where Y, and Y are the values of the benchmark index in years g and h. The partial derivatives of the objective function are a system of simultaneous linear equations whose solution is the Field index.

The equations for estimating the Field index between years 1 and 5 of the sample problem are as follows:

The procedure for extrapolation is analogous to that described above for interpolation. However, two points should be noted. First, if there are more than 2 years for which the data are complete, the selection of the benchmark years on which to base the adjustment of the link relatives offers a choice. It would seem logical that one benchmark should be the last complete year, but the selection of the other is arbitrary, and the year selected may affect the rate of growth shown by the index. Second, adding output data for a subsequent year may change the index numbers for the years since the last benchmark. Because the original estimate was based on incomplete data, and because the output data for the additional year give new information against which to judge performance in the earlier years, the result is reasonable.

The Field index calculated from the sample data is presented in table C-3 and compared with the Kaplan-Moorsteen index. The Field index has several desirable properties in addition to using all of the data. First, if the data are complete, the index is the same as a Laspeyres index. Second, if some of the series are missing but the remaining series are complete, the index is the same as the KaplanMoorsteen index. Third, the index can be calculated even if there are no series that are complete. And last, the index can be calculated without complete data for benchmark years. If there are not 2 benchmark years, the index can be derived from the unadjusted link relatives.

TABLE C-3.-ALTERNATIVE INDEXES CALCULATED FROM HYPOTHETICAL DATA

CHINA'S INDUSTRIAL SYSTEM

By THOMAS G. RAWSKI

I. INTRODUCTION

China's achievements in such diverse areas as nuclear weaponry, satellite technology, rural electrification, chemical fertilizer production and most recently, petroleum development illustrate the significance of industrial advance since 1949. Although the paucity of statistical information leads to differences among various estimates of industrial growth, all observers agree that output of factories, mines, and utilities has advanced at a rapid, though decelerating pace since 1949. My own studies indicate that in terms of 1952 prices, the average annual growth rate of industrial gross output value since 1952 falls within the range of 12 to 14 percent.1 China's achievements compare favorably with industrial performance in other large developing nations such as Brazil and India, particularly since these countries have enjoyed freer access to foreign assistance, expertise and technology than has the People's Republic.

This impressive record raises many questions about the nature and evolution of industrial planning and factory management in the People's Republic. Who formulates annual plans? What relations exist. among workers, factory executives and economic planners? What changes have occurred in industry since the 1950's? Could China benefit from the type of economic reforms which have recently appeared in the European socialist countries? This essay approaches these issues by discussing the origins of China's industrial system, its evolution since the early 1950's, and the efficiency of industrial operations.2

II. THE SPREAD OF STATE CONTROL AND PRODUCTION PLANNING

China's system of industrial planning was not born overnight. The spread of central economic control was a gradual process, and it is only with the ratification of China's First Five-Year Plan (FFYP) in mid-1955, over 2 years after its formal beginning in January 1953, that we can begin to speak of an integrated industrial system and policy rather than collections of ad hoc production orders and investment projects.

1 Thomas G. Rawski, "Chinese Industrial Production, 1952-1971." Review of Economics and Statistics 55.2 (1973), pp. 169-181. The use of a later price base would lower the esti mated growth rate, but changing from gross to net output would raise the rate of growth. For alternative estimates of industrial growth, see Robert M. Field's contribution to this volume.

2 Previous studies of China's industrial system include Ishikawa Shigeru, Chugoku ni okeru shihon chikuseki kiko (The Mechanism of Capital Accumulation in China) (Tokyo, 1960) Audrey Donnithorne, China's Economic System (London, 1967); papers by Kang Chao and Dwight H. Perkins in Alexander Eckstein et al. eds.. Economic Trends in Communist China (Chicago, 1968); Barry M. Richman, Industrial Society in Communist China (N.Y., 1969) and Christopher Howe, Wage Patterns and Wage Policy in Modern China, 1919-1972 (Cambridge, England, 1973).

As the victorious Red armies swept southward in 1949, China's new leaders sought to revitalize industry under a Soviet-inspired system of state ownership, central planning, and responsive enterprise leadership. Expropriation of enterprises formerly administered by the Kuomintang government placed leading producer enterprises, including Japanese-built plants, in Government hands. In the consumer sector, compulsory procurement contracts maintained state control over privately owned factories until they were nationalized in 1956.

In the sphere of planning and management, however, the paucity of expert personnel and of reliable information severely limited the rate progress. Unavoidable initial confusion was heightened by the regime's determination to begin new construction without waiting for normal production to resume at plants which had escaped severe wartime damage. As thousands of workers were added to industry's payrolls, the competing demands of rebuilding, innovation, and expansion piled new strains on an already overextended corps of skilled and experienced personnel.

Faced with the impossibility of asserting close control over an industrial sector which soon included 10,000 state enterprises, several million employees and thousands of construction projects, Peking concentrated its initial efforts on key commodities, enterprises, and regions. As one area, product, or unit developed adequate managerial competence, economic administrators directed their energies elsewhere. Growing control was most evident in the iron and steel sector, where rationalization was facilitated by the small number of firms and by the technology of metallurgy, which permits unskilled workers to perform a variety of duties under the direction of a few trained engineers. First priority went to the iron and steel works at Anshan, China's premier industrial facility, and to the nearby steel center at Pench'i. Chinese managers developed forms of teamwork which reduced the importance of individual skills. Captured Japanese personnel prepared detailed manuals which enabled ordinary shophands to work without close supervision. Imaginative innovations enabled even the least trained workers to operate delicate machinery.^

Rapid increases in output, labor productivity and in the accuracy of production plans followed these reforms. By 1952, the authorities could turn their attention to smaller steel plants at Chungking, Talien, Tayeh, T'angshan and elsewhere, which suffered from disorganization, poor quality control, neglect of maintenance and other elementary problems already eliminated at Anshan and Pench'i. Once again, reforms led to rapid improvements in performance.

In the machinery industry, creation of a system combining detailed central planning with competent and responsive enterprise management proved far more difficult. In comparison with metallurgy, engineering is characterized by numerous producers, a complex and shifting output mix and a technology which requires a series of technically exacting operations including design, casting, forging, machining, assembly, and inspection for thousands of different machine parts. In

3 Shanghai Machine Tool Plant lost 60 percent of its technical staff during 1953-54. while the East China Bureau of the Ministry of Heavy Industry transferred 70 percent of its technical cadres to construction units at about the same time. See Jen-min jih-pao (People's Daily, Peking, hence JMJP), Oct. 30, 1955, and Ta-kung pao (L'impartial, Shanghai), Jan. 3, 1953.

Chukyo tekkögyỏ chósa hōkoku sho (Survey Report on Communist China's Iron and Steel Industry) (Tokyo, 1955), I, 165, 180, 245.

trying to develop planned machinery production, Chinese officials confronted technical conditions which had been "a source of great difficulty" to American mobilization plans during the First World War.

As in steel, economic planning began with key products, regions, and enterprises. Again, outstanding progress was reported in the Northeast (formerly Manchuria), but the national picture was not bright. A 1954 editorial noted that enterprises outside the control of the First Ministry of Machine-building (FMMB), the authority responsible for major products of civilian machinery, lacked unified direction; eliminating their tendency toward "blind development" would take "a long time."

Even within its restricted scope of operation, the ministry found it difficult to prepare prompt, comprehensive, and accurate plans for the 91 firms under its control. A 1953 directive spoke of "utter confusion" in planning, technical and supply work, inspection and maintenance. Frequent delays and changes in production plans continued in subsequent years: As late as 1957, the FMMB was singled out for criticism and urged to "balance its supply in a well-coordinated and unified way and work out an overall plan of production." 8

Chronic tardiness, shifting targets, and complaints that plans were based on unreliable estimates and conjectures arose from weaknesses at the factory level as well as in Peking. Preoccupied with the daily demands of production, construction, labor training, and technical reform, factory officials could spare little attention for the task of compiling and transmitting the economic and technical data essential for smooth functioning of the planning system."

Elsewhere, progress toward a Soviet-inspired plan system fell between the extremes represented by steel and machinery. Textiles and chemicals were two sectors in which detailed data comparing different factories enabled planners to pinpoint technical difficulties from an early date. Construction, on the other hand, remained intractable, with reports of delays, slipshod budgeting, disorganization, and cost overruns persisting throughout the 1950's.10 As in the case of machinery, these problems arose in part from the nature of the industry: The unique features of each of many construction projects hampers close control of this sector in any economy.11

Despite these variations, the FFYP years saw the gradual development of a hierarchy of economic control stretching from Peking to the factory floor. The industrial ministries were increasingly able to translate centrally determined policies into effective action at the microeconomic level. The emerging system of industrial administration, which has survived without fundamental change to the present, is the subject of the following section.

Bernard M. Baruch, American Industry in the War (N.Y., 1941), p. 278.
JMJP, Dec. 6, 1954.

7 Survey of the China Mainland Press (hence SCMP) 610 (1953), p. 9.

& Extracts from China Mainland Magazines (hence ECMM) 90 (1957), p. 22. To cite one of many examples, a 1956 investigation discovered that officials at Chinan No. 1 Machine Tool Plant could not answer questions about the quantity of fixed capital, the turnover period for circulating funds, the number of machines in the plant or the volume of output per ton of raw materials. See Chiang Li, “Several Problems as Seen from Four Chinan Plants," Chi-hsieh kung-yeh (Machinery, hence CHKY) 1 (1957), p. 31.

10 Problems abounded even at key projects built with Soviet aid. The cost of enlarging Shenyang's No. 1 Machine Tool Plant, for example, turned out to be five times the initial estimate. See Pai Ou, "Brief Discussion of the Direction and Tasks of the Machinery Industry During the First and Second Five-Year Plans," CHKY 12 (1957), p. 5.

11 Commenting on the American scene. David Novick et al., Wartime Production Controls (N.Y., 1949). p. 287 report that "no phase of industrial and civilian mobilization for war was the subject of as extended discussion and as consistently bad administration as was construction."

III. THE INDUSTRIAL SYSTEM OF THE 1950's

China's industrial organization is a hybrid combining major features of Soviet institutions introduced during the 1950's with later modifications made in response to changing economic and political conditions. At the top stands the State Council, which holds formal responsibility for promulgating economic targets for all sectors. Once ratified by the State Council, economic plans carry the force of law, and failure to fulfill them is, technically speaking, illegal. In fact, detailed planning takes place in the State Planning Commission, which works in cooperation with the State Economic Commission, the State Statistical Bureau, the State Construction Bureau, the People's Bank, and other economic agencies subordinate to the State Council.

The State Council approves output plans for major commodities and value targets for various branches of industry. These norms are transmitted to the central government's industrial ministries-for coal, metallurgy, chemicals, textiles, etc.-which divide tasks and resources among constituent enterprises to ensure fulfillment of their portions of the national plan. Despite a gradual decentralization process beginning in 1957 which has transferred direct control of many industrial enterprises to the provinces and localities, this chain of authority has been an important feature of industrial administration since the creation of the first industrial ministries in 1952.

The fundamental unit of industrial activity is the enterprise. Each enterprise is headed by a director or manager. In addition to the technical functions of procurement, production, and sales work, directors enjoyed broad latitude over personnel and wage matters during the FFYP years. This system of "one-man management," based on Soviet practice, was subsequently challenged, and executive authority partially transferred to enterprise branches of the Communist Party. Party control reached a peak during the Great Leap Forward (195860), declined during the early 1960's, and may have rebounded under the Revolutionary Committees which have assumed nominal control of enterprise operations in the wake of the Cultural Revolution (1966-68).

The chief obligation of the firm, and of the managers and Party personnel occupying key posts, is to carry out the annual economic plans issued by the State Council and other organs of the central government. Despite periodic changes in the list of norms and in their relative importance, plan targets have always included figures for sales value and physical output of major commodities, financial quotas involving wages, costs, and profit, and subsidiary requirements concerning input coefficients, research, and innovation. Enterprises may also receive additional assignments such as expanding productive capacity, training workers for other firms and meeting special orders outside the current plan.

Enterprise plans typically emerge from consultations between factory executives and ministry officials. The center prepares preliminary drafts on the basis of overall policy objectives and the detailed information collected from below. Enterprise directors and more recently, workers, normally have an opportunity to discuss these draft plans and to suggest revisions before the final version is adopted. This bargaining process provides ample scope for enterprises to resist excessive output targets or to request additional materials, labor or equipment before accepting difficult assignments.