BALANCE IN COASTAL AND INLAND INDUSTRIAL

DEVELOPMENT

By CHARLES ROBERT ROLL, JR., and KUNG-CHIA YEH*

INTRODUCTION

Many countries in various stages of development contain regions which may be characterized as less developed than other regions within the same country. In China at the time of the establishment of the People's Republic such a situation existed and was of considerable concern to Chinese planners. The coastal regions of China were relatively more industrially developed than the inland areas and Chinese planners set out in the early 1950's to rectify this unequal distribution of industry. The 1950's saw substantial change, but recent data indicate that from 1957 to the 1970's there was little change in the relative shares of the regions in the gross value of industrial output. In the following pages we explore the initial conditions of the 1950's and the scanty data of the 1970's in order to suggest some likely hypotheses for an explanation of this equal aggregate industrial growth.

INDUSTRIAL LOCATION POLICIES, 1949-73

At the time the PRC became the government of the mainland, the economy it inherited can best be described as a composite of two economies: a relatively modern sector engaged primarily in the management of foreign trade and the manufacturing of cotton textiles and certain heavy industrial products, and a traditional indigenous sector. Roughly, the modern sector consisted of seven coastal provinces, and the traditional sector, all the provinces in interior China. The mapping of these two geographical regions into the two dualistic economies is of course imprecise, for in the coastal region there were backward localities (such as northern Kiangsu), and conversely in the inland region there were enclaves of modern industry (such as Hankow and Chungking). But by and large, the separation of the Chinese mainland into coastal and inland areas generally corresponds to its division into two sectors with distinctly different characteristics of economic development.

*The authors are members of the research staff of the Rand Corp. The views expressed in this paper are those of the authors and not those of the Rand Corp. or its research sponsors. 1 The 7 coastal provinces are: Liaoning. Hopei. Shantung. Kiangsu, Chekiang, Fukien, and Kwangtung. The inland area includes Kirin, Heilungkiang. Inner Mongolian Autonomous Region. Shansi, Shensi, Kansu, Ningsia Hui Autonomous Region. Tsinghai, Sinkiang Uighur Autonomous Region, Anhwei, Honan, Hupeh. Huan, Kiaogsi, Kwangsi Chuang Autonomous Region, Szechuan, Kweichow, Yunnan, and Tibet.

TABLE 1.-REGIONAL DISTRIBUTION OF LAND, POPULATION, AND INDUSTRIAL OUTPUT, 1952

Source: N. R. Chen, "Chinese Economic Statistics," Chicago, Aldine, 1967, pp. 123, 132; R. M. Field, N. R. Lardy, and J. P. Emerson, "A Reconstruction of the Gross Value of Industrial Output by Province in the People's Republic of China: 1949-73," U.S. Department of Commerce, 1975, p. 16; State Statistical Bureau, "Wo-kuo Kang-tieh Tienli Mei-tan Chihsieh Fang-chih Tsao-chih kung-yeh ti chin-hsi" (Past and Present of Iron and Steel, Electric Power, Coal, Machinery, and Paper Industries in China), Peking: Statistical Publishing House, 1958, pp. 5, 41, 140, 187; Tseng Wen-ching, "Chung Kuo-ti She-hui chu-i Kung-yeh-hua" (The Socialist Industrialization of China), Peking: People's Publishing House, 1957. pp. 256-257.

One important feature of the dualistic development was the high degree of concentration of China's economic activities and population in the coastal region, particularly in the cities. As shown in table 1, in 1952 its industrial output (including handicraft output) constituted 68 percent of the national total. The gross value of output of eight cities (Peking, Tientsin, Shanghai, Shenyang, Anshan, Luta, Fushan, and Penhsi) in turn accounted for about 55 percent of the total for the coastal region. If handicraft output is excluded from the total, the coastal region's share of industrial output would be still higher-close to three-fourths of the total. In all the 14 principal industries shown in table 1 (except coal), the region produced more than 60 percent of national output. The concentration of cotton textiles and heavy industries in this region was particularly striking.

The spatial distribution of agricultural resources also heavily favored the coastal region. The seven coastal provinces took up only 11 percent of the total land area. Yet their cultivated land accounted for 33 percent of total cultivated area in China. Moreover, these included some of the most fertile land in China, particularly areas in the delta of China's major rivers, the Liao Ho, Yellow River, Tangtze Kian, and Pearl River.

Not only industrial and agricultural resources were highly developed in the coastal provinces, so was railway transportation. In 1949/50, about 42 percent of the operating railway trunk lines in China were in the coastal region. Its railway mileage density was more than five times that of the inland region.

2 Field. Lardy and Emerson, op. cit., p. 16 and Sun Ching-chih. Tung-pei ti-chu ching-chi ti-li (Economic Geography of the Northeast Region), Peking: Ko-she Publishing House, 1959, p. 31.

3 Chi-hua ching-chi (Planned Economy), No. 8, 1957, p. 13.

4 Chao Kang, Agricultural Production in Communist China, 1949-1965, Wisconsin: University of Wisconsin Press, 1970. p. 295.

Yuan-li Wu, The Spatial Economy of Communist China, New York: Praeger, 1967, pp. 244-245.

The relatively large and fertile agricultural area both supported and needed a fairly high concentration of population in the coastal region. About 40 percent of China's total population resided in this region. The population density was about five times that of the inland area. Also, because of the concentration of industrial activities, the degree of urbanization was much higher. Of the nine cities with population of 1 million or over in 1953, six were in the coastal region." Close to one-half of the 101 cities with population of 100,000 or over were located in the coastal region.

From the standpoint of the Chinese leadership, the pattern of development was "irrational" for the following reasons. First, in the event of a direct military confrontation with a foreign power that is superior in air and naval power, the coastal provinces would be highly vulnerable, and the destruction of the industries in these provinces would mean the loss of a large part of China's industrial capacity. Second, industries in the coastal region had been importing raw materials (e.g., cotton and tobacco) from the inland areas and exporting the manufactured products (cotton cloth and cigarettes) to the inland area. The transportation costs of shipping raw materials and products back and forth could have been saved if the manufacturing plants were located where the raw materials and markets were. Third, resources in the vast inland area had been left unexplored or underdeveloped.

Accordingly, in planning the location of new industries, the Chinese leadership had three basic objectives: to reduce vulnerability of production sites to possible external attack, to lower transport cost by building new plants near markets and raw material and fuel-producing areas, and to develop the economically backward areas in the interior. However, there were conflicts between these objectives. Furthermore, there were other development goals, not the least of which was a relatively high rate of economic growth. Clearly, there were trade-offs between optimum industrial location and maximum growth. The benefits from establishing a new industrial center in the interior in terms of less vulnerability or lower transport costs would have to be balanced against a relatively larger investment in social overhead capital and a lower rate of industrial growth in the short run. Similarly, the exploitation of resources in the inland provinces might bring benefits only at the expense of economies of scale from the existing plants in the coastal area. Basically, the trade-off was between shortterm and long-term gains and between economic and noneconomic benefits. Because of these conflicting goals, questions of preferences and priorities arose, even though there was no dispute over the need to develop new industries. The choice was between allocating various proportions of total investment to each region, between expanding the productive capacities of existing plants and constructing completely new plants, between various production sites, and between constructing a smaller number of large plants in a few industrial centers. or a larger number of plants dispersed over many localities. Here the

Morris B. Ullman, Cities of Mainland China: 1958 and 1958, Washington, D.C.: U.S. Department of Commerce, 1961, p. 2.

Li Fu-chun. "Report on the First Five-Year Plan," in Chung-hua-jen-min kung-ho-kuo fa-chan kuo-min ching-chi ti-yi wu-nien chuhua (The First Five-Year Plan for National Economic Development of the People's Republic of China), Peking: People's Publishing House, 1955, p. 188.

leaders were divided. Some favored spatial dispersion on military and political grounds and opted for immediate development of the interior; others emphasized greater economic efficiency in locational planning and opted for development of the old industrial base.

During the period 1949-70, the leadership's regional policy vacillated. Broadly speaking, one can distinguish five phases of regional development during this period: the rehabilitation and First FiveYear Plan in 1949-57; the Great Leap and crisis in 1958-60; the Liuist period of 1961-65; the Cultural Revolution in 1966-69; and the post-Cultural Revolution period since 1970.

In the first 3 years of the regime, the planners hardly had any regional development policy to speak with. The administrative machinery for the centralized control of resources had just been set up. The leaders were concerned primarily with restoring production and price stability. Rehabilitation hardly began when the PRC was involved in the Korean War. The war inevitably brought severe strains on the economy so that the resources mobilized for development were relatively small. The priority at this stage was to rebuild the plants in Manchuria that had been dismantled by the Russians. It was not until the early 1950's when the First Five-Year Plan was being drawn up that locational planning was seriously considered. The Plan clearly favored a shift of industrial activity to the interior. Of the 694 major projects to be started during 1953-57, more than two-thirds were to be located in the inland area. During the first 3 years of this period (1953-55), investment in the inland area accounted for 55 percent of the total, compared to about 50 percent during 1950-52.10 The new industrial centers to be developed included Lanchow, Tai-yuan, Sian, Loyang in northwest, north and central China. Provinces in the southwest and south China were assigned lower priorities.

Toward the end of the FFYP period, Mao had some second. thoughts. In his major policy speech on the 10 important relationships in early 1956, he pointed out that during the past few years the coastal industries had been unduly neglected and that this should be corrected." He still believed that 90 percent or more of the projects in heavy industry should be located in the inland. But to do so, greater emphasis must be placed on the industrial centers in the coastal region. The rationale was that output and therefore profit of the state enterprises could increase more rapidly by fully utilizing and expanding the industrial capacity in the established centers; the latter could then provide the resources including capital, skilled labor, and new technology for developing the industrial centers in the interior.12 In essence, Mao's reasoning resembled the turnpike theorem in growth theory which states that it will be more efficient for an economy to expand along a path towards the optimal von Neumann growth path even though this involves moving away from the desired path for

8 According to an estimate by Hollister, state investment in 1950-52 amounted to only 3 to 8 percent of GNP. William W. Hollister, China's Gross National Product and Social Accounts 1950-1957, Glencoe, Ill. The Free Press, 1958. pp. 12-13, 128-129. Li Fu-chun, op. cit.

10 Tung-chi kung-tso (Statistical Bulletin), No. 21, 1956, p. 6.

11 Mao Tse-tung Ssu-hsiang Wan-sui (Long Live Mao Tse-tung Thought), Peking, 1969, pp. 43-45. 12 For specific examples of lower marginal capital-output ratios and shorter gestation periods for investment projects in the coastal area, see Li Fu-chun, "Implementation of the First Five-Year Plan," Hsin-hua pan-yueh-K'an (New China Semi-monthly), No. 14, 1956,

some period of time.13 In the present case, it would mean that given a long enough time horizon, industrialization of the inland area could be achieved faster by allocating more resources to the coastal area during the initial period even though it might slow down the industrial growth of the inland area for the time being.

Mao's speech signalled a major change in location policy. In his report before the Third Session of the First National People's Congress in June, Li Fu-chun reaffirmed the long-term goal to relocate industrial capacities to the inland but emphasized the need to rely on the coastal industries for the supply of consumer's goods, technical equipment, and capital.14 He therefore called for more investment to expand the productive capacities of the existing industries. The same policy was clearly stated in Liu Shao-chi's and Chou En-lai's reports before the Eighth Party Congress in September and in the draft Second Five-Year Plan.15 As a result, considerable development in the coastal industries took place in 1959-60.16

During this period, another major change in investment policy was in the making. The same policy statements cited above also called for greater emphasis on medium-sized and small plants. To implement this policy, a series of regulations to decentralize decisionmaking were promulgated in late 1957. Subsequently in 1958, again at the initiation of Mao, a vigorous program to develop small, indigenous plants raged all over the country. The program centered around the construction of backyard furnaces, but small projects in virtually all kinds of industries were built. Few, if any, leaders objected to the new focus on small factories. But some, like Chen Yun, questioned the wisdom of massive, uncoordinated development simultaneously on all fronts.17 Had the Great Leap in small plants succeeded, it would have increased appreciably the share of industrial production of inland provinces. But, it failed disastrously. Meanwhile, Sino-Soviet relations took a sharp turn to the worse. In July 1960, the Soviet Union abruptly recalled all its technicians in China, forcing many construction projects to come to a halt. A large number of these projects were located in the inland region. The impact of the Soviet withdrawal on the inland region was probably greater than on the coastal area. Thus on the whole, it appeared that only limited change in the geographical distribution of production capacities in this period had taken place.

In the period after the Great Leap, the urgent problem was economic recovery and consolidation. Because the economic crisis was essentially a crisis in the agricultural sector, a new policy of developing industry to support agriculture was adopted. This meant higher priority in resource allocation for the chemical and machinery industries that were mainly located in such coastal provinces as Kiangsu, Hopei, and Liaoning. In the allocation of industrial inputs to agriculture, areas with high and stable grain yields and areas growing the major economic crops were the favored areas, such as the Yangtze, Pearl, and

13 Robert Dorfman, Paul A. Samuelson, and Robert M. Solow, Linear Programming and Economic Analysis, New York: McGraw-Hill, 1958, pp. 329–335. 14 Li Fu-chun, "The Implementation of the First Five-Year Plan," Hsin-hua pan-yueh-k'an (New China Semi-monthly), No. 14. 1956, pp. 46-51.

15 Liu, Shao-chi, "Political Report." Chou En-lai, "Report on the Second Five-Year Plan," and "Proposal for the Second Five-Year Plan," Hsin-hua pan yueh-k'an, (New China Semimonthly), No. 20, 1956, pp. 10, 41-42, 166.

16 Mao, op. cit., p. 355.

17 Chen Yun, "Several Major Problems in the Current Capital Construction Work," Hung-chi (Red Flag), No. 5, 1959, pp. 1–16.