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the current leadership with the most profound set of economic problems China has confronted in over a decade. The paragraphs below will detail the extent of the economic downturn and examine a number of hypotheses that have been suggested to account for the decline in economic performance of recent years.

Most significantly, agricultural output during the 2 years 1976-77 does not appear to have risen significantly above the level of the 197475 harvests.10 As a result, China's imports of food grains increased sharply to almost 7 million metric tons in 1977 and will remain above average this year. This, of course, has absorbed a considerable portion of China's foreign exchange earnings and has depressed China's program to import modern plant, machinery, and equipment from the West. Poor performance has not been limited to food grains. Output of major industrial crops such as soybeans and rapeseed has also grown relatively slowly while cotton output has declined sharply.

Equally important, China's rate of industrial growth has fallen to about one-half of the long-term rate of 12 percent that had been achieved between 1952 and 1973." Industrial output grew by less than 5 percent in 1974 and then recovered to about 15 percent in 1975.12 In 1976, industrial growth came to a standstill or perhaps even registered a decline of about 5 percent.13 Several provinces were particularly affected, with decline of industrial output of 20 percent or more. 1977 was a year of rapid recovery with industrial output growth apparently approaching 14 percent. As a result the level of industrial ouput in 1977 was substantially less than it otherwise would have been, and industrial investment was significantly depressed, particularly in 1974 and 1976.

14

Finally the decline in China's economic performance over the past few years was reflected in the emergence of a large trade imbalance beginning in 1973 and a sharp decline in the rate of trade expansion. During 1974 the prices of industrial goods imported from the West rose sharply as a result of world-wide inflation.15 At the same time Western demand for many of China's traditional exports, particularly cotton textiles, was shrinking. As a result a trade deficit of $200 million in 1973 grew to about $800 million in 1974.16 Beginning in 1975 the Chinese sharply curtailed the growth of imports while attempting to step up their exports. Consequently the trade deficit

10 China's food grain output (including soybeans and potatoes in grain equivalent weight) was 274.9 million metric tons in 1974, according to a statement of Yang Li-kung, Vice Minister of Agriculture at an FAO conference in Rome in November 1975. Data for the harvests since then are quite limited. The 1975 harvest. appears to have been 230 million metric tons. See "Wen-hui pao" (Hong Kong) Mar. 9, 1978, p. 7; and International Rice Research Institute, "Rice Research and Production in China: An IRRI Team's View."" Los Baños, Philippines, 1978, p. 77. Estimates for 1976 and 1977 are subject to a higher margin of error, but the harvests appear to have been in the 275 to 285 million ton range in both years with the 1977 harvest. somewhat below that of 1976.

Robert M. Field, Nicholas R. Lardy, and John P. Emerson, "A Reconstruction of the Gross Value of Industrial Output by Province in the People's Republic of China: 1949-73," Foreign Economic Report No. 7. Washington, D.C.: Department of Commerce, 1975, p.19.

12 The 1974 growth is estimated from scattered provincial reports. The 1975 figure comes from Yü Ch'iuli's speech to the Fourth Session of the standing Committee of the Fourth National People's Congress on 23 October 1977 in Foreign Broadcast Information Service, "Daily Report, People's Republic of China,'" Oct. 25, 1977, p. E6.

13 This estimate is based on incomplete provincial reports and is subject to some error.

14 Fourteen percent was the preliminary estimate given in the close of 1977. No final figure was released in the first quarter of 1978, and Hua's speech made no specific mention of industrial growth in 1977. Until more information is released, this figure should be treated with caution.

15 Central Intelligence Agency, Office of Economic Research, "China: Real Trends in Trade with NonCommunist Countries since 1970," October 1977.

14 The trade data cited here and in the remainder of this paragraph are taken from Central Intelligence Agency, Office of Economic Research, "China: International Trade, 1976-77," November, 1977 and from reports released by the Japanese External Trade Research Organization.

was cut by three-fourths in 1975 and a surplus of about $2 billion cumulated during 1976-77. Consequently, in sharp contrast to the 1970-74 period when imports (in constant prices) were growing by about 12 percent annually and constituted a dynamic sector of the economy, imports in 1977 (in constant prices) remained well below the level of 1974.

CAUSES OF THE DECLINE

A number of hypotheses have been advanced to explain the recent sharp reversal of economic performance. These hypotheses are worth examining in some detail since they not only reveal the character of the critical problems that have confronted the post-Mao leadership, but also because they have somewhat different implications for the prospects for achieving the goals incorporated in the Ten Year Plan.

The most obvious hypothesis attributes China's recent poor economic performance to political developments, notably the sequence of events following the death of Chou En-lai in January 1976. These include the purge of the Vice Premier Teng Hsiao-p'ing in early April and the virulent attack on a set of economic policies which were attributed to Teng but appeared to differ only marginally from the overall strategy of economic development that had been enunciated by Chou at the Fourth National People's Congress in January 1975.17 In retrospect, however, it is clear that political events had begun to have an adverse effect on economic development as early as late 1973. The campaign against Lin Piao (the former Defense Minister who died while apparently attempting to escape to the Soviet Union) gave rise to deep factional cleavages in many industrial enterprises, leading to worker sabotage in some factories and widespread disruptions of the transport system. Although it was difficult to judge the effect of these activities on economic production, provincial data released in radio broadcasts made it possible to identify some of the most troublesome areas, most clearly Chekiang Province. Industrial output in Chekiang fell by over 10 percent in 1974, largely due to widespread disruption of production in Hangchow where several thousand People's Liberation Army troops were finally dispatched in 1975 to restore order.

While there was increased stability and recovery in 1975, 1976 was again marked by exceptional political disruption and uncertainty. During 1976, it became clear that the effect was not simply to close down factories for extended periods but also, more significantly, to undermine the consensus in support of the 10-year plan that had been formulated by the summer of 1975 and that was to have gone into effect in 1976. In the latter part of 1975, the followers of Madame Mao, as part of their attack on Teng Hsiao-p'ing, raised a series of objections to the plan. In retrospect it is clear that crucial aspects of the strategy embodied in the plan had come under sharp attack and were discussed throughout most of 1976. Not until after Madame Mao's followers had been arrested in the fall of 1976 and Teng Hsiaop'ing was officially rehabilitated in the spring of 1977 did the economy begin to recover from the sharp decline that had been caused by the paralysis of the planning process, widespread work stoppages, and disruptions of the transport system.

17 These criticisms were contained in a series of articles published in the Shanghai journal "Hsüeh-hsi yü p'i-p'an" (Studies and Criticism) in the spring of 1976.

A second hypothesis suggests that the decline in performance, particularly in the industrial sector, is the result of a long-term decline in labor productivity. Because industrial profits have been reinvested rather then being used to finance wage increases, the average wage in manufacturing was constant for the the 20 years between 1957 and late 1977.18 Because wage policy during the First Five Year Plan period explicitly linked the growth of real wages to increases in labor productivity, it has become increasingly difficult to motivate workers without wage increases. As a result, while the long term rate of growth of labor productivity is high, there has been little improvement in the past few years. In short, this hypothesis suggests that ideology increasingly has become a less effective substitute for material incentives.

A third hypothesis suggests that growth has slowed because of the cumulative effect of misallocated investment resources. Without the guidance of scarcity-based market prices or the use of relatively sophisticated planning techniques, Chinese planners may have neglected significant sectors of the economy. Long-term misallocation, in this view, has now had widespread unfavorable repercussions throughout the economy, depressing the rate of growth below its long-term level. The sectors thought to be the most neglected are coal, electric power, and transport. The shortage of transport capacity, for example, is thought to have contributed to delays in production as crucial inputs are not being delivered according to schedule. The apparent unwillingness of the Government to modernize the coal industry has resulted in a very slow rate of growth of output. Shortages of coal have, in the short run, depressed the rate of growth in other industries. And the longrun consequence is that in industry, petroleum-based energy sources are increasingly substituted for coal, reducing the amount of oil available for export.

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A fourth hypothesis attributes the decline in the rate of growth to an ever increasing burden of agriculture on the rest of the economy. In this view the Government has been forced to allocate an increasing share of investment resources to agriculture simply to maintain a rate of growth of agricultural output sufficient to feed a population which is currently expanding by about 15 million persons per year. The economics of producing adequate food on a fixed quantity of arable land (the amount of land under cultivation in China does not appear to have increased since 1957) are quite unfavorable. The gains in output that could be achieved through the strategy of increased mobilization of traditional resources within the confines of an unchanging agricultural technology were largely exhausted in the 1950's. In the early 1960's the leadership recognized that future agricultural growth would depend on the allocation of modern industrial inputs to the agricultural sector. But as more and more resources are applied to a relatively small fixed quantity of land, diminishing returns set in. Thus an ever growing quantity of chemical fertilizers, certain types of agricultural machinery, particularly irrigation equipment, is required to compensate for the fixed quantity of arable land.

Nicholas R. Lardy, "Economic Growth and Distribution in China." Cambridge University Press, 1978, pp. 174-175.

1 Robert F. Dernberger, "China's Economic Future," in Allen S. Whiting and Robert F. Dernberger "China's Future: Foreign Policy and Economic Development in the Post-Mao Era." New York: McGrawHill Book Co., 1977.

The option of meeting incremental food requirements through imports is foreclosed not so much by the doctrine of self-reliance as by sheer economic necessity. Any attempt by a country comprising onefifth of the world's population to satisfy its annual incremental food requirements entirely through imports would, at least in the short run, exert substantial upward pressure on prices in world markets. Thus the combination of diminishing returns and the need to remain largely self-sufficient in food grain supplies necessitates that the leadership allocate an ever growing share of resources to the less productive agricultural sector. Because the capital output ratio (the incremental quantity of investment necessary to generate a given increase in output) is much higher in agriculture than in industry, the allocation of investment is shifting to a pattern that is less favorable for maintaining rapid economic growth.

A final hypothesis suggests that much of the decline in the performance of the economy can be traced to the direct and indirect effects of the earthquake which struck Hopei Province in July 1976. As the veil of secrecy surrounding the earthquake is slowly raised it is clear that the loss of life and physical damage were enormous. Upward of threequarters of a million people were apparently killed and T'angshan, a major industrial city, was leveled.

EVALUATION AND IMPLICATIONS

In my view, the major causes of the downturn in economic performance in recent years appear to be transitory and potentially reversible. Political disruptions in 1974 and 1976, the Hopei earthquake in 1976, and poor weather in both 1976 and 1977, rather than long-term structural causes, appear to be the most important explanatory variables. This interpretation is, of course, subjective and given the paucity of economic data available, cannot be tested rigorously. The evidence and analysis supporting this interpretation is set forth below.

First, the pattern of provincial industrial development over the past few years suggests that political forces have outweighted longterm structural factors as causes of the decline in industrial growth. Most important the slowdown in industrial growth has occurred primarily because of significant declines in the absolute level of industrial output in some provinces rather than an across the board slowing of the growth rate.20 On the basis of scattered reports, it would appear that a few provinces have been able to maintain rates of industrial growth approaching their long-run average rates. Such widely separated provinces as Heilungkiang and Kwangtung would appear to fall into this category. On the other hand, regions where political strife was most intense in 1974 and 1976 suffered absolute declines in industrial output. In Kweichow, for example, industrial output appears to have fallen by about one-third in 1974. After recovering in 1975, output again fell in 1976, perhaps by 40 percent or more. Industrial output in Chuchou, an important industrial center in Hunan, fell by 31 percent in 1974. After recovering in 1975, output fell again in 1976. In Chekiang Province output fell significantly in 1974 and then continued to fall in 1975 and again in 1976. It was not until 1977 that the level of industrial output in Chekiang recovered to the levels achieved in 1973-the previous peak level of output. Industrial output

20 The analysis presented below is based on provincial reports.

also fell by about 16 percent in Hopei in 1976, although the cause was the July earthquake rather than political forces.

In short, over the past few years there has been sharply increased variation in the pattern of provincial industrial growth. This pattern suggests that the decline in the national rate of growth is the result of disruptions of growth that have been particularly severe in some regions, rather than the result of systematic forces, such as misallocation of investment funds, that would be expected to have a more uniform effect on provincial industrial growth.

Second, stagnation of agricultural output since 1974 also appears to reflect primarily short-run forces. China's agriculture most certainly has not encountered some biologically determined ceiling level of output and the prospects for sustained growth are quite favorable, particularly compared to many other Asian countries at comparable levels of economic development. I believe the argument that China's agriculture has been subject to sharply diminishing returns tends to underestimate the importance of technical change that has occurred since the shift in agricultural development policy of the early 1960's. Rather stagnation appears to have been caused by a disruption in the flow into agriculture of modern inputs produced by the industrial sector, poor weather in 1976 and 1977, and perhaps by management problems that have reduced peasant incentives.

Since the mid-1960's, agricultural growth has become dependent on increased supplies of chemical fertilizers and farm machinery particularly power tillers and electric and diesel pumps for irrigation systems. Because of weaknesses in the industrial sector discussed above, there was a sharp decline in the growth of these inputs after 1974. Following several years of rapid development, the production of chemical fertilizers was basically unchanged in the 4 years between 1973 and 1976.21 The total supply of plant nutrients from inorganic sources has actually declined because the quantity of imported fertilizers, after reaching a peak in 1972, has fallen, particularly since 1973. This, of course, was partially due to the policy of reducing imports after trade deficits were incurred in 1973-75. The growth of incremental supplies of other inputs to agriculture has also declined sharply. The inventory of powered irrigation equipment grew by 13 million horsepower in 1974 and 1975 but by only 7 million horsepower in 1976 and 1977. Numerous qualitative reports also suggest that agriclutural production has been set back because of shortage of electric power, fuels, et cetera. In summary, agricultural growth after 1974 has been impaired partly by failures in the industrial sector.

Poor weather in 1976 and 1977 has also depressed the growth of agricultural output below its long term rate. The influence of weather on Chinese agricultural output is extremely difficult to measure with the information that is freely available outside of China and this difficulty is compounded by the tendency of the Chinese to emphasize weather problems when there are shortfalls in harvests. Even after allowing for these considerations, it would appear that widespread flooding in 1976 and drought in 1977 depressed agricultural output significantly.

Finally, judging from Chinese press reports, in some regions there has been a tendency in recent years for higher level authorities within

21 Christine Pui Wah Wong, "Nutrient Supplies in the People's Republic of China," unpublished paper, March 1978, table 1A.

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