Although the ratio of the rates of growth in heavy industrial production to light industrial production will decline to something like 1.5 to 1, both rates of growth will be somewhat less in the future than they have been in the past; that is, decline to 9 to 10 and 6 to 7 percent, respectively. The reasons for a decline in the rate of growth of output in the producers goods industry have been outlined above. As for the light industrial sector, output in that sector is heavily dependent on agricultural inputs and, hence, will be seriously constrained by the relatively slow rates of growth of agricultural output. Furthermore, to maintain necessary increases in the production of foodstuffs, foodcrops will continue to be given priority over industrial crops in the use of cultivatable land. Therefore, the inability to significantly increase the production of these industrial and commercial crops can be expected to lead to Peking's continued reliance on the rationing of such products as textiles and edible oils and the dependence on imports to sustain the increased production of industrially produced consumer goods.

Foreign Trade

As long as the new Chinese leadership adheres to the present policy of self-dependency in foreign trade, that is, does not seek long-term foreign loans, the magnitude of the import requirements which follow from the very large-scale investment and industrial development program outlined in Hua's speech can only mean that foreign trade will remain as a very severe bottleneck to China's future economic development. Without foreign borrowing, China's import capacity is limited by export earnings and China's exports will continue to be dominated by the export of raw and processed agricultural products and raw materials. Not only does our forecast indicate that the rate of growth of China's agricultural production over the next decade will be relatively low, the domestic demands for that output will be increasing rapidly: that increase in demand coming from the increasing standard of living, the growth of the urban industrial labor force, and the growth of the consumers goods industries. As for raw materials, although well endowed in minerals, the Chinese must rapidly expand their exploitation of these resources for the purpose of satisfying their own needs of industrialization.

Quite simply, if the new leadership plans to achieve the targets for agricultural and industrial growth presented by Hua for 1985, the very attempt to achieve those targets will put tremendous pressure on the new leadership to seek foreign loans to remove this constraint on China's future growth. Yet, perhaps due to their experiences with the Russians during the 1950's and due also to its being a fundamental ideological principle over the past two decades, the Chinese leaderships has yet to change their policy of being unwilling to engage in long-term borrowing to finance their import needs. Western experts, and even the Chinese themselves, have offered the opinion that China's development of petroleum exports may be the means for alleviating the constraints placed on their import capacity. Indeed, petroleum exports have become an important and growing export commodity and will play an important role in their barter-trade with Japan over the

next decade. Nonetheless, China's domestic needs for energy as a result of industrialization and both technical and economic difficulties in obtaining ever-growing supplies of petroleum for export will limit the ability of this "liquid gold" to solve China's balance of payments over the next decade.52

In any event, the rapid growth in China's exports over the past decade is included in the past trend of China's export capacity, which is used here to forecast the growth of China's exports in the future. In making this forecast, our pessimistic forecast, we assume the Chinese will not engage in borrowing long-term loans from abroad, although even with our pessimistic forecast there will be tremendous pressure on them to do so. On the other hand, it is very difficult to imagine how they can realize the very optimistic forecast presented by Hua without long-term borrowing from abroad.

The procedure used to obtain a forecast for the likely trend in China's exports between 1975 and 1985 is really quite simple. The statistical relationship between the rate of growth of exports and rate of growth of China's GNP was quite stable over the past 25 years, as was the relationship between the rate of growth of exports and the rate of growth of agricultural production. Using either ratio and our forecast for the rate of growth of China's GNP and agricultural production over the next decade, the resulting forecast of the growth of exports is the same: 5 to 6 percent.53 Thus, assuming that there will be no changes in current policy regarding foreign borrowing or investments and in the desired level of self-dependency or foreign trade dependency, the likely rate of growth of both China's imports and exports over the next decade is approximately 5 to 6 percent. Whether or not they should or will be forced to change these policies is, of course, one of the most important policy questions facing the new leadership and is one of the major policy options they face which is discussed in the next section of this paper.

A convenient summary of each of the above forecasts for the growth of China's economy over 1975-85 and their comparison with those included in Hua's speech to the Fifth National People's Congress is presented in table 1. The comparison readily shows why those resulting from the analysis in this paper can be labeled "pessimistic" and those presented by Hua labeled "optimistic." Yet, it is important to recognize that even the set of more "pessimistic" estimates indicates the new leadership should be able to achieve considerable progress in the economic modernization of China by 1985.

52 See the papers by Hedija Kravalis, "China's Export Potential," and Kung-ping Wang, "Mineral Output and Productivity," this volume.

53 This forecast is also consistent with that implied in the paper by Hedija Kravalis, "China's Export Potential," in this volume.

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

1 National Foreign Assessment Center, CIA, "China: Economic Indicators," ER77-10508, October 1977. 2 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.

a 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.

4 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.

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

16 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.

18 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" assumptions regarding 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.