China's rural industry : structure, development, and reform

8474 F~ ~~~~~~~~ F 2fLE4 CO?Y China's Rural Industry Structure, Development, i nd Reforrm editcd by William A. Byrd and Liii Qingsong I \N'o -I J d Ba n It vwa r(} I i hibiic.li t ioi   China's Rural Industry   China's Rural Industry Structure, Development, and Reform Edited by William A. Byrd and Lin Qingsong PUBLISHED FOR THE WORLD BANK Oxford University Press  Oxford University Press OXFORD INEW YORK TORONTO DELI-Il BOMBAY CALCUTTA MADRAS KARACHI PETALING JAYA SINGAPORE HONG KONG TOKYO NAIROBI DAR ES SALAAM CAPE TOWN MELBOURNE AUCKLAND and associated companies in BERLIN IBADAN C) 1990 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press. Manufactured in the United States of America First printing February 1990 The findings, interpretations, and conclusions expressed in this study are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The maps that accompany the text have been prepared solely for the convenience of the reader; the designations and presentation of material in them do not imply the expression of any opinion whatsoever on the part of the World Bank, its affiliates, or its Board or member countries concerning the legal status of any country, territory, city, or area, or of the authorities thereof, or conceming the delimitation of its boundaries or its national affiliation. The Chinese characters used on the cover and throughout this book stand for "rural industry." Library of Congress Cataloging-in-Publication Data China's rural industry: structure, development, and reform / edited by William A. Byrd, Qingsong Lin. p. cm. Includes bibliographical references. ISBN 0-19-520822-6 1. China-Industries, Rural. 2. Industry and state-China. 3. China-Economic policy--1976- 1. Byrd, William. 11. Lin, Qingsong. HC427.92.C46553 1989 338.951 '009173'4-dc20 89-26665 CIP  Contents Preface vii Abbreviations and Terminology xi Contributors xiii I China's Rural Industry: An Introduction 3 William A. Byrd and Lin Qingsong 2 Research Design, Methodology, and Data 19 William A. Byrd and Lin Qingsong PART I. OVERVIEW 41 3 Causes of Rapid Rural Industrial Development 47 Du Haiyan 4 Development Patterns in Four Counties 63 Jan Svejnar and Josephine Woo 5 Market Interactions and Industrial Structure 85 William A. Byrd and N. Zhu 6 Development Issues and Policy Choices 112 He Jiacheng PART II. OWNERSHIP AND RELATED ISSUES 129 7 Ownership and Status Stratification 134 Luo Xiaopeng 8 Private Enterprises: Their Emergence, Rapid Growth, and Problems 172 Lin Qingsong 9 Entrepreneurship, Capital, and Ownership 189 William A. Byrd v  vi CONTENTS PART III. PERFORMANCE 219 10 Capital Formation and Utilization 222 Wang Xiaolu 11 Productive Efficiency and Employment 243 Jan Svejnar 12 Regional Imbalances 255 Wang Tuoyu PART IV. LABOR 275 13 TVP Workers' Incomes, Incentives, and Attitudes 280 Alan Gelb 14 The Rural Labor Market. 299 Meng Xin 15 Noneconomic Determinants of Workers' Incomes 323 Wu Quhui, Wang Hansheng, and Xu Xinxin PART V. THE ROLE OF COMMUNITY GOVERNMENTS 339 16 The Role of Township Govemments in Rural Industrialization 342 Song Lina and Du He 17 Why Industrialize? The Incentives for Rural Community Govemments 358 William A. Byrd and Alan Gelb PART VI. COMPARAT'IVE PERSPECTIVES 389 18 Convergence: A Comparison of Township Firms and Local State Enterprises 392 Song Lina 19 Chinese 7VPs in an International Perspective 413 Alan Gelb and Jan Svejnar References 427 Index 433  Preface The emergence and recent rapid growth of rural nonagricultural enterprises (township, village, and private enterprises-TVPS) in China is a striking and in many ways unique phenomenon. Almost ovemight, industrial activity has expanded tremendously and enterprises have proliferated. These changes have brought about large increases in rural personal incomes and significant shifts in the structure of the rural labor force. China's TVP sector has several noteworthy features. * Dynamism. Output has been doubling every three to four years, and hundreds of thousands of new firms have emerged each year on average. * Competitiveness. The sector has gained a large share of the domestic market for many industrial goods and has penetrated some export mar- kets as well. a Small scale. Although enterprises of substantial size exist, especially in the more developed areas, most firms are small concerns with only a few score employees and about Y100,000 in assets. a Diversity. There is great geographic variety in ownership, institutional arrangements, level of development, and degree of industrialization. * Outward orientation. Most output, especially of manufactured goods, is sold outside the community or locality in which it is produced. * Community orientation. Nearly all Tvps are tied in complex ways to their rural communities, and they would not consider relocating. * Factor immobility. Like the enterprises themselves, factors of production and human talent are largely immobile across localities and communi- ties. These characteristics will be analyzed in detail in this volume. Despite considerable scholarly work on China's rural industry in the 1970s and later (see chapter 2), little research of a comprehensive nature has been done. In particular, the rapid development of the TVP sector since 1984 has not been adequately documented and analyzed. In late 1985 the Institute of vii  viii PREFACE Economics of the Chinese Academy of Social Sciences (CASS) and the World Bank agreed to undertake a collaborative study of China's industrial TVP sector that would involve extensive data collection, joint fieldwork, shared data processing and analysis, international comparative research, and sponsorship of an international conference. This research followed earlier collaborative work on Chinese state-owned industrial enterprises (see Tidrick and Chen 1987). The main objectives of the project were (a) to gain a better understanding of how China's industrial TVP sector actually functions, (b) to leam about the rural communal institutional and regulatory framework within which it operates, (c) to ascertain the reasons behind the rapid growth of the sector, particularly since 1984, (d) to identify and analyze the problems and obsta- cles faced by the TVP sector as it continues to evolve and develop, (e) to evaluate on an informed basis different institutional and policy options for the future, and (f to shed light on the TVP sector from an international perspective. The main topics covered by the research included the perfor- mance of the TVP sector; the -rvp ownership system; roles and motivations of rural community authorities; the market environment and business prac- tices of TVPS; the allocation, circulation, and utilization of key factors of production; labor and wage systems; and regional variations in TVP develop- ment and rural industrialization. Details on project objectives and research methods are provided in chapter 2. This volume contains the initial research output of the project. The papers were written by Chinese and World Bank researchers on the basis of an agreed set of topics and were presented at an international conference held in Beijing, November 4--7, 1987. All of the papers were revised and edited in light of conference discussions. In addition to the two introductory chap- ters there are ten chapters by Chinese authors and seven by World Bank staff and consultants. All of the former and all but one of the latter focus on vari- ous aspects of China's industrial TVP sector. Chapter 19 provides an interna- tional perspective by looking at firms elsewhere in the world that are similar in some ways to Chinese TVPS. Other fruits of the project have been pub- lished elsewhere or have been circulated internally within China and the World Bank. Given the abundant data collected as part of the project, it is hoped that more published papers and longer works will be forth,coming as the materials and data are analyzed in greater depth. Through this collaborative research project the World Bank has gained a deeper understanding of China's industrial TVP sector. The Institute of Eco- nomics of CASS and other participating Chinese research institutions have benefited from organizing and conducting the first comprehensive, systematic research on China's TVP sector-a project that has applied a wide range of analytical techniques to a large, multifaceted, and relatively complete data set. An international perspective on Tvps has also been gained from analysis of existing literature and through field visits to other countries. Finally, this research has provided a basis for analyzing the policy issues that face the TVP  Preface ix sector and for evaluating different policy options. The project represents a further advance in collaboration between Chinese research institutions and international agencies, and we hope that it will lead to similar endeavors in the future. This collaborative research project would not have been possible without the help and active involvement of many people and organizations. We would especially like to thank the leaders and government officials of Wuxi, Jieshou, Nanhai, and Shangrao counties and the many TVP managers and workers who gave interviews and filled out questionnaires during the field investigations. Their assistance was invaluable and was willingly provided de- spite the substantial time and effort required. The research team invariably received the warmest hospitality when visiting the four counties. In addition, the help of government officials and of TVP managers and workers in Yuanping County (Shanxi Province) and Taihe County (Anhui Province) during related fieldwork is gratefully acknowledged. Officials of the TVP Bureau of the Ministry of Agriculture and the State Statistical Bureau also met with members of the research team and provided useful information on the national situation of the TVP sector. On the Chinese side, CAss and its Institute of Economics covered the bulk of financial expenditures. On the World Bank side, a grant from the World Bank research budget and operational funds from the China Division were the primary sources of financial support. A grant from the Ford Founda- tion financed international fieldwork and related costs. The financial assis- tance of all these institutions was essential for the success of this project and is acknowledged with thanks. Just as important as financing was the time of the members of the research team. In addition to CASS'S Institute of Economics and the China Division of the World Bank, the Development Research Institute of China's State Council Rural Development Research Center, the China Economic System Reform Research Institute, and the Sociology Department of Beijing Univer- sity contributed staff time. The project was organized under the overall supervision of, on the Chinese side, Liu Guoguang, vice president, CASS, and Dong Fureng, director, Insti- tute of Economics, cASs, and, on the World Bank side, first Fred Levy, se- nior economist, China Division, and subsequently Gene Tidrick, lead econo- mist, China Department. The respective team leaders for the project were Lin Qingsong, deputy director, Institute of Economics, CASS, and William Byrd, economist, Country Operations Division, China Department, World Bank. Others with major responsibilities for managing the research included He Jiacheng, chief, Development Division, Institute of Economics; Luo Xiaopeng, chief, Macroeconomics Division, Development Research Insti- tute, State Council Rural Development Research Center; and Alan Gelb, senior economist, Financial Policy Division, Country Economics Depart- ment, World Bank. In addition to the contributors to this volume, the following researchers  X PREFACE participated in field investigations and other parts of the collaborative re- search project: Gu Xiuliri, Hontg Wei, Hou Xueshan, Li Hanlin, Shu Yan, Christine Wong, Yang Xiaodong, and Yang Xiaodong. Their help with re- search design, data gathering, and other aspects of the work was invaluable. Li Lanting, Li Xiaomei, Lu Xiaoheng, Ma Changshan, Edna Monaghan, Qu Ayang, Wang Shuwen, and Zhang Yi lent administrative and related support to the project, and their help is gratefully acknowledged. The translators of the conference papers were Zhang Ciyun and others from the China Transla- tion Corporation; Zhang Xiaogang and others from the China Daily; Dai Rui, He Baoyu, Wang Lina, aond Zhang Zhixian. In addition to several contrib- utors to this volume, a number of scholars helped organize the international field visits and related background work for the project: Baburao Baviskar, David Ellerman, Saul Estrin, Derek Jones, Y. Y. Kueh, Nicholas Lardy, Lin Yifu, Virginie Perotin, and Janez Prasnikar. An international panel consist- ing of Baburao Baviskar, Ronald Dore, Benjamin King, Dwight Perkins, and Martin Weitzman participated in the international conference and contrib- uted valuable comments. Chinese participants not involved with the project who attended the conference included Du Rensheng, Wang Guichen, Bao Youdi, Chen Xihu, Hua Jianchun, Ren Long, Zhang Yi, and Zhou Qiren; their participation and comments are also greatly appreciated.  Abbreviations and Terminology Chinese terms, transliterated according to the Pinyin system, are in brackets. Abbreviations ABC Agricultural Bank of China [nongye yinhang] CASS Chinese Academy of Social Sciences GVAIO Gross value of agricultural and industrial output GVAO Gross value of agricultural output GvIO Gross value of industrial output LMF Labor-managed firm (Yugoslavia) LSE Local state enterprise [difang guoying qiyel PRS Production responsibility system (in agriculture) [baochandaohu or baogandaohu] RCC Rural credit cooperative [xinyong hezuoshe] TEC Township economic commission [xiang jingwei] TIC Township industrial corporation [xiang gongye gongsil. The township govemment organ that is directly responsible for supervising township enterprises. It has different names in different parts of the country and is sometimes combined with the township economic commission. If the two are not combined, the township industrial corporation is sub- ordinate to the township economic commission. TVCE Township and village community enterprise [xiangcun qiyel. Excludes enterprises run by production teams [shengchan duiban qiye]. TVP Rural nonstate enterprise (township, village, and private enterprise) [xiangzhen qiyel. Includes production team enterprises. y Yuan (currency unit). Recent average official exchange rates have been 2.30 yuan to the U.S. dollar in 1984, 2.94 in 1985, 3.45 in 1986, 3.72 in 1987, and 3.72 in 1988. (International Monetary Fund, International Financial Statistics.) xi  Xii ABBREVIATIONS AND TERMINOLOGY Terminology Bonds [jizil. Short-term (one to two years) financial instruments issued to workers or local residents by a-vPs or community governments; usually non- transferable. Interest on bonds may be fixed, variable with enterprise prof- its, or a combination of the two. Community government [shequ zhengfuJ. Primarily refers to township [xiang] and village [cun] community govemments but can also include production teams, sometimes termed villagers' small groups [cunmin xiaozu]. Enterprises. The types discussed are: state-owned enterprises [guoying qiye], community enterprises [zhengban qiyel, and private enterprises [minban qiye]. Under community enterprises are township enterprises [xiangban qiye], village enterprises [cunban qiye], and production team enterprises [shengchan duiban qiyel. Township and village enterprises fxiangcun qiyel are referred to as TVCES. Private enterprises include all kinds of nongovern- mental rural enterprises: cooperative firms, partnerships [lianhu qiyel, and individual proprietorships [getihu, geti qiye, or siying qiyel, which may have 100 or more employees. Extrabudgetary revenues and expenditures [yusuan wai shouzhil. Community gov- ernment incomes and expenditures that occur outside the state budget. Includes profit remittances from community enterprises, management fees paid by TVPS, ad hoc levies on the rural population, and sometimes shared above-quota tax collections that are retained by the community government. Management fees [guanli feil. Levies on TVPS by TVP bureaus, industrial- commercial administrative mrlanagement bureaus, or sometimes community governments, usually calculated as a straight percentage of sales revenue, generally in the 0.5-2.0 percent range. Units of measure. 1 mu = 0.1647 acres = 0.0667 hectares. 1 jin = 0.5 kilo- grams. Counties Surveyed Jieshou County, Anhui ]rovince Nanhai County, Guangdong P'rovince Shangrao County, Jiangxi Province Wuxi County, Jiangsu Province  Contributors The affiliations shown are those pertaining at the time of writing. William A. Byrd Country Operations Division, China Department, The World Bank Du Haiyan Institute of Economics, Chinese Academy of Social Sciences Du He Institute of Economics, Chinese Academy of Social Sciences Alan Gelb Financial Policy and Systems Division, Country Economics Department, The World Bank He Jiacheng Institute of Economics, Chinese Academy of Social Sciences Lin Qingsong Institute of Economics, Chinese Academy of Social Sciences Luo Xiaopeng Development Research Institute, State Council Rural Development Research Center Meng Xin Institute of Economics, Chinese Academy of Social Sciences Song Lina Institute of Economics, Chinese Academy of Social Sciences Jan Svejnar Department of Economics, University of Pittsburgh Wang Hansheng Department of Sociology, Beijing University Wang Tuoyu Institute of Economics, Chinese Academy of Social Sciences Wang Xiaolu China Economic System Reform Research Institute, System Reform Commission Josephine Woo Country Operations Division, China Department, The World Bank xiii  xiv CONTRIBUTORS Wu Quhui Institute of Economics, Chinese Academy of Social Sciences Xu Xinxin Department of Sociology, Beijing University N. Zhu Department of Economics, Georgetown University  China's Rural Industry   1 China's Rural Industry: An Introduction William A. Byrd and Lin Qingsong This chapter surveys the institutional framework, historical background, and present situation and importance of China's township, village, and private enterprise (TVP) sector. It is directed particularly at readers for whom the subject is new or whose knowledge about the sector is not up to date. We begin with some definitions. There are three levels of rural communi- ties in China. The township (formerly the commune), now the lowest level in China's government hierarchy, has an articulated government structure. The typical township has a population of 15,000-30,000. The village (for- merly the brigade) is not a separate level of govemment but has governmen- tal functions and a community structure. Villages generally have a population of 1,000-2,000. The production team ("villagers' small group") is purely a community structure, having lost most of its administrative functions as a result of the implementation of the production responsibility system (PRts) in agriculture in the early 1980s. The average team consists of about 30 households with a total of 150 people. The general term community govenm- ment is used to refer to authorities at all three levels. Communities in different parts of the country vary substantially in size and economic power. For example, in Nanhai County, Guangdong Province, the average township has more than 50,000 people and a gross value of industrial output (GVIO) of more than Y35 million. In Shangrao County, Jiangxi Prov- ince, by contrast, the average township has only 20,000 people and a GVIO of only Y393,000. There are some ambiguities in the delineation of the TVP sector, but the broadest definition, which is increasingly popular, encompasses all nonagri- cultural activities in rural areas and small towns other than those on state farms.' Hence the sector includes individual nonagricultural proprietorships and household firms as well as larger concems. Enterprises owned by community governments are referred to as community enterprises, and firms owned by individuals or partnerships are termed private enterprises. Community enterprises owned by townships and villages are re- 3  4 WILLIAM A. BYRD AND LIN QINGSONG ferred to as township and village community enterprises (TVCES); this category excludes production team firms, many of which have been privatized in one way or another. Occasionally township enterprises and village enterprises are discussed separately. Government organs at the township level responsible for supervising township enterprises are referred to as township industrial corpo- rations (TICS).2 The Institutional Framework Since the late 1950s China's rural economy has been organized under rural community structures that are linked to higher levels of govemment primar- ily through the Communist pairty hierarchy. Recent reforms have changed this pattem somewhat by restoring the township as the lowest level of gov- emment in rural areas and by allowing much greater scope for econornic ac- tivities and for the accumulation of assets by private individuals. Neverthe- less, community govemments retain their cohesiveness and have a significant role in the local economy. The most important characteristic of China's rural communities has been their stable membership. The household registration system has prevented large-scale rural-urban or rural-rural migration. Most people bom into a rural community stay there for their entire lives, and their children belong ro the same community. Immobility of population, of course, means immobility of human resources, although "ternporary" migration to cities and to other rural areas to seek jobs is increasingly common. Another key feature is the combination of income sharing within the com- munity with a considerable degree of financial self-reliance in relations with other communities and higher levels of government. Income sharin,g has taken various forms over time and in different areas. Before the reforms, the work-point system for production teams ensured relatively equal distribution of individual incomes within the team. Allocation of jobs in TVCES has been used to balance family incomes. Even coinmunity govemment decisions on the establishment and location of new firms have taken income-sharing con- siderations into account. Finally, the relatively equal distribution of agricul- tural land when the PRS was implemented contributed to maintaining a rela- tively equal distribution of inciDme within most rural communities. Income sharing has been weakened to some extent by the emergence and rapid growth of private economic activities and the abolition of the commune system. The degree to which commu[nities, particularly at the township level, are self-reliant has, if anything, increased since the late 1970s. Fiscal revenue- sharing systems have gradiually been extended down to the township level, particularly after the township became a separate level of administration and public finance in 1984-86. Most townships depend heavily on ex- trabudgetary revenues to meet: public expenditure needs. These revenues  China's Rural Industry: An Introduction 5 come primarily from TVPS in the form of profit remittances and management fees. (Management fees do not represent payment for services provided; rather, they are extrabudgetary levies by community governments, usually at the rate of 1-2 percent of sales revenue.) TVPs also generate the lion's share of budgetary tax revenues in the more industrially developed rural communities. Even for poorer, more backward communities, which receive fiscal subsidies, incremental financial resources depend largely on the efforts of the community government and its subordi- nate economic entities. Reforms in the local banking system have made lend- ing ceilings in a township dependent to a large extent on the generation of deposits within the township.3 Similarly, because of the immobility of human resources, rural communities must by and large rely on the human capital of their own members, although some better-off areas have been able to at- tract technical and other skilled persons by offering high wages and other benefits. Community governments have complex and often conflicting roles and re- sponsibilities. They are essentially ministates that provide a whole range of public and social services and (particularly at the township level) set policies and regulations within their jurisdictions. The instruments available to com- munity govemments include the establishment and- ownership of TVCES, deci- sions on community govemment expenditures. a considerable degree of influ- ence over the lending decisions of the local banking system in many areas, and encouragement and support of different types ot private enterprise. Com- munity govemments cannot, however, use certain policy instruments nor- mally available to states. Perhaps most important, they cannot engage di- rectly in deficit financing; that is, their expenditures may not exceed available funds (which include transfers from higher levels of govemment and from Tvps as well as the portion of locally collected taxes allotted to them). Hence they face a relatively hard budget constraint. Since they can- not effectively impose barriers against trade in goods, they cannot meaning- fully protect their enterprises from outside competition. In any case, the mar- kets represented by rural communities, even at the township level, are too tiny to be of much use to local TVPS in most industries. In addition to being local govemments, community governments are profit-oriented economic entities that might be compared with holding com- panies, investment corporattons, or headquarters of loosely controlled mul- tidivisional corporations. Although day-to-day management and business decisions are usually left to enterprise directors, community governments tend to be intimately involved in decisions on important investments, the establishment or dismantling of firms, significant changes in product lines, the appointment ot enterprise management, managerial compensation (and sometimes wages as well), and bonuses. Community govemments can also absorb risk for subordinate community enterprises and can finance invest- ments, both directly and through arranging other sources of funding such as  6 WILLtAM A. BYRD AND LtN QINGSONG bank loans. More generally, they represent their community enterprises in an often hostile administrative environment. Subsequent chapters explore the serious conflicts inherent in this dual role of community governments. But strong fiscal and employment incentives, community govemments' role in business development, and the market envi- ronment for outputs and material inputs in which TVPS function have com- bined to generate an extremely powerful push for the development of TVPS. TVPS fall into several imain categories. Traditional TVCES are under the ad- ministrative control of township or village authorities. Firms at the produc- tion team level often were not independent accounting units; instead they put their proceeds into the pot for collective distribution to their members. Many production team enterprises were privatized during or in the aftermath of the switch to the PRS. Somae township and especially village enterprises have been contracted or leased to individual management. (The contracts typically specify amounts or shares of enterprise profits to be remitted to the community government.) Private enterprises include both individual propri- etorships and partnerships owned and managed by several people; many are based on family or kinship ties. Close personal relationships with community government officials are almost invariably necessary for sizable private enter- prises if they are to navigate in the complicated administrative environment. Only a few TVPs are owned cooperatively by all or most of their workers, but in small communities where the employees of the main enterprise make up a significant proportion of the population, community ownership has some of the characteristics of cooperative ownership. Finally, there is an increas- ing number of joint ventures between different forms of ownership, within the TVP sector as well as with urban state and collective enterprises. Joint ventures involving foreign partners are still rare, but especially in Guang- dong Province, many l'vPs have cooperative relationships with foreign firms. Recent Changes in Rural Institutions China's rural communities have been profoundly affected by the reforms that have taken place since the late 1970s. The most important of these was the PRS, which gave individual households partial rights to land that had previ- ously been vested in the production teams. The PRs also greatly reduced the direct supervision of agricultural production by community govemments and effectively abolished the system of community work-points and collective dis- tribution of income in favor of a return to primarily household-based genera- tion of personal income. A closely related reform was the abolition of the communes and their replacement by townships, now the lowest level of gov- ernment in rural areas. An exirremely important policy change for the TVP sector was the relaxation of restrictions on the large-scale expansion of non- agricultural activities by rural communities. Although these restrictions were  China's Rural Industry: An Introduction 7 unevenly implemented and were never entirely effective in some parts of the country, their removal in 1978 created a political and administrative climate conducive to the rapid development of TVPS. Similarly, the removal of re- strictions against household nonagricultural activities and, more recently, against sizable private firms in rural areas stimulated a great spurt of TVP de- velopment. Finally, the PRS brought about a crucial change in TVP wage systems. In the past many TVCES paid salaries directly to the production teams of which workers were members-workers received work-points for their labor in TVPS and then participated in collective income distribution by the teams at year's end. This greatly diluted incentives, since the fruits of hard work were shared not only with other workers in the enterprise but also with all members of the production team. Even in TVPS that paid workers directly, fixed time wages were the norm. All this changed with the PRS. TVPS shifted to direct payment of workers, and performance-based pay-in the form of enterprise- based work-points, year-end dividends, profit-related bonuses, and, above all, piece-rate wages-became the norm. The impact on incentives and effi- ciency in the TVP sector should not be underrated. Regional Variations in Institutional Structure Despite its basically uniform organizational framework, China's TVP sector shows a remarkable degree of local and regional institutional diversity. This diversity is partly attributable to differences in exogenous factors-the tradi- tional resource base (especially human capital and agricultural land), proxim- ity to markets and to urban industry, pre-1949 industrial and commercial tra- ditions, delivery requirements for grain and other crops under the agricultural planning system, and prereform rural industrialization. But local authorities and community leaders have sometimes had a great influence on rural indus- trialization and local institutional structure. In the early 1970s Wuxi County authorities supported the continued development of commune and brigade industries counter to the prevailing national trend. Jiangsu Province (where Wuxi is located) several times successfully ignored national campaigns to shut down and "readjust" commune and brigade enterprises and to concentrate on agriculture. This resistance helped give it a commanding lead in rural in- dustrialization on the eve of reforms in the late 1970s. Nanhai County au- thorities allowed and protected "underground" private firms even in the prereform period. But in many counties local authorities did not effectively promote development of TVPS until very late, which handicapped the rural industrialization effort. Areas in which diversity is evident include the ownership of TVPS, the de- gree to which TVPs are under hierarchical control by townships, the policies of local and community authorities regarding TVPS, and the level of develop- ment and industrialization.  8 WILLIAM A. BYRD AND LIN QINGSONG OWNERSHIP. In the four counties in which intensive fieldwork was conducted-Wuxi, Jieshou, Nanhai, and Shangrao-striking differences were encountered (see chapters 2, 4, and 7). The 1985 share of private enter- prises in the GVIO of TVPs ranged from 3 percent in Wuxi to 51 percent in Jieshou, as against a national average of 17 percent. The relative weight of township and village enterprises also varied considerably; the share of town- ship enterprises was nearly three times that of village enterprises in Jieshou and close to twice as high in Shangrao, but in Wuxi the shares were nearly equal. Only in Nanhai did production team firms account for a substantial part of GVIO in 1985. CONTROL BY TOWNSHIPS. Villages and teams in Nanhai have been rela- tively independent and in particular have had freedom to develop their own firms. Wuxi has a highly integrated hierarchical structure of rural conmmuni- ties, and the township rules with a strong hand. Hence, even though village enterprises there are quantitatively important, they are effectively parl: of the township industrial sector. The degree of administrative control over wages, the prevalence of profit- related bonuses, the methods of appointment of TVP managers, the allocation of labor, and a host of othaer practices can differ greatly among regions, locali- ties, and even communities wiithin a locality. These differences can have an important effect on the behavior and performance of TvPs even though in most of them wages and managerial pay are significantly related to enterprise performance. LOCAL POLICIES. Counties in southern Guangdong Province variously promote large township enterprises, village and production team firms, pri- vate firms, and cooperative ventures with outside and foreign entrepreneurs. Wuxi's administrative climate makes it virtually impossible for large indus- trial private enterprises to emerge. Jieshou County authorities personally sponsor some of the more successful private entrepreneurs, supporting them with bank loans and administrative help. LEVEL OF DEVELOPMENT. The richest and most industrialized counties, such as Wuxi and Nanhai, have already largely achieved the equivalent of middle-income status. The most backward areas-an order of magnitude poorer and often hundreds or thousands of times less industrialized-are no- where near the takeoff sl:age. The industrialized counties face issues of how to organize, finance, and develop the TVP sector most efficiently; the less de- veloped counties are striving merely to get nonagricultural development started. These differences are discussed in more detail in chapter 12. The diversity of the TVP sector in different parts of China means that re- forms and policy measures that: work well in some areas may be unsuccessful  China's Rural Industry: An Introduction 9 in others. For example, many poor areas have tumed to industrialization based on private enterprise because they recognize that for a variety of reasons the traditional community enterprise system (epitomized by Wuxi) cannot succeed in backward areas. From another perspective, Wuxi's restrictions against private enterprises may not carry terribly high economic costs there because the local TVCE sector is so efficient, but such policies would be disas- trous in areas where TVCES perform poorly. Historical Background Before 1949 China was a poor and backward agricultural country, and most of its rural areas had only a few small workshops and some handicraft indus- tries. In 1949 the output value of such household sideline production totaled about Y1. 16 billion in fixed 1957 prices. After the founding of the People's Republic of China, sideline production developed rapidly. By 1954 more than 10 million Chinese farmers had taken part-time jobs in the commercial- ized handicraft industry, which yielded a total output value of Y2.2 billion that year. During 1955-57 China launched a large-scale agricultural cooperative movement. Farmers who were working part-time in handicraft industry, as well as individual handicraft workers, were organized into specialized sideline production teams under agricultural producers' cooperatives. The excessive emphasis that some cooperatives placed on agricultural production caused their sideline production to stagnate. Remedial measures by the authorities later helped to restore and develop sideline production in cooperatives. In 1957 the total output value of sideline production in China's rural areas reached Y2.29 billion, about 4.3 percent of the total value of agricultural output. Commune and brigade enterprises, the predecessors of the TVPS, sub- sequently began to emerge and develop on the basis of collective sideline pro- duction. In 1958 the people's commune movement swept across the vast rural areas of China. Dizzy with the "victory of transformation" (nationalization and so- cialization of the economy), China adopted the Great Leap Forward strategy and attempted to reach the "paradise" of communism by building the "golden bridge" of people's communes. Under the slogan of "mobilizing the whole nation to make great efforts to develop industry," rural people's communes established a large number of commune and brigade enterprises by siphoning manpower, funds, and materials from brigades and teams originally engaged in sideline production and by annexing more than 30,000 handicraft cooper- atives that had previously operated in small towns. By the end of 1958 com- mune and brigade enterprises in China employed 18 million people and yielded a total output value of Y6 billion. In the following year that figure catapulted to Y10 billion.  10 WILLIAM A. BYRD AN4D LIN QINGSONG The communization campaign not only dampened farmers' enthusiasm for production but also precipitated a crisis for the national economy. In 1960 the Central Committee of the Communist party and the central govemnment called for readjustment of the national economy and began to check the com- munization campaign. As a result, many commune and brigade enterprises discontinued operations. Some were later returned to production teams, some were changed into handicraft cooperatives, and the rest were closed down. In 1961 the total output value of commune and brigade enterprises nosedived to Y1.98 billion, and the figure dropped further to Y790 million in 1962 and Y410 million in 1963. During the following six years these enter- prises saw a small rebound in their output value, but they remained basically stagnant. Development of comnmune and brigade enterprises resumed during the lat- ter part of the Cultural Revolution period (1966-76). At the North China Agricultural Conference (August-October 1970) the State Council called for efforts to speed up agricultural mechanization. Acting in the spirit of th e con- ference, rural areas began to launch factories to produce agricultural machin- ery and farm tools. Meartwhile, many urban plants, absorbed in the Cultural Revolution, had stopped work. Market shortages became worse with each passing day, and some rural communities took advantage of this opportunity to set up firms. Although such enterprises were then widely regarded as the "tail of capitalism" and faced all kinds of restrictions and attacks, they still witnessed remarkable developrnent. Their output value climbed from Y9.25 billion in 1970 to Y27.2 billion in 1976, an average annual growth rate of 25.7 percent. After 1976, when the Gang of Four was overthrown, commune and brigade enterprises developed further. In 1978 there were more than 1.52 million such enterprises, and their output value reached Y49.3 billion. Gov- ernments at all levels set up aodministrative bureaus to strengthen manage- ment of these enterprises. In 1978 the Third Plenum oif the Eleventh Central Committee of the Chi- nese Communist party declared that "commune and brigade enterprises should strive for great development" and that As long as it is in conformity with the principle of rational economic development, commune and brigade enterprises should gradually engage in the processing of all farm and sideline products that are suitable for rural processing. Urban factories should shift part of their processing of products and parts and components that are suitable for rural processing to com- mune and brigade enterprises and help equip the latter with necessary equipment and technology . . . In addition, the state should adopt a pol- icy of allowing tax breaks or tax exemptions for commune and brigade enterprises in the light of their situation.4 In 1981, to reduce discrimination against commune and brigade enter, prises, the State Council issued regulations which reaffirmed that "commune  China's Rural Industry: An Introduction 11 and brigade enterprises already constitute an important part of the rural econ- omy, and their growth is in conformity with the comprehensive development of the rural economy."5 In 1983 the Central Committee further confirmed that "commune and brigade enterprises also belong to the cooperative econ- omy, and great efforts must be made to continue to consolidate and develop such enterprises."6 A series of such policies and regulations brought commune and brigade enterprises into a new stage of healthy, stable, and sustained high-speed growth. During 1980-83 their total output value jumped from Y65.7 billion to Y101.7 billion; the annual growth rate was 13.5-19.2 percent. The Central Committee Circular on Agricultural Work of January 1, 1984, stated that, in addition to supporting actively the development of commune and brigade enterprises, govemments at all levels should "encourage peasants to invest in or buy shares of all types of enterprises and encourage collectives and peasants to pool their funds and jointly set up various kinds of enterprises by following the principle of voluntary participation and mutual benefit." In a March 1984 circular the Central Committee and the State Council agreed to rename commune and brigade enterprises TVPS, since the people's com- munes had been abolished and a large number of partnerships and individual enterprises had come into being.7 The circular also declared, Vigorous efforts should be made to guide TVPS in terms of orientation of development and to exercise administration over them in accordance with the relevant state policies to ensure their healthy development. TVPS should receive the same treatment as state enterprises and are entitled to all necessary state aid. Since then China's TvPs have flourished more than ever. In 1984 the out- put value of TVPS (including TVCES, partnerships, and individual enterprises) totaled Y171 billion, and the figure rose to Y273 billion in 1985 and Y354 billion in 1986. Private enterprises grew faster than TVCES, service activities grew more rapidly than industry, and TVPS in economically backward areas made quicker progress than those in economically advanced areas (see chap- ter 12). Present Situation and Importance The growth of the TVP sector since the late 1970s and particularly since 1983 has been spectacular, whether measured by output, employment, assets, or profits (table 1-1). Nominal gross output value increased at an average annual rate of 24 percent in 1978-86, and GVIO grew by more than 23 percent a year in real terms. (Reliable price deflators for TVP services are not available.) Employment outside agriculture in rural areas grew by nearly 13 percent a year in 1978-86, for a total increase of 124 percent, or more than 30 million people.8 Data on TVCES (see table 1-1) indicate that their wage bills, assets,  Table 1-1. Growth of the TVP Sector, 1980-86 (average annual percentage change) Item 1978-80 1980-83 1983-86 1984 1985 1986 1978-86 Value of ouitput Gross (nominal), 16.5 16.5 37.1 34.9 46.8 30.2 23.8 Industrial (nominal) n.a. 15.0 42.3 40.5 50.7 36.0 27.9' Industrial (real)' 16.8 14.9 37.6 38.5 43.0 31.6 23.4 Employment Nonagricultural 7.3 5.4 24.2 38.5 20.1 15.1 12.7 Rural industrial 5.8 1.3 15.9 20.0 13.2 14.5 7.7 Number of firms All TVCEs -3.3 -1 9 4.1 22.5 -4.9 -3.3 -0.1 Industrial TVCEs -2.3 -0.6 5.7 21.1 -5.1 2.7 1.3 Financial indicators (TVCEs only) r..> Assets8 19.2 13.4 25.8 20.9 30.5 26.2 19.4 Profits, 15.0 2.7 13.5 13.4 31.6 -2.1 9.7 Taxes' 7.9 31.3 32.7 34.4 37.2 26.9 25.7 Bank loans n.a. 20.4 61.1 102.6 40.3 47.0 39.2b Gross revenues 19.4 15.9 33.8 36.6 44.1 21.7 23.2 Employment 3.0 2.5 10.7 18.9 7.9 5.8 5.7 Wage bill 17.4 13.8 26.5 36.1 26.0 17.9 19.3 Average wage 14.0 10.9 14.2 14.5 16.7 11.4 12.9 Average wage, state enterprises 11.7 2.5 17.8 19.5 17.3 16.6 10.3 n.a. Not available. a. Gross output value of rural nonagricultural materials-producing sectors (industry, construction, transport, and commerce). b. 1980-86 average, c. Gross output value in current prices was deflated by the implicit price deflator for Chinese industry as a whole (excluding village and subvi!lage midustrial firmns). This was done because sector-specific price deflators are unreliable and result in even higher "real" growth rates. d. Value of fixed assets net of depreciation plus physical working capital. e. Gross profits before payment of income tax but net of indirect taxes. f. Includes both direct and indirect taxes. Sources: State Statistical Bureau (1982, 1985a, 1986a, 1986b, 1987a, 1987c, 1987d).  China's Rural Industry: An Introduction 13 profits, and tax payments all increased rapidly in line with the growth of out- put and employment. Profits, however, rose much more slowly than other indicators, suggesting that profitability declined in the TVCE sector. Average wages in TVCES rose 13 percent a year in 1978-86, considerably faster than the rate of inflation. The stagnant number of TVCE firms probably conceals significant activity in establishments and exits of firms. Moreover, a tremen- dous number of new enterprises has been created in the private sector in re- cent years; the number of private enterprises reportedly reached 10.7 million at the end of 1985. Growth in China's TVP sector has been highly uneven over time, as can be seen from table 1-1. There was a sharp acceleration in 1983-86 compared with 1980-83; real GVIO rose by 15 percent a year in 1980-83 and by 38 percent a year in 1983-86. Growth in 1984 and especially in 1985 was sub- stantially higher than in 1986, and in 1987 the TVP sector again boomed. TVP growth performance has also been unbalanced geographically, with some areas, particularly coastal regions, experiencing more rapid growth than backward, less industrialized interior provinces. Between 1980 and 1985 the nominal value of TVP industrial output rose by 415 percent in Zhejiang Prov- ince but by only 37 percent in Nei Monggol (Inner Mongolia). In eight prov- inces the increase was greater than 250 percent; in seven it was below 120 percent. Many, although not all, of the fast growers were more industrialized from the beginning, and a number of provinces that had lagged in rural indus- trialization slid further into relative backwardness. Moreover, provincial growth rates mask great differences within provinces. Table 1-2 provides a more detailed picture of the growth of industrial out- put for TVPS under different forms of ownership. The GVIO of TVCES has in- creased at an average annual rate of more than 20 percent in real terms; it grew especially rapidly in 1984-85. The GVIO of private enterprises (includ- ing production team firms) has grown spectacularly from a tiny base in 1980. This may in part reflect the incorporation of economic activities that had previously escaped the statistical network, but it mostly represents real growth. Differential growth rates have led to substantial changes in the com- position of TVP industrial output by form of ownership (table 1-2). The shares of township and village enterprises have declined moderately, whereas the share of private enterprises nearly quadrupled between 1980 and 1986. As a result of the rapid growth documented above, which implies a dou- bling in size every three years or less, the overall dimensions of the TVP sector have been changing substantially. For example, measured by real GVIO, Chi- na's industrial TVP sector was roughly four times as large in 1986 as in 1980. Thus, any attempt to describe its size and characteristics can be only a snap- shot of a rapidly changing situation. Table 1-3 shows the dramatic changes in the composition of gross social product in China's rural areas. The share of crop cultivation dropped from almost half in 1980 to less than one-third in 1986; the share of other agricul-  14 WILLIAM A. BYRD AND LIN QINGSONG Table 1-2. Growth and Ownership Structure of TVP Industry, 1980-86 Item 1980-83 1983-86 1984 1985 1986 1980-86 Average annual growth of GVIO (percent) TVCEs Nominal 13.8 35.3 38.2 38.8 29.1 24.1 Real 11.4 33.5 38.0 34.3 28.4 21.9 Private enterprises' Nominal 32.8 93.9 65.4 159.3 69.9 60.5 Real (estimated) 32.7 87.7 63.1 146.1 64.7 57.8 All TVPs Nominal 15.0 42.3 40.5 50.7 36.0 27.9 Real 12.8 40.2 40.2 45.8 34.7 25.7 1980 1983 1984 1985 1986 Nominal GVIO, by ownership (percentage of total) Township enterprises 52.8 54.5 50.5 45.1 43.5 Village enterprises 41.8 37.1 39.6 37.9 35.2 Production team enterprises -b _b Partnerships 5.4 8.4 4.6 8.8 21.3 Individual enterprises 1J 5.3 8.2 J Note: Gvio, gross value of industrial output. Figures are available for nominal total rural GVIo, village enterprises' GVIO, and village-and-below GVIO. From these the GVIOs of township enter- prises and private enterprises (including production team enterprises) can be calculated. Figures for GVIO of township enterprises in 1980 constant prices are also available. Real values for other components of rural GVIO were calculated by using the implicit price deflator for China's total GVIO, excluding village-and-below GVIO, for which no deflators are available. a. Includes production teamn enterprises. b. Many production team enterprises were privatized in the early 1980s. Any remaining ones were probably included in the category of partnerships (cooperative firms). c. Derived from separate statistics compiled by the Ministry of Agriculture, which show higher absolute levels of industrial output value of private enterprises than do the figures of the State Statistical Bureau. Sources: State Statistical Bureau (1.982, 1984, 1985a, 1986a, 1986b, 1987a, 1987c, 1987d); China Economic Yearbook Editorial Board (1981, 1985). tural activities remained more or less constant; and industry rose from less than one-fifth to more than 30 percent, nearly equal to the share of crop cultivation. In 1987 rural GVIO exceeded the value of agricultural output for the first time. Construction, transport, and commerce rose modestly as a share of the total. Shifts in the structure of the rural labor force have been less dramatic but nevertheless significant, as is shown in table 1-4. Cultivation declined sharply in 1984 and 1985, but much of the slack was taken up by agricultural sidelines, which more than doubled their share. The proportion of the rural labor force engaged in industrial activities rose only modestly, from 6 percent  China's Rural Industry: An Introduction 15 Table 1-3. Composition of Rural Gross Social Product, 1980-86 Item 1980 1983 1984 1985 1986 Total rural gross social product (billions of yuan)a 279.2 412.4 506.8 634.0 755.4 Share of total (percent) Agriculture (cultivation) 49.3 47.1 43.3 36.0 33.1 Forestry, livestock, fishery, and sidelines 19.5 19.6 20.1 21.1 20.0 Industry 19.5 20.0 22.9 27.6 31.5 Construction, transport, and commerce 11.7 13.3 13.7 15.3 15.4 a. In current prices. Includes gross output value of the five materials-producing sectors (agri- culture, industry, construction, transport, and commerce), excluding nonmaterial services. Sources: State Statistical Bureau (1986b, 1987a, 1987c). in 1980 to 8 percent in 1986. Construction, transport, and commerce more than tripled their share, however, rising from less than 2 percent in 1980 to more than 6 percent in 1986. Overall, the movement of labor out of agri- culture in rural areas made a strong beginning in 1984-86, but four-fifths of the rural labor force is still engaged in agriculture and sideline activities. The TVP sector has become increasingly significant in generating fiscal rev- enues in rural areas and providing a growing proportion of the personal in- comes of rural inhabitants. Total tax payments by TVPS in 1985 (including profit tax and indirect taxes) were nearly Y14 billion. These taxes accounted for only 7.7 percent of total national budgetary revenue but for most tax col- lected in rural areas. (The stagnant agriculture tax generated only Y4 billion in 1985.) Tax payments by TVPS have been rising sharply as earlier exemp- tions are gradually phased out, although special treatment remains common and private enterprises, in particular, can evade much of their tax liability. The TVP sector remains more lightly taxed than the state sector (the differ- ence is considerably reduced if extrabudgetary remittances of TVps are taken into account), but its tax burden is much heavier than that of agriculture. Extrabudgetary remittances by TVPS to community governments are impor- tant, especially in the more developed areas. In 1985 TVCES turned over Y6.8 billion in profits to their supervisory community governments, not including management fees, which may have totaled Y2 billion or more. In compari- son, total tax payments by TVCES were Y10.9 billion. More than half of TVCE remittances to community governments were plowed back into reinvestment, but substantial amounts were used for support to agricultural production, for social services, and for community government payrolls, and a considerable amount (Y620 million) was distributed to community members. In 1985 the total of wages and distributions to community members by TVCES was Y31 billion. This represented Y40-Y50 per member of the rural population, or about 15 percent of average per capita rural income. Although  16 WILLIAM A. BYRD AND LIN QINGSONG Table 1-4. The Structure of the Rural Labor Force, 1980-86 Item 1980 1983 1984 1985 1986 Total rural labor force (millions of people) 318.4 346.9 359.7 370.7 379.9 Share of total (percent) Agriculture (cultivation) 82.8 81.5 70.9 67.3 Forestry, livestock, fishery, 80.2 and sidelines' 6.4 6.4 13.3 14.6 Industry 6.1 5.8 6.7 7.4 8.3 Construction, transport, and commerce' 1.6 2.5 4.4 5.5 6.1 Other' 3.1 3.8 4.7 5.2 5.4 a. At year-end. Does not include labor force of state farms. b. The industrial portion of the sidelines labor force has been included under industry. c. Commerce includes storage, catering, and other related personal services. d. Includes real estate admiinistration, public utilities, residential services, consulting, public health, education, sports, social services, scientific research, technical services, banking and insurance, government, Cormmunist party, and the like. Sources: State Statistical Bureau (1986b, 1987a, 1987d). private enterprises would add significantly to the figures, the role of the TVP sector in the generation of rural personal income is less important than its role in production. This is partly because the ratios of net to gross output value are much smaller in industry and, especially, in commerce than in agri- culture. Furthermore, m,ost TVCE profits go into investment and thus affect personal incomes only indirectly. There is great potential, however, for the TVP sector to become more important in the direct generation of income as well as employment. The TVP sector has become the most dynamic part of Chinese industry. It is an important actor in most industries and is dominant in a few. Its share in total national GVIO has risen sharply, from only 3 percent in 1971 (when the movement to promote commune and brigade enterprises was getting under way) to 9 percent on the eve of the reforms in 1978, to 12 percent in 1983, and then, rising very rapidly, to more than 21 percent in 1986. The TVP sector has roughly doubled its share of China's industrial output every five years, starting from a tiny base in the early 1970s but continuing to do so even as the base grew large in the 1980s. The share of the state sector declined from more than four-fifths in 1975 to three-quarters in 1980 to only about five-eighthis in 1986, while that of urban nonstate firms rose moderately. All segments of the TVP sector have seen their shares in Chinese industry as a whole increase, but private enterprises have shown the most spectacular growth in recent years; they rose from negligible levels in the late 1970s to account for nearly 5 percent of China's GVIO in 1986.  China's Rural Industry: An Introduction 17 TVPS are active in all but one of the fourteen principal subsectors of Chi- nese industry; only in petroleum is their share truly negligible. Otherwise the subsectoral coverage is surprisingly broad, and the pattern holds even in a more disaggregated industrial breakdown. The most important TVCE indus- trial subsectors are machinery, construction materials, textiles, chemicals, and food processing (in that order); together they account for nearly three- quarters of TVCE GVIO. Only for construction materials is the share far higher than for Chinese industry as a whole; shares of other subsectors tend to be no higher or moderately lower than for industry as a whole. TVP shares in the output of particular industrial products vary greatly, but again the coverage is broad. In 1986 TVPS produced 75 percent of all bricks made in China, 22 percent of the cement, 26 percent of the coal, 26 percent of the silk, 47 percent of the silk textiles, 27 percent of the edible vegetable oil, and 27 percent of the machine-made paper and cardboard. In addition, TVps accounted for about 30 percent of the national output of phosphate fer- tilizer and for high proportions of other industrial inputs into agriculture, such as farm tools and implements. Their share of production of metal- cutting machine tools is only about 4 percent, but they are increasingly im- portant in electronics (where they accounted for 6 percent of total national output value in 1986), in many consumer durables, and even in some more sophisticated industries. Only certain basic process industries with substantial economies of scale (for example, petroleum refining) are impervious to entry by TVPS. In sum, China's Tvps have already become a pillar of the country's econ- omy and are playing a decisive role in rural industrialization and national eco- nomic modernization. The TVP sector represents the only hope for moving rural labor into productive employment outside agriculture, particulaTly as long as restrictions against permanent migration into large cities are kept in place. Without TvP development, much of the gain in efficiency from agri- cultural reforms would not have been realized. At the same time, the TVP sector is increasingly important in Chinese industry as a whole, both in meet- ing rising demand for industrial goods and as a competitor and partner of state industry. Reforms and experiments with varied forms of ownership and management in TvPs have already had a great demonstration effect on urban economic reforms and will continue to do so. From a longer-term point of view, without the transfer of large numbers of farmers to TVPS, China's rural industrialization and national economic modemization will be impossible. The development of TVps has brought mil- lions of farmers into the competitive commodity economy, and this new en- vironment will instill new values and moral concepts. All these factors will have a far-reaching impact on China's modernization. But the development of TVPS will also inevitably bring a series of new problems for overall strategy and for the management of national economic development. Obviously,  18 WILLIAM A. BYRD AND LIN QINGSONG thorough and systematic study of problems in the development and opera- tions of TVPS and their influence on the economy as a whole is needed. This book represents a significant effort toward this end, on the basis of extensive new research. Notes 1. A few TVPS are involved in agricultural production. The definition excludes agricultural production by individual rural households. 2. TICS go under a variety of names, including township industrial corporations, township industry and trade corporations, and township industrial associations. Their functions often overlap those of township economic commissions, which have as one of their main tasks supervi- sion of local industrial development. In some areas the economic commission is directly responsi- ble for township enterprises, and there is no separate TIC. 3. Although there are large (positive or negative) imbalances between the two in many locali- ties, incremental loans to a large extent depend on incremental generation of deposits. 4. "Resolution on Several Questions about Speeding up Agricultural Development," (draft), December 1978. 5. "Several Regulations on Commune and Brigade Enterprises in Implementing the Principle of National Economic Readjustment." 6. "Several Questions on Current Rural Economic Policies." 7. Circular transmitting the "Report on Exploring New Areas for Development of Commune and Brigade Enterprises," submitted by the Ministry of Agriculture and the Party group of the ministry. 8. These figures refer to the nonagricultural, materials-producing sectors in rural areas (indus- try, construction, transport, and commerce) and exclude nonmaterial services. They may con- siderably underestimate TVP ernployment because they appear to leave out large numbers of part- time and seasonal TVP employees and some workers in small private enterprises. Statistics compiled by the Ministry of Agriculture indicate that the total number of TvP employees rose from 22 million in 1978 to 77 million in 1980, an increase of 55 million.  2 Research Design, Methodology, and Data William A. Byrd and Lin Qingsong The recent rapid growth, present significance, and great potential of China's TVP sector as outlined in chapter 1 make it an important subject for research. Accordingly, in 1986-87 the Institute of Economics of the Chinese Academy of Social Sciences (CASS) and the World Bank engaged in a major collabora- tive research project on TVPS. This chapter briefly reviews previous research on China's TVP sector and provides background on how the collaborative re- search project was initiated and carried out. It then looks at the project's objectives and design, including the approach to data gathering, sample se- lection, and methodologies. It concludes with a description and analysis of the data set. Background China's TVPS (formerly termed commune and brigade enterprises) were the subject of considerable research by foreign scholars in the 1970s. Most of this work, however, dealt with the broader subject of rural small-scale industry, including county-run collective and state enterprises. The main full-length works that emerged from this period were Perkins and others (1977), Sigurdson (1977), and Wong (1979). Of other contributions to the literature on Chinese rural industrialization, Riskin (1978a, 1978b) might be singled out. Research on rural small-scale industry by foreign economists was hin- dered in the 1970s by lack of access to data, but some scholars were able to conduct careful, detailed fieldwork. Foreign scholarly interest in the TVP sector continued into the 1980s, al- though paradoxically the volume of published work has been smaller. Much of the research has appeared in compendiums and journal articles or as part of broader works on rural development in China, including Enos (1984), Griffin and Griffin (1984), and Ho (1986). The World Bank has also done some work on China's TVP sector, most notably as part of an economic study of Gansu Province (World Bank 1988). The astonishing growth of the TVP 19  20 WILLIAM A. BYRD AND LIN QINGSONG sector in 1984-85 attracted a great deal of foreign interest, this time more explicitly focused on TVPS, but it has not yet yielded much published output. Chinese economists have been interested in the TVP sector and in small- scale rural industry for an even longer time. How to view these enterprises, and what were the appropriatre policies toward them, were important topics of discussion as early as the Great Leap Forward in 1958. The second wave of TVP development in the early 1970s also engendered considerable research and discussion. But most ChLinese research on TVPs before the early 1980s centered on such political and ideological issues as whether rapid develop- ment of TVPS was compatible with socialism and whether it would harm the administrative division of labor between agriculture and industry. Starting in the early ]i980s Chinese research on the TVP sector turned from the question of whether the sector should be allowed to develop to how and in what ways it should develop. This shift focused work on more concrete economic questions. Some Chinese research on the TVP sector in the 1980s has been careful, detailed, and high in quality; an example is the work of the Development Research Institute of the State Council Rural Development Research Center.' Zhou Qiren and associates have engaged in detailed re- search on a number of aspects of TVP development (for example, Zhoua Qiren and Huang Zhuangjun 1987). Another recent publication, based in part on preliminary testing and research done for this project, is Institute of Econom- ics, CASS (1987). Considerablle research has also been conducted on private enterprises in rural areas. Finally, there has been an extraordinary increase in the available statistical and other source materials on the TVP sector. The Township and Village En- terprise Bureau of the Ministry of Agriculture publishes useful information, as do the State Statistical Bureau (1986b, 1987c, and 1987d) and the Minis- try of Agriculture (1986a and 1986b). Despite the considerable volume of past and ongoing research on the TVP sector, until recently little if any comprehensive work had concentrated spe- cifically on TVPS, as distinguished from rural small-scale industry in general, county-run state enterprises, aind so on. Moreover, most of the work, particu- larly by foreign scholars, was not based on systematic data gathering. Most important, the rapid development of the TVP sector since 1984 has simply outrun past and even much current research. Thus, both the Chinese and the World Bank considered that there was room for a wide-ranging, compre- hensive, policy-orientect collaborative project on TVPS. In September 1985 discussions began on the possibility of a collaborative project on the TvP sector. Detailed work on project and questionnaire design was done in late 1985 and early 1986. A research team was assembled that included representatives of such Chinese institutions as the Development Re- search Institute of the State Council Rural Development Research Center, the Economic System Reform Research Institute, and the Sociology Depart- ment of Beijing University. In early 1986 two counties, Wuxi and Jieshou,  Research Design, Methodology, and Data 21 were selected as sites for in-depth fieldwork and enterprise samples. Chinese researchers visited each county to discuss logistical and administrative ar- rangements and to select sample firms. In March 1987 Chinese researchers conducted a pilot investigation, including a test of the draft questionnaires, in Yuanping County, Shanxi Province. The questionnaires were subse- quently revised. In June and July 1986 Chinese and World Bank researchers conducted in- depth fieldwork in Wuxi and Jieshou counties, and some members of the re- search team also spent several days doing fieldwork in Taihe County. The second main joint fieldwork effort took place in February and March 1987 in Nanhai and Shangrao counties. In October and November 1986 some of the Chinese researchers visited cooperative, labor-managed, and other small- scale firms in India, Yugoslavia, Great Britain, the United States, and Hong Kong and held discussions with scholars during the visits. This trip and sup- porting work were financed by a grant from the Ford Foundation. In the course of the trip discussions on data processing and analysis for the fieldwork in China were held at the World Bank in Washington, D.C. The work of processing and analyzing data and preparing research papers began in earnest in April 1987. The International Conference on China's Township and Village Industry, at which the papers in this volume were pre- sented, was held in Beijing, November 4-7, 1987. It was attended by the research team, other representatives of CASs and the World Bank, invited Chinese participants from government agencies and research institutions, and a panel of prominent foreign experts familiar with topics relevant to Chi- na's TVP sector. Project Objectives and Design The first main objective of the research project was to gain a better, more complete, and more solidly grounded understanding of how China's dynamic TvP sector actually functions. Its institutional and organizational structure needed to be thoroughly explored and analyzed. The second objective was to ascertain and assess the reasons behind the rapid growth of the TVP sector, particularly since the early 1980s. The third objective was to identify and analyze the problems and obstacles faced by the TVP sector as it continues to develop, especially institutional features of the TVP sector and problems in the administrative and regulatory environment that TVPS face. The fourth objective was to evaluate future institutional and policy op- tions. Although the research was not intended to generate concrete policy recommendations, it was hoped that the project would improve understand- ing of policy issues in the TVP sector so that future policy choices can be firmly grounded. The fifth objective was to gain an intemational perspective on China's TVP  22 WILLIAM A. BYRD AND LIN QINGSONG sector through review of relevant literature as well as through visits to foreign enterprises by Chinese researchers. To the extent appropriate, the research was to incorporate methodologies used in similar studies in other parts of the world. In line with its policy orientation, it was hoped that the project could be completed relatively quickly and that at least preliminary findings would be forthcoming in a short time. These objectives, as well as logistical and budgetary considerations, influ- enced the design of the research work. The project required considerable in- depth fieldwork that had to be accomplished in a relatively short tirme and with limited resources. C(areful, methodical gathering of both quantitative and qualitative data that coulcl be used in formal statistical analysis was re- quired. With these considerations in mind, it was decided to limit the in- depth fieldwork to four counties, each representative of a different pattem of TVP development (see chapters 4 and 7). The four counties were paired to allow relatively convenient visits on two separate trips, with the joint re- search team spending ten to fourteen days in each. Logistical considerations hence dictated a focus on China proper; the northeast, northwest, and south- west were not included, and even the northern part of China proper received relatively less coverage (see map 2-I).2 The limited number of localities selected made it possible to conduct thor- ough, comprehensive fieldwork in each, on a relatively large sample of enter- prises (an average of thirty in each county), with multiple questionnaires of substantial length. Extensive interviews were held with enterprises ancl with related local institutions. To ensure maximum reliability of the inforrrmation gathered, the bulk of the questionnaires had to be administered in person, and responses had to be double-checked in the field to rectify errors and omis- sions. A relatively large team olf researchers (more than twenty) was required to accomplish this work in a short time. Tradeoffs among the various objectives and constraints affected the sample of enterprises chosen. The bulk of sample firms had to be substantial corncems that kept reasonably good accounts and had at least several years of history to allow a time series. But since a crucial objective was to study the full range of ownership and management patterns in the TVP sector, oversampling of nontraditional forms of ownership and management was considered highly desirable. A difficulty here was that most private enterprises were founded only recently (1984 or later), are relatively small, and tend to keep poor ac- counts. The sampling of different forms of ownership was further complicated by the great differences in ownership patterns among counties. The samnples in two of the four counties contained virtually no private enterprises. The samples in the other two counties included a significant number of private enterprises, but at some sacrifice of the longevity of the firms: 31 percent of sample firms and 53 percent of private enterprises in the sample were re- portedly established in 1984-86. The sample of TVPS was limited to industrial firms, mainly in manufactur-  Research Design, Methodology, and Data 23 Map 2.1 The Location of the Sample Counties 1100 / 1200 LIAONING .- D.P.R. OF NEI M NGOL iI JNSH KRA ji HEBEUI * o SHANIUAJINX Gz ANGXI GA OSHANDONGG -3 4 ~ ANA Gogzo *NU Township Pingzhou HEA JINS gXZEIAG 7..)