All these measures contribute to reducing the gap between realized and potential output with fixed resources. In addition, Chinese policy has vigorously attacked the problem of mobilizing resources to achieve maximum expansion of the technological production frontier. General measures in this direction, including a high and rising investment rate, employment of seasonally idle rural labor, active recruitment of females into the labor force, and major advances in education and public health are all well known. Exploitation of marginal resource deposits by small rural industries and fixing industrial prices in accordance with average rather than marginal costs, a tendency apparent in U.S. military procurement during World War II, provide further examples of policies which raise the degree to which available resources are utilized in production.79

Except for a relatively small number of industries involved in vigorous price competition and rare instances of commodity shortage, the peacetime economies of the industrial West cannot match the strong and continuous pressure for improved X-efficiency which is a daily feature of China's industrial scene. The recent oil contretemps, for instance, showed that "with little or no effort, American industries of all descriptions * * * can save at least 10 percent of the energy they used to consume." 80 At the same time, European firms are believed to incur excessive wage costs of 20-30%.81 It is difficult to believe that surpluses of this magnitude can be found in Chinese consumption of raw materials, the dominant cost component in most sectors of industry.

Similar results would probably emerge from comparisons of China and other developing nations. Inventory data from several dozen major enterprises in India and China, for example, show that Indian firms typically require much more working capital for inventories alone than Chinese firms use for all purposes.82

In view of these considerations, it does not seem unreasonable to conclude that Chinese industry probably achieves a degree of X-efficiency which is not normally observed in nonsocialist economies. China's system displays a clear advantage in terms of mobilizing resources for productive use. At the same time, managers are strongly motivated to squeeze the most from available resources by raising output, lowering unit input coefficients and sharing information. Lacking organized strife within enterprises or secrecy between them, Chinese workers and their leaders appear able to approach industry's technical production frontier more closely than could be expected elsewhere. Finally, we must touch upon the dynamic aspects of Chinese per

79 For the rationale behind Chinese pricing policy, see Chang I-fei, "The Problem of Price Under the Socialist System," translated in ECMM 491 (1965), pp. 17-30. On the American side, one is struck by Miller's claim that "the adoption of the negotiated contract in place of ** * formal competitive bidding represented the greatest single step in the development of procurement policies during the war," even though "industry inevitably has the upper hand in these negotiations because of its superior information and the existence of a seller's market in war." See Pricing of Military Procurements, pp. 84-85, 44, which also notes (p. 13) that war contracts were extended to small firms "even though a price differential*** might be necessary."

80 Gene Smith, "A Number of Energy-Reduction Methods Help U.S. Companies Save More Than 10%," New York Times, Mar. 4, 1974, p. 45.

81 Ibid., Feb. 1, 1974, p. 40. The informant for this story, a management consultant, also asserted that industrial efficiency varies inversely with the strength of price competition: oil, computer, tobacco, beer and cosmetic firms show the worst performance, while textile producers who "have to be pretty hardnosed to survive" do best.

82 Indian data from Bhagwati and Desai, India, p. 167; Chinese data from Nai-ruenn Chen, Chinese Economic Statistics (Chicago, 1967), p. 282 and from Chūgoku sangyō bōeki sōran, pp. 24-28.

formance. The presence or absence of either type of static efficiency— Paretian or X-efficiency-tells nothing about an economy's responsiveness to shifts in priorities or in the underlying parameters and constraints imposed by nature and by domestic or international politics. Here, too, China's record appears strong.

With its "command economy" characteristics, China's industry has successfully adjusted to a series of major and discontinuous shifts in allocation and demand: swift growth of the rate of investment after 1949; sudden expansion of the military demand for producer goods after 1960; and in the past 15 years, a continuing shift toward agricultural support activities.

The utility of administrative control over key resources in times of large and rapid shifts in allocation is accepted wisdom among Western economists, whose broad preference for the market system is waived during wartime ̧83

84

Western economists also agree that the market fails to direct sufficient resources into areas which combine great technical uncertainty with high cost and long gestation periods. This is why we accept a monopsony-oligopoly relation between government and major defense suppliers despite the copiously documented propensity of this system to produce undesirable side effects which closely resemble the "system costs" found in Chinese and Soviet industry.85

Many of China's producer industries regularly engage in innovative tasks which from their perspective involve uncertainties no less serious than those faced by U.S. aerospace contractors. For these industries— and the list must include important elements of the machinery, chemical, metallurgy, petroleum, and defense sectors-China's choice of an allocative framework based on intensive negotiation between government and suppliers should be readily comprehensible to marketoriented Western economists.

Direct international comparison of the adjustment and innovative characteristics of industry is difficult. However, the experience of the 1960's has certainly demonstrated that Chinese industry is capable of meeting urgently required shifts in demand when recourse to imports is not possible. Although no crisis encountered by other large developing nations has placed similar pressures on their domestic industries, available evidence suggests that neither Brazil nor India, for example, could generate a stronger response to a major economic setback than was demonstrated by the Chinese in the wake of the Great Leap Forward.

VII. CONCLUSION

China's system of planned socialist industrialization aims at rapid transformation of the economy by mobilizing resources to raise output for investment and defense as well as for consumption. Consumer preferences, including individual desires for leisure both on and off

83 After setting out to criticize the direct controls implemented within the United States during World War II, Tibor Scitovsky, Edward Shaw and Lorie Tarshis are forced to conclude that especially in military-related goods, "the pricing system would not allocate goods adequately" in a future national emergency. See their Mobilizing Resources for War (N.Y., 1951), p. 207.

84 Kenneth Arrow, "Economic Welfare and the Allocation of Resources for Invention," in Nathan Rosenberg ed., The Economics of Technological Change (Harmondsworth, England, 1971), p. 169.

85 See Frederic M. Scherer, The Weapons Acquisition Process (Boston, 1964), which refers specifically to the Soviet parallel on pp. 211ff.

the job, occupy a distinctly subordinate position in the constellation of official goals.

In light of these objectives, our evaluation of performance in China's post-1949 industrial system must be broadly favorable. The preceding survey has shown that reliance on administrative rather than market control over resource allocation has contributed to China's achievements in raising the level, changing the structure and compressing the real cost of industrial output. This finding draws support from favorable comparisons of industrial growth in China and in other large industrial latecomers, and also from the revealed preference of the industrial democracies for nonmarket distribution of essential resources in wartime, when resource mobilization and rapid structural change replace consumer welfare as primary national goals.

We have also found that despite its successes, Chinese industry remains far from ideally efficient, especially in Paretian terms. Emphasis on quality objectives, limited decentralization, increased attention to profit and cost criteria and the "ratchet effect" of state and Party pressure for constant improvement in industrial operations have raised the minimum performance floor beneath which enterprises can expect swift official criticism, but recent news reports show that excessive attention to output volume, hoarding, unwillingness to innovate and other malpractices have not disappeared from China's industrial

scene.

The presence of these and other forms of resource leakage from productive tasks is not unique to China. Any system has its own built-in waste the effects of pollution, commuting and product differentiation come to mind in the American case-and it is difficult to argue that these costs are higher in China than elsewhere.86

In China's case, the remaining hardcore inefficiencies are much easier to detect than to remedy. Hoarding, for example, could be curtailed by combining stringent control of working funds, random inventory checks, and harsh, well-publicized punishment of violators. But without major reforms in the whole system of allocating and distributing materials, reduced inventories would raise the chances of supply-linked disruptions throughout industry, and might lower rather than raise output. The administrative and financial cost of the changes needed to maintain smooth production could easily outweigh the more obvious gains from liquidating excessive stockpiles.

This finding provides a typical illustration of the theory of the second-best, which teaches that correcting one among many inefficiencies may do more harm than good. This history of Soviet economic reform proposals as well as American defense procurement shows that even marginal institutional shifts may conceal a crossfire of analytic complications. This lends authority to the suggestion that in China too, simple and seemingly beneficial reforms might set off complex interactions which could interfere with the basic goals of growth and structural change.

It is entirely possible that with their relatively static product mix, modest growth rates and markets which show signs of becoming less homogeneous as personal incomes rise, China's consumer industries

86 On the concept of built-in costs, see Simon Kuznets, Economic Growth of Nation: Total Output and Production Structure (Cambridge, 1971), pp. 75-98; also E. J. Mishan, The Costs of Economic Growth (London, 1967).

could benefit from a substantial shift toward market-linked methods of allocation. But in the dominant producer sector, the continuing prominence of ambitious targets, technical uncertainty and unpredictable demand suggests that as in the past 25 years, fundamental institutional change holds little prospect for improving the performance of China's industrial system.

WORKERS' INCENTIVES IN CHINESE INDUSTRY*

By CARL RISKIN

As the "leading force" in China's economy, industry plays a role that decisively affects her entire development performance. The success that attends this role in turn depends upon the resourcefulness, skill, diligence, and creativity of the men and women who staff the enterprises of the industrial sector. While such a statement might be readily applicable to any other society as well, it is of particular interest in one whose leadership puts as much stress on the importance of the human factor as does the Maoist leadership in China. In such a society, one might expect to find special attention paid to the nurturing of human motivation, not only as an end in itself, but as a potent force for achieving economic modernization.

This essay surveys the main forces and mechanisms affecting the motivation of the industrial workforce in China today. It begins with a discussion of the general theoretical approach to wages and incentives contained in current Chinese Marxist discussion, and proceeds to take up in turn the factors that influence the motivation to become an industrial worker, considerations affecting the choice of occupation within the industrial sector, and the incentives to diligent and creative labor in one's industrial job. Throughout the essay, and particularly in its conclusion, attention is called to the innate social and psychological complexity of the subject of human motivation, and the importance in particular of the socio-political setting in which work takes place to the attitudes that determine work morale and productivity.

GENERAL DOCTRINE

China's wage system, according to the Chinese themselves, is still in part a "bourgeois" system of distribution. All sides in recent debates and discussions about wage reform agree on this point and regard it as inevitable for a certain period of time. The fundamental text cited in such discussions is Marx's "Critique of the Gotha Program," which is therefore worth quoting at some length:

What we have to deal with here is a communist society, not as it has developed on its own foundations, but, on the contrary, just as it emerges from capitalist society; which is thus in every respect, economically, morally and intellectually, still stamped with the birth marks of the old society from whose womb it emerges. Accordingly, the individual producer receives back from society-after the deductions have been made-exactly what he gives to it. * * *The same amount of labor which he has given to society in one

*I am indebted to Professors Audrey Donnithorne, Alexander Eckstein, Sam Noumoff, Hugh Patrick, Bruce L. Reynolds, Lloyd G. Reynolds, and Robert Scalapino for making available to me notes of their observations in China. Professor Donnithorne also brought other relevant materials to my attention, for which I am most grateful to her. The above persons are not responsible for the use I have made of these materials.