producer goods sector-over the past 25 years. The higher priority of agriculture will result not only in a smaller share of investment for industry, but also in a much greater percentage of that share going to industries that produce inputs for agriculture-chemical fertilizer, agricultural machinery, irrigation pumps, et cetera. A significant percentage of these goods are produced in rural, small-scale industries developed through investment at the local-especially the countylevel. However, this greater share of investment at the local level reduces the investment that might be made in the modern industrial sector by the central government.

Other budget items also reduce the investment funds available for the industrial sector. Among these are increasing expenditures on public consumption and social overhead capital, such as hospital and medical facilities, educational facilities, and public housing projects. Although there has been rapid growth over the past 25 years, much still remains to be done.48 Transportation facilities-including the rail, river, and highway network-will also have to be maintained, improved, and increased, not simply to keep pace with industrial development but to alleviate the existing problems as well. The lack of adequate transportation facilities has caused serious problems for the coordination of distribution and supply which can be expected to increase with continued industrial growth. With the share of investment thus reduced, the rate of growth of industrial production is also likely to decline in comparison with the rates of the past 25 years. Finally, whatever the share of investment allocated to industry, the annual output per unit of investment will also decline because of the shift in favor of the more capital-intensive industries and the modernization of existing industries. Having developed its basic industries to the point where it is relatively self-sufficient in energy, basic machine tools, and metals, China requires in the future the development of industries with significantly higher capital-output ratios. According to a study of China's energy consumption in 1966-74, each 1 percent increase in GNP required a 1.42 percent increase in energy supplies, meaning a GNP elasticity of 1.42.9 The provision of this supply will depend much more than it has previously on the extraction and processing of petroleum and the harnessing of hydroelectric power potential. Even the continued expansion of the coal industry will depend on the use of more modern mining and refining equipment for the more intensive exploitation of China's huge coal resources, rather than on the earlier labor-intensive methods.

In the machine-building and metal industries, the prospects are similar. Continued economic development with a higher number of continuous production runs, more production of standardized parts, higher quality and precision products, and more automation will increase the already existing demand for a greater amount and variety of task-specific, precision, complicated machinery, such as headless, precision grinders rather than basic surface grinders. These machines

Much of this public consumption is provided for by local units in China, especially the commune and the factory. Nonetheless, investments at this level still reduce the potential for investments in the modern industrial sector.

CIA, China: "Energy Balance Projections," A (ER)75-75, November 1975, p. 14.

will be required not only to equip factories that will be constructed in the future but also to modernize most existing factories. Some of these machines are already produced in China in limited numbers, but the scale of production must be increased significantly.

A unique feature of Chinese industry is the creation of construction, maintenance and repair, and equipment-production facilities within each factory. A significant portion of the capital accumulation and modernization in the industrial sector is provided by these machine shops that produce their own equipment, which tends to be the more basic or standard pieces. The task of the modern machine-building sector will be to create a domestic supply capability for the more sophisticated machinery and equipment that China's economic development will require.

Among these needs for machinery and equipment are the demands of China's defense establishment, agricultural sector, transportation sector, and the rapidly growing chemical industry (fertilizer and synthetic fibers). Even if China hopes to maintain only a conventional, but modern, military force, it would require the production of the most modern and up-to-date aircraft, ships, and weaponry. Any attempt to develop and maintain even a limited missile system with nuclear capabilities would involve relatively high capital and skilled labor costs, not to mention research and development expenditures. The larger and more efficient of the agricultural machinery plants in the rural industrial sector are equipped with modern machinery and are introducing assembly-line serial production. Engines for larger pieces of agricultural machinery are produced in the modern, largescale industrial sector, where the capital-labor ratio is higher than the average ratio for all Chinese industry. The transportation sector has a great need for trucks and equipment used in building and repairing roads. The production of these goods-an area in which the Chinese have been beset by problems of effective operation-must also be greatly expanded. China's development of the transportation system also will lead to the production on a larger scale of diesel engines, tank cars (for petroleum), and sealed-container carriers (for aqueous ammonia).

In the metal industry, serious bottlenecks remain in the production of finished rolled steel-a very important product in an industrialized country-and of high-quality alloys. Furthermore, the attempt to increase the variety and quality of metal products will require the development of purification and benefication facilities for improving the quality of the raw materials (iron ore and coal).

The above discussion assumes the Chinese will attempt to increase not only the absolute level of production of these relatively capitalintensive industrial products, but also their share in total industrial production. This intent is reflected in Hua's speech and also in the rapid growth in the 1970's of imports of these types of machinery and equipment, chemical fertilizers, and metals, which due to the constraints on China's export capacity, resulted in a serious balanceof-payments problem for China. This problem, reinforced by a basic

development policy which calls for the long run self-dependency of China's economy, resulted in Chinese purchases of complete plants for the chemical, metals, and petroleum industries, all of which are very capital-intensive industries.

The net effect of these tendencies in the rate, allocation, and productivity of investment on the rate of industrial growth is difficult to estimate. Undoubtedly, labor productivity will increase as a result of the new leadership's campaign to strengthen central control over the planning and management system in industry and to enforce stricter discipline and specialization within the labor force. The overall impact of these contrasting negative and positive changes, however, should be a reduction in the rate of China's industrial growth over the next decade compared with the very high rates of growth achieved in the past. Thus, the rate of growth of China's industrial sector may well fall to an average annual rate of 6 to 8 percent over the next -decade.50

Consumption

Recent articles in the Chinese press and statements in Hua's speech clearly reveal the new leadership's intention to rely on material incentives as the major stimulus for increased labor productivity and to secure increases in the standard of living for the labor force out of the resulting increases in output to maintain morale. The Chinese have steadily increased the share of cultivated area devoted to food crops and reduced the share devoted to industrial crops. This shift in cropping patterns, along with the use of rationing to enforce the more equitable distribution of the limited supplies, has enabled the Chinese leadership to assure a level of approximately 2,000 calories of food consumption per day for the population. The continued slow growth in foodstuffs production, however, will undoubtedly mean that the large-scale net import of foodstuffs will continue into the immediate future.51

Given these constraints on the domestic production and import capacity of foodstuffs, significant increases in the standard of living must be accompanied by increases in the share of total consumption accounted for by public consumption and manufactured consumer goods. Since 1960, there has been a slight reallocation of investment in industry from investment in the producers goods industries in favor of the consumers goods industries. Thus, while the rate of growth of output in the consumers goods industries is still lower than the rate of growth in the producers goods industries, the gap between these two rates of growth has been reduced. This gap in favor of the producers goods industries, given the priorities of the new leadership, will continue, but the rate of growth of light industrial production will considerably exceed the rate of increase in the standard of living.

50 See the papers by William Clark, "Electric Power Industry" and Jon Sigurdson, "Urban-Rural Relationships: Technology and Manpower Policies," in this volume, which present the reasons why energy constraints and shortages of middle-level technical and engineering personnel will prevent the Chinese from achieving industrial growth rates of 10 percent. Also see the paper by Robert Michael Field and Kathleen H. McGlynn, "Chinese Industrial Production," this volume, for estimates of contemporary rates of growth and structural changes in the industrial sector.

51 The average level of these net foodstuffs imports may well increase even slightly faster than population growth, depending on how rapidly the new leadership desires to increase the standard of living. Their level, of course, will fluctuate from year to year, depending upon the size of the harvest in the given and in the previous year.

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

Foreign Trade

As long as the new Chinese leadership adheres to the present policy of self-dependency in foreign trade, that is, does not seek long-term foreign loans, the magnitude of the import requirements which follow from the very large-scale investment and industrial development program outlined in Hua's speech can only mean that foreign trade will remain as a very severe bottleneck to China's future economic development. Without foreign borrowing, China's import capacity is limited by export earnings and China's exports will continue to be dominated by the export of raw and processed agricultural products and raw materials. Not only does our forecast indicate that the rate of growth of China's agricultural production over the next decade will be relatively low, the domestic demands for that output will be increasing rapidly: that increase in demand coming from the increasing standard of living, the growth of the urban industrial labor force, and the growth of the consumers goods industries. As for raw materials, although well endowed in minerals, the Chinese must rapidly expand their exploitation of these resources for the purpose of satisfying their own needs of industrialization.

Quite simply, if the new leadership plans to achieve the targets for agricultural and industrial growth presented by Hua for 1985, the very attempt to achieve those targets will put tremendous pressure on the new leadership to seek foreign loans to remove this constraint on China's future growth. Yet, perhaps due to their experiences with the Russians during the 1950's and due also to its being a fundamental ideological principle over the past two decades, the Chinese leaderships has yet to change their policy of being unwilling to engage in long-term borrowing to finance their import needs. Western experts, and even the Chinese themselves, have offered the opinion that China's development of petroleum exports may be the means for alleviating the constraints placed on their import capacity. Indeed, petroleum exports have become an important and growing export commodity and will play an important role in their barter-trade with Japan over the

next decade. Nonetheless, China's domestic needs for energy as a result of industrialization and both technical and economic difficulties in obtaining ever-growing supplies of petroleum for export will limit the ability of this "liquid gold" to solve China's balance of payments over the next decade.52

In any event, the rapid growth in China's exports over the past decade is included in the past trend of China's export capacity, which is used here to forecast the growth of China's exports in the future. In making this forecast, our pessimistic forecast, we assume the Chinese will not engage in borrowing long-term loans from abroad, although even with our pessimistic forecast there will be tremendous pressure on them to do so. On the other hand, it is very difficult to imagine how they can realize the very optimistic forecast presented by Hua without long-term borrowing from abroad.

53

The procedure used to obtain a forecast for the likely trend in China's exports between 1975 and 1985 is really quite simple. The statistical relationship between the rate of growth of exports and rate of growth of China's GNP was quite stable over the past 25 years, as was the relationship between the rate of growth of exports and the rate of growth of agricultural production. Using either ratio and our forecast for the rate of growth of China's GNP and agricultural production over the next decade, the resulting forecast of the growth of exports is the same: 5 to 6 percent. Thus, assuming that there will be no changes in current policy regarding foreign borrowing or investments and in the desired level of self-dependency or foreign trade dependency, the likely rate of growth of both China's imports and exports over the next decade is approximately 5 to 6 percent. Whether or not they should or will be forced to change these policies is, of course, one of the most important policy questions facing the new leadership and is one of the major policy options they face which is discussed in the next section of this paper.

A convenient summary of each of the above forecasts for the growth of China's economy over 1975-85 and their comparison with those included in Hua's speech to the Fifth National People's Congress is presented in table 1. The comparison readily shows why those resulting from the analysis in this paper can be labeled "pessimistic" and those presented by Hua labeled "optimistic." Yet, it is important to recognize that even the set of more "pessimistic" estimates indicates the new leadership should be able to achieve considerable progress in the economic modernization of China by 1985.

See the papers by Hedija Kravalis, "China's Export Potential," and Kung-ping Wang, "Mineral Output and Productivity," this volume.

43 This forecast is also consistent with that implied in the paper by Hedija Kravalis, "China's Export Potential," in this volume.