third countries and residual supplies of agricultural products during peak periods of Chinese demand for these products. Several major obstacles will prevent the United States from playing a major role, that is, compared with Japan and Western Europe, in the projected rapid growth in Chinese imports over the next 7 years. Foremost among these obstacles-mostly political-are the following: (a) Considerations which make it very difficult for the United Statesunlike any other major industrial country-to grant de jure recognition to the People's Republic of China and withdraw that recognition from the Republic of China; (b) considerations which have made it difficult for the United States to settle the issue of Chinese frozen assets in this country and American claims on assets and debts in China; (c) the considerations which have made it difficult for the United States to grant "most-favored-nation" tariff rights to Chinese exports in the normalization of commercial relations; (d) the system of legal controls in the United States on commercial trade with China; and (e) the difficulty which can be expected in any future attempt to remove U.S. controls on the extension of long-term credit for financing exports to China.70 None of these "difficulties" are insurmountable, but little or no progress has been made in solving them since the early 1970's and, as long as they remain, the United States will undoubtedly continue to follow Japan and then Western Europe as the major contributors to China's rapidly growing import trade over the next 7 years. CONCLUSION The discussion and arguments in this paper, as in a good many of the other papers in this volume, has emphasized the serious economic problems the new leadership faces in its attempt to modernize China's economy, and reach the front ranks of the industrialized world by the end of this century. Other papers in this volume present analyses and conclusions which are significantly more optimistic about China's economic future. Even those which emphasize the economic problems in China's future, such as this paper, also include arguments which would lead to a rather favorable interpretation of China's past record of economic development and possibilities for continued growth in the future, although nowhere near as optimistic as the prospects held forth in Hua's speech to the Fifth National People's Congress. 70 For a detailed discussion of these considerations which lead to these difficulties and of the difficulties which serve as obstacles to greater Sino-American trade, see Eugene A. Theroux, "Legal and Practical Problems in the China Trade," in the previous Joint Economic Committee compendium of papers on China's economy, "China: A Reassessment of the Economy," 1975, and Martha Avery and William Clark, "Sino-American Commercial Relations" and Stanley Lubman, "Legal Aspects of PRC Trade," in this volume. Two papers in this volume attempt to estimate the effect the granting of most-favored-nation tariff privileges to China's exports would have on Sino-American trade; see James Kilpatrick and Phillip Lincoln, "MFN and the China Trade," and Helen Raffel, "Tariff Restrictions and PRC Export Potential," in this volume. It should be noted that most of the papers in this volume deal with topics central to the economic problems and potential of China's economic development as would be viewed from within China itself; the papers in this volume referred to in this footnote are included because of the great concern with these problems of Sino-American trade by the American public and Government and these latter problems, especially MFN, are not nearly as crucial in determining China's economic future as they are in determining the future political relations between these two countries. For a discussion of the problems which are preventing the introduction of the necessary means of providing long-term financing of U.S. exports to China, see Frank Ching, "Rough Going Forecast for U.S. Proposals To Allow China Loans," The Asian Wall Street Journal, April 14, 1978. For example, all of the papers in this volume recognize the record of positive rates of growth in both agriculture and industry in China's economic development over the past 28 years, which have created a significant economic base for the new leadership to build on in their attempt to modernize China's economy. More important, all recognize the tremendous potential for future growth and even the more pessimistic of the papers that follow believe the new leadership's economic plans and policies will achieve a considerable degree of success; that is, further increases in GNP per capita. Perhaps most important of all is that these economic plans and policies of the new leadership indicate domestic economic rationality and stability and a far greater reliance on normal commercial relations with the industrialized countries of the non-Communist world than was true in the past. RECENT CHINESE ECONOMIC PERFORMANCE AND BY NICHOLAS R. LARDY* CONTENTS 1 Page In January 1975, Chou En-lai, in a major address to China's Fourth National People's Congress, called for the "comprehensive moderni- zation of agriculture, industry, national defense, and science and technology before the end of the century." In the 1976-85 decade, These unfavorable developments naturally call into question the very ambitious economic goals contained in the "Outline of the 10-Year Plan for the Development of the National Economy, 1976- 85," that were announced to the Fifth National People's Congress by Hua Kuo-feng in February 1978.2 The purpose of this paper is to review recent developments in light of China's record of economic development over the past 25 years and to analyze several alternative hypotheses that may explain the relatively poor economic performance over the past few years. This analysis highlights the critical problems that Chinese economic planners face in industry, agriculture, and foreign trade and then assesses, on the basis of currently available evidence, the prospects for achieving the goals incorporated in the In long-term and comparative perspective there are at least three salient characteristics of post-1949 economic development in China: Exceptionally high rates of economic growth, rising rates of capital formation, and extremely modest dependence on foreign financial While advocates of the "growth is obsolete" view thrive in the West, the Chinese leadership has always believed that rapid economic growth provides the most effective mechanism to transform China into a modern state and to raise the standard of living of its people. Indeed, China's average annual rate of economic growth between 1952 (the year in which post-civil war economic recovery was basically completed) and 1974 was approximately 6 percent or about 4 percent in per capita terms.3 At these rates total and per capita output double in 12 and 18 years respectively. Most notably industrial growth under the Communist regime has been extraordinarily rapid, doubling on the average every 6 years. While agricultural growth has been much more modest it has more than kept pace with the growth of population, a remarkable achievement given China's high population density per unit of arable land. This economic performance is most usefully judged in historical and comparative perspective. Although some other developing countries have grown as fast, only a few have sustained a 6-percent average rate of growth since World War II. China's economic performance is also impressive when it is compared with other large, densely populated Asian countries where per capita incomes were initially (late 1940's) comparable to those of China. In India, for example, another large continental country faced with the difficult problem of raising agricultural output on a relatively fixed quantity of arable land, the average annual rate of per capita economic growth between 1950 and the early 1970's was only 1.1 percent, roughly one-third that of China's. Pakistan has done somewhat better, with a rate of per capita growth slightly over half that achieved by China. In historical terms as well, post-1949 economic growth has been quite rapid. While there were isolated pockets of economic growth and modernization in China prior to 1949, these were restricted to small foreign-dominated coastal enclaves such as Shanghai and the northeast (Manchuria) that had developed under Japanese occupation and control. The economy as a whole failed to exhibit any sustained growth of per capita output in the half century prior to 1949. A second notable characteristic of the Chinese economy since 1949 is the unprecedented rate of capital formation (the ratio of gross investment to gross output). Estimated at about 5 percent for the 1930's and much less for the civil war years, it rose to 10 percent by 1952 (the beginning of the first 5-year plan), to 20 percent by 1957 (the end of the first 5-year plan), to 25 percent or more in the early 1970's.' These are rates of capital formation which are unusually high for a country of China's low level of economic development. They are, for example, almost twice the rates achieved in India and Pakistan. This high rate of investment has two important implications. First it is an antidote to the naive view that China's economic development strategy under Mao was concerned primarily with the pursuit of Dwight H. Perkins, "Issues in the Estimation of China's National Product." Harvard Institute of Economic Research Discussion Paper No. 471, April 1976. Robert Michael Field, "Civilian Industrial Production in the People's Republic of China: 1949-74," In "China: A Reassessment of the Economy," p. 149. John Mellor, "The New Economics of Growth: A Strategy for India and the Developing World." Ithaca, N.Y.: Cornell University Press. Dwight H. Perkins, "Growth and Changing Structure of China's 20th Century Economy," in "China's Modern Economy in Historical Perspective," ed. by Dwight Perkins. Stanford, Calif.: Stanford University Press, 1975, pp. 122-123. Robert Michael Field, "Real Capital Formation in the People's Republic of China: 1952-73," unpublished manuscript, July 1976. revolutionary ideals rather than economic progress. Clearly, revolutionary ideals have been important, but they have not usually overridden the overwhelming priority accorded to rapid economic growth. Secondly, these high rates of investment imply that the Chinese Government has been successful in deferring wage increases in the industrial sector in favor of reinvesting profits to finance further industrial growth. This, in turn, has important implications that I will pursue below. Finally, China's economic development has depended less on foreign financial aid than any other successful developing country since World War II. Even during the 1950's, Soviet loans in aggregate terms were relatively modest-about $1 to $2 billion over a period of 10 years. Repayments began quickly and by 1955 repayments to the Soviets exceeded new loans. During the decade from 1955 to 1965 the Chinese repaid their loans from the proceeds of their trade surpluses. At the same time that the Chinese began to repay their debt to the Soviet Union in the mid-1950's, they also initiated their own foreign economic assistance program. Since 1955 they have granted over $7 billion of economic and military aid-a substantial net capital outflow for a country of China's relatively low level of economic development. Of this flow, over half has consisted of economic aid to other lessdeveloped countries. Although aid expenditures have declined considerably in recent years, since 1970 they have averaged about $400 million per year. In short, China is the only less-developed country that has not only relied minimally on foreign credits, but also has been able to sustain a rather successful foreign assistance program of its own. Again, the comparison with India is instructive. India, since independence in 1947, has run an almost continuous foreign trade deficit. This deficit has been financed by foreign aid and capital inflows, primarily from the West, but in more recent years from the Soviet Union as well. Over the two decades from 1950 to 1970, India was the recipient of over $13 billion of net resource transfers (defined as imports less exports). India, in fact, has been the largest recipient of developmental aid and concessionary loans in the world. Despite this generous assistance, which financed 15 to 20 percent of India's capital investment during these two decades, India's rate of growth of gross national product in per capita terms has been about one-third that of the Chinese. In the view of some observers, the refinancing of India's cumulative external debt seems likely to become a regular feature of the international monetary scene. RECENT ECONOMIC PERFORMANCE In marked contrast with this favorable long-term record of economic grown and minimal reliance on foreign financial credits, China's economic performance in the past 4 years has been comparatively unfavorable. The rate of economic growth since 1974 has fallen far below the long-term average, and an unprecedented balance-of-trade deficit was incurred in 1974 and 1975. These developments have beset John Franklin Copper, "China's Foreign Aid in 1976," "Current Scene," vol. 15, Nos. 6 and 7 (JuneJuly, 1977), p. 13. John Mellor, "The New Economics of Growth." |