the commune system to undermine the autonomy of China's basic level of agriculture, the production team. In violation of previously established practices, higher levels appear to have appropriated both team manpower and funds for projects without seeking team approval. Because these projects in many cases appeared to have little or no benefits for the teams concerned, work incentives at the team level were reduced significantly.

These three causes of agricultural stagnation appear to be largely transitory. Over the long run the influence of weather will be less adverse than in 1976 and 1977. The flow of modern industrial sector inputs into agriculture began to grow again toward the end of 1977 and will almost certainly resume the pattern that was evident prior to 1974. The January 1978 speech of Yü Ch'iu-li, the Chairman of the State Planning Commission, clearly signaled a determination to restore the growth of production of chemical fertilizers, tractors and hand tillers, implements, and pumps.22 In addition to increased output of these products Yü's speech also called for improved quality and increased standardization of parts and components that will increase the efficiency with which these increased inputs are utilized. Finally with regard to incentives, a major thrust of policy since late 1977 has been the restoration of team level autonomy and increased work incentives as embodied in the phrase "more pay for more work, less pay for less work, and no pay for no work." The new state constitution also makes it clear that the ultimate goal of shifting the level of economic accounting to the brigade level has been deferred until "conditions are ripe." Yeh Chien-ying's report on the constitution specified that these conditions include a relatively even level of development among a brigade's production teams. If this policy is followed it will eliminate the major objection to the brigade as the basic level of economic accounting and income distribution.

The long-term prospects for agricultural growth in China appear quite favorable both because of the huge investments that already have been made in land infrastructure and because of the speed with which high-yielding technologies are adopted.

Since China's present cultivated area is about the same as in the mid-1950's, the growth of food grain output over the past two decades has been due largely to increased yields and intensity of agricultural cultivation that, in turn, have depended on improved water control and earlier maturing and higher yielding seed varieties. China's plant breeding program, in both rice and wheat, has been quite successful in developing faster maturing varieties that have allowed increased multiple cropping and thus increased yields per unit of cultivated land. But yields per unit of sown area of rice, far and away China's most important grain crop, remain far behind those achieved by other successful agricultural modernizers in Asia. This is partly because seed development has emphasized early maturation more than high yields and, more importantly, because the level of fertilizer application remains far below optium levels. Levels of nitrogen nutrients, even when organic sources are taken into account, remain far below the levels

22 Yü Ch'iu-li speech at the Third National Conference on Agricultural Mechanization, January 26, 1978. Foreign Broadcast Information Service, "Daily Report, People's Republic of China" January 31, 1978, pp. E6-E25. 23 "The Constitution of the People's Republic of China" adopted March 5, 1978, Chapter one, Article 7. Peking Review No. 11, 1978 (March 17, 1978), p. 7.

24 Yeh Chien-ying, "Report on the Revision of the Constitution," Peking Review No. 11, 1978 (March 17, 1978) pp. 23-24.

25

applied in Taiwan, South Korea, and Japan and Western plant scientists who have had an opportunity to make field observations have frequently noted symptoms of nitrogen difficiency in Chinese crops.2 As the level of chemical fertilizer application increases and higher yielding seeds are developed and diffused over a wider area, China's food grain production should grow significantly.20 Chinese rice yields of 3.4 tons per hectare in 1976, are only marginally greater than those achieved in Japan in the 1920's, before the widespread use of chemical fertilizers, and a little more than half present day Japanese rice yields. Careful historical research on Japanese agriculture," and evidence from elsewhere in Asia shows that land infrastructure is frequently the major obstacle to the achievement of output growth when improved seed varieties are diffused and fertilizer input levels are increased. Because China has already achieved a remarkably high degree of control of water in rice farming, 28 they are well prepared to make maximum advantage from the increased levels of fertilizer availability that are planned over the next few years. Similarly, compared to other Asian countries where there are enormous obstacles to the diffusion of high yielding seed varieties and improved farming practices,29 the Chinese have been remarkably successful in realizing the adoption of high-yielding technologies.30

The above evaluation of China's economic performance in recent years, if correct, has several important implications. First, the evaluation suggests that the recovery of industrial output in 1977 represents a return to the pre-1974 pattern of growth rather than a continuation of the fluctuating pattern of industrial performance observed over the past few years. Given political stability rapid growth should be sustained for several years. This view would also seem to be corroborated by a series of major conferences convened in China beginning in 1976. In addition to important conferences dealing with all of industry and agriculture, there have been significant specialized conferences dealing with important branches of industry such as coal, metallurgy, electric power, and railroads as well as functional conferences dealing with finance and banking, supply and marketing, and capital construction. These conferences, of course, culminated in the Ten Year Plan which was approved by the Fifth National People's Congress in February 1978.

The predominant theme of these conferences is the return to sustained and rapid economic growth. Renewed emphasis is to be given to rigorous cost accounting, improved enterprise management through strengthening the authority of plant managers, and centralized planning. The ability of the new regime to announce new policies suggests that the paralysis of the economic decisionmaking process, so evident in 1976, has come to an end. That is, the large meetings attended by

25 See for example, "Plant Studies in the People's Republic of China: A Trip Report of the American Plant Studies Delegation." Washington, D.C.: National Academy of Sciences, 1975, pp. 29-30 and "Wheat in the People's Republic of China." Washington, D.C.: National Academy of Sciences, 1977, pp. 2, 6, 14. International Rice Research Institute, "Rice Research and Production in China: an IRRI Team's View." Los Banos, Philippines, 1978, p. 43. "Wheat in the People's Republic of China," p. 121.

27 Yujiro Hayami, "A Century of Agricultural Growth in Japan: Its Relevance to Asian Development." Tokyo: University of Tokyo Press, 1975. p. 189. James E. Nickum, "Hydraulic Engineering and Water Resources in the People's Republic of China: Report of the U.S. Water Resources Delegation." Stanford, Calif.: U.S.-China Relations Program, 1977. p. 52. International Rice Research Institute. "Rice Research and Production in China." p. 14. International Rice Research Institute. "Constraints to High Yields on Asian Rice Farms: An Interim Report." Los Banos, Philippines, 1977.

20 International Rice Research Institute, "Rice Research and Production in China," pp. 12-13.

several thousand representatives from throughout the country in 1977, were called primarily as a means of disseminating a new policy line that was already confirmed at the highest levels rather than serving as a forum for the actual resolution of policy problems. This has subsequently been confirmed by the pro forma approval of the plan at the Fifth Congress.

A second important implication of the optimistic projection for economic growth is that a number of important and previously divisive economic policy issues have already been resolved. The most crucial of these issues are wage policy and the degree of reliance on imported foreign technology. It is frequently argued that the leadership faces a fundamental dilemma in any effort either to modify the structure of wages in manufacturing to provide greater skill incentives, for example, or to raise the average wage level. On the one hand to increase the average wage and avoid inflation would require a reallocation of investment away from capital goods and toward manufactured consumer goods. Thus the wage increase would reduce the rate of investment. On the other hand to increase wages without increasing the supply of manufactured consumer goods and cutting back on the rate of investment is a certain invitation to inflation. In this view the leadership is faced with the unpleasant choice between reducing the rate of investment and ultimately the rate of growth or abandoning their conservative monetary policy and allowing a rate of inflation that would be unprecedented in the last 25 years.

It is far more likely, however, that the modest realinement of the wage structure undertaken in late 1977, which included a 10-percent increase in the wages of almost two-thirds of all staff and workers and a limited reintroduction of bonus systems, will have a substantial positive feedback on labor productivity. This feedback would raise the rate of economic growth and thus allow the Chinese both to maintain a very high rate of investment and to step up production of manufactured consumer goods, thus avoiding inflation. In short, the wage increase is not necessarily a no-win situation for the leadership. It might reap a very substantial payoff from only a modest increase in the total wage bill.

It also appears that the Chinese have reached a consensus on the degree of reliance on imported foreign technology and the financial practices to be used to pay for imported plant and equipment. The formulation of China's Fourth 5-Year Plan (1971-75) was based on a fundamental liberalization of their approach to foreign trade-a shift from what might be generally described as a strategy of minimization of imports to what appeared to be a strategy of minimizing reliance on foreign credits. The consequence of this shift in strategy was a sharp spurt in total trade volume-indeed, 1971-74 is the only period since 1955, when net Soviet credits were terminated, during which the rate of growth of foreign trade (measured in constant prices) exceeded the rate of growth of industrial output. From the point of view of the Chinese, the timing of this accelerated pace of foreign trade, was however, most unfortunate. Changing world market conditions, that is the combination of significant price inflation and recession in the West, significantly reduced the demand for many of China's traditional exports, while at the same time forced the Chinese to import at substantially increased prices. Consequently China's terms of trade (the ratio of the prices of exported goods to the prices of

imported goods) fell sharply. Rather than drastically cutting the level of imports to maintain a balanced trade account, the Chinese chose to stretch its policy of minimal reliance on foreign credits in order to maintain a significant flow of imported plant and equipment. Evidence of this stretching came primarily in the form of Chinese acceptance of medium-term loans under the rubric of "deferred payments" which allow the Chinese to stretch out the payments for import of complete plants ("turn key projects") over a 5-year period that begins only after the construction is completed. Consequently in 1974 and 1975 the Chinese accumulated a foreign trade deficit of about U.S. $1 billion.

In addition to stretching its policy of minimal reliance on foreign credits in 1974-75, Chinese planners also attempted to shift the composition of reduced imports to avoid sharply reducing the quantity of imported plant, machinery, and equipment that are vital to achieving the modernization goals originally announced by Chou En-lai and recently reaffirmed by Hun Kuo-feng in his February 1978 speech. Specifically, although total imports fell in 1975, the value of imported plant, machinery, and equipment actually rose in 1975 to $2.2 billion. The modest fall (relative to the decline in the total import bill) in these imports to $1.8 billion in 1976, partly was due to a substantially improved harvest in 1974 and modest growth in 1975 that allowed Peking to curtail significantly the volume of imported food grains from an average of 7.3 million metric tons in 1973 and 1974 to 1.9 million metric tons in 1976. Thus at least through 1976 the Chinese attempted to maintain their imports of plant, machinery, and equipment, a marked departure from previous recessions in which capital goods imports have fallen rapidly in response to worsening domestic economic performance.

Poor harvests in 1976 and 1977 are, however, now reversing this process and the value of imported capital goods is falling rapidly as agricultural imports grow. The value of imported agricultural products roughly doubled in 1977 to about $12 billion and seems certain to be maintained at this level in 1978. Consequently, imports of plant, machinery, and equipment declined sharply in 1977, perhaps to as low as $1 billion.

Despite these unfavorable circumstances, the Chinese seem determined to resume the pattern of foreign trade of 1970-74 when imports, particularly of capital goods, were growing rapidly. Thus the Chinese seem to have resolved the divisive arguments on foreign trade strategy that marked much of 1976. A series of articles have appeared in the Chinese press to explain the necessity of selected imports of Western technology if they are to meet their very ambitious goals for economic growth. The emphasis in these articles appears to be more on the Maoist dictum of "keeping the initiative in our own hands" rather than excluding imports or minimizing foreign trade. This suggests that while the Chinese for the time being are certainly not prepared to consider direct foreign investment or even joint ventures, that the main constraints on imports will be financial rather than ideological. This view seems to be supported by the increased number of Western firms that have been invited to Peking to discuss a broad range of capital goods exports to China, as well as a step up of industrial exchange activities.

There is also evidence of a new positive attitude on the part of the Chinese toward export promotion which is rather different from that which prevailed in the past. The Chinese have adopted far more flexible attitudes with regard to provision for inspection of Chinese goods, the testing and labelling according to U.S. standards of pharmaceuticals exported to the United States and meeting the stipulations of the U.S. Food and Drug Administration for food products exported to the United States in order to expand their export markets.

The long-term trade agreements signed in the first quarter of 1978 with both Japan and the European Common Market underline this Chinese commitment to accelerate the transfer of foreign technology to China. The accord with Japan is particularly significant since the Japanese will supply China with $7 to $8 billion of complete plants and $2 to $3 billion in construction materials and equipment during 1978-85. These imports of plant and technology will be concentrated in petroleum, coal mining, metallurgy, power generation, and transport. Over the period of the agreement, these imports will be financed by increased exports of raw materials to Japan-primarily of crude oil and coal. But the bulk of China's capital goods imports will be completed in the early years of the agreement whereas Chinese raw material exports are planned to begin at modest levels in 1978, grow moderately in 1979-81, and then increase sharply in 1982. Thus, the Chinese asked for and were granted deferred payments, which will be underwritten by the Japanese Export-Import Bank, to finance the imbalances that will occur in the early years of the agreement. Since there will be substantial trade with Japan in addition to that covered by the long-term agreement, total trade with Japan will grow rapidly and the supply of imported capital goods will increase sharply. The agreement with the European Economic Community, which collectively is China's second largest trading partner after Japan, does not specify the volume of anticipated trade. But numerous Chinese industrial trade delegations have been visiting Europe since 1977, suggesting that there will also be an upturn in trade beginning in 1978-79.

SUMMARY AND PROSPECTS

The primary causes of China's declining economic performance since 1974 appear to be short term and political in character rather than long term and structural. The adverse influence of these shortterm elements appears to have receded rapidly, due largely to the decisive actions taken by the new government since late 1976. However, even if we could confidently assume future political stability, the target rates of growth included in the 10-year plan remain quite ambitious.

The broad targets for 1978-85 are, however, only marginally higher than those achieved during the decade prior to the recent economic decline. Thus, the 10-year plan bears little resemblance with the wildly optimistic plans that were advanced during the Great Leap Forward in the late 1950's. The planned rate of development of industry, 10 percent per year, is the same as that achieved during the 1964-74 decade. The possibility of slightly better future performance cannot be ruled out since the 1964-74 decade included the Cultural Revolution that had a significantly adverse effect on industrial production and investment. The prospects for the coming years are also