The failure to stave off such a challenge could greatly jeopardize the political stability which would be absolutely essential to the success of China's modernization efforts. In the short run, political stability also depends on the cohesiveness of the various elements that have made up the post-Mao leadership. Recent political events in Peking, including major decisions and appointments approved by the Fifth NPC, have provided an appearance of political unity and stability. Yet differing factional interests still exist. In the next few years, unity and stability will require a durable, cohesive coalition of all leadership elements.

The current drive to improve efficiency is aimed at certain facets of economic operations in which output could be raised through better utilization of the existing resources. But certain types of economic inefficiency are found deep rooted in socialism and socialist institutions themselves. The socialist systems of centralized control over resource allocation, price formation, success criteria, and a host of other procedures in economic decisionmaking are designed to assure resource use in conformity with planners' preferences rather than with an economic optimality. The resultant inefficiency, therefore, cannot be removed without fundamental reforms.

Economically, as indicated above, the greatest bottleneck lies in the agricultural sector. The success of the four-modernizations program will hinge critically on the Chinese ability to expand agricultural output considerably faster than population growth. Since the early 1950's agricultural production in China, growing on the average at 2 to 3 percent a year, has merely kept pace with population increases. In spite of massive efforts to construct farmland capital projects, particularly in the past decade, China's agriculture is still vulnerable to changes in natural conditions. At the same time, birth control and late marriage, while beginning to show some effects on population growth especially in the cities, have a long way to go in reducing the overall rate of increase.

To finance the modernization program and allow for a moderate increase in the standard of living, China now has set up a rather ambitious plan to lower the rate of population growth to below 1 percent within 3 years and step up the rate of agricultural growth to 4 to 5 percent in each of the 8 years from 1978 to 1985.98 To achieve these targets will be extremely difficult, if not impossible. Without very favorable weather conditions and major technological breakthroughs, it will be highly unlikely that China can obtain the annual rates of increase targeted for agricultural production.

Certain other economic sectors, particularly electr c power and transport, have developed into major bottlenecks brought about by years of relative neglect in investment allocation. The slow progress of these two sectors, considered as "vanguards" in the Chinese economy, ,99 is likely to constrain China's industrial growth in the immediate years ahead. To assure rapid industrial expansion in the 1980's will

$7 For a discussion of economic inefficiency under socialism, see Abram Bergson, "The Economics of Soviet Planning", New Haven: Yale University Press, 1964, especially chap. 14; and Joseph Berliner, "The Innovation Decision in Soviet Industry," Cambridge: MIT Press, 1976.

Hua's Report to the Fifth NPC.

SPC, "The Great Guideline for Socialist Construction," People's Daily, Sept. 12, 1977, pp. 1, 2, 4.

require power and transport to grow more rapidly than industry as a whole.1

The shortage of technical manpower will also become a major constraint. The extent to which it will inhibit industrial growth depends on how fast the loss of half a generation in education and basic research will be recovered and on how effective the new educational system will be in turning out sufficient numbers of advanced engineers and scientists.

Between 1952 and 1977 the rate of industrial growth in China averaged about 10 percent a year. China will have to stay at least at this rate to attain its stated goal of accelerating economic progress. Depending on the degree of success that China may have in reducing economic inefficiencies and in enhancing technological progress, industrial growth during 1978-85 could proceed at an annual rate of over 10 percent. In view of the various constraints enumerated above, sustained industrial growth at a rate higher than 12 percent a year seems unlikely. As the industrial production base grows over time, however, it will become increasingly difficult to sustain these high rates of growth during 1986-2000.

2. China's Projected Relative Economic Position

To gain some idea as to China's future economic position relative to the major industrial countries, an attempt is made here to project China's gross national product (GNP) to 1985 and 2000 and compare it with the projected GNP's for the United States, the Soviet Union, Japan, and the countries of the European Economic Community as a whole. Bearing in mind that the GNP estimates for China are subject to a considerable margin of error and that an international comparison of GNP's is fraught with problems and difficulties, the projection provides orders of magnitude with respect to probable changes in China's future economic capabilities relative to the other major powers. The projected estimates for the major industrial countries. were made on the assumtpion that their GNP's during 1977-2000 would grow at rates somewhat lower than those attained during 1960-76. As a latecomer in modern economic development, however, China's GNP in the balance of the century can be expected to rise faster than in the past, provided that the country succeeds in implementing its modernization program. But as development proceeds, the rate of growth is likely to gradually slow down.

Assuming the 10-year economic plan (1976-85) will see average annual rates of growth before 1985 in the probable ranges of 3 to 4.5 percent for agricultural production and 10 to 12 peecent for industrial production and assuming further the resultant GNP growth rates would range from 6.5 to 8.5 percent a year,2 compared to an annual rate of 6 percent during 1952-76,3 the projected GNP for China in 1985 will lie between 570 and 675 billions of constant 1976 U.S.

1 Clarke's study of China's electric power industry shows that the ratio of the growth rate of the electric power industry to that of the industry as a whole was 1.6 during the period 1952-75, but declined to 1.3 during 1971-85. He projects the ratio at 1.3 for the period 1977-85. See Clarke's paper in this volume.

* This range was derived on the assumption that during 1976-85 the average annual growth rates would be 3 to 4.5 percent for agriculture, 10 to 12 percent for industry, and 5 to 7 percent for the service sector, and that in 1975 agriculture contributed 37 percent to China's GNP, industry, 38 percent and services, 25 percent. The estimates of various sectors' contribution to GNP were based on Robert F. Dernberger, "The Economic Consequences of Defense Expenditure Choice in China," in Joint Economic Committee, China: A Reassessment of the Economy, 1975, pp. 467-499.

3 National Foreign Assessment Center, China: Economic Indicators, Washington, D.C., Oct. 1977, p. 3.

dollars. For the period 1986-2000, the probable ranges fo annual growth rates are assumed to decline to 2.5 to 4 percent for agriculture and 8 to 10 percent for industry, resulting in a range of GNP growth rates from 6 to 7.8 percent a year. China's GNP in the year 2000 is thus projected at a level between 1,367 and 2,094 billions of constant 1976 U.S. dollars. These ranges of estimates for 1985 and 2000 represent reasonable expectations of what GNP levels could be achieved through the modernization effort. The attainment of levels significantly below the lower estimates would indicate the failure of the four-modernizations program to reach its stated economic goal. On the other hand, the probability of achieving levels considerably above the higher estimates will be small without very major ideological modifications, institutional reforms and technological breakthroughs.

TABLE 1.-DISTRIBUTION OF GROSS NATIONAL PRODUCTS OF 5 MAJOR POWERS, 1976, 1985, AND 2000

1976 GNP figures are based on Central Intelligence Agency, Handbook of Economic Statistics, 1977, Sept. 1977, p. 31, Average annual growth rates of GNP for both 1977-85 and 1986-2000 are assumed to be 3.5 percent for the United States, 4 percent for the European Economic Community, 4.5 percent for the U.S.S.R., and 7 percent for Japan. China's GNP is projected on the basis of two different ranges of growth rates for 1977-85 and 1986-2000. Projection I which gives the lower end of the estimates assumes an average annual growth rate of 6.5 percent for 1977-85 and 6 percent for 1986-2000. Projection II which shows the higher end of the estimates is based on an average annual growth rate of 8.5 percent for 1977-85 and 7.8 percent for 1986-2000. The rationale for the selection of these growth rates and the resulting range of GNP estimates for 1985 and 2000 are explained in the text and in footnotes 2 and 4.

The above table shows the GNP distribution of the five major powers in 1976 and the distribution projected for 1985 and 2000 according to the assumptions made above. In 1976, the five major powers combined accounted for about 70 percent of the world's GNP. Of these five major powers' total GNP, China's share in 1976 was only 6.7 percent; it produced less than one-fifth of the level of the world's largest producer, the United States, and some 60 percent of the level of fourth largest, Japan. A successful modernization drive in China could increase its share to 8 to 9 percent by 1985 and 10 to 14 percent by the year 2000. With the most optimistic estimate, China's GNP would still rank last among the five major powers by the end of the century, but could reach over half of the U.S. level and more than 70 percent of the Japanese or Soviet level."

4 On the basis of the estimates of various sectors' contribution to GNP in 1975 and the growth rates assumed for these sectors during 1976-85, as explained in footnote 2, the distribution of GNP among the three main sectors in 1985 can be estimated as 28 percent for agriculture, 49 percent for industry and 23 percent for services. Assuming that during 1986-2000, the range of annual growth rates are 2.5 to 4 percent for agriculture, 8 to 10 percent for industry, and 4 to 6 percent for the service sector, the average annual growth rates of GNP can be derived in the range from a low of 6 percent to a high of 7.8 percent.

It should be noted that in terms of GNP per capita China is not a world power, and in all probability will not become a power by the end century. In 1976, GNP per capita in China was only $340, while the figure was $7,860 for the United States, $5,330 for the European Economic Community, $3,590 for the Soviet Union, and $4,880 for Japan. (Central Intelligence Agency, Handbook of Economic Statistics, 1977, pp. 18-19.) Even with the most optimistic assumption that the annual rate of population growth will be reduced to 1 percent within 3 years, as planned, and will remain at this rate in the balance of the century, and that GNP by the year 2000 will reach the higher end of the range estimates, China's GNP per capita by the end of the century will come to only $1,735, a level comparable to the figure for Iran, Hong Kong, and Mexico in 1976.

CHINA: SHIFT OF ECONOMIC GEARS IN MID-1970's

BY ARTHUR G. ASHBROOK, Jr.

CONTENTS

Page

I. Key findings.

II. Introduction: Organization of the paper_.

III. Three political upheavals: Damage assessment...

204

209

210

IV. Agriculture: Expanded capacity, mediocre output gains.
V. Industry: Bottlenecks and uneven growth___.
VI. Military industry: Continued restraint_

214

217

219

VII. Foreign trade: The cutting edge..

220

VIII. Living standards: Impatience with moderate advances.
IX. Population: Initial successes in control program.......
X. Prospects: Moving ahead at reduced rates..

APPENDIXES

A. Updating of simplified GNP accounts__.

B. Sources of information on the Chinese economy.

222

224

225

229

233

TABLES

1. China: Economic results, 1949-77-

2. China: Major economic indicators, 1949–77.

3. China: Line items in calculation of GNP, 1949-77

1. For much of 1975-77-the 3 years since the publication of the last Joint Economic Committee volume-the economy of the People's Republic of China moved ahead erratically without firm commands from the center. A fierce power struggle over the succession to Chairman Mao Tse-tung precluded unified economic policy guidance.

2. After Mao's death on September 9, 1976, the new governing faction under Hua Kuo-feng moved swiftly to arrest its chief radical opponents, the Gang of Four, and to begin the process of "restoring great order across the land." The Fifth National People's Congress, convened in late February 1978, approved an ambitious 10-year economic plan (1976-85) to accelerate the modernization of China's Marxist-Leninist society.

3. Economic damage from the political turbulence of recent years, while serious, was less than the losses suffered during the 1967-68 peak of the Cultural Revolution and far less than the losses of the Great Leap Forward (1958-60). As the Soviet-style economic system has taken root, political upheavals have had less and less impact on the daily workings of the economy and its growth patterns.

4. Direct economic damage in 1975-77 mainly took the form of sizable losses in potential industrial output, due to transportation tieups, shortages of coal and steel, and failures of economic administrators in coordinating inputs with outputs. Other, less direct, damage

stemmed from a lowering of factory discipline, fear of managers to take initiatives, failure to exploit available domestic and foreign technology, the protracted standdown in higher education, and the general irresolution in central economic policy.

5. Even though growth in industry, agriculture, and foreign trade was stunted in the 3-year period, important additions were being made to capital plant. Several big petrochemical plants and other modern industrial facilities were commissioned; major water control and land reclamation projects were pushed forward; and the rail and road networks were upgraded and extended into new areas. Investment amounted to a healthy one-quarter of gross national product. 6. Similarly, despite prolonged disputes over how to reestablish the higher education system, human capital was accumulating on a broad front. Primary and secondary schooling expanded, and millions of Chinese workers increased their on-the-job mastery of modern industrial and agricultural methods.

7. Behind the political turbulence, most households experienced small improvements in living standards, through the growth in the number of higher paying jobs, the greatly increased stock of consumer durables in household use, the self-help improvement of rural housing, and the continued grudging permission for private plots, handicrafts, and trade.

8. While remaining well below the 1970-71 peak, the production and procurement of military hardware rose gradually in 1975-77, and the modernization of the armed forces proceeded at a deliberate pace.

9. The population control program, which is being successfully extended further into the countryside, has helped bring the national population growth rate below the 2.3-2.4 percent rates of 1967-71, with rates under 1.5 percent in prospect by 1985. The program has begun to have substantial impact because its goals are consistent with most of the modernizing trends in Chinese society, for example, improvements in health care, education, benefits for the elderly, and opportunities for women.

10. The post-1960 blackout on economic statistics was partially lifted in early 1978, when several specific national economic targets for 1985 were announced. Otherwise, the planning and statistical organs over the last 3 years continued to release only scattered percentage figures, which implicitly confirm the tentativeness of economic planning and the spottiness of economic results.

11. In addressing the problems of economic modernization, the fledgling Hua government already has stiffened labor discipline, raised the wages of urban workers in the lower grades, begun to restore educational standards, and encouraged the wider import of foreign technology. Vice-Premier Teng Hsiao-ping-brought back from political banishment for the second time, as the de facto executive officer of the PRC-has sparkplugged this revived emphasis on hard work, increased output, and industrial expertise.

12. In the period 1978-80, the goverment expects to break bottlenecks in steel and coal production, move aggregate output closer to the economy's capacity, and further make up for recent neglect of science and technology.