technological capabilities by relying on the training of experts, of acquiring the most advanced knowledge available abroad, by developing the necessary facilities for basic research, and to test new innovations more carefully and adequately before they are introduced in actual production. In this way, the new leadership obviously believes they can better achieve those innovations which will lead to sustained growth in agricultural production.43

The results of these efforts on a few model communes during the 1970's have indeed been impressive. In fact, it was the observed results for these model communes which led the Chinese leadership to adopt this program calling for the nationwide emulation of what the model communes had done as the means of solving China's agricultural problem. Yet, their failure to appreciate the extent to which locational (being near large cities, having good transportation facilities, et cetera), historical (being located in areas of traditionally high yields), or special (receiving considerable state aid) factors explained these satisfactory results, it is very doubtful that other areas, that is, those with low and unstable yields, will be able to easily emulate the experience of these model areas. Most important is the key role played by the availability of water in the achievement of this hoped for transformation of China's traditional agriculture. Quite simply, there are a good many social, economic, and technical constraints which limit the suitability of Tachai-type or advanced county campaign for serving as the solution to China's agricultural problem; constraints which will at least significantly restrict the kinds of increases in yields which havebeen observed in the model communes." 44

In other words, the Chinese are unlikely to achieve a breakthrough during the next decade in their attempt to solve the agricultural problem. As a result, agricultural development will continue at the pace of 2 to 3 percent, remaining as the major constraint on China's overall economic growth and on significant increases in the standard of living of the Chinese people."

See the speeches by Teng Hsiao-ping and Hua Kuo feng to the National Science Conference, attended by approximately 6,000 representatives, held immediately after the Fifth National People's Congress in March of 1978. These speeches can be found in Peking Review, No. 12, March 24, 1978 (Teng's speech) and No. 13, March 31, 1978 (Hua's speech). The document discussed and adopted by this conference was titled the Outline National Plan for the Development of Science and Technology, 1978-85. As is true of the longrun economic plan, 1975-85, this new policy adopted for the development of China's science and technology is merely the "rehabilitation" of a plan originally sponsored by Teng Hsiao-ping in 1975. Due to pressures from radical leaders, then able to use Mao's critical support, these plans were shelved in 1975 and Teng Hsiao-ping was removed from his positions of power.

44 There may appear to be an inconsistency in the argument in this section of the paper. On the one hand it is argued that the Chinese will find it increasingly difficult to utilize the means used in the past (that is, irrigation, double cropping, etc.) to obtain greater agricultural growth in the future and that the marginal productivity of current inputs (that is, fertilizer, et cetera) will decline as their level of use increases. In other words, the Tachai or Advanced County Campaign won't work as a means of achieving a breakthrough in China's agricultural problem. Yet, in the following paragraph in the text, we argue that agricultural growth in the future is likely to remain what it has been over the past decade or so. These arguments are made compatible for the following reasons. Although given increases in agricultural output will become more difficult (that is, more costly), the Chinese leadership has already decided to devote the resources necessary for obtaining increases in output on a much greater scale than in the past. Although the marginal productivity of current inputs on each piece of land declines with increases in the level of inputs used, the growth of agricultural output throughout China in the past was due, in part, to the increase of these inputs in certain areas of China. Thus, diminishing returns should become an important problem in those areas, but Chinese agriculture contains many areas where the use of these inputs still has a relatively high marginal productivity. Quite simply, a though the expected returns obtained, on the average, from a given amount of investment and effort in Chinese agriculture in the future is smaller than in the past, the expected increase in the total scale of efforts and attempt to create a more balanced and complementary mix of inputs over a larger area should enable the Chinese to maintain a rate of growth in total agriculture approximately equal to that in the past.

45 The same conclusion was argued in the two articles on agriculture in the previous Joint Economic Committee compendium of papers on the Chinese economy: Dwight H. Perkins, "Constraints Influencing China's Agricultural Performance," and Alva Lewis Erisman, in China: Agriculture in the 1970's," China: A Reassessment of the Economy, 1975." It also is consistent with the agricultural papers presented in this volume: Charles Liu, “PRC Agriculture: Performance and Emerging Issues in the 1970's," and James A. Kilpatrick and Henry J. Groen, "Chinese Agricultural Production."

Industry

Increases in industrial production are obtained by increasing either the amount of physical capital, raw materials, and labor used for production or the productivity of these inputs. Since China is adequately endowed with raw materials and labor supply, the dominant constraint on its industrial development is the need to maintain its recent rate of investment in physical capital. The significant industrial growth since 1949 was made possible by a very high rate of investment. Despite the claims made in Hua's speech, that is, more total investment in 1978-85 than in the entire previous 28 years, the Chinese will have greater difficulty in maintaining both that high rate of investment and, more important, the rate of return on that investment in the coming years.

46

Although a host of arguments can lead to this conclusion, only the signal reasons will be presented here. The damping of the rate of investment will result from the pressures tending to increase the rate of consumption. Because of rationing and the relatively stable real wages that have existed for the past few decades, considerable pent-up demand undoubtedly exists for higher standards of living. In recognition of this problem, the new leadership announced pay increases for approximately 60 percent of the industrial workers, that is, those in the lower wage scales, during the past year. But, if the Government is to continue to use material incentives, it will have to effect steady increases in wages in order to obtain increases in productivity. Since agricultural production is growing only slightly faster than population, rapid increases in manufactured consumer goods, especially durables such as bicycles, sewing machines, watches, radios, et cetera, may alleviate this problem somewhat but will not solve it.

The source of the demand for a higher standard of living is found in both the industrial and the agricultural sectors. Nonetheless, the fact that industrial workers already enjoy a relatively high standard of living has forced Peking to control strictly the rate of migration from the rural areas to the urban industrial centers. Although the recent drive to create rural, small-scale industries has reduced the rural-urban differences in income levels, it has not significantly altered the differences in income between industrial and agricultural workers.47 The relatively low standard of living of the average Chinese peasant, its slow rate of growth, the longstanding promise of equitable income distribution, and the necessity to sustain both the labor effort and political loyalty of the peasants will create a pressure that the Chinese leadership will be unable to deny to devote a greater share of the total GNP to consumption.

Whatever the rate of investment in the future, the growing importance of several alternative claims on investment will tend to reduce the share that has been allocated to industry-especially the

48 Gross domestic capital formation accounted for approximately one-fourth of gross domestic product during the 1950's; more than half of this capital accumulation was in the industrial sector. Reliable data are not available for the 1960's or 1970's, but the Chinese undoubtedly maintained an investment rate above 20 percent and although agriculture has enjoyed a much higher priority since the 1950's, approximately 40 percent of total investment must still go to industry.

47 This refers to national averages and does not include those individual communes that have become quite prosperous and whose members enjoy a standard of living quite similar to that of industrial workers. Most of these prosperous communes are to be found in the neighborhood of large metropolitan centers; thus they have large markets close by in which to sell their subsidiary products.

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 county— level. 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 1.42.49 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

48 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.

80 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.

1 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.