On the Economic Crisis in Communist China

Communist China's drive for major power status-an urge to narrow the gap between herself and the two superpowers-has been the central objective of her campaign for economic development. In pursuit of this goal, Chinese planners have concentrated on expanding as rapidly as possible the country's capacity to produce capital goods and military matériel. For this purpose, a mechanism for institutionalizing a high rate of involuntary saving and for channeling it into the desired lines of investment had to be fashioned.

Concretely, this meant that the different segments of the economy had to be brought under the immediate control of the planners and policy-makers, so as to enable them to mobilize and allocate resources at great speed and with maximum flexibility. Agrarian transformation, nationalization of banking, transport, industry and trade, centralization of fiscal administration, rationing, price and wage control, and a variety of other regulations were all intertwined and designed to assure this goal.

During its first ten years the Chinese Communist régime was singularly successful. It rapidly captured "the commanding heights" in the economy, restored it to working order and launched an industrialization program of vast proportions. Manufacturing plant capacity was expanded at a very fast pace and production rose about 14 to 18 percent annually between 1952 and 1959. As a result, the output of steel increased about tenfold, electric power almost sixfold, coal fivefold and cement fourfold. In contrast, manufactured consumer goods, such as cotton yarn, grew much less rapidly- that is, about two to two-and-a-half times between 1952 and 1959, still a very respectable rate.

This rapid advance was dramatically reversed in the aftermath of the Great Leap. The marked decline of agricultural production in 1959 was soon followed by stagnation and contraction in industry. Thus economic development was brought to a standstill and since 1960 Communist China has been in the throes of a depression. How can this dramatic reversal be explained? What are its background and economic history?

II

In spite of eight years of rapid industrial growth accompanied by relatively non-violent collectivization, Chinese Communist policy-makers approached the end of their first Five Year Plan with some serious unresolved problems on their hands. They needed a development strategy that would provide a way out of the dilemmas posed by agricultural stagnation. Farm production was growing only slowly, possibly just sufficiently to keep pace with population growth. Moreover, the harvest was subject to sharp fluctuations in response to changing weather conditions. This in turn led to marked annual fluctuations in the rate of industrial growth.

Agriculture was clearly becoming the critical bottleneck in the further development of industry. A poor harvest would inevitably lead to domestic food shortages reflected either in rising prices or in tighter rations. This could, of course, be alleviated by imports of food; but such imports would have to be at the expense of capital goods needed for expansion of industry. In the absence of these imports, food shortages were bound to interfere with the provisioning of an expanding urban labor force. This was brought home forcefully by the fact that while urban population grew by about 30 percent between 1952 and 1957 (rural population increased by only 9 percent), total government collections of grain remained more or less stationary throughout this period. On this basis, it would seem that government agricultural policies not only failed in the field of production but also in the field of distribution; that is, collectivization, which was primarily designed to fortify official control over farm output and its disposal, apparently did not bring with it increases in what was collected from the farm. Contrary to the planners' scale of preferences, farm consumption probably increased while urban consumption declined. Thus, although production had been sacrificed for control, control itself did not seem to have been significantly strengthened.

Under Chinese conditions, agricultural stagnation and poor harvests have an almost immediate impact on industrial production as well. In as much as the bulk of Mainland China's exports were in the past agricultural, shortfalls in farm production thereby reduced the country's capacity to import capital goods for industrialization. At the same time these shortfalls cut into the domestic supplies of raw materials available for textile manufacture and food processing. Thus unless agricultural output could be raised, the growth of industrial capacity would be curtailed, and existing plants would be forced to operate below capacity. To these difficulties were added a rise in the rate of population growth and increasing pressure of population on the available land.

The pressures on agriculture were further aggravated by the fact that Soviet credits were largely exhausted and repayment of the accumulated debt had to begin in 1954-55. Previously, China had imported more from the Soviet Union than she exported-the deficit being financed by credits-but now the situation was reversed. In order to amortize the debt, an export surplus had to be maintained, which in turn meant stepped-up deliveries of agricultural products.

All of these problems converged in the course of 1957, in part due to a succession of two mediocre harvests (in 1956 and 1957) and in part due to strains, shortages and bottlenecks engendered by a sudden and marked increase in the level of investment and the quickening in the pace of collectivization between 1955 and 1956. The Chinese leadership now faced a disconcerting dilemma: to find a strategy which would permit and foster the simultaneous development of agriculture and industry, or to push one at the inevitable expense of the other. Yet it was unthinkable to divert investment resources from industry to agriculture with a consequent decline in the rate of industrial growth.

It was against this background that a new development strategy was evolved during 1958. In its reluctance to divert investment resources from industry to agriculture, it still resembled the Soviet model, but in other respects, and in its implementation, it represented not only a sharp departure from that model, but also from its specifically Chinese variant as incorporated in the first Five Year Plan.

At its core, the new strategy involved mass mobilization of underemployed rural labor on a scale not attempted before, even in China. This additional labor was to be used locally for three purposes: (1) labor-intensive projects such as irrigation, flood control and land reclamation; (2) increased agricultural production through greater applications of labor designed to raise unit yields by closer planting, more careful weeding and the like; and (3) rapid expansion of small-scale industry. All of this was to be accomplished without raising rural consumption, and since local labor would be used no transport costs need be incurred.

Of course, these were not entirely new measures. Mass labor projects are an ancient tradition in China and have only been perfected and modernized by the Communist régime. However, rural labor mobilization prior to 1958 was much less comprehensive and systematic than during the Great Leap Forward (1958-60). The same can be said for the development of small-scale industry, which has traditionally been a subsidiary occupation for the Chinese farmer, though mostly confined to weaving of textile cloth and other handicrafts. Now the Chinese planners viewed it as one of the principal means of increasing the rate of industrial growth. In effect, they decided upon the simultaneous development of two distinct industrial sectors: a modern, large-scale, capital-intensive sector and a small-scale, labor-intensive sector. In pursuit of this policy of technological dualism, or "walking on two legs," as it was officially termed, the expansion of small-scale industry was promoted in such fields as iron and steel, machine shops, fertilizer production, power generation and coal extraction, in addition to the more traditional textile and food-processing industries.

Small-scale industry was to be developed by using local raw materials and simple equipment manufactured locally. The output of these industries would be used to satisfy the rural demand for manufactured consumer goods and agricultural equipment. The rural sector would thus be pushed into involuntary and partial autarky-partial, because though taking nothing from the modern sector, it was expected to contribute substantially to it. The rural sector, then, would need to save enough of its current income not only to finance its own development but to contribute to the growth of the modern sector.

The success of this strategy was critically dependent upon the degree to which underemployed labor could in fact be mobilized; if so, whether this could be done without curtailing farm production on the one hand and raising farm consumption on the other; and finally, whether earthen dams or canals, built almost entirely by raw labor without equipment, would be adequate to cope with major floods or droughts. Available evidence suggests that the Chinese leadership genuinely believed that these problems could be overcome through institutional reforms combined with a far-reaching change in the attitudes of cadres and of the peasantry at large.

As to the first, it became clear by early 1958 that the collectives (officially referred to as agricultural producers' coöperatives of the advanced type) were too small in size and too large in number to serve as adequate instruments for administering and controlling vast labor projects; there were then about 740,000 collectives averaging less than 200 households each. Communes, representing an amalgamation of close to 30 collectives with an average membership of about 4,330 households, proved much better suited to this purpose.

As for the need for changed attitudes, the Chinese policymakers understood that better control and administration had to be coupled with adequate incentives. But reliance on material incentives was precluded if increases in farm production were to be set aside for financing investment in industry. The leaders therefore managed to convince themselves that psychic income could replace increases in real income, provided the attitudes of the rural cadres and particularly of the peasantry could be changed.

The attitude of the party leadership was epitomized by the key slogan of 1958: "Politics takes command." Beginning in late 1957, the impression was conveyed that policy-makers had adopted the principle of "where there's a will there's a way." They appeared to feel that during the period 1955-57 they had overestimated difficulties and underestimated the possible impact of "ideological remolding" on the economy.

In a sense what the Chinese policy-makers were saying was that ultimately economic development is a function of organization and attitudes as molded by ideology. No doubt these are important and within limits may compensate for lack of physical resources, capital and backward technology. However, part of the difficulty in late 1957 and in 1958 was that the Chinese leaders talked and acted as if the limitations on their resources were completely irrelevant. In doing so, the party was apparently strongly influenced by its perception of the lessons learned from the collectivization, the "hundred flowers" and the "rectification" campaigns.

Before mid-1955 the official approach to collectivization had been cautious and gradualist. There is considerable evidence of a debate within party councils at the time between those who wanted to maintain this go-slow approach and those who wanted to accelerate the pace. When Mao decisively sided with the latter group, the die was cast and collectivization was completed within a year and a half. Looked at from the vantage point of 1957, collectivization turned out to be surprisingly successful. Contrary to expectations, it encountered no active resistance from the peasantry, was carried out relatively smoothly and without the dire consequences at the time that were associated with collectivization in the Soviet Union. This experience no doubt greatly emboldened many elements of the leadership and the party as a whole; it led them to conclude that they had overestimated peasant resistance to change and had given too much weight to the counsel of the technicians and experts who constantly called attention to the constraints, obstacles and difficulties.

As a result, the expert was downgraded-a move reinforced by the discovery during the "hundred flowers" campaign that many intellectuals and professional groups were hostile and ideologically unreliable. This, in turn, prompted the party to embark upon the all-out "rectification" campaign, which stressed the need for greater reliance on the "masses" and on politically tested elements, even if these were technically less competent.

It is within this framework that the ambitious targets of the Great Leap were formulated and that maximum pressure was exerted on the cadres to fulfill and overfulfill them. These pressures, propelled by the notion that nothing was impossible, and coupled with the subordination of economic administration to local party control and the general downgrading of the expert, removed all of the independent checks previously built into the system of economic planning and management. Thus in 1958 the door was opened wide to self-generated delusion concerning production accomplishments in agriculture and industry.

To understand how these errors in judgment were made, one must perhaps reach back into Chinese Communist Party history. It seems quite possible- though it cannot be explicitly documented-that decisions at this time were strongly influenced by experience during the long civil war extending from 1927 to 1949. On many occasions in these years, small groups of Communist bands were isolated and had to shift for themselves with little or no contact with the Party Center. Under these circumstances, the leaders of these groups had to be given wide latitude and they, in turn, had to exercise initiative and judgment, which they did with notable success. Would not a similar approach be worth trying in 1957 to accomplish somewhat different tasks? And would not the fact that the régime was now at the seat of power, not in the wilderness, facilitate rather than hinder the effort?

Often Chinese Communist writings and major policy speeches suggest that Mao and his closest associates viewed the process of economic development as if it were a series of military campaigns; in their eyes economic development entailed a conquest of successive obstacles and fixed positions. After all, these leaders spent a major part of their life in guerrilla warfare which must have left its mark on their modes and habits of thought. Therefore in formulating economic objectives or policies they looked for ingredients and inputs which were essential for military success; they showed little understanding or appreciation of the measures necessary for economic growth.

III

On top of this came unfavorable weather. While officially all of the blame for the current agricultural crisis is placed on nature, it is clear even from the régime's own pronouncements that the prolonged neglect of agriculture-inadequate investment, poor production incentives, perpetual reorganization and disorganization of agrarian institutions, and a host of specific planning errors-was bound to have an effect sooner or later even if the weather had been favorable. In order to understand the dimensions and the impact of this crisis it is necessary to examine its character in greater detail.

The State Statistical Bureau stopped publishing annual production results in January 1960, after releasing the annual communiqué on plan fulfillment for the previous year. As a result, for 1960, 1961 and 1962 we do not even have official production claims. However, it has been officially admitted that production declined in recent years, with some statements hinting that it has dropped to 1957 or 1955 levels. Because of all this statistical confusion and secrecy, the last more or less reliable set of agricultural statistics is for 1957; since then, most of our information is based on qualitative and circumstantial evidence. The table on the next page represents an attempt to translate these indications into quantitative terms.

As far as hard information is concerned, data on population are perhaps just as scarce and unreliable as for farm production. If one accepts the official figures, population must have grown between 2 and 2.5 percent a year between 1952 and 1958. Given the depressed food situation and the resulting nutritional deficiencies since 1959, it certainly could not have grown at a higher rate and probably expanded more slowly than that.

TOTAL AND PER CAPITA FOOD CROP PRODUCTION TRENDS, 1957-62

Food Crop Population Growth Index, Domestically Produced Food Year Production assuming an annual rate Crop Availability Per Capital, Index of population growth of: based on assumed annual population growth rate of:

1.5% 2.0% 2.5% 1.5% 2.0% 2.5%

1957 100 100.0 100.0 100.0 100.0 100.0 100.0 1958 115 101.5 102.0 102.5 112.9 112.3 111.8 1959 91 103.0 104.0 105.1 87.9 87.9 86.2 1960 86 104.6 106.1 107.7 82.4 81.2 80.0 1961 90 106.1 108.2 110.4 84.8 83.2 81.5 1962 98 107.7 110.4 113.1 91.4 89.2 87.1

Sources: Food Crop Production Index based on production estimates of the U. S. agricultural attaché in Hong Kong.

Reliable information concerning the precise magnitude of the food crisis is not available. What evidence we have is based on reports of refugees in Hong Kong, of foreign visitors to China, some scattered reports in the Chinese press and the incontrovertible fact that China is importing grain from Canada, Australia and other countries.

The indices in the foregoing table suggest that food crop production reached its low point in 1960, when per capita availability of domestically produced grain declined by close to 20 percent as compared to 1957-and has been slowly recovering since. Apparently, food production in 1960 dropped even below 1959 levels not only because of another poor harvest, but also because hog-raising and vegetable-growing were collectivized that year with bad results.

In retrospect it is clear that the acute food crisis of recent years was brought about by a decline in the quality as well as the quantity of food. As might be expected, the incidence of nutritional diseases increased and apparently reached a peak in 1961. What effect this had on the death rate we do not know. The most that one can say is that, while the food crisis has been serious, there have been no indications of mass famine on a nationwide scale. Nevertheless, the situation in the winter of 1960-61 was so acute that even military rations had to be cut. Partly on this account and partly because the soldiers saw adversity all around them, affecting their relatives and friends as well as themselves, army morale and discipline seem to have been seriously undermined at that time. All this also led to considerable demoralization of local party cadres and of the local militia so that in some areas there were peasant uprisings accompanied by an almost complete disintegration of local administration and authority.

IV

Chinese agriculture was in a state of constant instability between 1949 and 1956. Following three years of turmoil accompanying land reform, the transformation from private landholding to almost complete collectivization was compressed into four short years extending from 1953 to 1956. Yet collectivization did not mark the end of this process. The introduction of the communes-at first slowly and cautiously at the end of 1957, and then at an unusually rapid pace in 1958-spelled not only instability, but upheaval in the countryside.

The precise origin of the communes, in conception and in practice, is rather obscure; but there is no question that they constitute an integral and essential element of the Great Leap. Central to it was the notion of the "mass line," release of the "spontaneous initiative of the masses," mass mobilization of labor and of the total energies of the people as a whole. In implementing this strategy, economic management was decentralized and the communes emerged as instruments of local control and decision- making. In effect, then, centralization at the top was replaced by centralization at the bottom.

What seems to have been intended was a far-reaching and completely revolutionary change in the forms of agricultural production and in the pattern of rural life-not far different from the agrogorods advocated by Khrushchev at one time. Both in a sense strove for the creation of agricultural cities in which the peasantry would be uprooted from the land and, in effect, proletarianized. Such measures, if successful, would not only greatly facilitate state control over the countryside, but could (it was hoped) lead to a restructuring of peasant attitudes, rendering them more pliable and amenable to the régime's objectives.

Not all of the regulations for these early model communes were implemented. For instance, dismantling of villages did not get very far. Other measures were not instituted to the same degree everywhere, although the basic outlines of the communes as they spread rapidly over China did not depart very much from the original plan. But many difficulties were encountered in 1958, primarily those revolving around the problems of incentive and of shifting resources (including labor) from place to place.

In this early phase, differentiated and incentive rewards were more and more replaced by an egalitarian wage system based on "each according to his need." This created a great deal of friction, and soon proved to have a negative effect on labor productivity. At the same time, the shifting of labor led to considerable disruption of agricultural production, so that by the end of 1958 and early 1959 the leadership was forced to begin its retreat from the early concept of the commune.

As the agricultural crisis deepened in the course of 1960, mass labor mobilization schemes were abandoned and the construction and special production units that had proliferated during the Great Leap were discontinued. The commune was further decentralized so that gradually the production team, composed of about 40 households, became the basic unit for the allocation of resources and other economic decisions. As part and parcel of this reversal, peasants were again allowed private garden plots where they might raise livestock and vegetables. In many cases even the communal mess halls were abandoned. By the end of 1961, the agrarian transformation of the Great Leap had run full circle. The commune had become little more than a unit of local government, so that in essence the forms of agricultural production, consumption and distribution were back to the collectivization stage of 1955-56.

The uncertainties caused by these experiments and constant shifting back and forth were bound to have a negative effect on incentives; indeed they may have been more damaging than the ills which each change was designed to cure. These constant changes, which have characterized Chinese agricultural policy since 1949, are a symptom of a continuous groping for an incentive system which would allow the régime to have its cake and eat it too-that is, to extract the utmost from the peasant's output without interfering with farm production. The ideal situation from the régime's standpoint would be to have stable consumption with steadily rising production. But, in fact, food supply per capita barely rose-if at all-during the first Five Year Plan.

Having been relatively successful in their drive to collectivize, and now desperate to break out of the vise of agricultural stagnation, the Chinese were apparently emboldened in 1958 to go beyond tested forms of agricultural and economic organization under socialism. Thus they began to innovate (through communes, through decentralization and through mass mobilization), and in the process departed from the Russian model. Viewed from the vantage point of 1964, it is clear that when they embarked on radical innovation, they failed.

Consequently, while the Chinese carefully avoided the Soviet collectivization débâcle up to 1957, they fell after that into the same trap as their Soviet predecessors. But, while a sharp decline in Russian crop and livestock production between 1928 and 1932 did not arrest industrial growth, in China it led to an industrial standstill after 1959. Except during World War II, when vast areas of European Russia were overrun by German armies, the Soviets never experienced industrial stagnation of comparable proportions at any time after 1928. Finally, the Soviets were never forced to reverse radically and completely their order of planning priorities as the Chinese had to do in early 1962.

V

As one surveys Communist China's brief economic history, one is struck time and time again by how much harvest fluctuations and trends affect the level of economic activity in general. This relationship became particularly clear when in 1959 the sharp downturn in agricultural output, followed by a succession of several bad crops, led to a cumulative decline in industrial production and in national product as a whole. As the leadership became fully conscious of the depth of the agricultural and economic crisis, it finally closed the books on the Great Leap and the development strategy associated with it. This was coupled with a sober re-assessment and the enunciation of a new economic policy at the Ninth Plenary Session of the Eighth Central Committee in January 1961, when the food supply crisis was at its worst. The policy crystalized in the course of 1961 and was articulated as doctrine by Chou En-lai in his Report on Government Work at the National People's Congress in the spring of 1962.

The new line is based on the slogan that "agriculture is the foundation for the development of the national economy." This is coupled with a policy of "readjusting, consolidating, filling out and raising standards" in industry and all of the non-agricultural sectors. In concrete terms this has meant a complete turnabout in planning priorities, with agricultural development accorded highest rank, and heavy industry relegated below the manufacture of consumer goods. As a result, the level of investment was curtailed and its composition was markedly altered.

The new policy also brought with it an upgrading of technical considerations and a greater reliance on material incentives in all segments of the economy. In industry this meant that greater attention was paid to quality, plant maintenance and costs.

Unfortunately, reliable and precise information on trends in industrial production, investment and employment is not available for recent years. Therefore we do not know the rates of change in industry between 1960 and 1963. Nevertheless, from official statements and the reports of travelers and refugees, it is possible to determine the direction of movement even if its extent cannot be accurately measured.

It is clear that the pace of industrial advance began to slow down significantly in 1960. At first this decline was confined to the food- processing and textile industries which had to cut back production because of the shortage of raw materials (e.g. cotton, tobacco) resulting from the agricultural crisis. It would appear that in 1960 the level of investment was still increasing although the rate (in relation to national product) probably declined. However, this situation changed markedly when the Great Leap was officially abandoned in 1961; thereafter there was a marked drop in production in most, if not all, branches of industry: in consumer goods industries because of continuing shortages of agricultural raw materials, and in producer goods industries because of shortages in demand engendered by investment cutbacks resulting from the agricultural crisis. The decline in heavy industry was also accelerated by the exodus of Soviet technicians in the fall of 1960, which delayed the completion of a number of plants. Also, some existing plants were closed, creating significant pockets of urban unemployment.

The net result of this stagnation is that much of the ground gained by industry during the Great Leap has been lost in the past three years. On the basis of qualitative indications, it would appear that for a number of industrial products, output fell back to 1958-and in quite a few cases even to 1957-levels. The principal exceptions to this are crude-oil extraction, which apparently continued to expand throughout all of these years, and certain branches of the chemical industry, particularly fertilizer production, which of course is closely tied to the "agriculture first" policy. More recently there has also been a growing emphasis on the manufacture of synthetic fibers in a gradual attempt to render the country's textile industry less dependent on agricultural raw materials.

In effect, then, since 1960 the Communist Chinese economy has exhibited many of the classical symptoms of a deep economic depression, quite uncharacteristic of Soviet-type economies. The Great Leap had induced a sharp rise in urban employment and migration to the cities; in the depression that followed, this swollen and partially unemployed population in turn complicated the problem of urban food supply at a time of falling agricultural production. A more or less forced backward migration to the villages was then called for, apparently with the thought not only of easing the urban food problem, but also of reducing the burden of collecting food in the countryside. By relying to a considerable extent upon grain imports to feed the remaining urban population, the régime could preserve-at least for the time being-its more favorable incentive system. The net effect of these measures is that in the last three years, China has in some respects reverted to a prewar pattern of agricultural trade. She has once more become a net importer of grain, using these imports to feed the cities and thus relieve the burden imposed on the peasant.

It now appears that the 1960-61 consumption year marked the low point of the depression. Since the 1962 harvest, there has been a significant improvement in the supply of food and agricultural raw materials, as well as some signs of a general economic recovery. Whether this recovery will continue and provide the basis for a cumulative upturn, it is too early to say. As always in China, the quality of the harvest in the next few years will be one of the decisive factors.

Is China's present economic stagnation temporary or is it a more chronic condition reflecting intractable problems? In attempting an answer, we should remember that the Chinese Communists mounted a program of economic development which carried them forward with a strong momentum for "ten great years," 1949-59. The rapid rate of economic growth attained justified itself and spurred on the party, the cadres and the people to increasing effort and sacrifice. To be sure, during the first half of that decade, economic expansion was speeded to a considerable extent by rehabilitation of war-devastated or disrupted plants, so that relatively modest inputs yielded sizable increments in output. Another favorable factor was the availability of Soviet credits until 1957 and of Soviet technical assistance until mid-1960.

In recent years, on the other hand, some uniquely unfavorable factors have been at work. In addition to a succession of three bad growing seasons, the sudden withdrawal of Soviet technicians in 1960 and the near cessation of complete plant deliveries following on its heels contributed greatly to the sharp curtailment and disruption of industrial production. These special conditions aside, the failure of the Great Leap itself seriously damaged morale and organization. The setback destroyed the image of invincibility and infallibility in which the régime had enveloped itself; the cadres were left confused and disillusioned and the people's confidence in the leadership was shaken. At the same time the institutional framework of the economy was weakened. This of course applies particularly to agricultural organization, patterns of land use and the whole incentive structure in agriculture. Last but not least, statistical services were profoundly disorganized and technical considerations were thrown to the wind.

These tendencies have, of course, been reversed since 1961-62, but the question remains how rapidly the damage can be repaired. If the leadership continues to pursue an "agriculture first" policy, if it can curb its ambitions for rapid industrialization, if it keeps the rate of investment at modest levels, and if it carefully nurtures a favorable incentive system in the countryside, it may gradually repair the damage done and bring the economy to the point where rapid industrialization is again feasible. It may be that the Chinese Communist leadership has set aside the third Five Year Plan period (1963-67) for this purpose.