RECENT CHINESE ECONOMIC PERFORMANCE AND 1 In January 1975, Chou En-lai, in a major address to China's Fourth National People's Congress, called for the "comprehensive modernization of agriculture, industry, national defense, and science and technology before the end of the century." In the 1976-85 decade, China was to build a "relatively comprehensive industrial and economic system" that would serve as the foundation for the more ambitious goals that were to be achieved by the year 2000. Yet, in the 3 years since Chou's speech, China's agricultural output has stagnated, industrial output growth has fallen far below the average rate achieved in the previous decade, and China's foreign trade in real terms remains well below the level of 1974. These unfavorable developments naturally call into question the very ambitious economic goals contained in the "Outline of the 10-Year Plan for the Development of the National Economy, 197685," that were announced to the Fifth National People's Congress by Hua Kuo-feng in February 1978.2 The purpose of this paper is to review recent developments in light of China's record of economic development over the past 25 years and to analyze several alternative hypotheses that may explain the relatively poor economic performance over the past few years. This analysis highlights the critical problems that Chinese economic planners face in industry, agriculture, and foreign trade and then assesses, on the basis of currently available evidence, the prospects for achieving the goals incorporated in the 10-year plan. BACKGROUND In long-term and comparative perspective there are at least three salient characteristics of post-1949 economic development in China: Exceptionally high rates of economic growth, rising rates of capital formation, and extremely modest dependence on foreign financial assistance. Nicholas R. Lardy is a member of the Department of Economics faculty at Yale University. 1 Chou En-lai, "Report on the Work of the Government," Peking Review No. 4, 1975, p. 23. Hua Kuo-feng, "Unite and Strive To Build a Modern Powerful Socialist Country," Peking Review, No. 10, 1978, pp. 7-40. While advocates of the "growth is obsolete" view thrive in the West, the Chinese leadership has always believed that rapid economic growth provides the most effective mechanism to transform China into a modern state and to raise the standard of living of its people. Indeed, China's average annual rate of economic growth between 1952 (the year in which post-civil war economic recovery was basically completed) and 1974 was approximately 6 percent or about 4 percent in per capita terms. At these rates total and per capita output double in 12 and 18 years respectively. Most notably industrial growth under the Communist regime has been extraordinarily rapid, doubling on the average every 6 years. While agricultural growth has been much more modest it has more than kept pace with the growth of population, a remarkable achievement given China's high population density per unit of arable land. 3 This economic performance is most usefully judged in historical and comparative perspective. Although some other developing countries have grown as fast, only a few have sustained a 6-percent average rate of growth since World War II. China's economic performance is also impressive when it is compared with other large, densely populated Asian countries where per capita incomes were initially (late 1940's) comparable to those of China. In India, for example, another large continental country faced with the difficult. problem of raising agricultural output on a relatively fixed quantity of arable land, the average annual rate of per capita economic growth between 1950 and the early 1970's was only 1.1 percent, roughly one-third that of China's. Pakistan has done somewhat better, with a rate of per capita growth slightly over half that achieved by China. In historical terms as well, post-1949 economic growth has been quite rapid. While there were isolated pockets of economic growth and modernization in China prior to 1949, these were restricted to small foreign-dominated coastal enclaves such as Shanghai and the northeast (Manchuria) that had developed under Japanese occupation and control. The economy as a whole failed to exhibit any sustained growth of per capita output in the half century prior to 1949. A second notable characteristic of the Chinese economy since 1949 is the unprecedented rate of capital formation (the ratio of gross investment to gross output). Estimated at about 5 percent for the 1930's and much less for the civil war years, it rose to 10 percent by 1952 (the beginning of the first 5-year plan), to 20 percent by 1957 (the end of the first 5-year plan), to 25 percent or more in the early 1970's.' These are rates of capital formation which are unusually high for a country of China's low level of economic development. They are, for example, almost twice the rates achieved in India and Pakistan. This high rate of investment has two important implications. First it is an antidote to the naive view that China's economic development strategy under Mao was concerned primarily with the pursuit of Dwight H. Perkins, "Issues in the Estimation of China's National Product." Harvard Institute of Economic Research Discussion Paper No. 471, April 1976. Robert Michael Field, "Civilian Industrial Production in the People's Republic of China: 1949-74," In "China: A Reassessment of the Economy," p. 149. John Mellor, "The New Economics of Growth: A Strategy for India and the Developing World." Ithaca, N.Y.: Cornell University Press. Dwight H. Perkins, "Growth and Changing Structure of China's 20th Century Economy," in "China's Modern Economy in Historical Perspective," ed. by Dwight Perkins. Stanford, Calif.: Stanford University Press, 1975, pp. 122-123. Robert Michael Field, "Real Capital Formation in the People's Republic of China: 1952-73," unpublished manuscript, July 1976. revolutionary ideals rather than economic progress. Clearly, revolutionary ideals have been important, but they have not usually overridden the overwhelming priority accorded to rapid economic growth. Secondly, these high rates of investment imply that the Chinese Government has been successful in deferring wage increases in the industrial sector in favor of reinvesting profits to finance further industrial growth. This, in turn, has important implications that I will pursue below. Finally, China's economic development has depended less on foreign financial aid than any other successful developing country since World War II. Even during the 1950's, Soviet loans in aggregate terms were relatively modest-about $1 to $2 billion over a period of 10 years. Repayments began quickly and by 1955 repayments to the Soviets exceeded new loans. During the decade from 1955 to 1965 the Chinese repaid their loans from the proceeds of their trade surpluses. At the same time that the Chinese began to repay their debt to the Soviet Union in the mid-1950's, they also initiated their own foreign economic assistance program. Since 1955 they have granted over $7 billion of economic and military aid-a substantial net capital outflow for a country of China's relatively low level of economic development. Of this flow, over half has consisted of economic aid to other lessdeveloped countries. Although aid expenditures have declined considerably in recent years, since 1970 they have averaged about $400 million per year. In short, China is the only less-developed country that has not only relied minimally on foreign credits, but also has been able to sustain a rather successful foreign assistance program of its own. Again, the comparison with India is instructive. India, since independence in 1947, has run an almost continuous foreign trade deficit. This deficit has been financed by foreign aid and capital inflows, primarily from the West, but in more recent years from the Soviet Union as well. Over the two decades from 1950 to 1970, India was the recipient of over $13 billion of net resource transfers (defined as imports less exports). India, in fact, has been the largest recipient of developmental aid and concessionary loans in the world. Despite this generous assistance, which financed 15 to 20 percent of India's capital investment during these two decades, India's rate of growth of gross national product in per capita terms has been about one-third that of the Chinese. In the view of some observers, the refinancing of India's cumulative external debt seems likely to become a regular feature of the international monetary scene. RECENT ECONOMIC PERFORMANCE In marked contrast with this favorable long-term record of economic grown and minimal reliance on foreign financial credits, China's economic performance in the past 4 years has been comparatively unfavorable. The rate of economic growth since 1974 has fallen far below the long-term average, and an unprecedented balance-of-trade deficit was incurred in 1974 and 1975. These developments have beset John Franklin Copper, "China's Foreign Aid in 1976," "Current Scene," vol. 15, Nos. 6 and 7 (JuneJuly, 1977), p. 13. John Mellor, "The New Economics of Growth." 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 Severa! 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. China's food grain output (including soybeans and rotatoes 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 280 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 Yi 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. 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. 17 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 1975.1 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 "Hsüch-hsi yü p'i-p'an" (Studies and Criticism) in the spring of 1976. |