China - Second Agricultural Research Project

Docamm of The World Bank FOI OMCIAL USE ONLY Ret Nz P-3868-CH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION ON A PROPOSED IDA CREDIT OF SDR 24.3 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A SECOND AGRICULTURAL RESEARCH PROJECT August 6, 1984 I TMS dsmwt a a re t_duW dIbhudm _ my be =W by X my Em the PInince d o dWk seda dohe. I c my meW .hd wrue be dhdmd w1Eh.w Wed Bmk d I -  CrREC EQUIVAETS Currency unit - Yuan (Y) Calendar 1983 June 1984 US$1.00 - Y_ 1.98 Y 2.07 Y 1.00 _ US$0.51 US$0.48 The staff appraisal report is based on the exchange rate of US$1.00 = Y 1.97 prevailing at appraisal. FISCAL YEAR January 1 - December 1 WEIGHTS AND MEASURES I meter Cm) 3.28 feet L kilemeter (km) = 0.62 miles L hectare (ha) = 2.47 acres 15 mu 1 kilogram (kg) = 2.2 pouads ton 1000 kg 2,205 pounds ABBREVIATIONS CAB - Chinese Academy of Sciences CAAS _ Chinese Academy of Agricultural Sciences CAST - Chinese Association of Science and Technology CXB - Central Meteorological Bureau CNTIC - China National Technical Import Corporation CVAO - Cross value of agricultural output MAAF - Ministry of Agriculture, Animal Husbandry and Fisheries MF - Ministry of Forestry NWREP - Ministry of Water Resources and Electric Power PC - Project Commission PIU - Project Implementation Unit PO - Project Office SSTC - State Science and TechnoLogy Commission  - i - FOR OMCIAL USE ONLY CHINA SECOND AGRICULTURAL RESEARCH PROJECT Credit and Project Su -ary Borrower: People's Republic of China Amount: SDR Z4.3 million (US$25 million equivalent) Terms: Standard Project Description: The project would upgrade and strengthen 15 selected crop- specific and regional research centers and ten agrotechnical extension stations. It is aimed at improving production technologies for foodcrops, cash crops, livestock and fisheries; strengthening resource management capabilities in agriculture and related fields; and developing a model county extension station to be replicated nationwide. Principal features of the project would be construction and renovation of laboratories, offices, farm buildings and staff housing; scientific and farm equipment needed for research and experi- mentation; library equipment, books and materials; local and overseas training in the agricultural sciences and library science; and technical assistance (about 96 man months) applied to review of center research programs, program formulation for extension stations, and future project preparation. Principal benefits from project assistance would be increased quality and volume of agricultural research, improved resource planning and management, and lessons in extension planning. These results over the long term would be expected to contribute to achievement of agricultural growtb targets, thereby helping to raise incomes, nutritional levels and overall living standards. Project uncertainties regarding possible duplication of research activities and the applicability of research to farmers' needs would be reduced by project-financed program reviews and measures to strengthen linkages with extension units and agricultural colleges. Th document has a restrcted distribution and may be used by recipients only in the performance of their offca duties Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Costs: Local Foreign Total /a - S million Civil works 19.9 3.5 23.4 Laboratory, office and farm equipment and supplies 2.4 15.2 17.5 Library development 0.3 i.2 1.5 Overseas and local training 0.9 1.9 2.8 Technical assistance and preparation of furture projects - 1.4 1.4 Base Cost 23.5 23.2 46.6 Physical Contingencies 2.2 1.9 4.1 Expected price increase 3.7 4.5 8.3 Total Project Costs 29.4 29.6 59.0 Charge on Use of Foreign Capital 10.0 - 10.0 Total Financing Required 39.4 29.6 69.0 Financing Plan: Total IDA 25.0 Government 44.0 Total 69.0 Estimated IDA FY 1985 1986 1987 1988 1989 Disbursements: $ million Annual 1.3 7.5 8.7 5.0 2.5 Cumulative 1.3 8.8 17.5 22.5 25.0 Rate of Return: N.A. Staff Appraisal Report: No. 5039-CRA, dated July 23, 1984.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE PEOPLE'S REPUBLIC OF CHINA FOR A SECOND AGRICULTURAL RESEARCH PROJECT 1. I submit the following report and recommendation on a proposed IDA credit to the People's Republic of China to help finance a second agricultural research project. The credit, for SDR 24.3 million (C25 million equivalent), would be on standard IDA terms. PART I - THE ECONOMY 2. An introductory economic report, entitled "China: Socialist Economic Development" (No. 3391-CMA), was distributed to the Executive Directors on June 1, 1981. A country economic memorandum, entitled "China: Recent Economic Trends and Policy Developments" (No. 4072-CHA), was distributed to the Executive Directors on March 31, 1983. Another economic mission that visited China early this year is currently preparing a report on long-term development issues and options, which is expected to be submitted to the Executive Directors by the end of 1984. Basic data on the economy are given in Annex 1. Background 3. Following a period of major institutional changes in the 1950s, including land reform and the eventual establishment of comutnes in rural areas and the extension of pubLic ownership to cover almost all of the modern sector, development efforts in China have been directed toward the major objectives of industrialization and poverty reduction. Decpite sharp oscillations in policy and political upheavaLs like the Great Leap Forward (1958-61) and the Cultural Revolution (1966-76), China has made substantial progress toward achieving its objectives. Industrial growth since 1949 has averaged more than 12Z p.a. (compared with under 5% for agriculture); the current share of industry in GDP (around 44%) is similar to the average for middle-income developing countries; and the country now produces a far greater variety of industrial goods than most other developing countries. Per capita GNP (with adjustments for international comparability) grew at 2.5-3.0% p.a. in 1957-S1, significantly above the average for other low-income developing countries. In terms of basic education, nutrition and health, the Chinese population is better off than its counterparts in other low-income developing countries. 4. However, China remains a very poor country, with a GNP per capita of only $300 in 1982 and about 200 million people or 20Z of the population with unacceptably low incomes. The economy is also inefficient, past growth has come mainly from massive mobilization of resources. For a country that faces significant domestic resource conszraints, inefficiency is a particularly serious problem.  - 2 - 5. To address these problems and ensure rapid growth and improvements in living standards, the Government initiated a program of reform and adjust- ment in 1979. Economic reform, aimed at improving the efficiency of the economic system, involves: (a) improving the quality of central planning and pclicy coordination; (b) devolving more decision-making authority to lower level units; (c) establishing more direct links between incomes and the performance of economic units and individuals; and (d) relying more on market mechanisms and economic instruments and less on administrative directives to influence economic activity. Structural adjustment, aimed at speeding improvements in living standards, has involved readjusting the relative shares of consumpcion and investment in national income, some major sectoral and subsectoral -eadjustments, and greater emphasis on foreign trade. In 1981, problems with inflation and large budgetary and current account deficits resulted in short-term stabilization temporarily receiving the highest priority, but by 1982 the Government was again pushing ahead rapidly with adjustment and reform. Economic Reform 6. Reforms have now affected all sectors of the economy and institu- tions from the central government down to rural households. A major govern- ment reorganization has strengthened the core planning and manAgement agencies Cespecially the State Planning Commission and the State Economic Commission) and reduced the number of commissions, ministries and agencies under the State Council from 98 to 52. Reorganization within ministries also has occurred, while that of provincial and local governments is now under way. Economic mnagement has been decentralized: provincial and local authorities have been given more autonomy in investment decision making and use of credit to finance investment has increased; provincial and local governments have been granted greater budgetary flexibility and more incentives to expand revenues and/or economize on expenditures; and ministries, new local trading companies and some enterprises now have authority to engage directly in foreign trade. 7. Reforms have been most far-reaching in rural areas, where introduc- tion of various types of the "production responsibility system" has given small groups and households more autonomy in production and investment decisions and linked incomes directly with output. By the end of 1982, 92Z of production teams in China had implemented such a system; 78% had implemented a household responsibility system, whereby collective ownership of farm land and major equipment is maintained but plots of land are contracted out to individual households, which can retain whatever they produce beyond their obligations to the state and to the collective (which account for about one third of production). The number and types of rural markets have also increased. 8. Economic reform has not proceeded as far or as fast in urban areas, but signifi-ant systemic changes have occurred. Refor- in the management of state enterprises have aimed at improving incentives through profit retention schemes and more flexible payment and employment practices. There have also been experimental changes in the organization of state enterprises, a greater variety of marketing channels, some price flexibility and adjustment of relative prices, and greater autonomy for state enterprises in production decisions. The scope for cooperative and individual economic activities has also been enLarged.  - 3 - 9. Many economic reforms, especially those in rural areas, have already had a positive impact on efficiency, while others will take longer to have a significant effect. There are also some emerging issues with economic reform that the Government will need to address. In rural areas, there is a poten- tial conflict between enhanced economic incentives and equity in income distrioution, continued provision of basic services, and mobilization of labor. In the state enterprise sector, many units are still !.clined to overinvest and overproduce, since substantial decentralization of decision making and controL over resources has not been accompanied by necessary reforms in the pricing system. More use is being made of the market, but information and transport systems are still weak, markets are fragmented and competition is limited. It has also been difficult to develop effective indirect fiscal and monetary policy instruments. Adjustment, Stabilization and Growth 10. During the past four years, the Government has followed a strategy of setting relatively modest targets while implementing economic and admin- istrative measures that contribute to adjustment and stabilization as well as to economic growath. The various measures have included: major increases in agricultural procurement prices; strict controls on many other prices; rationing and other administrative measures to improve efficiency of resource use; cutbacks in state capital construction investment; fiscal measures to limit the budget deficit; increases in interest rates; moderation of currency and credit expansion; and the introduction of an internal settlement rate for foreign exchange transactions and other measures to encourage exports and economize on imports. 11. These economic and administrative measures, combined with systemic changes, have played an important role in the impressive performance of the Chinese economy in recent years. Gross agricultural and industrial output at constant prices grew by 7.3Z per year between 1978 and 1982 - agriculture by 7.5% and industry by 7.2Z (heavy industry by 3.4Z and light industry by 11.8%). Net material product (NMP) at constant prices grew by an estimated 6.3% p.a. during the same period. Net investment has stagaated in real terms, while material consumption grew by over 9Z p.a. between 1978 and 1982. The share of investment in NMP was reduced from 36% in 1978 to 29% in 1982. Domestic consumption of energy rose by Less than 2% p.a. during 1978-82. 12. Structural adjustment and rapid overall economic growth, combined with a low population growth rate (1.3% p.a. between 1978 and 1982), have led to rapid increases in per capita incomes. In urban areas, real per capita incomes increased by 4.8% p.a. between L978 and 1982; in ruraL areas the reaL increase in per capita incomes was about 12Z p.a. Wnile more prosperous areas and households may have benefitted the most and income differentials at a local level may have increased, many poor areas and househoLds have also enjoyed substantial income improvements. 13. The high rate of investment in 1978 and the low returns to much of this investment made a cutback in the investment rate a priority for the adjustment program. But achieving such a cutback has proved difficul'. Decentralization of investment decision making has permitted a rapid growth in investment financed from retained earnings or local resources. As a result, most of the cutbacks in investment have been in large centraLly financed  - 6 - projects (in 1981 even the priority sectors of energy and transportation were affected), though some of these were revived in 1982. 14. Government policy measures have helped restore domestic economic stability by lowering the rate of inflation from 6% in 1980 to 2.42 in 1981 and 2X in 1982, and by reducing the budget deficit (adjusted to eliminate financing items) from 7% of NNP in 1979 and 5Z in 1980 to Less than 22 in 1981 and 1982. The restoration of fiscal stability was achieved mainly by sharp cuts in expenditures on investment. Subsidies (mainly on daily living necessities) rose dramatically from about 7% of total expenditures in 1978 to 26% in 1982, when they were 9Z of NMP. 15. China's external position has also changed greatly in recent years; the current account deficit of $3.4 billion in 1980 was converted into a $5.6 billion surplus in 1982 and an estimated $4.6 billion surplus in 1983, an improvement far greater than anticipated. The real growth of merchandise exports has been very impressive, averaging over 15% p.a. during 1978-82, mainly because of rapid growth in manufactured exports. The growth rate has been declining steadily, however. Meanwhile the volume of imports declined in both 1981 and 1982, due in part to the lagged effect of contract cancellations and suspensions, but also to delays in equipment deliveries and to problems in obtaining high technology goods. The decline was reversed in 1983 and a substantial increase in imports is expected in 1984 and 1985 as China expands its investment program and imports more machinery and equipment. 16. A major consequence of the Government's conservative balance of payments strategy has been reduced foreign borrowing. In 1980 and 1981 the Government cut back sharply on interbank borrowing and in 1982 took advantage of the unexpectedly strong current account position to repay commercial bank and other loans. In 1981 China's debt service ratio was 7.8%, and in 1982 10.0Z, due in part to accelerated loan repayments. At the end of 1981 total reserves (excluding gold) were $5 billion; by the end of 1982 they had increased to over $li billion (equivalent to about seven months of 1982 imports), and by the end of 1983 they were nearly $15 billion. The rese-ve surplus will be significantly reduced as China accelerated its development in 1984 and might record a slight deficit for this year. Medium-Term Prospects 17. During the remainder of the 1980s, the Government's efforts to improve living standards should be helped considerably by continuation of a relatively low population growth rate; by opportunities to make greater and more efficient use of foreign technology and capital; and by the potential for improving efficiency through economic reform. Rapid and equitable economic development is constrained by a number of factors, however. There are serious shortages of skilled manpower (current enrollment in universities and tech- nical and vocational schools is one quarter of the average rate for other developing countries). With limited possibilities for expanding the cultivated area and with cropping intensities and yields already quite high, the growth rate for agriculture is unlikely to average more than 3-4% p.a. during the 1980s. Energy availability will continue to constrain industrial growth, and there are capacity constraints in the transport and commercial sectors. Large investments will be required in energy and transport at a time when competing demands from other sectors, especially housing, are very great,  - 5 - domestic revenues have not been growing rapidly, and decentralization has weakened government control over investment. 18. In recognition of these difficulties, the Government's Sixth Five- Year Plan (published in December 1982 but covering the period January 1981 through December 1985) emphasizes continuation of the program of "adjustment, reform, con:.iLidation and improvement of the national economy." The plan period is essentially viewed as an interim period during which the foundation will be laid for more rapid economic development under subsequent pLans. Modest targets are set for production and income growth (4Z p.a. for gross agricultural and industrial output and for NMP), consumption is expected to grow faster than investment, prices will be kept basically stable, the budget deficit will be kept low, and a significant expansion in foreign trade is forecast, with imports growing more rapidly than exports. Priority will be given to measures improving efficiency rather than maximization of output, but the Government expects most production targets to be surpassed, as they have been in the first two years of the Plan. 19. Reform implementation will continue during the next few years. Rural reforms will be broadened and strengthened, with the production responsibility system extended to new spheres of activity, new types of organization (including joint ventures between rural and urban units) encouraged, and the administrative functions of commines separated from their economic functions. In state-owned industry, taxation will fully replace profit remittance as the primary means of raising government revenue, indus- trial administration will be streamlined, and more inefficient enterprises will be closed down. The commercial system will be reformed and cooperative and individual commerce, particularly in rural areas, will be promoted. In investment planning, the Government is striving for more effective imple- mentation of existing administrative regulations, but improving the structure and efficiency of investment will be a long and difficult process, dependent very much on progress on other aspects of reform. Measures to introduce formal economic analysis (including use of shadow prices) into investment decisions and to make producing units more economically and financially responsible for their decisions through appropriate pricing and incentive schemes are especially important. Price reform itself is recognized as being crucial, but in view of the complexities and magnitude of the changes required, the Government has decided that it cannot implement comprehensive price reform until after 1985. However, appropriate upward or downward adjustments in some of the most distorted prices are being made, and the prices of many minor commodities are being allowed to fluctuate according to market conA4tions. 20. uring the remainder of the 1980s, China's development and moderni- zation prc.,ams are expected to result in rapid growth of imports of capital and intermediate goods. Foreign capital requirements for energy development will be particularly heavy. By the late 1980s, some imports of oil are also likely to be necessary before new domestic energy production capacity is established. China's temporary current account surpluses thus are expected to change to moderate deficits over the next several years. But the overall rate of import expansion, the size of the current account deficit, and the magnitude of foreign borrowing requirements are very sensitive to assumptions about economic trends and the effectiveness of government programs. For example, an acceleration of economic growth without significant improvements  - 6 - in efficiency, especially energy efficiency, could result in large current account deficits by the end of the 1980s. In fact, a relatively high rate of economic growth of 6-7X p.a. during the rest of the 1980s (which is the growth rate used in the projections in Annex 1) will probably be feasible only if major improvements in energy efficiency continue. 21. China has a strong claim to concessionary lending because it is still one of the poorer countries in the world. However, access to concess- ionary capital to finance its development and modernization program is limited: apart from Bank Group funds, a significant amount of concessionary capital is Likely to come only from Japan and a few other bilateral donors and will probabLy average only $500-600 million a year during the 1980s. 22. For China, as for many other developing countries, the 1980s will be a difficult decade. But looking further ahead, China's economic prospects appear favorable. By 1990, most new entrants into the labor force will have received some secondary education, and the skilled manpower deficit will have been reduced. Further progress will have been made in tapping China's large energy potential and in using it more efficiently. Continuation of recent manufactured export trends should generate additional foreign exchange, enabling the Government to use foreign capital more freely and be less concerned about its terms. If the country's immense wealth of human talent, effort and discipline can be combined with policies that increase the efficiency of resource use, China will be able to achieve continuing subtantial increases in the living standards of its people. Whether this potential can be realized, however, will depend crucially on the success of the Government's program of reform and adjustment in the 1980s. PART II - BANK GROUP OPERATIONS IN CHINA 23. In view of the particular circumstances of China and the economic transition now under way, the Bank's relationship with China should have several broad objectives. Firstly, the Bank should offer China its considerable development experience and institutional knowledge. Moreover, working with the Bank represents one means for China to re-establish its position in the world community after its lengthy isolation. Secondly, the Bank should assist China in removing the major constraints on development: shortages of energy, transport infrastructure, skilled manpower and modern technology. Even more important, the Bank should help the authorities to use these and other inputs more efficientLy, by improving project analysis and investment control, as well as overall economic management and planning. Finally, the Bank should help the Government identify ways of reducing China's remaining poverty. Since the Government has been successful in meeting the basic needs of most of its people, these efforts should concentrate on the poorest rural areas. 24. Since China's change of representation in the Bank Group in May 1980, 18 projects involving lending of about $1,913 million have been approved. Four have been in education (University Development, Agricultural Education and Research, Polytechnic/TV University, and Agricultural Education II), four in energy (Daqing Oilfield Gaotaizi Reservoir Development, Zhongyuan-Wenliu Petroleum, Karamay Petroleum, and Lubuge Hydroelectric), four in agriculture (North China Plain, Heilongjiang Land Reclamation, Rubber  - 7 - Development and Rural Credit), two in transport (Three Ports and Railway), two in industry (Industrial Credit I and II), one in health (Rural Health and Medical Education), and one in technical cooperation (Technical Cooperation Credit). Annex II contains a summary statement on these loans and credits as of March 31, 1984. Economic and Sector Work 25. The Bank's economic and sector work was initially designed to provide a basis of knowledge on the development and functioning of the Chinese economy. This work resulted in completion of a nine-volume introductory economic report in June 1981. A follow-up country economic memorandum analyzing developments over the subsequent two years, was distributed to the Executive Directors in March 1983. Ir addition, the Bank has undertaken studies in several areas important for our understanding of the Chinese system, including rural finance and urban planning and management in Shanghai. The economic mission which visited China in February and April 1984 will prepare a report on long-term development issues and options. 26. Other economic work is designed to assist China in its present effort to promote efficient use of investment resources, and more generally to introduce new methods of economic management and planning. In the context of the Industrial Credit Project, an appraisal manual was developed with Bank assistance by the new financial intermediary, the China Investment Bank. The Bank is also helping the Agricultural Bank of China to develop a similar manual in connection with the Rural Credit project. A program of economic research on China's development problems, aimed at the appLication of advanced analytical techniques, is under way in collaboration with Chinese economic research institutions in the areas of enterprise incentives and analysis of structural change. 27. Sector studies will help, inter alia, to identify and prepare future investments. Some have been included in Bank Group-financed projects, e.g., agricultural development in Shandong Province under the North China Plain Project, containerization under the Three Ports Project, and agricuLtural manpower and research under the Agricultural Education and Research Project. A rural finance study provided the background for the Rural Credit Project. A health sector review looked at rural health care delivery systems and health manpower development and provided the background for the Rural Health and Medical Education Project. The agricultural research study provided the background for the proposed project. Near-Term Lending 28. Work is proceeding on a range of projects, with emphasis on improved management and efficiency as well as on technical assistance and training. Several are in the key sectors of energy and transportation. In energy, the Bank's efforts will help to increase the supply of power and fuel. Power projects will place particular emphasis on technology transfer for system design, investment planning and staff training, as well as increasing generation and transmission capacities. Future petroleum projects will, like the first three, emphasize the introduction of modern technology, staff training and studies, particularly for enhanced oil recovery, upgraded exploration, and gas development. Other operations are likely to involve  -8- development and management of large undergrour.d coal mines in Shanxi province. In transportation, work is proceeding on a second railway project and a second ports project to provide additional capacity. Bank assistance is also planned for a roads project. 29. In view of China's shortages of manpower with higher or technical education, the Bank will continue its support of education through another university development project and a teacher education project. Support for agriculture would continue through the proposed project to provide further assistance in agricultural research, and through projects to assist the Government in forestry and seeds. In industry, there will be projects for technical renovation and modernization in industries such as fertilizer, machine tools and cement as well as further lending to the China Investment Bank. A rural water supply project is also proposed. PART III - THE AGRICULTURE SECTOR 30. Agriculture in China, including crops, livestock, forestry and fisheries, provides sustenance to over one billion people; is the source of income for some 290 million farm families; and accounts for about 35Z of the country's GDP. Only about 100 million ha of China's land area of 960 mil- lion ha are arable. Farming systems are intensive, with large inputs of labor and chemical and organic fertilizers. Nearly half of the arable land is irrigated and more than half of this area grows at least two crops per year. Foodgrains occupy about 80Z of the cropland and account for 65Z of total agri- cultural output. This intensive system of production allows China to meet the basic food needs of its population (about 22% of the world's total) from less than 8% of the world's arable land. Grain yields are about 50% greater than those in other developing countries. Agricultural production is carried out in communes, state farms and privately managed plots which account for about 87, 5, and 8%, respectively, of the country's arable land and 80, 4, and 16% respectively, of the gross value of agricultural production. 31. Agricultural development has been accorded high priority since the founding of the People's Republic. With investment in agriculture averaging about 10% of total national investment, the sector grew by about 3.2Z p.a. from 1955 to 1978. Agricultural productivity per hectare of cultivated land increased considerably. Grain yields nearly doubled between 1952 and 1978; the most rapid increase occurred in the years 1965-78 when Government policy put special emphasis on achieving self-sufficiency in grain production. These gains, accomplished through combined application of abundant local labor and current and capital inputs such as chemical fertilizers, pumpsets, and mechan- ical threshers, allowed China to feed an additional 300 million people. Remarkable as this achievement was, because of the arable land constraint, total production in fact did little more than keep pace with population growth during this period. Moreover, the Government's policy of promoting increased local self-sufficiency in grains checked possible gains from crop specializa- tion and exchange and, in some extreme cases, led to serious ecological imbalances. By the late 1970's, official assessments began focusing attention on the unsatisfactory state of people's incomes and living standards, particularly in certain regions of the country.  - 9 - 32. Beginning in 1979, the Government departed from previous policy by setting targets for a relatively high growth path for personal incomes and consumption while scaling down goals for growth in GNP and investment. How to increase the production of food and other agricultural products needed to help meet this commitment to improved nutritional and living standards for China's Vast population is the challenge of the next two decades_ As an imnediate measure, the Government shifted emphasis from grain self-sufficiency to crop diversification based on comparative advantage at the local level so as to tap potential gains from specialization and exchange. Already the effect has been considerable: the total area sown to grain crops between 1979-82 declined by 6 million ha to the lowest level since 1952. At the same time, as a result of increases in per ha yields, the total output of grains increased. For the long term, the Government is in the process of refining subsector growth tar- gets and activating the means to achieve them. Major targets for the year 2000 include: (a) a 2% annual growth in grain production (rice, wheat, maize and other coarse grains) from the average 1979-81 base with the area sown to grain remaining substantially unchanged; (b) raising yields and production of such important cash crops as cotton, fruits and vegetables, the demand for which is expected to expand rapidly as incomes rise; (c) increasing forest coverage from r-he present 13% of China's land area to about 20% to meet the rising demand for forest products; (d) increasing the contribution of the livestock sector to gross value of agricultural output (GVAO) from the current figure of 15Z to 25Z with meat consumption more than doubling; and (e) expanding aquatic products output from 5 million tons to 11 million tons by supporting intensive fish cultivation, especially in freshwater ponds. 33. Key elements of the Government's strategy to achieve these growth targets are: (a) designation of certain areas as special production bases for marketable crops; (b) creation of improved and well-integrated systems of pro- duction, storage, transport, and marketing; (c) expansion of agricultural research activities and increased use of modern inputs and technology; (d) improvement of incentives to producers - e.g. encouraging household agri- cultural activities and individual enterprises through increased use of the production responsibility system, providing higher procurement prices than in the past for farm produce, and expanding the flow of credit to rural areas; (e) strengthening the agricultural extension system for rapid transfer of relevant technology to farmers; and (f) continuation of past programs for boosting agricultural output - e.g., construction of irrigation works, combined use of chemical and organic fertilizers, production of certified seeds, and development of pest management systems. 34. Improved producer incentives, a renewed emphasis on specialization, and introduction of new crop varieties are among the principal factors contri- buting to the high growth performance of the agricultural sector since 1979. GVAO has grown at an annual average rate exceeding 7Z, or more than twice the rate achieved over the previous two decades. Demand for agricultural products is expected to steadily increase over the next two decades in response to increasing per capita income and moderate population growth. China's culti- vated area will remain essentially unchanged over the period - land lost to roads, urbanization, and industrial development will be approximately offset by newly reclaimed land - so that meeting future agricultural growth require- ments will depend critically on increases in cropping intensity and yields on existing cultivated areas.  - 10 - Organization of Research 35. Following the decade-long disruntion caused by the Cultural Revolution (1966-76), China has reintroduced long-term research planning, re- established professional societies under the Chinese Association of Science and Technology (CAST), and restored the system of professional rather than political management of research organizations. The State Science and Technology Commission (SSTC) is again at the forefront of planning and coordinating China's scientific work with the help of its affiliates at the provincial level. The Chinese Academy of Sciences (CAS), the nation's premier research agency, supervises the work of over 100 research institutes conducting primarily basic research. Ministry-supervised research is another major part of the research structure. In agricultural research, the most prominent of the ministerial agencies is the Chinese Academy of Agricultural Sciences (CAAS) under the Ministry of Agriculture, Animal Husbandry and Fisheries (MAAF). The CAAS is responsible for 31 research institutes, 3 research laboratories and a central library and information service. As of June 1983, total CAAS staff numbered 8,897 with about 45% researchers, 10X administrative staff, and 45% support staff. The HAAF also supports other smaller research agencies - e.g., the China Aquatic Sciences Research Institute (Aquatic Products Bureau) and the South China Tropical Crops Research Institute (Bureau of State Farms). Similarly, other ministries sponsor specialized research: The Ministry of Forestry (HF) is the parent agency for the Academy of Forestry Sciences, the Central .Meteorological Bureau (COB) is responsible for 6 affiliated research institutes, and the Ministry of Water Resources and Electric Power (MWREP) oversees 33 affiliated research organizations with a staff of about 5,000. At the provincial level, provin- cial academies of agricultural science take the lead in conducting applied research. These academies are supervised and funded by the provincial govern- ments, but guidance in research pla3ning is provided by the CAAS or other central ministry affiliates. Nationwide there are 393 agricul:ural research institutes at the provincial Level and above (including the CAAS), with a total staff of 59,822 of which 31.5Z are researchers, 10.5% administrators, and 58Z support staff. 36. During the Cultural Revolution many major research institutions were closed and staff dispersed to the countryside. As a result of such disrup- tion, most research institutions suffer from shortages of funds, poor research facilities and equipment, and inadequately qualified staff. In some cases, laboratories and office buildings originally belonging to a research institu- tion but taken over by other government units had to be repossessed and renovated. Experimental fields and greenhouses need to be established or upgraded. In terms of equipment, many research laboratories operate with obsolete or incomplete sets of even the most essential items such as weighing scales, microscopes, pH meters, and ovens. Qualified staff, especially at the middle -nd senior levels, are in short supply. A survey of the 15 research centers included in the proposed project shows 40% with only the bachelor's degree or less; only 13Z are at the Ph.D. or equivalent level.  - 11 - Links Between Research and Extension 37. In general, research is the major function of the national, provin- cial and prefectural organizations while the counties, commnnes, and brigades are primarily responsible for extension, demonstration and training. The MAAF administers a vast extension network through its General ExteLsion Bureau in Beijing responsible for supervising a hierarchy of agencies/units reaching downward to the specialized household Level. Though China's past agricultural successes must be attributed in large part to the effective working of this system, the Government in 1979 began a major program to further upgrade exten- sion services and personnel in order to expedite transfer of new technology to farmers. Plans, now being implemented, call for replacing the county research institute in each of China's 2,300 counties with a new agrotechnical extension station which would combine under one administration previously independent services - e.g. soil testing, seed production, plant protection. Under the current production responsibility system which makes the individual household a key unit in economic decision-making, this consolidation of services is viewed as the most effective meAns of ensuring a two-way flow of information between technical/research institutions and farmers. By 1983 over 300 stations had been established. Research Priorities 38. Despite all of its handicaps in terms of facilities, equipment, and staff and its pr.longed isolation from the international research community, China's agricultural research system has made a considerable contribution to increased agricultural production. This is particularly striking in the case of rice and wheat. China's development strategy for the next two decades, however, places enormous new demands on the research system: First, current growth targets emphasize production increases not only in grains, the area in which past research achievements have been greatest, but also in other sub- sectors - cash crops, livestock, aquatic products - which have not reaped the same benefits from research. Second, in crop production, the major source of production increases is assumed to be increased yields - rather than increased acreage - which implies a major role for research in supplying new high-yield- ing, disease- and pest-resistant plant varieties. Third, research is a critical element in the Government's plans to exploit underutilized resources to boost production of livestock, aquatic products and forestry products. Major research priorities developed in response to the Government's current growth strategy are: (a) in foodgrains, development of hybrids with shorter maturation periods and improvement of seed quality and seed production technology; (b) in cash crops, development of improved varieties and better storage, processing, transport and marketing techniques; (c) in forestry, work on forest soils, vegetative propagation of improved plant materials and updating forest inventories; (d) for increased livestock production, work on breed improvements, control of animal diseases, and development of high quality protein feed; (e) in aquatic products, development of improved breeds and better storage and processing techniques; (f) in water resource development, increasing the efficiency of water usage and irrigation and drainage system design; and (g) in meteorology, development of improved weacher surveillance and prediction for major agricultural areas.  - 12 - Bank Group Lending for Agriculture 39. The Bank's strategy for lending in China's agriculture sector is to support the Government's efforts to raise agricultural production through the more efficient use of land and water resources and improvements in the support services such as research and agricultural education. The first Bank Group operation in the agricultural secror, the North China Plain Agriculture Project (Credit 1261-CHA, approved on June 15, 1982 for $60 million), will provide irrigation and drainage for 200,000 ha covering parts of nine countries in three provinces. Work on this project, the first large-scale attack on soil salinity and waterlogging in China, is proceeding vell. A second project, the Agricultural Education and Research Project (Credit 1297-CHA, approved on November 2, 1982 for $75.4 million) will support the Government's program to strengthen higher education and research in the agricultural sector by providing civil works, equipment and technical assist- ance to selected agricultural colleges and research institutes. The project is progressing on schedule. The Heilongjiang Land Reclamation Project (Loan/Credit 2261/1347-CHA, approved on April 18, 1983 for a total of $80.3 million) viiL develop 200,000 ha on state farms in Northeast China by constructing surface drains and access roads and providing various agricultural machinery and other support services to increase marketable surpluses of wheat, maize and soybeans. Implementation is proceeding well. The Rubber DeveLopment Project (Credit 1417-CHA and Special Fund Credit SF-5- -CA, approved on November 29, 1983 for $100 million), will assist in new planting and replanting of 40,000 ha of rubber in Guangdong Province. Bidding activities are under way. The Rural Credit Project (Credit 1462-CHA, approved on April 24, 1984 for $50 million) will provide funds through the Agricultural Bank of China to subborrowers in Guangxi in southern China for the development of orchards and other economic tree crops, agroprocessing, livestock, and aquaculture. The first proposed subprojects are underway and are under review. Future project possibilities include forestry, seeds developuent, irrigation and drainage, aquaculture, rural credit, and integrated area development in relatively poor regions. Project Formulation and Rationale 40. As part of its overall program to boost the level and efficiency of agricultural production, the Government is placing high priority on strength- ening the support services provided by the research, extension and education systems. The Agricultural Education and Research Project now under way, is supporting an initial phase of assistance for 11 agricultural colleges and 7 research institutes, all key institutions covering essential aspects of the agricultural sciences, forestry, fisheries, meteorology and hydrology. A project-financed Agricultural Research Study has confirmed that the main needs of the system are to improve the physical facilities for research, to develop the requisite high level manpower to increase research quality and volume, to strengthen research planning, management and program formulation, and to ensure effective communication of research results to farmers. The major rationale for Bank Group involvement in the proposed Second AgricuLtural Research Project is to assist the Government in addressing these needs. In particular, it would enable the MAAF and other agencies responsible for project implementation to gain access to improved technology and technical  - 13 - advice based on international experience_ Based on the Agricultural Research Study and consultation with the Bank Group, the Government has selected for assistance 15 research centers and ten agrotechnical extension stations. These 15 centers, located in areas with wide differences in climate and physi- cal conditions such as Inner Mongolia, Guangzhou, Xinjiang and the North China Plain, would be supported under the project. The centers would focus on research in such areas as food and cash crops, fisheries, livestock, forestry, hydrology, and meteorology. IV. THEE PROJECT 41. The original project proposal, prepared by the MAAF, was reviewed by an IDA mission in April 1983. During that and subsequent missions, discus- sions involving the MAAF, IDA staff and consultants led to several changes in the project's technical features. A Staff Appraisal Report No. 5039-CHA, dated July 23, 1984, is being distributed separately. Supplementary project data are provided in Annex III. Negotiations were held in Washington from July 9 to July 11, 1984 with a Chinese delegation led by Mr. Luo Qing of the Ministry of Finance. Project Scope and Design 42. The overall objective of the project would be to support the Government's plans to upgrade research facilities, to improve the quality and supply of researchers and technicians; to strengthen research planning, management and program formulation, and to strengthen agricultural exten- sion. The project would expand and improve 15 research centers throughout China responsible for priority research in food and cash crops, livestock, aquatic products, forestry, hydrology and meteorology. The project would also support a pilot program to strengthen the extension work of 10 county-level agrotechnical extension stations. Principal Project Features (a) project works: construction or renovation of 112,OCO sq m of laboratories, offices, farm facilities, and staff housing for the research centers; (b) scientific equipment, farm equipment and computers: scientific equipment, both standard and specialized items, farm equipment and computers for the research centers and audio-visual and analytical equipment for the extension stations; (c) library equipment, books and materials to upgrade research center library facilities; (d) local and overseas training for both center and station staff in the agricultural and related sciences, management and library science; and  - 14 - (e) technical assistance: consultant services to assist in review of center research programs, program formulation for the extension stations and future project preparation. Research Centers 43. The 15 research centers selected for funding under the second project are located in eight provinces and one municipality representing six different agro-ecological zones. Research concerns reflect Government priori- ties (paras. 38 and 40) of raising crop yields, developing underutilized resources, and improving resource/information management. Centers were selec- ted for inclusion in the project because of their potencial capability - based on past research achievements, location, importance of research programs, and relatively competent research staff - to respond rapidly to the needs for increased agricultural productivity. Most centers are currently providing, or will be expected to provide, technical and consultative services; several, in addition, are offering postgraduate degree programs and short-term training for local technicians. Assiscance provided under the project, therefore, is expected not only to increase the research output of the centers, but to enable them to function more effectively as regional/national resources and training centers in major agricultural disciplines. 44. Project Works. Civil works financed under the proposed project would cover construction and renovation of research laboratories, offices, farm experiment facilities and staff housing for 12 of the 15 proposed research centers. Funds for farm improvement - land leveling and road, irri- gation and drainage system upgrading - would be included for four of the 12 centers. By the end of the project, 61 new or renovated laboratories and ancillary facilities would lay the foundation for planned increases in research programs. 45. Scientific Equipmenc, Farm Equipment and Computers. The project would finance laboratory equipment, materials and supplies, farm equipment, and computers for the 15 proposed research centers. Laboratory items would account for about 70Z of all equipment and would include balances, centri- fuges, optical equipment, anaLytical equipment, cooling and heating equipment, and glassware and chemicals. The project would provide 5 minicomputer systems and 15 microcomputers to 9 of the 15 institutes. Computers would cover about 20Z of total equipment expenditures. The project would enable the centers to improve the quality of ongoing research and to begin about 55 new research projects. 46. Library Equipment. The project would help expand and upgrade existing research center library facilities to enable the library to assume a more pivotal role in center research activities. The project would finance essential library equipment, furniture and books. By the end of the project, center libraries would be expected to have acquired in total about 240,000 new titles. About 11 man-years of overseas training and 22 man-years of local training in library science would be used to upgrade library staff. 47. Local and Overseas Training. The project would provide a total of 119 overseas fellowships (totaling 98 man-years) and 293 in-country fellow-  - 15 - ships (totaling 275 man-years) for training in basic and applied agricultural sciences as well as library science. Twenty-five of the overseas and 53 of the in-country fellowships would be for degree training; 94 and 240 respec- tively would be for individual short-term training and group study visits. By the end of the project, about 35Z of existing research staff would receive some form of training, about 10% abroad. An assurance was obtained from the Government that candidates chosen for overseas study would be selected in accordance with criteria satisfactory to the Association and that those chosen would receive language training as needed at the language centers established under Cr. 1297-CHA (Section 3.06 of the draft Development Credit Agreement). 48. Technical Assistance. The project would finance approximately 92 man-months of consultant services to assist the research centers on a short-term basis in program development and review and to participate in con- ducting workshops and seminars. During negotiations assurances were obtained that by August 31 of each year, beginning 1985, research programs and technical assistance plans for the following year would be prepared for IDA review (Section 3.07 of the draft Development Credit Agreement). The project would also provide funds for consultants to assist in preparing a third-phase agricultural research project. Agrotechnical Extension Stations 49. In support of the Government's plan to improve extension services by establishing consolidated, county-level agrotechnical extension stations nationwide, the project would support a pilot program of assistance to ten recently-formed stations in ten different provinces/municipalities. The sta- tions are primarily responsible for conducting local field trials of research center findings, providing training for 'key" farmers, and keeping the research centers informed of any problems which may arise as new technology is adopted. Stations were selected for inclusion in the proposed project on the basis of: (a) geographic and agroclimatic distribution, (b) proximity to a provincial/municipal research academy or college as a potential source of new technology and expertise, (c) relative readiness in terms of buildings and staff to begin operations, and (d) availability of counterpart funds for the project from the county budget. Assistance provided under the project would help develop a model which, if successful, might be extended to the 2,000 counties which have yet to set up consolidated extension services. 50. Equipment. The project would finance a standard package of equip- ment for each agrotechnical extension station consisting of simple audio- visual items such as 16 mm projectors and overhead projectors and basic laboratory equipment including microscopes and soil testing instruments. The project would also provide two field vehicles to each station. 51. Local Training. On the average, each station has 85 staff members. Under the project, 750 persons or about 90Z of total staff would receive month-long training courses at local colleges in such areas as exten- sion methodology, audio-visual techniques, and use of laboratory testing instruments.  - 16 - 52. Technical Assistance and Extension Committees. The project would finance 4 man-months of consultant services to assist the 10 agrotechnical extension stations in program formulation. Ongoing advisory assistance would be provided locally by 10 Extension Committees to be established under the project as policy, planning, and coordinating units within the provincial bureaus' extension offices. The committees would be linked with the MAAF's Leading Group on Extension, a recently-created central unit responsible for coordinating the activities of the three major agricultural support services, education, research and extension. Implementation Schedule 53. The project wouLd be implemented over a five-year period beginning in 1985. Preparatory civil works are well under way. Working drawings and contracting arrangements with local construction companies would be finalized during 1984 so that construction might begin in January 1985. Bid documents for about 60% of all equipment items have been prepared and reviewed by IDA; the bid invitation for this first phase of equipment procurement would be expected to be issued bv September 1984 and evaluation and award completed early in 1985. An additional phase of equipment procurement would begin in late 1985. Equipment deliveries would begin in mid-1985 and be completed by the end of 1987. Training activities would be expected to start imediately following consultant services by mid-1985. Cost Estimates 54. The total cost of the proposed project is estimated at US$59.0 million including contingencies. The foreign exchange component is estimated at $29.6 million or 50Z of total project cost. Costs for buildings include a small element of local taxes on materials, probably less than 10Z. Imported equipment is exempt from taxes or duties. Cost estimates for civil works, goods and services are based on mid-1984 prices projected to January 1985. Civil works were estimated on the basis of preliminary designs using unit prices based on similar type of work. Equipment costs were based on suppliers' current price quotations applied to detailed equipment lists. Costs for averseas training were estimated at $15,000 per man-year for degree training and $1,000 per man-mnth for nondegree training. For in-country training, costs were estimated at $250 per man-month for degree training and $170 per man-month for nondegree training. The contingency allowance of 12.4 million includes: (a) physical contingencies ($4.1 million) estimated at 10% of base costs for civil works and 10% for equipment; and (b) expected price increases ($8.3 million) which amount to 16% of the base cost plus physical contingencies and are based on annual price escalation for goods and services of domestic and foreign origin in US dollar equivalents of 3.5% in 1984, 8% in 1985, 9% annually from 1986-88, 7.5% in 1989, and 6Z annually from 1990-95. Financing 55. Total financing required, including the charge on the use of foreign capital is $69.0 million equivalent. The proposed IDA credit would amount to $25 million (42% of total project costs) and would be used primarily for  - 17 - purchase of equipment, most of which would be imported, fellowships and technical assistance. The remaining $44.0 million would be financed by the Government. Procurement 56. Scientific equipment and computers with an estimated cost of about $18.9 million would be awarded on the basis of international competitive bidding in accordance with Bank Group Guidelines. Small items of equipment costing not more than $50,000 each and $1.9 million in total would be procured on the basis of three price quotations under procedures acceptable to IDA. Books in foreign languages and teaching materials estimated at about $0.9 milLion would be purchased directly from publishers or distributors after negotiating for the best discounts. For equipment procured through ICB, local manufacturers would be extended a 15% preference margin or the prevailing customs duties, whichever is lower. Prior IDA review of contract awards would exclude small contracts ($200,000 or less) estimated to cover less than 15Z of the value of all contracts. Goods with a value of $2.9 million, mainly small equipment items, furniture and supplies, would be financed by the Government and procured locally through local procedures. Civil works (US$29.1 million) would be procured through established local procedures which are acceptable to the Bank Group. Consultants would be employed under terms of reference agreed with IDA and in accordance with Bank Group Guidelines for consultants. Disbursements 57. Disbursements for equipment, materials and vehicles would be made at 100% of the foreign cost for direct imports and 100% of the local ex-factory cost for locally manufactured items. Disbursements for overseas training and consultant services would be made at 100% of total expenditures. All with- drawal applications would be fully documented except: (a) for expenditures under equipment, materials and vehicles contracts whose value is less than $50,000 equivalent; (b) for expenditures for overseas fellowships; and (c) for expenditures under consultants' services contracts whose value is less than $50,000 equivalent. Withdrawal applications for these expenditures would be supported by a statement of expenditures certified by the Project Director. Supporting documentation would be retained in the Project Office in Beijing and be made available to IDA supervision missions. In order to provide for efficient disbursement of the credit proceeds, a special account would be opened in U.S. dollars in the Bank of China with an initial deposit of U.S. $ equivalent of SDR 2,430,000 ($2,500,000) which represents the estimated expenditures for the most active three-month period with a margin of 20%. Applications for replenishment of the special account would be submitted quarterly, or whenever the special account is drawn down to 50Z of its initial deposit, whichever comes first. Supporting documentation would be retained in the Project Office (PO) and be available for review by supervision missions. Opening of the special account would be a condition of effectiveness (Section 5.01 of the draft Development Credit Agreement). 58. The completion date for the proposed project would be December 31, 1989 and the closing date, June 30, 1990. The disbursement schedule would be expected to be faster than the IDA regional average because bid documents for  - 18 - equipment are at an advanced stage of preparation thus making it possible to procure most items in the first three years of the project. Accounts and Audits 59. Records of civil works expenditures would be maintained by the People's Construction Bank of China which would be responsible for disbursements to construction companies engaged under the project. These records would be consolidated into a single account by the People's Construction Bank in Beijing and forwarded annually to the Project Office (PO). The PO wouLd keep records of equipment expenditures and would prepare an annual account of equipment and civil works expenditures. An assurance was obtained from the Government that the project accounts would be audited annually by independent auditors acceptable to IDA and that the audited accounts would be submitted to IDA within six months of the close of each financial year (Section 4.01(c) of the draft DeveLopment Credit Agreement). Project Management and Implementation 60. At the ministry level, the MAAF wouLd have primary responsibility for the proposed project. Interagency coordination where necessary would be provided by a recently established Project Panel comprising senior officials from the MAAF, MF, MWREP, and CMB. The Director of the MAAF's Education Bureau would serve as Project Director with overall responsibility for project execution. Day-to-day responsibility for project management would be the responsibility of an existing Project Office (PO) which is staffed from the Bureaus of Education and Science and Technology. This arrangement represents a continuation of what has proved an effective implementation structure under Cr. 1297-CHA. The PO is headed by a Project Coordinator who reports to the Director of the Education Bureau in his capacity of Project Director. The Project Coordinator is responsible for supervising the work of the PO's five sections - Liaison and Coordination, Projects, Finance, Fellowships, Equipment Procurement - which are staffed with technical experts and support personnel. For purposes of implementing the proposed project, additional personnel including a Deputy Project Coordinator have been seconded to the PO from the Science and Technology Bureau. Overall, the PO would continue the responsi- bilities assigned to it under Cr. 1297-CHA: coordinating project work with all central agencies involved; acting as chief liaison with IDA; maintaining project accounts and submitting disbursement applications to IDA; monitoring civil works design and construction; administering Local and overseas training programs; and supervising all aspects of the equipment procurement process. The PO would also be responsible for preparing a project completion report for IDA review. In equipment procurement, the PO itself would be responsible for reviewing equipment lists and preparing technical specifications. The China National Technical Import Corporation (CNTIC) would be primarily responsible for bid invitation, evaluation, and award of contracts in consultation with the PO. 61. The Project Commission (PC) established under Cr. 1297-cHA would provide technical expertise and advice to the PO, review research center staff development plans, and determine requirements for consultant services. At the institution level, the PO and the PC would be assisted by Project Implemen-  - 19 - tation Units (PIUs) which have been established by each research center and agrotechnical extension station to carry out local planning, budgeting and monitoring functions. During negotiations, an assurance was obtained from the Covernment that the P0, PC and PIUs would be established and/or maintained, with functions and responsibilities acceptable to IDA, and adequately staffed with qualified personnel during the life of the project (Section 3.01 of the draft Development Credit Agreement). Fellowship nominations made by project institutions wouLd be submitted to the PO for approval in accordance with selection criteria satisfactory to IDA. Benefits, Justification and Risks 62. The project would provide training for about a third of the research staff of 15 research centers, establish or renovate and newly equip about 60 research laboratories, and help develop model agrotechnical extension stations. Principal benefits from this assistance would be increased quaLity and volume of agricultural research, improved resource planning and manage- ment, and lessons in extension planning that might be applied to other exten- sion stations currently being established. Over the long term, these results could be expected to help China reach its agricultural growth targets and thereby raise incomes, nutritional levels and overall living standards. Research would also contribute to improved environmental protection and control by developing new technology for land use and soil and water conserva- tion and rehabilitating arid lands and forest reserves. 63. Achievement of anticipated benefits from the proposed project depends largely on the existence of effective mechanisms to identify research priorities appropriate to farmers' needs, to assign research projects making best use of resources, and to promote farmers' acceptance of new technolo- gies. In many developing countries, the inadequacy of these mechanisms has hindered the success of major research projects. In China, research and extension services have worked with notable effectiveness in the past to facilitate a two-way flow of information between research institutions and farmers. The project would support further strengthening of these linkages by helping to develop a model agrotechnical extension station designed to consol- idate previously separate extension units and to interact closely, assisted by a new project-sponsored Extension Committee, with local research and education services. Through the annual review of research programs supported under the project, project research centers would also be encouraged to sharpen their focus on practical problems, responsive to farmers' needs. While existing and planned research/extension linkages in China represent an aid rather than an impediment to project success, there is some risk that, given the complexity of China's research system, the demand for research in certain areas may be overstated leading to some unnecessary duplication of efforts. This risk of overlapping efforts would be reduced somewhat as a result of the completed Agricultural Research Study which seeks to clarify research priorities and the capabilities of the various institutes which make up the research system. The annual reviews of project centers would also help avoid duplication in their fields.  - 20 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 64. The draft Development Credit Agreement between the People's Republic of China and the Association, and the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 65. Additional conditions of effectiveness of the proposed credit would be the following: (a) The Borrower's State Council shall have approved the Development Credit Agreement; (Section 5.01(a) of the draft Development Credit Agreement); and (b) The Special Account shall have been opened (Section 5.01(b) of the draft Development Credit Agreement). Special conditions of the project are listed in Section III of Annex III. 66. 1 am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 67. I recommend that the Executive Directors approve the proposed credit. A. W. Clausen President August 6, 1984 Washington, D.C.  ANNEX I - 21 - Page 1 of 6 OltAA. 7wC S St. Or - SOCIA. 7ICAwWS sATA SlEET CR136. 7CrS air,. or Ionic OF S (EIGUT AVrRACES) 1 Walr C605T NEce" ESTUSATE) lb mo- 1970& ESTD,aTUL LOW INCOM NICOLE rumc. IB5 ASDA A? CSAA2F 1, 1 sri0 p &D^Tlid Asa