ing weight hauled per train. Motor transport has become a major provider of short-haul transport, but roads are still relatively poor and total annual truck production is fairly small. Although China's rapidly growing supplies of petroleum augurs well for the development of a modern transport system, the Chinese must still make large investment of capital in that sector which do not directly add to increases in output.18 These investments do, however, provide much of the necessary "social overhead capital" which facilitates the efficient operation of a modern economy. A good transportation network also increases production through efficiencies in input supply to producers and output distribution to end users.

One of the most important consequences of the concentration of investment fund in investments in those industries producing inputs for other industries was the limitation of investment in agricultural producers goods. The Chinese planners recognized this problem, but their expectations that the reorganization of agricultural production into collective units of production and resulting mobilization of labor effort would lead to large increases in agricultural production proved to be erroneous.19 Yet, it wasn't until the agricultural crisis in 1959-60 that the Chinese began to significantly expand those industries manufacturing producers goods for agriculture, such as agricultural machinery and equipment and chemical fertilizers. As a result, China has made great strides since 1960 in increasing the horsepower of mechanical pumps utilized in irrigation and of tractors used in cultivation (both larger tractors and smaller "walking" tractors). The main contribution of this increase in mechanization in agriculture was not merely for the purpose of directly increasing output, but to release labor for a wide range of capital construction projects in the rural areas and to allow for increased multicropping and the increased cultivation of more labor intensive, but higher yield, crops.

The growth of the chemical fertilizer industry was the most significant result of the reallocation of investment funds in favor of industries producing inputs for the agricultural sector. Historically, the Chinese have relied heavily on inputs of organic fertilizer and chemical fertilizer has become a significant input in agricultural production only recently. A significant share of this chemical fertilizer is imported, drawing upon China's scarce foreign exchange holdings. Most recently, however, the Chinese purchased 26 chemical fertilizer plants, which will soon be operating at full capacity, more than doubling the total domestic production of 1974.20

Although the change in investment priorities in the 1960's has helped to offset the earlier neglect of the production of industrial inputs for agriculture, China's needs in irrigation and drainage equipment, agricultural machinery and equipment, and chemical fertilizer

1 This is not to say that the Chinese have been unable, through intensive use of the existing facilities and equipment, to facilitate the growth of output in the economy which actually occurred: the average annual rate of increase in industrial production of 13 percent between 1952 and the mid-1970's was equaled by the rate of growth in tons hauled by the modern transportation sector. Nonetheless, modern transportation is a serious constraint on the margin in that it severely limits the rate of growth in industrial output, the rational and efficient distribution of what is produced, and desired changes in the location and structure of industry. Furthermore, although the modern transportation sector did provide the services necessary to attain the rates of growth actually achieved in the past, it did so by depending on a considerable volume of imports of transportation equipment; one-third of China's total imports of machinery and equipment from the non-Communist countries and one-half China's total imports of machinery and equipment from the Soviet Union in 1961-1973. CIA, "Foreign Trade in Machinery and Equipment Since 1952," A (ER)75-60, January 1975.

19 See the discussion of agricultural developments in part IV, this volume.

20 For a more extended discussion of the argument on this paragraph, see Robert F. Dernberger, "China's Economic Future," op. cit., pp. 102-103.

still far exceed domestic supplies. Thus, the continued rapid expansion of these industries remains a necessary condition for solving China's agricultural problem. Increases in the output of these products are very costly, that is, the marginal capital requirements for a unit increase in output are relatively high, and all indicators predict that even as the Chinese increase the use of these inputs, they will encounter declining increases in agricultural production. In other words, the costs will be relatively high and the returns may not be as great as is anticipated.

Until recently, many rural areas were unable to gain ready access to the inputs produced in the modern sector. This is due in part to the neglect of investments in the transportation system and in part to the traditional geographical location of industries which was not changed significantly between 1952 and 1973.21 Through altered patterns of urbanization and their control of rural to urban migrationin fact, their frequent reversal of this normal flow-the Chinese leadership has attempted to redress these problems. Yet, while the emergence of medium-sized industrial centers in the rural areas will reduce some of the demands on the transportation network, the development of these growing new urban centers will greatly increase the need for social overhead capital which does not directly contribute to increases in production.22

Finally, the unbalanced growth within industry has placed constraints on the growth of per capita consumption. Through a system of wage controls, the rationing of low-priced necessities, and setting of high prices for consumers durables, the Chinese leadership has been able to control the effective demand for consumers goods and most evidence seems to support the argument that the material standard of living, especially in terms of basic necessities, has not increased significantly since the mid-1950's. There has been, of course, a marked increase in the provision of public goods and services, such as health care, public housing, and education. The increased supplies of consumers durables, that is, bicycles, watches, and radios, has raised living standards somewhat, but these supplies seem to benefit primarily the industrial workers, a small portion of the total labor force. Nonetheless, the average family now enjoys a decent standard of living and deviations from this average are limited.

On the other hand, the new leadership already has adopted policies to reinforce the reliance upon material incentives, and to be meaningful, these policies must be complemented by an increase in investment in consumers goods production. Many of the industries producing consumers goods, however, have experienced periods of excess capacity during the past due to an inability of the rate of growth of agricultural products used as inputs in the consumers goods industries to keep pace with the growth of capacity in that sector. Rapid growth in the output of the consumers goods industries, as well as rapid growth in the standard of living, therefore, depend on the rate of growth of Chinese agricultural production-the main bottleneck in China's economic development as a result of the disproportionate sectoral growth in the past.

Charles Robert Roll, Jr., and Kung-chia Yeh, "Balance in Coastal and Inland Development," in the previous Joint Economic Committee's compendium of papers on China, "China: A Reassessment of the Economy," 1975, p. 88.

22 For a more extended discussion of this argument, see Robert F. Dernberger, "China's Economic Future," op. cit., pp. 103-104.

The Chinese leadership, aware of the consequences of placing priority on the development of the producers goods industries, which produced inputs for other industries, as a prerequisite to the development of the other industries, were divided between those, such as Liu Shao-chi, who argued that agriculture could be socialized into large cooperative units only after industrial development allowed for mechanized agriculture, and those, such as Mao Tse-tung, who argued that socialization of the relations of production should precede the mechanization of agriculture. The Maoist position was predicated on the belief that ever larger cooperative units would "unleash" sufficient productive powers through the mobilization of labor which would provide the increases in production necessary to satisfy both the input demand of the nonagricultural sectors of the economy and allow for increases in the standard of living as well. Thus, even without largescale investments, they believed institutional reorganization would solve their short-run production problems and mechanization would be obtained as a byproduct of the industrialization of the economy in the long run.

The Maoist position won out in the mid-1950's, but it was not long before the short-run contradictions of their position created serious problems for the Chinese. The rate of growth in the gross value of agricultural output fell during the mid-1950's and the annual level of the net grain supply transferred to the state was constant over the period 1956-57.23 This situation restricted an increase in the supply of food to urban areas, limited the ability of the state to export agricultural goods to finance imports of investment goods, and reduced agricultural products available as inputs for the consumers goods industries. Various economic indicators for 1957 reflect this situation: A decline in nonagricultural employment, a decrease in exports, an increase of only 5.6 percent in the industrial production of consumer goods, and a decline in total capital construction. In fact, 1957's rate of growth for the economy as a whole was the lowest for any year since 1949.

In 1958, the Chinese leadership launched their communization movement and the "Great Leap Forward." Favorable weather and increases in labor force participation and workdays of effort per laborer brought increases of 19 percent in grain output and 25 percent in the gross value of agricultural output in 1958. Bad weather and the delayed negative effects of this extreme socialization policy in agriculture brought on the agricultural crises of 1959-61. Output equal to the level achieved in 1958 could not be achieved again until 1965.24 As pointed out above, this crises forced the Chinese to reevaluate their development strategy and to recognize the need to solve the agricultural problem by changing their investment allocation priorities for development.

The results of this decision to change the allocation of investment in favor of the producers goods industries producing inputs for the agricultural sectors discussed above and a more detailed discussion of

23 David Ladd Denny, "Rural Policies and the Distribution of Agricultural Products in China: 1950-1959," unpublished Ph. D. dissertation, University of Michigan, 1971, p. 41.

24 In the absence of official data for agricultural production during this period, there is some disagreement in the literature over the magnitude of the declines in output in 1959 and 1960 and the length of the recovery period in the early 1960's. For a representative set of estimates see appendix A in Arthur G. Ashbrook, Jr., "China: Shift of Economic Gears in Mid-1970's," this volume. See also the discussion of developments in this period in papers by Charles Liu, "PRC Agriculture: Performance and Emerging Issues in the 1970's," and by James A. Kilpatrick and Henry J. Groen, "Chinese Agricultural Production," in this volume.

China's attempt to solve the agricultural problem in the 1960's and 1970's and the likelihood of their success in the future is discussed below. It can be noted here, however, that the results thus far have not been striking. Between 1964 and 1974, the average annual rate of increase of grain output was less than 3 percent and the Chinese have had to rely on sizable imports of grain to make up deficits in domestic supplies. Thus, agricultural development still remains the major constraint to overall economic development and increases in the standard of living; that is, it is the fundamental economic problem facing the new leadership.

This brief review was not an attempt to provide a complete or detailed description of China's economic development over the past quarter century but rather a summary of the Chinese leadership's program to gain control of resources and use those resources to achieve rapid increases in heavy industrial production which also resulted in a relatively high overall growth rate and a significant restructuring of the economy. Yet, this successful record was qualified by their failure to follow a more balanced set of priorities, resulting in serious bottlenecks with regard to such other sectors as transportation, consumption, and agriculture; bottlenecks or major problems the new leadership must solve. This is not to say, however, that the pursuit of the traditional socialist priorities in the allocation of investment in the past was unwise. Although not solving all the problems of economic development, the Chinese have created and maintained a substantial industrial base, while maintaining a somewhat stable and adequate standard of living for the population; a significant industrial base which the new leadership can build upon in their attempts to achieve the economic modernization of China.

THE FIXED PARAMETERS OVER THE NEXT DECADE

In their attempts to achieve the economic modernization of China, the new leadership will work within the context of certain fixed parameters. There is probably no dimension of China's economic, social, or political situation that can be safely assumed as absolutely fixed. Nonetheless, several characteristics of the economy are likely to remain stable over the next decade, either because the Chinese decisionmakers will be unable to change them or because they will be unlikely to want to do so. The most important of these concern China's resource base and its economic and political system.

25

As argued earlier, the fundamental obstacle to economic development in China is the need to solve the agricultural problem. Any solution must take as "relatively fixed" the available area of cultivatable land, its location, its inherent fertility, and the existing climatic conditions. Given these constraints, the Chinese peasants have been able to support almost one-fourth of the world's population with less than 8 percent of the world's cultivated area of land by means of relatively traditional, labor-intensive technology. The Chinese cannot expect to achieve a steady and significant rate of increase in agricultural output from a new lands policy. Rather, increases in output must come from higher yields; the latter obtained by a spread of

25 See the discussion in the sections on "Resource Endownment" and on "Factors of Production and Modernization" in James A. Kilpatrick and Henry J. Groen, "Chinese Agricultural Production," this volume.

double-cropping and irrigation, changes in cropping patterns, new seeds, modern input like chemical fertilizer, et cetera. The Chinese are attempting this transformation through the current program of significant technological change and intensive, rather than extensive investment in agriculture.

While the success of these programs is crucial to China's development, agricultural transformation is only a necessary, not a sufficient condition for modernization. To adequately develop an industrial base, a country must have access to raw materials and, given the very large size of the domestic market, the success of China's industrial program rests to a considerable extent on China's domestic resource base. The two most critical categories of raw materials for industrial use-namely energy and minerals are evaluated here as indicative of China's very favorable position in terms of resource endowment.26 For example, in terms of energy resources. China is among the front rank in coal, having high-quality and easily mined, but somewhat poorly distributed, reserves. China also has an extensive river system, with the third largest runoff in the world. Although these rivers' geographic features allow for the development of considerable hydroelectric power capacity with "relatively" low construction costs, 73 percent of the hydropower potential is located in the southwest of China at a considerable distance from the centers of economic activity.27 In the north, silting and irregular flows create obstacles to the utilization of rivers for power supplies. Given China's coal deposits, however, over two-thirds of China's electric power is generated in thermal electric power stations.

The ratio of energy requirements to GNP growth is between one and two for most countries; a 1-percent increase in GNP will require an increase of between 1 and 2 percent in energy supplies. Despite the very favorable endownment in coal and hydropower potential, there have been limits to the rate at which the Chinese have been able to expand their utilization of these resources and the short-run solution to China's energy needs was facilitated by the exploitation of China's petroleum deposits. Until fairly recently, while China was thought to compare favorably to the United States and the U.S.S.R. in hydroelectric power and coal reserves, it was considered low in petroleum deposits. Recent developments and gological surveys have significantly changed that pessimistic outlook to one of optimism.28 Nonetheless, the long-run solution of China's energy needs will rely on the development of the extensive hydropower capacity, which has been explicitly recognized by the new leadership. While these domestic energy resources are available for the long-run modernization of China's economy, however, the limits on their ability to develop additional capacity rapidly in the short-run will place a constraint on the rate at which the Chinese can expand industrial production over the near future.29

25 For a detailed survey of China's energy and mineral reserves, see Vaclav Smil, "Energy Production," and Kung-ping Wang, "Mineral Output and Productivity," in this volume.

27 See William Clark, "Electric Power Industry," this volume, for a further discussion of this point. The estimates of China's deposits of petroleum are undoubtedly subject to wide margins of error and are being modified as one new deposit after another is discovered. For one review of these estimates, see Selig S. Harrison, "Time Bomb in Asia," Foreign Policy, No. 20, Fall, 1975. In that source, Harrison estimates that "Peking appears likely to reach the current production level of Saudi Arabia by 1988 or soon thereafter." Idie., p. 4. For knowledgeable and more up-to-date estimates, see Vaclav Smil, "Energy Production," and Kung-ping Wang, "Mineral Output and Productivity," in this volume.

For a more detailed analysis of these energy constraints on China's future growth, see William Clark, Electric Power Industry," and Vaclav Smil, "Energy Production," in this volume.