Xi’s Costly Obsession With Security
How a Quest for Control Threatens China’s Economic Growth
ANY discussion of concessions in the Union of Soviet Socialist Republics must emphasize their relative unimportance in Soviet activity, a fact which is often obscured in foreign journals. As of October 1, 1928 (the latest date for which figures are available) the value of the output of foreign concessions was 85.6 million rubles (about $44.1 million),[i] on a capital investment (as of the beginning of 1929) of only 50.095 million rubles (about $25.765 million). This was only a fraction of 1 percent of the total production of the state industries. Foreign concessions are equally unimportant in their contribution to Soviet finances. Only 5 million rubles is credited to concessions in the 1929--30 budget, an insignificant sum in the total of 11.39 billion rubles.
Not only is the activity of the foreign concessions small, but it is not keeping step with Soviet Russia's own activities. Figures for the year 1928--29 are not yet available, but it can safely be prognosticated that they will reveal lower results. At the end of 1929 there were 59 foreign concessions in operation -- 13 German, 11 Japanese, 6 American, 5 British, 4 Polish, 3 Swedish, 3 French, and 14 others distributed among 9 nations. It is known that some of these have since been liquidated and that others have been redeemed by the state by agreement with the concessionaires. That the remainder are not growing apace is also indicated by a comparison of budget receipts. In 1928--29 concessions paid into the state treasury about twice the amount of the estimates for 1929--30.
The success of the first year (1928--29) of the Five Year Plan of Industrial Development, the meager investment of foreign capital in concessions proper, and the conclusion of a number of contracts for technical collaboration -- these factors have led to a certain modification of our general attitude toward concessions. In order to carry out our plan of industrial development we cannot, and will not, wait for the influx of foreign capital. Already, a little more than a year after the preparation of the Plan, several of the enterprises proposed are on the way to realization. We are creating them with our own resources and, in a number of cases, the work is so far advanced that the question of leasing them to concessionaires cannot even be entertained. The concessions of the future will be almost entirely limited to the important industries: mining, electric power plants and metallurgy; and the limitation is shown in the list of concessions offered in the program adopted in 1928, which would require an investment of but half a billion dollars, or only 2 or 3 percent of the expenditure foreseen by the Five Year Plan.
The policy of the Soviet Government has not varied in its encouragement of applications for concessions, but since 1928 standards have become more rigid and offers are entertained only from foreign undertakings which enjoy the highest reputation. The Soviet Government has accepted less than 8 percent of the applications received since the policy was instituted, but the number of applications is increasing, having risen last year to over 200, over a quarter of them from the United States.
On November 30, 1929, Mr. Rykov, President of the Council of People's Commissars, outlined the three principles which govern foreign concessions. First, concessionaires must operate their concessions with their own capital and not with capital drawn from Soviet economy. Secondly, concessions have nothing in common with colonial enterprises. Foreign capitalists who invest in the U. S. S. R., however, have a right to profits greater than those which they would consider sufficient in their own country, though these profits must be kept within a reasonable limit. Thirdly, concessionaires should abandon all illusions as to the possibility of any reëstablishment of a private property régime in the U. S. S. R.
It is the first point that is of major practical importance. Mr. Rykov stated the desideratum that operating capital should be obtained from abroad and not derived from sources within the U. S. S. R. The corollary of this is that concessions already in operation must improve their financial position by drawing on foreign capital and not on the resources of the country itself. This principle should be borne in mind in regard to applications, and financial calculations should be based on it. The records show a state of things which falls short of this condition. Our experience has been succinctly stated by Mr. Brockschmidt in an article in the German review Wirtschaftsdienst for June 28, 1929. He says: "The operation of concessions has not justified the hopes for a greater influx of foreign capital. It appears that in the course of the past three years the total of profits exported amounted to 130 percent of the capital imported." Though of course these new enterprises are now part of our industry, and for this reason represent no mean advantage to Soviet Russia, we have gained nothing from them in the last few years from the point of view of our balance of foreign payments.
This fact may be observed from a consideration in detail of the capital situation in the concessions. Let us take, for example, the manufacturing concessions, which are the largest single group. Figures for 1928--29 are not yet published, but from what is known of them it is not likely that they will materially alter the situation as given in 1927--28. According to these figures, 19 manufacturing concerns have a capital investment of 37 million rubles (exclusive of real property, principally buildings, valued at 4 million rubles, which has been chiefly contributed by the Government), or almost three-quarters of the total capitalization of all groups. The 1927--28 production of these firms was valued at 31.8 million rubles, or more than a third of the total production of concessions and about a half of the total production of manufacturing concessions.
It appears that 18.6 million rubles, or almost exactly half of the amount invested in these 19 concerns, represents in the main unpaid taxes due to the state as well as the share of the state in the output of these undertakings, or loans raised within the U. S. S. R. Nor is this the extent of the quota of national capital in these concessions. Of the 18.4 million rubles representing the capital contributed by the concessionaires, only a part has been imported from abroad, the balance being supplied out of profits. The fact emerges that the amount of foreign money is only about a quarter of the total investment.
Concessions which use raw materials of foreign origin may also be a debit item in our balance of foreign payments. They are a charge on our national economy in another sense -- they do not help us to develop our own resources as do those concessions which use domestic materials. Concessionaires are authorized by their contracts to import from abroad raw materials and even semi-manufactured goods if they are unable to obtain them in the home market. But in order to simplify the balance of payments these imports must be reduced to a minimum. The 1927--28 production of the 19 firms already mentioned was valued at 31.8 million rubles. The value of raw materials used was 14.2 million rubles, of which 7.8 million rubles, or over half, came from abroad.
Mr. Brockschmidt has proposed the following remedy: to establish a committee composed of representatives of the concessionaires and of the state industries to examine disputes, and to allow importation only when raw materials cannot be obtained "on the home market in sufficient quantities, of the desired quality, and at prices which may be considered as normal on comparing them with those paid abroad." This suggestion cannot be accepted. It is logical that the concessionaire should use the same raw materials as are employed by the state trusts which are sometimes his competitors on the home market. When the demands for the importation of raw materials are well founded, however, they will be given careful consideration until such time as the materials in question can be produced within our country.
The provisions in the agreements covering taxation are not uniform. The payment of a specified sum in lieu of taxes is sometimes conceded to the concessionaire as a special privilege. In such cases the agreement fixes the amount to be paid every year to cover all the fiscal obligations of the concessionaire. In regard to profits, a special proportion, from 15 to 25 percent, depending upon the amount of capital imported, is left entirely at the disposal of the concessionaire. For the purpose of this calculation the amount of exportable profits which the concessionaire cares to invest in the enterprise instead of transferring abroad is added to the capital actually imported. The share of the state in the output of the concessionaire is payable either in cash or in kind and is determined in the agreement. It represents the consideration for which the state confers upon a foreign company the right of exploitation. In order to build up their cash resources certain concessionaires have postponed meeting their obligations to the state treasury in spite of the penalty for non-payment. Delays of from five to nine months have occurred. The Lena Goldfields, the British mining concession in Siberia and the Urals, is particularly conspicuous for its lack of punctuality.
Excess profits are those which exceed the rates established by the concession agreement. They are divided between the concessionaire and the Government in accordance with a schedule fixed in that agreement. The Government's share increases with the growth of excess profits; it may be 65 percent and even more. A certain uniformity is thus introduced in the profits of the concessionaire and by this system he is also encouraged to lower his selling prices, because the higher the profit the more he will have to pay to the Government.
The question which is perhaps uppermost in the minds of foreign observers is whether, in view of these conditions, the concessions are profitable. The figures show that they are. A study of the balance sheets of the manufacturing concessions showed that on October 1, 1928, the gross profits realized on an investment of 15.2 million rubles was 16.8 million rubles. The state treasury received 2.3 million rubles as income tax and excess profits tax. After the payment of taxes, therefore, the concessionaires made a profit of nearly 14.5 million rubles. The share of the state was 4.9 million rubles, or 34 percent, and the net profit of the concessionaires amounted to 9.6 million rubles, or 66 percent; and the sums which they could transfer abroad under the terms of their agreements were 96 percent of the net profit.
Obviously the return was very handsome. But it would be a mistake to consider such profits as normal. The average return on concessions in the Soviet Union will continue to be above the return which foreign capitalists consider attractive when investing in their own country, but the necessity of limiting profits is obvious.
It is sometimes stated that the taxation of profits is a serious handicap to development. A study of 31 balance sheets for 1926--27 gives us an answer to this objection. During this period the firms in question manufactured and sold articles worth 26.8 million rubles. Their profits from the sale of these goods amounted to 13.6 million rubles, while the share of the state treasury in the profits was 1.4 million rubles. Taxes and other charges amounted to 426,000 rubles. If one takes into consideration the very favorable conditions of marketing manufactured goods which prevailed at that time in Soviet Russia and the comfortable margin of profits, one can hardly maintain that the burden of taxes was unduly high. The Government is inviting foreign capitalists to take part in the development of the economic resources of the country and therefore has no reason to obstruct its own purpose by imposing upon them an unreasonable fiscal burden. In this respect foreign concessions in the U. S. S. R. are placed on the same footing as state enterprises.
The regrettable failures of some of the concessionaires (such as the German forest concession Mologoles and the Harriman manganese concession in Georgia) do not damage our thesis as to the profitability of the concessions. The causes of the liquidation of the Harriman concession have been dealt with in both Russian and foreign newspapers.[ii] Mr. Harriman not only did not carry out the program of important improvements provided for in his agreement, but also proved incapable of fighting successfully against the growing competition of other manganese producers outside of Russia. And as an emergency measure we were ourselves forced to undertake the exploitation of the manganese mines in Nikopol-Mariupol in order to safeguard our place in the international market which, after the abandonment of the Harriman works at Tchiaturi, was endangered by important producers of other countries, such as British India, Brazil and South Africa.
The troubles of Mologoles were more complex, but they illustrate our principle that if we invite foreign capital to Soviet Russia it is on the understanding that it will depend on its own resources, not on ours. The State Bank was interested in the fate of this concession and twice went to its rescue, but this assistance could not be indefinitely prolonged.
Much has been written about the problem of the Lena Goldfields but little has been heard about the Soviet point of view. It should be realized that mining concessions require important works in connection with prospecting and exploration. If one limits oneself to the exploitation of those mines which have the richest deposits of ore, and if sufficient funds are not allowed for exploration of new deposits, the financial results are bound to remain precarious. In December 1929 the president of the Lena Goldfields declared that the Soviet Government had opposed the transfer of funds to Great Britain so long as certain payments due the Treasury were not made, with the result that the company owed £270,000 in Great Britain and £646,000 in other foreign countries. He added that at the present time revenue is derived almost exclusively from the iron mines of the Urals, which show an average monthly profit of some £30,000.[iii]
The facts are as follows. The Soviet authorities, being interested in the development of the Lena Goldfields concession, granted it financial assistance. For example, in 1926 it received a loan of 3.5 million rubles, at 4 percent, and in 1928 the authorities extended this loan to 1931; the repayment of a second loan of 2 million rubles granted in 1927 at 2 percent has also been postponed, in view of the weak financial position of the company; a third loan of 2 million rubles was granted at the beginning of 1929, and has not yet been repaid. The copper smelting plant in Degtiarka, with an annual output of 1,638 tons, should have been put in operation in 1929, but the company did not live up to this obligation. A second plant, with an output of 11,810 tons, which according to the agreement should be put into operation in 1931, almost certainly will never be constructed by the company. Furthermore, it has not even started construction of the zinc plant in Altai, which it should have built in the course of the present year. As to the production of gold in Siberia, it has not accomplished even one-half of its program for 1929 in the Lena-Witim district. The state's share in the output of the concession has not been paid since 1928. The salaries of the workmen and employees have not been paid in the Urals and Altai since the autumn of 1929; the company's debts for salaries amounted in June 1930 to over one million rubles. Finally, according to Section 86 of the agreement, the Lena Goldfields "concessions can be terminated before the expiration of the date of the agreement only in consequence of the decision of a court of arbitration." As a matter of fact the company did not wish to await the appointment of the court of arbitration and contrary to the express terms of the contract suddenly abandoned the exploitation of its mines and workshops. Thus the concession's financial demise has taken place before its juridical one. The Lena Goldfields Company received the richest and most promising regions of the country for exploitation and exploration, and enjoyed a large measure of financial assistance from the authorities, but it could not raise any foreign loans. Knowing that it would be unable to meet its obligations in 1931 (as it has been unable to meet them in the course of this and previous years), the Company has taken a "preventive measure" in order to place the Soviet authorities before a fait accompli.
A very different impression is given by an examination of the affairs of the Japanese petroleum concession in north Sakhalin. A report on the activities of this company was presented to the general meeting of shareholders in May 1929. Gross profits for the financial year amounted to 3.5 million yen; the cost of exploitation was 2.2 million yen, and the expenses of management 300,000 yen, leaving a net profit of 1 million yen. After payments for sinking fund and taxes, a dividend of 8 percent was distributed to the shareholders. Gross profits for the financial year 1929 amounted to 5 million yen; the expenses were 3.5 million yen, leaving a net profit of about 1.5 million yen. The coal mining concession of the same company paid no dividends, the small profit for the financial year being used to meet the losses of the preceding year.
As for the concessions engaged in manufacturing industries, the information of Mr. Skobelev indicates that the profits averaged 53 percent of the capital owned by the concessionaires in 1926--27, and 64 percent in 1927--28. According to the preliminary computations of Mr. Knopinsky, the profits of concessionaires in the textile industry in 1927--28 were 64.3 percent; in the paper industry, 58.0 percent; in the chemical industry, 31.7 percent; and in the metallurgical industry, 40.4 percent.
Capital is imported by the concessionaire with the understanding that it will be fully amortized by the time his contract has expired. As a general rule, provisions are made for the amortization of capital invested in all machinery, implements, etc., imported by the concessionaire. The cost of any improvements not covered by the amortization provisions must also be refunded to the concessionaire. All such payments, as well as his profits, may be exported in gold exchange at the rate at which the capital of the enterprise was imported, that is, the gold parity of the chervonetz (10 rubles) in dollars, pounds, German marks, etc.
It may be objected that this rule does not apply in case of a premature liquidation of the concession. This objection, however, is based on a misunderstanding. When the Harriman concession was liquidated, outlays for the importation of machinery, for construction, etc., were refunded to the concessionaire in obligations payable on a gold basis.
Since the transfer of his profits abroad in the form of foreign drafts is guaranteed to the concessionaire under the terms of the existing agreements, he cannot be embarrassed by the prohibition of importation and exportation of Soviet currency and by special regulations for the issue of drafts to pay for imported raw materials and machinery. These agreements assure to him the supply of drafts necessary for purchasing raw materials and machinery and for meeting the interest and sinking-fund obligations on his foreign loans within the limits fixed in advance by arrangement with the competent financial authorities. The concessionaire is also given a guarantee that he will be permitted to transfer abroad sums paid to him by the Government for his outlays not covered by the amortization provisions of his agreement, and also the sums he may realize by the sale of property which is not taken over by the Government. In point of fact, no case has ever occurred when a concessionaire has not been able to purchase foreign drafts from the State Bank after an authorization for the transfer had been duly issued to him.
Another problem in connection with concessions is the problem of labor. That Soviet labor has accustomed itself to foreign concessions seems to be indicated by the following resolution of the Eighth Congress of Trade Unions, held in 1928: "The masses of workers should be informed of the necessity of attracting foreign capital in those branches of industry which are unable under existing conditions to develop successfully with the help of the financial resources of the Soviet state alone." But the concessionaires on their part must accept the labor legislation in force in Soviet Russia, including the regulations for hours of labor. At present the eight-hour day is in operation, but in the near future the seven-hour day will be applied to enterprises operated by concessionaires as well as by others.
The concessionaires may hire workers through the labor exchanges or by means of a collective agreement with the trade unions. The number of skilled and unskilled foreign workers is fixed by the agreements at from 15 to 20 percent of the total number employed. In 1928 only 4 percent of the workers were foreigners, in 1929 only 3.3 percent, though in the Far Eastern concessions the ratio of foreign workers is considerably higher.
Because of their high rate of profits and the weak competition offered by national industry, the concessionaires in the early years paid higher wages on the average than did the state-owned enterprises. Later on, in 1928--29, wage conflicts developed as the result of the growth of national industry, the employment by concessionaires of raw materials produced within the country, and their desire to preserve the high rate of profits. There were also conflicts due to such questions as the protection of workers, hiring and dismissal. In 1928, when new collective agreements were signed, 15 disputes were reported in the mining industry, 54 in the metallurgical industry, 18 in the lumber industry, 41 in the chemical industry, and 67 in the food-producing industries. Most of these troubles were due to disagreements over wages, though a few may be traced to exaggerated and ill-founded demands advanced by certain groups of workers excited by the systematic refusals of the concession administration. Not infrequently the management displayed a regrettable tendency to avoid mediation by the trade unions when applications were made direct to them by the men.
Looking back on the disputes that have occurred, we find that the majority were solved by an understanding between the parties or by the mediation of the local trade dispute committees. Thus 23 percent were decided in favor of the concessionaires, 49 percent in favor of labor, while 28 percent ended in a compromise. All things considered, experience shows that the better and stronger the economic organization of the concession itself, the fewer are the causes for labor disputes.
What are called technical aid contracts are now of greater vitality than concessions. These contracts are an indisputable necessity for the U. S. S. R. Their essential character consists of the obligation assumed by a foreign firm to put at the disposal of the economic organs of the U. S. S. R. its technical processes and trade secrets, to send engineers and skilled workmen to the U. S. S. R. to act as instructors, as well as to admit Soviet engineers to their own workshops. The signature by a foreign firm of a contract for technical aid signifies also the establishment of close relations with our scientific institutions. For this and other reasons we call these contracts "contracts for technical collaboration."
On July 1, 1929, there were 58 of these agreements in operation, but the number had increased to 108 by March 1, 1930. The distribution by countries was as follows: the United States, 42; Germany, 41; France, 10; Sweden, 7; Great Britain, 5; Italy, 2; Switzerland, 1. The distribution by industry was as follows: metallurgy, 37; chemistry, 26; electricity, 13; mining, 12; artificial silk, 4; miscellaneous industries, 16. The agreements with American firms have a most important place. This is partly due to the interest we are taking in mass production, so that we can produce goods at low prices. An example is the agreement concluded by the State Automobile Trust with Mr. Henry Ford. Our interest is also partly due to the growth of our commercial relations with the United States. Our exports to the United States (in round figures, based on the official figures of the Amtorg Trading Corporation) amounted to $22 million in 1927--28 and to $40 million in 1928--29, and our imports were $91 million and $109 million respectively.
The number of offers of technical collaboration received by us from foreign firms has been growing steadily. It was 21 in 1925--26, 32 in 1926--27, 48 in 1927--28, and 63 in 1928--29. First place is held by Germany, which sends us 49 percent of all offers received. Then comes the United States with 24 percent. The number of offers received from Great Britain and France has also increased: the British offers were 7 in 1927--28 but 20 in 1928--29. All offers are submitted to a close scrutiny and it is to be noted that the proportion of applications from high class firms increases steadily.
As for foreign capital, which so far has refrained from substantial investments in the U. S. S. R., there seems no reason why it should not follow the lead of foreign industrial firms. Only firms of the highest standing, however, need hope to have their offers of capital and technical experience accepted for exploitation of the concessions proposed by the Soviet Government.
The effective employment of foreign technical methods, especially in industries admitting of high standardization of the American type, presents for us so urgent a problem that the Government has embarked on a program of still more energetic measures to encourage closer relations between our economic organs and reliable firms in America and Europe. The immense market of the U. S. S. R. is open primarily to foreign firms which already have given us, or will give us in the future, an opportunity to profit from their technical knowledge and their experience. They in turn will profit from orders for machinery and other goods.
[i] Of which 65 million rubles was in manufacturing and 20.6 million rubles in mining.
[ii] See the explanation of the causes of the Harriman failure given in an article in L'Information, December 19, 1928, with which we fully agree, although we are unable to accept the general conclusions of the article.
[iii]L'Information, December 18, 1929.