several thousand representatives from throughout the country in 1977, were called primarily as a means of disseminating a new policy line that was already confirmed at the highest levels rather than serving as a forum for the actual resolution of policy problems. This has subsequently been confirmed by the pro forma approval of the plan at the Fifth Congress.

A second important implication of the optimistic projection for economic growth is that a number of important and previously divisive economic policy issues have already been resolved. The most crucial of these issues are wage policy and the degree of reliance on imported foreign technology. It is frequently argued that the leadership faces a fundamental dilemma in any effort either to modify the structure of wages in manufacturing to provide greater skill incentives, for example, or to raise the average wage level. On the one hand to increase the average wage and avoid inflation would require a reallocation of investment away from capital goods and toward manufactured consumer goods. Thus the wage increase would reduce the rate of investment. On the other hand to increase wages without increasing the supply of manufactured consumer goods and cutting back on the rate of investment is a certain invitation to inflation. In this view the leadership is faced with the unpleasant choice between reducing the rate of investment and ultimately the rate of growth or abandoning their conservative monetary policy and allowing a rate of inflation that would be unprecedented in the last 25 years.

It is far more likely, however, that the modest realinement of the wage structure undertaken in late 1977, which included a 10-percent increase in the wages of almost two-thirds of all staff and workers and a limited reintroduction of bonus systems, will have a substantial positive feedback on labor productivity. This feedback would raise the rate of economic growth and thus allow the Chinese both to maintain a very high rate of investment and to step up production of manufactured consumer goods, thus avoiding inflation. In short, the wage increase is not necessarily a no-win situation for the leadership. It might reap a very substantial payoff from only a modest increase in the total wage bill.

It also appears that the Chinese have reached a consensus on the degree of reliance on imported foreign technology and the financial practices to be used to pay for imported plant and equipment. The formulation of China's Fourth 5-Year Plan (1971-75) was based on a fundamental liberalization of their approach to foreign trade-a shift from what might be generally described as a strategy of minimization of imports to what appeared to be a strategy of minimizing reliance on foreign credits. The consequence of this shift in strategy was a sharp spurt in total trade volume-indeed, 1971-74 is the only period since 1955, when net Soviet credits were terminated, during which the rate of growth of foreign trade (measured in constant prices) exceeded the rate of growth of industrial output. From the point of view of the Chinese, the timing of this accelerated pace of foreign trade, was however, most unfortunate. Changing world market conditions, that is the combination of significant price inflation and recession in the West, significantly reduced the demand for many of China's traditional exports, while at the same time forced the Chinese to import at substantially increased prices. Consequently China's terms of trade (the ratio of the prices of exported goods to the prices of

imported goods) fell sharply. Rather than drastically cutting the level of imports to maintain a balanced trade account, the Chinese chose to stretch its policy of minimal reliance on foreign credits in order to maintain a significant flow of imported plant and equipment. Evidence of this stretching came primarily in the form of Chinese acceptance of medium-term loans under the rubric of "deferred payments" which allow the Chinese to stretch out the payments for import of complete plants ("turn key projects") over a 5-year period that begins only after the construction is completed. Consequently in 1974 and 1975 the Chinese accumulated a foreign trade deficit of about U.S. $1 billion.

In addition to stretching its policy of minimal reliance on foreign credits in 1974-75, Chinese planners also attempted to shift the composition of reduced imports to avoid sharply reducing the quantity of imported plant, machinery, and equipment that are vital to achieving the modernization goals originally announced by Chou En-lai and recently reaffirmed by Hun Kuo-feng in his February 1978 speech. Specifically, although total imports fell in 1975, the value of imported plant, machinery, and equipment actually rose in 1975 to $2.2 billion. The modest fall (relative to the decline in the total import bill) in these imports to $1.8 billion in 1976, partly was due to a substantially improved harvest in 1974 and modest growth in 1975 that allowed Peking to curtail significantly the volume of imported food grains from an average of 7.3 million metric tons in 1973 and 1974 to 1.9 million metric tons in 1976. Thus at least through 1976 the Chinese attempted to maintain their imports of plant, machinery, and equipment, a marked departure from previous recessions in which capital goods imports have fallen rapidly in response to worsening domestic economic performance.

Poor harvests in 1976 and 1977 are, however, now reversing this process and the value of imported capital goods is falling rapidly as agricultural imports grow. The value of imported agricultural products roughly doubled in 1977 to about $12 billion and seems certain to be maintained at this level in 1978. Consequently, imports of plant, machinery, and equipment declined sharply in 1977, perhaps to as low as $1 billion.

Despite these unfavorable circumstances, the Chinese seem determined to resume the pattern of foreign trade of 1970-74 when imports, particularly of capital goods, were growing rapidly. Thus the Chinese seem to have resolved the divisive arguments on foreign trade strategy that marked much of 1976. A series of articles have appeared in the Chinese press to explain the necessity of selected imports of Western technology if they are to meet their very ambitious goals for economic growth. The emphasis in these articles appears to be more on the Maoist dictum of "keeping the initiative in our own hands" rather than excluding imports or minimizing foreign trade. This suggests that while the Chinese for the time being are certainly not prepared to consider direct foreign investment or even joint ventures, that the main constraints on imports will be financial rather than ideological. This view seems to be supported by the increased number of Western firms that have been invited to Peking to discuss a broad range of capital goods exports to China, as well as a step up of industrial exchange activities.

There is also evidence of a new positive attitude on the part of the Chinese toward export promotion which is rather different from that which prevailed in the past. The Chinese have adopted far more flexible attitudes with regard to provision for inspection of Chinese goods, the testing and labelling according to U.S. standards of pharmaceuticals exported to the United States and meeting the stipulations of the U.S. Food and Drug Administration for food products exported to the United States in order to expand their export markets.

The long-term trade agreements signed in the first quarter of 1978 with both Japan and the European Common Market underline_this Chinese commitment to accelerate the transfer of foreign technology to China. The accord with Japan is particularly significant since the Japanese will supply China with $7 to $8 billion of complete plants and $2 to $3 billion in construction materials and equipment during 1978-85. These imports of plant and technology will be concentrated in petroleum, coal mining, metallurgy, power generation, and transport. Over the period of the agreement, these imports will be financed by increased exports of raw materials to Japan-primarily of crude oil and coal. But the bulk of China's capital goods imports will be completed in the early years of the agreement whereas Chinese raw material exports are planned to begin at modest levels in 1978, grow moderately in 1979-81, and then increase sharply in 1982. Thus, the Chinese asked for.and were granted deferred payments, which will be underwritten by the Japanese Export-Import Bank, to finance the imbalances that will occur in the early years of the agreement. Since there will be substantial trade with Japan in addition to that covered by the long-term agreement, total trade with Japan will grow rapidly and the supply of imported capital goods will increase sharply. The agreement with the European Economic Community, which collectively is China's second largest trading partner after Japan, does not specify the volume of anticipated trade. But numerous Chinese industrial trade delegations have been visiting Europe since 1977, suggesting that there will also be an upturn in trade beginning in 1978-79.

SUMMARY AND PROSPECTS

The primary causes of China's declining economic performance since 1974 appear to be short term and political in character rather than long term and structural. The adverse influence of these shortterm elements appears to have receded rapidly, due largely to the decisive actions taken by the new government since late 1976. However, even if we could confidently assume future political stability, the target rates of growth included in the 10-year plan remain quite ambitious.

The broad targets for 1978-85 are, however, only marginally higher than those achieved during the decade prior to the recent economic decline. Thus, the 10-year plan bears little resemblance with the wildly optimistic plans that were advanced during the Great Leap Forward in the late 1950's. The planned rate of development of industry, 10 percent per year, is the same as that achieved during the 1964-74 decade. The possibility of slightly better future performance cannot be ruled out since the 1964-74 decade included the Cultural Revolution that had a significantly adverse effect on industrial production and investment. The prospects for the coming years are also

enhanced by the more realistic assessments that have been made of lagging industrial branches such as coal. After years of minimizing investments in the coal industry, the new plan envisages widespread mechanization of the industry, partly through imported equipment. This should help to alleviate chronic coal shortages that have had an adverse effect on other branches of industry.

In the agricultural sector, the planned rate of growth, from 4 to 5 percent per year from 1978 through 1985, is higher than the 3% percent annual gains achieved in the 1964-74 decade. Consequently, it seems unlikely that China will achieve the target of 400 million metric tons of food grains by 1985. Yet, because of the large investments that have already been made in irrigation systems and the ability of the Chinese to diffuse rapidly higher yielding seed varieties, the average rate of agricultural growth may approach 4 percent per year, given average weather conditions. Because of the significant decline in the rate of population growth that has been underway for some time, an average rate of growth of 3%1⁄2 to 4 percent would be a considerable accomplishment. Food grain output would be over 350 million metric tons in 1985 and per capita food supplies would be significantly higher than at present. An average annual increase of 3% to 4 percent would result in more than a 2: 1 margin between the rate of growth of agricultural output and population growth. In most other Asian countries at comparable levels of development, rates of growth of food output are barely equal to population growth.

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A return to economic performance similar to that of the 1964-74 decade, however, is dependent on two crucial conditions. First, there must be a stable political environment that is conducive to long-run economic planning. In the absence of automatic mechanisms for determining the allocation of resources, these decisions are made through a direct political process that is extremely vulnerable to disruption. If the political consensus that appears to underlie the 10-year plan should be shaken, there could be a renewed paralysis of the planning process, a deferral of investment decisions, and a decline in the rate of economic growth.

A second condition for the resumption of sustained growth is the deferral of the modernization of China's military establishment. The underlying scarcity of resources and the envisaged increase in the flow of investment to improved social services and transportation infrastructure; to scientific and technical modernization; as well as to industry and agriculture implies that the share of resources allocated to the military cannot be increased substantially. China's national defense is still to be modernized by the end of the century. But high resource costs and technical difficulties will mean that an across-theboard modernization program will have to be deferred well into the 1980's if goals in other sectors are to be met. This will not preclude either a rising absolute level of defense expenditure or significant improvements in selected weapons systems, but a systematic modernization program will depend on a more developed industrial sector.

Ironically, debate over the priority to be given to military modernization is most likely to erode the consensus upon which the 10-year plan is based. There is considerable indirect evidence of an important

Based on a projected further decline in the rate of natural increase to 1.7 percent by 1980 and to 1.3 percent by 1985. John 8. Aird, “Population Growth in the People's Republic of China," Table 2, Intermediate Model.

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