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Industrial Policy Reform in China: Structural and Regional ImbalancesAuthor(s): Richard M. AutyReviewed work(s):Source: Transactions of the Institute of British Geographers, New Series, Vol. 17, No. 4 (1992),pp. 481-494

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Industr ia l p o l i c y r e f o r m i n C h i n a : s truc tural a n dr e g i o n a l imba l ance sRICHARD M. AUTYLecturern Geography,Departmentf Geography,University f Lancaster, ancaster A14YBRevisedMS received 1 March,1992ABSTRACTChina'spostwar commitment to economic self-sufficiencyrequireda rapid expansion of heavy andchemical ndustry(HCI).Such a strategy is especially risky for low-income countries since it conflicts strongly with theircomparativeadvantage inlabour-intensive activity. It makes heavy demands on scarce capital resources and yields low returns,implying sizeablecosts in terms of consumption foregone. For China the risks arecompounded by a relatively poor naturalresource base andthe weak allocative efficiency of the command economy system. HCI is also difficult to downgrade. The Dengist reformsseek to shift resources from investment to consumption and from HCI to light industry and agriculture.They posedilemmas over whether to discardexisting HCIplant, upgrade it, or build new plant- and where. Reformis hamperedbythe rigidity of Chinese institutionswhich perpetuatedHCI dominance through an unintended investment surge 1984-88.KEYWORDS: China,Economic development, Inter-countrycomparison,Industrialpolicy, Regional change

INTRODUCTION: IMPLICATIONS OFECONOMIC AUTARKYStrategic goals underlayrevolutionary China'spost-war decision to stress economic self-sufficiency.However, a closed economy requiresa large heavyand chemicalindustry (HCI)sector in orderto secureall capital goods inputs domestically, yet HCI doesnot normally outstrip light industry in importanceuntil countries reach mid-income levels of develop-ment. This is shown in Table I by the SyrquinandChenery(1989) norms(whicharebased on datafrommore than one hundred countries, and describechanges in the structure of production and compo-sition of absorption as per capitaincome rises).Self-sufficiency therefore requires low-income countrieslikeChina to commithigh levels of capital nvestmentand skilledlabourto buildup theirinitiallysmallHCIsector. But this commitment runs counter to suchcountries'comparativeadvantagein labour-intensiveproduction.Accelerating the growth of HCIis there-fore riskyfor low-income developing countries. Thisis the case even for those countries like China andIndia, whose size confers the twin advantages oflarge domestic markets (with which to capture theeconomies of scale in HCI) and diversified natural

resource bases (with which to supply energy andmaterial nputs).Indiaillustrates the risks: ts HCI Drive resulted insizeableefficiency losses (Auty, 1991a). It spawned aslow-maturing HCI sector which stunted ruralpur-chasingpower, attenuatedthe growth of competitivelight manufacturingand entrenched a rigidhigh-costcommandeconomy. Itwas associated with relativelyslow economic growth, disappointing levels ofinvestment efficiency and sizeable losses in terms ofthe consumption foregone by a population whichcould ill-afford it. Moreover, the wasteful use ofresourcesarisingfromHCI'sdominance of the Indianeconomy was exacerbatedby the country's commit-ment to regional dispersal.This is because the scaleeconomies of HCI dictate a spatial concentrationofproductionwhich clasheswith the egalitariangoal ofspatial decentralization(Lyons, 1987). Finally,Indiashows that a low-income country may have no moresuccess in downgrading HCI (once it has becomeestablished) than the large mid-income countrieswhich opted for strong economic autarky, likeMexico or Brazil.This paper analyses the postwar Chinese HCIDrive with particular reference to the problemsof reforming HCI. The dearth of market signals inTrans. nst. Br.Geogr.N.S. 17: 481-494 (1992) ISSN:0020-2754 Printedin Great Britain

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RICHARDM. AUTYTABLE.CheneryndSyrquinormsorvery argeountries

Per apitaGNP($1980) 150* 275 550 1100

AbsorptionPrivate onsumption 75-9 70-3 65-9Publicconsumption 10-6 11-6 12-9Investment 15-8 20-1 22-8Total absorption 102-3 102-0 101-6Value dded

Agriculture 47-6 31-1 21-0 13-4Mining 2-0 2-6 3-0Manufacturing 26-9 18-3 24-3 29-7Light industry 12-8 15-1 16-7Heavy industry 5-5 9-2 13-0Constructionndutilities 6-9 8-5 9-5Services 25-5 41-7 42-8 47-4Exports 6-8 11-6 11-2 11-5

Value ddednHCIChemicals 1-4 2-3 3-2Nonmetallicminerals 1-0 1-5 1.8Base metal 1-3 2-3 3-4Machinery,ngineering 1-8 3-2 4-6

Sources: ood(1986),exceptcolumn1*,Perkins1988)

China's command socialist economy might beexpected to exacerbate efficiency losses while thestrong central control should enhance reform pros-pects. Within this context, this paper asks: howdid the HCI Drive affect China'seconomic growth,structural hange and investment efficiency?Was thepre-reformpattern of Chinese development sustain-able?And was Chinaany more successful than otherlarge newly industrializing countries (NICs) in itsefforts to reformits autarkic ndustrialpolicy?Infact,Chinadid make repeated efforts from the late 1950sto downgrade the dominance of HCI. In this it wasahead of other large NICs like India, Brazil andMexico and paralleledmoves by Taiwanand Korea.The paper is structured in five sections. First,China's postwar economic growth is analysed andthree HCI Big Pushes are identified. Second, thechanging pattern of the Chinese economy's sectoralstructure, and the allocation of output betweeninvestment and consumption, is comparedwith thatof Indiaand also with the CheneryandSyrquinnormsforlargelow-income developing countries.Third, heefficiency of agricultureand manufacturing s evalu-ated, noting Chinese HCI's slow maturation withreference to three key sectors (steel, petrochemicalsand automobile assembly). Fourth, the Dengist

reforms are examined in the light of the constraintsimposedby the institutionalenvironment.Theconse-quences for regional income inequality of both theHCI and reformpolicies provide animportanttheme.The finalsection outlines the policy implicationsforChina in the 1990s.POSTWAR CHINESE ECONOMICGROWTHBefore examining post-war trends in Chinese econ-omic growth and structuralchange it is necessary tonote some deficienciesin the data.Pre-1980 data forthe Chinese economy arerelatively sparse(Jefferson,1990; Perkins,1988). Moreover, what statistics thereare have been compiled in a differentmanner fromwestern convention, furtherincreasing problems ofcomparability.Finally,Chenery (1982) cautions thatthe inefficiencies in Chinese industry may lead tooverstatementof the size of the manufacturing ectorand also of total economic output.In an effort to overcome these difficulties, theWorld Bank (1985a) has reworked the ChineseNational Accounts and produced an input-outputtable for the early-1980s. This exercise involved sec-toral reclassificationto yield separatemining, metal

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Industrial olicyreformn ChinaTABLEI.SourcesfeconomicrowthnChina% ontributiono netmaterialroduct)

Period 1953-57 1958-66 1966-76 1977-85

Capitaltock 0-8 1-9 2-8 3-3Labourorce 1-7 1-6 1-8 1-7Productivity 3-7 (1-3) 0-6 4-1Total 6-2 2-2 5-2 9.1Source:Economist (1987) p. 18, afterPerkins

products and logging sectors. It also required pricerealignment to more closely match the price struc-tures of other low-income countries. Forexample,thepricesof textiles and consumerdurableswere reducedwhile therewere moderatepriceincreasesforagricul-ture and construction, sizeable ones for machineryand large increases for energy. While these adjust-ments improve ourunderstandingof the early 1980sposition, earlierdataremain ess transparent.The Chinese gross domestic product (GDP)growth rate has been higher than that of Indiathrough the postwar period but it has fluctuated n away which paralleles that of India.Rapid economicgrowth duringthe 1950s gave way to a lengthy mid-period of slower growth before more rapidgrowthresumed from the late-1970s. Perkins (1988) esti-mates that Chinese per capitagross nationalproduct(PCGNP) increased from $175 in 1952 to $550 by1985 (in constant 1980 dollars). His 1952 figurematches that derived by reducing the 1970 WorldBank(1989a) per capita figure in line with pre-1970growth rates.However, his estimate of $550 in 1985seems to be on the high side: the World BankTablesyield a 1985 figureof $445. Ifthe World Bankfigure sadopted, Chineseper capitaGDP is still about 50 percent higher than that of India (although short-runfluctuations may occur in the gap due to lags inexchange rateadjustments).Therehave been three HCIBig Pushes in postwarChina. The first two were planned and comprise theSoviet-inspired Big Push of the mid-1950s and thedefence-driven Big Push launched in the late 1960s.The thirdHCIBigPushwas not plannedandoccurred1984-88 as anunintendedby-productof the Dengistreforms.During the initialBig Push of the FirstFiveYear Plan 1953-57 China'sGNP grew very rapidly(Table II). It was executed with Soviet help andsubstantialgainscame from TotalFactorProductivityGrowth (TFPG), .e. the residualgrowth after takingaccount of increases in labour and capital inputswhich is attributable o technicaladvance(Economist,

1986; Perkins,1988).However, the firstHCIBigPushended in the disaster of the Great Leap Forwardwhich inflicted a massive negative shock on theeconomy 1958-61.Although the availabledata precludeclose evalu-ation and direct comparisonwith HCI Big Pushes inother largeNICs, it seems likely that the Chinese BigPushwould have inflicted sizeable negative spillovereffects on the economy in the late 1950s. This isbecause anHCIBigPushinvariablyexceeds domesticimplementationcapacity(Auty, 1992). In a commandeconomy like that of China, the negative macro-economic spillover effects (inflationand expandingfiscal and trade gaps) would be suppressed.Rather,the impact would be transmitted in terms of thediversion of higher levels of capital and humanresources to HCIwith correspondingwithdrawals ofresources from consumption-orientedactivities suchas light manufacturingand agriculture.The resultwould be shortagesof both consumergoods andHCIgoods. Such shortages did emerge in Chinaby 1957and they adversely affected agriculturalproduction(Riskin,1988, pp. 109-110).Large numbers of small communal HCI plantswere established in the winter of 1957-58 as theGreat LeapForwardattempted to make up for HCIshortfalls rom'backyard'production.TheGreatLeapmay have been politically inspired (Prybyla, 1987)but it also offered a tempting answer to economicproblems- but only if its assumptionof muchunder-used labour in the ruraleconomy was correct. Forin addition to quickly removing supply bottlenecks,not least of inputs to farming, the Great Leapalso promised to slow the alarming drift of ruralpopulationinto the cities (Riskin,1988).Under the Great Leap,industrialoutput allegedlyjumped 45 per cent in 1958 (moreover,much of theoutput was unusable). It fell sharply in 1959 asimplementationcapacity was breached,and sank toits 1957 level within two years (Riskin,1988). What-ever the specificcauses of the early 1960s' economic

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slowdown, GNP growth averaged only 1-4per centunder the Second Plan (1958-62) and industrialoutput did not recover to pre-Leaplevels until themid-1960s (Bunge, 1981; Cole, 1988). The averagegrowth rate of 4-3percent 1958-70 was significantlydown from thatof the mid-1950s (TableII).The decelerationin economic growth through the1960s was the more disappointing because it oc-curreddespite an increase in the rate of investment.By 1970 investment absorbed29 per cent of China'sGNP, twice the CheneryandSyrquinnorm fora largelow-income country and a reflectionof the resourcemobilization capacity of the command economy(Table I).Sucha level of investment,if deployed withKoreanefficiency,could have propelled the Chineseeconomy at a 10 per cent annual growth rate, butChina's GNP growth was barelyhalf that at only 5-5percent under the FourthPlanthroughthe remainderof the CulturalRevolution. Investmentefficiencywasdisappointing:Table IIsuggests that throughout thepolitical upheavalsfrom 1958-76 TFPGwas, like thatof Indiain the same period, low or negative. Growthin those yearswhen material ncentives were minimal(Prybyla, 1987) was driven overwhelmingly by in-creases n the labourforceand incapitalaccumulation,ratherthanby improvedproductivity.However, the Chinese economy did surge 1969-73, partly reflecting the second HCI Big Push andpartly recovery from the upheavals of the CulturalRevolution.The GNP growth rateaveraged 11-8percent annually 1969-73 (World Bank, 1989a) as theplanners sought to establish HCI in the interiorprovinces for reasonsof militarysecurity.The decen-tralizationof industryduringthe CulturalRevolutionaimed to make each province self-sufficient so thata military invasion would need to be total to beeffective (Rothenberg,1987).This decentralizationof the early 1970s echoed anearlierpolicy which had, however, left the regionaldistributionof industrylittle changed. The FirstFiveYear Plan had aimed to reduce the prominence ofShanghai(which,with the northeast,had dominatedindustrialproductionbefore the Chinese revolution).Major steel complexes were built at Wuhan (Hubei)and Baotou (Inner Mongolia), while the war-damaged factories of the northeast (including theAnshan steelworks in Liaoning) were refurbished(Figure 1). Yet twenty years later the northeasternthird of the country still accountedfor three-quartersof industrial production (Bunge, 1981; p. 240).Moreover, as shown later, the HCI-led effort todevelop the interior contributed to the low overall

productivity of pre-reform Chinese investment(Wanging Guo, 1988).The disappointing1959-76 trendin the speed andcapital efficiency of Chinese economic growth washalted by the Dengist reforms. Whereas economicgrowth decelerated in most other developingcountries after the 1973 and 1979 oil shocks, thereforming Chinese economy responded with evenmore resilience than the reviving Indian economy.GNP growth averaged 8-6 per cent under the FifthPlan 1976-80, and then rose to 11-1 per cent 1981-85 underthe SixthPlan. The fasterChineseeconomicgrowth ratesreflecteda strong recovery frompoliti-cal upheavalas well as the benefits of rural reforms.But, as in India, the downgrading of HCI proveddifficult o achieve.POSTWAR STRUCTURAL CHANGEAlthough China's command economy could deployhigh levels of investment it proved less adroit ineither modifying the sectoral allocation of thatinvestment or in securingan efficient returnupon it.The protracteddominance of HCI is evident in thechanging structureof the postwar Chineseeconomy.China launched its autarkic ndustrialpolicy beforeIndiaand both countrieswere encounteringproblemsby the 1960s. But while India experienced a pro-nounced slowdown in structuralchange (albeit notthe downgrading of HCI which improved capitalefficiencyrequired) rom the mid-1960s, the structureof production of the Chinese economy evolvedrapidlythroughout the entirepostwar period.In the early 1950s, the share of services in ChineseGNP was comparable to that of the Chenery andSyrquinnorms for very large countries (TablesI andIII), although agriculture was significantly biggerwhile manufacturing was remarkably small. Theinitiallyshrunkenmanufacturing ectorinpartreflectswar damage which included the cannibalizationofChinese HCIin Manchuriaby the departingRussians.The rapidgrowth of Chinese industrialoutput afterthe revolutionpushedthe sector'shareof value addedfrom 15 per cent in 1957 to 45 per cent by 1976.A second striking feature of Chinese structuralchange is that despite attempts to downgrade HCIin the late 1950s and again from the late 1970s,HCI maintained its early dominance. The rate ofinvestment of heavy industry to light industry wasin excess of 8:1 into the 1980s (Prybyla, 1987).Although dataon net valueaddedare not availableatthe subsectoral evel for the earliestperiod,figuresfor

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Industrial olicyreformn ChinaTABLEII.China:tructuralhangendabsorption952-1985 %GNP)

PercapitaGNP 1952 1970 1980 1985($1980) 175 245 290 445

AbsorptionPrivateconsumption 55-3 55-0 51-7Public consumption 15-5 16-3 13-9Investment 29-2 30-0 38-7Total 100.0 101-3 104-3Exports 2-1 2-8 7-1 9-9

ValueAddedAgriculture 63-0 35-0 32-0 31-2Industry 8-5 41-1 48-0 45-3Manufacturing 31-7 35-3 33-4Construction and utilities 9-4 12-7 11-8Services 28-5 24-0 20-0 23-4

Memo item:adjusted1981 structure f productionAgriculture 35-8Industry 37-9

Mining 10.8Light manufacturing 8.1HCI 16-4Electricity 2-6Construction 4.7Services 17-2

Sources:Perkins(1988), World Bank(1989b), World Bank(I985a)

the mid-1950s indicate that HCI by then accountedfor 56 percent of the gross value of industrialoutput.This was alreadyfarhigher than would be expectedfrom the Chenery and Syrquin norms for a devel-oping country, given that the Chinese per capitaincome level was below $200 (in constant 1980dollars).HCIalreadyoutstripped light manufacturingin termsof value added(aftersubtractingthe value ofnon-manufacturingindustry from industrial outputand adjustingfor the higher gross/net ratios of HCIcomparedwith light industry).Yet, the Chenery andSyrquinnorms for very large countries suggest thecross-over to HCI dominanceoccurs well above a percapitaGNP level of $1000. With 3 percent percapitaGNP growth, China would have takena further twogenerations to achieve that level.Driven by HCI, Chinese industry continued toincrease its share of GDP through the 1970s, theunadjusted figure reaching almost 50 per cent in1980. Even aftermakingthe priceand sectoraladjust-ments noted earlier,Chinese industry still accountedfor 43-6 per cent of GNP by the early 1980s whereasthe Cheneryand Syrquinnormis close to 27 percent(Table I). The gains by industry in its share of GDP

were at the expense of the neglected service sector(TablesI andIII).The size of the industrial ectordoesnot appearto arise from statisticalfluke:there is noevidence that the small size of the Chinese servicesector had been due to service workers hidden in thestatisticsfor other sectors likemanufacturing.Ratherit reflects redundancies within the command econ-omy in commerce and finance as well as the almosttotal neglect of personal services inherent in thesocialistproductionsystem (WorldBank,1985a).On the eve of the Dengist reforms, industrialoutput rebounded as plant built in the second (early1970s) BigPushachievedfullcapacity:having grownby 3-4 per cent 1973-76 industrialoutput expandedby 13 per cent in 1977 and 14 per cent in 1978.However, the reforms aimed to improve the Chinesestandard of living by boosting consumption andlowering investment, especially in HCI.The reformsaimed to do this by raisingthe efficiency of resourceuse and this meant downgrading self-sufficiencyasan economic objective. This in turn implied greaterregionalandnationaleconomic specialization,with avastly expanded role for trade.The Dengist reforms initially triggered rapid

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TABLEIV. China'seconomic erformance 981-89

RuralReform UnintendedHCI BigPush Stabilization1981 1982 1983 1984 1985 1986 1987 1988 1989

Investment (%GDP) 29.1 29-6 30-3 32-2 38-7 39-3 39-2 39-9 36-1GDP growth (%/Yr) 4-9 8-3 9-8 13-5 13-1 8-0 10-5 11-2 3-9Consumer price index (%/Yr) 5-8 3-3 4.2 (0-4) 17-2 8-1 16-3 30-3 12-1Budget balance (%GDP) (1-2) (1-4) (1-7) (1-5) (0-5) (2-0) (2-2) (2-5) n.a.Currentaccount (%GDP) 0-8 1-9 1-5 0-9 (3-5) (2-6) (0-1) (11) (1-2)Foreign debt (%GDP) 1-8 2-6 2-9 3-7 4-8 7-2 10-6 12-2 113

Source:World Bank(1990)

growth in farmproductionand shifted the industrialpriority firmly from HCI towards textiles and con-sumer goods. Consumption increased its share ofnational income in the early years of the reforms asthe shareinvestment declined from 36 per cent to 30per cent of GNP 1978-83 (World Bank, 1985a).Tradealso increased:exports exceeded 7 per cent ofGDP in 1980 and although this is still two-thirds ofthe Cheneryand Syrquinnorm,that figure compareswith 2-8 per cent in 1970 and 2-1 per cent in 1952(Table III).Primaryproducts accounted for almosthalf of all Chinese exports while manufacturedexports were dominatedby textiles (one-fifthof totalexports)- despite three decades of HCI-ledgrowth.This reflects the slow maturation(i.e. attainmentofglobal levels of quality and competitiveness) ofChinese HCI which was unable to generate muchforeign exchange, a remarkablysimilaroutcome tothat of India.Chinese industrial output decelerated sharply1979-80 but the negative impact of this on GNPgrowth was offset by rapid ruralgrowth (Perkins,1988). Ruralreform ifted the agricultural rowth rateto 8 per cent 1979-84 andwas associated with sharpincreases in consumption. The latter accounted fortwo-thirds of China's economic growth 1980-84(World Bank, 1989b). Since food output grew sub-stantiallyand the ruralmanufacturing ector provedflexible there was little pressure on inflation:pricesrose by barely3 percent 1980-84 (TableIV).There-after,rural nvestment switched fromfarms to indus-try andby the mid-1980s ruralmanufacturingoutputexceeded that of farmoutput (Economist,1988).However, as in other largeNICs pursuingautarkicindustrialpolicies, Chinaexperienced great difficultyin sustainingHCIreform.The early Dengist reversal

of the dominance of HCI was unexpectedly endedwhen the reforms were applied to industrialproduc-tion in 1984. This is because the devolution ofdecision-making to enterprises unintentionallytriggereda third HCIBig Push. HCI'sshare of invest-ment,having fallenfrom 48-7percent to 35-7percent1978-85, climbed backto 43-5 percent by 1988. Theconsumptiongainsof the earlyreformswere reversedas the contribution of investment to growth morethan doubled to 72 percent comparing1985-88 with1980-84. Thegrowth in industrialoutputacceleratedfrom9-9 per cent 1980-84 to 17-8 per cent 1985-88and jeopardized the entire reform strategy as theprices of many goods rose. This depressed workerincentives:grainproductionstagnated 1984-87 andurban iving standards ell (Zweig, 1987).The unintended HCI Big Push 1984-88 meantthat,despite the rapidrate of economic growth fromthe late 1970s (which doubled GDP in seven years)and the new reform priorities, the productionstructureof the Chinese economy in the late 1980scontinuedto be dominatedby HCI. Some two-thirdsof Chinese manufacturing output came from HCIcomparedwith less than two-fifths for the Cheneryand Syrquinnorms (TablesI and III).HCI has there-fore proved no easier to reform in a commandsocialist economy than it has in India's commandcapitalistsystem (Lucas,1989) or the more market-orientedsystems of Mexico and Brazil.INVESTMENT EFFICIENCYAggregaterendsThe costs of HCI dominance,in termsof low invest-ment efficiency and consumption foregone, havebeen heavy. Despite the unusually high rate of

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Industrial olicyreformn ChinaTABLE . Chineseer apitaegionalrossvalue findustryndagriculture1980prices)

1952 1978 1980Value Yuan %National Yuan %National Yuan %National

Eastcoast 184-5 133 847-9 144 982-2 141Centre 118-5 85 469-4 80 537-4 80West 92-1 66 312-3 53 391-4 56National 139-2 100 589-6 100 694-5 100

Source:Wanging Guo (1988) p. 35

investment during the two decades prior to the re-forms,percapitaconsumptionin Chinagrew no fasterthan that of other low-income countries. The domi-nance of HCI during those years reduced Chineseconsumptionin two ways. First, t pushedthe Chineserateof investment to very high levels (30 percent andmore of GNP), with a corresponding withdrawal ofresourcesfrom more consumption-orientedactivity.Second, as noted below, the resources invested inHCIgenerated a relatively low return.The aggregate Chinese incrementalcapitaloutputratio (ICOR), which measures the ratio of extrainvestment to additional output, is estimated ataround 5 for the years 1957-79. This comparesunfavourablywith an ICOR of 3-9 for mid-incomecountries1960-78 (WorldBank,1981). More specifi-cally, the Chinese ICOR deterioratedfrom the late-1950s to the 1970s (i.e.more capitalwas requiredtoproduce a given level of output so that the ratioincreased). The productivity of installed capitaldeclined sharply and HCI project gestation periodsdoubled to eight years. Technology also laggedduring the years of autarkicdevelopment: gains inTFPGwere low ornegative 1958-76 (TableII).How-ever, the Dengist reformsdramatically mproved theChinese ICOR to 3-4 1980-88 (Wood, 1990).After adjusting for price differences betweenChinaandmore open economies, the productivity ofindustrialinvestment appears to have been inferiorto that of agriculture.Within industry, the return onHCI was lower than that of light manufacturing.Yetdespite such figures, the sectoral distribution ofChinese investment held remarkably teady. Data for1965 and 1977-79 show that in each time periodChinaallocatedone-fifth of total investment for agri-culture, 55 per cent for industry and infrastructure(four-fifthsof that for HCI) and the rest to otheractivity (Riskin,1988).Furtherevidence of impairedindustrialefficiencycomes fromthe relativelyhigh levels of materialsand

energy consumption per unit of GDP in the Chineseeconomy. Energy and steel consumption per unit ofindustrialoutput aresimilar o those of India but twoto three times levels in Brazil.In the command econ-omies of easternEurope,similarhigh levels of energyandmaterialsconsumptionreflect nefficiencies n usein the absence of conservation incentives (Bernstam,1991).

Apart from the resource allocation inefficienciesinherent n the pursuitof anautarkicndustrialpolicy,a furthersource of inefficiency lies in China's largestate-owned enterprises (SOEs) which, as in India,dominatedHCIinvestment. In 1979 SOEs producedmore than four-fifths of industry value added (ex-cluding brigade production)with 88 per cent of thecapitalstock and 58 percent of the workforce.Urbancollectives produced one-eighth of the output andcommunesaroundhalf that.China's regional decentralizationpolicy was yetanother factor impairing investment efficiency. Forexamplethe seven westernprovincespossessed threetimes the industrialcapitalof Shanghai,butgeneratedscarcely half as much profit and tax (Wanging Guo,1988). Worse, as Table V shows, three decades ofHCI-led spatial decentralization failed to eliminatethe wide regional variationsin Chinese levels of in-come (Cole, 1987; Li,1990;Zweig, 1987).Priorto thereforms,the per capitaincome of ruralareasdeclinedto less than half the level in urbanareas. However,China was more successful than India in providingbasic needs since the average daily calorieintakewasestimated at 2500 1980-82 comparedwith 1900 forIndia(PerkinsandYusuf, 1984).Finally, he inabilityof the neglected light industrysector to absorbsurplusrural abourwas reflected n amarked all in rural abourproductivitybetween 1957and 1975. The sown areaexpanded by only 0-2 percent annually1952-79 while the workforceincreasedby 2 per cent annuallyso that the sown area/workerfell to two-thirds of the 1952 level. Output rose

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because more workers were absorbed and becausethose in work increased their annual days workedfrom 170 in 1957 to around 250 in 1975. Rawski(1979) estimates that employment in agriculturegrew from 231 million to 329 million 1957-75while manufacturing mployment expandedfrom 15million to 40 million.Infact,the shareof agriculturentotal employmentremainedconstant andin the early-1980s resembledthat of Indiaat around 70 per cent(WorldBank,1985a).The 1957-75 agricultural rend of ever-increasinglabourinputs to offset declining labourproductivitywas not sustainable. Meanwhile, the lag in ruralproductivity and attenuation of light industry werenot compensated for by the performance of theChineseeconomy's spearhead,HCI.SlowHCImaturationChineseHCI has very lengthy maturationrates com-paredwith the yardstickof Koreawhich matured itsshipbuildingsector in two yearsandits steel sector ineight years(Auty, 1991b).In the case of China,a widegap still remains between the performanceof its HCIand global standards even after more than threedecades of HCI-led growth (Jefferson,1990). Thisreflects the muting of international and domesticcompetitive stimuli and the dissipation of the econ-omies of scaleinpursuitof the regional dispersalgoal.Paralleling India, steel dominated Chinese HCIand the development of alternative materials suchas petrochemicals was retarded. Other globallydynamicpostwar sectors such as vehicle productionwere also slow to develop. Changes in the rate ofgrowth of Chinese steel production reflect trends inthe overall rate of economic growth. Chinese steelcapacity tripled in the decade 1955-65 to reachalmost 20 million tonnes when productionwas threetimes thatof India.After growing slowly throughtheCultural Revolution output almost doubled againbetween 1975 and 1985 to 55 milliontonnes.Theregionaldispersalpolicy eventually resulted nall provinces but the western-most ones of Xizangand Qinghai producing pig iron while only oneprovince, Xizang,produces no steel at all (Figure1).But the goal of spatial decentralization causedChinese production technology to be markedlydualistic, as in India. For example, China producedsteel in the early 1980s, in around 2000 state andcollective enterprises, ranging upwards from smallunits with less than 5000 tonnes annualproductiontoworldscale integratedunits. But only one integratedsteel mill (Baoshan,near Shanghai)was built on the

coast, even though such a site is potentially China'smost efficient location.Production is dominatedby fourteeenlargeplantswith more than I million tonnes capacity whichaccount for 60 per cent of Chinese production. Thelarge plants tend to be raw materials-orientedandlocated in the north, northeast and central-southregions. The average size of the smaller millsresponsible for 40 per cent of Chinese output is10000 tonnes whereas efficient optimum-sizedwestern mini-millsexceed 500 000 tonnes capacity.Chinese steel technology is generally backward,even in the largerunits.Some 31 per cent of produc-tion still emanated from open hearth units in the1980s while less than one-third was produced bycontinuous casting. The largest integrated steelplants, like Anshan, have low productivity:Anshanuses 50 manhoursper tonne of steel and Baotou 60manhours- ten times the levels in modern westernplants (FinancialTimes, 1986).A similarlydualisticanduncompetitiveproductionsystem characterizesthe chemical sector. The pre-occupationwith steel in China,as in India,resultedinthe neglect of non-steel materials. Strict control ofpricesandimportscreatedsizeablerepresseddemandforpetrochemicals,as did the technological lag arisingfrom the extreme isolation of the Chinese economy1958-70. However, China began to adopt westernpetrochemicalplant in the early 1970s and it made afurther arge expansion through the late 1980s.Basic chemicals and petrochemicalsgrew rapidlyfrom the early 1970s andfourplantswith a combinedethylene capacity of 600 000 tonnes were commis-sioned by 1978 (three in the northeast and onefurther west in Gansu). However, only the Beijingunit was world scale, even though the Chinesedomestic market was large enough to absorb theoutput of two world scale ethylene crackers.Underthe reforms a second round of ethylene expansioncommenced in the mid-1980s (Figure 1) involvingthree world scale units (in Heilongjiang, Shandong,andJiangxi).The legacy of these expansions in termsof plantsize is for the averageChinesepetrochemicalplant to range midway between that for Korea andIndia:average plant size was half that of Korea andtwice that of India.In fact, the wisdom of Chinese petrochemicalexpansion may be questioned since the country'snaphthafeedstock base andrelatively long construc-tion times make it a relatively high cost producerofethylene, low density polyethylene andhigh densitypolyethylene and a low-cost producer of no major

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