CHINA: IN PURSUIT OF ECONOMIC MODERNIZATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80T00702A000500060015-4
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 20
• Document Creation Date: December 15, 2016
• Document Release Date: January 28, 2004
• Sequence Number: 15
• Publication Date: December 1, 1978
• Content Type: RP

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Assessment
Center
China: In Pursuit of
Economic Modernization
ER 78-10680
December 1978
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China: In Pursuit of
Economic Modernization
Central Intelligence Agency
National Foreign Assessment Center
Summary
Chinese economic policies have undergone great change in the two years
since Mao's death and the purge of the leftist Gang of Four. In contrast to the
narrowly conceived policies of earlier years-products of a rigid and confin-
ing ideological orthodoxy-both domestic and foreign economic policies now
display a vigorous, growth-oriented pragmatism. The most dramatic policy
reversal has been Peking's invitation of US oil firms to participate in the
development of China's offshore oil. Prior to October 1976, such a move
would have been inconceivable.
Ideological constraints, though greatly relaxed, are still present; but they
are much less confining and therefore have less impact on policy decisions
than the desire for rapid economic growth and considerations of economic
efficiency. The effect has been to greatly expand the number of policy options
available to Peking, and the moderate government has exhibited remarkable
flexibility in its initial round of decisions.
Peking's overriding goal is to build China into a major economic power
by the end of the century. In the view of China's leaders, this requires the
rapid modernization of agriculture, industry, and science and technology.
When national defense needs are added, the programs that Peking has in
mind are referred to as the "four modernizations."
The Fifth Five-Year Plan (1976-80) was to have been the launching pad
for this modernization drive. After a poor start, however, attributable in part
to a resurgence of leftist power and political turmoil, the Fifth Plan has been
incorporated into a 10-year plan that extends through 1985. The few targets
publicized thus far indicate that the new plan is ambitious and in many
respects probably feasible only under the most auspicious conditions. How-
ever, regardless of whether all targets are met on schedule, the new plan
signifies a long overdue commitment to major modernization and expansion
programs for key sectors of the economy.
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The success of the 10-year plan, and the modernization program as a
whole, hinges on Peking's ability to strengthen management, raise labor
productivity, and improve the effectiveness of investment. Already, reforms
are under way, and changes are evident in industrial organization, factory
management, wage policy, and in policy toward science and education. The
relaxation of the political climate has also paved the way for freer discussion
of economic problems and the rehabilitation of prominent economists who
were purged during the Cultural Revolution.
Permeating these reforms and reflecting the vigor of the new pragma-
tism is a willingness to draw on foreign technology and capital that goes well
beyond past limits. Also evident is a recognition that imports of plants and
equipment alone cannot solve China's problems. Foreign systems of manage-
ment, methods of education, and the like are also of considerable interest.
As the plan proceeds, the anti-Gang of Four, "let's get on with it"
sentiments that have helped produce a broad consensus on goals and
programs will weaken as a source of cohesion. And the plan will need to be
readjusted, reopening potentially contentious issues. With its options greatly
expanded, however, Peking should find itself in a better position to deal with
the economic trade-offs that have in the past given focus to disruptive
political disputes.
While policy options are no longer circumscribed by a rigid ideological
orthodoxy, economic realities still pose formidable obstacles to modernization.
China's nearly 1 billion people, an agricultural sector technologically so
backward that it employs 70 percent of the labor force, a "modern" industry
using techniques that are 10 to 30 years out of date and with operations
presently most inefficient-these are the basic determinants of China's
economic future, and they will impose strict limits on the pace of moderniza-
tion. These economic facts of life emphasize the difficulties facing China's
leadership; they do not, however, deny the possibilities for substantial
improvement in economic performance. Other factors, such as native abilities
and political and cultural strengths, ameliorate to some extent the limits set
by basic economic conditions. The apparent determination of the current
leadership to rapidly modernize the economy suggests that, perhaps for the
first time in the 30-year history of the People's Republic of China, the full
economic potential of the Chinese economy may be exploited.
The discussion which follows is not a rigorous examination, either of
China's new 10-year plan or of the other topics discussed. For the most part,
the absence or near absence of statistical data preclude all but the simplest
quantitative treatment. Rather, it is meant to be a collection of considered
impressions of the plan and of the policy changes which have become
apparent in 1977-78.
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China: In Pursuit of
Economic
BACKGROUND
Many of China's economic problems in recent
years are traceable to the Cultural Revolution
(1966-69). As a result of that episode, a faction
deriving its power basically from its access to
Mao Tse-tung and its control of the propaganda
apparatus became a major political force in the
1970s and a source of economic instability. Eco-
nomic issues increasingly were defined in ideo-
logical terms, with struggles between moderates
and leftists sharply reducing Peking's ability to
deal with economic problems. The confusion
among managers, workers, and rank-and-file
party cadres, caused by abrupt and extreme
swings in policy, further contributed to deteriora-
tion of the economy.
By the mid-1970s the seriousness of the eco-
nomic situation had become apparent, even to
outside observers. Deterioration has been most
evident in industry-where growing production
imbalances within the iron and steel industry
have resulted in steel shortages, and where de-
clining growth in coal production has caused
widely disruptive energy shortages. Agriculture
has also been affected. The media in recent
months have revealed numerous occasions when
local cadres, in carrying out leftist policies, took
actions which reduced the work incentives of
commune members.' Such instances, repeated
throughout the countryside and coupled with
disruptions to the flows of industrial inputs and
consumer goods to rural areas, may help explain
why agricultural performance has been particu-
larly disappointing since 1975.
When a strengthened moderate faction began
in 1975 to advocate strong measures to revitalize
the economy, the list of economic problems fac-
Modernization
' Perhaps the most common complaint has concerned the en-
forcement of overly restrictive regulations on private and collective
trade on rural free markets. In some areas, this led to a significant
reduction in peasant income.
ing Peking greatly obscured the gains that had
been made over the previous two decades.
China's GNP by 1975 was some 2.7 times that of
1957, the final year of the First Five-Year Plan.
With population growing at an average annual
rate of over 2 percent, this works out to per
capita GNP growth of just over 3 percent yearly.
An overwhelming share of this growth has come
from industry, where output has expanded at an
average annual rate of about 9 percent. In
contrast, as one would expect of a sector employ-
ing traditional, centuries-old production technol-
ogies on relatively fixed land area, agriculture
has grown much more slowly-2 percent annu-
ally, or approximately the same rate as popula-
tion growth.
This record of impressive, but uneven, growth
has been obtained by maintaining investment at
a high 20 to 25 percent of GNP. Conversely, the
share of output going to consumption has been
restricted, and gains in personal consumption
have been modest. There have been noteworthy
improvements for the consumer in some areas,
particularly in health and education. In such
basic and important items as food and clothing,
however, gains since 1957 have been much less
noticeable. When compared with pre-1949
days-a comparison that Peking likes to make-
even the minimal gains in food and clothing
consumption acquire added significance. But as
time goes by, fewer and fewer individuals are
able to remember those days; and over the past
decade, the comparison has begun to lose its
impact on the Chinese consumer.
On the eve of the Fifth Five-Year Plan (1976-
80), Peking therefore had to face up to several
critical problems:
? Agriculture, despite heavy dosages of invest-
ment since the mid-1960s, remained a drag
on the economy.
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? Industry, the major source of growth for
more than a quarter of a century, was beset
with growing difficulties.
? The urban labor force, after two decades of
sacrifice, had begun to demand a higher
priority for consumption at a time when
investment needs also were greater.
These general issues, along with the inade-
quacy of the transportation network, greatly
increased the pressures on China's leadership.
ECONOMIC PERFORMANCE IN 1976-78
The first two years of the Fifth Plan were
disappointing. Economic performance in 1976
was extraordinarily poor: turmoil associated with
the purge of the Gang of Four, unfavorable
weather, and the devastating T'angshan earth-
quake combined to hold the level of economic
activity to a standstill. Last year saw notable
progress in some sectors and continued stagna-
tion in others; for the economy as a whole,
performance fell short of expectations. The all-
important grain harvest in 1977 remained un-
changed from the 1975 level of about 285 million
tons. Industrial output in 1976 showed no gain
over 1975, although productive capacity contin-
ued to expand. And despite the 14-percent gain
claimed for 1977, many industrial facilities were
still operating well below capacity in the first
half of 1978.
After industrial production failed to grow in
1976, Peking had hoped that a strong recovery in
1977-the first full year following the purge of
the Gang-would provide a firm basis for accel-
erated growth during the remainder of the Fifth
Plan. However, shortages of raw materials and
electric power left many plants with considerable
idle capacity. These problems were made worse
by continued worker unrest, commercial disloca-
tions, and widespread violations of financial reg-
ulations. Late that year, State Planning Commis-
sion chief Yu Ch'iu-li told a forum of party and
state cadres that because of severe bottlenecks
and the generally chaotic situation, China's eco-
nomic problems could not be solved in a single
year.
Many of these problems will occupy Peking for
the remainder of this plan period, but there is
little question that economic recovery is well
under way. Statistics for the first half of 1978
would seem to warrant a more bullish assess-
ment, but their meaning is obscured by the
comparison with the first half of 1977, when the
economy was floundering. For example, gross
value of industrial output for the first half of
1978 was reported as 24.6 percent above that for
the comparable period of 1977; and substantial
gains were claimed for steel production (66.9
percent), coal (19.3 percent), electricity (17 per-
cent), crude oil (11.2 percent), cement (32.8
percent), chemical fertilizers (47 percent), and
tractors (27 percent). The volume of rail freight
reportedly rose by 22.4 percent. Despite these
gains-so large that they appear to say more
about the weakness of the economy in early 1977
than the strength of activity in 1978-Hua Kuo-
feng in July described progress at that point only
as "in the nature of recovery." Other information
also suggests that the level of economic activity
in 1978 has been merely satisfactory and that the
economy remains vulnerable in many areas.
Apart from the continuing disorder, planners
have repeatedly cited agriculture, steel, electric
power, coal, and transportation as "weak links."
The list should also include light industry where
production problems have been described as
"acute."
THE EMERGING SHAPE OF
NEW ECONOMIC POLICIES
Modernization and the 10-Year Plan
Peking has yet to specify what is meant by its
announced goal of achieving "front rank" eco-
nomic power by the year 2000. This obviously
requires a major breakthrough in the lagging
agricultural sector, greatly expanded industrial
capacity, and the development of a strong capa-
bility in science and technology, especially of an
applied nature. Progress along these lines should
lead to substantially improved living standards
and real incomes. But this could hardly create, in
a single generation, anything resembling an af-
fluent society. For example, were China able to
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sustain its historical growth rate of about 6
percent annually, by the year 2000 its GNP
would still be 15 percent below what US GNP
was in 1975. And with a population that is likely
to approach 1.5 billion by the end of the century,
China's per capita GNP would be less than
$1,000, about equal to that of Brazil at present.
Even remarkable Chinese success in implement-
ing birth control programs would not alter this
judgment. Actual possibilities for the economy
over the next two decades, of course, fan out
considerably depending on how much progress is
made during the next eight years, the first phase
of the modernization program.
Agricultural Goals
Peking's target of producing 400 million tons
of grain in 1985 implies average annual growth
of 4.3 percent in 1978-85, compared with a 3.6-
percent average during the previous eight years
and no increase at all in 1976 and 1977. Attain-
ment of this goal would mean grain production of
more than 350 kilograms per capita, well above
the 300-kilogram level achieved in the late 1950s
and regained in recent years. China's planners
clearly are banking on early payoffs from ex-
panded mechanization and land improvement
programs, as well as improved seeds and rapidly
increasing output from imported chemical fertil-
izer plants now coming on stream.
Since other agricultural subsectors, such as
livestock and subsidiary production, have consis-
tently grown more rapidly than grain output, the
goal of 4- to 5-percent annual growth in the total
value of agricultural production should not be too
difficult to achieve if the grain production target
is attained. Realistically, output is likely to fall
somewhat short of these goals.
Industrial Targets
The planned annual increase of more than 10
percent in total industrial output seems within
reach, given the 9-percent average annual
growth of the past decade-which occurred in
spite of periodic, politically caused disruptions.
Still, the Chinese will have to make an enormous
effort in energy-especially oil and coal-and
steel, and increase their purchases of foreign-
made plants and equipment. The planned change
in the pattern of growth, favoring light industry,
may also cause unforeseen difficulties.
Investment Priorities
Agriculture
Peking's 10-year plan places heavy demands
on agriculture for foodstuffs and industrial raw
materials, both for domestic consumption and
export. The stagnation of grain production since
1975-following a. decade and a half of heavy
investment in agriculture-has once again dem-
onstrated the vulnerability of the economy to
agricultural setbacks. Earlier this year, party
Chairman Hua Ku.o-feng spelled out the implica-
tions of continued slow growth in agriculture:
... Agriculture is the foundation of the
national economy. If agriculture does not
develop faster, there will be no upswing in
our industry and economy as a whole; and
even if there is a temporary upswing, a
decline will follow. There will be really
serious trouble in the event of major natural
calamities....
To accelerate output growth-or, perhaps more
realistically, to guard against the possibility that
a series of poor harvests will undercut the 10-
year plan and stall the drive for modernization-
Peking has stepped up its investment in
agriculture.
Current agricultural policy emphasizes in-
creased mechanization along with a push for
farmland improvement. As a result of steel short-
ages in 1976-77, the mechanization program is
behind schedule, but the leadership intends to
make up for lost time and fulfill the original
targets. These targets call for the "basic" mecha-
nization of agriculture by 1980.2 Goals for major
items, apparently stated in terms of inventory
(except for fertilizer), include:
? A 70-percent increase in large and medium-
sized tractors.
2 Precisely what is meant by "basic" mechanization is unclear.
One official has defined it as replacing with machines 70 percent of
the manpower employed in major farm operations.
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? A 110-percent increase in machine-drawn
farm implements.
?-A 36-percent increase in hand-guided trac-
tors.
? A 32-percent increase in drainage and irriga-
tion machinery.
? A 58-percent increase in chemical fertilizer
production.'
To achieve these goals, state-supplied steel for
the manufacture and repair of farm machines
during 1978-80 will be raised by a total of 50
percent over the previous three-year period; and
the share of locally produced steel used on the
farm and in machinery production will be upped
from the current 30 percent or so to more than
40 percent.
Perhaps because these objectives are so ambi-
tious, and the sector so backward, Peking has
selected the farm machinery industry as one of
the first industries to be reorganized under a plan
that may eventually encompass all of industry.
Underlying this action is the familiar proposition
that production, quality of output, and productiv-
ity can be substantially improved by setting up
large, highly specialized production facilities.'
Although small, locally managed plants will con-
tinue to be important sources of simple machin-
ery and equipment for the farm sector, they will
no longer be the primary agent for mechaniza-
tion. Many of these plants instead will be ab-
sorbed into local or regional networks featuring
large-scale, specialized production and assembly
facilities. One of the reports delivered at the
Third National Conference on Agricultural
' Asked to outline mechanization goals, an official in the State
Council office in charge indicated that one of the goals is to supply
600 kilograms of chemical fertilizer per hectare by 1980.
'New China News Agency recently reported that the First
Ministry of Machine Building held a meeting at which delegates
"summed up both positive and negative experiences gained since
1964 in organizing production according to the principle of coordi-
nation between specialized departments.... They unanimously
agreed that a salient problem in the organization and management
of the machine building industry today is that factories are either
`big and all-inclusive' or `small and all-inclusive,' and because of
that, duplication in construction and production is quite common,
production is scattered and small scale, and production processes
are backward with low efficiency, poor quality, and high costs."
The farm machinery and motor vehicle industries have been chosen
as the first sectors to be reorganized.
Mechanization, held in January, told how au-
thorities in one municipality had doubled the
output of tractor gears in only six months by
pooling the gearmaking equipment from seven
different tractor plants and adopting more up-to-
date production techniques.
Increased mechanization is designed first of all
to relieve seasonal labor shortages, the most
immediate and direct effect of which will be to
permit an increase in multiple cropping and raise
grain yields. Larger supplies of irrigation and
drainage equipment will improve Chinese capac-
ity to deal with drought andflooding and will aid
in the expansion of areas of "high and stable
yields."
Mechanization will also help compensate for
the loss of agricultural labor to nonfarm activi-
ties-a problem that appears to have been sig-
nificant during recent years. Since the early
1970s, as a result of the rapid development of
rural industry, demand for rural labor has
greatly increased. Large numbers of peasants
have been drawn away from collective agricul-
tural activities, resulting in a shortage of farm
labor and, in some areas, a decline in farm
output. Increased mechanization will help solve
these problems and will also encourage more
rapid industrialization in those areas where in-
dustrial development has been retarded by labor
shortages.
The growth in use of machines envisaged by
Peking will encounter difficulties, many of which
relate to or affect the demand for farm machin-
ery. Poor machine quality, the lack of standard-
ization, and the limited range of equipment and
accessories available have been cited as major
reasons for the reorganization of the farm ma-
chinery industry. Without substantial improve-
ments in these areas, rural communes and pro-
duction brigades may be reluctant to make major
investment purchases. An additional factor in
this investment decision is the scarcity of trained
manpower to operate and repair farm machinery.
Peking anticipates considerable improvement in
these areas (the number of technicians is to be
doubled by 1980); and to further attract pur-
chasers, ? it plans to cut costs-and presumably
prices-20 percent by 1980.
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The goal of 85-percent mechanization set for
1985 means that investment in machinery will
continue to absorb a large share of agricultural
investment during the Sixth Five-Year Plan
(1981-85), but there will be a shift of emphasis
away from simple machinery and tractors to
heavier, more sophisticated items. Farmland
capital construction, particularly those programs
other than irrigation and drainage, will receive
relatively greater emphasis during 1981-85
(compared with 1976-80) in order to meet the
1985 target of providing one mou (one-fifteenth
of a hectare) of stable, high-yield farmland per
rural resident. Peking also plans during the next
plan period to invest more heavily in land recla-
mation, much of it in border areas where state
farms are predominant; more than 13 million
hectares of land are to be reclaimed during the
next eight years, expanding farmland by some 12
percent. The chemical fertilizer industry should
continue to receive a large share of investment
during the Sixth Plan period; although the last of
the 13 large imported urea complexes will be in
full production by that time, the rate of applica-
tion of chemical fertilizers still will be low com-
pared with usage in Japan and Taiwan.
The above discussion highlights the more im-
portant components of agricultural investment
scheduled for 1976-85. Peking is aware of the
complexities of rural development and that the
above programs are only part of the matrix of
inputs and practices that are associated with the
modernization of agriculture. Current programs
do not ignore, for example, the investments that
must be made to improve seed varieties, to
develop better methods of plant protection, and
to adapt cultivation techniques to new crops and
cropping patterns. For the moment, however, the
emphasis is on machinery, land improvement,
and chemical fertilizer production-which ap-
parently are thought to offer quick payoffs in
terms of sharp increases in labor productivity
and output growth.
Industry
Hua Kuo-feng has sketched out the investment
program that will be required to generate an
overall industrial growth rate of more than 10
percent annually during the next eight years.
According to Hua:
... the state plans to build or complete
120 large-scale projects, including 10 iron
and steel complexes, nine nonferrous metal
complexes, eight coal mines, 10 oil and gas
fields, 30 power stations, six new trunk
railways, and five key harbors.
The cost of the program, in terms of funds
budgeted for capital construction in industry
during 1978-85, will approximately equal the
total of the previous 28 years.'
Metals. The 10 projects in the steel industry
apparently include the construction of three en-
tirely new complexes and the renovation and
expansion of seven existing facilities. Peking is
seeking the latest technology from Japan and
possibly West Germany for these projects, and
the cost will be enormous. The foreign exchange
bill for one new plant alone could easily exceed
the combined cost of all of China's whole plant
purchases in the early 1970s. Because of the high
cost and China's limited experience in construct-
ing huge integrated plants, the steel moderniza-
tion program almost certainly will be stretched
out, perhaps even into the 1990s.
Little is known about the nine nonferrous
metal complexes cited by Hua, although Peking
has approached both Japan and Italy regarding
facilities for processing aluminum and copper.
China's capabilities in these industries are badly
dated, and Peking will probably seek out foreign
suppliers of complete plants as the quickest
means of expanding capacity and updating
technology.
Energy. Plans for 1985 indicate an attempt to
rectify the longstanding imbalance in investment
allocations that have grossly favored the oil
industry and neglected coal. (Coal accounts for
66 percent of primary energy production, petro-
leum 23 percent, natural gas 10 percent, and
hydroelectric power 1 percent.)
During 1978-87, Peking plans to double coal
production to reach an output rate of more than
' Hua has stated that the capital construction effort as a whole in
1978-85, in terms of funds budgeted, will equal the total for the
previous 28 years.
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I billion tons per year. This will prove difficult:
the implicit average annual growth rate would be
7.2 percent, compared with the actual 6.3-
percent average growth in coal production since
1970. The industry is technologically backward
and its labor productivity notoriously low; over
one-third of total output is produced at small
mines and pits. To accomplish its goal, Peking
plans to increase mechanization at existing mines
and open eight new large mines.
Oil production probably is planned to grow at
rates comparable to those of recent years--
around 13 percent annually-rather than at the
rates of earlier years-over 20 percent. Nonethe-
less, the share of investment allocated to the
petroleum industry shows no signs of declin-
ing. The costs of finding and producing oil are
steadily rising. Most of China's readily accessible
deposits-shallow deposits in the north and
northeast-have already been tapped and in
some cases are showing initial signs of depletion.
For example, Ta-ch'ing, which produces one-half
of China's oil, is yielding an increasingly large
water cut (the field is water injected) and its
shallow reservoirs have come within sight of
depletion. The shallow deposits at Sheng-li and
Ta-kang, which together produce another 30
percent of total production, have some potential
for expansion, but from their beginnings these
fields-because of complex geological conditions
that have resulted in a multiplicity of scattered,
small reservoirs with widely differing character-
istics-have taxed Chinese technical capabilities.
Outside of a few fields with shallow deposits of
unknown potential, additional production gains
will have to come from deposits that are deeper,
offshore, or located in the far west-and which
therefore require large investments in infrastruc-
ture and more advanced technology.
Primarily as a result of coal shortages, domes-
tic oil consumption has grown at an average
annual rate of more than 15 percent since
1970-a rate that Peking considers excessive,
since it has eaten into the surplus available for
export. Petroleum now supplies a little over 20
percent of China's energy needs, up from 13
percent in 1970. This shift toward greater use of
oil is bound to continue, despite efforts to spur
the growth of coal production.
An examination of energy consumption trends
indicates that it will be very difficult to slow the
growth of demand for oil; indeed it will probably
grow more rapidly as modernization gets under
way. Mechanization will greatly add to petro-
leum consumption in the agricultural sector,
where energy use has nearly tripled since
1970. And the expanded use of diesel locomotives
and motor vehicles, together with agricultural
mechanization, probably will more than offset
any successful efforts by industry to reduce its
per unit consumption of petroleum. With crude
oil output rising at an average rate of 11 percent
annually since 1974 and the future demand for
oil-for domestic use and export-likely to ex-
ceed 15 percent. annually, it is not hard to
understand why Peking has moved so quickly to
initiate talks with US and Japanese oil com-
panies about possible cooperative development of
China's offshore oil resources. As a result of
domestic consumption trends and the importance
of crude oil exports in foreign trade plans, the
petroleum industry will continue to command a
large share of state investment and in addition
will receive a substantial infusion of foreign
capital.
The 30 new power plants, together with ca-
pacity increases at small plants and the expan-
sion of existing facilities, should enable the
Chinese to maintain high rates of growth in
electricity output through 1985. Nevertheless,
capacity will expand at best by 6 to 8 million
kilowatts per year (compared with an average of
about 5 million kilowatts annually in recent
years), and production will have difficulty keep-
ing pace with demand. Local shortages will
continue to occur. The severity of those shortages
will depend upon the effectiveness of conserva-
tion measures and the degree to which transmis-
sion and distribution facilities are improved.
Transportation
The six new trunk railroads and five new
harbors mentioned by Hua are only the more
visible parts of a comprehensive program for
modernizing the transport sector.
Plans for the railroads, the backbone of
China's transport sector, call for:
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? Widespread use of diesel and electric locomo-
tives, lightweight passenger cars, greater ca-
pacity freight cars, and the most modern
high-speed passenger trains.
? Extensive adoption of heavy-duty rails, auto-
matically controlled crossings, and increased
capacity bridges.
? Introduction of computer services throughout
the system.
? Mechanization of cargo handling, track
maintenance, construction, and locomotive
repair.
To increase traffic on other transport modes-
trucks, ships, and aircraft-China can be ex-
pected to introduce such intermodal services as
containerization and piggyback operations.
In nearly all aspects, the Chinese must look
abroad for both equipment and technological
know-how. Although no major new contracts
have been signed, substantial orders from Japan,
West Germany, and France are in prospect. In
addition to diesel locomotives, jet transports, and
motor vehicles, the shopping list includes tech-
nology related to centralized traffic control sys-
tems and other computer applications.
New Quest for Efficiency
The above list of projects will greatly expand
productive capacity. To realize its modernization
goals, however, the Chinese leadership is count-
ing on substantial payoffs from new and im-
proved systems of economic management.
It is in the realm of planning and management
that recent initiatives contrast most sharply with
the practices of the past 10 years. Current
economic policies in many ways resemble, in
their demonstration of flexibility and pragma-
tism, policies that were discussed and experi-
mented with during the early 1960s, before the
Cultural Revolution. Then, as now, a leadership
headed by economic moderates faced the prob-
lems of rebuilding a weakened economy and
establishing new organizational and incentive
structures more supportive of future growth. In
recent months Peking has taken measures to
restore peak levels of productivity and to improve
the efficiency of resource use. New initiatives are
most apparent in the areas of wages and incen-
tives, factory management, planning and organi-
zation, and in policy toward science and technol-
ogy. The political and ideological relaxation that
has followed the purge of the Gang also extends
to economic discussion, and prominent econo-
mists are again playing a role in public affairs.
Wage Reform
Peking's success in bolstering economic growth
during the remainder of the Fifth Plan period
depends heavily on its ability to improve work
incentives and boost labor productivity. When
the present government took office in October
1976, it faced a disgruntled work force which
since 1974 had increasingly resorted to slow-
downs, absenteeism, and strikes to protest low
wages and eroding living standards. One year
later, with low morale and low productivity still
serious problems, the new leadership announced
pay increases for three-fifths of the urban labor
force, stressing that the improved economic situ-
ation made it possible to raise wages. None-
theless, everyone realized that the move was
intended to buy time until a more thorough
consideration of wage policy was possible.
The pay hike probably has had a beneficial
impact on work discipline and, therefore, on
productivity. However, the wage increase-
amounting to some 10 to 15 percent for the
lowest paid workers and around 10 percent over-
all-is probably regarded by many as in-
adequate. The abolition of production bonuses in
the late 1960s (which cut personal incomes of
industrial workers by approximately 10 percent),
followed by a period of essentially unchanging
wages and larger-than-normal price increases,
resulted in serious losses of purchasing power
which the wage increase leaves largely unre-
stored. In view of the magnitude of discontent
over wages and living conditions, any substantial
improvement in work incentives-and produc-
tivity-will require further concessions by
Peking.
The current leadership recognizes the need for
a comprehensive wage reform which in addition
to raising pay rates and sanctioning the use of
production bonuses and piece rates, would, inter
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alia, establish rules governing eligibility for and
regularity of promotions. This may involve no
more than enforcing existing regulations-regu-
lations that have been widely ignored during the
past decade.
The basic problem, however, is in deciding just
how much wages should be raised; or, whether
bonus and piece rate systems-or some combina-
tion of the three-may be more effective in
raising labor productivity. And these decisions
must be coordinated with plans for consumer
goods production and imports. The apparent
inaction on wage reform may signify that Peking
is hoping that the small wage increase granted in
1977, along with the introduction of bonuses and
piece rates and some improvements in living
conditions,' will reduce worker dissatisfaction
(that is, raise labor productivity) to an accept-
able level.
Hua Kuo-feng's remarks at the National
People's Congress last February ended any
doubts that the leadership plans to make greater
use of material incentives. Hua said that the staff
and workers of state enterprises should be paid
"primarily on a time-rate basis with piecework
playing a secondary role, and with additional
bonuses."' He also indicated that preparations
for a reform of the wage system were under way.'
The length of Hua's comments on wages and
living conditions is revealing. Past references to
'A report prepared for the State Council in 1975 cited the need
to (a) build more dormitories for workers; (b) improve the opera-
tion of mess halls, nurseries, and medical services; (c) improve the
organization of spare-time educational, cultural, recreational, and
sports activities; and (d) solve the problem of husbands .and wives
working in separate places for long periods.
' It is interesting that piece rates, generally opposed by labor,
seem to be welcomed by Chinese workers. Apparently, production
norms are sufficiently low that the additional effort required to
increase earnings is relatively unimportant after years of low and
unchanging wages with little or no opportunity to supplement wages
by production bonuses or overtime.
Hua's further remarks on the necessity of increasing the supply
of nonstaple foodstuffs to urban consumers seem to confirm that
inadequate supplies of nonstaple foodstuffs have in recent years
been a difficult problem and perhaps an important source of worker
dissatisfaction. That he also called for improvements in housing,
both for urban and rural residents, is not surprising, since lack of
adequate housing has always been a problem. His remark, however,
suggests that housing inadequacies have been a source of particular
aggravation in recent years.
these topics by members of the leadership have
been brief and for the most part noncommittal
statements to the effect that, as production in-
creased, consumption and living standards would
increase accordingly. Hua's remarks are further
confirmation of the pressures being exerted by
Chinese consumers and of the leadership's recog-
nition that these demands can no longer be
ignored or turned aside by ideological con-
demnation of material incentives and appeals to
patriotism. The 12-percent annual rate of growth
planned for light industry during 1976-85-
2 percentage points higher than for industry as a
whole-and the apparent decision to import con-
sumer goods when excess demand becomes a
problem are examples of the type of policy that
can be expected from Peking.
Strengthening Enterprise Management
Almost two years after the purge of the Gang
of Four, and despite continuing efforts by the
leadership, enterprise management remains in a
state of confusion. Last year the First Ministry of
Machine Building promoted a campaign to im-
prove product quality. Surveying results at the
end of the year, it found that only about 20
percent of the enterprises had achieved marked
results, that about 60 percent "did some work,
but their efforts were not vigorous, earnest, and
meticulous-and thus produced only fair re-
sults," and that the remaining 20 percent "either
carried out their work perfunctorily or did noth-
ing at all."
Kiangsu Province in June reported on its at-
tempts to improve product quality and reduce
materials consumption during the first five
months of this year. Of 33 products examined for
quality, 28 showed improvements over 1977, but
only seven reached the highest quality levels
attained in earlier years. "Materials and other"
consumption indexes for 43 products were exam-
ined: 37 were lower than last year, but only 10
reached previous lows.
These are evidently typical experiences, for in
July a People's Daily editorial complained of
"numerous problems" in management, and a
circular issued by the State Economic Commis-
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sion-announcing that September would be the
first "quality month" for industry and communi-
cations-said that "the trend toward a worsening
of product quality has been changed somewhat,
but the low quality of products remains a serious
problem."
The intractability of these problems has forced
Peking to devote more time to management
issues and has hastened the adoption of two
important measures. Following Hua Kuo-feng's
announcement of the decision at the National
People's Congress, Peking has begun to abolish
enterprise "revolutionary committees." These
were formed during the Cultural Revolution to
assume the tasks previously handled by party
committees and enterprise managers. Apparently
they became the loci of bureaucratic infighting
and, collectively, a source of industrial disorder.
Greater control of operations is now being vested
in individual managers (under the direction of
local party committees) whose authorities and
responsibilities are now more extensive and clear-
cut.
With the elimination of revolutionary commit-
tees in production units, Peking has mounted a
concerted attempt to restore the systems needed
for effective management, for example, financial
and quality controls, material consumption
norms, and the like. The most recent, important
development in this area has been the issuance in
April of the Central Committee document, the
30-Point Decision on Industry.' The People's
Daily editorial announcing the action called the
document the "fundamental law" for industrial
and communications enterprises, which, it said,
"provides a basis to eliminate chaos, restore
order, and set things straight from the bottom
up." The editorial went on to describe the docu-
ment: "It specifically defines a series of princi-
ples and policies on tasks and basic regulations
for enterprises, methods and work styles, and
ways of improving industrial management and
quickening the pace of industrial development."
'The full title is Decision of the Central Committee of the
Chinese Communist Party Concerning Some Problems in Speeding
Up the Development of Industry (draft). The document is not yet
available outside China. However, New China News Agency has
published a list of the major points; these are listed in the appendix.
The 30 Points represents a major accomplish-
ment in the lengthy attempt to bring order to the
economy. In recounting the history of this strug-
gle, and of the document, People's Daily pointed
out that it retains "many" good points from the
70-Point Decision on Industry promulgated in
the early 1960s, the 10 Points of 1972, and the
1975 document referred to as the 20 Points.
The appearance of the 30 Points, bearing the
imprimatur of the Central Committee, should
help dispel the misgivings of managers and
middle- and lower-level functionaries who thus
far have been reluctant-for fear of a sudden
change in policy that would make them targets
for leftists-to implement the policies of the new
government. Indicating that not even this action
is expected to completely allay the fears of lower
level officials, People's Daily cautioned that,
"Due to the longtime ideological confusion
caused by the Gang of Four, we may encounter
some ideological obstacles during this trial
implementation."
The 30-Point Decision on Industry is mainly
concerned with immediate productivity increases
and the reestablishment of familiar institutions
and practices which can be expected to have a
positive impact on efficiency. Perhaps more sig-
nificant over the long run is Peking's curiosity
and questioning about managerial techniques
used in other countries with vastly different
economic systems--implying that China's lead-
ers are considering further, perhaps major,
changes in the economic system.10 In the most
publicized instance, they have shown consider-
able interest in the Yugoslav system; but the list
of countries where official Chinese visitors have
displayed more than a passing interest in man-
agement extends to Japan, several countries in
Western Europe, and Romania." There is noth-
ing to suggest what changes Peking may have in
mind, but the flexibility that such a search
10 For additional suggestions that this may be so, see the TAN-
JUG interview with the economist Sun Yeh-fang in the Foreign
Broadcast Information Service Daily Report: People's Republic of
China, 23 August 1978, pp. A/26-28.
" It is interesting to note that the author of a recent article
advocating technology imports and ventures with foreigners is
associated with an apparently new Institute of Foreign Economic
Management of the Chinese People's University.
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implies is remarkable when one considers the
ideological rigidity that has constrained public
discussion and policy during much of the past 10
years.
Changes in Planning and Organization
Paralleling Peking's attempts to strengthen
enterprise management are moves to tighten
central control and to raise economic efficiency.
It would probably be inaccurate to character-
ize what is happening as a return to strong
control by the center. Rather, it seems more
likely that current developments are first of all a
reaction to the extreme de facto decentralization
that occurred amidst the chaos of the early
1970s 12 and secondly a reawakening of the de-
sire-apparent in 1964-65 and now given new
impetus by plans for modernization-to improve
efficiency. Peking since the late 1950s has dis-
played an understanding and acceptance of the
importance of local initiative in tackling its
economic problems; and there is no evidence that
anyone in the leadership is now arguing that
authority over the economy should be concen-
trated, in whole or in large part, in Peking."
After all, many of China's 29 provincial units
have populations that are larger than all but a
few countries. And the Chinese, if anyone,
should be aware of the problems which ensue
from a large central bureaucracy.
"A de jure decentralization of sorts-probably administrative
only-took place in 1970, perhaps in association with the rapid
growth of local small industry at that time. But there is no evidence
that the provisions enacted were extreme or opposed by anyone in
the current leadership.
13 For example, Hua Kuo-feng's speech to the National People's
Congress contains the following passage: "Given the strengthening
of unified central leadership, it is necessary to develop the initiative
of both the central and local authorities. While the former must
have absolute control on major issues, power should devolve on the
latter with respect to minor ones. Power is to be centralized where
necessary, while active support is to be given to the local authorities
in undertaking what should be put in their charge." In this instance
Hua's emphasis is on more central control, but the passage is-also
meant to reaffirm Peking's commitment to an administratively
decentralized control system. Remarks by the prominent economist
Sun Yeh-fang in an August interview with a TANJUG corespond-
ent suggest that even now, while strengthening central control,
Peking may be contemplating reforms which extend the authorities
of enterprise managers.
In what appears to be one recent
manifestation of the strengthening of central
control, the number of ministries under the State
Council has been expanded. Whereas in 1975 a
single ministry was responsible for fuels and
chemicals, now there are separate ministries for
coal, petroleum, and chemicals. Similarily, indi-
vidual ministries have been reestablished to gov-
ern the textile industry and the railroads. The
appearance of additional ministries by itself does
not necessarily signify stronger central control;
but given the frequency of editorial commentary
in the official press calling for more unified
planning and coordination, it is reasonable to
assume that the new ministries reflect steps in
this direction.
Another sign of the tightening of control, but
obviously much more complex in its intentions
and implications, is the apparently imminent
reestablishment of the six economic regions into
which China's 29 provincial units once were
grouped for planning purposes. While we know
very little about how this regional framework
operated in the past, oblique references by Hua
Kuo-feng and Yu Ch'iu-li to regional economic
systems in each of the six major regions suggest
that a regional setup is being revived to facilitate
long-term planning and to strengthen control of
the economy at an intermediate level between the
provinces and Peking.
Other new organizations have also appeared,
perhaps connected with the attempt to reassert a
greater measure of central control, but more
obviously associated with the desire to improve
efficiency. Particularly noteworthy was the rees-
tablishment last year of the National Petroleum
Corporation, which reportedly has taken over
operational responsibility for the oil industry,
leaving the Ministry of Petroleum Industry
charged mainly with policy formulation. A min-
isterial-corporate structure of this sort also may
figure in the reorganization announced for the
agricultural machine industry. Similar corpora-
tions were set up in these and several other
industries in 1964-65 but were later abolished
after condemnation by radicals as "capitalist
monopoly trusts."
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Although details are sketchy, the corporate
idea seems to have two rationales. As described
in 1964-65, the corporations and enterprises un-
der their control were to be relatively free of
interference from local authorities; especially in
matters of policy, they were to be accountable
only to the central authorities in Peking. In
addition, such enterprises would be "specialized"
rather than "all-inclusive," making it possible to
reduce costly duplication in organization, person-
nel, and fixed assets.
In July New China News Agency reported
that the First Ministry of Machine Building was
reorganizing its affiliated departments and enter-
prises along lines of specialization "to improve
coordination and planning." This form of organi-
zation had been tried in 1964, NCNA noted.
Reforms had recently begun in Peking and
Shanghai, and the Ministry had dispatched per-
sonnel to aid in the reorganization to a number of
provinces." A farm machinery corporation was
set up for the northwest region of the country,
with factories in Shensi, Kansu, Ninghsia, and
Sinkiang Provinces designated to produce parts
and accessories.
The emphasis on efficiency extends to military
industries. Both Yu Ch'iu-li and Hua Kuo-feng
have signaled the leadership's intentions to,
where possible, "integrate" military and civilian
enterprises. Presumably the objective is to make
idle or underutilized capacity in military plants
available for civilian use and to more carefully
scrutinize those military resource allocations that
could be used for civilian purposes.
Renewed Emphasis on Expertise
Meeting the human capital requirements of a
modernization program would be difficult under
the best of circumstances; now, the "crisis" in
education and science is perhaps the major ob-
stacle to the fulfillment of China's goals.
Reestablishing an educational system capable
of turning out well-prepared graduates, like most
of the tasks facing Peking, will take several
14 NCNA cited Liaoning, Kiangsi, Shantung, Honan, and the
northwest.
years. The logistics alone are formidable. Al-
though undergraduate enrollment is rapidly be-
ing expanded, it remains below pre-Cultural
Revolution levels. Post graduate education will
resume in the fall of 1978, but with an enroll-
ment of only 9,000. One of Peking's responses to
the protracted nature of the restoration process
has been to reinstitute a system of "key" schools
whereby resources are concentrated on a limited
number of highly qualified students who will
form the nucleus of the scientific and technical
contingent required for modernization. The deci-
sion has also been made to send literally thou-
sands of students abroad for training at the
undergraduate as well as graduate levels. The
realization that resources" must be concentrated
on a limited number of high-priority objectives
also is evident in discussions of the plans for
scientific and technical work.
For the past year and a half, Peking has been
considering the directions its science policy
should take. Two major planning conferences
were held in late 1977 and early 1978-one for
natural sciences, the other for more general
scientific and technical matters-prior to the
National Science Conference, held in March
1978. There, amid much fanfare and speeches by
top party leaders, a draft science plan for 1978-
85 was presented. The plan is broad in scope,
covering everything from very basic consider-
ations on education to foreign training for Chi-
nese scientists and the areas of research to be
tackled during the next eight years.
Fang Yi, head of the State Scientific and
Technological Commission, earlier had an-
nounced that research work was to focus on a
number of key problems in industry, agriculture,
and national defense. In his discussion at the
March conference, Fang elaborated on those
problems. He focused on eight areas of research,
three of which relate directly to industry: energy,
materials, and computers. Touching in turn upon
oil, coal, and electric power-all of which are
priority concerns--Fang also brought up the
need to explore new sources of energy, mention-
ing first the need to step up research on nuclear
energy. In materials research, he cited metal-
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lurgy, holding up the needs of the steel industry,
in particular the beneficiation of hematite, as an
item of top priority; Fang also mentioned a
number of nonferrous metals industries where
research is needed to solve technical problems.
His discussion of research on computers simply
noted the large number of areas where comput-
ers are valuable tools and declared Peking's
intentions to build a "fair-sized" computer indus-
try by 1985. The discussion of agricultural re-
search covered a wide range of topics, reflecting
the general technological backwardness of Chi-
nese agriculture.
The new leadership is keenly aware of the
importance of scientific-technical work to Chi-
na's modernization. Despite added spending on
science and technology, shortages of research
personnel and educators will persist for some
time. The recognition that this is so is reflected in
the careful attention to the needs of agriculture,
industry, and national defense over the next eight
years and the concentration of scientific re-
sources on a limited number of projects with a
reasonable possibility of quick payoffs.
with another prominent rehabilitee, Hsu Ti-hsin
(now head of ERI), and a third economist,
Kuang Jih-an, presided over a series of regional
economic planning forums. In addition to holding
discussions of current economic conditions and
the 10-year plan, forum participants also dis-
cussed ongoing research and proposed topics for
future work. The proposed topics, as reported by
New China News Agency, presage a movement
away from the "quote Mao, quote Marx" eco-
nomics that had become standard fare in recent
years. This change is beginning to be seen in the
journal Economic Research which resumed pub-
lication this year after a decade-long hiatus.
Hsueh Mu-ch'iao is another rehabilitee of
note. He once headed the State Statistical Bu-
reau, was a deputy on the State Planning Com-
mission, and was head of the National Price
Commission. Hsueh's current role is unknown;
he has been noted in attendance at important
functions, and some of his writings from the
1950s have been republished-for no apparent
reason except perhaps to notify the bureaucracy
of his return.
Reappearance of Prominent Economic Officials
Among the signs of a budding economic lib-
eralism are the rehabilitation of once-disgraced
economic officials and the promise of a return to
more substantive economic discourse.
Perhaps most symbolic of Peking's about face
in economic policies is the reappearance of
economist Sun Yeh-fang. During the Cultural
Revolution, Sun--a former director of the State
Statistical Bureau and once head of the Eco-
nomic Research Institute of the Academy of
Sciences-was denounced as "China's Liber-
man" for advocating study of Yugoslavia's use of
profits as a management tool. The vehemence of
the attacks on Sun made his rehabilitation in
1.977 as remarkable as Vice Premier Teng Hsiao-
p'ing's reappearance in 1973.
Sun since April has been an adviser to the
Economic Research Institute where he shares
responsibility for restoring and planning China's
economic research effort." In May, he, along
"For further information on Sun, including his thoughts on
economic reforms, see the interview by TANJUG correspondent
Aleksandr Novacic in FBIS, August 23, 1978, pp. A/26-28.
Widening Role for Foreign Technology
Just as China is looking abroad for models of
managerial efficiency, so are its planners turning
to the foreign sector for acquisitions of modern
plants and technology. With investment priorities
now generally established, extensive negotiations
are under way with Japanese and Western firms
for a new wave of technology imports that should
continue for the next several years.
Complete industrial plants top the shopping
list. Major interest centers on facilities for the
steel, electric power, petrochemicals, and fertil-
izer industries. Inquiries also have been made for
plants producing nonferrous metals, locomotives,
trucks, and electronic components. In addition to
whole plants, the Chinese have shown great
interest in purchasing specialized machinery and
equipment, particularly items needed by the fuel
industries. Computers and telecommunications
equipment also are high on the list.
Despite Peking's new overtures, however, tech-
nical and financial constraints restrict the scope
of any drive to expand technology imports. While
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a sizable army of middle-level factory techni-
cians has been spawned by China's "learning by
doing" approach to industrial training, there is a
serious shortage of experienced design and pro-
duction engineers and other highly trained tech-
nicians essential in setting up and operating a
modern factory. Even with the new emphasis on
expertise, a resolution of this problem is bound to
take a very long time.
A major financial constraint is China's limited
capacity to earn foreign exchange. Credits and
other forms of import financing can smooth the
repayment obligations, but ultimately higher lev-
els of exports are needed. Many traditional ex-
ports depend directly on the backward agricul-
tural sector, and the past failure to invest in
mining and processing of metals and minerals
forces China to import many of the goods that it
should be able to export. Technical problems and
rapidly increasing domestic demand will con-
strain exports of petroleum. Nevertheless, as
Peking progresses with its modernization plans,
China is likely to evolve new methods of financ-
ing foreign purchases. These methods may take
the form of greater acceptance of foreign debt
and widening interest in generating new sources
of export earnings.
In recent months, for example, Chinese offi-
cials have been considering trade and financing
arrangements that they would not even discuss
previously: (a) long-term credits and the financ-
ing of capital imports through foreign bank
deposits with the Bank of China; (b) barter and
compensation deals for plant purchases; (c) the
importing of materials to reprocess for export;
(d) designation of certain factories to produce
goods for specific foreign markets; and (e) fuller
compliance with international standards on pat-
ents, trademarks, and copyrights. There has also
been some talk of cooperative ventures with
foreign oil firms to develop China's offshore oil
resources. How far Peking is willing to pursue
these more adventurous trade and finance prac-
tices is unclear. Stated policy still precludes
direct loans, joint ventures, and foreign invest-
ment. The leadership likely will introduce these
more flexible practices on a selective basis, rede-
fining self-reliance to justify their actions, but
not abandoning the basic principle.
COMPETING NEEDS AND
POLICY CHOICES
Productivity gains play such an integral role in
the 10-year plan that the deftness with which
Peking handles related topics like wage reform,
bonus schemes, and consumer goods markets will
have a major impact on the success of the plan.
The sensitivity of the wage issue and the possibil-
ity that by responding to worker demands the
leadership may be contributing to an incipient
consumerism have wide-ranging implications
that will be discussed at length by the Politburo.
The very fact that these problems are by and
large unfamiliar to the leadership makes unlikely
their quick and efficient resolution. And it in-
creases the possibility that misjudgments will
further jeopardize plan goals.
In earlier years, Peking could concentrate on
maximizing the rate of investment and output
growth, while avoiding bottlenecks and inflation-
ary pressures. Consumer needs were not ignored;
but the consumer was made to understand that,
at least for the time being, growth in personal
real incomes had to remain small. Because the
price level generally was kept under control, a
small annual increase in wages was acceptable to
the work force. Open complaints were very infre-
quent and work slowdowns, absenteeism, and
strikes were practically unheard of. This is no
longer the case.
Workers learned during the Cultural Revolu-
tion that they could express their economic griev-
ances with a degree of impunity and effectiveness
that was previously unsuspected. The abolition of
production bonuses in the late 1960s (which cut
personal incomes of industrial workers by ap-
proximately 10 percent) followed by a period of
essentially unchanging wages and larger-than-
normal price increases turned minor grievances
into serious labor problems. Government inaction
resulted in a variety of job actions and a sharp
decline in labor productivity.
Peking not only has to face up to the problems
of lost purchasing power and wage reform, but it
must also convince the worker that this govern-
ment is fair and can be trusted. First and most
important, however, it must come up with a
package of wage increases and bonuses that
significantly increases incomes, and it must en-
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sure the availability of goods at prices that leave
the worker with real gains.
In the next year or two, consumption increases
can be achieved by tapping unused capacity in
light industry and restoring order to markets,
especially those for nonstaple foods. Productivity
growth in response to the wage increase in late
1.977 and in anticipation of further wage adjust-
ments will also provide for some increases in
consumption.
Beyond 1980 and until the current investment
program is completed, more than moderate gains
in consumption seem unlikely. Investments in
agriculture are being substantially increased.
Since foodstuffs account for about one-half of
consumer expenditures, increases in agricultural
investment imply gains in consumption. And
because a large share of the raw materials used
in light industry also comes from the agricultural
sector, growth in industrial consumer goods out-
put should also improve. Agriculture, however, is
fickle; without favorable weather, investment
may not yield the anticipated growth-particu-
larly if one is looking for a payoff within the
relatively short period of five to 10 years. When
discounted for variation in weather and the
complexities of agricultural development, the
agricultural component of investment can be
expected to yield only moderate gains in output
and consumption growth.
Light industrial output is to grow by 150
percent during 1978-85, an average annual rate
of slightly more than 12 percent. Comments by
the head of the State Planning Commission and
by officials in the Ministry of Light Industry
indicate, however, that these gains are intended
to come largely from fuller utilization of capacity
and more efficient use of inputs, not from invest-
ments in new capacity. Our estimate of growth in
consumer goods production shows an average
annual rate of growth of 7 to 8 percent since
1957. This falls so far short of the planned 12
percent that one has to be skeptical of Peking's
ability to achieve its goal without massive addi-
tions to capacity.
The growth of per capita consumption will also
be constrained by yearly population increases of
1 to 2 percentand by exports of consumer goods.
Foodstuffs and light industrial products account
for over 50 percent of total exports. Raw materi-
als, particularly crude oil and coal, are to become
an increasing share of exports, but until the mid-
1980s when current investments in those sectors
really begin to pay off, foodstuffs and light
industrial goods will continue to be important
export items.
All of this suggests that, Peking may find itself
still faced with labor problems and lagging pro-
ductivity throughout the 10-year plan. If it turns
out that moderate consumption gains will not
induce the productivity gains implicit in plan
goals, then Peking may be forced to cut back on
its investment in heavy industry, something that
would be done only reluctantly.
The defense budget cannot be regarded as a
significant source of transferable funds. Cuts in
defense spending in the early 1970s (with no
evidence of substantially larger expenditures
since) and the real need for a costly program to
modernize conventional forces have probably
been cited in arguments for an increase in mili-
tary budgets. However, in the debate last year on
military spending, the Hua regime argued that a
strong defense requires a modern industrial base.
The debate apparently ended with a consensus
(1) to hold military spending at a level which
allows for the most essential aspects of defense
modernization and (2) to make underutilized
resources controlled by the military partially
available for civilian industry. The impression is
that much of the resources which are transfer-
able to civilian use has already been-or soon
will be-tapped, lessening the possibility for
significant resource transfers during 1981-85.
Peking is showing less reluctance to rely on the
foreign sector, and it conceivably could invite
additional foreign investment in its consumer
goods industries; but such arrangements could
hardly provide a significant share of the needed
increase in consumer goods production. Simi-
larly, further efforts to improve efficiency, if
successful, would seem to offer the hope of only
marginal gains in the output of consumer goods.
When one considers the political as well as the
economic difficulties that China's modernizers
are likely to encounter, the undertaking they
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APPENDIX
The following are the main points contained in
the document, Decision of the Central Commit-
tee of the Chinese Communist Party Concerning
Some Problems in Speeding Up the Development
of Industry (draft), issued in April 1978, for trial
implementation. The selection of points is by
New China News Agency.
1. Exposing and criticizing
Four.
the Gang of
2. Intensive learning from Taching.
3. Criteria for improvements in industry.
4. Political work in industry.
5. The system of responsibility of the plant
director and division of labor under the leader-
ship of the party committee, and other basic
systems.
6. Overall planning and strengthening of
leadership.
7. Reorganization of industry in accordance
with the principle of specialization and coor-
dination.
8. The initiative of the central and local
authorities and the structure of industrial
administration.
9. Emphasizing the expansion of fuel, power,
raw material, and transport industries.
10. Supporting agriculture.
11. Developing all energy sources.
12. Tapping the potentials in existing enter-
prises through technical innovations and reno-
vation.
13. Strengthening scientific research, adopt-
ing advanced techniques and technology.
14. Multipurpose utilization of resources, and
environmental protection.
15. Launching emulation drives.
16. Training cadres, workers, and technical
personnel.
17. Applying the principle "from each accord-
ing to his ability, to each according to his work".
18. Attending to the welfare of workers and
staff members.
19. Urban work. serving production and the
welfare of workers.
Source: New China News Agency, in Foreign Broadcast Informa-
tion Service Daily Report: People's Republic of China, July 5,
1978, pp. E/13-14.
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have embarked upon is even more impressive.
Considerable controversy appears inevitable-
not only over basic policy changes certainly but
also over the nuts-and-bolts issues of implemen-
tation that affect the political and economic
status of bureaucrats and bureaucracies. Never-
theless, Peking seems capable of resolving these
difficulties in ways that will allow satisfactory
gains in per capita consumption and, at the same
time, permit rates of investment and industrial
growth that are reasonably close to plan goals.
In short, the 10-year plan is likely to be a
successful first step toward the modernization of
China's economy.
Comments and queries on this paper are wel-
come and may be directed to the Director for
Public Affairs, Central Intelligence Agency,
Washington, D.C., 20505; area code 703-351-
7676. For information on obtaining additional
copies, see the inside of the front cover.
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