widespread mechanization of the industry, partly through imported equipment. This should help to alleviate chronic coal shortages that have had an adverse effect on other branches of industry.
In the agricultural sector, the planned rate of growth, from 4 to 5 percent per year from 1978 through 1985, is higher than the 3% percent annual gains achieved in the 1964-74 decade.-Consequently, it seems unlikely that China will achieve the target of 400 million metric tons of food grains by 1985. Yet, because of the large investments that have already been made in irrigation systems and the ability of the Chinese to diffuse rapidly higher yielding seed varieties, the average rate of agricultural growth may approach 4 percent per year, given average weather conditions. Because of the significant decline in the rate of population growth that has been underway for some time, an average rate of growth of 3%4 to 4 percent would be a considerable accomplishment. Food grain output would be over 350 million metric tons in 1985 and per capita food supplies would be significantly higher than at present. An average annual increase of 3 4 to 4 percent would result in more than a 2 : 1 margin between the rate of growth of agricultural output and population growth."' In most other Asian countries at comparable levels of development, rates of growth of food output are barely equal to population growth.
A return to economic performance similar to that of the 1964-74 decade, however, is dependent on two crucial conditions. First, there must be a stable political environment that is conducive to long-run economic planning. In the absence of automatic mechanisms for determining, the allocation of resources, these decisions are made through a direct political process that is extremely vulnerable to disruption. If the political consensus that appears to underlie the 10-year plan should be shaken, there could be a renewed paralysis of the planning process, a deferral of investment decisions, and a decline in the rate of economic growth.
A second condition for the resumption of sustained growth is the deferral of the modernization of China's military establishment. The underlying scarcity of resources and the envisaged increase in the flow of investment to improved social services and transportation infrastructure; to scientific and technical modernization: as well as to industry and agriculture implies that the share of resources allocated to the military cannot be increased substantially. China's national defense is still to be modernized by the end of the century. But high resource costs and technical difficultiess will mean that an across-theboard modernization program will have to be deferred well into the 1980's if goals in other sectors are to be met. This will not preclude either a rising absolute level of defense expenditure or significant improvements in selected weapons systems, but a systematic modernization program will depend on a more developed industrial sector.
Ironically, debate over the priority to be given to military modernization is most likely to erode the consensus upon which the 10-year plan is based. There is considerable indirect evidence of an important
31 Based on a projected further decline in the rate of natural increase to i1.7 percent by 1980 and to 1.3 percent by 1985. John S. Aird, "Population Growth in the People's Republic of China," Table 2, Intermediater Model.





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debate between those who prefer to postpone military modernization in order to achieve gains in other sectors, particularly agriculture, and those who prefer to allocate more resources to defense and its supporting heavy industries at the expense of agriculture and manufactured consumer goods. Haa's report to the fifth congress, whichI gave bare mention to modernizing defense, suggest a consensus was finally achieved for deferring military modernization. But this issue is certain to be raised again when the broad goals of the 10-year plan are transformed into more detailed and operational annual economic plans.











THE POLITICAL DYNAMICS OF THE PEOPLE'S REPUBLIC OF CHINA
BYWILLIAM W. WHITSON*
CONTENTS
Par@
Introduction_ 63
Political 64
The cycle of political 68
Current political 74
A summary of Chinese political perspectives-------------------------- 78
INTRODUCTION
Is the economy of the People's Republic of China likely to be substantially influenced by "politics"? That is, does a reading of the record of the past 30 years suggest that future policy conflicts among Chinese over the "proper" allocation of political power among themselves, and over the style of decisionmaking and issue resolution might substantially affect prospects for economic growth? The answer appears to be a resounding "yes; but * ." The qualification is an admission of the failure of both political scientists and economists to sort out the precise relationship between Chinese Communist political structure and style on the one hand, and economic development, on the other. That the two are interdependent cannot be disputed. But answers to questions of cause and effect elude the most meticulous student of both fields. The impact of a succession of political decisions on the dynamics of the economy is generally accepted but it has proved impossible to link specific economic consequences with specific political decisions.
Though China specialists and U.S. policymakers are far from precision in their understanding of the relationship between politics and the dynamics of the Chinese economy, one key to better understanding and prediction is a recognition of the multiple bases on which China's political alliances are built. Policy arguments are couched in ideological language, and indeed, ideological cleavages are significant ones. Increasingly, however, over the past quarter century, three other sets of cleavages, and patterns of loyalties they engender, have shaped the political process in China: Generational, regional, and bureaucratic.
Sometimes, for the individual, these loyalties are mutually reinforcing in support of a policy decision. More often, however, they put the individual under cross pressures; that is, his competing loyalties dictate support for conflicting policies. Factional strength is thus precarious, and can be shifted by skillful appeals to groups under cross pressures.
*William W. Whitson is Chief of the Foreign Affairs and National Defense Division, Congressional Research Service.
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In consequence carefully built compromises among competing loyalties are destined to be altered as their relative importance changes under the pressure of issues. Though our understanding of this process is still rudimentary, such a mode of analysis can be useful giving hape and a sense of dynamics to the process of economic policymaking in China.
The following pages briefly outline the elements of the four major cleavages that shape patterns of loyalties in Chinese politics-the ideological, the generational, the regional, and the bureaucratic-and then sketch how evolving and shifting coalitions have contributed to cyclic patterns in political power structure and style since 1949. This sets the stage for a review of the most critical domestic and foreign political issues currently confronting the leadership, and finally, an assessment of the potential impact on political stability should the leadership choose to depart from policy directions that seem to have emerged since Mao's death.
POLITICAL LOYALTIES
Generational loyalties are the most difficult to assess. Nevertheless, these form the basis for many "old boy networks," each drawing its strength from a unique history of shared crises and achievements.' Four distinctive generational groupings deserve attention: pre-World War II; the War Years; the Cultural Revolution; and the postCultural Revolution.
The great majority of the leaders drawn from the pre-World War II years (1922-36) come from the six provinces bordering the Yangtze River. They may, therefore, be called the Southern Revolutionaries. From this group came the "Long Marchers," participants in the epic strategic withdrawal from their fertile but politically hostile homeland to a barren and forbidding loess plateau west of the Yellow River. Men and women who conceived and made a great revolution, these leaders are generalists with long memories and haunting doubts about their legacy to their beloved country. Because most of them are in their seventies, little time remains in which they may place the permanent stamp of their vision, their waning energy, and their enormous experience in China. Most of the central Peking leadership, including the Deputy Premier, Teng Hsiao-p'ing, the new Minister of Defense, Hsu Hsiang-ch'ien, the President of the National People's Congress and former Defense Minister, Yeh Chien-ying, the most of the 11 military regional commanders and chairmen of provincial revolutionary committees belong to this generation. Their influence is still decisive; but their losses in 1976 (e.g., Chou En-Lai, Mao Tse-Tung, Chu Te, Kang Sheng and Tung Pi-Wu) warned them that time is running out.
The great majority of the important leaders drawn from 16 continous "war years" (Sino-Japanese War, Civil War, and Korean war: 1937-53) come from provinces north of the Yellow River. They may, therefore, be called the Northern Warriors. Like the Southern Revolutionaries, they formed strong factional ties, forged in battle, death, and great victory. Generally better educated than the older group, more inclined to specialization and professionalism, many of these people came from conservative middle-class families and joined
1 For a more detailed analysis of generations in China's elite, see William W. Whitson, "The Chinese High Command" (New York, Praeger, 1973), ch. 9.







the cause of the nation, not of communism, when a foreign enemy threatened. In many ways less regionally parochial, more technically qualified, and even more patriotic than the older generation, this generation now manages most of the ministries, the to staffs of the military establishment and the key operating units op the People's Liberation Army. The new Premier, Hua Ku-o-feng, is a member of this northern warrior group. Now in their late fifties and early sixties, they focus their energies on the management of the present rather than either the atonement of the past or the judgement of history.
The "Cultural Revolution generation" is composed of young men and women who entered the political arena after 1953 and dared to believe and adopt the idealism of the older generations, especially the Southern Revolutionaries who had written extensively about the spirit of the revolution when few resources other than esprit had been available. Drawn from all over China, and inspired to dedicate them-selves to a new China, these young men and women might be called the Nation Builders. Turning away from classicists and the traditions of Chinese education and the traditional measures of worth in China, for 16 years the nation builders moved out of the cities and the farms of central China to the borders. Armed with Mao's thoughts, they largely succeeded in imposing a pervasive network of party and g vernment systems and procedures on 800 million people. While increasingly conscious of "China" as a nation-state, this generation makes the machinery of China's political system work-and sometimes break down. Energetic and idealistic but also increasingly bureaucratic, professional and consumer oriented, they demonstrated their frustrations with both unrealized ideals and their own creaking bureaucracy from 1966 to 1968. At that time, the Great Proletarian 'Cultural Revolution became an epic watershed, probably the politically climactic period of their lives. Still sorting out the significance of that major social trauma for their generation, they have only limited impact on major decisions; but no major decisions can be carried out without them.
The post-Cultural Revolution generation, entering the political arena after 1969, is comprised of the majority of the population of the country. Only vaguely aware of the sacrifices and dedication of the first two generations, concerned with their own problems of immediate
-survival, this generation has no role in decisionmaking but can clearly frustrate or help realize the vision and managerial goals of older leaders. They are the grist of China's political mill and are probably less patient than either the Northern Warriors or the Nation Builders for the rewards of the new China. They may therefore be called the Consumer Generation. It will be these young men and women who will heed the call of their elders to fight the future political battles now forming already to challenge the prevailing compromise.
Regional loyalties may reinforce or undermine generational loyalties and give geographic focus to China's political system.
The issue is concerned with the power of central authority. Distribution of political power among the center, 11 major military regions
.provincial-level revolutionary committees, has fluctuated wildly since 1949. Depending uDon the administrative or political issue, the long-term trend uiAil i976 had been toward delegation of considerable authority to lower-level leaders. That trend has been interrupted periodically by efforts at the center to retrieve control over certain issues. But the complexity of the Chinese political system,







the size of the country and the slow development of its communication and transportation systems have encouraged the trend toward selective decentralization. The trend has been reinforced by the increased availability of competent administrators from the generation of the "Nation Builders."
While these young people have been encouraged to think in terms of China's needs, their limited mobility (with the exception of the Red Guard movement of the Cultural Revolution and the "down to the countryside" movement) and the old tradition of localism in Chinese politics have obstructed party efforts to raise the level of political vision beyond the boundaries of the home county or province. Thus, i4regionalism." (primary loyalty to the needs, values, and goals of the locale rather than China as a whole) remains a powerful force in Chinese political dynamics and may often overwhelm the personalized ethic of an "old bov network" with its roots in the collective generational memory.
At risk of oversimplifying "the facts" while yet continuing a theme already suggested above, the locus of Chinese political power is shifting from the Southern Revolutionaries to the Northern Warriors. That this shift is an accident of the history of the Communist movement in China does not detract from its significance for changing priorities and perceptions of political issues.
From a Chinese viewpoint, the "Mason-Dixon Line of China" is the Huai River, flowing eastward along a course approximately TOO miles south of the railroad from Lienkang to Chengehou. In the field of foreign affairs, northern Chinese historically have been less tolerant of the Russians than have southerners. The north (especially in Manchuria) has had a more extensive and balanced experience with the Japanese than the south. From a northern viewpoint, the principal geopolitical threat is continental and Russian; southerners see the principal threat from the sea. The tradition and conditions of war for the north have demanded walled cities because the adversary could sweep into North China from 'the Mongolian steppes. Indeed, the Great Wall symbolizes this defensive mentality and its preoccupation with cavalry and nomadic fluidity. Conversely, the broken terrain of the south, extending from the South China Sea all the way to the Tibetan highlands, has encouraged guerrilla warfare, with small unit operations relying on dispersion rather than concentration of defensive forces.
In addition to the pull of generational and regional loyalties on the decisions of China's leadership, shorter term bureaucratic loyalties play an increasingly important role in the behavior of key political actors. Whether between party and military careerists or within those two huge, interlocking bureaucracies, the complexity of bureaucratic politics in China reflects pervasive careerists aspirations for power for its own sake. These aspirations and the games they evoke are most characteristic of the Northern Warrior generation, the men and women who made their early careers through 15 years of continuous warfare and now stand poised to take control of the entire political game from their elders.
Prior to 1949, careers were made and broken primarily through the traditional Chinese mode of personalized factional ("old boy") loyalties, increasingly formalized during the 1940's into mobile "field armies." When these field armies ended the Civil War in 1950 and settled down in regional roles of postwar economic reconstruction and





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political stabilization, the regional loyalty system began to unfold. Simultaneously, the search started for a national bureaucratic structure-a structure suited for managing a restive and talented population.
Unlike older generational and regional criteria for promotion, bureaucratic criteria would inevitably include such measures as professionalism, responsiveness to special bureaucratic organizational values and, ultimately, a careerist perspective which can argue seriously that "What's good for the Chinese Air Force (for example) must be good for the country."
Rarely would members of the Southern Revolutionary generation argue from such premises during the 25-year period after liberation; theirs was and is a different kind of parochialism. But the Northern Warrior generation and the younger Nation Builders had the technical education, the opportunity for specialization and the challenge of a burgeoning bureaucratic empire to inspire them to play the bureaucratic game. Today that game is highly developed in China and must be factored into any calculus of political behavior. What was once a "generalist" ethic associated with the older generation of revolutionaries, who combined party and military careers and functions as the need arose, has now been diffused into much more complicated, specialized ethical systems that begin to resemble the phenomena of American bureaucratic political life.
Thus the professionals of the civil bureaucracy are increasingly concerned with limiting the role of the military in decisions about scarce resources allocations. In a move to confirm the military role of senior officers, in the winter of 1973-74, Teng Hsiao-p'ing arranged the transfer of eight military regional commanders to new posts where they lost their key roles as chairmen of revolutionary committees. Thereafter, the movements to dislodge the military from provincial level civil management roles proceeded apace.
Concerned with economic development and the problems of an underemployed populance, civil leaders are inclined to emphasize internal political threats (to their own tenure, to stability, to goals of political and economic national integration, et cetera). Under the leadership of Teng Hsiao-p'ing, they take increasing exception to the older military "generalists," whose education and experience suited them for the demands of a revolution and a combat environment of small arms, not an environment of missiles.2
That same generation of elder military leaders find themselves under pressure from their juniors, increasingly professional and technically qualified and impatient to take over the high command. But such emphasis on military professionalism and "modernization" brings its own conflict with civil bureaucrats over the correct mix of guns versus butter. At stake is the issue of pace: how fast the PLA will receive new aircraft; how fast the PLA will receive improved communication equipment; how fast the older leaders will "retire"; how fast the older regionally based distribution of political-military power will be transformed into a truly national army.
Standing behind all three sets of demands on the loyalties of China's leaders are ideological conflicts. These involve conflicts in values, goals, and style dating back to the earliest arguments among the Southern Revolutionaries. Since 1949, those arguments have been
2 See FBIS (PRE, Jan. 31, 1978, p. El) for the left page article in People's Daily on January 30 regard Tezjg's 1975 criticisim of overstaffing, lethargy, arrogance, extravagance, laziness, and laxess in the PLA.





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clustered in two categories known as the two lines: radical and conservative.
In their most extreme form, the radicals of the revolution are the esthood of the movement. They measure costs and gains in ideoorgiical terms; their goal is the transformation of the Chinese soul from the patience and conservatism of the rural, tradition-bound peasant to the impatience and entrepreneurial daring of the factory, technical innovator. Their target is "the masses." Thus, at risk of destroying their own elite status and of low economic growth rates, they lean toward populism, the very real costs of economic selfsufficiency and the drama of struggle (including violent armed battle) as the preferred engine of rapid social change.
Conversely, the conservatives are the bankers of the movement. Favoring the values of "expertness" rather than "redness," they also wish to change the soul of China; but they prefer that an educated elite retain control of the process, in which compromise rather than struggle remains the central ethic of disciplined evolutionary, not revolutionary, change. At risk of delaying the rewards of such change for the masses, they prefer to concentrate limited resources for planned economic and political development.
THE CYCLE OF POLITICAL POWER
Since 1949, the interplay of the foregoing sets of loyalties has been reflected in a succession of changes in both the structure of political power and policy approaches to key political and economic issues 3 Often explained primarily in terms of ideological controversy, these changes also reflected successive compromises forced by coalitions built on generational, regional, or bureaucratic loyalties as well. Table I reflects the phenomenon of the "4-year cycle"; that is, the fact that a shift has occurred approximately every 4 years to bring a new era in political or economic style and consequences. Rarely have such shifts been so abrupt as to preclude transition periods, usually lasting less than a year, when the outcome of a political struggle appeared moot. During such periods, students of China were usually unable to understand precisely what was happening or where the process was likely to lead.
For example, anyone who argued in 1977 that post-Mao conservatives had seized power and are unlikely to relinquish it would have done well to recall the testimony of China specialists before the Fulbright committee in the spring of 1966. One after another, they assured the committee that, come what may, the party was stable and would dominate political life in China. Within a year, the party had been so damaged by passions unleashed in the "Cultural Revolution" that only the discipline of the PLA, not the party, kept essential services functioning and moderated the excesses of youthful enthusiasm and frustration.
a For a related phasing of economic developments since 1949, see Ashbrook, p. 207, for a discussion of the economic aspects of each of these phases in post-1949 Chinese history.





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TABLEL-Political periods in China, 1950-78
Me Daft*
Postwar 1950-53
1953-54
Postwar 1954-57
1957-58
The "Great Leap 1958-61
1961-62
Socialist 1962-65
1965-66
The "Cultural 1966-70
1970-71
Military 1971-75
1975-76
Post-Mao civil 1977During the first period of political stabilization (1950-53), a determination to spread Communist political control over the entire country (including Tibet) was guided by ideological commitments and founded on historic conflicts-and agreements-among key members of the southern revolutionary generation. A handful of old comrades temporarily held a monopoly of political power for application to two enormous challenges: internal stability and external military threat (in Korea). Thanks to a fund of mutual trust built up over their years of civil war, central leaders were able to delegate enormous authority to colleagues in remote provincial capitals. They applied positive and negative incentives, according to focal needs, to assure Communist control. The Korean war, while, draining critical resources, also assisted achievement of the primary internal goal by draining off the only potential source of residual organized resistance, the remnants of the Nationalist Army. Furthermore, the war temporarily removed most of the best qualified professional Communist military leadership, thus giving the party the edge over its potential adversary, the military, in establishing early primacy over local civil administration. Political processes during this period were not substantially influenced by regional and bureaucratic loyalties. But it was during this period that the foundations for those new loyalty systems were established.
With the ending of the Korean War in 1953, the return of key military leaders and regular forces set the stage for a new regionalism. One by one, PLA armies moved from the Korean peninsula back into metropolitan China. During the transition period from mid-1953 through the summer of 1954, decisions about the regional allocations of these forces and their proud leaders were fundamental political decisions destined to shape the emerging pattern of political conflict for the next 15 years.
By September 1954, the important decisions bad been made and a reorganization of China's military structure confirmed the regional emphasis with the title "military region" applied to 13 huge areas for military (and ultimately political) jurisdiction. At the same time, the old "field armies" were disbanded, a crucial step in a process of eroding formal old boy networks fram the civil war years.
Simultaneous with the founding of the new regionalism, the origins of intrabureaucratic conflict gave form to what has become an enduring





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jurisdictional debate. The Korean War era gave impetus to a fundamental strain of military and civil professionalism, always pres-ent in the PLA from its founding in 1927 and increasingly evident in the civil party and Government bureaucracies from as early as the dayv-s of the Central Kiangsi Republic. If the challenges of governing a huge land and a huge populace inspired the values of civil technical and administrative skill at home while the military fought a war abroad, the war inspiredl similar values among the military, daily facing the most sophisticated weaponry in the world. Upon returning to China, they wanted early and rapid modernization; they gave themselves rank and new uniforms; andl they boasted of a burgeoning technical school system including a national defense college. Soviet officers from all services were busily engaged in transforming the PLA into a modern g'rournd army.
During this period of Communist consolidation of power (1954-57), ais Communist bureaucracy increased its grip on the land and the people, regional and bureaucratic competition for resources for hulndIreds of military andl civil projects was partially muted by assi-tance from the U.S.S.R. Indleedl, real and apparent success in mobilizing political and economic resources prompted experimentation with lettingr a hundred Piower,- bloom." Shocked an(l disappointed by the dlepthl of latent popular hostility and increasingly conscious of popular resentment a gains t a proliferating andt self-serving bureaucracy, '.radical" ideologues promoted "the Great Leap" (1958-61).
The economic goals and consequences of this period are discussed hr Ashbrook below. Multiple political purposes were embedded in this tension-laden experiment with mass participation in industrial production. At it's heart was the same political goal as that of the "hundIred flowers" episode of 1957: a rising sense of national unity through release of popular energy in a great national surge of public service. Results "on all fronts," in addition to the politically therapeutic benefits, would presumably sustain a pervasive sense of confidence in self, in the party and in the country.
instead, the sloganeering of the 1957-58 transition evoked harsh criticism from the Minister of Defense, Peng Te-huai, w.ho publicly denounced the unprofessional, wishful initiatives of the "_Maoists" and earned for himself and many around him a purge into political obs curity in late 1959. Determined to eradicate the bureaucratic elitism
acIexcessive professionalism of the system, si a vle ic
1959, the radicals went to the masses as well as like-minded colleagues to preach self-confidence and inspirational zeal.
When economic f ailure resulted, political failure followed. Desertions in the PLA frightened both civil and military leaders. Uprisings in several North China provinces warned local and national leaders that Communist control, so carefully nurtured since 1950, might be at stake. Reacting to a perceived lunacy of -Maoism in both inenland external affairs, the Soviets decided to withdraw their economic and political support in 1960, thereby leaving several hundred projects in a semifinished, nonproductive condition.
Later to be condemned for his "capitalist roader" mentality, Liu Shao-ch'i demanded -from his owNNn generation and his bureaucratic subordinates bureaucratic solutions rather than ideological slogans. Between 1961 and 1962, a transition and winning coalition of conservat ive, pragmatic political and economic pl anners forced Chairman





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Mao, according to his later testimony, "into the second line" of aulthority while the "conservatives" undertook to lead the country into a period of "Socialist transformation" (1962-65).
Dedicated to the reassertion of central authority over a restive and widely disillusioned populace, elitists including such figures as CThou En-lal, Yeh Chien-ying and the PLA Chief of Staff Lo Jui-ch'mng, supported by key party and military regional leaders, imposed disciplined resource alloc actions, and bureaucratic procedures, reinspired elan and tightened belts to accommodate to very real deprivation. T1he burgeoning professionalism of this periodI was increasingly evident across the board, culminating in the military with a 1965 plea from, Chief of Staff Lo Jiu-ch'ing, for a nationwide weapons competFiion, serious war preparations against the United States and a forward defense along the Vietnam border.
However, despite the political goal of increased centralized control; regional "mountaintops" of elite privilege and power emerged during the post-"Great Leap" era. Powerful civil and military regional leaders, no longer as trusting of old generational colleagues in Pekingand in other regions-as they had been in the early 1950's, began to hoard both political and economic resources. The withdrawal of Russian assistance in 1960 had left the center's treasury seriously depleted. It was imperative for central leaders to assert greater control over surplus production in the wealthier regions and cities. But
theproesswas no lneeay and not altogether successful. Regional andl new bureaucratic interests were clearly threatening older generational and ideological loyalties.
Concerned about these cross pressures in Chinese political life, Mao Tse-tung used 1965 to assemble like-minded "radicals," identify allies, and map a plan for a "Cultural Revolution." Prepared to destroy the elitism of the bureaucracy if necessary, this new movement would aim at a revival of revolutionary ideals and a fulfillment of their promise to the "Nation Builders," that third "generation" who had matured politically after the 1949 liberation. For these people and their Maoist leaders among the first two generations, the answer to the question, "Who shall hold power"? was clear: the Nation Builders.
Like its predecessor, the Great Leap, the Cultural Revolution aimed at mass participation in the political process. Unlike the Great Leap period, political objectives were given much greater emphasis than economic objectives. And the intergenerational tensions of the movement combined with ideological zeal to inspire an unprecedented explosion of youthful energy and pseudo-religious fervor. At the local level, adversaries sought to settle old scores. All of the most destabilizing impulses in society were encouraged to surface and reveal the very tentative and tenuous nature of prevailing compromises among generational, regional, bureaucratic, and ideological interests.
In spite of military professional concerns with a double external threat from both the north and south, scarce psychic and material resources were lavished on this internal, epic realinement of values and priorities. In opposition to the comfortable balance of power among regional leaders and between Peking and the provinces, a wave of purges unseated hundreds of key officials, both civilian and military, leaving the military finally in temporary control of a politically fragmented and psychologically shaken Party and administrative structure. Ideological purity suffered substantially as contending
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groups "used the Red Flag to fight the Red Flag"; that is, interpreted Mao's thoughts and central directives to favor their own special interests. Rank amateurs armed principally with enthusiasm invaded thousands of factories and offices to seize power.
Althoughli the most serious excesses of the period had become muted by late 19'68, following the formation of the last "Revolutionary Committees" in Sinkiang and Tribet, a realinement of bureaucratic, regional, and ideological interests continued for 3 more years while leaders from the second "Northern Warrior" generation reaped the greatest benefits in career development. The problem of removing the military bureaucracy from local civil management roles was not to be solved. quickly. Thle problem of realining the comparative authority and. roles of contending generations, easing out the very young and the very old while retaining the most suitable, if not the best, of the m Iddleaged was politi cally sensitive, especially since "expertness" was clearly a more promising criterion for retention than "redness."
iThe widely respected Premier, Chou En-lai, met the challenge with an inlspired campaign of personal anti institutional cajolery, promise, and threat. It seems likely that future historians will credit Chou principally with the successful, if hazardous, transition to a new era. The most politically hazardous periodic began in the spring of 1971, when Chou probably persuaded Chairman Mao that a combination of domestic and international factors arguedt for an opening to the UnitedStates. One by one, powerful military regional commanders were called. to Peking, some staying for several months presumably to debate this momentous proposed shift in Chinese policy. Personi fying gthe coalition of forces opposing such a move-regional (pro-South, antiN ortlh), b ure aucra tic (promilitary, anticivil) and ideological (promodernization, anti1evelopment) -m Piao, the Minister of Defense called upon old comrades and Korean war veterans to oppose this app~arent lunacy. The September 1971 purge and death of Lin and other close associates effectively ended the transition and ushered in a new period of reconstruction.
The 4 years from late 1971 through 1975 were not years of unimpeded progress for pragmatic, professional bureaucrats, despite Chou En-lai's efforts to build a national consensus about the values, of cost effectiveness and competence. Opposition to a steady erosion of "radical" political gains (luring the cultural revolution was inevitable. Indeed, the politics of the entire postcultural revolution period may be seen as a conflict among interpretations of that era. Opposition notwithstanding, four trends received encouragement during this period.
Members of the southern revolutionary generation who had always worked most closely with Yeh Chien-ying, Chou En-lai, Tenoy Hsiaop'ing and the so-called Second and Third Field Army factions received renewed support greater authority and a widening stage on which to exert their waning energies. Their closest proteges among the younger Northern Warrior generation who were ideological or bureaucratic allies enj oyed predict able benefits in assignments to key ministries and military commands.
In regional terms, the northern orientation of the Northern Warriors was encouraged by Chou En-iai and exerted a steady influence on policy toward. the U.S.S.R., the United States, defense, resource allocations between development and military modernization, and such issues as Taiwan (delay on any decision), central-regional power