POST MORTEM: THE CHINESE ECONOMY

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• Collection: Declassified Articles from Studies in Intelligence: The IC’s Journal for the Intelligence Professional
• Document Number (FOIA) /ESDN (CREST): 0006183047
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• Document Release Date: July 30, 2014
• Case Number: F-2013-02322

Approved for Release: 2014/07/29 006183047SECRETSome lessons for estimative in-telligence on Communist Chinaderived from analysis of errorspast.POST MORTEM: THE CHINESE ECONOMY (b)(3)(c)  Seldom has Western intelligence been so awry as in the esti-mates which it made of Communist China's strength duringthe past few years. Without decrying the difficulties involvedin those estimates, a candid examination of finished intelli-gence during the unfolding of China's economic history willreveal gross errors in interpreting the events as they occurredand in estimating the probable consequences of the regime'sextreme economic policies. The causes of these errors werecomplex, but as a central one it may be suggested that untilvery recently there existed in the Western ?intelligence world adisposition to respect, or at least a reluctance to disparage,? Communist China's own claims and policies in economic mat-ters.This attitude probably had its origin in the early years ofthe Communist regime, when the leadership conveyed by itsactions a distinct impression of being more adroit, adaptable,honest, and reasonable than its counterpart in Stalin's USSR.Western travellers and diplomats in China had found that theChinese were not so neurotically heavy-handed as the Rus-sians in such matters as the security supervision of foreignvisitors. The leaders had controlled inflation and suppressedcorruption. They managed land reform with comparativeease, even though they found it necessary to kill many, land-lords. Furthermore, they showed at an early stage that theywere capable of really big achievements: progress in the re-habilitation of transport facilities had been rapid and the Chi-nese armed forces had put up an effective fight in the Koreanwar. Perhaps these and other early attitudes and achieve-(b)(3)(n)Approved for Release: 2014/07/29 006183047Approved for Release: 2014/07/29 006183047The Chinese Economyments put us into a receptive frame of mind for what they.were subsequently to claim and to propose; perhaps we tendedto translate our general impression of Chinese energy andflexibility into a belief that they possessed sufficient acumento develop smoothly a modern economy.The First Five-Year PlanWhen China first began to issue over-all production figuresin 1954 and 1955, we tended to accept them with little reserva-tion, even though our own estimates had been lower, in gen-eral, than the Chinese claims. In the circumstances, we wereprobably justified in doing this: the Chinese figures were ac-companied by hitherto unrevealed detail which appeared topermit them to be checked, and such few tests as we couldapply for internal consistency gave a general credibility tosome of the more abstract data released at about the sametime, data such as gross value of production, budgetary and in-vestment figures, and financial and banking information.Allowing that we were justified in accepting these earlyclaims, there were grounds for looking sceptically at theclaimed performances in agriculture from 1956 onwards. Byand large, however, the intelligence community accepted thatthe Chinese Communists substantially collectivized agricul-ture in a single year and in that same year achieved a recordharvest. In a later section of this paper I shall raise the ques-tion of whether the collectivist principle is suitable to agri-culture anywhere or at any time; but even if the generallong-term efficacy of collectivization had been above suspicion,there was ample evidence in the USSR and the EuropeanSatellites that considerable trouble and loss of production canattend its early stages. It behoved us to inquire whethersuch a crash programme as China's in 1955 and 1956 couldhave been achieved without detrimental effects on morale andproduction, at least in the short term. Had we given moreweight to this danger we might have been less willing to ac-cept Chinese claims that food production increased inevery year of the first five-year plan, and it is possible thatwe should have suspected the strongly illiberal and doctrinairetendencies which were to culminate in the Leap Forward.It has become customary within the intelligence commun-ity, when discussing the first five-year plan, to describe it asThe Chinese Economy ?SECRET"well conceived and impressively implemented," with the con-notation that the able leadership of the regime was a prin-cipal causal factor. Knowing what we now know about agri-cultural difficulties, is there justification for persisting in thisformulation? The plan's neglect of investment in agricultureis surely a serious black mark against it. If the underlyingpolicy of giving highest priority to heavy industrialization isaccepted, perhaps the plan can be accurately described as"well conceived." But even then, it is permissible to wonder ifthe term is really apt; after all, the plan was not promul-gated until half way through the period of its operation.Furthermore, there is reason to believe that the Russians ex-ercised a restraining influence on the Chinese, who wanted amuch more ambitious rate of growth; indeed, the first five-year plan can appropriately be described as Russian, ratherthan Chinese, in concept and largely in execution as well.What can still be said about the plan is that an impressiveamount of industrial plant was installed during the period;there is not much doubt of this. But even this achievement,it can now be seen, is somewhat tarnished. The Chinese wereable to install this plant only with massive Soviet assistance.I do not believe that-either the Chinese or we should be criti-cized for failing to discern all the pitfalls in such an extremedependence on the USSR, but it is now clear that when theChinese were leapfrogging to high levels of technology in se-lected fields they were only postponing the serious problems ofdeveloping a broad and sound industrial base.The Leap ForwardThus while Western intelligence appreciations were notbadly awry during the period of the first plan, they provideda sufficiently biased picture to make us vulnerable to theclaims of the Leap Forward. With the advent of the latterin 1958, reality and intelligence appreciations began to divergeso widely as to impair very seriously the fulfillment of our in-telligence aims. In the last months of 1957 there were signs ofChinese dissatisfaction with the application of the Sovietmodel to China, but the counsels for temperate and rationalmodification were soon overwhelmed, and a frenetic movementdeveloped which was to bring China to the verge of eco-nomic disaster. Even allowing that so many matters becomeApproved for Release: 2014/07/29 006183047SECRETApproved for Release: 2014/07/29 006183047The Chinese Economyclear in the wisdom of hindsight, it is difficult at this stage tounderstand why the West was so slow in appreciating the out-rageous character of the Leap Forward.Under the grand slogan "more, better, faster, cheaper,"the regime was attempting something almost magical, some-thing never before attempted. It had already destroyed theprofit motive, and when it virtually abandoned central con-trol it provided a strong case for predicting that, unless trulyeffective alternative means of coordinating and regulatingeconomic activity were introduced, chaos would 'result. In-stead, it was long implicit in the Western intelligence com-munity's assessments that the Chinese had discovered an en-tirely new economic system and that this system not onlycould work but could achieve very impressive results.It is strange to recall for how long we acquiesced in theChinese statistics with their spiralling production figures.Any country's national statistics are subject to the possibility?of honest mistake and to the fact that all governments like toshow their best statistical faces to the world, but there arethree reasons for treating Communist statistics with particu-lar circumspection, and these reasons applied with specialforce to Communist ChinaNduring the Leap Forward years.First, there may be inbuilt tendencies towards exaggera-tion, even where the leadership does not countenance them.But during the Leap Forward the inbuilt forces of exaggera-tion received a strong impetus from the exhortations of theregime. If ever there was an invitation to reject statistics,it was the leadership's injunction that statistics should servepolitics. Whatever might have been the precise meaning ofthis injunction, it was pregnant with dangers for the statisti-cal reporting system. It would have been well if, when thatslogan was first coined, we had tentatively concluded that wecould no longer believe the statistics.The Western intelligence community's recognition thatChina was promulgating false statistics was not only belated;it was also inconsistent. After being forced to the conclusionthat agricultural statistics were greatly exaggerated, wetended for some time to accept statistics for industrial out-put, despite the fact that industry was known to be heavilydependent on agriculture; and even after some of us hadThe Chinese Economyscouted the industrial claims, others continued to acceptthem. Our tendency to be influenced by the regime's exag-gerated claims was so marked that even after rejecting theseclaims we provided estimates of our own which were also muchtoo high.Second, even accurate statistical data can fail to convey thetrue picture. Economic statistics can provide an exaggeratedidea of the state of prosperity in a Communist country, asmeasured by a qualitative assessment of the socio-economic-political situation. Poland in about 1956 and more recentlyEast Germany are good examples of this. Conversely, we canthink of some non-Communist economies which, statistically,should have been dead and buried long ago, for example Egyptand Indonesia. With respect to Communist China in 1958, itwould have been possible to conclude from the industrial pro-duction and investment figures given out that the countrywas firmly on the path to industrial greatness; but a qualita-tive appreciation would surely have suggested that the statis-tics did more than justice to China's basic industrial capabilityand that continuing Soviet support of the economy would benecessary even to maintain the industrial gains which hadbeen achieved.Third, the data may be too crude for use with advancedmethodology. There' is reason to believe that we have gonetoo far in applying advanced theorems and statistical pro-cedures to Chinese Communist data which do not really lendthemselves to refined development. Much as we should liketo obtain confident constructions and projections of China'snational product and its sub-aggregates and to comprehendmore fully the interactions of those sub-aggregates, the qual-ity of the basic inputs seems quite inadequate for the purpose.Though great ingenuity has been applied to the effort, we arefaced with paucity and unreliability of information on incomesand expenditure; the pricing data available to us are oftenextremely faulty; information on types and rates of produc-tion is so spotty as to make estimates of industrial outputmost hazardous; and the quality and quantity of investmentare too uncertain to permit realistic estimates of capitalyields. Only to a very limited extent can refined methodolo-gies compensate for faulty data.Approved for Release: 2014/07/29 006183047Approved for Release: 2014/07/29 006183047??seeRt-T- The Chinese EconomyThe CommunesThe communes episode is now justly regarded as an ab-surdly executed experiment. The precipitateness with whichthis radical programme was introduced smacked of the ac-tions of fanatics who believed that they had discovered theblinding truth and that somehow Providence would provide.Almost from the beginning the disruptive possibilities inher-ent in such rapid regimentation and in interference withfamily life and the staggering management difficulties in-volved in the system were privately recognized, or at least sus-pected, in many quarters. Many of us recall having said, orhaving heard our colleagues say, "They have gone too far thistime; they will never pull this off." Yet the written apprecia-tions which appeared revealed the same fatal bent whichcharacterized our approach to the Leap Forward; they pointedto some dangers, it is true, but in general they emphasizedthe great potential strength of the system, its economic ad-vantages in terms of proportionality and scale, and its prob-able efficacy in bringing about true full employment.Sources of ErrorIf the greatest sin in the intelligence world is to underesti-mate our enemy, we thus committed the second greatest sinduring the era of the Leap Forward and the communes; wegreatly over-estimated Communist China's capabilities and didso largely on the basis of what the Chinese themselves toldus. It is true that we subjected their statements to analysis(perhaps over-sophisticated analysis), but frequently, I amafraid, with too great a readiness to give them the benefit ofthe doubt.A number of attitudes and pressures were responsible forthis approach. Doubtless the chief of these was the desire toavoid the danger of underestimating a country dedicated tohostility to the West. Doubtless also the earlier example ofthe leadership's realism, adroitness, and flexibility had im-pressed us to the extent that we failed to regard the LeapForward as an indication that our original assessment of theregime's astuteness had been wrong.Much of the fault, however, lay in the analytical procedureswhich we adopted at the time. It is natural that specialists inThe Chinese Economy SECRETparticular analytical fields should be prone to consider theirown areas of activity somewhat in vacuo, and it must be con-ceded that the Leap Forward claims for almost any single in-dustrial commodity might have been capable of achievementif the remainder of industry had not simultaneously beenleaping forward. It behoved the generalists among us toquestion the feasibility of achieving, simultaneously, verylarge increases in virtually all fields of production. But thegeneralist, enmeshed hi his craft, tended for too long merelyto aggregate the specialists' estimates for individual fields ofactivity; furthermore, he subjected these aggregates to tech-nical refinements which were not warranted by the quality ofthe data.For the sake of internal consistency, I shall allude here alsoto a factor which I shall treat in more detail at a later stage;I refer to the pressure on the analyst for determinate andquantitative answers. These pressures came from bothwithin and without the intelligence community and, com-bined with our, earlier impression of Chinese capabilities, theyled almost inevitably to our being misled by Leap Forwardclaims. Had the analyst been permitted and encouraged toadopt a more frankly intuitive and premonitory approach, wemight have foreseen from the beginning that the small-scalemovement in industry would fail; in early 1959 we could havewarned our policy makers that serious 'food shortages werelikely and that industrial breakdowns were imminent; andfrom the moment the Soviet technicians departed we couldhave stated that the formula for industrial chaos was com-plete.Basic PostulatesIt is clear from this review that to some extent we couldhave avoided serious pitfalls if we had been more prone tochallenge certain conventions which we had earlier accepted.This consideration points to the need to examine constantlythe basic postulates which govern our approach to the studyof Communist China. There is nothing very original in thisthought; indeed, it is a truism that in any of the social sci-ences our assumptions are often erected on shifting sands,having frequently been formulated, not because they neces-sarily accorded exactly with reality, but because some pre-Approved for Release: 2014/07/29 006183047IfApproved for Release: 2014/07/29 006183047The Chinese Economyliminary formulation is necessary if a scientific approach is to' be used at all.There is obviously an infinite number of postulates under-lying our intelligence studies of Communist China. Many ofthese are beyond the expertise of the intelligence economist(for example the assumption that the regime has firm politicaland military control), but it seems to me that of the manypostulates which. bear directly on the intelligence economist'stask there are four which are particularly deserving of con-tinuous examination. These are discussed in the followingparagraphs.The first is that the Chinese Communist leadership is flexi-ble, realistic, and willing to learn by its mistakes. In thefive years that have elapsed since China's economic planningbecame purely Chinese, in the sense that it was no longerheavily influenced by the USSR, the Chinese leadership's rec-ord in this respect has been very bad indeed. It has at timesshown itself to be unrealistic, perverse, and obstinate. It hasbeen so doctrinaire in its approach to economic development,particularly in agriculture (where the Chinese certainly can-not be considered inexperienced) , and has exhibited suchsimple faith in ideological indoctrination as the touchstone ofeconomic progress that one can but wonder if these rude revo-lutionaries really are capable of comprehending China's com-plex economic problems. I do not mean to imply, however,that the Chinese Communist leadership is necessarily incap-able of being flexible and of learning from its errors. Imerely propose that for the time being we should retain awholesome distrust of any approach which attempts to judgeor predict the Chinese Communist regime's actions and poli-cies by its reputation, however and by whom that reputationmay be gauged.Another is that the collectivist principle can work well inagriculture. Wherever collectivism of the Communist typehas been tried, the record has been poor. The success oftropical plantation farming and cooperative farming in Israelsuggest that organizationally and even psychologically sometype of collective farming with workers who are not ownersmay be feasible. It does seem definite, though, that? collectivefarming will not succeed if it is imposed on a population whichARThe Chinese Economyis -hostile to it. Furthermore, the collectivist principle will bedifficult to establish in small-scale, intensive agriculture, withits great emphasis on opportunism in cultivation. On boththese counts it is unsuitable in China. If these views are valid,they point to a dilemma for the Communist regime, for whichcollectivization is a means of gaining the necessary controlof agricultural output.A third is that it is possible for the Chinese to achieve anacceptable measure 'of success in agriculture without makingagriculture paramount in their planning. Our earlier ac-ceptance of this postulate was implicit in the fact that, al-though we realized that agricultural investment was beingneglected in favour of industry, we did not forecast a conse-quent early failure of agricultural production to keep pacewith population growth. Perhaps we were correct in assum-ing that such factors as the rehabilitation of the long-neglected irrigation works, the salutary effects of land re-distribution, and the restitution of law and order would givethe regime an adequate margin of time to develop a heavy in-dustry which could, in turn, be directed to the support of agri-culture. In retrospect, however, it is questionable whether wepaid sufficient attention to the interaction of these same fac-tors and the growth of population.? Whether or not we were justified in retaining this implicitassumption in the past, we should now examine' it ex-tremely critically. We are all prone to expound the huge prob-lem of the world's population explosion, and it is surely neces-sary for us to remember that China is the world's leading ex-ample of that problem. In view of the parlous condition ofChina's agriculture today and the long period needed to ac-quire modern implements, seeds, fertilizers, and scientifictilling techniques, it would seem wise to adopt a tentative as-sumption that nothing short of a brilliant and sustained ef-fort in agriculture would be sufficient to give the Chinese Com-munist regime a chance of surmounting its problems of foodand people.It will be noted that in stating this postulate I did not de-fine what constitutes an "acceptable" measure of success inagriculture. Here it may be well to call attention to anotherassumption implicit in our analyses, namely, that the Commu-Approved for Release: 2014/07/29 006183047io1Approved for Release: 2014/07/29 006183047The Chinese Economynist leadership will bend every effort to prevent starvationamong the Chinese people. I grant that failure to do thiswould bring great loss of face on an already somewhat dis-credited regime: inevitably more Chinese, who for the pastdecade have been prepared to endure hardship in the cause ofnation building, would conclude that the Communists had lostthe mandate of Heaven. Nevertheless, a ruthless regimemight take a calculated risk, particularly if it was then en-gaged in a programme of capital improvement in agriculturethat would bear fruit in the near future. I suggest, there-fore, that an acceptable measure of success in agriculturemight have to allow for a tolerable margin of? starvation inbad years.The fourth is that Communism, as we know it, will workwell and be retained in China. At least until comparativelyrecently, we have implicitly assumed that Communism wouldpersist in China in a form closely akin to that in the rest ofwhat we still call the Sino-Soviet Bloc. We were therefore notprepared to recognize and appreciate the radical nature ofthe deviation which the Leap Forward represented. Eventhough that deviation was cloaked in the pious phrases offundamentalist Communism, it was in fact a complete de-parture from the principles of central planning applied else-where in the Bloc. Today, although the Chinese have recoiledfrom the excesses of the Leap Forward and are trying to rec-tify the damage, they are still faced with the same basiceconomic problems that they were trying to solve when theyembarked on that frenzied campaign. Can China be any lessconcerned now than it was then to exploit fully its mostabundant resource, manpower? Must it not continue to seekout labor-intensive production techniques which can be feasi-bly substituted for the capital-intensive techniques of Com-munist practice?This inspires the question whether China's natural settingwill exert such powerful influences as to cause a marked andpermanent modification of Communism as we know it. TheChinese have a long record of regurgitating or radically modi-fying foreign intrusions. Today they are experiencing severeeconomic difficulties which are the resultant of their grimnatural setting and their interpretation of an alien dogma.50The Chinese Economy SECRETIt is legitimate to speculate whether they are in the earlystages of modifying out of existence yet another alien intru-sion, or at least to conjecture that they may be in the processof working out a radically different practical interpretationof Marxist dogma.These considerations bring to question whether we are re-garding China sufficiently as a unique problem. It is incum-bent on the Western intelligence world to go back and ascer-tain, exhaustively and in detail, the nature of CommunistChina's departures .from the orthodox Communist method?such departures, for example, as the abandonment of rigidplanning, the dropping of the scientific approach, and the ap-parent rejection of the notion that material abundance is pre-requisite to the move to Communism. If we could obtain areasonable hypothesis explaining why these departures tookplace, we could come closer to saying whether the Chineseare in the process of rejecting or substantially modifying yetanother alien infringement.ConclusionsThe most important single conclusion which emerges fromthis study is that experience precludes us, for the time beingat least, from employing the inductive method to obtain con-fident generalizations about the wisdom, realism, and abilityof Communist China's leadership. We must try to assess themeaning of the regime's statements and actions largely inisolation from what we are tempted to think we know aboutthe regime itself. We simply are not sufficiently familiarwith the mainsprings of the leadership's behaviour to be ableto say with any real assurance that it has learned from itspast mistakes, or whether it is likely to pursue its aims con-sistently, or even what those aims may be.If this conclusion be valid it is big with implications for ourintelligence assessments .of what is happening in China atpresent and of what is likely to happen in the future. Thethree most important basic variables affecting the futureChinese course are the forces of nature, the state of Sino-Soviet relations, and the wisdom and realism of the regime.The first of these is imponderable, the second is full of un-certainty, and we are now forced to treat the third as beingintractable to confident assumptions.Approved for Release: 2014/07/29 006183047CIApproved for Release: 2014/07/29 006183047t;CCRET The Chinese EconomyThese remarks might be taken to suggest that there is verylittle that the intelligence world can say about the conditionand prospects of Communist China's economy, but the posi-tion is by no means as gloomy as this. What is suggested isthat our estimates will have to be much less determinate thanin the past, and I think our intelligence efforts will improve ifwe recognize this. We must be boldly frank with our cus-tomers whenever situations arise with which our conventionalanalytical approach cannot cope; in particular, we must avoidquantifying in the absence of adequate reliable data. Wemust sometimes be content to describe qualitatively what isoccurring, pointing out the theoretical strengths and weak-nesses of the Chinese position and predicting, with appro-priate qualifications, whether the strengths or weaknesseswill dominate. Had we used this approach during the LeapForward we should have obtained an understanding of whatwas happening in China sooner, perhaps very much sooner,than we did.It is probable, too, that a less rigid and less ambitiousanalytical approach will permit us to make better use of suchlimited hard intelligence as is available. As early as 1959 therewas what can now be recognized as fairly clear evidence of afood shortage in China, but we could not give sufficient weightto this evidence because it was so patently inconsistent withour previous conclusions. There is little enough reliable infor-mation emerging from Communist China, and we cannot af-ford to allow our basic postulates and methodologies to be-come so crystallized as to prevent us from wringing the fullmeaning from hard intelligence when it comes our way.In this post-mortem on our experiences with China's LeapForward I have dealt mainly with problems springing fromour analytical attitude. It would be a rash person indeedwho would care to suggest an organizational cure-all for ourdifficulties, but I would like now to touch briefly and lightlyon the subject of organization for research on CommunistChina. Are there any organizational lessons we can derivefrom our failures?The dearth of usable official information has seriously af-fected our research, and we have freely admitted this. Iwonder, however, if we have been fully aware of what it wascnThe Chinese Economydoing to our organizations during the Leap Forward. Finedivisions of research responsibility had earlier been estab-lished to pursue research in some depth. These divisionsserved us ill as the information dried up. More and moreanalysts lost their moorings, fewer people had the big picture,and in the scramble to keep up intelligence production moreconjecture?fragmented, uncoordinated conjecture at that?went on at all levels.? The pressure for determinate resultswas of course part of the malaise. But in retrospect, wemight have maintained somewhat greater organizational flex-ibility as well as the more realistic research requirements pre-viously mentioned, and the need for this still exists and seemslikely to continue.Another aspect of organization deserves some considera-tion. We have tended to conduct our economic research onChina somewhat in isolation from other disciplines. I do notwish to depreciate my own craft nor to discourage wide-ranging economic research. At the same time we mustrecognize the pitfalls of parochial viewpoints. I suspect thatour judgements on the management factor in Chinese eco-nomic development would benefit from the insights of politicalscientists; and I feel confident that we could have madesounder assessments of the prospects for the communes if wehad not confined ourselves to the strictly economic aspects ofthe problem. We all face the frustrations of jurisdictionallimits in our research, but we might have another look at thepossibilities for promoting a broader interdisciplinary andinter-speciality approach to problems.Approved for Release: 2014/07/29 006183047r.t