Rural industry china's new engine for development

by Tu Nan

Agriculture in China has made impressive progress in the past five years. Gross product value of agriculture increased at an average rate of 10 per cent per annum while in the 28 years from 1953 through 1980, it averaged only 3.5 per cent. In the Sixth Five Year Plan per caput net income of farmers more than doubled, from 190 yuan to about 400 yuan, surpassing the total gain of net income in the previous 28 years.

New policies and strategy, accumulated investment, and more input, coupled with more advanced science and technology all played an important part in the process. In the policy field, the contracted responsibility system combined with better pricing and marketing policies and decentralization all contributed to better results.

Yet in recent years, a new star is rising rapidly on the horizon and fast gaining central stage - rural industry. In the five years from 1979 to 1983, its gross product value increased an average of 17 per cent a year, surpassing the annual growth rate of national industrial development of 14 per cent. In 1984 and 1985, rural industry advanced at the astounding rate of 40 per cent and 45 per cent respectively. It is estimated that the total value of its output, at 330 billion yuan in 1986, surpassed that of agriculture, at 304 billion yuan, for the first time in history. This marked a significant new phase in China's rural development.

The background. The conspicuous features of the environment for China's development and modernization are the country's huge population, limited agricultural resources and a rather low starting base. China is far below world average in the use of some essential agricultural inputs. Arable land per caput is less than a third of world average. Per caput water and forest resources are only one-quarter and one-fifth of the world average respectively. Yet such limited resources have to support a huge rural population of over 800 million, 95 per cent of which is crowded into the southeastern half of continental China. Chinese peasants had long been seeking an opportunity to break out of their poverty and take part in the process of development and modernization. The family farming system introduced some eight years ago released the long pent-up enthusiasm of Chinese peasants for production and prosperity. Agricultural efficiency was thereby enormously improved, but redundant labour, that which agriculture could not absorb quickly, became common in the countryside and now accounts for about half the rural labour force. It is only natural that these workers are eager for new undertakings. As the policy of invigorating the domestic economy got under way, the surplus labour force in the countryside immediately seized new opportunities to launch all kinds of rural enterprises. On the other hand, inadequate infrastructure, especially the transport bottleneck, also makes it necessary to process large amounts of additional agro-products on-site in the countryside. Rising living standards also create demand for more diversified consumer goods that the public sector cannot fully meet.

In some countries modernization has more or less followed the pattern of advanced industrial cities and backward agricultural countryside accompanied by the migration of population from the latter into the former. For a huge country like China, this is neither possible nor desirable, in either financial or physical terms. Since the founding of the People's Republic, the bulk of state investment went to cities, industry, and transport. The result has been impressive but far from satisfactory. Until eight years ago differences between the cities and the countryside were actually widening. Under the old economic system one might say that the cities and the countryside of China had been running on separate tracks. In encouraging the development of rural industry and achieving admirable results, China seems to have found its own particular road to industrialization, modernization, and urbanization suited to its specific conditions.

The miracle. There are now 22 big cities with non-agricultural populations exceeding one million and 28 medium cities with populations between half a million and a million. The 22 megacities alone account for some 40 per cent of the urban population of China and the bulk of the country's industrial capacity, revenue base, and institutions of higher learning. On the other hand, there are over 90 000 rural towns and townships, each with a population of several thousand. It is in these towns and townships that the miracle of rural industry has taken place. The range of enterprises covers almost every trade. There are now about 370 million labourers in rural China. About 300 million of them work in agriculture at least part of their time. About 40 million are in secondary industries, mainly in manufacturing, building, and mining, representing a 74 per cent increase over 1980. About 30 million are in tertiary industries, mainly in transport, commerce, catering, and other services. Rural industry now employs about 20 per cent of the labour force of the Chinese countryside and accounts for some 25 per cent of the total industrial output value of China. In some sectors, rural enterprises have become a sizeable force in the national economy. They now produce over 80 per cent of all iron farm tools, 53 per cent of building material, around 50 per cent of garments and shoes, 43 per cent of sulphate of iron, about 25 per cent of textiles, and some 20 per cent of coal. Their products not only sell throughout the country, but have begun to enter the international market. In 1985, they contributed US$4 billion worth of goods and services on the international market. Now over 8000 rural enterprises are engaged in export production of some 1 500 varieties of products. Nearly 900 of them are joint enterprises with foreign capital. Their 8 million building workers represent more than 60 per cent of the national construction force. Seasonal migrant skilled workers are another feature. For instance, the province of Jiangsu alone sends 35 000 building workers to Sinjiang, in extreme west China, to work for some 10 months of the year and come home every winter. In short, rural industry is now playing an indispensable role in supplementing the deficiencies of state industries and is filling considerable gaps of every conceivable kind.

The pace of expansion of rural industry in China is really remarkable. In the six years between 1980 and 1986, the number of enterprises increased 214 times, from some 56 000 to over 12 million. Gross product value quadrupled, from 65.6 billion yuan to 330 billion yuan. The taxes paid to the state annually quintupled. In the fourth largest city of China, Shenyang, tax paid by rural enterprises accounted for 70 per cent of all local government revenue in 1985 (all Chinese cities have a number of agricultural counties under their jurisdiction). Their total profit approximately tripled in the four years from 1980 to 1984, from 6.6 billion yuan to 18.7 billion yuan. In the past five years, more than half the income increment of the rural population came from rural industry. It is now safe to say that rural industry has become the most dynamic part of the Chinese economy.

The merits. Rural industry in China has been developing under difficult conditions, but there are a number of positive factors that contribute to its vitality, among them:

High flexibility. There are various forms of partnership at varying levels below the county. Enterprises of the county level and higher are mostly state-owned. The most popular and fastest expanding form is the family household undertaking and its alliance with some sort of collective or cooperative enterprise. These are usually centred around certain products, some kind of technology or a line of service. They are inevitably small-scale, permitting quick management decisions in fast-changing market conditions as well as specialization in the production and marketing of thousands of small commodities. About half of all the buttons in China nowadays come from a tiny township in Wenzhou in east China that has developed into the button centre of the whole country for both manufacturing and marketing. Its turnover in button trade exceeded 100 million yuan last year.

Low cost. Rural industry needs no investment from the state. There are no managerial staff assigned by the state with their cradle-to-grave social security cover. An elastic wage system mostly linked to performance is also highly cost saving. Where some investment is inevitable, it is much less than in a state enterprise. For instance, while large state coal pits need 200 yuan of investment to create the capacity to produce one ton of coal, small rural pits need only 20-30 yuan. Thus the 200 million tons of coal produced by rural enterprises annually saved government investment to the tune of some 3.5 billion yuan. Generally speaking, to give employment to one person in a city requires over 15 000 yuan of investment from the state, but rural enterprises need only about 10 per cent of that amount to create one job. Their circumstances dictate that their overheads have to be very small. A great many rural manufacturing enterprises subcontract the making of parts to family workshops where there might be only one or two small lathes using spare space in the family home. They are able to make optimum use of manpower; often they use marginal material or even scrap rejected by state enterprises.

Creating employment. The population of China, now greater than 1 billion, is expected to be between 1.2 and 1.3 billion around the turn of the century. Youngsters entering the labour market number more than 10 million a year and are expected to peak at 13 million before the year 2000. Providing jobs for them is perhaps the single most formidable task facing the Chinese Government. Rural industry, being labour intensive by necessity, appears to be a possible solution to this problem. It absorbed 12 million additional workers in 1985, a 22 per cent increase over 1984, and is bound to provide the main outlet for 10 million-plus fresh labourers coming on stream every year in coming decades.

Better management. Here the picture is certainly mixed. It is generally believed that only some 30 per cent of rural enterprises are well managed, some 40 per cent are of average management standard, some 20 percent are poorly managed, barely remaining in operation, and the remaining 10 per cent are facing closure or bankruptcy. However, in some aspects, they compare favourably with state-run enterprises. In 1984 for every 100 yuan fixed asset, the output value of rural industry is more than twice the average for state enterprises. Profit, at 34 yuan, is more than three times that of the state enterprises. Tax generated at 15 yuan is nearly one and a half times as much. In a country where the science of management was once deliberately ignored, it is difficult to imagine that undereducated peasants, some still illiterate, can properly manage rural enterprises. Here the very nature of the entities in a given situation makes all the difference. In contrast to state enterprises rural enterprises link remuneration directly to performance. The quality of their management and their ability to react immediately and correctly to shifting market conditions are a matter of survival for them. Generally, only better educated and more talented peasants venture to set up such enterprises.

Increasing revenue. As rural industry creates much more wealth per caput than agriculture, it is fast becoming an ever more important source of revenue for the Government. In 1985, it paid over 13.7 billion yuan of tax to the state, representing 7.5 per cent of the total tax revenue and 20 per cent of new added tax income during the year. In recent years, it has been increasing at the rate of some 30 per cent a year, a rate much faster than that of other tax revenues. Besides, it paid over 30 billion yuan in the five years between 1981 and 1985 to local governments and over 8 billion yuan a year to collective welfare undertaking. Taxes paid by rural enterprises now account for over two thirds of state revenue collected from the countryside. In Jiangsu province, some 85.5 per cent of new increased revenue came from rural industry in the past seven years.
The problems. Like all new ventures, rural industry in China is fraught with problems. Chief among them:

Obsolete equipment and low technology. There are about 1.8 million technicians in some 400 000 enterprises at the county level and above in China, but rural enterprises have extremely few, if any. Serious environmental pollution is but one aspect of this vast problem.

Shoddy product quality. A considerable glut of many products of inferior quality has already appeared and is forcing many rural enterprises either to improve or to be driven out of existence. But the picture is far from uniform. Some rural enterprises are turning out products of excellent quality of international standard.

Low productivity. This obviously depends on the method of calculation. The comparison with state enterprises can only be relative and the picture extremely mixed. While its productivity is generally higher than agriculture and could compare favourably with the less efficient part of state enterprises, it certainly lags far behind the more modern and better managed ones. It is also generally more energy-consuming.

Shortage of raw material and energy. This is a common problem facing many industries, but an especially acute one for some rural enterprises. Now only about a quarter of them working under contract with state enterprises or having direct links with them receive allocations of raw material at official prices under state plans. The other three quarters have to buy their raw material on the market, where it can be several times more expensive. They get only about half their power supply from the regional grid. For the other half, they have to generate their own electricity in very expensive ways. The shortage of current compels some of them to operate only three or four days a week. A number of rural enterprises are criticized for competing with more efficient modern factories for a limited supply of certain materials.

Shortage of capital. Capital formation for rural enterprises relies mainly on the savings of peasants, the majority of whom are still far from prosperous. Banks and credit institutions gave some assistance, totalling nearly 48 billion yuan of loans of all kinds in 1984, but with the tightening of credit in an overheated economy, this has dwindled. Internal accumulation and the savings of employees totalled about 30 billion yuan in 1984.

Inadequate information. In China where commodity economy was officially recognized only recently, market information is bound to be inadequate. A few family undertakings specializing in the dissemination of market information have appeared and proved very popular, but they are far from adequate. Therefore, decisions to create new enterprises are occasionally taken on the basis of insufficient or inaccurate information.

Declining profit. High costs, low productivity, and excessive levies all cut into the profit margin of rural enterprises. In the five years between 1979 and 1983, their overall profit margin declined from slightly under 25 per cent to just over 15 per cent. When capital increment depends largely on the internal accumulation of on enterprise, this obviously weakens its ability to upgrade equipment and expand production.

Irregularity and disorder. It should not be surprising when large numbers of small enterprises based on profit incentive mushroom in an unruly manner in an underdeveloped rural society. The Government gives tax relief to new enterprises for a couple of years, but some of them change their name and brand frequently to prolong the privilege. They close down and open again too easily. In the absence of a sound land-use law, they tend to take up too much good land. Fakes and substandard products of every description have also appeared. But such practices are being subjected to regulation and are not the main stream of the development of rural industry.

Disincentive to agriculture. The prosperity of rural industry and the higher wages paid to its workers naturally reduces the interest of peasants in tilling the land, especially for lower-priced grain crops. The solution seems to lie in providing special favourable treatment to grain production and encouraging the development of the so-called vertically integrated farming and agroprocessing as a means to achieving better economy of scale and the more even distribution of wealth.

Polarization or equalization. Under the new economic policies, some families become rich sooner and faster than others. But a few enterprises have grown to a sizeable scale, employing several hundred workers. Credit institutions also tend to give more credit to bigger and more profitable enterprises as there is better assurance of repayment and fewer larger loans are obviously easier to handle. Whether private enterprises of such a scale, and even larger, should be allowed to develop further in a socialist society, and whether they should be limited, raises a policy issue as well as a practical problem that has yet to be answered. But the marvellous development of rural enterprises of partnership or ownership has so far definitely contributed to accelerate the growth of the economy and improve the living standard of the rural population.

Uneven regional development. As of 1984, eight relatively developed provinces and metropolitan areas along China's east coast accounted for over one-half of all the country's rural industry while eight least developed inland provinces had only some four per cent of the total. In the highly developed province of Jiangsu, rural enterprises now employ some 10 million people. Their product value of 2.25 billion yuan in 1984 already accounted for over half of the total product value of industry and agriculture. But such uneven development is being remedied, and the less developed areas are fast catching up.

Too much levy. In an ambience long wedded to poverty, it is not strange for many quarters to turn to the new "rich" for all sorts of need for help. In fact, their wealthiness has been overestimated. In an underdeveloped countryside, where casual customary manners rule far more widely than strict law and order, levies of all kinds have been imposed on rural enterprises by local authorities. But such excesses have caught the attention of higher authorities and efforts are being made to curb them to lighten the burden of rural industry....

The policies. China is now in a crucial stage of development, and economic reforms of historic significance are being implemented. The major components of a new set of more liberal policies may be summarized as: - invigorating the domestic economy and opening up to the outside world - reduced mandatory planning to be integrated with expanded guidance planning - macro-economic control to be combined with micro-economic decontrol - direct control by administrative means to be replaced by indirect control through economic leverage - vertically controlled management to be replaced by horizontal linkages between related enterprises - driving force of enterprises to come from within enterprises rather than from without - enterprises are to shift from a closed pattern to an open pattern where micro-economic decision-making is decentralized. In such a context, and in line with the official recognition of the economy as commodity-based and market-oriented, it is only logical that the main content of the Government's policy toward rural industry is to develop a sound market system in which support to the growth of rural industry is lent through such economic leverages as tax, credit, interest, subsidy, supply of raw material, and quality control. Such a market system should cover agroproducts and byproducts, agricultural inputs, consumer goods, technology, information, capital and financial services, labour and jobs, and building and construction. Two aspects are being given special attention: the collection and dissemination of market information and the gradual development of a sound legal system together with the provision of legal service, as these are obviously indispensable in any effective market system. In other words, government endorsement of the development of rural industry will come mainly in the form of policy guidance with the provision of relevant information and regulation through law enforcement in a favourable economic climate. Other policy measures worth mentioning include:

- Financial assistance and resources reallocation. It is generally believed that state enterprises still enjoy considerable advantages over rural enterprises in, for example, the supply of raw material, investment funds, planned production, marketing outlet, and energy provision. Hence it is considered necessary to give rural industry some special treatment in tax payment and credit as compensation and to ensure fair competition. It should be pointed out, however, that rural enterprises have generated as much as four times more revenue for the state than they received in favour and support from the state in recent years. But perhaps of even greater importance is the policy of using part of the revenue from rural industry to support agricultural development. It is estimated that modernization of agriculture in China at a moderate rate requires investment of 1 trillion yuan. The state would be hard-pressed to provide that amount. The bulk of it would have to come from the countryside itself. Rural industry already contributed over 10 billion yuan to agriculture accounting for 15-20 per cent of its total profit in the past five years and is destined to generate the overwhelming majority of investment capital needed by agriculture in the years to come.

- Encouraging horizontal links. In a vast country like China, great variety in natural resources and the extent of development is a distinctive feature. Generally speaking, the coastal areas are far more developed, with much more managerial talent and technical skill, than inland provinces, which are, however, generally endowed with more natural resources, but they are also much more densely populated with an acute land shortage. Voluntary association of all kinds of partnership based on the principle of mutual benefit enables them to compensate for one another's deficiencies and give full play to the different strengths of various localities. After a long period of excessively rigid control from the central Government, the benefit of such horizontal collaboration is especially pronounced and is giving a push to rural development. In one instance, about half the rural industry near Shanghai has become subcontractors, supplying parts to large enterprises in the metropolitan centre.

- Assisting better division of work. For historical reasons, the processing of agricultural products in China is located mostly in cities and towns rather than in the countryside. These industries are going to shift gradually back to where the raw material is produced. This would make processing much more economical. Furthermore, rural enterprises are encouraged to cover the whole line of such undertakings, including preproduction services, packaging, storage, transport, marketing, and other post-production services. In other words, rural industry, which by necessity is agriculture-based, should in turn provide a complete range of services to promote agricultural development, thus leading to the formation of local vertically integrated agro-industrial businesses. Industries not suitable for developing in cities will gradually be shifted out to the countryside.

- Technical assistance. The Government has formulated a programme, named SPARK, designed specifically to assist the technological upgrading of rural industry in the Seventh Five Year Plan period. It consists mainly of: developing 100 complete sets of relatively advanced equipment suited to the conditions of rural China and organizing their mass production; assisting the establishment of 500 model rural enterprises for demonstration purposes and providing them with complete sets of appropriate technology, management rules, product design, and quality-control methods; training 1 million young managers every year with knowledge of appropriate technology and modern management knowhow. Some 2.3 billion yuan of investment capital has been secured so far. Bank loans and government appropriation account for only some 16 per cent of the total amount. The bulk is generated by the enterprises themselves. It is expected that this programme will add over 10 billion yuan of annual output value to the rural enterprises in a couple of years' time with an input/output ratio of nearly 1: 5....

Prospects and implications. The extraordinary pace at which rural industry is developing in China is rapidly giving it predominance in the country's rural economy and pushing agriculture into second place in the more developed parts of the country. In less advanced areas, it is rapidly catching up. The size of its employment is expected to expand by 70 per cent by 1990 to reach 120 million and further to. 220 million by 1995 or shortly thereafter. Its pace of growth in recent years is two to three times faster than the average speed of industrial development in general. Its output value is expected to reach approximately 60 per cent of the gross product value of the Chinese countryside by the end of this century. In fact, the expansion of rural industry in China accounted for around half of the net increase of gross product value of her industry in the last couple of years. But even more important is the pivotal role it played in the improvement of the structure of the rural economy by introducing extensive diversification into the countryside. Taking all factors into consideration, its productivity is expected to improve by five per cent a year in the next decade. Its share in total export is expected to account for no less than 15 per cent.

But the significance of the development of rural industry in China goes far beyond its quantitative expansion. It has important implications in finding a solution to the huge population and employment problem, in supplementing the deficiencies of the state-run industries and m narrowing the wide gap between cities and countryside. In the past 36 years, urban population in China has roughly doubled, from 100 million to 200 million, with the additional 100 million divided equally between natural growth of urban population and controlled migration of rural inhabitants into cities at very high cost to the state. It is projected that the labour force of the Chinese countryside will reach 450 million by the year 2000, but agriculture will be able to absorb no more than 220 million of them. Rural industry, labour-intensive by nature, is poised to absorb the balance. In many countries, a clearly defined way to urbanize is a problem yet to be solved. In the case of China, by one key indicator, the annual output value of an industrial worker is, at 4 500 yuan, 7.5 times that of a farmer, at 600 yuan on average. It is difficult to imagine that a modern socialist state could be built with advanced cities but a very backward countryside. The development of rural industry offers a solution to the difficult problem of narrowing the rural-urban gap; this is the gradual industrialization and modernization of the huge intermediate area between the agricultural countryside and the metropolitan centres by building large numbers of small towns and townships (the number of townships increased over 150 per cent in the past five years). Such a network of small towns and townships would form a multitude of bridges between cities and countryside through which capital, technology, managerial talent, raw material, finished and semifinished products could flow back and forth. In another sense, it also enables China to avoid potentially dangerous antagonism between workers and peasants and between cities and the countryside which the widening differences between them would inevitably induce.

Another question of no less importance is the spiritual and cultural aspect of rural development. The significance of cultural and educational advancement and the gradual change of traditional values and social concepts cannot be overemphasized. For rural China to move ahead from a semi-subsistence, half closed farming society, with all its inertia and stagnation, to a modern commodity-oriented agro-industrial society, it needs all the impact of a cultural shock, which only the development of rural industry with its entrepreneurial spirit and managerial acumen can bring about. On the other hand, the material improvement of rural conditions would also contribute to the rural population's cultural advancement. Some 20-30 per cent of the after-tax profit of rural industry in recent years has already been devoted to the development of education, culture, public health, sports and local government administration in the Chinese countryside.

One more lesson which China has learned in the past three decades is the limitations of state-run enterprises. The Government can take direct charge only of crucial lifelines of the economy and a limited number of key enterprises. It has to rely mainly on a whole set of policies and strategies to guide the rest of the vast economy. Rural enterprises will develop under such guidance and fill the innumerable gaps which the public sector cannot possibly take care of, especially the thousands of omnipresent small commodities.

The remarkable thing about rural industry is that it needs very little of what China is short of investment capital to make optimum use of what China has in surplus - manpower. By relying mainly on correct policies and strategy, it is able to tap the vast potential of the smallest economic cells of rural China in terms of both human and physical resources, thereby avoiding the biggest weakness of China in its industrialization, modernization, and urbanization and turning it to its best possible advantage. In a sense, it might be considered a sort of extension of the contracted responsibility system in agricultural production - both rely mainly on the catalytic role of policies to stimulate the initiative and enthusiasm of workers, peasants, and managers. In another sense, it might also be likened to the early stages of the industrial revolution in the West. The main difference lies in the presence or absence of firm state guidance and/or regulation in the context of the whole social system. Past lessons in the shortcomings of excessive rigidity in economic policies and over-centralized administration in China have been well learned. The emphasis of the new approach will be the ever improved use of a gradually more finely tuned regulated market mechanism and a measured flexibility to facilitate healthy development.

The full-fledged development of rural industry in China has only a short history. All kinds of problems and defects are inevitable in the initial stage, but these are by nature relative and transitory. The objective laws governing the development of rural industry will see to it that these would be rectified in the process. China should have learned enough lessons in the past decades to realize such historical rationale and logical necessity to be able to guide rural industry to maturity.