Report No. 3391-CHA E ; p 1 China: Socialist Economic Development (In Nine Volumes) 3391 Annex D: Challenges and Achievements in lndustn Vol. 5 June 1, 1981 (reprinted March 10, 1982) East Asia and Pacific Regional Office FOR OFFICIAL USE ONLY Document of the 4brid Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS The Chinese currency is called Renminbi (RMB). It is denominated in yuan (Y). Each yuan is subdivided: 1 yuan = 10 jiao = 100 fen Exchange rates used in this report are as follows: 1977 $1.00 = Y 1.828 1978 $1.00 = Y 1.661 1979 $1.00 = Y 1.541 WEIGHTS AND MEASURES Chinese statistics are usually in metric units; in addition, mu and jin are often used: 1 mu = 0.1647 acres = 0.0667 hectares (ha) 1 jin = 0.5 kg FISCAL YEAR January 1 - December 31 TRANSLITERATION The Pinyin system is used in this report. C46400/J79061/D3159/66 FOR OFFICIAL USE ONLY CHINA: SOCIALIST ECONOMIC DEVELOPMENT AN-LNEX D C'HALL,.NGES A.Nm ACHI -VEMENTTS IN INDUSTRY Table of Contents Page No. 1. PAST GROWTH AND RECENT OUTPUT . . . . . . . . . . . . . . . . . . I A. Past Growth ... . . . . . . . . . . . . . . . . . . . . . . I B. Gross Output by Branch of Industry. . . . . . . . . . . . . . 7 C. Selected International Comparisons. . . . . . . . . . . . . . 11 2. STRUCTURE AND ORGANIZATION ... . . . . .... . . . . . . . . 19 A. Overview by Broad Classes of Enterprises . . . . . . . . . . 19 3. Organizacion and Management . . . . . . . . . . . . . . . . . 24 Central Control and Coordination. . . . . . . . . . . . . . 24 External Supervision of Enterprises . . . . . . . . . . . . 26 Management of Znterprises . . . . . . . . . . . . . . . . . ^z9 Enterprise Plans and Incentives . . . . . . . . . . . . . . 30 C. Size and Regional Pattern of Industry . . . . . . . . . . . . 33 Scale of Production ... . . . . ..... . . . . . . . . 33 Regional Patterns of Industrial Development . . . . . . . . 36 3. RECENT CHANGES IN POLICY ................... . 39 A. Reassessment of Past Policies . . . . . . . . . . . . . . . 39 B. New Policy Framework . . . . . . . . . . . . . . . . . . . . 40 C. Implementation of the New Policies . . . . . . . . . . . . . 41 4. STRENGTHS, WEAKNESSES AND PROBLEMS . . . . . . . . . . . . . . . 50 A. The Chinese Authorities' Appraisal . . . . . . . . . . . . . 50 B. Mission Findings. . . . . . . . . . . . . . . . . . . . . . . 52 Efficiency in Production . . . . . . . . . . . . . . . . . 53 Product Designs, Production Technology and Labor Skills . . 55 Pollution and Environmental Impact. . . . . . . . . . . . . 57 Management and Decision Making . . . . . . . . . . . . . . 58 The Price and "Signal" System . . . . . . . . . . . . . . 58 Compensating Strengths . . . . . . . . . . . . . . . . . . 59 5. ISSUES AND CHALLENGES . . . . . . . . . . . . . . . . . . . . . 60 A. Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . 60 B. Energy Conservation .61 C. Raw Materials for Consumer Goods. . . . . . . . . . . . . . . 64 D. Manufactured Exports. . . . . . . . . . . . . . . . . . . . . 67 E. Technology Acquisition . . . . . . . . . . . . . . . . . . . 68 F. Restructuring . . . . . . . . . . . . . . . . . . . . . . . . 70 G. Reforms and Improved Management . . . . . . . . . . . . . . . 70 H. Price and Tax Reforms .71 This document has a restricted distribution and may be used by recipienus only in the performance of their offcia duties. Itl contents may not otherwise be disclosed without World Bank authorization. C46400/J79075/D3159/67 - ii - Page No. TABLES IN TEXT 1.1 Aggregate Indicators of Industrial Output Growth, 1952-79 . . . 2 1.2 Leading Industrial Products: Physical Output and Growth Rates, for Selected Years and Periods (1952-79) . . . . . . . . 6 1.3 Trends in Gross Output, Fixed Assets and Labor Force in Industry, and Associated Indices, 1952-79 . . . . . . . . . . 8 1.4 Value and Growth of Output, 1979, by Branch of Industry . . . . . 9 1.5 Percentage Shares and Per Capita Value of GDP from Industry and Manufacturing: China (1979) and Other Economies (1978) . 12 1.6 Selected Physical Comparisons of Industrial Output in China and India .... . . . . . . . . . . . . . . . . . . . . 14 1.7 Percentage Composition of Gross Industrial Output: China and Other Countries ... . . . . . . . . . . . . . . . . 16 1.8 Percentage Composition of Gross Manufacturing Output . . . . . . 18 2.1 Aggregate Industry Statistics by Ownership, 1979 . . . . . . . . 20 2.2 Economy-wide Statistics for Light and Heavy Industry, 1979 . 21 2.3 Employment, Wage Bill and Average Wage per Worker in State Enterprises, 1979 . . . . . . . . . . . . . . . . . . . 23 2.4 Motor Vehicle Production in the Most Important Plants, 1979 . . . 35 2.5 Geographical Pattern of Gross Industrial Output, 1979 . . . . . . 37 3.1 Manufactured Export Trends, 1976-79 . . . . . . . . . . . . . . . 44 3.2 Trends in Investment in Capital Construction by Industry, 1977-79 ............................ 46 -46400/J89422/D3159/02 1. PAST GROWTH AND RECENT OUTPUT A. Past Growth 1.01 China's manufacturing industries /1 have made enormous advances since 1949. Today, though not without weaknesses, they have impressive capabilities and turn out a remarkable range of products. Even taking into account the high priority given them and the costs of their development, their advances are a huge achievement. 1.02 According to official estimates, gross industrial output has in- creased in real terms more than forty-fold since 1949, implying an average growth rate of over 13% p.a. If the 1949-52 recovery period is omitted, the rate for 1952-79 is 11.1% p.a. Especially swift growth was achieved in the early years of reconstruction and recovery (nearly 35% p.a. from 1949-52) and on through the First Five-Year Plan (18% p.a. from 1952-57). Thereafter, growth slowed; but in 1957-79, despite all setbacks, gross output continued to grow at nearly 10% p.a. (Table 1.1). Results for 1980 show an increase of 8.7% over the 1979 figure. Net output in current prices has grown more slowly than gross output in constant prices,/2 at rates averaging 8.6% in 1957-79 and a little less since 1970. But in real terms this growth may have paralleled that of gross output, since there has been a slow downward drift /1 Statistics for manufacturing cannot be completely separated from those for a wider group of activities that come under the heading of "industry" in China. This heading covers manufacturing, electric power, mining and mineral extraction, logging and transport of timber, and the many services provided to workers and staff within Chinese industrial enterprises. Chinese data for industry (and for gross industrial output) cover all state enterprises and, in addition, urban collective and commune-owned rural enterprises that meet three tests: they have at least ten workers (though they may be handicraft cooperatives); they have buildings and equipment; and they operate at least three months per year. (However, in rare instances significant enterprises are counted that do not strictly meet all these tests.) Output from rural industrial enterprises owned by production brigades or production teams, and from commune enterprises too small or seasonal to meet these tests, is counted in agricultural output, while manufacturing output on a very small scale within such units as households or service enterprises (e.g., tailoring, repairs, or the smallest food processing operations) generally goes unrecorded. /2 It is not clear conceptually how to deflate net output when a substantial share consists of indirect taxes (para. 1.05 below) . Adding to this difficulty, for years prior to 1970, the only available information on price trends comes from implicit deflators and thus depends on the reliability of the gross output series. Price indices and deflation are discussed further in the Appendix to the Hain Report. C46400/J78712/D1383/45 -2- Table 1.1: AGGREGATE INDICATORS OF INDUSTRIAL OUTPUT GROWTH, 1952-79 Net output in Index number of gross output current prices in constant prices (Y billion) (1949 = 100) Excluding Including Heavy Light brigade brigade industry industry Total industry industry Year 1952 329.7 214.6 245.0 11.7 12.2 1957 1,024.3 393.2 560.0 25.4 26.0 1965 2,144.9 739.2 1,108.8 50.4 n.a. 1970 4,252.9 1,104.9 1,925.8 77.0 78.3 1975 6,896.6 1,602.0 2,980.3 112.7 n.a. 1977 7,922.2 1,875.0 3,450.7 119.7 n.a. 1978 9,158.1 2,077.5 3,916.5 138.5 143.5 1979 9,863.3 2,276.9 4,249.4 155.0 160.9 Average Growth Rates (% p.a.) 1952-79 13.4 9.1 11.1 10.0 10.0 1952-57 25.4 12.9 18.0 16.8 16.3 1957-79 10.8 8.3 9.6 8.6 8.6 1957-65 9.7 8.2 8.9 8.9 n.a. 1965-75 12.4 8.0 ;0.4 8.4 n.a. 1975-79 9.4 9.2 9.3 8.3 n.a. 1957-70 11.6 8.3 10.0 8.9 8.9 1970-79 9.8 8.4 9.2 8.1 8.3 Sources: Main Report, Appendix Table A.4, and Statistical Annex, Table A 2.3. C46400/J78361/D3159/03 -3- of industrial prices since 1957, with some being reduced while others have remained unchanged./l 1.03 The broad picture of rapid and remarkable growth suggested by these series is confirmed by all available evidence. However, there may be mild upward biases in the growth rates given in the official series, since Chinese prices and accounting conventions give heavier weight to fast growing sectors. Prices of industrial products are almost certainly higher on average, by international comparative standards, for the newer products whose output has grown fast than for old ones whose output has grown more slowly; and there are problems in creating links in the series where products change. Accounting conventions used to compute gross output are almost certainly biased toward greater multiple counting of output in fast-growing industries such as iron and steel, machine-building, petroleum and chemicals, particularly as a result of the links between them;/2 but there is much less multiple counting in slow-growing, older industries such as food and agricultural processing. Indeed, by contrast to the practice in many other countries, gross output does not include the value of the raw materials used in such activities as grain milling, slaughtering, and cotton ginning, except in the largest urban enterprises. 1.04 A further problem is that over time, and as a result of changing priorities and technologies, the output mix has shifted, as has the relation- ship between final output and intermediate inputs such as steel, coal or electricity. In some years more than others, a significant share of output has remained unused or unuseable and gone into stockpile buildup or has been otherwise wasted (construction projects never finished, excessive consumption of materials, etc.). Thus, trends in useful final output may have diverged from those in measured output. In addition, because gross output has been treated as a leading target at all levels, many reporting units, faced with choices in their product mix (specification and variety of output), produc- tion methods, accounting of their costs, and the valuation of unstandardized /1 Industrial prices have declined slightly on average, by less than 1%, since 1970; for a large sample of large and medium-sized state enter- prises, according to the State Statistical Bureau (SSB), gross output in current prices was Y 198.4 billion in 1979, compared to Y 199.7 billion in the 1970 accounting prices more commonly used. Judging by data for enterprises visited, the principal price declines have occurred in machinery prices; in a few enterprises producing machinery, gross output was more than 15% lower valued in current prices than in 1970 prices. /2 For example, the iron that is turned into steel, or the oil that is turned into petrochemicals and then synthetic fiber, is counted at each processing stage. C46400/J79029/D3159/04 -4- products (which is often done on a "cost plus" basis), have probably tended to make choices that have raised their measured gross output performance; and the frequency and statistical weight of these biased choices has almost certainly fluctuated over time as policies have changed./i 1.05 Net output, too, is a peculiar measure./2 About one fourth consists of labor costs, which were held down from 1957-77 by granting almost no wage increases (in contrast to increases before and since). Because, with minor exceptions, there is no charge for use of capital, most of the remainder (over two thirds of net output) is indirect taxes and planned profits designed to serve as indirect taxes, based on prices that do not reflect demand and supply but make profits seem higher in some industries than in others. Compared to market economies, these price markups and indirect taxes at successive stages of manufacturing are relatively high, while price markups and indirect taxes in commerce are generally small, with the effect that much of the national income shows up as net output in industry rather than services. Low prices of foodstuffs and most services in China add to the relatively heavy weight of industry. As a result of these price and tax patterns, trends in net output are not a reliable indicator of trends in real output (though they are sensitive to trends in cost efficiency). Indeed, Western concepts used in national accounting and in aggregating output were never designed for such a price and tax system, so inferences based on these concepts may be misleading. 1.06 The achievements of China's industries, and their rapid expansion from 1952 through 1979, are vividly illustrated by increases in the physical /1 Recent growth rates of gross output are subiect to some of the same diffi- culties. For example, there 'has been a rapid growth of petroleum-based products, such as synthetic fibers and plastics, that are assigned high prices and are counted at successive stages of processing. However, useful output has almost certainly increased as a share of the total in 1979 and 1980. /2 Net output is computed on the basis of an accounting identity, as the sum of taxes, profits, wages, interest, and management fees. Depreciation is not included. The wages include those of people primarily engaged in services within the enterprise (e.g., health personnel, teachers, nursery attendants, cooks, and full-time students), whose output is not included in gross output. Other welfare service expenditures (including pensions) are treated in some circumstances like other costs, and in others they come out of profits. C46400/J90796/D3159/05 -5-. output of particular products (Table 1.2)./1 In nearly all products shown, the rate of growth has been lower since 1957 than in 1952-57, but most branches of industry have achieved vigorous expansion since then, despite the setbacks of the Great Leap Forward (1958-60), the withdrawal of Soviet assistance (1960), and the years of intermittent turmoil associated with the Cultural Revolution (1966-76). In fact, though the post-1966 events disrupted output growth in some years not included in the table, their negative effects on physical output growth are not obvious in the table itself. 1.07 The neglect of consumer goods industries over long periods, now being criticized in restrospect, is also not obvious from the table. By standards of more advanced countries, per capita production of most consumer items remains very low, but considerable gains have been made, as can be seen from the swift advances in light consumer engineering products such as bicycles, radios and watches. The gains made in these and other consumer goods in 1979 and 1980 have been spectacular, however, both absolutely and by comparison with all earlier periods. Meanwhile, in 1980 output of seve- ral types of capital goods was sharply reduced to match demand, while production of fossil fuels declined (paras. 3.07-3.13). /1 The dimensions of China's output in some other light industry products in 1979 are given below: Garments .................. 744 million units Woolen blankets ........... 6.9 million units Footwear .................. 503.3 million pairs (incl. 116 million of leather and 180 million plastic) Canned food ............... 0.501 million tons Dairy products ............ 0.054 Soap ..................... 0.753 Cigarettes ................ 651 billion units (1980 = 760 bln units) Clocks .................... 19.78 million Wines & alcoholic bev. 3.1 tons of which beer 0.52 (1980 = 0.688 mln tons) Leather hides (oxhide equivalent)/a .............. 30.8 million units of which pigskins ....... 44.22 /a Two pigskins or six sheep or goat skins are counted as equivalent to one oxhide. Sources: Ministry of Light Industry, State Economic Commission, and communiques on plan fulfillment in 1979 and 1980. c~~~~~~~~~~~~~~~~~~~~~~~~~~I 1 e~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 7 C46400/J78984/D3159/06 -7- 1.08 Throughout the existence of the People˝s Republic, much effort has been devoted to attaining new technical capabilities. Nearly the entire range of modern industries has been set up, with much emphasis on those making capital equipment. In the past two decades, China has manufactured the bulk of its new equipment for itself. In practically every significant industry, major plants have been created in several parts of the country, and smaller plants have also been established. A widespread machine-building capability has also been fostered by encouraging enterprises and branches of industry to build much of their own machinery and by requiring local units to build many of their own plants. Special efforts have been made to spread manufacturing into backward regions and rural areas. Meanwhile, industrial research institutes and the more advanced factories continually strive to make new products and master recent technologies. As a result, there is a foundation of engineering experience, and a breadth of technical capabilities, unusual in a developing country. 1.09 Quantitative advances, even in periods of political isolation,have been won through a combination of ingenuity and expediency.and increased inputs. For example, by using small plants and outdated methods, when difficulties were encountered in building larger plants and mastering newer methods. There has also been a vast expenditure of resources in pursuit of industrial expansion. 1.10 Some data are available on the increases in inputs associated with China's enormous expansion in industrial output (Table 1.3). The gross value of fixed assets in industry, valued (at least since 1949) at original purchase prices, nearly kept pace with output in 1952-57 and then increased considerably faster than gross output after 1957, becoming 42% higher per unit of output in 1979 than in 1957. Thus, output per unit of fixed capital declined. This can be attributed in part to a rising share of output from capital-intensive industries. Meanwhile, the industrial labor force expanded more slowly than output. But labor productivity, which grew at a spectacu- lar 15.4% p.a. in 1952-57, rose in 1957-79 at only 3% p.a. This was based in part on a swift increase in fixed assets per worker. Taking both labor and fixed capital into account, total factor productivity grew rapidly from 1952 to 1957, but scarcely at all after 1957. In fact, if fixed capital is given a weight slightly larger than that of labor, the combined factor productivity declined somewhat, and if labor is given greater weight it rose only slightly. In simple terms, this suggests that growth of industrial output in China in 1957-70 was achieved entirely by increasing the quantity of factor inputs and not by increasing the efficiency with which they were used. B. Gross Output by Branch of Industry 1.11 China's classification of branches of industry is based on the Soviet scheme of the 1950s. In showing the gross value of output by branch of industry (Table 1.4), an attempt was made to rearrange industries approximately according to the international classification system. However, the correspondence remains imperfect. C46400/J78984/D3159/16 -8- Table 1.3: TRENDS IN GROSS OUTPUT, FIXED ASSETS AND LABOR FORCE IN INDUSTRY, AND ASSOCIATED INDICES, 1952-79 /a 1952 1957 1977 1979 Gross output (1949 = 100) 245.0 560.0 3,450.7 4,249.4 Net output in current prices (Y bln) 11.7 25.4 119.7 155.0 Gross value of fixed assets /b (Y bln) 15.8 35.2 n.a. 380.38 Index of fixed assets per unit of gross output (1957 = 100) 102.6 100 n.a. 142.4 Labor force (mln) /c 12.56 14.01 48.09 53.40 Index of fixed assets per worker (1957 = 100) 50.1 100 n.a. 283.5 Index of labor per unit of gross output (1957 = 100) 204.9 100 55.7 50.2 Index of gross output per worker (1957 = 100) 48.8 100 179.5 199.1 Index of total factors per unit of gross output (1957 = 100) (based on weights of 0.6 for fixed assets and 0.4 143.5 100 n.a. 105.5 for labor) (based on reversed weights) 164.0 100 n.a. 87.1 /a Brigade industries are not included in any of the data shown. /b Independent accounting units only. /c Annual average employment in state enterprises rose from 7.34 million in 1957 to 29.57 million in 1977 and 30.38 million in 1979. Sources: Tables 1.1, 2.1; SSB, Ten Great Years, Beijing: Foreign Languages Press, 1960, p. 93, showing fixed assets in 1952 and 1957; and data provided by the SSB. -9 _ Table 1.4: VALUE AND GROWTH OF OUTPUT, 1979, BY BRANCH OF INDUSTRY Gross value Number of of outout Growth rate Percentage Branch of industry enterprises (Y million (%) shara of (end of 1979) 1970 prices) 1978/79 gross outnou Food, beverages and tobacco (incl. salt mining) 44 682 51 872 10.0 11.3 Textiles (incl. synthetic fibers) 12.1 172.Q Wearing apparel, footwear and leather products 23,551 13,880 /a 11.lib 3.0 Sawmills, wood products and furniture 12,683 5,499 11.4 1.2 Paper, pulp and paperboard 4,105 6,030 12.0 1.3 Paoer products, printing, cultural, educational and sports goods 11,256 9,650 /a 16.1/b 2.1 Chenicals, (including mining), rubber and plastic products 22,384 56,184 7.0 12.2 Basic chemicals 2,570 7,221 17.1 (1.6) Chemical fertilizers & insecticides 5,232 10,690 4.8 (2.3) Rubber and plastic producer goods 4,876 11,175 9.1 (2.4) Pharmaceuticals, photo film, fats and oils, soap and detergents 3,238 10,011 0.3 (2.2) Petroleum and coal products 653 16,348 /a 8.9/b 3.6 Petroleum refining and processing 286 15,154 9.4 (3.3) Coal washing and dressing 60 184 5.7/h Coke and coal chemicals 307 1,010 /a 2.4/b (0.2) Nonmetallic mineral building materials 43,495 15,400 9.1 3.3 Cement and cement products 9,927 6,003 23.1 (1.3) Refractory materials, ceramic, brick, lime, etc. 32,941 8,119 0.6 (1.8) Glass 627 1,278 15.8 (0.3) Basic metallurgy and metal mining 5,138 41,027 11.1 8.9 Iron and steel, and iron mining 2,828 28,702 /a 12.0 (6.2) Nonferrous metals (incl. mining) 2,310 12,325 /a 9.3 (2.7) Machinery, equipment and metal products (including repair) 104,071 124,484 7.7 27.1 Agricultural equipment 9,608 10,913 -5.8 (2.4) Industrial machinery and equipment 7,786 24,027 -5.9 (5.2) Transport equipment, except bicycles 2,842 14,542 14.3 (3.2) Construction and road building machinery 238 826 49.4 (0.2) Machinery for nonproduction use 1,871 6,040 18.3 (1.3) Other manufacturing (and piped water) 48,421 16,993 /a -3.3/b 3.7 Logging and transport of timber 1,569 2 976 6.1 0.6 Coal mining 8 805 1.1 2.5 Petroleum and natural gas extraction 21 9,803 3.4 2.1 Nonmetallic mining for bldg. materials 2 527 1,332 4.4 0.3 Electric power 8,923 ltt162 9.5 3.8 Total 355,320 460,080 8.5 100.0 /a Approximately within Y 5 million. lb Approximate. Source: Combines two sets of data, one from State Econonic Cotmission, the other supplied by Chinese authorities to the United Nations Statistical Office. C46400/J78752/D3159/07 - 10 - 1.12 Probably no more than 11% of the total gross output came in 1979 from mining, timber extraction, electric power, gas and piped water, while about 89% (roughly Y 410 billion) came from manufacturing./| 'However, the share of manufacturing would almost certainly be significantly lower in net output. This is principally because a very large share of the value of gross output in manufacturing represents the cost of purchased current inputs - energy, materials and components - rather than value added (wages, profits, etc.) in the industry itself; but in mining or timber extraction, purchases from outside are relatively less, and the ratio of net to gross output is higher. In electric power, purchased inputs were significant but profit margins in China are reported to be high, swelling net output. Probably the share of net output associated with manufacturing would have been in the order of 80-83%./2 1.13 To go from Chinese statistics on net output from industry to a Western national accounting estimate of gross domestic product (GDP) origina- ting in industry (in the sense of manufacturing, mining and electric power), three principal adiustments are necessary (apart from the almost impossible task of adjusting for the special features of Chinese prices). Depreciation must be added; net output in brigade industries must be switched from agriculture to industry; and the wages of people engaged in services or other nonindustrial activities within industrial enterprises must be reassigned to other sectors./3 The net effect of these adjustments, as they /1 Output of extractive heavy industries totalled Y 29.91 billion, while in salt production, valued at about Y 3 billion, the large majority comes from evaporation rather than mining. /2 That quality and mix (if not accounting quirks) play roles in growth rates expressed in gross value of output can be illustrated by some of the one-year growth rates in Table 1.4. In the petroleum industry as a whole, gross output rose 7% in 1979 - based on a rise of 3.4% in extraction and 8.9% in processing - even though crude oil output only rose 2% and the combined tonnage of leading processed products rose 4.6%. Output of sawmills, wood products and furniture rose 11.4%, when timber output increased in physical units by 5.4%. The value of cement and cement products rose 23.1% when the quantity of cement rose 13.3%. In other instances, the effect was quite different; for example, gross output from coal mining rose 1.1% while physical output of coal increased 2.8%. /3 Strictly speaking, logging should be transferred in full to agriculture, forestry and fishing; an allowance for small-scale industries other than brigade industries should be added; and the adjustment for services might be more complicated (though many welfare expenditures of industrial enter- prises, such as pensions, are transfers); but these are minor. C46400/J78984/D3159/08 - 11 - have been made in the mission's estimates of the national accounts,/1 is to raise GDP from industry to Y 171 billion in 1979, or 43.6% of GDP. If this estimate is roughly correct, manufacturing must have generated about 35% of GDP, at Chinese prices. C. Selected International Comparisons 1.14 China is one of only a few countries in the world that has sustained industrial growth rates as high as 10% p.a. for more than 20 years. (Japan did this from about 1950 through 1973.) Comparative data for 1960-78 show that India and other low-income countries as a group expanded their industrial sectors at about 5% p.a., while middle-income countries had a median growth rate of about 7.5% p.a. The fastest industrial growth in these years came in the Republic of Korea, which averaged about 17% p.a., while among other countries of over 25 million people, only Thailand and Nigeria (with its oil resources) reached 10% p.a., while Turkey achieved a little over 9% p.a./2 1.15 This rapid progress and the peculiarities of Chinese prices make the industrial sector unusually large relative to the rest of the economy. Industry and construction together appear to supply as much as 47% of GDP, and, as already noted, manufacturing about 35%. These are high ratios compared to international standards in market economies, as shown in Table 1.5./3 However, if international prices were used (and indirect taxes were thus excluded as they are in other countries), the shares in China would probably be roughly similar to those in middle-income countries. 1.16 By international standards, China's industrial output per capita remains small. Valued at Chinese prices and exchange rates, manufacturing output per capita is not much over one quarter of the average (valued in their own prices) for middle-income countries and about 4% of the average for industrialized market economies (Table 1.5). But it is three times higher than the average in low-income countries, and this difference would be greater in a comparison of output from the "organized" manufacturing sector. /1 See the Main Report, Appendix Table A.10. /2 See World Bank, World Development Report, 1980, Annex, Table 2. The numbers in this table are for manufacturing and for all industry, defined to include construction, so that Chinese statistics have been adjusted to match. /3 However, the shares in 1978 were 62% and 52%, respectively, in the USSR, and were even higher in several Eastern European countries (World Bank, World Development Report, 1980, Annex, Table 2). C46400/J78712/D1383/60-61 Table 1.5: PERCENTAGE SlIARES AND PER CAPITA VALUE OF GDP FROM INDUSTRY AND MANUFACTURING: CIIINA (1979) AND OTHER ECONOMIES (1978) All Middle- low-income income Industrialized China India countries countries market economies Percentage of GDP from: Industry & construction 47 26 24 34 37/a Manufacturing 35 (est.) 17 13 25 27Ta IJS dollars per capita from: Industry & construction 120 48 48 425 2,990 Manufacturing 90 (est.) 31 26 313 2,180 /a In 1960 these shares were 40% and 30%, respectively. Source: China, mission estimates; other countries, based on World Bank, World Development Report, Annex, Tables 1 and 3. C46400/J89422/D3159/09 -13 - 1.17 Table 1.6 presents selected physical comparisons of industrial output in India and China. In heavy industry, the numbers suggest that China's output per person is roughly twice that of India. In consumer goods industries, India's output per person is four times higher than that of China in refined sugar, and roughly equal to that of China in cotton cloth. By contrast, China's output per person is clearly many times higher in consumer engineering products for everyday use. The contrasts are particularly striking in radios, sewing machines, and wrist watches./l 1.18 In terms of total output, China ranks among the world˝s major industrial countries. The net value of manufacturing production (again at Chinese prices and official exchange rates) is about one seventh that in the USA. In 1979, in terms of quantity produced, China led the world in output of cotton yarn and fabric. It ranked third in output of cement, coal, and sulphuric acid, fifth in steel, and seventh in electric power. By early 1981, .its output of radios (at about 3.3 million per month) was second only to that of Hong Kong. China's share of world output in 1979 was about 4.8% in steel and 3.4% in electric power. Comparisons based on physical output of basic intermediate goods are biased in China's favor, however, since manufacturing in China tends to be wasteful of energy and materials (for example, in 1978, the conversion efficiency of primary energy in China is estimated to have been 28%, compared to 51% in the USA and 57% in Japan); and the final products probably involve less fabrication and have a lower average value relative to the materials used than goods manufactured in leading industrialized coun- tries. In some branches of output, moreover, China is still only a very small producer by world standards; for example, its output of motor vehicles in 1979 was only 0.4% of the world total. /1 China's lead may be ever greater, for example, in TV sets, where India did not report any output. C46400/J89422/D3 159/13 - 14 - Table 1.6: SELECTED PHYSICAL COMtPARISONS OF INDUSTRIAL OIJTPUT IN CHINiA A.ND INDIA Ratios Physical output China/ China 1q80/ India China India India 1978 Description Units 1978 1973 1980 1973 Population (mid-year) mln 644 952 976 1.43 1.52 Electric power bln kWh 107.06 256.6 300.6 2.40 2.79 Crude steel mln tons 9.948 31.78 37.12 3.19 3.73 Cement mln tons 19.626 65.24 79.86 3.32 4.07 Sulphuric acid mln tons 2.107 6.61 7.64 3.14 3.63 Tractors (10 hp & over) o000 53.088 113.5 9R.0 2.14 1.85' Motor vehicles 000 97.5 /a 149.1 222.0 1.53 2.28 Cotton cloth mln m 7.955Tb 11.03 13.47 1.52 1.86 Bicycles mln 3.501 8.54 13 .02 2.44 3.72 Wrist watches mln 4.409 13.511 22.16 3.06 5.03 Radios mln 1.919 11.697 30.04 6.10 15.65 Sewing machines -000 245 4,865 7,680 19.86 3 1.35 Refined sugar mln tons 6.474 2.267 2.57 0.3 5 0.40 /a In 1978, India produced 46,000 passenger cars, 13,600 buses and motor coaches, and 37,900 trucks (lorries); it also produced 303,000 motorcycles (not counted here). Comparable figures for China are not available, but the numbers of passenger cars and motorcycles are believed to have been much smaller. /b This may not include handloom production, although there is no footnote to this effect in the UTnited Nations statistics. Sources: Table 1.2; United N!ations, Yearbook of Industrial Statistics, 1978 Edition Vol. II: and World Bank population estimates. C46400/J78984/D3159/10 - 15 - 1.19 China's employment in industry totalled 53.4 million in 1979, or roughly 63 million including brigade industries (para. 2.09) many of whose workers, however, work in industry only part of the time. These are enormous absolute numbers by international standards. By comparison, in 1976, a total of roughly 60 million workers were employed in industry in western and southern Europe, the USA and Canada taken together, about 49 million in the USSR and Eastern Europe, and fewer than 12 million in Japan./l India's employment in industrial establishments with 20 or more workers, or 10 workers and a power source, was not much more than 7 million. Industrial workers in establishments with 10 or more workers each probably averaged 10-11% of the population in industrialized market economies, 13-14% in the most industria- lized centrally planned economies, around 6% in China and the more indus- trially advanced developing countries, and 1-2% (or even less) in the poorest and least developed countries. 1.20 China's net output per worker in industry, excluding brigade enter- prises, was equivalent to about $1,865 in 1979 (at Chinese prices and exchange rates). Comparisons with other countries are extremely difficult, but the available evidence suggests that this is a low ratio for factories in developing countries. Judging by the UN industrial statistics, only in South Asia is factory output per worker as low./2 But if handicraft workers (who are fewer in China) are counted in industry (as they are in other countries' population census statistics), China's output per worker becomes several times higher than that in South Asia. 1.21 One of the most interesting areas for comparison between China and other countries is the structure of industrial output. International compa- risons (Table 1.7) allow an assessment of the significance of China's indus- trial structure. The figures showing the percentage of output from industries classed in China wholly or, for the chemicals and machinery groupings, primarily as heavy industries, seem to imply that richer economies have a larger share of heavy industry than China, by several percentage points. But this must be qualified by taking into account consumer durables - in /1 Based on UN, Yearbook of Industrial Statistics. Figures do not include the smallest establishments. /2 In most other developing countries, the nearest comparison would be value added per person engaged in manufacturing, measured in "factor values" that exclude indirect taxes, in prices of earlier years, for establishments above a size that varies (in the UN industrial statistics) between countries. In India for 1976, this value added was equivalent to $1,386; in 1977 it was $1,244 in Bangladesh and $2,358 in Indonesia. Table 1.7: PERCENTAGE COMPOSITION OF GROSS INDUSTRIAL OUT'PUT: CHINA ANI) OTHER COUNTRIES United Fed. Rep. of United Rep. of China /a States Cerivaniy Japan Kingdom Ltdly Polanid Spain Yugoslavia Korea India Industry branch 1979 1977 1976 1977 1976 1977 1977 1976 1977 1977 1976 Food, beverages & tobacco 11.4 13.4 11.8 12.4 16.5 12.3 16.9 13.9 16.1 15.1 17.8 Textiles 13.0 3.3 3.3 4.7 4.3 6.4 7.3 4.4 6.4 13.4 15.4 Apparel, leather & footwear 3.0 2.7 2.8 1.8 2.5 4.8 5.1 5.1 5.1 6.8 1.4 Wood products & fu,rniiture 1.2 3.0 3.1 3.8 2.6 2.4 3.9 2.8 5.1 3.0 0.5 Paper, pu1lp & paperboard 1.3 1.7 1.0 1.4 1.0 /b 0.6 1.6 1.5 1.4 1.2 Chiemicals, rtubber & plastic products 12.3 10.8 13.5 11.0 12.4 13.9 9.2 13.1 8.6 12.0 14.6 Petroleum & coal refining 3.6 6.3 4.1 5.4 5.9 4.9 2.2 7.9 4.4 9.4 5.5 Nonmetallic minierdls & products /c 3.4 2.7 3.2 3.3 3.3 5.0 3.9 4.3 3.9 4.1 3.2 Iroun & steel, nonferrous metals & metal muining 9.0 6.9 9.4 10.5 7.6 9.9 9.9 16.8 11.3 2.7 10.9 Machinery, equipment & metal products 27.3 34.2 35.4 35.6 31.0 30.5 32.9 20.4 27.0 20.0 18.8 Miscellaneous manufacturing 6.0 6.4 3.8 6.4 6.2 5.1/b 2.1 4.1 4.0 3.9 2.0 Coal mining 2.5 1.1 1.6 0.1 1.9 n.a. 3.7 0.6 1.4 0.9 2.1 Petrolewin & coal extraction 2.1 3.8 0.4 0.1 0.8 0.8 n.a. n.a. 0.6 ni.a. 0.7 Electricity 3.9 3.7 6.6 3.5 4.0 4.0 2.3 5.0 4.6 2.3/d 5.9 'I'otal 100.0/a 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Shdre in predomindntly "beavy indtistrIes" /e 64.1 69.5 74.2 69.5 66.9 69.0 64.1 68.1 61.8 56.4 61.7 /a Adjusted to exclude logging. Tb Paper is included in mniscellaneous manufactturing. Th Building mnaterials, but not pottery. 7h 1973; calculationis assume the same share in 1977. Te All those listed below chemicals, except miscellanteous mDanufacturing. Souirces: Coluputed from T'able 1.4 and UN, Yearbook of Industrial Statistics, 1978 EditLon, Vol. 1. C46400/J78984/D3159/11 - 17 - particular, passenger cars for individual use, which are not a factor in China but swell the output of predominantly heavy industry in countries with a higher ratio than China. For a poor country with almost no passenger cars, China may have a high share of its output from heavy industry; but the share is only a little higher than that in India (based on Indian statistics for factories but not smaller establishments or handicrafts, which are mainly in light industry). 1.22 In other ways as well, China's industrial output pattern turns out to be intermediate between those in highly developed countries on the one hand, and those in the Republic of Korea and India on the other. For example, the share of textiles in China's output (13%) is over three times higher than that in the richest countries, and close to that in the Republic of Korea or India. But the share in machinery and metal products (27.3%) is about the same as that in Yugoslavia, substantially above that in India or the Republic of Korea (about 19-20%) but below that in leading industrial countries (31-36%). In many of the other industries, including chemicals and basic metallurgy, shares in large countries are much the same irrespective of their level of development, and China's shares are in no way unusual. 1.23 One industry in which China is somewhat out of line with interna- tional patterns is food, beverages and tobacco, where China's share is slightly below the low end of the range, even though shares could be expected to decline as income rises. This low share could be caused, however, by low prices of foodstuffs, by the exclusion of brigade and very small-scale enter- prises from the Chinese statistics, and by Chinese statistical definitions (para. 1.03), which give less than the usual weight to raw materials used in agricultural processing. 1.24 To extend such a comparison to a wide range of developing countries, it becomes necessary to look instead at the percentage composition of gross output in manufacturing (Table 1.8). China is well below the usual range of developing countries in its share of output coming from food, beverages and tobacco; but its share is well above the usual range in machinery, equipment and metal products. This table helps to emphasize that in contrast to China, few other developing countries make most of their own capital equipment and have their own well-developed steel industries; those that do, such as Brazil and India, have an industrial structure rather similar to China's. C46400/J78984/DI383/43-44 Table 1.8: PERCENTAGE COMPOSITION OF GROSS MANUFACTURING OUTPUT Philip- Indo- China /a Japan Brazil Turkey India Colombia Egypt pines Nigeria Kenya nesia (1979) (1977) (1974) (1977) (1976) (1976) (1974) (1977) (1976) (1977) (1977) Food, beverages & tobacco 12.5 12.9 17.7 24.4 19.7 33.8 32.5 36.5 22.7 50.7 43.7 Textiles 14.4 4.9 8.3 13.3 17.1 12.6 23.4 7.6 14.7 4.1 14.4 Apparel, leather & footwear 3.4 1.8 3.3 1.4 1.5 4.9 2.3 2.2 1.7 2.7 1.2 Wood products & furniture 1.3 3.9 4.0 1.5 0.6 1.0 0.9 3.2 4.1 1.6 3.1 Paper & pulp 1.5 1.5 1.7/b 1.5 1.4 2.6 2.0 1.8/b 1.4 1.3/b 0.9 Chemicals, rubber & plastic products 13.4 11.4 } 11.7 16.2 14.9 10.7 12.4 15.6 ) 11.9 Petroleumn & coal } 20.5 } 19.0 refining 4.0 5.7 } 9.6 6.1 5.2 3.8 12.2 9.3 } /d Nonmetallic mineral X building materials 3.7 3.3 3.5/c 3.6 3.0 3.5 3.3 3.5 3.9 4.0/c 4.1 Iron & steel 6.6 8.3 } 9.0 9.6 2.6 4.9 4.1 0.1 1.9 1.2 Nonferrous metals 2.7 2.5 } 2.4 1.9 0.8 2.1 0.4 1.5 } n.a. Machinery, I equipment } 35.7 & metal } products 30.3 37.1 } 18.1 20.8 13.4 11.7 12.2 20.5 11.6 17.4 Other manufacturing 6.2 6.7 (5.3) 3.5 2.1 4.7 2.4 (3.9) 4.5 (3.1) 2.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 /a Mining is assumed to comprise 10% of nonferrous metals, 5% of iron and steel, 2% of chemicals and 1% of food, beverages and tobacco as shown in Table 1.4 above. Including indirect taxes (excluded in some other countries). /b Estimated as half the total in paper and products. /c Includes pottery and china. /d Statistics for Indonesia do not include this (rather large) industry. Sources: Table 1.4 and UN, Yearbook of Industrial Statistics, 1978 Edition, Vol. I. C46400/J78712/D3159/21 - 19 - 2. STRUCTURE AND ORGANIZATION A. Overview by Broad Classes of Enterprises 2.01 The basic organizational unit in the industrial sector is the enterprise. This is usually a single plant, often a very small one, but the largest manufacturing enterprises are complexes of several related production units in the same vicinity, under unified management. A basic distinction among enterprises is their legal ownership. The more important ones are owned by the state ("the whole people"). The rest are collectively owned. They include urban collective enterprises and enterprises belonging to rural communes. 2.02 Table 2.1 presents economy-wide statistics on industry in 1979, by type of ownership. At the core of the industrial sector are about 60,000 independent accounting units belonging to the state, with an average of well over Y 5 million worth of gross fixed assets each. These and other state enterprises averaged 371 workers each. Collective enterprises are much smaller, averaging 133 workers and Y 210,000 worth of gross fixed assets in urban areas and about 50 workers and Y 75,000 worth of gross fixed assets in rural communes. State enterprises, though less than one fourth of the total, produced nearly 82% of the net output, compared to 11.7% coming from urban collective enterprises and 6.5% from those belonging to and operated by rural communes. 2.03 Information on the value of assets, profits and taxes is only available for independent accounting units primarily in industry, i.e. not for industrial enterprises subordinate to units primarily in other fields (for example, railroad maintenance and repair yards, printing and publishing units belonging to ministries, or workshops engaged in prototype production or making laboratory instruments within research institutes). In the units covered, which produced 96% of the total net output, the state sector had most of the gross fixed assets (91.1%), circulating funds or working capital (83.1%), net fixed assets plus circulating funds (88%), and profits and taxes (87%)./1 Conversely, the collective enterprises weigh more heavily in employment; together they had 42% of the total industrial employment, compared to less than 10% of the fixed assets. Capital per worker or staff /1 Gross fixed assets are valued on the basis of historical costs, and net fixed assets on the basis of these costs less accumulated depreciation. In the enterprises visited, a majority of the fixed assets consisted of production equipment; the other major items were buildings used in production, repair and maintenance equipment, and welfare and community facilities including workers' housing. Circulating funds are based on an average for the year in current prices and refer almost entirely to the costs of materials and work in progress within the plant, since finished products are sold almost immediately to other organizations. C46400/J89422/D3159/22 - 20 - Table 2.1: AGGREGATE INDUSTRY STATISTICS BY OWNERSHIP, 1979 Industrial enterprises Collective Total Urban enter- State- collec- Rural prises owned Total tive commune All Industrial Enterprises /a No. of enterprises (end of year) 355,013 83,837 271,176 99,679 171,497 Gross output (billion 1970 yuan) 459.07 371.98 87.09 63.72 23.37 Net output (billion current yuan) 154.54 126.50 28.04 18.06 9.98 Employment (thousands, end of year) 53,400/b 31,091/c 22,300/b 13,277 9,000/b Wages and salaries (billion current yuan) n.a. 23.02 n.a. 6.76 n.a. Independent Accounting Units Only Gross fixed assets (Y billion, end of year) 380.38 346.67 33.71 20.91 12.80 Net fixed assets (Y billion, end of year) 262.97 237.86 25.11 14.96 10.15 Circulating funds (Y billion, average) 133.44 110.87 22.55 17.12 5.43 Net fixed assets plus circu- lating funds 396.41 348.75 47.66 32.08 15.58 Profits and taxes (Y billion current) 99.41 86.44 12.97 8.56 4.41 /a For the definition and coverage, see para 1.01, footnote 1. /b Estimated and rounded. /c Average during the year was 30,381; see Table 2.3 below. Source: State Economic Commission. C46400/J78984/D3159/23 - 21 - member (net fixed assets plus circulating funds) averaged Y 11,217 in state enterprises but only Y 2,416 (21.5% as much) in urban collective enterprises and about Y 1,730, in those run by rural communes./l 2.04 Industrial enterprises in production brigades are not included in any of these statistics except where noted. According to estimates by the Ministry of Agriculture, at the end of 1979 there were about 580,000 industrial enterprises in production brigades, with a total of 9.73 million workers and staff; their gross output for the year was Y 16,327 million. Thus, brigade enterprises averaged only 17 workers each. Gross output per worker, which was about Y 12,000 in state enterprises, Y 4,800 in urban collective enterprises, and Y 2,600 in commune enterprises, averaged only about Y 1,680 in those of production brigades. However, in both types of rural units, and especially in production brigades, many of the workers spend only part of their time in industry. If brigade enterprises are counted, China in 1979 had over 935,000 industrial enterprises. Only about half of their total employment was in state enterprises, but these produced nearly four-fifths (78%) of the combined gross output. 2.05 In China, the basic structural division in industry is between light and heavy industry (Table 2.2). Light industry includes all consumer Table 2.2: ECONOMY-WIDE STATISTICS FOR LIGHT AND HEAVY INDUSTRY, 1979 Percentage shares Light Heavy Light Heavy industry industry Total industry industry All Industrial Enterprises Number 207,853 147,160 355,013 58.5 41.5 Gross output (bln 1970 yuan) 197.96 261.11 459.07 43.1 56.9 Net output (bln current yuan) 59.13 95.41 154.54 38.3 61.7 Independent Accounting Units Only Gross fixed assets (Y billion) 66.55 313.83 380.38 17.5 82.5 Net fixed assets (Y billion) 45.40 217.57 262.97 17.3 82.7 Circulating funds (Y billion) 37.28 96.16 133.44 27.9 72.1 N.f.a. plus c.f. (Y billion) 82.68 313.73 396.41 20.9 79.1 Profits and taxes (Y billion) 39.46 59.95 99.41 39.7 60.3 Source: State Economic Commission. /1 The absolute figures would be slightly higher in each case, if capital used in enterprises that are not independent accounting units could be computed and added; but the general picture would not be affected. C46400/J78984/D3159/24 - 22 - goods, food products, processed agricultural products, and textiles, plus many producer goods, for example, pulp and paper, synthetic fibers, and the simpler types of farm equipment./l Heavy industry includes the other manufacturing industries such as steel, cement, and most types of machine building, together with electric power, timber extraction, and all mining other than salt mining. Heavy industry, using nearly 83% of the net fixed assets, produced nearly 62% of the net output in 1979. Its share of industrial employment was slightly over 58%./2 Heavy industry also generated 60% of the profits and taxes from industry. For each Y 100 of capital invested (net fixed assets plus circulating funds), light industry yielded Y 47.7 in profits and taxes, compared to Y 19.1 from heavy industry. The share of profits and taxes in net output appears to have been slightly higher in light industry than in heavy industry. However, net output per person employed was about 15% higher in heavy industry, which also produced slightly more profits and taxes per worker. Despite the sizeable overall profits in industry, about 23% of all state industrial enterprises operated at a loss in 1980. 2.06 In light industry, enterprises in the state sector produced 76% of the gross output of Y 198 billion compared to 24% from collective enterprises, including those belonging to rural communes. The state enterprises numbered about 55,000, employed 8.46 million workers and staff, and had Y 51.6 billion worth of fixed assets. This means that in heavy industry, 85% of gross output came from state enterprises and 15% from collective enterprises. It also implies that state-owned enterprises in heavy industry numbered fewer than 30,000 (about one third of the total) but produced about 60% of the gross output in the state sector. To do this, they employed over Y 295 billion in gross fixed assets (85% of the total assets in the state sector) and about 22 million workers (72.2% of the state sector's average employment during /1 Among the other products classed under light industry are goods for pro- duction (or military) use made from wood, bamboo, rattan, natural and synthetic fibers, textiles, paper, paperboard, furs or leather; machinery and equipment for medical and cultural use (including, for example, typewriters, motion picture equipment, and small calculators); metal products for construction and packing use; craftsmen's and other hand tools; industrial fats and oils; paints and varnishes; dyes and mordants; soaps and detergents; camera film; salt chemicals; pharmaceu- ticals and piped water. However, everv aspect of the motor vehicle industry, including repairs, is counted as heavy industry. A comparison of Table 2.3 with Table 1.4 reveals that over two-fifths of the 104,000 enterprises in machinery and metal products, and a large share of those in chemicals, rubber and plastics products, must have been counted as light industry. /2 This is an inference from data cited in paras. 2.06 and 2.08, and implies that there were roughly 31 million workers and staff in heavy industry, C46400/J78984/D3159/25 - 23 - 1979). These numbers imply that in the state sector, heavy industry possessed nearly twice as much fixed capital per worker as light industry, but produced only about half as much gross output per worker. 2.07 In state industrial enterprises, over half of the work force in 1979 was employed in "machine building" (including metal products, transport equipment, instruments and electronics), coal mining, and basic metallurgy (Table 2.3). The highest average wages were paid in the coal mining sector (perhaps because of health hazards) and the lowest in the food industry. The average wage of Y 758 in state industrial enterprises compares to perhaps Y 520 in urban collective enterprises. (Average wages in the rural commune and brigade enterprises must in turn have been considerably lower than those in urban collectives.) Table 2.3: EMPLOYMENT, WAGE BILL AND AVERAGE WAGE PER WORKER IN STATE INDUSTRIAL ENTERPRISES, 1979 Average annual Average employment Wage bill wage ('000) (Y mln) (Y/year) Electric power 786 577.56 735 Coal mining, washing and dressing 3,770 3,422.89 908 Petroleum extraction and refining 478 413.04 864 Basic metallurgy (incl. mining) 3,012 2,454.95 815 Chemicals (incl. mining), plastic and rubber products 2,815 1,965.30 698 Nonmetallic mineral building materials (incl. mining) 1,857 1,308.91 705 Machinery and metal products 9,175 6,723.45 733 Timber and wood products 1,200 1,039.19 866 Food products, beverages and tobacco 2,006 1,329.86 663 Textiles 2,740 1,981.75 723 Paper, pulp and paperboard 410 296.35 723 Other industries 2,132 1,505.66 706 Total 30,381 23,018.91 758 Source: Data supplied to UN Statistical Office. C46400/J79029/D3159/26 - 24 - 2.08 Of the collective enterprises (excluding brigade enterprises), nearly 120,000 must have been in heavy industry and over 150,000 in light industry. Enterprises in heavy industry had a majority of the fixed assets (about Y 19.8 billion compared to Y 13.9 billion in light industry) and produced about 45% of the gross output. A little less than 40% of their employment was in heavy industry and slightly over 60% in light industry. There is also a significant share of heavy industry among the enterprises belonging to production brigades; for example, they must have included over 80,000 of China-s 90,000 small hydroelectric stations and about 12,000 small coal mines./1 B. Organization and Management Central Control and Coordination 2.09 The major institutions above the ministerial level responsible for coordination in the industrial, transport and communications sectors are the State Economic Commission (SEC), the State Planning Commission (SPC), and offices of the State Council responsible for particular economic functions or groups of ministries. The SEC has prime responsibility for executing the annual plans of these sectors, and thus resolving problems and setting priorities in plan implementation. It is also concerned with associated issues such as quality control, technical standardization, and organization and specialization to improve current production. The SPC draws up and subsequently adjusts the annual plan which, when elaborated at lower levels, governs current production; it also prepares longer term plans. It has the power of approval over major investment projects, which are then carried out under the State Capital Construction Commission. The SEC and SPC, located in the same building, work closely together. Other state commissions contribute to coordination in their more specialized areas of concern. Those most involved in industry are the recently created Energy Commission, the Machine Building Industry Commission, and the Import-Export Control Commission. 2.10 Below these supraministerial bodies, 14 central government minis- tries are primarily engaged in manufacturing. These include eight ministries of machine building,/2 and six others, as follows: /1 This can be deduced by subtracting numbers in Table 1.4 above from the total numbers given in Chinese press reports. /2 The First Ministry of Machine Building is responsible for general indus- trial equipment for civilian use (para. 2.13 below); the Fourth Ministry of Machine Building is in charge of the electronics industry, both civilian and military; and the others are responsible for such industries as shipbuilding, aircrafts, armaments, nuclear programs, aerospace and guided missiles. C46400/J78984/D3159/27 - 25 - Agricultural Machinery Building Materials Industry Chemical Industry Metallurgical Industry Textile Industry Light Industry The other primarily industrial ministries are those of Coal Industry. Petroleum Industry, Forestry, and Electric Power. 2.11 Industrial enterprises are also found under practically every other ministry (in early 1981 there were a total of 38 ministries) and most other leading government organizations, if only to meet the special needs of each. This is part of a widespread pattern of vertical integration and self-reliance within organizational units. The Building Materials, Chemical and Metallurgical Industry Ministries have their own mining operations. The Ministry of Textile Industry has its own petrochemical complexes to produce synthetic fibers; and it also produces most of China's textile machinery. Practically all ministries have machine-building enterprises, supplying at least some of their own needs for machinery. The Ministry of Coal Industry makes coal mining machinery; the Ministry of Railways makes railway equipment; the Ministry of Geology makes its own geological instruments; the Ministry of Posts and Telecommunications makes telephone equipment; the Ministry of Communications builds ships and other maritime transport equipment; and so on. The Ministry of Education produces its own textbooks and other educational materials. The Ministry of Forestry runs sawmills and particleboard plants. The Ministry of State Farms oversees at least indirectly some 6,100 industrial enterprises on state farms, while the Ministry of Agriculture exercises indirect supervision over commune and brigade industries. Military equipment departments have many factories, some of which produce items now being channeled into civilian consumption such as clothing, footwear, sunglasses and radios. Not infrequently, two or more ministries, as well as regional govern- ments, make similar products at plants designed to serve a specific market; in some cases, the plants may be unaware of the existence of other plants making very similar ranges and types of capital equipment for a different ministry. 2.12 As an example of the sphere of influence of one ministry, the Ministry of Light Industry in 1979 contained 18 industrial departments, each corresponding to a branch of industry, for example, pulp and paper, daily use machinery (bicycles, sewing machines, watches, etc.), pottery and ceramics, food and beverages, chemicals for daily use, leather and shoes, ready-made garments, furniture, plastic materials, metal hardware, arts and handicrafts, or machinery for light industry. Under its supervision were 10,600 state enterprises and 55,600 urban collective enterprises. Their workers and staff totalled nearly 10.5 million including 3.82 million in the state enterprises (producing gross output valued at Y 48 billion) and 6.63 million in the collective enterprises (with gross output valued at Y 36 billion). Net output totalled Y 29.1 billion. -46400/J89422/D3159/28 - 26 - 2.13 In heavy industry, because of the more direct supervision generally exercised, the sphere of each ministry is narrower. Compared to gross output of Y 84 billion from enterprises under the Mlinistry of Light Industry, and Y 53.9 billion from those under the 14inistry of Textile Industry, the First Ministry of Machine Building was responsible for gross output valued in 1979 at Y 35.89 billion. The six general bureaus under it were heavy and mining equipment, general machinery, machine tools, motor vehicles, electrical equipment, and (temporarily under its leadership) instruments. Enterprises under its supervision produced about 20,000 kinds of products, including 983 new products first made in 1979. Under its responsibility were about 4,240 state enterprises and 2,200 urban collective enterprises, with a total of 3.64 million employees including 148,700 technical people. Fixed assets were valued at Y 30.62 billion (including 463,000 machine tools) and circulating capital, Y 17.1 billion. Net value of output in 1979 was Y 10.76 billion, including Y 6 billion in profit and Y 1.6 billion in taxes. A ministry such as this one, exercising much direct concentrated control over its factories and research institutes, is powerful and bears much responsibility for translating national concerns into programs and priorities for its subordinate units. External Supervision of Enterprises 2.14 The central organization is mlirrored, on a smaller scale, in each province or independent municipality. Each has industrial bureaus (Shanghai and Liaoning had 11 each), coordinating officials, and economic and planning commissions, which are guided by the corresponding central organizations, as well as the regional government. The province may decide on relatively small investments, but these must, nevertheless, be approved step by step up to the provincial level and decided there by top planning and economic officials working together. Bigger investments get approval at successive levels and are decided in Beijing. Inevitably, both current production and investments require careful meshing of output and expansion plans by different organizations at the same level, placing heavy burdens on the coordinating and planning functions throughout the system. 2.15 Chinese manufacturing enterprises (both state and urban collective enterprises) are in some ways not unlike separate branch plants within a large company in a market economy. The management gets its assignment, plan and plan targets, capital, marketing, and most of its production inputs from higher levels, which bear the responsibility for the strategy, policies and administrative and accounting procedures followed, as well as all major decisions affecting the medium-term future, such as investments or significant changes in the enterprise's products. Even personnel assigned to the enterprise and wage and compensation plans are decided from the outside. Decisions in these areas reflect the enterprises capabilities and accumulated financial resources, as well as national policies in force at the time. C46400/J79061/D3159/29 - 27 - 2.16 Thus the operation and management of an enterprise are greatly influenced by the levels and units that have direct responsibility for supervising it. This responsibility, more often than not, is shared by two organizations which exercise "joint" ("dual") leadership, for example, a central ministry (which may exercise primary leadership in the production of items under its centralized control) and a provincial-level government (which has primary responsibility for some of the other functions that are not so centralized). In other cases there is a single chain of supervision. Enterprises may, for example, be under a county, a neighborhood "street committee" in a city (in the case of a small urban collective) , or directly under a regional or municipal bureau in their industry or a central ministry. 2.17 The unit of government that has this supervisory power over an enterprise often acquires a sense of proprietorship from originally starting or at least transforming or expanding it, using its own funds and management efforts, and also from sharing its revenue. Enterprises sometimes change hands, however. In 1958 and again in 1970, many enterprises were shifted from central to regional or local control; and in other periods, and follow- ing these two shifts, widespread changes have taken place in the opposite direction. Enterprises also sometimes pass from one ownership category to another, for example, from collective into state enterprises. Within the last two years many new corporations have been organized as intermediate layers in supervision; many of these are administrative, but some are enterprises comprising several plants. 2.18 Direct supervision includes substantial powers of review and approval over the enterprise's actions, budgets, expenditures, etc. Even if the enterprise is uniquely under a county or central ministry, this means in practice a particular bureau or office in that organization while other bureaus or offices within it also have dealings with the enterprise. Usually at lower levels of a single chain of responsibility (for example, when the enterprise reports to a corporation to which it is assigned), the unit with immediate supervisory power operates much like a wholly-owned subsidiary or administrative branch of the next unit above it (perhaps the provincial no. 2 bureau for light industry). Thus, important decisions tend to be passed upwards and the enterprise must be aware of the chain above. Even when primary supervision is vested in a lower level, a central government ministry helps to make national policy and supervise technical standards throughout the industry. Conversely, the local government has a major influence on decisions involving land use and spatial aspects of industry even in enterprises reporting directly to higher levels of government. Indeed, different types of decisions regularly bring in different actors - labor authorities or financial officials, for example. Thus, enterprises must submit requests through the units above them, which must then go through different institutional channels in each case, in requesting different kinds of workers (manual workers, office and administrative staff, technical or professional workers, and new technical graduates); and little C46400/J78984/D3159/30 - 28 - success can be expected where these requests call for skilled workers./1 The enterprise and those who supervise it must also interact regularly with various other state authorities (planning authorities, supply bureaus, the PeopleTs Bank, etc.) most of which are themselves under a sort of "dual leadership," taking much of their guidance from higher levels in their specialty. If an action is important, approvals are likely to be required from several concerned units or organizations, and final approval may have to be sought at higher levels. 2.19 The picture thus emerges that most intermediate organizations routinely depend on procedures and referral of decisions, acting more like subsidiary branch managers than independent centers of decision making. Within the industrial system, however, there undoubtedly exist nodes of concentrated entrepreneurship and decision-making power (somewhat akin to the management of independent companies); these include the top levels of central ministries and the principal coordinating officials in industry within provincial-level governments. Bureaus for particular industries, within ministries or within regional government, also have a substantial influence. Smaller centers with the power to act like virtually independent companies are probably found in major municipalities and in counties. At all levels, however, the art of management requires a highly developed sense of how to go through procedural channels and obtain required clearances. 2.20 The degree of centralization is higher for heavy and defense industries than for light industries, mainly because the heavy industries typically rely on materials or produce output that is centrally allocated on a national basis, in contrast to most of the light industries. Thus, in the "machine building" industries, out of about 17,000 state-owned independent accounting units,/2 some of which are in light industry, no fewer than 12,000 are directly under central ministries. But in most cases they are under dual (joint) leadership with provincial authorities. Only 79 industrial enter- prises under the First Ministry of Machine Building, for example, were under the ministry alone. The Ministry of Chemical Industry had unique control of only two enterprises, and the Ministry of Metallurgical Industry had just fifteen enterprises under its control alone. Central control is found in enterprises that are very large or otherwise strategically important. Conversely, light industry is almost entirely under the direct control of regional or local authorities. The level of government supervising a plant also depends on the technical competence and industrial experience of the local authorities. Except in the largest cities such as Shanghai, enter- prises are generally supervised at a regional level that encompasses most of their market. Small local industries operated by the counties or equivalent units are generally plants using fairly simple technology to serve the local geographical area. /1 See Annex G,"Education", paras. 2.21-2.23. /2 There were in 1979 about 75,000 collective independent accounting units in these industries with gross output of Y 31.1 billion. C46400/J78984/D3159/31 - 29 - Management of Enterprises 2.21 Enterprise management concentrates on only a narrow range of tasks: production to fulfill the plan (including quality control), maintenance and repair of equipment, trying to assure the timely arrival of inputs needed in production, relationships with workers including their welfare and training, advancing the enterprise's technical know-how and skills, and preparing proposals to higher levels on investments to improve the plant. 2.22 The internal organization of enterprises, after years of management by revolutionary committees, has returned to an older pattern of management organization. A manager is assisted by several deputies, including a chief engineer and a chief accountant. There are usually over half a dozen staff departments, for example, finance and accounting, planning, labor and wages, training, and general administration. Immediately beneath this management level are the workshops (or other production units), whose leaders are closely involved in the production work. Managers keep workers well informed of actual results compared to plans and goals; often results for each team or unit are posted, along with photographs of individuals and teams who have done especially well. Party units within the enterprise help to guide political aspects of management at all levels to assure that workers are responsive to the latest campaigns and instructions. Of course, the pattern of organization varies in details and complexity according to the size, activity, and physical features of the enterprise. The largest manufacturing enterprises such as the Anshan Iron and Steel Company are gigantic and extremely complex./l 2.23 The enterprise supplies many services and welfare benefits to its employees, including prepared meals in the enterprise dining halls, medical care, and retirement pensions. Frequently these benefits include subsidized housing owned by the enterprise (with dormitories for single workers), day-care centers, preschools or even primary schools for workers children, and recreation facilities (ranging from common rooms to basketball courts and cinemas). To help overcome shortages of education and skills in the work force, enterprises offer adult education and training courses (full or /1 Mines had been separated from the Anshan complex, which nevertheless still had about 130,000 workers and staff in November 1980, organized into about 40 plants (each with its workshops or other production units), and a wide range of supporting facilities, for example research and design institutes, a 2,700-bed hospital, health clinics in each plant, two institutes of higher learning, three technical middle schools, and a school for training technicians, with a total of about 10,874 students, and six after-work training schools (counting short-duration courses, 42.7% of workers were involved in education). C46400/J78984/D3159/32 - 30 - part time) for workers; sometimes enterprises have their own technical training institutes./I The workers representatives have a consultative voice in matters relating to workers welfare and interests. 2.24 Differences appear between state and urban collective enterprises mainly in wage levels and the way in which profits are divided. Wages in urban collective enterprises are lower - sometimes much lower - than those for similar jobs in state enterprises; and there are substantial regional variations. The formal differences in methods of profit distribution are greater than the end results. In state enterprises, all profits belong in principle to the state; the share controlled by the enterprises is very small, although it has been increased wherever reforms have been introduced. By comparison, collective enterprises pay a graduated income tax, which in the larger enterprises amounts to 55% of the profit after indirect taxes. The remainder is divided according to a formula that varies in detail according to the locality. As of late 1980, the norm in Beijing seemed to be that 40% went to the municipal bureau in the enterprise's field, 30% to the corporation to which it belongs, which is directly under the bureau, and 30% (i.e. 13.5% of total profits) to the enterprise itself. Where an enterprise was especially profitable, this last share was only 20% (9% of total profits). The pattern was much the same in other cities; and if the enterprise did not belong to a corporation, the municipal bureau got a larger share and the enterprise itself still got a minority share. However, in early 1981 a national decision was made to raise the urban collective enterprise's share of its profits after taxes to the range of 50-70%. Much as in the state enterprises affected by reforms, the collective enterprise-s share is divided in turn, with 40-50% being plowed back into productive investments, and smaller, roughly equal, shares used for workers welfare services and bonuses. The collective enterprise may also be allocated investment funds or working capital, and its losses if any may be funded out of the resources of its bureau or corporation. Enterprise Plans and Incentives 2.25 The annual plan guiding an enterprise-s work is the result of a formal process through which plan proposals, passed down in broad outlines from higher authorities, are fleshed out with details, iterated through suggestions, and finally agreed between planning authorities, the enterprise, and higher levels above it. As part of this cycle, enterprise managers may participate, with their superiors, in conferences (usually twice a year) on their particular industry, in which the potential of suppliers is reconciled with the demands of customers. An effort is made to reach decisions to which everyone assents, so that responsibility for the results is shared and widely /1 The role of enterprises in upgrading workers' skills is particularly crucial in view of the virtual immobility of labor (most workers remain with their first employer) and the fact that enterprises usually get only a fraction of the qualified and skilled staff they request. C46400/J78790/D3159/33 - 31 - diffused. In briefings and discussions of an organization or a set of pro- posals, the procedure is generally constructive and cooperative but cautious, with everyone sensitive to thne (unequal) influence of each actor in thie decision-making process. Participants act as technical experts, making their required, objective contributions in the prescribed order. 2.26 In its annual plan (a set of interlocking documents), the enterprise is given targets to fulfill, together with detailed instructions and con- straints on the resources it is to use, how many workers will be employed and paid at each wage rate, etc. The most important targets in the past have been the physical quantity of output (measured, in a multiproduct enterprise, by its accounting value in 1970 prices) and output quality. Recently emphasis has been placed also on profits and, as a new target, the fulEillment of all contracts. Targets also include the variety or specification of output (i.e. the mix produced), consumption of materials, labor productivity, cost, and the amount of working capital used. Some of the secondary targets (such as labor productivity) are essentially redundant once the principal targets are met using the resources available. 2.27 The fulfillment of plan targets is only part of what is being demanded of the enterprise. Additional targets or other concerns may be decreed by the latest policies and campaigns in response to national objectives. Thus, for example, added emphasis has been given recently to saving energy and reducing consumption of scarce raw materials, with specific targets reportedly being conveyed to the enterprise outside the routine planning process. Nevertheless, in practice a great deal of the evaluation enterprise performance and much of the thinking about plans and results, at all levels, appear to be based (not always consciously) on the 1970 prices that measure output and the current prices that measure costs and profits. C46400/J79029/D3159/35 - 32 - 2.28 The plan gives the enterprise little scope for varying its technology or substituting one input for another. Raw materials and other purchased materials for production are specified, together with their sources and channels through which they are to be delivered. (Similarly the plan specifies the recipients of the enterprise's output.) However, because an enterprise may not receive its planned allocations on schedule, due to production or transportation failures elsewhere, it must cultivate alternative supply channels to provide for such contingencies. The authorities informally permit various types of barter deals among enterprises to cope with these difficulties. Also, plans are often changed and reallocations or reductions made during the year to channel scarce inputs on the basis of revised national priorities. Funds for circulating capital and financing of payrolls, up to limits set in the enterprise's financial plan, are provided by the People's Bank free of interest, while additional funds can be borrowed for working capital - usually at 5.04% interest - under strict controls. Fixed capital to be used in production is inflexible. Additions to plant, new equipment, and even improvements to existing equipment are decided by higher authorities, based on detailed submissions by the enterprise. (Inevitably prevailing prices influence these decisions as well - for example, one finds frequent references to the pay-back period of investments.) A principal change under the reform experiments (which involved 6,600 enterprises as of early 1981, many of them large and important) has been to allow enterprises some funds and latitude to "tap their potentials" by modernizing their own plant and equipment as well as to build added housing, while providing them channels to purchase machinery and building materials. 2.29 Motivation in the enterprise, from managers on down, depends Drimarily on nonmonetary rewards and peer pressure. Much emphasis is placed on team accomplishments, and individuals are encouraged to internalize socially approved objectives and behavior patterns. Bonuses have been reintroduced, but they are small and tend to be shared nearly equally, with managers getting no more than the average. Any income adjustments are usually given to all workers. A worker's pay is practically never reduced and no one is discharged. Pay differentials within a factory are generally rather narrow and have tended to reflect people's ages and past histories (for example their grade levels in 1957 when wages were first frozen for long periods) at least as much as contrasts in their education and skills. Except for a few older managers, whose salaries still reflect higher salary differentials in the past, Chinese managers generally earn only a little more than ordinary workers, for example about Y 100 a month as compared to about Y 65. C46400/J79029/D3159/36 - 33 - C. Size and Regional Pattern of Industry Scale of Production 2.30 China is widely renowned for the important role played by rural, small-scale industry, and more generally for the coexistence of enterprises of different sizes, with output from large numbers of small plants being used to supplement that from large and medium-sized ones, which exemplifies the prin- ciple of "walking on two legs." This approach has allowed China to achieve a high degree of self-sufficiency, based on small plants that could be quickly built without foreign assistance. It has also allowed industry to be spread to the countryside in support of agriculture. Recently, however, the role of small-scale industry has been shifting. Many of the small plants built in the past have come to be seen as highly inefficient and as competing for scarce fuel and raw materials with larger, more efficient plants. Meanwhile, an effort is being made to build up efficient small plants in and near the cities, including networks of parts suppliers and labor-intensive light industries. 2.31 In China, enterprises are classified as large, medium sized or small, drawing lines that vary from one industry to the next, based on plant capacity where convenient units exist and value of fixed assets where they do not./l Chinese sources appear to agree that hardly more than 5,000 enterprises are classed as large or medium sized; some writers suggest there are about 1,200 large and about 3,000 medium-sized enterprises. Together they are said to account for less than half of the total output, with about one fourth coming from the large enterprises./2 2.32 The aggregate importance of small industrial enterprises in China does not seem to be remarkably large by international standards. Other developing countries and many industrialized ones also have many small /1 In steel, for example, an enterprise with an annual productive capacity of over 1,000,000 tons is considered large, one with a 100,000-1,000,000 ton capacity, medium sized, and one with less than a 100,000 ton capacity, small. In paper 30,000 tons capacity is large, 10,000-30,000 tons is medium sized, and under 10,000 tons is small. In general engineering equipment, a plant with over Y 30 million in fixed assets is large, one with Y 8-30 million is medium sized, and one with under Y 8 million is small, but in light industry, in some branches, a large enterprise is one with over Y 20 million in fixed assets. Some of these examples are from Liao Jianxiang, "China's Policy on Simultaneous Development of Big, Medium, and Small Industrial Enterprises, and the Selection of Technology," presented in Madison, Wisconsin, November 1980. /2 The numbers are drawn mainly from the paper by Liao Jianxing, just cited, and one by Xie Shirong, "Discussions on Problems of Chinese Style Moderni- zation," Jingji Yanjiu (Economic Research), No. 1, 1980; but these papers do not appear to be entirely accurate in their discussions of total numbers of enterprises by ownership, so their statistics must be treated with caution. C46400/J79029/D3159/37 - 34 - establishments. Indeed, China has few specialized urban establishments with only a few people each, while these are common in market economies; and handicraft production was much reduced during the Cultural Revolution. Many of the types of small enterprises found in China today tend to be at least as common elsewhere, for example, those engaged in initial processing of agricultural raw materials, local repair of equipment, handicrafts, parts manufacturing, and those in labor-intensive industries commonly carried out on a small scale, such as garment-making, furniture-making, and many food industries. 2.33 China-s smaller enterprises are unusual, however, in that many of them, dispersed throughout the country, are engaged in types of production that are characterized everywhere by large economies of scale. As a result, China has quite an unusual structure of production within particular industries. In cement, for example, there are 49 large and medium-sized plants using rotary kilns, and 25 more are now being built. However, about two thirds of the total output comes from small enterprises using vertical kilns - basically stationary chimneys - where cement is cooked in batches. This technique became obsolete many decades ago in the West, and it presents difficulties in quality control, but in China it has been widely used because it involves low investment costs, is simple to master, and can supply low-strength cement in rural areas where transportation costs are a serious problem. China now has over 3,400 plants using vertical kilns in a wide range of sizes: the 120 biggest ones have production capacities of over 80,000 tons per year each, while about 1,000 run by communes and production brigades have production capacities of only about 2,000 tons per year each. In the cement industry as a whole, energy consumption per ton of cement is roughly double the average in leading industrialized countries, because wet process technology is still used even in the rotary kiln plants built in China. 2.34 In the nitrogenous fertilizer industry, as recently as 1977, nearly two thirds of the output came from over 1,400 small plants, using technology based on partial oxidation using coal, another old technique long abandoned in the West. Typically these small plants have an ammonia production capacity of 3,000-5,000 tons per year, which is about one hundred times smaller than that of imported fertilizer plants. Energy consumption averages 10 million calories per ton of ammonia in the large, imported plants, 18 mil- lion calories per ton in the medium plants (which are generally Chinese-built, using coal), and 24 million calories per ton in the small plants. The usual final product of the small plants, ammonium bicarbonate, is unstable, and in its usual, powdered form it begins to decompose when exposed to moisture or temperatures above 200C. As a result, there are serious difficulties in storing or transporting the fertilizer; and it cannot be applied on the soil surface but must be buried deep in the soil, which requires complicated application procedures./l Investment costs per unit of nutrient output were, at least until recently, at least as high - and (despite a low price of coal) /1 Equally serious problems occur when the final product is aqueous ammonia. In consequence the average effectiveness of both fertilizers, per ton of ammonia, is much lower than that from large plants. C46400/J89422/D3159/38 - 35 - variable costs under good management appear to be more than twice as high - in the small plants as in a recently imported urea plant./l Energy consumption and quality differences are also substantial and are similarly linked to plants of different sizes in the iron and steel industry, with the small plants often using 3-4 times as much energy per ton of output as the international standard, while the highest energy efficiency is attained in the largest plants such as Anshan; there the ratio is being reduced rapidly, though it was recently still about 1.3 times the average in Japan. 2.35 The phenomenon of very small plants competing with larger ones for scarce resources is found in a surprising range of industries. In some, as in iron and steel, the very small plants account for only a small and dwindling share of total output, while in others (such as paper) they remain extremely important. The phenomenon is prominent in other types of industries as well. Thus, for example, of about 640 factories producing ball and roller bearings, 49 principal enterprises produce 62% of the national output, while most of the others are very small. The cost of making similar sets of bearings is up to three times higher in a small plant than in a specialized large plant. 2.36 In the motor vehicles industry, the output of six principal auto- motive factories (Table 2.4) was supplemented by the output of many smaller plants in 1979. At one time more than 20 provinces were reported to have their own truck factories, and most probably still do. In the city of Table 2.4: MOTOR VEHICLE PRODUCTION IN THE MOST DMPORTANT PLANTS, 1979 Changchun No. 1 ("Liberator" 4-ton truck) 63,002 Beijing (Jeep and 2 ton truck) 24,170 Nanjing (2-1/2 ton truck) 15,021 Hubei No. 2 ("Eastwind" 5-ton truck)/a 14,501 Shanghai (passenger car) 4,015 Jinan (8 ton truck) 3,515 Total 124,224 Other plants (most very small) 61,462 Total production 185,686 /a Located at Yongyang in a mountainous region 500 km north- west of Wuhan, this Chinese-built plant was initially intended to make 100,000 trucks per year, but has encountered many difficulties. /1 These cost comparisons are based on findings in an unpublished study by Christine Pui Wah Wong, "Rural Industrialization in the People's Republic of China," 1980. C46400/J79029/D3159/39 - 36 - Wuhan, the local motor vehicle industry employs 20,000 people. The principal enterprises (which included many branch plants) had a combined assembly capacity of 7-8,000 trucks, including at least three principal types and numerous other models made in small numbers - and there were also several dozen enterprises supplying parts./I Regional Patterns of Industrial Development 2.37 When the People's Republic was established, China's industries were heavily concentrated in the coastal provinces. Since then, a major effort has been made to build up industries throughout the country and especially in the interior. Table 2.5 shows the recent geographical pattern of gross industrial output compared to population. Industry is still disproportionately concen- trated near the older industrial centers, but it is also significantly devel- oped in relatively backward parts of China. The leading industrial region (at least in terms of gross output) is East China - particularly Shanghai and the adjacent provinces of Jiangsu and Zhejiang, which together produced roughly one quarter of the national total. Shanghai has achieved remarkably success- ful industrial growth since the early 1950s, relative to the investments put into it, and has built up sophisticated and versatile engineering industries. At the same time, it is China's leading source of high quality light indus- trial products. A second leading industrial region is the Northeast, which is still the leading base of heavy industry and has a share of industrial capacity considerably bigger than its one sixth share of gross output. The third major industrial region is North China, particularly Beijing, Tianjin, and adjacent Hebei Province. In some ways, nearby Shandong and Hunan Provinces are part of this zone, in and around the North China Plain./2 This third zone along with Shandong Province links the other two, so that one could almost say that there is an industrial corridor, roughly from the city of Harbin in the Northeast down to a little south of Shanghai, containing about 60% of China's industries. Other concentrations of industry are found in central China (particularly Hubei and Hunan), Sichuan in the southwest, and Guangdong on the southeastern coast. 2.38 Each of China's 29 principal geographical divisions appears to have increased its gross output at least 12-fold from 1952 /3 to 1979, compared to a 17-fold growth nationwide. During this period, only five /1 However, jeeps assembled in Wuhan use several major components built in other provinces; and more generally, motor vehicle and engine plants appear to have a considerable degree of specialization and cooperation, which is now being encouraged. /2 In Table 2.6 Henan is listed in the Central-South region and Shandong in the East region, based on past administrative arrangements, but histori- cally and in their geography they have often been counted in North China. /3 Most of the percentage shares for 1952, presented in verbal briefings, varied from estimates published outside China. C46400/J78790/Dl383/49-50 - 37 - Table 2.5: GEOGRAPHICAL PATTERN OF GROSS INDUSTRIAL OUTUfiT, 1979 Approxinate ?ercencage shares of industrial Industrial output per capita output Population (Yuan) Northeast Region Liaoning 9.1 3.5 i,213 Jilin 2.7 2.2 567 Heilongjiang 4.6 3.3 5666 North Region Beijing 4.6 0.9 2,424 Tianjin 3.8 0.3 2,354 Hebei 4 .4 .2 396 Shanxi 2.3 2.5 432 Nei M4onggol 1.2 1.9 297 East Region Shandong 6.5 7.4 413 Anhui 2.5 4.9 234 Shanghai 12.9 1.2 5,231 Jiangsu 8.4 6.1 654 Zhejiang 3.3 3.9 399 Jiangxi 1.7 3.3 242 Fujian 1.5 2.6 277 Central South Region Henan 3.7 7.4 236 Hubei 4.1 4.8 406 Hunan 3.4 5.4 299 Guangxi 1.6 3.6 269 Guangdong 4.6 5.8 372 Northwest Region Shaanxi 2.3 2.9 376 Gansu 1.8 2.0 436 Qinghai 0.3 0.4 370 Ningxia 0.3 0.4 378 Xinjiang 0.7 1.3 2o6 Southwest Region Sichuan 5.4 10.1 254 Guizhou 1.0 2.8 168 Yunnan 1.3 3.2 190 Xizang /a 0.2 /a Total 100.0 100.0 473 /a Less than 0.05%, so that the average output per capita is probably under Y 125. Source: State Economic Commission and SSB; per capita output estimate derived. C46400/J78361/D3159/40 - 38 - regional units (the coastal cities of Shanghai and Tianjin and the three provinces of the Northeast Region) experienced substantial declines in their shares of the nation's output. Numerical comparisons supplied unofficially suggest that these declines were all of rather similar proportions. Along the eastern coast is a long, contiguous belt (from Guangdong in the south up through Fujian, Jiangxi, Zhejiang, Anhui, Jiangsu, Shandong and Hebei) in which all the provinces roughly maintained their shares. Moving west toward the interior, there is a vast contiguous area (from Guangxi in the south up through Hunan, Hlubei, Hunan and Shanxi north to Inner Mongolia, and westward to Shaanxi, Gansu, Ningxia and Qinghai) in which all the geographical units achieved large increases in their shares. Slightly east of this zone, the capital district of Beijing more than doubled its share of industrial output. Counting also the modest increases achieved in Sichuan and Guizhou, a very slight increase in Xinjiang, and the beginnings of industry in Xizang (Tibet), all of the interior and western China expanded its industrial output faster than the national average. If a year other than 1952 is used as the base year for comparison, the picture changes in detail; for example, Jiangsu (near Shanghai) expanded its share from about 6.3% in 1957 to 8.4% in 1979./I /1 Additional information on the geographical location of industry emerged from briefings on particular topics. For example, in machine-building and metal products (including electronics, transport equipment, instru- ments and other engineering products), a breakdown by geographical areas based on one-time regional divisions was given in rough numbers for 1979 as follows: Number of Gross output Region enterprises (Y billion) Northeast 12,900 19.2 North 14,000 20.6 East 32,000 47.0 South-Central 22,000 18.9 Southwest 14,900 9.0 Northwest 6,800 6.8 In 1952 only 10% of China's cotton yarn came from "hinterland" regions but they supplied 37% in 1979; in paper the rise was from 25% to 40%. Out of Y 84 billion worth of output by enterprises within the general supervision of the Ministry of Light Industry, Shanghai led with Y 11.37 billion while seven other province-level units also had output over Y 4 billion: Guangdong (Y 7 billion ); Shandong (Y 6.3 bil- lion); Jiangsu (Y 5 billion); Sichuan (Y 4.3 billion); Zhejiang (Y 4 billion); and Tianjin (Y 4 billion). C46400/J78752/D1097/02 ws - 39 - 3. RECENT CHANGES IN POLICY A. Reassessment of Past Policies 3.01 Shifts in Chinese economic policy since 1979 have already profoundly affected industry. These shifts have been based on a revised assessment of China's situation and problems, and a return to tactical flexibility in pursuit of long-term goals. A higher priority is now being given than in the recent past to raising living standards as part of the quest for economic development. High priority is still given to industrial advances, but with the goal of achieving the modernization of industry (the second of the "four modernizations"/I), which implies a need to strengthen qualitative performance and technology. 3.02 Previous Chinese economic policies are now being criticized in retrospect as having placed excessive emphasis on heavy industry, accumulation and "production for production's sake," at the expense of attention to the needs being served. Particular excesses occurred from taking "steel as the key link" and overinvesting in the metallurgical industry, among others. Meanwhile, light industry was badly neglected, along with agriculture and "nonproductive" investments such as housing, education and cultural facilities. "Between 1966 and 1978, of the total amount of investment in capital construction, heavy industry took up more than 55%, agriculture, a little more than 10%, and light industry even less, only about 5%."/2 As further examples of the neglect of light industry, in 1976 only 2.1% of China's machinery output was built "by heavy industry for light industry;" and as of 1978, only 11.7% of the steel products made in China were used "for light industrial goods."/3 Production remained divorced from customers' needs, while numerous imbalances persisted. As a result, living standards were hurt, and the economy suffered from shortages of consumer goods, building materials, electricity, spare parts, and other items. Deliveries of goods and materials under the state plan were not dependable. Construction capacity was overextended, with too many projects started - particularly in heavy industry - so that investments took much too long to complete. Meanwhile, a significant fraction of the goods produced could not be used, but instead piled up in state warehouses. /1 The others are the modernization of agriculture, science and technology, and national defense. /2 Beijing Review, Dec. 21, 1979, p. 11. Heavy industry, it must be remembered, includes mining and electric power. /3 Ibid. C46400/J79029/D1097/03 ws - 40 - 3.03 A related criticism is that inadequate attention was given, particularly in 1966-78, to the efficient use of resources. Thus, inefficient enterprises, once established, were allowed to make losses and use excessive quantities of energy and materials per unit of output. Too much emphasis was placed on industrial self-sufficiency within each region and organizational unit. Both small and large plants were built to be "complete," based on a high degree of vertical integration, while opportunities were neglected for creating an efficient division of labor through specialization. Industrializ- ation programs put too much emphasis on immediate gains in production; investments in support of industry were neglected, notably in mining, transport, communications and power. B. New Policy Framework 3.04 The new policy framework first announced in early 1979 is designed to counteract and gradually overcome these problems, and to permit continued progress in face of an overall shortage of resources, including energy, foreign exchange and financial resources. As in an earlier period of readjustment (1961-65), the Chinese leaders have decided to reduce aggregate pressures on the economy by slowing the rate of growth, particularly in heavy industry, while sharply cutting back capital construction. At the same time, an effort has been launched to correct imbalances throughout the economy, relieving shortages and removing bottlenecks. The supply of consumer goods is to be increased; high priority has thus been given to light industry as well as agriculture at the expense of heavy industry. This approach reduces energy demand and helps to combat financial disequilibrium; it also frees resources for tackling deficiencies in the existing system and for finding ways of meeting technological challenges. In tackling deficiencies, a central objective - again reminiscent of similar efforts in the early 1960s - is to adjust what is produced to the needs of consumers and the economy as a whole. Pressure is being put on manufacturers to study the needs of their customers and, in some cases, to sell to them directly rather than turning output over automatically to higher authorities; exports have also been given high priority. A related policy theme is to get more and better output out of existing enterprises, and more generally, to promote efficient use of resources. To the extent required, efficiency is to be fostered by changes in organization and by restructuring inefficient industries. 3.05 A period of "readjustment, restructuring, consolidation and improvement" was inaugurated in 1979 to implement these policies. Initially this program was to last three years (1979-81). Because of the depth and difficulty of the problems encountered, the program has now been extended at least through 1983. 3.06 Within industry, light industries and a few bottleneck sectors have been given much higher priority and are receiving favored treatment in the allocation of scarce inputs, while rapidly expanding their output. Other industries are being set qualitative tasks. These include adjusting output to C46400/J78790/D1097/04 ws - 41 - customer needs, advancing technological capabilities, and, in some cases, beginning to restructure while creating a wider division of labor, including networks of parts suppliers. Throughout industry, steps are being taken to economize on the use of fuels and energy, raw materials, and working capital. Reforms have included experiments to give enterprises somewhat greater autonomy, but also new types of contracts, some competition among enterprises serving the same markets, and the beginnings of commerce in means of production. C. Implementation of the New Policies 3.07 The effects of the revised priorities are evident from China's recent trends in industrial output. Up to late 1978, gross output expanded rapidly, as vast new investments came on stream and production recovered from earlier political disruptions. Output increased by about 15% in 1976, by about 14% in 1977, and by 13.5% in 1978. Under the new policies, however, industrial growth has slowed down to 8.5% in 1979 and 8.7% in 1980 - still well above the planned rate of 6% for 1980. 3.08 A more dramatic effect has come in the relative contributions of light and heavy industry. Previously, heavy industry, grew faster than light industry; for example, in 1978, heavy industry increased its output by 15.6% and light industry by 10.8%. In early 1979, after the policy change, heavy industry continued to outpace light industry, but after the middle of the year, this situation was reversed. The final results for 1979 showed an increase of 9.6% in light, industry compared to 7.7% in heavy industry. In 1980 the difference was spectacular. Light industry increased its output by 18.4% while heavy industry grew by only 1.4%. As a result, the share of light industry in gross output rose from 43.1% in 1979 to 46.9% in 1980. Thus, under the new policies, the growth of heavy industry decelerated in two years from 15.8% to 1.4%, while that of light industry surged forward. In the first quarter of 1981, output of light industry rose by an estimated 9.9% compared to the same 1980 period, while output of heavy industry dropped, leaving a 1% overall growth. As a result, the proportion of light industry in gross indus- trial output rose to 50.2%./l 3.09 In 1979 and again in 1980, spectacular increases have been achieved in the output of consumer engineering products. In 1979, the number of tele- vision sets produced rose 157%, while the number of cameras rose 33%, wrist watches 21%, and bicycles and radios 18% each (Table 1.4 above). In 1980, big gains were achieved again in production of radios (117%), television sets (87%), cameras (57%), sewing machines (31%), wrist watches (30%), and bicycles (29%), while some other items such as tape recorders and pocket calculators jumped forward even faster from a modest base. Textile output also jumped by about 20% in 1980, with gains in individual products ranging from 11% (cotton yarn) to 47% (synthetic fiber). /1 Xinhua news release of April 15, 1981. C46400/J78943/D1097/05 ws - 42 - 3.10 The surge in light industry outpuit reflects aggressive implemen- tation of the shift in priorities. Allocation of electricity has been switched to favor enterprises producing consumer goods and exports, some of which are guaranteed electric power even in the event of widespread power failures. Priority has also been given to light industry in transport and in the supply of materials. Scarce raw materials in industries such as textiles are being systematically channeled to the more efficient enterprises, which can achieve a higher output from limited supplies. Cotton and other raw materials for light industry, and materials for packing or packaging exports, were imported in 1980 on a larger scale than ever before, while imports of steel products were cut back sharply. 3.11 By contrast, in many branches of heavy industry, the 1980 annual plans called for a sharp decrease in output. These planned cutbacks have not been equally distributed across enterprises; rather, orders, energy and materials are being channeled first to the best performing enterprises and have been cut back more than proportionately for the weaker ones. Many of the larger machinerv enterprises appear to be operating at only a small fraction of their potential capacity; in some, workshops are receiving electric power in a sequence oyer the week. Thus in some industries at least, vast amounts of excess capacity, built in previous eras, remain largely idle for lack of sufficient orders, energy, or raw materials. 3.12 Output would have fallen absolutely in heavy industry in 1980, if it were not for capital equipment producers obtaining orders from buyers with needs not previously served rather than relying only on orders from their usual customers under the plan. Probably the largest efforts in this direction was made by enterprises under the First Ministry of Machine Building, which got 46% of their 1980 orders through their own efforts. In steel, output rose to over 37 million tons, instead of declining as planned to about 33 million tons, but output was reportedly up sharply in steel products in short supply and down in those in excess supply. Restructuring has also been carried forward vigorously in other industries. For example, in cotton textiles, a number of small and technically backward mills have been closed down. In tractors, an effort is being made to reduce the number of enterprises assembling final products, while converting many small factories into specialized parts suppliers. 3.13 Particularly striking successes have been achieved in raising industrial output in the face of energy shortages. The increase of 8.5% in industrial output in 1979 was achieved with only a 3.1% increase in national energy supplies, but with an improvement of 5.1% in energy utilization per yuan of gross output in industry. The 8.7% increase in output in 1980 was similarly achieved in the face of a 1.3% drop in national energy output, based on a 2.4% decline in coal, a 0.2% decrease in oil, a 1.7% fall in natural gas, and a 6.6% increase in electric power production. Thus, over the two years, industrial output rose by about 18% in a context of an increase of less than 2% in the national energy supply. Energy use throughout industry is now being closely monitored. Preliminary reports C46400/J78790/D1097/06 ws - 43 - claimed "savings" in industry itn 198,0 of ahout 10%`, in oil, 5% in coal, and 3 in electric power use, relative to outputi. "ore recent co.iiputations show "savings" equal to about 35 million standard Cons of coal equivalent, or 7.2% of industrial energy use, of which 22 million standard tons came from shifts in the composition of output (from heavy to light industry) and the other 13 million tons (2.7% of energy use) through improved management of industrial output or savings within industries. 3.14 Progress has also been achieved in expanding manufactured exports. The US dollar value of China's exports of manufactures and nonferrolus metals increased in 1979 by over 40% as compared with 20% p.a. in the two previous years (Table 3.1). World inflation in the US dollar price of manufactured exports averaged 14-15% p.a. in these years, so that real growth has accelerated sharply. This success is believed to have continued in 1980, when the dollar value of total merchandise exports rose by 28%./1 3.15 The bulk of China's manufactured exports consist of textiles and other light industry products (Table 3.1). Only a small share is capital goods. A more detailed picture of China's manufactured exports can be gained from reports from importing countries. In 1978 only about one third of total exports were sold in industrialized economies. Over half were sold to developing market economies including Hong Kong and Macao; and probably no more than 15% went to centrally planned economies in Europe or Asia. Developing countries were the predominant market for most product groups and took an especially large share of China's exports of machinery, equipment, and other metal products. China's import penetration in industrialized countries is still small. China in 1978 supplied only 4.6% of OECD member countries' combined imports of manufactured goods from developing areas of East Asia; the share was 16.3% in textiles and 3.2% in clothing. OECD manufactured imports from China were less than one fifth of those from either Hong Kong or the Republic of Korea. They were also smaller than those from Mexico, India, Singapore, or Brazil. 3.16 Numerous new measures have been introduced since late 1978, to promote trade and to attract foreign capital to assist in China's industrial development. New trade corporations and other special organizations (such as the China International Trust and Investment Corporation) have been created; existing foreign trade corporations have established branch offices with expanded powers; and the power to enter into foreign trade arrangements has been partly decentralized. Several new types of arrangements have been introduced, including processing of foreign supplied materials or assembly of foreign supplied components; compensation trade in which foreigners supply equipment and assistance in exchange for part of the output; joint ventures; and cooperative production in Chinese-owned facilities. Special export processing zones are being set up on the southeast coast near Hong Kong. /1 For further details on trade trends see Annex H, "External Trade and Finance." C46400/J79061/D1383/46 - 44 - Table 3.1: MANUFACTURED EXPORT TRENDS, 1976-79 (million current US dollars) Growth rate (% p.a.) 1976- 1978/ 1976 1977 1978 1979 78 79 Manufactures & Nonferrous Metals (SITC 5-8) 3,111 3,525 4,510 6,343 20.4 40.6 Heavy & Chemical Industry Products 808 851 1,010 1,497 11.8 48.2 Chemicals & related 198 L84 234 424 8.7 81.2 Machinery & transport equipment 238 296 332 464 18.1 39.8 Metals & other products 372 371 444 609 9.2 37.2 Light & textile industry products 2,303 2,674 3,519 4P846 23.6 37.7 Included in Another Classification /a Textiles 1,481 1,573 2,190 2,940 21.6 33.3 Handicrafts 460 599 720 941 25.1 30.7 Other light industry 527 601 736 968 18.2 31.5 Machinery 182 216 261 (340)/b 19.8 30.3 Total Merchandise Exports 6,855 7,590 9,745 13,658 19.2 40.2 Of which: Fuels 924 1,068 1,345 2,654 20.6 97.3 /a Relationships between this and the previous classification are not fully understood. /b Including a new category of technology and related equipment. Source: Ministry of Foreign Trade. C46400/J79029/D1097/07 ws - 45 - Thus far, these new arrangements only account for a small fraction of China's manufactured exports, and it is still the exception that foreign buyers supply designs or have direct contacts with Chinese manufacturers./l By international comparative standards, Chinese trade arrangements are still bureaucratic. However, these shifts represent an important start. Revised internal pricing of foreign trade transactions at an exchange rate (Y 2.8 per dollar) more favorable to exports and import substitution has been another valuable measure to stimulate manufactured exports; and other direct signals and measures within China have apparently been vigorous. 3.17 The readjustment program has been considered to be less satisfactory in cutting back industrial construction than in switching current output. However, in the economy as a whole, huge cutbacks have been made in programs of capital construction, except in energy and power, transport, communica- tions, and building materials, where serious bottlenecks require fast completion of crucial projects. Fully 295 large and medium-sized construction projects were suspended or deferred in 1979, and over 200 more in 1980, compared to 82 completed in 1980 and 904 still under construction at the year's end. Large cutbacks were also made in provincial construction programs. Cutbacks in 1979 (Table 3.2) centered in metallurgy and industrial equipment, while the largest increase came in cement. Not much net rise seems to have occurred in investment in light industry; indeed, construction in some categories (such as chemical fibers) was reduced; so that the swift output increases of 1979-80 seem to have been based mainly on previously unused capacity. 3.18 In 1980, the effort to cut back construction in the aggregate has been thwarted not only by slowness to implement the program to the extent called for, but also by increases in decentralized, uncoordinated investment. This has included much investment in new industrial capacity by lower levels of government, which were given increased autonomy in their use of resources, and by rural communes and brigades, which as a result of higher procurement prices now have higher cash incomes. Capital construction covered by the national budget fell by 24.9% in 1980 compared to 1979, while other state capital construction roughly doubled, so that the overall total rose by 7.8%. /1 From July 1978 to the end of June 1980, China received a total of $60 million of export processing or assembly fees; this total is expected to rise to $100 million by the end of 1980, based on a cumulative total of over 6,300 processing or assembly contracts, of which 70% were with Hong Kong and M4acao, 20% with Japan, and 10% with other countries. About 330 compensation agreements were entered into from mid-1978 to mid-1980, mostly with Hong Kong and Japanese partners. Up to the end of 1980, 17 joint ventures had been entered into, most of them in tourism and light or handicraft industries, along with a handful of cooperative ventures, of which the largest was a $50 million contract for manufacturing toys. According to China-Business-Review, March-April 1979, pp. 72-73 and November-December 1979, p. 21, preliminary agreements have been signed with NcDonnell Douglas for joint production of DC-9 Super 80 jets and with Bell Helicopter Textron for production of helicopters. Annex H provides further information on these and other changes in trade policy. C46400/J78943/D1383/47-48 - 46 - Table 3.2: TRENDS IN IN1VESTMENT IN CAUPITAL CONSTRUCTION ,Y INDUSTRY, 1977-79 /a Value in million current vuan Percent snare 1977 1978 1979 1977 1973 9,79 Food, beverages & tobacco 364 512 512 1.7 1.9 2.0 Textiles 1,496 1,338 1,412 6.9 4.9 5.5 Chemical fibers 1,190 904 760 5.5 3.3 3.0 Wood products & furniture 39 49 58 0.2 0.2 0.2 Paper & pulp 147 207 280 0.7 0.7 1.1 Chemicals, rubber & plastic products 2,905 3,134 2,946 13.3 11.4 11.5 Basic chemicals 668 1,196 1,318 3.1 4.4 5.1 Fertilizers & insecticides 1,907 1,500 1,234 8.8 5.5 4.8 Pharmaceuticals, fats, soap, etc. 131 173 150 0.6 0.6 0.6 Petroleum industry except extraction 588 813 622 2.7 3.0 2.4 Coal washing & dressing 11 13 67 0.1 0.1 0.3 Nonmetallic mineral building materials 669 916 1,244 3.1 3.3 4.8 Cement & cement products 297 422 728 1.4 1.5 2.8 Glass 42 41 44 0.2 0.2 0.2 Other 76 126 91 0.4 0.5 0.4 Basic metallurgy & metal mining 4,273 4,648 3,472 19.6 17.0 13.5 Machinery, equipment & metal oroducts 3,252 4,081 3,624 15.0 14.9 14.1 Agricultural equipment 534 651 445 2.5 2.4 1.7 Industrial machinery & equipment 940 1,388 789 4.3 5.1 3.1 Transportation or "communication" equipment 572 558 443 2.6 2.0 1.7 Machinery for nonproductive use 162 210 157 0.7 0.8 0.6 Other manufacturing 538 660 709 2.5 2.4 2.8 Coal mining 2,247 3,167 3,119 10.3 11.6 12.1 Petroleum & natural gas extraction 1,488 2,347 2,085 6.8 8.6 8.1 Logging & transport of timber 247 388 436 1.1 1.4 1.7 Electric power 3,472 5,091 5,099 16.0 18.6 19.9 Total 21,736 27,316 25,685 100.0 100.0 100.0 /a Includes investment in the state budget and by various localities, enter- prises and industrial departments. Does not include renewal and replacement of fixed assets and investment put up by collectivelv owned organizations. Source: Data supplied to UN Statistical Office. C46400/J79029/D1097/08 ws - 47 - (Investments made by industrial enterprises appear to have been more acceptable as they were largely restricted to plant improvements and new housing). In late 1980, the central authorities reasserted central control over investments at lower levels and sharply criticized "blind and duplicate" local investment in industry. Strict rules were imposed to forbid new investments in some industries (for example, cotton textiles), while requiring central approval of investments in others. 3.19 Sentiment against this surge of decentralized investment focused not only on its effects in construction, but even more on its effects on the supply of raw materials for light industry. Too much processing capacity has been created by uncoordinated investments. Perhaps the worst effect has been a swift expansion of inefficient light industry in poor and backward regions, using local raw materials formerly shipped to distant industrial centers. This has contributed to a shortage of raw materials such as hides and leather, fibers and tobacco, in China's leading industrial centers. The new local industries achieve much less quantity and quality of output per unit of raw materials. 3.20 These developments seem to have sprung from increasing decentralized units' power to invest without changing the signal system of prices, taxes, and scarcity rationing. A drive to expand industries in each locality, wherever local resources and prerogatives permit, reflects high projected financial returns based on this tax and price structure, which make industries seem very profitable sources of local revenue. Other parts of the explanation are also a pent-up desire to improve local incomes and living standards, and the difficulty of getting goods in short supply. These considerations make such investments appear enormously attractive locally, even when (as is very often the case) they make no sense from a national point of view, since the industry as a whole may already have redundant capacity and be starved for either orders or raw materials. 3.21 Officials now appear to be concerned that the expansion of both urban and rural collective enterprises has been proceeding too rapidly. Statistics now available show an increase in the number of enterprises at the commune level and above from 322,723 in 1977 to 355,013 in 1979 (a rise of about 10% in two years), with most of the increase coming in machinery or metal products, food, and building materials enterprises./l The number of collective enterprises reportedly jumped sharply also in 1980. At the same time, employment estimates with and without state enterprises (Table 1.3 above including the footnote) indicate that the number of workers in urban collective and rural commune enterprises must have increased by /1 See Statistical Annex, Table 7.2. C46400/J79061/D1097/09 ws - 48 - about 4.5 million from 1977 to 1979. Along with diversion and shortages of raw materials, the apparent deceleration in the growth of light industry in the last months of 1980 and the first quarter of 1981 may have reflected, in some cases, capacity constraints. However, any major cutback in China's rural small-scale processing industries, or measures to keep them from expanding further, could have adverse effects on rural incomes and employ- ment, so that there are clear tensions between policy objectives in this area. 3.22 In the state sector, and particularly in heavy industry, each enterprise and region has tried to adjust its program in light of the new priorities, campaigns, and injunctions from the center. Among the most interesting programs are those in machine building. The Minister of the First Ministry of Machine Building has written that, in the machine-building industries, six changes are now being pursued: "The first is the change from principally serving heavy industry to serving many other needs as well, like those of agriculture, light industry, municipal construction and the people's livelihood. The second is the change from principally serving the construction of new factories to serving old factories as well in tapping their potentials, innovations and transformation. The third is the change from merely carrying out manufacturing to undertaking the responsibilities of designing complete sets of equipment and planning complete processes for production, installation, adjusting and testing, repair and maintenance, supplying fittings, personnel training and so on. The fourth is the change from aiming at the domestic market to fighting our way into the international market. The fifth is the change from producing small batches to producing large ones and gradually achieving specialization in production. The sixth is the change from principally grasping output value and output quantity to principally grasping quality, variety, punctuality in delivery, the lowering of costs and the continual raising of our enterprise management standard. The core of the six changes is the raising of the ability of the machine-building industry to satisfy various social needs so that the production is really carried out for the sake of satisfying the needs of various sectors of society".!l /1 Zhou Zijian, "Structural Reform and Direction of Development of the Machine Building Industry," Red Flag, No. 11, June 1, 1980, as trans- lated by the British Broadcasting Corporation in BBC SWB FE/6453, June 24, 1980. Briefings on machine-building elaborated much the same points, stressing also efforts to supply more equipment to collectively owned enterprises. Makers of industrial and military equipment have switched part of their output and now make consumer products as well as equipment for sectors not previously served. C46400/J79029/D1097/10 ws - 49 - 3.23 These efforts to reorient machinery output have required managerial and institutional reforms. Machinery production is being based on orders and contracts; some equipment is being sold, and even advertised, for the first time; and enterprises are being allowed to sell their output directly once their targets are met. Efforts are being made to strengthen enterprises' "sense of operation, of market, of competition and of service." 3.24 Within industries, efforts are also being made to carry out reorga- nization based on principles of rationalization, efficiency, cooperation, and specialization. Thus, for example, in the system under the First Ministry of Machine Building, hundreds of specialized corporations and associations have been established based on more than 10 forms of association or integration. Further programs and proposals for reorganization and management reforms are being considered and exhaustively discussed. In machine building, these now include efforts to reorganize across the lines set by industrial activities, regulations, ownership, military vs. civilian spheres, etc. Thought is also being given to creating information centers relating to international and domestic markets, as part of an effort to strengthen indicative planning and forecasting. 3.25 An enormous effort continues to be devoted to technological transformation, mastering new products, and raising the technical level of industry. In machine building, this effort now seeks to shift the emphasis from quantity to quality. Energy conservation and lower costs of production are central themes. Energy-inefficient products are being phased out. Much emphasis is being placed on improving testing equipment, quality control, and technical and scientific research work. Efforts are being redoubled to master advanced design technology. Stress is being placed on improvement of basic components and products. Key plants are being re-equipped and renovated to improve their precision and efficiency. Tasks and schedules have been specified for mastering particular new technologies and for producing new major items of equipment, sometimes with foreign contractual assistance. 3.26 One concern inevitably raised by China's recent policy shifts in industry is the need to reconcile potential conflicts between elements of the new policies. Perhaps the biggest conflicts can be seen in budget alloca- tions. The expansion of light industry has been achieved at some cost; "in 1980, the state granted a loan of Y 2,000 million for the light, textile and electronic industries while the local authorities appropriated a sizeable amount of funds."/1 All the other new policy concerns also tend to require either additional funds or project cutbacks. While drawing up programs in line with these policies, managing officials at every level have also identified needed investments or have proposed projects that have yet to be approved. Thus, even where there is a common thread in programs at all levels, such as energy conservation, it is often woven into proposals for new investment. /1 Beijing Review, January 26, 1981, p. 7. C46400/J79061/D1097/30 ws - 50 - 4. STRENGTHS, WEAKN ESSES AND PROBLEMS A. The Chinese Authorities' Appraisal 4.01 Chinese officials' appraisals and published statements on their manufacturing industries are paradoxical. On the one hand, high technology areas of industry have recorded many admirable engineering and technical accomplishments, making, for example, gigantic precision machines and very difficult instruments. Production of a wide range of difficult products has been mastered. Output has grown rapidly. But on the other hand, the reports point to many significant problems and weaknesses. 4.02 To some extent these negative evaluations reflect high aspirations and an almost exclusive focus on comparisons with advanced industrialized countries. For example, most of China's light industries are described as very backward by international standards. Their capacity is still tiny compared to what is needed; their equipment is mainly obsolete; their Chinese-made equipment is of poor quality; imported equipment is needed for many tasks; plants are too small; many cause serious pollution; and particularly outside Shanghai and Tianjin, technical capabilities are very weak, the level of managerial competence is very low, and product designs and quality are generally poor and uninspiring. 'Moreover, most of these industries are weak, struggling with serious raw material problems caused not only by insufficient supplies (which are difficult to correct), but also by the poor quality and unsatisfactory processing of natural materials (leather, wool, etc.) and by past neglect of light industry needs (so that dyes, strip steel, etc., are of poor quality and many items must be imported). Evalua- tions of these aspects of industrial performance would be more favorable if other developing countries were the point of reference. 4.03 Based on Chinese authorities' statements, some important weaknesses in industry as a whole, and especially in heavy industries, are listed below. (a) Though there is some very good equipment, the proportions are much inferior to those in advanced countries; thus, a much smaller fraction of the machine tools are special purpose or high pre- cision types, and the share in China has hardly been increasing. (b) Product design is a weak area. Equipment produced tends to be 20 to 30 years out of date, based on past borrowings and only slow increases in China's own design capabilities. By current international standards, a large share of the equipment now made is inefficient in use of energy and performs poorly. Many machines are small, slow, or have poor control systems. Often they do not achieve the same standards of accuracy or productivity as their foreign prototypes. C46400/J79029/D1097/31 ws - 51 - (c) The design problem is aggravated by low levels of technical know- how in moving from new product designs to series or mass pro- duction. This reflects both inexperience in designing assembly lines and difficulties in designing and building the specialized machinery required. Adding to these problems, the quality of equipment suffers because of an inability to make particular components well and the inferior quality of alloy metals or other materials, which reduce product life and performance. As a result, China can make only small quantities of equipment based on its best designs. Many machinery plants can only produce equipment of types no longer required or wanted. The average quality of equipment has tended to fall further below that in advanced countries as foreign industries have moved forward to new generations of technology. (d) For these and other reasons, even though China tries to make most of its own equipment, there are many desirable equipment items that it cannot yet supply for itself. Efforts to become energy efficient or raise the level of technology and performance increase the need for imports. Adding to this need, large numbers of par- ticular materials cannot yet be supplied in adequate quantities. In the metallurgy industry, for example, difficulties have come in manufacturing (for example, in silicon steel, stainless steel, tinplate, or thin sheet steels) while other difficulties relate more to mining and initial mineral processing (for example, of copper, aluminum and other nonferrous metals). (e) These shortages in turn are part of a general problem of imbalances in industrial capacity, as industries have not developed sufficiently along lines of serving and meshing with user needs. (f) Management quality and methods are deficient and technical levels are weak in most plants and industries, with various negative consequences, e.g. mistakes are made, and the potential of existing enterprises is not fully realized. More technical personnel (with higher education) are needed. There is also a need to foster innovation. (g) Wasteful errors have been made in the planning and design of even the largest industrial projects, with construction often begun before finishing engineering studies or analysis of the suit- ability of the project design. As a result, expensive plants in industries such as steel, chemical fertilizer, oil refining, and petrochemicals (including some foreign-built plants) have had to stand idle for lack of raw materials, energy, or other basic requirements; vast sums were spent to build a cross-country pipe- line to transport natural gas, which could not, in fact, be produced; and poor choices have been made in project sites. C46400/J79029/D1097/32 ws - 52 - (h) In most branches of industry there is usually one segment of the industry that presents special problems compared to the better plants (for example, very small plants where the quality of output is poor and materials consumption high). B. Mission Findings 4.04 Plant visits and discussions at different levels generally con- firmed or proved consistent with the information about the problems and achievements of China's industries given in briefings by central ministries and commissions, as well as in recent writing by high officials. Neverthe- less, the available information is usually insufficient to allow an accurate assessment of the absolute dimensions of these problems, the absolute standards being applied, or (much harder still) the standards that should apply in China. 4.05 Many of the difficulties in evaluating the performance of China's industrial sector relate to the country's level of development, others to the country's economic system. Alleged inefficiencies in the system are closely associated with efforts to promote growth and technological advances, and thus some of them may be prices to be paid for the system's strengths. But faster advances might well be possible, if resources could be used more appropriately. The economic efficiency of investment choices and the techniques used ought to be judged by their contribution to the achievement of national objectives, taking into account the resources available and the opportunities offered by international trade. China's resource situation has some unusual features, especially considering the resources inherited from the recent past; and such a large economy faces inevitable difficulties in obtaining, through trade, more than a small fraction of the equipment or other industrial inputs it requires for rapid growth. China can drive up the prices of many of the goods it wishes to import, or drive down the prices of many of its exports. This situation makes it difficult to judge whether courses of action are economically efficient, or what alternative technologies or decisions would be more appropriate. This is especially true since prices in China do not reflect scarcity value (or shadow prices) of particular goods or factors of production. The high scarcity value of some factors (e.g. foreign exchange or highly skilled engineering talent), and the very low scarcity value of some others (e.g. unskilled labor that does not consume urban housing and services) can be inferred; and judgments can be made on the most obvious mistakes. But in many instances, information is insufficient to judge whether a course of action makes economic sense or not. This is true not only when techniques or equipment are backward or uniquely Chinese, but also when they are advanced. C46400/J79029/D1097/33 ws - 53 - Efficiency in Production 4.06 With few exceptions, the plants visited showed many signs of inefficient use of capital. Machinery is abundant: most plants are opulently equipped for their tasks. In many plants, a high proportion of the machinery appears to stand idle most of the time. Some is production machinery used only occasionally, or back-up capacity; some is idle because the plants have unbalanced capacities; and usually some is idle for other reasons, such as lack of orders and energy. However, machinery is invariably well maintained. 4.07 A large share of the machines and instruments, including many fine pieces of equipment, are Chinese made. Indeed, almost all plants and all research institutes visited have built a significant proportion of their equipment for themselves. Maintenance and repair shops are outstandingly well equipped, partly to avoid problems of securing spare parts, which are rarely available. A textile factory, for example, had a foundry and a forge for making spare parts, and extensive, well-equipped machine shops that could repair even their own maintenance machines. The instrument maintenance workshop at a petrochemical plant had a forge, a die-casting unit, an electroplating unit and a heat treating department, along with extensive calibration and repair facilities. 4.08 Enterprises also typically contain huge amounts of working capital ..n the form of work in progress. Often this takes up valuable floor space or is kept outside, exposed to the elements. 4.09 Buildings seem to receive less attention than the equipment in them. While machinery is maintained with exemplary care, buildings are nearly always poorly maintained and are often rather dark, with broken windows; the machinery is nearly always cleaner than the corridors. Buildings designed and constructed for a particular industrial purpose were not as well designed as those built at the same time in other countries. Some factory layouts cause difficulties; and serious problems are encountered in providing dust-free environments, e.g. for making power transmission equipment. The design of buildings now under construction seems to be much improved. Another common problem is that factories have been located in the middle of workers housing, or in residential areas, aggravating environmental pollution problems. Safety is pursued by providing protective helmets and goggles, and by wall posters and instructions stressing the priority of accident avoidance, but press tool guarding is nonexistent and welding operations are generally unscreened. 4.10 A large share of China's most technologically skilled enterprises are said to be in crowded and unsatisfactory older buildings. At many of the units visited, buildings were originally designed and built for another purpose (e.g. living quarters). Though this practice may be the source of initial economies, it leads to added costs and operating problems later. Thus, it is difficult to maintain clean, dust-free conditions in an integrated circuit plant that was formerly a school; and the layout of an engineering institute leads to compromises if it is used as a vehicle plant. C46400/J79029/D1097/34 ws - 54 - The difficulties of operating enterprises in "second-hand" buildings are increased when the enterprise expands. Reluctance to build encourages overcrowding of equipment; the work flow is handicapped; supervision is difficult; and damage to the product is more lilkely. 4.11 Labor seems to be assigned in very large numbers, even taking into account the needs of training and materials handling; and this is especially true in plants that now stand partly idle. As a result, particularly in heavy industry, large numbers of workers appear to have little to do. It seems possible that a large part of the work is executed bv a small proportion of the work force employed. The potential of some highly trained people is not fully used. The present low level of worker utilization may be temporary but could have long-term effects if a leisurely paced, part-time pattern of working becomes accepted (work habits acquired in youth will be hard to change later). 4.12 At some plants, allocations of products and materials according to the annual plan may be inefficient and make little economic sense./l 4.13 Inefficiency could also be traced to a dependence on supplies from a different ministry or organizational unit that evidently placed its own objectives ahead of those of its outside customers, or to some other failure in coordination, or conflict in objectives, among separate units. These problems are never readily admitted - Chinese units at all levels invariably criticize only themselves. 4.14 Striking contrasts were found in the apparent efficiency and tecinical strength of several branches of industry. Indeed, the arrangements connecting the different sectors of the economy, which are very different /1 Thus, to augment its own insufficient mining capacity, the Juhan Iron and Steel Works was importing about 1.5 million tons per year of Australian iron ore (which had to be reloaded from ships into barges in Shanghai, then into trains at a river port). This augmented the mill's pig iron output, but for lack of the necessary steelmaking facilities, 700,000 tons of pig iron were being sold (and had to be reheated somewhere else) in face of a national surplus of pig iron. The rest of the Australian ore served, at the margin, to supply steel to the plant's older rolling mills, probably making steel products of types in surplus supply, and indirectly helped to allow locally mined ore to be used to operate three inefficient smaller steel mills belonging to the province. Meanwhile, the new hot and cold rolling mills at Wuhan, China's finest steelmaking facility with a unique capacity to make steel of types in short supply, were operating at only a small fraction of capacity, by some accounts partly for lack of electric power to run them at higher levels; but little thought seemed to be given to switching power from less important uses (such as making pig iron). C46400/J79029/D1097/35 ws - 55 - from those in a market economy, lead to more compartmentalization and weaker coordinating forces to assure equitable access to resources in different branches and levels of the system. This means, for example, that new equipment and more efficient methods do not drive out older vintages in the same way; and technological improvements or management standards do not spread among industries and organizations by the same mechanisms. However, within each branch of industry (defined by final products and a common reporting ministry), much attention is paid to spreading better practices through visits and technical assistance arrangements among enterprises or regions. 4.15 Within light industry, the strongest branch is clearly textiles, while most other branches have serious shortcomings. A cotton spinning and weaving plant visited by the mission appeared extremely efficient and meticulous by international standards, attaining very high machine efficiencies and an extremely high proportion of first quality fabric. The textile finishing plants, though regarded (no doubt correctly) as the weak link in the industry, were nevertheless well managed and technically good. By contrast, the garment factories, though export successes and probably outstanding by Chinese standards, were backward and had low rates of machine utilization by international standards. A paper plant visited exemplified important deficiencies of the whole paper production industry, i.e. the small scale of equipment and difficulty in obtaining raw materials (most Chinese output is based on reeds, straw, bamboo or bagasse). 4.16 In heavy industry, marked differences in strength (by world standards) are apparent, even in different branches of the same Ministry. Thus, for example, the machine tool industry appears stronger, by international standards, than the motor vehicle and internal combustion engine industry, if only because mass production is not expected to the same extent. A big petrochemical complex based mainly on Chinese engineering appeared admirably up to date, with very satisfactory operation and mainte- nance. Product Designs, Production Technology and Labor Skills 4.17 The quality of Chinese-made machinery and equipment appears to vary widely, by international standards, from excellent to extremely poor. Chinese workers have produced a wide variety of good equipment, embodying many of the latest principles. This includes some big items such as blast furnaces; but most of their successes involve items made in very small numbers. Industry seems able to supply a wide range of instruments needed at the laboratory level or to control operations in processing industries. Many machine tools appear to be of high technical quality. But a majority of designs are obsolete and inferior to some degree, compared to those in advanced countries, and the designs of many items of equipment made in C46400/J78752/D1097/36 ws - 56 - large series are way out of date, for example, the noisy and slow industrial sewing machines, or the textile machines with cast iron gears. 4.18 There is a wide range in the quality of machinery in various industries. Laboratory equipment and general purpose machine tools are more competitive in design and quality than textile machinery and paper machinery. In textiles, the lack of advanced equipment appears to be most acute in the dyeing and finishing sections and in the spinning of synthetics. In heavy industries, there have been problems in scaling up equipment, in producing large, comp'lex systems, and in introducing numerical controls and other new developments. Another major problem in modernizing equipment has been the need to improve specialist components or assembly parts (e.g. automobile electrical equipment, diesel injection equipment, vehicle brakes systems, industrial hydraulic and pneumatic systems, small motors, or power trans- mission chains). Items such as these are supplied by Chinese sources. They are well finished and generally sturdy, but frequently they have technical designs of 1950 or earlier. 4.19 Most product designs in consumer goods industries leave much to be desired, notably in visual appeal but often also in performance quality. 4.20 While many production technologies in use are outdated, they frequently appear to be appropriate for existing conditions. Some plants visited have tried to raise the level of their manufacturing technologies by their own efforts and have made significant advances. But despite a strong grasp of the scientific principles, others have not been entirely successful because of the difficult operating requirements of the improved techniques. 4.21 With few exceptions, Chinese plants do not possess large, specialized production lines, which would lock them into outdated designs. Rather, much manufacturing of series products is by methods more suitable to the manufacture of prototypes, i.e. it is based mainly on the skill of the operative, who uses general purpose machine tools. Often newer designs are being made in small numbers in the most advanced plants or institutes. Assembly line or other mass production techniques observed were not usually very advanced. 4.22 Given the products being made and the methods used, Chinese enter- prises showed admirable attention to quality and much craftsmanship. Quality control is an active concern; often statistical quality control charts were displayed in workshops. Some enterprises had well equipped quality control testing facilities and others were trying to acquire testing equipment. 4.23 The most serious lags in both product design and manufacturing technologies are evident in industries in which, outside China, technology has moved forward especially fast in the last two decades, while the Chinese industry has had little help from abroad. A semiconductor (integrated circuit) plant visited, for example, was extremely backward and had very low ratios of circuits produced per silicon chip started, by today's standards. C46400/J79029/D1097/37 ws - 57 - Again, only small numbers of computers are produced and they are not standar- dized, which has hampered software development. Telephone and related telecommunications is another area in which Chinese equipment is outdated and where new technology would probably be far more efficient. 4.24 Clearly the overall supply of high quality professional and technical manpower is a serious problem, especially as a result of the hiatus in higher education from 1966-76. Some units visited have been unable to get new technical specialists in recent years, and others were retraining recent "worker, peasant and soldier" graduates, with mixed success. The available information on educational attainments of the industrial labor force, though fragmentary, suggests that ratios of well-educated personnel are low by Far Eastern as well as Western standards./l 4.25 Nevertheless, scientific skills and technical know-how are remarkable in many units. Based on experience elsewhere, most of the technological difficulties observed could be expected in a country at a fairly advanced intermediate level of development, though a few are due to China's past isolation. 4.26 The units appeared to be less hampered by a lack of skilled manual workers. Indeed, shop-floor skills were excellent in most plants. Specialized training arrangements for workers appear to have been generally successful. 'Machinists and other machine operatives were maintaining high standards of work. Machined finishes appeared first class. Handicraft workshops produced fine workmanship. Foundry workers produced high quality castings in foundries that were sound in essentials but not elaborately equipped. Forging operations, however, might have been improved, since material economy was poor. Furnace operations in steel mills were adequate but not outstanding. Pollution and Environmental Impact 4.27 Chinese industry has serious pollution problems; these are now being taken seriously after being disregarded (e.g. in locating plants) in the past. Probably the heaviest polluters are the large integrated steelworks. A considerable amount of work has evidently been done to develop possible solutions; the schemes proposed demonstrated a general awareness of the technologies available and of their potentials, which would include energy savings to offset some of the considerable costs./2 Other heavy /1 See Annex G, "Education," paras. 2.02, 2.03, 2.08 and 2.09 and Tables 2.1 and 2.5. /2 For example, at the Shoudu (Capital) Steelworks in Beijing an estimate was given of Y 375 million for introducing coke dry quenching, converter gas cleaning and recovery, and boiler and power generation expansion, combined with modification of an adjacent power station using recovered gas from the plant. C46400/J79029/D1097/38 ws - 53 - polluters are the pulp and paper industries, which pose special problems, since the volume and type of pulp effluents depend on the pulping process and thus the cellulosic materials used. Chemical recovery systems are available internationally for the larger wood-based pulp operations, but it will be difficult to develop economically attractive systems for pulping the reeds and straw used in China. The relocation of plants now in cities may be required. Other industries are also working to reduce pollution. The Beijing and Shanghai municipal authorities have developed pollution control programs and are exerting pressure on industry to comply. Increased vigilance is also needed in investment projects, since experience in other countries has shown that pollution problems can be more cheaply avoided by the initial siting and design of plants, than by retroactively adjusting plants already built. Management and Decision Making 4.28 It is frequently asserted in China that industrial managers are not sufficiently well trained, so chat management methods are backward. Managers in industry at all levels appear dedicated, energetic and remarkably able, in pursuing their assigned tasks. Both in research and production many Chinese managers appeared perceptive about tiheir technical problems and had well-based ideas on how to deal with them, with the help of resources from higher levels. Major deficiencies are apparently experienced, however, in the methods and procedures by which decisions (particularly on investment projects, but also on the allocation of scarce resources) are reached and in the information used in making them. As a result, mistakes and inefficient choices seem to be frequently made. For example, the design of investment projects in manufacturing appears liable to give insufficient attention to requirements for power, materials, and transportation or to the choice of sites. Procedures appear to diffuse responsibility for such decisions, so that everyone, and thus no one, will be responsible if mistakes occur. 4.29 Information available to central authorities appears to be insufficient and not appropriate for making analytical choices in invest- ment, resource allocation, planning, etc. Not nearly enough is known about possibilities, requirements and alternatives at the local level. The need to choose among alternatives in project appraisal is not fully appreciated, and insufficient analytical information seems to be collected for this purpose. 4.30 Not much economy-wide information is made available to guide enter- prises, even those given wider responsibilities. Some managers have encoun- tered great difficulties in forecasting. This adds to the difficulties of new challenges for which they have no previous preparation. The Price and "Signal" System 4.31 A further source of inefficiency at all levels seems to be the distorted signals created by the system of prices, taxes, and charges (if any) for the use of resources, including capital and lahor. Inevitably many C46400/J79061/D1097/39 ws - 59 - choices are made at all levels based on costs, financial returns, profits, or quantity indexes based on output value. These choices are frequently led astray as a result of a very weak and uncertain relationship in industry between money costs (or returns) and "true" scarcity values. The most obvious problem has been the lack of charges for the use of capital (except bank loans for above-plan working capital). Another difficulty is that labor costs reflect the number of workers but not the scarcity of the skills involved. Tax and revenue incentives favor small-scale local investments that may not be desirable from a wider perspective, even taking into account their employment and income distribution effects. 4.32 Prices of industrial products, which include a large markup at each stage of processing (over two thirds of value added is profits or taxes) are reportedly anomalous in regard to the difficulty of the product's manufacture; furthermore they do not reflect demand and supply. Price ratios (for example, of cotton vs. polyester fabric, or fuel oil vs. gasoline, or textile machinery vs. consumer durables) differ enormously from world trade prices (both above and below). Enterprises make expensive items for themselves to keep their costs down, though from a national viewpoint manufacture outside that enterprise would be much cheaper. Price signals can lead to decisions throughout the economy to make more of the products in excess supply, and to try to use those in scarce supply, as well as to misdirect investment. 4.33 Until this signal system can be adjusted, centralized decision making is likely to be prone to mistakes. The decentralization of decision making does not offer a satisfactory solution, since enterprise managers will be guided to make decisions that are undesirable from a national point of view. Compensating St rengths 4.34 Compensating to some extent for the problems noted, China's industrial sector is full of talented and energetic people, accustomed to carrying out ambitious tasks within the existing environment. Moreover, as a result of its disciplined, effective organizations, China can quickly concentrate resources into priority undertakings. These features set China apart from most developing countries. They become sources of great strength and dynamism whenever China's industrial efforts are well aimed and recent policies, described in Chapter 3, have been generally well aimed. C46400/J79029/D1097/53 - 60 - 5. ISSUJES AND- CHALLENGES A. Overview 5.01 The industrial sector has been at the center of discussion and actions concerning both adjustment and reform. A promising beginning has been made, but an arduous and lengthy -ask lies ahead. The transformation of Chi- nese manufacturing will have to be carried out with only limited investmnent and construction funds in a period when energy and foreign exchange will be increasingly scarce. A finely balanced approach will thus be required. 5.02 Given such challenges as modernizing industry, conserving energy and producing more consumer goods, China's industrial planners face difficult tasks. In some of these tasks, inadequate information exists to guide decisions on the direction and sequence of actions needed. Yet efforts to overcome immediate obstacles, without anticipating future obstacles, are unlikely to achieve more than a slow and uncertain advance towards long-run goals. 5.03 The inherent difficulty of the tasks ahead, and the need to look ahead and take coordinated action soon on many fronts at once, can be suggested by a list of the principal constraints on China's ability to raise aggregate output of useful industrial products within the next few years: (a) energy in all forms, with a special crunch coming in oil; (b) raw materials for light industry; (c) exports and foreign exchange; (d) construction and investment capacity, as dictated by the ability to finance investment and to supply building mnaterials and appropriately skilled construction crews; and (e) system performance in matching output to demand, managing the financial aspects of readjustment and restructuring, coordinating different units, stimulating production in appropriate directions, and improving the quality of investment programs and project designs. iMost of these constraints will continue for the next 10-15 years, and there will be time to do more about others, for example: (f) shortages of skilled people, especially managers with technical or economic training, designers, engineers and scientists; (g) lack of technical know-how, above all in fast-changing areas such as electronics, computers and precision instrumentation and control systems; (h) inadequate transport and communications networks; and (i) insufficient mining and processing of metals, ores and concentrates, such as iron ore, copper and aluminun, and fertilizer minerals (phosphates and potash). Over this longer time horizon, an opportunity also exists to overcome the obsolescence or inefficiency of much existing capacity, to implement thorough reforms, and to promote more efficient technology advances. Most of these longer term challenges also call for early action. C46400/J79029/Dl097/54 - 61 - 5.04 In order to meet China's immediate and longer term needs in a timely fashion, even though consumer goods are given highest priority, heavy industry cannot be neglected. Machinery and equipment, in particular, are needed for many purposes - increasing coal, oil, ore and building materials production; replacing energy-inefficient capacity to achieve energy savings; building new plants to serve the raw material needs of light industry; expanding the capacity of light industry directly; and providing equipment for electric power, transportation, telecommunications, and construction. This will require both re-equipping and modernizing existing plants, and setting up new plants that embody newer technology and turn out products that will revolutionize all China's industries (for example, by introducing greater precision, electronic controls and computerized efficiency). These needs cannot be ignored if consumer goods output is to continue to rise, so the efficient use of China's limited investment and capital equipment-making capacity is vital. B. Energy Conservation 5.05 The energy shortage appears to be the biggest immediate challenge. On a national level, the overall energy supply will grow at only about 2.2% p.a. in 1980-85. This contrasts with a growth of energy supply of 10% p.a. in 1965-75 and 5.6% p.a. in 1975-80. Electricity will increase by no more than about 4.5% p.a. compared to over 11% p.a. in 1965-75 and 9% p.a. in 1975-80, so that power supplies will be extremely tight. Coal output will probably grow at about 3.3% p.a., while oil output is expected to fall from its recent peak of 106 million tons to about 100 million tons in 1985. The energy shortage will also continue in the second half of the decade, with a further decline quite likely in oil production, although growth rates of electricity and coal output are expected to be raised through increased investment. For the decade as a whole, the growth of energy supply is likely to be less than 3% p.a. 5.06 In response, during the next few years of readjustment, the indus- trial growth rate is expected to be lowered to around 5-6% p.a., with lower growth rates (in the order of 2-4% p.a.) in heavy industry and higher rates (perhaps 7-8% p.a.) in light industry. Industrial growth will then be acce- lerated somewhat, as conditions permit, in the second half of the 1980s. Projections given in the Main Report suggest that the growth rates attainable will be extremely sensitive to the degree of success achieved in energy conservation and in switching to the use of other forms of energy as a substitute for oil. With high energy savings and switching, industrial growth rates averaging 6% p.a. in 1980-85 and over 7% p.a. in 1985-90 appear attainable. By contrast, even in the second half of the decade, industrial growth would probably have to be held to about 5% p.a. if no more than moderate savings and switching can be realized. C46400/J79029/D1097/55 - 62 - 5.07 In the projections associated with the higher savings and faster growth scenario, heavy industry (other than electric power generation) bears the main burden of energy savings in the economy as a whole. It is assumed to reduce its use of coal and oil combined relative to final output, over the decade, by an average of 3.9%, p.a. (i.e., by nearly one third in 10 years), and light industry by about 1.6% p.a. (by 15% in 10 years)./I For all indus- try combined including power generation, the saving in coal and oil is assumed to average 2.7% p.a. over the decade./2 Meanwhile burning of crude or heavy oil directly as a fuel (in boilers, furnaces or kilns) is projected to decrease by about 12 million tons in electric power generation and by a slightly larger amount, perhaps 15 million tons, in the rest of industry. This implies that nearly two thirds of the present direct burning of oil as a fuel (a little over 40 million tons) would be eliminated, to free oil for higher priority uses. This switching process will be very important to meet fast-rising requirements for oil as a source of motor fuel (in transport, agriculture and construction) and as a feedstock in making nitrogenous fertilizer, petrochemicals, plastics and synthetic materials, which will be much needed in agriculture and light industry. 5.08 High rates of energy saving and switching appear potentially attainable in China, in view of the very high energy consumption of industry today compared to international standards, but they will not be easy. Hardly any effort was made to achieve energy conservation in China prior to 1979, when energy use per yuan of gross output was cut by 5.1%. In 1980 an even larger reduction, estimated at 7.2%, was achieved (para. 3.13). However, the bulk of this (a saving of 4.5%) came from increasing the share of light industry, and thus reducing the share of heavy industry with its greater energy demands, while 2.7% was saved within industries. Meanwhile, as already noted (para. 3.13), preliminary press reports pointed to a reduction of about 10% in oil use per unit of gross industrial output. 5.09 In its current programs, China is holding down energy requirements in several ways: overall growth of industrial output is being reduced; the composition of output is being diverted from energy-intensive products; /1 For underlying assumptions see Annex E, The Energy Sector," paras. 1.30-1.45. Such a high rate of energy savings would not be required in industry, if energy output (and especially coal output) can be raised higher than projected, or if economies can be achieved - beyond those assumed in the projections - in the use of energy in other sectors. The main alternative areas for savings of coal would be thermal power generation, where modest energy savings are assumed to take place, and household use. A reduction in the rate of growth - particularly in heavy industry - would be an alternative way to ease the pressure. /2 Computed from data from Annex E, Tables 1.8 and 3.1, calorie equivalents from Table 1.1, and the underlying assumptions. Roughly one fifth of this saving comes from increasing light industry's share of the total industrial output. C46400/J79029/D1097/56 - 63 - orders are being directed to the more energy-efficient plants, while produc- tion is reduced in the most energy inefficient plants; and practices are being improved to save energy in existing furnaces and boilers. Upper limits are being placed on energy to be used per ton in making such products as pig iron or nitrogenous fertilizer; if these limits are exceeded, plants are likely to be closed. Also, new energy-saving investments are beginning to be made. 5.10 As in other countries, there is much scope for energy savings throughout industry at low cost by such simple means as waste heat recovery, better insulation, and improved operating procedures (for example, better preparation of raw materials, better furnace maintenance, procedural or valve system readjustments to avoid heat losses, and reduced wastage of metal and other materials in manufacturing). Moreover, compared to most countries, China has many plants (notably small ones) that consume inordinate amounts of energy relative to output. Thus large savings could be accomplished by closing these plants or reducing their output, though this would require careful planning and expansion of transportation to serve the same markets from energy-efficient plants. In addition, with suitable investments, substantial energy savings could be obtained by modifying existing plants. Examples of this include: replacing the least efficient of China-s 180,000 industrial boilers; using heat and steam along with other by-products that are now wasted, for instance through cogeneration of steam in power plants or generation of power from blast furnace gas; and converting to processes that are more energy-efficient, such as conversion from wet to dry process with cold firing and preheaters in cement making and to coke dry-quenching or use of oxygen converters in place of open-hearth furnaces (and increased use of continuous casting) in steelmaking. Energy can also be conserved by switching to product designs that require less or different materials and thus, indirectly, less energy. Improved standard designs of equipment such as boilers and stoves are much needed. 5.11 In China as in most countries, a majority of the energy used in manufacturing is consumed by a small number of energy-intensive industries, including iron and steel, chemicals and fertilizers, petroleum refining, nonferrous metals, pulp and paper, and nonmetallic building materials. Many of these industries now use energy very inefficiently by international standards (paras. 2.33 and 2.34). An energy conservation program in China will have to include detailed programs to increase energy efficiency in each of these industries, analyzing energy consumption, identifying major potential sources of energy savings and switching, and instituting improved monitoring systems and exchange of information on conservation and switching programs as they develop. Such plans could also assess costs and benefits at alternate prices, determine the most economical way of modernizing and restructuring the industry with energy conservation as the focal point, and identify a plan of action for each plant, as well as providing for the needed equipment supply, C46400/J79029/D1097/57 - 64 - instrumentation, transportation, coordination among ministries, and implemen- tation. In each industry the plan should cover financial arrangements, inclu- ding long-term loans for the required investments, and appropriate incentives for enterprises, such as higher profit retention rates and accelerated depre- ciation schemes. 5.12 Measures are also needed in other industries to economize on their use of energy-intensive materials, and to encourage, evaluate, facilitate and finance many small, decentralized investments to save and switch energy. 5.13 Switching from oil to coal as a fuel on the scale envisioned will be particularly difficult and will require both strong incentives and substantial investment. After all, oil is an easier and cleaner fuel to use than coal: transportation, handling, storage, firing, flame and temperature control, and ash disposal are all troublesome when coal is burned, and a larger scale of output tends to be required to achieve comparable heat efficiency. Moreover, increasing the use of coal in place of oil as fuel requires the conversion of existing boilers and other units, or closing down oil-fired plants in favor of new coal-fired ones. 5.14 The existing structure of energy prices is likely to prove a serious obstacle. No financial incentive now exists in China to switch from oil to coal, since fuel oil is actually cheaper (per calorie of heat) than coal. This is in sharp contrast to the situation in most countries. Moreover, Chinese prices of coal, crude oil, and electricity for industrial use are also low at official exchange rates, compared to international prices,/1 and probably also compared to the prices of equipment and materials required in energy-saving investments. Thus, energy price adjustments could potentially make an important contribution to success in energy saving and switching. In adjusting energy prices, an interim two-tier pricing system might prove useful, with a gradually increasing (though still subsidized) base price for below-quota consumption and a sharply higher price for amounts con- sumed in excess of quotas. The quotas could then be tightened year by year. C. Raw Materials for Consumer Goods 5.15 Another big problem in the immediate future is to expand the supply of raw materials for light industry. A growth rate of 7-8% p.a. in light industry would probably imply a growth of 5-6% p.a. in raw materials required. Much of the output in light industry comes from branches based on agricultural raw materials, such as foods, natural fibers, and animal hides. An increasing share, however, comes from branches based on industrial materials, defined to include some natural substances such as timber and paper pulp, as well as metals, plastics or chemical fibers. Imported /1 See the Main Report, Table 6.2, or Annex E, Table 1.5. C46400/J79029/D1097/58 - 65 - materials have been used increasingly in the last two years to augment domestic supplies. (This has had an effect on world prices, notably raising the price of cotton, of which China now buys about 20-25% of the amount sold internationally; although this share is expected now to fall). 5.16 Material shortages are due in part to the difficulties of increas- ing agricultural output, while limited foreign exchange resources restrict imports. In some crucial raw materials, progress is being made; thus in 1980 China managed to increase cotton output by 22.7% over 1979 levels, from 2.207 million tons to 2.707 million tons largely through yield increases; and a larger area has been planted in 1981. Official targets call for further large increases in fiber supplies by 1985, of which about 200,000 tons will come from chemical fiber capacity due to come on stream by 1983. But such successes are rare and, to the extent that they require diversion of scarce farmland, can only be achieved at the cost of reduced farm production. 5.17 Other natural materials in short supply include wool, silk, leather, timber, alternative sources of cellulose (such as reeds and crop residues), and various foodstuffs. The production of some of these materials is difficult to increase quickly; thus the supply of wood can only be increased over the longer term, say ten years, by planting quick-growing trees in South China now. To serve the paper industry, where demand greatly exceeds the supply of raw materials, more reeds must be cultivated and technology must be mastered to make newsprint from bagasse. For some materials, such as leather and wool, the quality of processing needs to be improved at each stage. Provision of inputs to expand agricultural output is now a high priority in industry. Industrial centers are also being encouraged to make special arrangements with regions producing needed raw materials, supplying them with technical assistance, equipment and consumer goods in exchange for raw materials. 5.18 There is potentially more flexibility in the supply of industrially based inputs, but capacity limitations (for example, cold reduction mills to produce sheet steel and tinplate), initial learning difficulties in new plants, and outdated allocation patterns have been holding back output growth in key subsectors. There has been a reluc- tance to continue expanding capacity in the petrochemical, synthetic fiber, plastics, and other synthetic materials industries, because declining oil output has made feedstocks scarce. But these petrochemical-based materials are usually more energy efficient than the natural resource-based or metal products that are their closest substitutes, and they often also C46400/J79029/Dl097/60 - 66 - have other advantages./! Thus, capacity expansion to meet the needs of light /1 By way of example, in 1978 the US National Science Foundation, in examining the relative energy intensiveness of cotton and polyester fibers, concluded that 25% more energy is required to make a polyester cotton blend shirt than to make one entirely of cotton. But since polyester cotton fabrics are twice as durable and require less maintenance than all-cotton fabrics, the life cycle energy requirement of all-cotton clothing in the USA was estimated to be as much as 90% higher than that of blended clothing. This somewhat surprising result is due to the high energy requirement of cotton production, taking into account energy used in fertilizers and pesticides and power used in irrigation. Further useful comparisons are as follows (based on Kunststoffe No. 69, 1979, p. 419, and Chemical Week, March 28, 1979, p. 20): Energy Requirement for Fabricated Products Energy consumption Product Unit (Oil tons equivalent) Polypropylene film 1 million sq m of 110 Cellulose film packaging material 155 Polyethylene I million fertilizer 470 Paper sacks sacks 700 Polyethylene pipe 100 km of 1" pipe 120 Cahamsed steel pipe 500 PVC pipe 100 km of 4" drainage 360 Cast iron pipe pipe with fittings 1,970 PVC I million 1 liter bottles 97 Glass 230 Comparison of Energy Consumption for Metal and Plastics Coal ton equivalent/m 3 Metals Aluminum 22.6 Copper 16.0 Zinc 13.0 Steel 11.7 Plastics Polystyrene (PS) 5.1 Polyvinyl Chloride (PVC) 4.0 Polypropylene (PP) 3.4 High density Polyethylene (HDPE) 3.4 Low density Polyethylene (LDPE) 3.1 C46400/J79029/D1097/61 - 67 - industry may be desirable, even if the feedstock must come from imports or reduced exports. As in much of China's industrial sector, however, signifi- cant imbalances exist within the relevant industries, so that some petro- chemicals (including polyester chips for making synthetic fiber) must be exported for lack of domestic demand. Initially, investment appears to be needed principally in "downstream" capacity - for example, plastics and their products, and synthetic fibers and yarn. 5.19 Material shortages can also be counteracted by expanding the output of consumer goods that have a high input of human capital (skills and technical know-how). This involves improving the quality of fin'shed products and continuing to expand the supply of light engineering products (as in consumer electronics) that have high values relative to the cost of the materials used. D. Manufactured Exports 5.20 A third immediate challenge is to expand manufactured exports. China is likely to encounter severe shortages of foreign exchange over the next decade as exports of oil and petroleum products, which made up about one quarter of the country's exports in 1980, decline and are perhaps replaced by net imports, due to falling oil output. Rapid expansion of manufactured exports would allow China to maintain or increase its capacity to buy imports other than oil. China's potential for expanding exports appears excellent, given its abundance of low-wage workers, its shop-floor skills and craftsman- ship, its large underutilized capacity, and its enormous potential for economies of scale. Market prospects are generally good: the volume of manufactured exports from all developing countries is expected to grow through 1990 by at least 10% per year, if protectionist trade barriers in industria- lized market economies do not increase significantly. China's share of world markets is still miniscule in most of the labor-intensive light industries; and even in textiles, the quotas already in force against China leave considerable room for export expansion. There are very promising long-run prospects for exporting machinery, equipment and components, for which the world market is huge and has few restrictions. 5.21 But China's finished manufactured goods (both consumer goods and capital equipment) tend to be deficient or unsatisfactory, by international standards, in their design, if not in their performance characteristics then at least in styling. Though they may be well suited to Chinese tastes and conditions, they usually appeal only to overseas Chinese or people in the poorest developing countries. To expand exports swiftly, Chinese industries must produce goods styled and designed for the world's bigger and more open markets. This will require measures to increase the exposure of Chinese manufacturers and designers to foreign manufacturing methods, product designs, tastes, styles and practical requirements, as well as direct measures to strengthen Chinese design capabilities. These measures are also important because updating Chinese product designs can lead directly to modernizing equipment and improving consumer goods for domestic use. C46400/J79061/D1097/62 - 68 - 5.22 Manufacturers need to be allowed to use imported components and materials to produce exports, particularly where Chinese alternatives are inferior or poorly suited to customer requirements. This is allowed in most other countries producing manufactured goods for export. The possibility of supplying the same inputs in China, in competition with imported inputs, could then be promoted, for example, by cancelling indirect taxes and reducing profit markups on inputs used in making exports. Chinese exports are often eliminated from the market or their value is greatly reduced because of deficiencies in small components or raw materials, or for lack of some feature (such as numerical controls on machine tools) that could be added by using imported accessories. 5.23 Export procedures and organization also appear to be seriously deficient by international standards. Procedures can be tedious and slow, but even more serious is the almost complete lack of direct contact between Chinese manufacturers and foreign buyers (several layers of official bureaucracy may separate the two). This prevents China from attracting potential export customers, most of whom want to work directly with their suppliers, and from capitalizing on a very important potential source of free technology, training and manufacturing advice. Arrangements for marketing need to be strengthened, as do those that provide services and spare parts to foreign buyers. Here again, there is a need for participation (and travel) by the manufacturers and their technical experts. 5.24 In addition, exports are hampered by shortages of packing and packaging materials; by shortcomings of anti-shrink equipment in textile finishing; and sometimes by transport difficulties. The price of labor in the new export processing zones on the south coast near Hong Kong may have been artificially set too high; minimum labor costs, computed at $1.06 per hour in one foreign study, are at least double those in some of the competing export zones in other parts of the world, and are high relative to those in the rest of China. Nevertheless, considerable export increases can be expected as a result of these zones and all the other measures already taken to stimulate exports. 5.25 The possibility is now being discussed in China of turning 3-6 cities on or near the coast, including Shanghai and Tianjin, into special export-oriented cities, with revised institutional arrangements intended to allow them to emulate the manufactured export success of Hong Kong. If this could be effectively done it could potentially have an enormous impact on China's exports and economic growth. E. Technology Acquisition 5.26 Chinese manufacturing methods and product designs are far from stagnant. Technology acquisition is being actively pursued in most indus- tries. But the process needs to be made more cost effective and quicker, so C46400/J79029/D1097/63 - 69 - as not to hold back progress in linked industries. Increased success in this area depends on measures to increase incentives and reduce practical obstacles to introducing and spreading innovations, along with increased direct contact with foreign methods and ideas; it calls for revised rules for the small amounts of investment needed in many cases to implement improvements; and finally it requires improving the quality of decisions on whether, when and how to purchase technology from abroad - decisions that are inherently complex because of the many economic, practical, and technological considerations involved. 5.27 In this regard, China could sometimes benefit from expert foreign consultant advice. In some cases, for example, it may be cheaper to bring in people familiar with needed technology, or to build up Chinese exports as part of an exchange - for instance, by exporting "software" in exchange for technology in the electronics or computer industries. It is also important to anticipate problems of assimilation and repercussions on surrounding processes, and to judge whether or not particular foreign technologies are appropriate in Chinese circumstances, or can serve as a springboard for further advances. Some Chinese enterprises are struggling with advanced borrowed technology, largely because essential complementary inputs are difficult to get. 5.28 Some Chinese industries are technologically backward in ways that handicap other industries around them, while their backwardness and isolation make their own technical experts an unreliable source of guidance on what is needed. Some of these lags involve whole systems of which manufacturing is only one part - for example, road transport or telecommunications. But creating a more up-to-date system is complicated by the need for coordinated action by several different organizations - the people who provide metals, rubber and plastic component materials for motor trucks, those who must supply new types of motor fuel, the truck and component manufacturers, the highway and bridge builders, and the organizations that operate trucks, supply repair services, and stock spare parts. 5.29 Newly emerging and rapidly changing fields of technology are likewise encountering difficulty in China if they cut across existing organizational lines. Thus, in the semiconductor industry, there is a need to improve the quality of silicon crystals (now made by the Ministry of Metallurgical Industry) and pure chemicals (now supplied by the Ministry of Chemical Industry), and to acquire technology and construct super-clean and vibration-free buildings for manufacturing (by the Fourth Ministry of Machine Building, except where other users are trying to acquire their own capabilities). (In other countries the crystals and pure chemicals are usually made along with the chips.) It is necessary simultaneously to build forward links to potential users in several separate industries, each struggling with its own technological problems - such as the computer and associated software industries, and those making precision instruments and control systems. Compared to a market system, reassignment and coordination of responsibility, and creation of new organizations, are difficult in China, C46400/J79029/D1097/64 - 70 - while the forces working to create geographical agglomerations of specialized but complementary enterprises, which could advance their -related technologies together, are practically absent. Thus technological advance can easily be held back by fragmentation and bureaucratism, especially in areas where existing organizations are weak or poorly coordinated. F. Restructuring 5.30 A related difficult task is the physical restructuring of China's industries, as well as the reassignment of labor that becomes redundant or unproductive. Some restructuring is already taking place, through efforts to create a greater division of labor (including networks of parts suppliers); through creation of new corporations that can potentially shift resources among their component enterprises; through "socialist competition" for markets; through closing some inefficient enterprises, and giving reduced or different tasks to others; through efforts to prevent the proliferation of small plants where they are redundant, but to create more of them where they complement large plants; and through further construction of modern, large plants. This process could be made maore cost effective by the development of appropriate rules and procedures for scrapping and replacing old capacity. 5.31 A more difficult challenge, however, is the reassignment of workers in redundant or unproductive jobs, including those at plants that are closed down. Throughout China, there are already many idle or underemployed workers using scarce housing, food, services and public facilities, and even many skilled technical people who are underemployed, particularly in heavy indus- tries that are being cut back; some should be reassigned to the expanding industries or switched into new tasks. More generally, the existing system of labor assignment appears too rigid for the needs of an advancing industrial sector. New arrangements, under which people - especially those with scarce skills - are transferred more often, may be needed to help spread technical know-how and high standards from one enterprise to another, and to allow scarce manpower to be redeployed as needs shift. G. Reforms and Improved--Management 5.32 In addition to these specific challenges, there is also a more generalized need for reforms to improve the management and performance of the industrial sector. Of particular importance are improvements in project design and appraisal, investment planning, and resource allocation; asso- ciated improvements in management methods and information flows; and reform of prices, taxes and other indicators used by decision makers at all levels. C46400/J79061/D1097/65 - 71 - 5.33 On the analytical side of decision making, advice from outside experts might prove extremely useful in determining information to be gathered and ways of processing it to help guide decisions, together with methods and uses of formal modeling, and techniques for the conceptual analysis of choices. Particularly crucial may be improvements in the design and appraisal of investment projects. H. Price and Tax Reforms 5.34 Perhaps the most difficult of all reforms, for political as well as economic reasons, is the reform of prices and taxes. The inability to achieve this has forced the Chinese authorities to continue to rely mainly on old methods and very imperfect information, particularly in the management of resources that are scarce but underpriced. 5.35 An important step now being introduced is the imposition of charges for the use of fixed capital assets, and the use of loans which have to be repaid as a basis for new investments. But to complement these steps, the entire structure of industrial prices and taxes needs to be revised. This is especially difficult since prices in China play a role in distributing income and funds for potential investment and production uses among ministries and other organizational units of all sizes. Thus, price changes are likely to encounter much resistance. 5.36 What may be needed is to map out an entirely new structure and price strategy in advance, and then to move towards it, first, by shifting to a consistent system of "shadow prices" in investment decisions and planning calculations, and in accounting calculations designed to judge enterprise performance, and second, by adjusting actual prices in a series of steps in which some prices go up and others down, leaving the overall level unchanged, while finding ways of preserving equity among the organizations involved. The new structure could be as follows. The prices of internationally tradeable raw materials could be roughly aligned with international prices that reflect the usual tradeoffs for China in the international market. Charges could be imposed for the use of scarce capital and other scarce resources, such as highly skilled labor. Price markups at successive intermediate stages of manufacturing could be reduced, and anomalies could be eliminated, in the light of cost comparisons and input-output relationships as well as prices abroad. Where distributive implications of the new prices are unacceptable, two-tiered prices can be introduced as a second-best measure. Indirect taxation could be converted to a value-added tax, large enough to cut further into profit margins in manufacturing, augmented by additional taxes on finished products, to maintain the overall tax yield. (This is important since revenue from industry is crucial for China's national budget.) Tax advantages now given to small-scale as against large-scale plants could be reduced or eliminated, and tax holidays could be given only in industries requiring capacity expansion. C46400/J79029/D1097/66 - 72 - 5.37 Tne optimal price structure will not be immutable. Further adjustments will be required to reflect trends in international prices, costs, and the relative scarcity of different products. But these adjustments can be made on the same principles, while using systematic changes in the exchange rate to buffer against inflationary influences from abroad, as has often been done in the past. A special advantage from China's present price system is that there is an opportunity to introduce new constant prices, while revising accounting procedures; thus it should be feasible to judge an enterprise's performance on the basis of a dual system of prices, substitu- ting forward-looking for backward-looking (1970) accounting prices. 5.38 Putting a more modern price system into place would allow progres- sive decentralization of decisions that can best be made at the enterprise and local levels, and would give much better guidance to central decision makers in the selection of investments. Indeed, it should be possible to reduce the demand for new investments to more nearly match the potentially available supply of funds, while helping to assure that scarce resources are not wasted in either investment or production. Like some other needed improvements, the creation and design of an improved industrial price and tax system would undoubtedly benefit from expert outside advice, which in turn would have to be adjusted to the underlying goals and preferences of the Chinese authorities.