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The encouragement of small-scale industries in rural areas in China is an essential element of regional development programs which today focus on agricultural development and diversification, local raw material utilization, resource mobilization, and long-term employment impact. However, rural industry in China is not a homogenous concept, as it is the outcome of two different strategy approaches. First, it is the logical outcome of a sector strategy involving technology choices in a number of industrial sectors-most of which were initiated during the great Leap Forward or earlier. This has required the scaling down. of modern large-scale technology through a product and/or quality choice combined with design changes in the manufacturing process.1 Second, rural industry is part of an integrated rural development strategy also initiated during the Great Leap Forward-where a number of activities are integrated within or closely related to the commune system. They are often rooted in the traditional sector of the economy and have often been preceded by a long tradition of village crafts. Such industries are often based on the scaling up of village crafts. The scaling up of cottage industries in China is not based on improvement of technology alone, but the cottage industries have been converted into modern small-scale industries through cooperativization, electrification, and access to low-cost simple machinery. The assumption for both categories is that they, in the main, should be using local resources and should be meeting a local demand for producer goods and industrial services.

Consequently, the rural industrial sector in China consists of enterprises which vary greatly in size and in degree of technological sophistication. The total number of enterprises is very high. The largest category consists of the very small brigade-level repair and manufacture shops, of which there may be several hundred thousand. The second largest category is likely to be the small mines-or mining

1 The best-known examples are small-scale production of nitrogen chemical fertilizer, cement and iron, all of which are discussed at some length in a forthcoming monograph on Rural Industrialization in China, to be published by East Asian Research Center, Harvard University, by the author. For a theoretical discussion of the issues involved, see Ishikawa, Shigeru: A note on the choice of technology in China; the Journal of Development Studies, 9(1), 161-86, 1972.

spots of which there are likely to be considerably more than 100,000. There are also 50,000 small hydroelectric stations. A large number of the 50,000 communes are likely to have their own workshops for grain milling, oil pressing, and other food processing plants, woodworking shops, et cetera, which are usually organized in multipurpose units. Rural heavy industry-small iron and steel plants, cement plants, chemical fertilizer plants, and other chemical plants-may amount to between 5,000 and 10,000 units. The number of county-run machinery plants may amount to more than 3,000 units. Then there is also a large number of light (consumer) industry enterprises in counties, communes, and brigades, and these may amount to more than 100,000 units. So, the total number of industrial units-within the rural industrial sector-is likely to be in the region of 500,000 or more.

However, total rural industrial employment is still limited and total employment is estimated to be in the region of 10-17 million, which may correspond to approximately 50 percent of total employment in manufacturing and mining. Since the summer of 1973, a couple of provinces have indicated clearly that, based on local conditions and relevant instructions from higher authorities, the number of workers used by industries at county, commune, and brigade levels should not exceed 5 percent of the labor force in a county. All other available information indicates that this may be the upper limit today.

China has not released any national figures for employment in county-, commune-, and brigade-level enterprises. There can be no doubt that employment in various parts of the county differs widely. Rural areas which are under the administration of big industrial cities have 20 percent or more of the labor force in industry. Remote places in the interior of the country may have hardly any industrial activity. Information from a number of relatively well developed (in terms of rural industrialization) regions in Hopei province indicates that less than 5 percent of China's total labor force is engaged in rural industries. The Chinese labor force is estimated to be approximately 350 million, which is about 70 percent of the population between the ages of 15-64.

Rural industry is distributed within a county at brigade, commune, and county level, with the heavy industry and larger enterprises located in the county capitals. The larger county capitals usually would not have a population exceeding 20,000. Most of the rural industrial enterprises are relatively small, rarely exceeding a few hundred employees. When discussing rural industry in China, it is essential to realize that many of them are not small by international classification and that many of them are located in small urban centers-county seats with a population of up to 20.000-which are not considered rural areas according to international classification. Rural industry is in this context not defined on the basis of size but as any local industry run by county, commune, or brigade. The enterprises are collectively owned or wholly owned by the state but under local management.3 Rural industry also includes units attached to middle schools, hospitals, and health clinics.

Information provided by officials of Lin County Industrial Bureau, Honan Province. Summer 1973.

The collectively owned enterprises may be jointly financed by the state and collective

Rural industry in China forms one part of the small-scale industrial sector which basically is made up of two different parts. (The other is the urban small-scale industrial sector, which is not discussed here.) The sophistication and scope of industrial activities are dependent on the level of education, economic development, natural resource endowment, nearness to ideas, and new information. Consequently, it is realistic to differentiate between rural industry in near-city locations and rural industry in rural areas proper. The former seems to have much more in common with urban-based small-scale industry than is the case for the rest of rural industry.

The development of industries in rural areas around Shanghai, Peking, and Tientsin, with a substantial amount of subcontracting, may indicate the long-term prospects for rural industry in the rest of the country. The formation of technical and organizational skills is only in the early stages of development in most parts of rural China. This and the still low level of mechanization explains why the industrial level in most rural areas in China is still comparatively low compared with more favored rural areas around the big cities.

Industrialization in rural areas proper appears to have been successful only when local character has been stressed. In other words, those activities, which have high coefficients for backward linkages to agriculture and for forward linkages to final users in the localities have been successful. A distinct difference between the approaches to rural industrialization in the late fifties and in the period since the Cultural Revolution is that the latter approach appears to have much higher coefficients for forward and backward linkages in the locality.

It seems that the greatest merit of small enterprises, as experienced in China, lies not in the superiority of their capital/labor or capital/ output ratios but in the overall savings in resources they make possible.*

Rural industry is part of a communication network which has the important task of spreading innovations as quickly as possible within a local technology system. New things and ideas often look complicated to an outsider, and, therefore, people have to be able to ask questions, to test things and ideas, and to get a feeling for them in order to fully understand and accept them. A tightly meshed network is a consequence of the fact that the links of personal communications are heavily restricted by distance for most individuals. Personal communication between pairs of individuals and direct observation are I still the basic instruments for the diffusion of innovations.

Furthermore, small-scale industries serve as an important training ground for peasants who are learning manufacturing skills. The peasants are aided in adapting to an industrial environment and to conditions found in larger enterprises. This training contributes to the local formation of technical and organizational skills, and is part of a general process of breaking down the barriers to a transition from a

Watanabe argues that "small enterprises seem to contribute most to the economic development of countries with surplus labor and shortage of capital (which applies to China at her present stage of development) under the following conditions: "(1) Where they can be set up without heavy overhead capital expenditure on buildings, land, and infrastructure;

"(2) Where the diseconomies of small enterprises are compensated by the use of idle capital, labor, and raw materials;

(3) Where division of labor between enterprises in different size groups, e.g. in the form of subcontracting, enhances the overall efficiency of the industry."

(in "Reflections on Current Policies for Promoting Small Enterprises and Subcontracting", by Watanabe, Susumu; International Labor Review, vol. 110, No. 5, November 1974).

traditional to a modern economy. Consequently, rural industrialization has positive implications for the social development of the country. This is apparently one of the major reasons why the leadership has attempted to make rural industries reach almost every corner of the country.

Rural industrialization still has a relatively limited impact on the employment pattern. However, the sector engages approximately 3 percent of the total number of people of working age. Another 2 percent are engaged in the mass scientific network in rural areas. Consequently, 5 percent of the working age population in rural areas actively are engaged in activities which are likely to have a strong impact, not only on productivity, but also on the mental outlook in rural

areas.

THE SECTOR STRATEGY

Substantial industrial activities are today included in integrated rural development programs centering on the communes, including their subunits and the higher administrative levels of counties. This approach is likely to have great significance for future decentralization of industry and rural development. The small-scale process plants, which are usually parts of the integrated rural development programs, have attracted considerable attention in China as well as outside the country. It is of interest to discuss their justification, particularly as they continue to play an important role in some industrial sectors. Small-scale nitrogen fertilizer and cement plants are the most obvious examples of our discussion. Sector strategy choices have in the past been made in almost all industrial sectors of which the iron production in "backyard furnaces" is the best known example, but probably one of the least successful examples of Chinese technology choices.

The concern of a dual approach-the two-leg policy of the Great Leap Forward was based on two assumptions. First, that techniques existed or could easily be developed whereby labor could be substituted for capital, enabling better use of China's abundant manpower resources. Second, the increased industrial production would boost the capacity of the modern industrial sector and meet the stringent requirements for quality and specifications in that sector. These assumptions were clearly incorrect in most sectors. However, a dual strategy persists in a number of sectors, and it has often been assumed that the Chinese rural, small-scale industrial enterprises provide a textbook example of choices of technique. Such an assumption may be correct if one looks at the industrial system as a whole-including mining of raw materials, and transportation. However, the assumption does not appear to be correct for the core industrial processes.

5 It was recently reported that over 10 million people now take part in scientific experi ments in rural areas. There are also experimental stations and groups in most rural people's communes and production brigades. (China Develops Science and Technology Independently and Self-Reliantly, Peking Review, No. 46, 1974, p. 14.)

The number of small-scale chemical fertilizer plants was in early 1974 around 1,800 of which approximately 1,000 produce nitrogen fertilizer and the others phosphate fertilizer. Average annual production is today 8,000 tons of ammonium bicarbonate (NHCO3) in a small-scale nitrogen fertilizer plant.

The number of small cement plants in rural areas has increased from about 200 in 1965 to 2,800 in 1973. The production capacity of the small cement plants increased during the same period from roughly 5 million tons to an estimated 19 million tons. Consequently, the average size of the plant has decreased considerably-from about 25,000 tons per year in 1965, to 6.800 in 1973.

7 An economic analysis includes the following statements:

(a) Inferior techniques are those which produce the same output as some other technique using more of at least one factor and no less of any other.

(b) Efficient techniques are those which are not inferior to any other techniques among those available.

LABOR

By limiting the discussion to the use of two factors--capital and labor-the choice of technique in most alternative small-scale units in a number of important industrial sectors cannot be explained. The rural industries certainly use more labor and most of the rural process industries have higher capital/output ratios than alternative largescale counterparts. However, this means that Chinese economic planning also considers other criteria which will be evident from the cement and nitrogen fertilizer production.

We assume To in figure 1 to be the modern technique used for the manufacture of an industrial product at a certain point in time. The likely development of this technique in developed countries would be in the dotted area (II), because of relative abundance of capital and rising labor costs. It would be in the interest of developing countries to have a development in the shaded area (III), to make better use of scarce capital resources and abundant manpower resources.

Using available plan prices it appears that the alternative (smallscale) techniques being used in a number of Chinese industrial sectors would fall in the remaining area (I). This would indicate that they are inferior techniques, perhaps partly reflecting the considerable economies of scale which affect process industries. There can be no doubt that, in a strict economic sense, many alternative techniques used in Chinese process industries are inferior, using available Chinese plan prices. However, they may be efficient when seen as interacting components in a local industrial system.

Figure 1. Technology development and capital/labor ratios.

Nitrogen Chemical Fertilizer 8

China has four main options in providing her agriculture with nitrogen chemical fertilizer. First, fertilizer can be imported. Second, large plants for making fertilizer can be imported. Third, China can manufacture her own large-scale plants for producing nitrogen fertil

The early overall development of China's fertilizer industry is described in "China's fertilizer economy" by Jung-chao Liu, Edinburgh University Press, 1971. It should be noted that a considerable amount of the nitrogen intake comes from nonchemical fertilizers. However, it is virtually impossible to quantify the contribution of nonchemical fertilizers to total nutrient intake, but it seems likely that, until the early seventies, it probably exceeded, on average, the amount provided by chemical fertilizers.