China - Socialist economic development (Vol. 5 of 9) : Annex D: Challenges and achievements in industry

Report No. 3391-CHA E ; p 1 China: Socialist Economic Development (In Nine Volumes) 3391 Annex D: Challenges and Achievements in lndustn Vol. 5 June 1, 1981 (reprinted March 10, 1982) East Asia and Pacific Regional Office FOR OFFICIAL USE ONLY Document of the 4brid Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS The Chinese currency is called Renminbi (RMB). It is denominated in yuan (Y). Each yuan is subdivided: 1 yuan = 10 jiao = 100 fen Exchange rates used in this report are as follows: 1977 $1.00 = Y 1.828 1978 $1.00 = Y 1.661 1979 $1.00 = Y 1.541 WEIGHTS AND MEASURES Chinese statistics are usually in metric units; in addition, mu and jin are often used: 1 mu = 0.1647 acres = 0.0667 hectares (ha) 1 jin = 0.5 kg FISCAL YEAR January 1 - December 31 TRANSLITERATION The Pinyin system is used in this report.  C46400/J79061/D3159/66 FOR OFFICIAL USE ONLY CHINA: SOCIALIST ECONOMIC DEVELOPMENT AN-LNEX D C'HALL,.NGES A.Nm ACHI -VEMENTTS IN INDUSTRY Table of Contents Page No. 1. PAST GROWTH AND RECENT OUTPUT . . . . . . . . . . . . . . . . . . I A. Past Growth ... . . . . . . . . . . . . . . . . . . . . . . I B. Gross Output by Branch of Industry. . . . . . . . . . . . . . 7 C. Selected International Comparisons. . . . . . . . . . . . . . 11 2. STRUCTURE AND ORGANIZATION ... . . . . .... . . . . . . . . 19 A. Overview by Broad Classes of Enterprises . . . . . . . . . . 19 3. Organizacion and Management . . . . . . . . . . . . . . . . . 24 Central Control and Coordination. . . . . . . . . . . . . . 24 External Supervision of Enterprises . . . . . . . . . . . . 26 Management of Znterprises . . . . . . . . . . . . . . . . . ^z9 Enterprise Plans and Incentives . . . . . . . . . . . . . . 30 C. Size and Regional Pattern of Industry . . . . . . . . . . . . 33 Scale of Production ... . . . . ..... . . . . . . . . 33 Regional Patterns of Industrial Development . . . . . . . . 36 3. RECENT CHANGES IN POLICY ................... . 39 A. Reassessment of Past Policies . . . . . . . . . . . . . . . 39 B. New Policy Framework . . . . . . . . . . . . . . . . . . . . 40 C. Implementation of the New Policies . . . . . . . . . . . . . 41 4. STRENGTHS, WEAKNESSES AND PROBLEMS . . . . . . . . . . . . . . . 50 A. The Chinese Authorities' Appraisal . . . . . . . . . . . . . 50 B. Mission Findings. . . . . . . . . . . . . . . . . . . . . . . 52 Efficiency in Production . . . . . . . . . . . . . . . . . 53 Product Designs, Production Technology and Labor Skills . . 55 Pollution and Environmental Impact. . . . . . . . . . . . . 57 Management and Decision Making . . . . . . . . . . . . . . 58 The Price and "Signal" System . . . . . . . . . . . . . . 58 Compensating Strengths . . . . . . . . . . . . . . . . . . 59 5. ISSUES AND CHALLENGES . . . . . . . . . . . . . . . . . . . . . 60 A. Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . 60 B. Energy Conservation .61 C. Raw Materials for Consumer Goods. . . . . . . . . . . . . . . 64 D. Manufactured Exports. . . . . . . . . . . . . . . . . . . . . 67 E. Technology Acquisition . . . . . . . . . . . . . . . . . . . 68 F. Restructuring . . . . . . . . . . . . . . . . . . . . . . . . 70 G. Reforms and Improved Management . . . . . . . . . . . . . . . 70 H. Price and Tax Reforms .71 This document has a restricted distribution and may be used by recipienus only in the performance of their offcia duties. Itl contents may not otherwise be disclosed without World Bank authorization.  C46400/J79075/D3159/67 - ii - Page No. TABLES IN TEXT 1.1 Aggregate Indicators of Industrial Output Growth, 1952-79 . . . 2 1.2 Leading Industrial Products: Physical Output and Growth Rates, for Selected Years and Periods (1952-79) . . . . . . . . 6 1.3 Trends in Gross Output, Fixed Assets and Labor Force in Industry, and Associated Indices, 1952-79 . . . . . . . . . . 8 1.4 Value and Growth of Output, 1979, by Branch of Industry . . . . . 9 1.5 Percentage Shares and Per Capita Value of GDP from Industry and Manufacturing: China (1979) and Other Economies (1978) . 12 1.6 Selected Physical Comparisons of Industrial Output in China and India .... . . . . . . . . . . . . . . . . . . . . 14 1.7 Percentage Composition of Gross Industrial Output: China and Other Countries ... . . . . . . . . . . . . . . . . 16 1.8 Percentage Composition of Gross Manufacturing Output . . . . . . 18 2.1 Aggregate Industry Statistics by Ownership, 1979 . . . . . . . . 20 2.2 Economy-wide Statistics for Light and Heavy Industry, 1979 . 21 2.3 Employment, Wage Bill and Average Wage per Worker in State Enterprises, 1979 . . . . . . . . . . . . . . . . . . . 23 2.4 Motor Vehicle Production in the Most Important Plants, 1979 . . . 35 2.5 Geographical Pattern of Gross Industrial Output, 1979 . . . . . . 37 3.1 Manufactured Export Trends, 1976-79 . . . . . . . . . . . . . . . 44 3.2 Trends in Investment in Capital Construction by Industry, 1977-79 ............................ 46  -46400/J89422/D3159/02 1. PAST GROWTH AND RECENT OUTPUT A. Past Growth 1.01 China's manufacturing industries /1 have made enormous advances since 1949. Today, though not without weaknesses, they have impressive capabilities and turn out a remarkable range of products. Even taking into account the high priority given them and the costs of their development, their advances are a huge achievement. 1.02 According to official estimates, gross industrial output has in- creased in real terms more than forty-fold since 1949, implying an average growth rate of over 13% p.a. If the 1949-52 recovery period is omitted, the rate for 1952-79 is 11.1% p.a. Especially swift growth was achieved in the early years of reconstruction and recovery (nearly 35% p.a. from 1949-52) and on through the First Five-Year Plan (18% p.a. from 1952-57). Thereafter, growth slowed; but in 1957-79, despite all setbacks, gross output continued to grow at nearly 10% p.a. (Table 1.1). Results for 1980 show an increase of 8.7% over the 1979 figure. Net output in current prices has grown more slowly than gross output in constant prices,/2 at rates averaging 8.6% in 1957-79 and a little less since 1970. But in real terms this growth may have paralleled that of gross output, since there has been a slow downward drift /1 Statistics for manufacturing cannot be completely separated from those for a wider group of activities that come under the heading of "industry" in China. This heading covers manufacturing, electric power, mining and mineral extraction, logging and transport of timber, and the many services provided to workers and staff within Chinese industrial enterprises. Chinese data for industry (and for gross industrial output) cover all state enterprises and, in addition, urban collective and commune-owned rural enterprises that meet three tests: they have at least ten workers (though they may be handicraft cooperatives); they have buildings and equipment; and they operate at least three months per year. (However, in rare instances significant enterprises are counted that do not strictly meet all these tests.) Output from rural industrial enterprises owned by production brigades or production teams, and from commune enterprises too small or seasonal to meet these tests, is counted in agricultural output, while manufacturing output on a very small scale within such units as households or service enterprises (e.g., tailoring, repairs, or the smallest food processing operations) generally goes unrecorded. /2 It is not clear conceptually how to deflate net output when a substantial share consists of indirect taxes (para. 1.05 below) . Adding to this difficulty, for years prior to 1970, the only available information on price trends comes from implicit deflators and thus depends on the reliability of the gross output series. Price indices and deflation are discussed further in the Appendix to the Hain Report.  C46400/J78712/D1383/45 -2- Table 1.1: AGGREGATE INDICATORS OF INDUSTRIAL OUTPUT GROWTH, 1952-79 Net output in Index number of gross output current prices in constant prices (Y billion) (1949 = 100) Excluding Including Heavy Light brigade brigade industry industry Total industry industry Year 1952 329.7 214.6 245.0 11.7 12.2 1957 1,024.3 393.2 560.0 25.4 26.0 1965 2,144.9 739.2 1,108.8 50.4 n.a. 1970 4,252.9 1,104.9 1,925.8 77.0 78.3 1975 6,896.6 1,602.0 2,980.3 112.7 n.a. 1977 7,922.2 1,875.0 3,450.7 119.7 n.a. 1978 9,158.1 2,077.5 3,916.5 138.5 143.5 1979 9,863.3 2,276.9 4,249.4 155.0 160.9 Average Growth Rates (% p.a.) 1952-79 13.4 9.1 11.1 10.0 10.0 1952-57 25.4 12.9 18.0 16.8 16.3 1957-79 10.8 8.3 9.6 8.6 8.6 1957-65 9.7 8.2 8.9 8.9 n.a. 1965-75 12.4 8.0 ;0.4 8.4 n.a. 1975-79 9.4 9.2 9.3 8.3 n.a. 1957-70 11.6 8.3 10.0 8.9 8.9 1970-79 9.8 8.4 9.2 8.1 8.3 Sources: Main Report, Appendix Table A.4, and Statistical Annex, Table A 2.3.  C46400/J78361/D3159/03 -3- of industrial prices since 1957, with some being reduced while others have remained unchanged./l 1.03 The broad picture of rapid and remarkable growth suggested by these series is confirmed by all available evidence. However, there may be mild upward biases in the growth rates given in the official series, since Chinese prices and accounting conventions give heavier weight to fast growing sectors. Prices of industrial products are almost certainly higher on average, by international comparative standards, for the newer products whose output has grown fast than for old ones whose output has grown more slowly; and there are problems in creating links in the series where products change. Accounting conventions used to compute gross output are almost certainly biased toward greater multiple counting of output in fast-growing industries such as iron and steel, machine-building, petroleum and chemicals, particularly as a result of the links between them;/2 but there is much less multiple counting in slow-growing, older industries such as food and agricultural processing. Indeed, by contrast to the practice in many other countries, gross output does not include the value of the raw materials used in such activities as grain milling, slaughtering, and cotton ginning, except in the largest urban enterprises. 1.04 A further problem is that over time, and as a result of changing priorities and technologies, the output mix has shifted, as has the relation- ship between final output and intermediate inputs such as steel, coal or electricity. In some years more than others, a significant share of output has remained unused or unuseable and gone into stockpile buildup or has been otherwise wasted (construction projects never finished, excessive consumption of materials, etc.). Thus, trends in useful final output may have diverged from those in measured output. In addition, because gross output has been treated as a leading target at all levels, many reporting units, faced with choices in their product mix (specification and variety of output), produc- tion methods, accounting of their costs, and the valuation of unstandardized /1 Industrial prices have declined slightly on average, by less than 1%, since 1970; for a large sample of large and medium-sized state enter- prises, according to the State Statistical Bureau (SSB), gross output in current prices was Y 198.4 billion in 1979, compared to Y 199.7 billion in the 1970 accounting prices more commonly used. Judging by data for enterprises visited, the principal price declines have occurred in machinery prices; in a few enterprises producing machinery, gross output was more than 15% lower valued in current prices than in 1970 prices. /2 For example, the iron that is turned into steel, or the oil that is turned into petrochemicals and then synthetic fiber, is counted at each processing stage.  C46400/J79029/D3159/04 -4- products (which is often done on a "cost plus" basis), have probably tended to make choices that have raised their measured gross output performance; and the frequency and statistical weight of these biased choices has almost certainly fluctuated over time as policies have changed./i 1.05 Net output, too, is a peculiar measure./2 About one fourth consists of labor costs, which were held down from 1957-77 by granting almost no wage increases (in contrast to increases before and since). Because, with minor exceptions, there is no charge for use of capital, most of the remainder (over two thirds of net output) is indirect taxes and planned profits designed to serve as indirect taxes, based on prices that do not reflect demand and supply but make profits seem higher in some industries than in others. Compared to market economies, these price markups and indirect taxes at successive stages of manufacturing are relatively high, while price markups and indirect taxes in commerce are generally small, with the effect that much of the national income shows up as net output in industry rather than services. Low prices of foodstuffs and most services in China add to the relatively heavy weight of industry. As a result of these price and tax patterns, trends in net output are not a reliable indicator of trends in real output (though they are sensitive to trends in cost efficiency). Indeed, Western concepts used in national accounting and in aggregating output were never designed for such a price and tax system, so inferences based on these concepts may be misleading. 1.06 The achievements of China's industries, and their rapid expansion from 1952 through 1979, are vividly illustrated by increases in the physical /1 Recent growth rates of gross output are subiect to some of the same diffi- culties. For example, there 'has been a rapid growth of petroleum-based products, such as synthetic fibers and plastics, that are assigned high prices and are counted at successive stages of processing. However, useful output has almost certainly increased as a share of the total in 1979 and 1980. /2 Net output is computed on the basis of an accounting identity, as the sum of taxes, profits, wages, interest, and management fees. Depreciation is not included. The wages include those of people primarily engaged in services within the enterprise (e.g., health personnel, teachers, nursery attendants, cooks, and full-time students), whose output is not included in gross output. Other welfare service expenditures (including pensions) are treated in some circumstances like other costs, and in others they come out of profits.  C46400/J90796/D3159/05 -5-. output of particular products (Table 1.2)./1 In nearly all products shown, the rate of growth has been lower since 1957 than in 1952-57, but most branches of industry have achieved vigorous expansion since then, despite the setbacks of the Great Leap Forward (1958-60), the withdrawal of Soviet assistance (1960), and the years of intermittent turmoil associated with the Cultural Revolution (1966-76). In fact, though the post-1966 events disrupted output growth in some years not included in the table, their negative effects on physical output growth are not obvious in the table itself. 1.07 The neglect of consumer goods industries over long periods, now being criticized in restrospect, is also not obvious from the table. By standards of more advanced countries, per capita production of most consumer items remains very low, but considerable gains have been made, as can be seen from the swift advances in light consumer engineering products such as bicycles, radios and watches. The gains made in these and other consumer goods in 1979 and 1980 have been spectacular, however, both absolutely and by comparison with all earlier periods. Meanwhile, in 1980 output of seve- ral types of capital goods was sharply reduced to match demand, while production of fossil fuels declined (paras. 3.07-3.13). /1 The dimensions of China's output in some other light industry products in 1979 are given below: Garments .................. 744 million units Woolen blankets ........... 6.9 million units Footwear .................. 503.3 million pairs (incl. 116 million of leather and 180 million plastic) Canned food ............... 0.501 million tons Dairy products ............ 0.054 Soap ..................... 0.753 Cigarettes ................ 651 billion units (1980 = 760 bln units) Clocks .................... 19.78 million Wines & alcoholic bev. 3.1 tons of which beer 0.52 (1980 = 0.688 mln tons) Leather hides (oxhide equivalent)/a .............. 30.8 million units of which pigskins ....... 44.22 /a Two pigskins or six sheep or goat skins are counted as equivalent to one oxhide. Sources: Ministry of Light Industry, State Economic Commission, and communiques on plan fulfillment in 1979 and 1980.  c~~~~~~~~~~~~~~~~~~~~~~~~~~I 1 e~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 7  C46400/J78984/D3159/06 -7- 1.08 Throughout the existence of the People