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

! National Foreign Assessment Center, CIA, "China: Economic Indicators," ER77-10508, October 1977. Breakdown of value for GNP in 1975 into values for output in agriculture, industry and services obtained as follows: Value of GNP in 1970 (from source in footnote 1, above) used to determine value of output in agriculture and industry in 1970 on basis of shares of those sectors in GNP in 1970; these shares (0.32 for agriculture and 0.48 for industry) from Dwight H. Perkins, "Issues in the Estimation of China's National Product," in Alexander Eckstein, "Quantitative Measures of China's Economic Output," University of Michigan Press, forthcoming. The value for output in agriculture and industry in 1970 are projected forward to 1975 by means of the index of output in these sectors, 1970-75, in source in footnote 1, above. The value of output in the service sector in 1975 is the residual.

* Value of output in industry in 1970, estimated by means described in footnote 2, above, is distributed to the consumers goods and producers goods sector on basis of share of those sectors in total industrial output in 1970; these shares (0.56 for producers goods and 0.44 for consumers goods) from Robert Michael Field, "Civilian Industrial Production in the People's Republic of China, 1949-74, "in previous Joint Economic Committee compendium of papers on China's economy, "China: A Reassessment of the Economy, 1975. "The values for output in the consumers goods and producers goods industries in 1970 are projected forward to 1975 by means of the index of output in these sectors, 1970-75, in source one above.

Per capita consumption assumed to be 60 percent of per capita GNP. See Alexander Eckstein, "The Chinese Development Model," this volume. Ecksteim makes this assumption for 1974.

⚫ Derived on basis of estimates for absolute values for 1975 and 1985 in col. 1 and 3, respectively.

• See text.

7 Value of output in services sector assumed to grow an annual rate of growth equal to the average of the annual rate of growth of population and output in industry.

Sum of values for agriculture, industry, and services.

• Absolute level in 1975 projected forward at an annual rate of growth of 2.5 percent.

10 Sum of values for consumers goods and producers goods industries.

11 Absolute level in 1975 projected forward at an annual rate of growth of 6.5 percent.

12 Absolute value in 1975 projected forward at an annual rate of growth of 9.5 percent.

13 Intermediate" model estimate for population in 1985 in John Aird, "Demographic Change in the PRC," this volume.

14 Absolute value in 1975 projected forward at an annual rate of growth of 5.5 percent.

"Derived on basis of estimates for absolute values for 1975 and 1985 in col. 1 and 5, respectively.

14 Rates of growth for 1978-85 presented in Hua Kuo-feng's speech to the Fifth National People's Congress, Feb. 26, 1978. (Peking Review, No. 10, Mar. 10, 1978.) The rate of growth for industry was to be over 10 percent.

17 Absolute value in 1975 projected forward at an annual rate of growth of 4.5 percent. Absolute value in 1975 projected forward at an annual rate of growth of 10.5 percent.

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

GNP in 1985. Finally, and most important, this successful program of industrialization will be obtained while the Chinese maintain their present policy in regard to self dependency, that is, no large-scale, long-term borrowing from abroad.54

This forecast, of course, is nothing but a reflection of the several crucial assumptions made in its derivation, but it is important to note that the forecast is labeled a "pessimistic" one because of these assumptions. The results, however, as indicated above, depict a rather satisfactory result of the Chinese leaderships efforts over the next several years. Furthermore, while our results are more "pessimistic" than those presented by Hua in his "optimistic" speech to the Fifth National People's Congress the difference is not all that great; Hua's forecasts yielding an overall annual rate of growth approximately 2 percentage points higher or a level of economic output in 1985 that is approximately 20 percent higher than our forecast. Although the most significant difference between the two forecasts is in the agricultural sector, Hua's target rate of growth almost twice as large as that in our forecast, the resulting structure of the economy in 1985 is almost identical in both forecasts.

The principal distinction between these two forecasts, that is, what lies behind the different results, is between our more "pessimistic" and Hua's (and the Chinese planners) more "optimistic" assumptionsregarding three crucial parameters of these forecasts: Production possibilities, the rate and allocation of investment, and the policy of selfdependency. The relatively slow growth of agriculture and the reductions in the relatively high growth rates in industry included in our forecast are derived, in part, from the assumption of a downward trend in input productivity in the future compared to their levels in the past 25 years, that is, based on the "law" of diminishing returns. The Chinese, on the other hand, expect to experience rapid shifts outward in the production possibilities frontier due to rapid innovations. The assumption we make in our forecast, we believe, is more solidly grounded in both economic reasoning and historical evidence, not only for China but for other economies as well. The two forecasts are both related to relatively short period of time and the considerable time lag and investment required for the spread and implementation of innovations that would be necessary would appear to rule out any short-run or sudden change in the quantitative relationships between inputs and outputs for an entire sector. Furthermore, the relative neglect by the Chinese of the basic research and development efforts that lead to these innovations for achieving higher input productivity has led to a significant shortage of middle-level technicians and engineers for effectively implementing the "borrowed" or imported innovations from abroad, also arguing against any sudden technological transformation of China's economy.

In industry, the new leadership obviously hopes to achieve the rapid outward shift in production possibilities by means of significant additions to their capital stock: 120 large-scale producers goods industrial and transportation projects in the development of 14 industrial bases.

As the reader will note, the forecasts for exports and imports in table 1, because they were both assumed to grow at the same rate in 1975-85, include the continuation of a slight import surplus in commodity trade. The magnitude of the import surplus, however, could readily be financed by Chinese receipts in the noncommodity trade catagories in the balance of payments and short-term commercial credits which were utliized by the Chinese in 1975 for this purpose.

Our forecast, however, is derived on the bases of the assumption the Chinese will do well to maintain the existing rate of investment and the share of that investment going to the producers goods industries. Hua's targets and his discussion of these industrial and transportation projects, on the other hand, implicitly indicate not only a significant increase in the rate of investment, but an equally significant reallocation of that investment in favor of the producers goods industries. While China's political and economic system would allow China's new leadership to increase the rate of investment and allocate that investment according to the planners priorities; their doing so to develop the 120 projects mentioned by Hua would seriously call into question his forecast's predictions concerning the relatively high rate of growth in the agricultural sector and the relatively high rate of growth we have included with his forecast for per capita consumption. Finally, even if the Chinese are able to achieve the implied high rates of investment and its reallocation in favor of heavy industry, the size and nature of these industrial and transportation projects would make it somewhat doubtful the major portion of them could be completed and brought into production at an efficient level of operation by 1985; that is, their contribution to increased input productivity and total output could be included in the output targets presented by Hua.

Perhaps the most significant difference in assumptions behind the two sets of forecasts presented in table 1 concern China's policy of self-dependency. Our "pessimistic" forecast reflect the serious constraints placed on China's economic development over the next 7 years by the relatively slow growth in agricultural production (2 to 3 percent) which results in a relatively slow rate of growth in exports (5 to 6 percent), and an unwillingness to engage in large-scale, long-term foreign borrowing. The continuation of this policy would, therefore, seriously limit the expansion of China's imports over the next 7 years; that is, seriously constrain the rate of investment and rate of growth of industrial production and/or increases in the standard of living of the labor force. As is indicated in table 1, Hua's speech does not include any quantitative forecast for the foreign trade sector, only stating "there should be a big increase in foreign trade." Given the resource constraints emphasized in our "pessimistic" forecast, not only will the achievement of the targets presented by Hua require a very rapid increase in the level of imports, but an obvious need to rely on a significant volume of long-run foreign loans for financing those imports.

EMERGING POLICY CHOICES OF THE NEW LEADERSHIP 55

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

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

facing the new leadership and the many articles and press releases which have come out of China over the past year, the economic policy and strategy choices of the new leadership in several key areas have been made clear. These choices offer even greater evidence for the argument that China's program of economic modernization under the new leadership must rely on extensive borrowing from abroad if it is to succeed.

Self-Reliance

Neither Hua's speech, nor the reports in the Chinese press, explicitly refer to a recognition of this need to abandon China's longstanding policy of self reliance in regard to foreign loans; a policy so entrenched over the past two decades that it almost can be designated as an ideological principle. Yet, Hua's speech did mark a major step in that direction. This major speech by the leader of the party and the Government, devoted largely to the new program for the modernization of China's economy, makes no mention of the principle of selfreliance. This aspect of Hua's speech is very important as it is one of the most explicit indicators that the arrest of the Gang-of-Four was not just another in the series of periodic swings in the pendulum since 1949 as a result of the continuous political infighting for positions of power. Rather, it represents the extent to which the moderatepragmatic approach to China's economic development problems has emerged victorious over the radical opposition, that is, Mao's development strategy, in the two-line struggle of the entire past 28 years. Political infighting among groups and individuals for positions of power obviously will continue and some observers have already begun to speculate about a possible confrontation between Hua Kuo-feng and Teng Hsiao-ping. As far as economic policy is concerned, however, the overwhelming victory of the moderates-pragmatists in the two-line struggle becomes cleared with each new speech and press release.56

Although they have not yet publicly abandoned the policy of selfreliance in regard to long-term foreign borrowing, one of the first and most explicit decisions of the new leadership was the abandonment of the policy of self-reliance in regard to the import of foreign technology and producers goods. This step is not surprising inasmuch as the debate over China's reliance on these imports had been a key issue in the two-line struggle in economic policy. This is especially true after 1969 when China's dependence on imports, reduced to a remarkably low level as a result of the Cultural Revolution, increased significantly under the influence of Chou En-lai and the core of moderatepragmatic leaders, including Teng Hsiao-ping, who were rehabilitated under his guardianship." The ensuing very rapid increase in the level

58 To indicate the extent to which the victory of the moderate-pragmatic economic policies has been made complete, students applying to graduate school have been informed the questions concerning politics on the qualifying exams will cover Marxism-Leninism, political economy (that is, the labor theory of value), and the two-line struggle. There is no mention of the Thoughts of Mao. Another example is the list of topics to be investigated by the new economics section of the Academy of Science, all of which take up issues which Marxism-Leninism fails to answer, but which Mao provided answers for during the last 15 years of his life. $7 See the discussion of the changes in China's foreign-trade in the late 1960's and early 1970's which reflected outcomes of the two-line struggle over foreign trade policy during this period in Robert F. Dernberger, "Economic Development and Modernization in Contemporary China: The Attempt to Limit Dependence on the Transfer of Modern Industrial Technology from Abroad and to Control Its Corruption of the Maoist Social Revolution," in Frederic J. Fleron, Jr., ed., "Technology and Communist Culture," Praeger, New York, 1977, pp. 224-264.

of imports (chemical fertilizer, foodstuffs, machinery and equipment, and complete plants) was compounded by the unexpected rise in prices in the West, creating a serious balance-of-payments problem for the Chinese in 1974.58 These developments in the balance of payments, the changes in Sino-American relations which saw the United States soon become one of China's major trading partners, and the suggestion by Teng Hsiao-ping that the growing level of imports be financed by increased exports of Chinas raw materials, including petroleum, played a significant role in the downfall of the rehabilitated moderatepragmatic leadership in 1975.

Following Mao's death and the purge of the radicalsm for positions of power, however, the restored moderate-pragmatic leadership did not take long in their open advocacy of abandoning a policy of selfreliance in the modernization of China's existing industrial capacity and in the rapid expansion of that capacity. Numerous sector-by-sector reviews and critical appraisals of the backwardness of the level of technology in China's industry placed the blame squarely on the radicals' implementation of the policy of self reliance. The means for correcting this situation and for attaining the most advanced levels of productivity and output in the industrialized countries by the end of the century was also made explicit; it would be necessary for the Chinese to rely heavily on imports of technology and machinery and equipment from abroad. The long-run objective, of course, remains the same- a self-dependent modern economy.59 But in the short run or over the foreseeable future, China's rate of foreign trade dependency can be expected to revert to the norms of the 1950's when the import of foreign technology and producers goods, including complete plants, represented one of the most intensive periods of technology transfer in the history of industrialization.

Given the size of China's economy, its relatively rich resource endowment, and the industrial base already developed over the past. 28 years, the above arguments do not predict the Chinese will rely on imports to supply 40 percent of their investment in machinery and equipment as was true in the 1950's. On the other hand, their import dependency will obviously be significantly higher than the approximately 10-percent level experienced as a result of the selfreliance policies of the 1960's. No precise estimate can be made until more is learned concerning the exact levels and structure of the investment and output targets of the long-run economic plan for 19751985. Nonetheless, China's imports over the next 7 years should increase at a considerably faster rate than the 5- to 6-percent estimate included in the pessimistic estimates in table 1, which assumes imports will be financed from export earnings and the Chinese will not. engage in long-term foreign borrowing, if the Chinese hope to be able to achieve the investment and output targets presented by Hua. They should increase considerably faster, not merely because of the very significant increases in investment and output in Hua's speech compared to those presented in our pessimistic estimates in table 1, but

"For further details of these changes in China's foreign trade, see Rich Batsavage and John Davie, "China's International Trade and Finance," in this volume.

For a review of the level of technology embodied in the existing capital stock in Chinese industries, on a sector by sector basis, see John B. Craig and James M. Lewek, "The Chinese Machine Building Industry," in this volume.