OER CONTRIBUTION TO LONG-RANGE DDI STUDY ON CHINA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001900010196-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 24
• Document Creation Date: December 19, 2016
• Document Release Date: May 23, 2006
• Sequence Number: 196
• Publication Date: February 26, 1974
• Content Type: MEMO

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26 February 1974
SUBJECT OER.,Contribution to Long-Range DDI
Study on China
Attached is the economic contribution to the long-
range China study. If you have any questions, please
phone
Chief, China Division
25X1
Attachment:
As Stated
Distributicn: (S-5955)
O & 1 -- Addressee
1 - D/OER
1 - Ch/D/C
- St/F/C
V_r 1 - SA/ER
1 - St/CS
(26 February 74) 25X1
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OER CONTRIBUTION TO LCNG-?t NGE
DDI STUDY O:: CHI::;
CHINA: TEE ECONOMY 10 AND 25 YEARS FROM NOW
Ten-years from
distanced the other
Indonesia. Yet the
Key Judgments
now, in 1984, China.a'ill have further out-
large LDCs such as India, Pakistan, and
PRC probably will not have gained ground
on the modern high-technology economies such as Japan,
Western Europe, and the United States. China will still
be a big poor nation with the potential and airbition for but not the realization of -- superpower status.
Rate of Growth
China's GNP will have grown at an average of 4% to 5?,
sufficient to support continued expansion of industrial
capacity and output, the maintenance of the population at
slowly rising levels of well-being, and the equipping of
the armed forces with a growing quantity and variety of
strategic offensive weapons.
Impact of 'olitical Upheavals on Grc;?:tz
We anticipate that periods of political turbulence will
have had smaller impact than previously because of the in-
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creasing rootedness of Communist economic organizations,
controls, and practices. The continued growth of vested
interests and the expansion of the corps of technical experts
over the next 10 years will have made the economy resistant
to all 3ut the most violent political shocks. If this is so,
the events that will have accompanied the replad meat of
riao.and Chou will, not have greatly altered fundamental economic
patterns in the. PRC.
Population
The pressure of population against the means of subsistence
will have been relieved slightly by the growth of national
output. The impact of China's population control program on
total population is likely to have proved negligible. None-
theless, the program will finally have accumulated sufficient
force to permit appreciable cuts in growth rates beyond 1984.
Agriculture
Decreasing returns in the agricultural sector will have
been staved off through the completion of major irrigation
projects and huge increases in the production of chemical
fertilizers. Output of the agricultural sector will have
advanced at an average of 2'-3% annually.
Industry
Industrial capacity and output will have doubled compared
to 1974. Technology in the metallurgy, electronics, machine-
buildinc, and military branches will have made conspicuous
advances.
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AV-
C,01941
Enera
Efforts to modernize the coal and electric power industries
will have been only partially successful. Output of petroleum
will have expanded rapidly from a small base. Petroleum ex-
ports, while a key factor in-China's balance of trade, will
constitute only a tiny percent of international-supplies.
Foreign Trade. .,
China's foreign trade in 1984 will continue to be over-
whelmingly .;,.. .
oriented to non-Communist countries, as in 1974.
Even though the leadership will be reiterating its policy of
% economic self-reliance, China almost certainly will have a
wider variety of dependence on the major industrial nations --
for modern equipment, new technology, and credits.
Economic incentives
By 1984, the top leadership will be facing rising dis-
content among an increasingly literate and technically
sophisticated population. grievances will include austere
living conditions and stringent controls over personal life
and thought. An especially touchy point will be the manner
in which young educated people are assigned to the various
urban and rural posts in the economy.
And by the End of the Century?
The possibilities fan out with increasing rapidity between
1984 and the end of the century. Twenty-five years from
NTIAL
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now the Chinese economy could be anywhere between: (a)
a state of collapse from overpopulation and/or debilitating
military adventures; or (b) a state of world leadership,
with China having made uninterrupted progress and the other
major nations having failed to cope with shortages of key
resources. We believe that the Chinese will land up in
between, (a) not hitting the bottom of the range, because
the economy has developed a great deal of ballast and the
people are tough and flexible, and (b) not reaching the
top, because unfavorable labor/land and labor/capital ratios
will prevent a spectacular acceleration in.economic growth.
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CONFII
Background
Discussion
1. The economist has great advantages over the political
scientist and military expert in foretelling the state of
the Chinese or any other society 10 or 25 years from now.
Political and military factors are evanescent. Political
campaigns or political scandals can.erupt overnight. Key
leaders can. ?.d~e unexpectedly or suddenly drop from sight.
Military alliances are quickly fashioned and quickly dissolved.
Military forces are rapidly deployed to new fronts. New
weapons change the balance of power in unpredictable ways.
2. In contrast, the economist deals with elements that
have tremendous stability over time -- the transportation
network, the mills and mines, the farms and irrigation systems,
the natural resources, the population pyramid, and the
organization and practices of economic life.* The present
discussion sets forth the policies and trends in the various
sectors of the Chinese economy that are expected to color events
over the next decade, 1974-84, and to determine the state of
the economy in 1984. An observer coming back to an economy
a decade later will almost always find a recognizable assembly
*For a detailed discussion of these enduring elements in the
Chinese economy, see the two compendiums sponsored by the Joint
Economic Committee of the Congress: (a) . An Economic Profile.
of Mainland China (,:ashington, Government Printing 0-i:ic'-e '! 1-67) ;
and (UT) ? o Fenublic o: China: =n Economic Assessment
(h,ashir.gton, Gcvernment rrint~ng C~i~cc, l~'7
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 MIN
of physical facilities and ofamiliar pattern of organizational
practices. On the other hand, a Rip van Winkle of 25 years
absence would find numerous fundamental (and unpredictable)
changes to absorb in his thinking. Therefore, the portion of
the discussion that takes thQ argument 25 years into the future
is necessarily more speculative, less specific -b,- and much
shorter.
Economic Planning and. Administration
3. The year 1974 is the fourth year of theFourth Five-
Year Plan (1971-75), which marked the resumption of regular
Soviet-style economic planning after the purges of the Cultural
Revolution. The economic planning and administrative system --
with its sub-systems for balancing supplies of materials, pro-
curing'and distributing grain, selecting among investment
proposals, arranging for inter-organizational transfers of funds,
assigning young graduates to their proper slots, and col-
lecting statistics -- presumably will continue to operate
through a series of five-year plans. If so, in 1984 the economy
will be in the fourth year of a sixth five-year plan, with the
organizations, controls, and practices of the Chinese "command
economy" more deeply rooted than ever.
4. As the output of a centrally managed economy increases
and as technology becomes more complex, the problems. of reconciling
recuire:: tints for .men, machines, and materials emnand ex-
c :.u1=?: Ch na will need a crowing corps of economic
:_n-, ?5tat_scicians, tec rical specialists, and bureau
chiefs to handle a -soaring volume of economic
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administrative work. The expansion of this "technostructure"
over the next ten years will have important effects on the
continuing "red versus expert" problem. The intensified
technical training and the enhanced position of the expert
in a modernizing China means the creation of new vested
interests and a natural tendency toward depolitiCization of
the expert.' Even though the "reds" launch new rectification
campaigns in, the next decade, their power to discomfit the
over the long term
experts and to interrupt production is waning/-- at least
this is the judgment that underlies the present discussion.
Economic Policy
5. Key decisions made on economic policy in 1972-73 will
greatly influence the thrust of economic activity over most
of the next ten years. These policies, in general, support
the agricultural sector and strengthen the ability of the
economy to guarantee minimum subsistence to the growing popu-
lation.
in ustrial plants -- I _ c.:e: nicai fertili .cr pla:.
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Imports of grain were raised to 7.5 million tons in
1973 (in contrast to a normal 5 million tons), and
contracts already signed indicate minimum imports of
9 million tons for 19.74. Long-term contracts with
Canada, Australia, and Argentina extend throt:gn 1976;
0
Peking in 1973 contracted for $1.2 billion in Western
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and artificial fiber plants -- as compared with only
$60 million in 1972. These new plants, which will
come into operation in the late 1970s, will increase
China's urea capacity to 5 times the present 1:vel
and will reduce the pressure on agriculture for natural
fibers.
? In spite of China's long-standing, reluctance to incur
foreign debt', two-thirds of the value of the new
plants ordered in 1973 will be financed through
deferred payre,ts. The economy will readily handle the
level of debt service payments required.
6. The momentum imparted by the grain and industrial
contracts, the new credit arrangements, and the general opening
of China to wider commercial and scientific contracts will
not easily be reversed over the next decade. These economic
policy developments reinforce the argument above, namely,
that only a major political upheaval will reverse the
general direction of economic events in the next decade.
7. in the first two months of 1974, new political ferment
has gripped China. Campaigns are underway to insure that the
relaxation of revolutionary conduct of the post-Cultural
Revolution years -does not go too far. We expect that the new
political turbulence will not to be pushed to the point
r.?here no new contracts r: i 11 be signed for '.foreign industrial
Giants. At _, minimum, hc:,?ever, the current political tur-
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bulence serves as a yearning to China-watchers against facile
straight-line projections of economic policy and growth
prospects.
Population Pressure and Population Policy
8. Because of the return to peace, the reduction in
infant mortality, and a general improvement in nutrition and
public health,'popolation under the Communist*regime has
grown at 2% annually, compared with 1% or. less, in. the pre-
Communist period. The present population control campaign,
which began as the: Cultural Revolution faded, includes these
features:
? official encouragement of later marriage, for example,
men at 30 instead of 25, women at 25 instead of 20;
provision of_training in birth control methods and
manufacture and di::tribution of birth control devices
and pills;
inclusion of control tnrccts in the various
u intrccuccion,on a :.Mall scale so far, of specific baiy
quotas for lo,:w-level economic units.
use of "barefoot dcctors" (yo'-'-hful rural medical
corpsmen) and practical nurses to spread birth
control information throughout the countryside;
widespread propaganda on (a) the need for smaller
families as a means of maximizing the participation of
women in the labor force, and (b) the error in empha-
sizing male children as continuers of the ^,rnily line;
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9. Population for most of tie next ten years is likely
to continue to incv~case at 2?. because (a) improvements in
public health will continue to reduce mortality rates, and
(b) the birth control campaign will have little effect beyond
city limits, certainly in the first few years. ,Most observers
who have hazarde. an estimate of China's population accept
the Chinese census figure of 583 vaillion of mid-1953 but
part company on the rate of growth. Certainly the authorities
population at 800 million and some at 750 millicn. Unfortunately,
there are no accurate statistics in this ccnnecticn. ;;ever-
theless, the officials at the supply and Crain department
are saying confidently, "The number is 800 million people."
Officials outside the grain department say the population
is "750 million only" while the :iinistry of Commerce affirms
that "the number is 830 million." F_o,,ever, the planning
department insists that the number is "less than 750-million."
The Ministry of Commerce insists on the bigger number in
order to be able to provide goods in large c?.:antities.
The planning men reduce the fi::ure in order to strike a
balance in the clans of th e various state departments.
10. In this present?ciscussion the zopulatien figure
accepted for mid-year 1974 is 920 m-4-1-1-ion, which im lics
an average annual rate of growth of 2.2% -- below the rates in
in Peking do not know how fast the population has grown since
the genius. Consider this statement by Vice?
Hsien-nien, Chou's deputy for economic affairs, in an
interview with an Egyptian journalist in 1971:
. We have been racing against time to cope with the
enormous increase in population. Some people estimate?.the
other ~c . lou Asian ccu:a.:_ES ~ ith . cns 3rahl- -C:e:-
standards of 12- c : c.-a ..... ~_ zhis _97 ; _ re is used E!n.,.
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if growth averages 2% over the next 10 years, China's popu-
lation would number 1,120 million in 1984. If the population
control program succeeds in breaking growth clown to 1# by the
end of the 10 years, with growth for the period averaging
1.5%, the population would reach 1,070 million in 1984.
Because of the economic policy changes sketched out above,
the'extra 130~to.100 million people can be supported.
None theless,.?the people added to the population -- who will
contribute practically nothing to over-all output -- represent
the continuation of the pressure of an immense and expanding
population on overloaded agricultural resources.
Agriculture: Diminishing Returns?
11. After the three disaster years of 1959-61, during
which China basely avoided mass starvation and even the
toppling of the government, the regime made an about-face
in agricultural policy. Previously, planning had focused on
the rapid development of heavy and military industry. The
agricultural sector had been left to its own resources;
increased production was to come from the collectivization
of the countryside and from investment based on rural man-
power and local materials. Beginning in 1962, the new
agricultural policy called for large and steadily expanding
inputs into the agricultural sector from the industrial
sector -- chemical fertilizer, pumps and other irrigation
ccquipmant, tractors, pesticides, and improved varieties of
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12. During the Cultural revolution (19666-69), emphasis
was redirected to the building of numerous local fertilizer,
cement, and agricultural ecuipment plants. In the last two
years, the tide has switched back to the larger modern
plants, as witness the huge cor.-itmert made in 1973 for the
purchase of foreign chemical fertilizer plants.4 These plants
will have their impact starting in the late *1970s. They
will give China?a capacity for producing urea 6 'times as
large as capacity at yearend 1973.
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13. The policy of the last decade of insuring the
agricultural base of the economy was centered cn increasing
the yields on the 20% of the tillable acreage with the
highest potential for growth. As the volume of inputs to
agriculture has climbed, the possibility-has risen of
diminishing returns; China may soon get a smaller and smaller
response of production as larger inputs are applied to less
favored acreage.W4e believe that the spectre of diminishing
return will be held off for the next 10 years at least.
Many large rivers still remain to be harnessed; existing in-
provements in agricultural technology can be spread
advantageously to sizable backwater areas; and China is only
beginning to exploit the advanced techniques of the "green
revolution."
Industry: Advantages of Backwardne,!s
14. At the beginning of 1974, China even while making
noteworthy achievements in 'Industry, remains 5 to 20 years
or more behind in the various industrial branches.
Whereas the Chinese manufacture basic transportation
and steel-making equipment, they must turn to Western
Europe and Japan for advanced vehicles and steel
furnaces and rolling mills.
Whereas China has just announced the successful
trial Production of its initial third generation
ca:;.puter, tha trued States and Japan have been movinu
rapidly b:.yond the third generation of computers.
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Whereas the Chinese are capable of manufacturing the
equipment for exploration and drilling for onshore
oil, they rust turn to the United States and other
suppliers for offshore equipment;
Whereas the Chinese are in the process of deploying
several dozen missiles of medium and intermediate
.-range, the United States and the USSR have for some
time deployed hundreds of intercontinental missiles,
some of incredible complexity and accuracy.
15. Over the next 10 years, Chinese industrial pro-
%duction probably will increase at an average annual rate of about
8%. By 1984, then, industrial production will be twice the
present level and will have benefitted from major infusions of
both domestic and foreign technology.
16. The PRC has ample opportunities remaining of
obtaining low-cost technology embodied in foreign plant and
equipment. The major industrial nations, which will have to
cough up billions more to pay for their oil, will be anxiously
contending for their share of the Chinese market. Even anxiously
though China's purchases remain small by world standards,
they are growing rapidly and will be boosted over the next 10
yeas by Peking's less puritanical attitude toward credit.
At the same tine that China will be making great technological
strides, the hi cr:.-tec!In:o1ogy nations %,,4 11 be driving
ahead on
-- ? x::_11 continue to i:L'I:efit from its
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relative industrial backwardness, that is, in 1984 it
will still be able to obtain plant and equipment on which
R&D costs have been paid off and technical problems
ironed out.
17. Petroleum production by 1984 will have expanded to
several times the current level of 1"million*b/d. Most of
the additional. output will have come from the, exploitation
of large new onshore fields opened in the early 1970s.
DDNIFIDENTIAL
Limitiations on the expansion of production in these fields
does not arise from lack of resources or technical competence
but from limitations on production equipment and pipelines.
In the contrasting case of offshore fields -- which almost
certainly will become an appreciable part of China's output
in the 1980s -- the acquisition of foreign technology will
be a critical factor in determining the pace of development.
18. While petroleum plays the glamour role, coal will
continue to supply the great bulk of China's primary energy
even in 1984. Recent increases in the production of coal
have been realized only because of intensified working of
existing mines, sometimes to the ;Dint of rapidly diminishing
returns. The failure to invest in large new mines during
the current plan period is attributable not to oversight
but rather to the higher priority needs of agriculture
and its suppcrtirc i::dustrics. This failure ill be rep l^
over the r.e::t 10 years in tight supeli ::s of cc -n! an:: e? cctric
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19. In 1984, military production will have moved forward
in the quantity and variety of weapons for all branches of
the armed forces, with the most prominent gains having been
made in the production of strategic offensive weapons.
Foreign Trade: Tied to the West
20. The policy changes of 1972-73, which entail larver
imports of grain and industrial plants and recourse to
foreign credit,. do not mean an abandonment of China's key
economic goal of self-sufficiency. Peking has correctly
concluded that imports of equipment and know-how from Japan,
Western Europe, and the United States give China its only
grain,
chance for ultimate Pelf-sufficiency in production of/ modern
machinery and weapons. Over the next ten years, the plant
and equipment now being ordered will give China's modernization
program a fillip, especially in chemical. fertilizer,
artificial fibers, iron and steel, - electronics, ana transportation
21. By 1984, the volume of China's foreign trade in
real terms will have roughly doubled. The pattern of trade
will have the following features, which i1i most cases'are
holdovers from 1974.
? China will gain low-cost food and industrial equipment,
materials,*and technology in return for raw materials,
light manufactures, and high-value foodstuffs;
Roughly 8O of trade will continue to be with the
non-Communist countries; Peking will deliherately
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 spread its orders for industrial plant among a
number of suppliers -- Japan, the United States,
West Germany, France, the UK, Italy, and the smaller
nations of Western Europe;
? The tremendous imbalance of trade to be expected
with these suppliers will continue to he offset by
the'fiore than one billion dollars net earnings in
dealings with Hong Kong; this pattern, of course, will
be operative in 1984 only if Peking's relations with
the Crown Colony have continued on the same track;
China's imports of grain, which have recently been
:rising toward 10 million tons a year, will ha--e
fallen back to a c,.ickle - in 1984 if
the expansion of the chemical fertilizer industry has
worked out as ;,Manned; the United States probably
minor
will have become a/ supplier of grain, being turned
only
to/hen Canada, Australia, and Argentina are unable
to fill China's orders, and
Petroleum will have become a key export for China,
even though the amount involved will be peanuts by
international standards.
Living Standards: Up Enough?
22. From 1949 to 1974 -- with the exception of the disaster
~:rarC of 1959-61 -- the Chinese Communist regime has been able
to st:_ r.ly a grc.dng r:o_ elation with the basic recessitias
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of life. Small yet palpable increases in living standards
have gradually been achieved:
? Thanks largely to the private garden plots and
livestock holdings, the quality, variety, and avail-
ability of foods have been improving;
? Cautious advances have been made in the~color and
variety of wearing apparel;
0 Steady. gains have been made in the replacing or up-
grading where notable improvement has come from
after-hours work and local building materials;
? Sizable percentage gains have been made in the pro-
duction and sale of basic consumer durables -- wrist-
watches, transistor radios, bicycles, sewing machines,
and kitchenware; and
Increases in collective consumer services -- trans-
portation, education, health, and entertainment --
have added to the actuality and the feeling of well-
being in the PRC.
23. The distribution of income in China is highly,
egalitarian by the standards of Asia. `evertheless, a con-
siderable amount of inecuality is pcr: teed, mainly as a means
of spurring productivity. The prc biers is whether enouch
resources are available to keen up productive morale. The Pekinu
leadership :aces the "Mat have you dc. -IC for ..::? lately?"
Fti' dre:'re. T::e creat :..aic.rit_ of t i:cc no clear
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remembrance of how bad things %.-ore before 1949. As the
Cultural Revolution advocates claimed, revolutionary fervor is
lacking on the part of the young and those older people with
accumulated vested interests. Furthermore, a built-in conflict
exists between the widening of literary and technical sophisti-
cation and the maintenance of austere standards 'bf consumption.
Traditionally, the Chinese people have kept. 'private their
thoughts and way ,pf.fife. By no means are they completely
won over to the Maoist way of public "struggle, criticism,
transformation." By 1984, living standards should have risen
perceptibly above the standards of 1974. The government almost
certainly will have proved able to contain any discontent
with the slowness of advance and with the'contrast between
spartan consumption and rapid technical advances.
Experts Have Post Position
24. The ten years between 1974 and 1984 will have seen a
further proliferation and professionalization of the economic
and engineering bureaucracy (the "technostruc:ture"). In
the "red versus expert" confrontation, the future will belong to
the expert in spite of Chairman Mao's efforts.
Tc;enty-five Yea's into the Future
25. V.hereas the economic prognostications for 1984 are.
based on considerable foreknow.ledoe of the state of China's
coital plant, the possibilitics.%AEcn rapidly when we push
cut- farther into the future. e'.ona the ]'.: for factors affect. n~-
the future:
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a The population growblV'"fig OWL will be fairly
stable for 10 years, could change by a percentage
point or more over 25 years, with substantial effect
on Peking's ability to support industrial and military
expansion;
? China's self-sufficiency
in energy could be a., telling. advantage by
the turn of the century or could mean little in the event
the'pr2sently beleaguered industrial nations have
solved their energy problems;
0 The struggle betsean the "red" and "expert" political
philosophies in China could lead to-marked changes,
up or down, in the rate at which China: accumulates
capital plant and technology over 25 years;
? The foreign trade
pattern, which now has a general
pattern locked in for some,years by contracts with
non-Communist countries for grain and industrial
equipment mey alter in wholly unforeseen ways as
China moves beyond the 1970s~ and
? Political and military developments of the next
several years could bend the economy toward new
goals that would have a pronounced effect by the turn
of the century on many of the fundamental characteristics
of the economy described previously.
2G. If everything. ;rent wrong cconomical?.:r and/cr China
~'.f ercd a militc.?? c e
-_ C i 'a er Gt:: ~?r G=.Su &'t'JT, the economy
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could be in a state of collapse by the year 2000. To examine
the economic side only, this worst possible case is unlikely
because of (a) the high quality of China's population as
the human raw material for economic development, (b) the
sti,o.`.?,- chances of success in -population control toward the
end of the century, (c) the tremendous natural Zesources,
which easily meet superpower standards, and (d) the growing
amount of "economic ballast", that is, the stabilizing
effect of *the'growing accumulation of physical, technological,
and organization capital.
27. :Tor is the best possible case -- which combines
relief from the Malthusian trap, smooth absorption of foreign
.technology, avoidance of political turbulence, and the inability
of rival nations to adjust to energy shortages -- a likely case.
Too much of the governing philosophy in the PRC stems from
the Long March and the Yenan period and will constitute a
barrier to extraordinarily rapid development. Furthermore,
the tensions within, China as to which people get the small
number of slots in the educational system and which young
graduates get the cushy urban posts will hardly disappear in
the next 25 years.
28. Thus, vithin the huge range of possible outcomes
after 25 years, we believe the actual outcome will be within
a still wide rancre of middle possibilities. China almost
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certainly will not be a superpower in the class of the US
or-the USSR (or a possibly united Europe or a possibly re-
energized Japan). Within this middle range of hypothetical
outcomes, the PRC could be either (a) well on its way
to superpower status, or (b) remaining far behind the
high-technology countries as a big and still poor nation.
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