San José State University
Department of Economics
Thayer Watkins
Silicon Valley
& Tornado Alley

Economic Development in China After Mao

The Four Modernizations

Although the Four Modernizations are associated with Deng Xiaoping this program was articulated by Zhou Enlai in 1975. The Communist Party from Lenin was committed to industrialization but Maoism took a different attitude; i.e., that modernization was a road to capitalistic restoration. Zhou Enlai was suffering from cancer and was politically too weak to confront Mao's wife, Jiang Qing, on this issue. But Deng Xiaoping was more combative. In the fall of 1975 he published three documents which were to be the basis for the Four Modernizations. The Gang of Four labeled these documents Three Poisonous Weeds and made Deng the target of the Antirightist Deviationist Wind Campaign. In his New Year's Message of 1976 Mao warned against emphasizing material progress. By April Deng had been dismissed from all his official posts.

By October of 1976 Mao was dead and the Gang of Four under arrest. Deng was rehabilitated and the Four Modernizations promoted. By August 1977 Deng was reinstated and he delivered a speech to the Eleventh Party Congress stressing the Four Modernizations of:

In practical terms this meant electricity in the rural areas, industrial automation, a new economic outlook, and greatly enhanced defense strength.

The Ten Year Plan

In February of 1978 Chairman Hua Guofeng revealed a ten year plan for the period 1976-1985. The Plan involved 120 projects consisting of:

Iron and Steel10 complexes
Nonferrous Metals9 complexes
Oil and Gas10 fields
Coal8 mines
Electricity30 power stations
Railroad7 trunk lines
Water Transportation5 harbors
The Ten Year Plan

The turmoil that Mao and the Maoists imposed upon China can be seen reflected in the statistics on iron and steel production. In 1960 steel production was almost 19 million tons, up from 1.35 tons in 1952. But the Great Leap Forward caused production to fall back to 8 million tons in 1961. After recovering and reaching a peak of 25.5 million tons in 1973, leadership of the Gang of Four during the Cultural Revolution brought a fall to 21 million tons in 1976, a net gain of only 10 percent over the 1960 figure.

The Ten-Year Plan called for an increase in steel production to 60 million tons per year by 1985 and to 180 million by 1999. The leadership didn't expect to achieve such gains by homegrown development; instead they entered into a $14 billion contract with a German steel company to build a major steel complex in eastern Hebei province and a $2 billion contract with a Japanese firm to build another on the outskirts of Shanghai. Other plants were also to be built.

Major petroleum discoveries were made in the 1960s and the Ten-Year Plan called for investing $60 billion in ten new oil and gas fields. China relies very heavily on coal for energy and the Ten-Year Plan called for doubling coal production to 900 million tons per year through the creation of eight new mines. China at the time of the formulation of the Ten-Year Plan was relatively weak in the use of electrical power. The Ten-Year Plan called for the development of 20 hydroelectric power plants and 10 other types of power plants.

In 1977 China was still a predominantly agricultural economy but the government had not supported institutional and technological measures to increase productivity and, as a consequence, per capita production of grains had remained at 1955 levels. The Ten-Year Plan called for a $33 billion investment in the mechanization of agriculture and improvement of irrigation. One important side-effect of this program is that if it worked there would be 100 million workers who would be released from farming and for whom the government would have to make provisions for in other sectors. The institutional structure was modified to encourage higher production through individual initiative and more flexible production arrangements. Commune farmers were encouraged to pursue sidelines of production on small plots.

The Ten-Year Plan called for the modernization of its military but with China already spending 7 to 10 percent of its GDP on the military in 1978 a modernization called for in the Plan would cost an enormous $300 billion.

Capital was definitely scarce at the beginning of the Ten-Year Plan. It was estimated that the Ten-Year Plan goals would cost between $350 billion and $630 billion in 1978 prices. The government had been relying very heavily upon the revenue it gained by requiring the sale of agricultural products to the State at artificially low prices and selling them at a higher price. But this policy did not encourage productivity in agriculture and agricultural development stagnated. The percapita output of grains, as stated previously, was not any higher in 1977 than it was in 1955. The State Enterprises, instead of being a source of profit for the State, required large subsidies necessitating the milking of agriculture.

For the Ten-Year Plan the government sought other sources of revenues. One source it tried to develop was tourism. Hotels and other tourist facilities were built and there was some success, but notably the vast majority of the tourists were overseas Chinese.

In desperation China turned to encouraging foreign investment as a way of financing the development projects. German and Japanese companies provided the capital for major projects in return for a share of the benefits.

China also reversed its policy concerning foreign loans. In December of 1978 China arranged a $1.2 billion loan from a consortium of British banks and by mid-April China had received or arranged for $10 billion in foreign loans.

China in 1978 had a serious shortage of technical personnel. The Cultural Revolution had disrupted the system of higher education for about twelve years. Estimates of the total size of the technical and scientific workforce in China in the 1970's were in the neighborhood of sixty thousand. For a nation of one billion people sixty thousand is a miniscule amount. By the early 1980's the scientific and technical workforce had grown to about 400,000, a substantial increase but still a quite small amount for a nation of over one billion people. There is even more of a shortage of middle level technicians and skilled workers.

Problems of Implementation of the Ten-Year Plan

In the first year of the Ten-Year Plan the government began 100,000 projects which would cost in total $40 billion. The total investment the government committed itself to in 1978 was about 36 percent of China's GDP. It was not possible to sustain this level of investment financially or technically.

The $2 billion steel complex that a Japanese company was to built in the vicinity of Shanghai ran into major difficulties. The site chosen by the Chinese government planners was in swamp land on the edge of the Chang Jiang (Yangtze River). The swampy character of the land required hundreds of thousands of steel pilings be driven into the ground before the steel complex could be built. After construction started in 1979 it was discovered that the electrical power supply in the area was inadequate for the steel plant and the site was not accessible by the ships that were to bring iron ore from Australia and Brazil. The first stage of the projected $2 billion complex cost $5 billion. The government stopped construction on the second stage leaving the Japanese firm which had agreed to build the steel plant in financial difficulty.

The bigger ($14 billion) steel complex the Chinese government contracted to be built in Hebei by a German company was also in difficulty. The site was found to be at risk for earthquakes. Another planned development was located in the city of Wuhan. It was to process raw steel into higher quality steel but it was found to require so much electricity that if it operated there would be no power left for anything else in the province. But even if there had been adequate power the area could not supply an adequate amount of the raw steel for its operation.

Revision/Retrenchment of the Ten Year Plan

By 1979 even official government sources like the newspaper Renmin Ribao (People's Daily) acknowledged that the initial phase of the Ten Year Plan was seriously flawed by lack of proper preparation which led to enormous wastes. Hua Guofeng announced in June of 1979 a period of adjustment, reconstruction, consolidation and improvement for the economy. Priorities were shifted, away from heavy industry toward agriculture and light industry. Planned investment in agriculture was increased from $26 billion to $59 billion. The Ten-Year Plan target for steel production was cut from 60 million tons to 45 million. Light manufacturing industries, particularly those that could earn foreign currency, were to be encouraged. Construction as well as heavy industry was cut back. But the cuts were not uniform, across-the-board cuts. The production goals for several key sectors were as follows:

SectorOutput1985 Targets
(million tons)
(million tons)
(million tons)
(million tons)
The Ten Year Plan Revisions

Altogether 348 major projects in heavy industry were halted, including specifically projects in steel, machine production and chemicals. Over four thousand smaller such projects were also stopped. China's shortage of investment capital was worsened by the high cost of its 1979 invasion of Viet Nam.

Institutional and Structural Reorganization

Generally the 1980's brought a relaxation of control by the Communist Party. Communes and enterprises were allowed to sell over-quota production at prices above the government-set prices. Workers were allowed more freedom in making decisions concerning their own welfare. Enterprises were allowed to borrow funds and in special area seek foreign joint-venture partners. Five Special Economic Zones (Guangdong and Fujian in the south and Beijing, Tianjin in the north, and Shanghai), with power to negotiate arrangements with foreign businesses, were created China tried to model this institutional change on the Yugoslavian and Romanian experiences which were thought at that time to have successfully melded socialist and capitalist systems.

With a new awareness of the productivity of capital rates of return became a concern. The figures differed considerably among industries. The profit margin is not the same as the rate of return on capital but profit margins give some indication of the variation among industries. In petroleum the profit margin was 40 percent while in coal mining it was only one percent.

With relaxed control more internal migration has developed and China began to experience an overt unemployment problem. Previously any surplus labor in the cities was forced to go to the countryside. This may have solved the problem of people being without a job but to put people in unproductive or underproductive jobs may simply have hidden the unemployment.

The real key to rapid economic growth in China was the Town-and-Village Enterprise system. Towns and villages were allowed to enter into agreements with companies from Hong Kong in which the Hong Kong firms supplied the capital, management and marketing for an enterprise. The town or village retained 51 percent ownership so there was no issue of foreign control. This was a system that could be expanded indefinitely and solved the problem of funding and the supply of management and marketing expertise.

Based upon China Without Mao by Immanuel C-Y Hsu 1983

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