Growing Out of the Plan

Chapter 4: Growth of the non-state sector

(1979-1983)

Synopsis: Chapter 4 covers the initial liberalization that modified the

state monopoly over the industrial sector, and permitted substantial
entry of non-state producers, particularly in rural areas. (Pg. 24)
 Terms
ECEs – European Command Economies.
TVEs – Township and Village Enterprises.
RCCs – Rural Credit Cooperatives.
guapaizi – Collectives. (Urban & Rural)
Baogandaohu – Household farming.
Rural Enterprises /Rural Industrialization – In the
1970s the importance of the five small rural industries
were stressed. These were iron and steel, cement,
chemical fertilizer, hydroelectric power, and farm
implements.
 Agricultural Reform
Toward the end of 1978 the Third Plenum initiated a more
relaxed economic policy which shifted the volume and
direction of intersectoral resource flows in rural areas. This
resulted in three major changes:

Return to family farming. (Initially outlawed by the Third

Plenum)
Rapid increase in household savings.
Rapid growth of rural enterprises.
 Agricultural Reform

The new relaxed policy included a reduction in the degree of

extraction from rural areas. It also reduced the effective tax rate
on the rural sector by:

Raising agricultural prices.

Reducing taxes.
Increasing state investment in agriculture.
 Agricultural Reform
In September 1980 the government classified rural areas
into three regions:

Poor and mountainous regions – were allowed to carry

out family farming.
Intermediate regions – would preserve the collectives
but organize more flexible work groups.
Advanced regions – would preserve the collectives but
develop specialized agricultural and non-agricultural
households in addition.
 Agricultural Reform
Rural Household Responsibility System
Percentage of households participating at year-end
120%

100%

80%

60%

40%

20%

0%
1979 1980 1981 1982 1983 1984
 Rapid Growth of Household Saving
Total household saving jumped from 7% of household income in 1978 to
17% in 1982.
Financial saving tripled from 2.3% of household income in 1978 to an
average of 6.8% in the years 1980-83.
The household share of total national saving increased from 11% in 1978
to over 35% in 1981.
From 1978 to 1984 household saving increased while government and
enterprise saving decreased. During this period rationing was being
reduced and prices of free markets for agricultural produce were stable or
declining.
As household businesses left the agricultural collectives their need for
currency increased.
Relaxation on constraints in non-agricultural business led to investment
opportunities which required preparatory saving.
 Rural Enterprises
In 1978 only 9% of China’s total industrial output was produced in rural
areas. At this time 90% of the rural labor force were agriculturalists.
In 1980 13.5% of commune-level enterprises operated at a loss and
required subsidization.
Between 1970 and 1978 rural industrial employment grew at a 20%
annual rate, but firms still lacked autonomy and incentives.
The new 1979 policy: “Whenever it is economically rational for
agricultural products to be processed in rural areas, rural enterprises
should gradually take over the processing work.”
Once they were free to do processing work they also set out to engage in
other profitable activities such as energy production and product exports.
This was seen as radical decentralization, but it also strengthened the
rural collectives.
 Rural Enterprises
Policymakers anticipated new enterprises run by
villages and townships, but they did not anticipate the
effect this would have on the economy as a whole.
Most communes were abolished between 1983-84 and
functions were divided between townships that had
responsibility of government operations while local
economic committees took over economic
management.
 Causes of Rapid Growth of Rural Industry
Fundamentals: Factor price ratios reflected China’s true factor endowment. (See
page 149 paragraph 2)
Rural industries were extremely profitable. (Miscellaneous consumer goods were
not provided under the command economy. TVEs filled the role. In Wenzhou
small-scale rural firms specialized in items like buttons, ribbons, and elastic bands.)
Taxes were low on rural industry. (Rural industry was supposed to provide support
to local agricultural projects and were not taxed as high as urban industries.)
Capital was available. (High profits low taxes. Local government officials acted as
intermediaries and would pressure local branches of the banking system to fund
their firms. They were the guarantors of loan repayment. As household saving
increased supply of funds to RCCs increased.)
Proximity to urban areas and state firms fostered rural industrialization. (It was
very profitable for urban enterprises to subcontract to rural enterprises.)
Organizational diversity accommodated growth. (Privatization/Retrenchment.)
 Rural Output Structure: Three case studies
Building materials – Reforms/higher incomes led to a
housing boom which required more building materials.
Private construction had previously been prohibited.
New policies allowed for the rural industrial sector to
provide supply materials for rural construction. The
creation of this new sector was almost always
beneficial to the economy.
Textiles – Large scale entry reduced social
productivity.
Coal – Property rights and safety issues complicated
this sector.
 Contention Over Rural Industry
1981 Retrenchment – Conservatives scaled back tax
breaks.
High tax rates stimulated development because local
officials could share a portion of the tax revenue.
In 1984 policy shifted back in favor of rural industry,
but only after conservatives assured the state
monopoly over the most lucrative enterprises such as
cigarettes.
Conservatives remained hostile toward rural industry
until the late 80s.
Non-state Industry and the National Industrial
Economy

Street Industries – Small workshops established to

proved employment for housewives and youth. (Small
collectives.)
Small state enterprises accounted for 35.8% of total
output in 1978, but only 12.2% in 1991.
By the 1980s about half of big collectives were
partially mechanized.
 Conclusion
Success in the non-state agricultural sector was
obvious by 1984.
“The emergence and growth of the non-state sector is
one of the most important elements of China’s
economic reform. This is so not because the
performance of the non-state sector has been so
outstanding but rather because the emergence of the
non-state sector introduced a competitive market
environment to China.”