straining the rate of growth of light industry. Growth in heavy industry increasingly dominated aggregate industrial growth over the period 1957-73. Moreover, the leading subsector within the heavy industry sector, with an average compound rate of growth between 1957 and 1971 of about 20 percent per year, was the machinery industry.28 Clearly, differential patterns of growth in the machine-building industry could go a considerable distance in reconciling the aggregate equal rates of industrial growth with the physical output series in table IV above. If one assumes that the coastal area produced 78.6 percent of the machine tools in 1957 as well as in 1971 29 and if one further assumes that this share is a good proxy for the value share of machinery output in 1970, then machinery output alone accounts for about 42 percent of the increment in coastal industrial outputassuming, of course, equal rates of growth in the coastal and inland

areas.

If one employs 1952 prices and performs a similar calculation with the physical output series given in table IV, only 7 percent of the increment in output from 1957 to 1970 is explained for the coastal areas, but 30 percent is accounted for in the inland area.30 Adding the machine building and other increments together, one can plausibly suggest that about 50 percent of the increment is accounted for in both inland and coastal areas and, thus, and more surprising, the yet to be identified portion of output in each region grew at about the same rate in each region. Of course, this conclusion rests on the assumption that coastal and inland machinery output grew at fairly equal rates over the period, and that physical output of machine tools could serve as a crude proxy for machinery output value. Thus, our calculations should be viewed not as exact magnitudes, but more as illustrative calculations of the probable sectoral and regional trends within the gross value of industrial output.

In our rather crude calculation we have discovered that adding machinery output offsets the movements in favor of the inland areas that the physical output series reveals. However, the regional output value of these items, when one includes machine building, was only about 20 to 25 percent of total regional output. Further, the portion of output we have described as "yet to be identified" must remain unknown because of lack of data. Nevertheless, some interesting insights can be gained from what so far has been a purely algebraic manipulation of scanty data.

First, we point out that if oil had not been included in the physical output series then the identified growth in the inland area would have been substantially reduced. Two factors are clear from such a consideration. First, it is evident that new and fast growing industries that enjoy sustained growth can considerably influence movements in the regional distribution of output. The growth in oil points out the more capricious nature of regional development in that natural endowment can play a large role. To be sure, perhaps even larger roles are played by consumption demands and transportation costs, but the location of reserves is clearly important. Second, the calculations provide us

28 We Are in the Midst of Advancing (Wo-men Cheng-tsai Ch'ien-chin) People's Publishing House, Peking, 1972, p. 55. Machinery output in 1971 was reported to be about 13 times that of 1957.

Field, op. cit., p. 84.

30 Prices taken from T. C. Liu and K. C. Yeh, The Economy of the Chinese Mainland, Princeton, 1965.

with some empirical evidence for the construction of some suggestions concerning the reasons for the regional balance in aggregate output. The first hypothesis that might be used to explain the regional balance in growth despite the unbalanced investment in favor of the inland region is that the pattern of investment in the inland areas, especially during the First Five-Year Plan, the period of probable greatest imbalance, was confined to either high capital output ratios or to industries that were destined to grow slowly for various reasons. One cannot even speculate on the pattern of investment in heavy industry for lack of data. However, we do have some knowledge of the textile industry. After liberation much of the discussion concerning the "irrational" distribution of the industry was focused on the textile industry. As a result, by the 1970's the cotton textile industry's capacity in inland areas had increased from 10 to 20 percent in about 1949 to 45 percent of total industry capacity.31 Such an increase was due not only to new investment but also to the movement of production facilities into the interior.32 The textile industry depends on agriculture for its material inputs, particularly cotton, and, since the rate of growth of agriculture has been slow, this has invariably constrained the rate of growth of textile output.

Second, beginning in 1955-56, as we have pointed out above, increased emphasis was placed on the full utilization of coastal areas in support of inland development and for more cost effective increases in production. Then, following the Great Leap Forward, increased emphases were placed on industry to provide inputs for the support of agricultural development. We think that the inevitable results of such policies were derived demands for intermediate inputs and investment goods on the part of inland industries and on the part of agriculture that stimulated output growth in the coastal areas. Thus, initial development policies favoring the interior and later agricultural policies created derived demands for growth in the coastal area. It is interesting that just such a counterintuitive result occurred in Italy during the 1950's when development policies favoring the south created demands in the north and center that stimulated output in the two more industrialized regions.33

A third factor possibly aiding the growth of the coastal regions may have been the campaign for "self-sufficiency" that has received continuing emphasis since about 1965, although mentioned in the early 1960's. In the production sphere the intent of the campaign is to produce more locally self-sufficient production centers. For example, if a city specializes in heavy industry, it is to develop light industry. Given the skilled labor force and the well-developed industrial infrastructure in the coastal area, it may have been easier (that is, required less investment) for the coastal regions to move ahead in the establishment of new industries or in the creation of additions to existing capacity. Further, in this vein one could also speculate that the continuing demand for new products and new technology has naturally fallen to the coastal areas to fill, given the coastal area's comparative advantage in human capital over the interior.

31 We Are in the Midst of Advancing, op. cit., p. 75.

32 More than 90 mills were moved inland from Shanghai during the period 1949-73. Peking Review, Jan. 17, 1975, p. 12.

33 Hollis B. Chenery, "Development Policies for Southern Italy," The Quarterly Journal of Economics, LXXVI, No. 4 (November 1962), pp. 515–547.

CONCLUSIONS

In summary, it is our opinion that several factors have led to equal aggregate output growth despite an investment balance in favor of the interior. These are input contraints in the textile industry, derived demands for coastal output generated by inland industries and agriculture, emphasis on self-sufficiency and new product output. At our current state of knowledge about the Chinese economy these opinions must be considered hypotheses rather than explanations. We have sketched out, in a rudimentary fashion, the initial conditions in the coastal and inland regions, Chinese policies with respect to development within these regions and the scanty evidence available about coastal and inland changes. These scanty data have led us to suggest certain hypotheses concerning the revealed equality in the regional growth of aggregate gross industrial output. There is little doubt that some may construe the equal growth since 1957 as indicating a policy failure on the part of the Chinese Government with respect to the development of the interior. It seems clear, however, that this is not the case. Rather, emphasis on the coastal areas for development purposes suggests a pragmatic approach to the full utilization of China's resources to attain more than one goal. Moreover, if China's leaders had not adopted the policy of favoring inland areas, China almost certainly would have developed as a dual economy.

ECONOMIC PLANNING IN THE PEOPLE'S REPUBLIC OF CHINA: CENTRAL-PROVINCIAL FISCAL RELATIONS

By NICHOLAS R. LARDY

I. INTRODUCTION

The degree of central control of economic planning and resource allocation is one of the least understood dimensions of post-1949 Chinese economic development. There is general agreement that during the First Five-Year Plan period (1953-57) the Chinese adopted a Soviet model of economic planning which emphasized highly centralized economic planning and management. As discussed below, this period was marked by the development of vertically organized industrial ministries, centralized determination of relatively detailed physical output targets for various sectors of the economy, and centralized control over the distribution of important raw materials and intermediate goods.

However, since the beginning of the Second Five-Year Plan (195862) the Chinese have made a concerted effort to modify this relatively centralized system of economic planning and management. By introducing a considerable degree of decentralization of decisionmaking the Chinese hoped to overcome the deficiencies of the highly centralized planning system that had developed by the mid-1950's. This was particularly evident during 1957 and 1958 when a series of formal decentralization directives was issued by the State Council and the Central Committee of the Chinese Communist Party. These measures are generally believed to have transferred a broad range of economic planning and resource allocation powers to the provinces at the expense of the central planning agencies and central government ministries that had played a dominant role in resource allocation during the First Five-Year Plan period.

As a result of the decentralization introduced in the late 1950's, it is now widely believed that centralized economic planning of the type that prevailed during the First Five-Year Plan no longer exists. Instead of a nationally integrated economic plan in which major spatial and sectoral allocation decisions reflect the preferences of the central political leadership, it is now widely believed that the direction of economic development is largely determined through a series of independently compiled provincial economic plans that reflect the preferences of provincial economic decisionmakers. Provincial leaders are primarily concerned with maximizing expenditure and investment in their own regions. Each area thus husbands its own resources and resists transferring significant amounts to the central government. As a result there are only minimal flows of real resources

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between provinces. The ensuing pattern of economic development is frequently referred to as one of regional self-sufficiency or autarky.1 The purpose of this paper is to examine this regionalist view of Chinese economic planning in somewhat greater detail, to trace its logical economic implications, and to attempt to determine whether or not the Chinese pattern of development is consistent with these implications. This analysis begins with a brief summary of the character of economic planning during the First Five-Year Plan period and the problems which the reforms of 1957-58 were designed to correct. This in turn, is followed by an analysis of the nature of the decentralization introduced by the reforms and an examination of the empirical evidence relating to the regionalist view of Chinese economic planning.

The major hypothesis advanced in this paper is that although the decentralization of 1957-58 introduced a number of economic reforms that have endured up to the present, these were concerned primarily with economic management rather than with economic planning and resource allocation. That is, the center, in order to improve the efficiency of economic planning and management, transferred a broad range of administrative authority to provincial governments but retained considerable resource allocation and planning powers. An analysis of central-provincial fiscal relations provides empirical evidence which suggests that the central government continued to exercise broad planning powers and that this has had a profound effect on the character of Chinese economic growth. This evidence suggests that provincial planners have not had a substantially increased role in determining the allocation of the country's economic resources and that, as a result, economic growth since the decentralization has not been characterized by a strong pattern of regional self-sufficiency. In fact, the degree of geographic redistribution of resources carried out by the Chinese central government is rather striking, particularly when compared with other large, less developed countries such as India.

II. CENTRALIZATION OF ECONOMIC MANAGEMENT, 1953-57

A variety of forces after 1949 led the Chinese to adopt the Soviet model of economic planning. Foremost among these was the full commitment of the new leadership to the rapid development of China as a major industrial and military power. They recognized that a rapid acceleration in the rate of growth could be attained only through a substantial increase in the rate of investment. The Soviet pattern of development was perceived as the only viable means for achieving the required increase in the rate of overall investment and the desired allocation of an unusually large portion of this investment for heavy industry.

1 This general view is expressed in a number of studies. See for example, Audrey Donnithorne, The Budget and the Plan in China: Central-Local Economic Relations (Canberra: Australian National University Press, 1972). Alternative formulations of the regionalist view of Chinese economic planning emphasize the enhanced role of the military region commanders rather than provincial leaders in the resource allocation process. See especially Jürgen Domes, "New Course in Chinese Domestic Politics: The Anatomy of Readjustment," Asian Survey 13, No. 7 (July 1971), p. 641.