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State and Market in Socialist Development: the case of Chinese industrial planning

Gordon White

One of the fundamental aims of revolutionary socialist In the case, and in more recent development in the marxist tradition has been that of contexts, the logic of socialist aims (class trans- transforming economic processes,replacing the formation and ) and of under- '' of markets under with the development (low levels of savings and technology, 'scientific' determination of social needs through pervasive scarcity, lack of trained personnel, [Bettelheim 1976]. Early theorists of Soviet dependence and international hostility) have combined , such as Bukharin and Preobrazhensky, held to create an equation between the 'social mechanism that, as the new socialist society arose,it would of planning' and apervasive,hierarchicalstate displace the 'economic categories' characteristic of apparatus [Senghaas 1981]. It is the which has capitalism (value, price, wages, profits). The science of taken on a dual historical role: as a developmental economicsitself would become obsolete,tobe counterpart to the capitalist entrepreneurial class and replaced by a merely technical discipline of rational as a system of economic coordination counterpart to economic calculation in a society organised as a single markets. Though lamented by liberals and leftists 'people'sworkshop'[Bukharin 1920 (1971): 12; alike, there is an inexorability about this equation in Bukharin and Preobrazhensky1920(1969); Brus the early stages of socialist transformation. As we shall 1973:ch 6]. Marxist economists have argued that, see later, however, the logic of grows weaker as while markets are not peculiar to the capitalist system, its initial tasks are fulfilled, and the contradictions they have reached their peak of historical development between a pervasive state and the requirements of therein, on the one hand operating as the underlying social, economic and political development intensify. logic of economic processes and, on the other hand, (along with ) as a fundamental source of capitalism's chronic instability and eventual collapse. Socialist Transformation of Chinese Industry provides a particularly dramatic example of Over the past half century, while capitalism has sought both the capacities and limits of the as an tocontrol the destructivepotential of markets, instrument of industrialisation. Like their nationalist socialismhasgrappledwiththeproblemof and imperial predecessors, the leadership of the constructing a productive alternative to them. In each Chinese (CCP) who assumed power case,theroleof thestatehasbeencrucial. in in 1949 saw rapid and comprehensive Revolutionary socialists in power have faced the industrialisation as the basic way to strengthen China challenge of translating mobilisational metaphors and as a nation-state - there was no question of whether academic constructs such as 'scientific planning' and or when to industrialise, but how. They inherited a ' production'intosocial mechanisms sizeable state industrial sector from the Kuomintang capable of surpassing the economic achievements of regime, producing 34.7 per cent of total industrial capitalism. While the founding fathers of output value in1949 [Xue 1981:18]. The impetus were optimistic - overly so - about the capacity of towards industrialisation, particularly heavy industry, socialistplanners and organised populationsto was further strengthened by the hostile international assume consciousanddemocraticcontrolof environment of the early l950s and the influence of economies already highly developed by capitalism, the Soviet economic advice and assistance. actual conditions of revolutionary socialist success - in relatively undeveloped societies -have greatly Giventhespecificconditionsof theChinese restricted the choice of institutional embodiments of , the new regime's attitude to indigenous the 'plan'. industrial capitalists was far more favourable than ¡OS Bulletin,954. sol5 so 2. institute of Developusent Studies. Susses

4 their bolshevik precursors in the aftermath of the By 1956, all modern sectors of capitalist industry had . The national ' was been converted into joint enterprises. Though many defined as an ally against imperialism and was initially managers retained their posts after that date and recognised as one of the four collaborating classes former owners continued to receive fixed which formed the official social basis of the post- payments on their capital (until the height of the revolutionary state. But indigenous Chinese industrial in 1967), from 1956 onwards capital was weakly developed in 1949 (particularly in these were de facto state enterprises. Along with this heavy industry) and was weakened further by an transformation of private industry, the socialist state outflow of capitalists and managers, particularly to sector expanded through renovation and expansion of and Taiwan, in the immediate pre- and previous (Kuomintang or foreign) enterprises and an post-revolutionary period. Over the longer term, ambitious programme of industrial construction moreover, the CCP realised that capitalists as a class, during the First Five Year Plan (1953-57). By 1956. all and markets as social processes, were sources of China's modern industry was, de jure or de facto, in potentially countervailing power. Transformation of state hands, as Table I shows. the industrial mode of production was essential for political as well as economic reasons. Simultaneously, commerce was also socialised: in wholesale trade, state and (state-controlled) Joint or Though the transition to state control of industry was cooperative commerce handled 97.2 per cent of total seen as essential, the mechanisms of transition were turnover by 1956; in retail trade, the figure was 95.8 relatively moderate and incremental, using economic per cent [Cheng 1982:ch 5]. as well as politico-administrative methods. Indigenous private industrial enterprises were not appropriated at Changes in formal ownership aside, the modern one fell swoop; there were two intermediate stages of industrial sector was gradually incorporated into the '. In the first, dominant up to 1953, the new system of planned production and distribution state regulated private enterprises by economic means constructed during the First Five Year Plan along the - monetary measures, price controls, taxation - and lines of the traditional centralised Soviet model. In this by gradually expanding control over supplies of raw system, central planning agencies calculate overall materials and wholesale trade in industrial com- economic balances, in static and dynamic terms, and modities. In the second phase, the state gradually agencies at different levels specify and converted private enterprises into joint state-private transmit orders on output and distributionto concerns, sending party or government cadres to join subordinate productive units. In China, state agencies or supplant the original managers. specified eight quantitative and qualitative targets

Table J

Transformation of private industry, l949S6

state stale-capitalist private rear indusíri' industry industry

joint private st ate- enterprises private producing enterprises for the state

1949 34.7 2.0 7.5 55.8 1950 45.3 2.9 14.9 36.9 1951 45.9 4.0 21.4 28.7 1952 56.0 5.0 21.9 17. 1 1953 57.5 5.7 22.8 14.0 1954 62.8 12.3 19.6 5.3 1955 67.7 16.1 13.2 3.0 1956 67.5 32.5

Percentages oÍ gross industrial output salue. encluding handicrafts. Source: State Statistical Bureau 1960:38

5 which were binding on enterprise managers: total could make their own economic decisions. The output value, product mix, quality, consumption of resulting degree of bureaucratisation was tempered to raw materials and energy, total wage bill, costs of some extent in practice. The system was less 'top production, profits (ie net revenue) and working down' than its Soviet predecessor; there was scope for capital. In such a system, market mechanisms play a subordinateunitstopresstheirdemands and marginal role: investment ratios are administratively considerable bargaining between state organs and determined and there are no capital markets; prices their subordinate enterprises. Moreover, there was a are administratively determined and regulated; money trend towards the emergence of informal markets in plays a passive, accounting role; the pattern of output raw materials, intermediate and finished products, as is overwhelmingly determined by the preferences of enterprises sought to remedy shortages and unplug state officials (not merely 'planners'), not market bottlenecks by setting up barter networks manned by demand: and sectoral relationships are determined by 'fixers'. a 'material balancing' process based on technical coefficients without any systematic opportunity-cost The maoist system of industrial planning was thus a accounting based on real or shadow markets. In terms complex mixture of administrative regulation, political of officialcategories, relations among industrial bargaining (vertically and horizontally) and 'grey' enterprises and between state organs and enterprises markets. But it was also a system in which the defining were not (following Stalin) to be based on exchange of characteristics of market processes were absent, weak commodities based on the '', but were or driven underground: productive units lacked subject to unified accounting at the national level, as if autonomy, economic linkages were predominantly industry were one large corporation. vertical (state-enterprise), not horizontal (between enterprises)[Liao1980],production dominated There were important, but relatively residual, market exchange (ie market demand had little impact on the elements: notably in relations between (state) industry pattern of output) and the regulating role of prices was and cooperative agriculture and in retail sales of very circumscribed. industrial consumer goods. In the area of industrial labour allocation, however, where the and Eastern European states have made considerable Chinese Industrial Performance: use of (regulated) markets, the Chinese system has Achievements and Problems remained firmly under state regulation since the mid- The results achieved with this cumbersome framework 1950s [White 1982:620-l]. should not be underestimated. China was successful, in a little over two decades, in establishing a relatively Though these central managerial features of Chinese comprehensive industrial structure while avoiding industrial economy remained consistent until the late dependence on foreign countries (except perhaps in l970s, one must be careful not to confuse Chinese the mid-1950s). During the1950s theratio of practice with any simple model of 'central planning'. investment noseby an estimated3.2-3.6times During the maoist period industrial planning was a compared to. 1931-36 [Yeh 1968:510-11] and con- contradictory amalgam of procedures, formal and sistently high (though fluctuating) rates of overall informal, built up coral-like over three decades. accumulation1have been maintained since then (for Though retaining the classic Soviet form, it was figures, seeStateStatistical Bureau1983:25 - modified by successive waves of reform, notably hereafter SSB). Most of these investment funds were during the Great Leap and the Cultural channelled into directly productive investment [SSB Revolution. The main thrust of these reforms was 1983:27], the lion's share going to industry, especially towards organisational decentralisation of planning heavy industry [SSB 1983:326-34]. The industrial proportion of total national product rose substantially andmanagerialpowersfromcentraltolocal government (akin to Khrushchev's regional decen- and a formidable heavy industrial capacity was tralisation of the Soviet planning system after 1957), established [SSB 1983:15, 216-17]. For example, the resulting in a partial dispersion of regulative power. value of machine-building output rose from 11.4 per Moreover, though a lot of activity described as cent of total industrial output value in 1952 to 27.7 per 'planning' clearly went on, it was poorly informed, cent in 1975. The annual rate of growth in industrial output value (in constant prices) was 10.9 per cent weakly coordinated, circumscribedinscope and uneven in impact. The resulting system was not very flic accumulation lundis officiall\ defined as that part of the 'centralised' nor particularly 'planned'. But it was national income a hich is used for expanded reproduction, non- heavilyadministered,a concepttobe carefully productive construction and increase ofproduct ve and non- distinguished from planned. 'Plan' instructions were productive stockits ni at erial format ion is the neu, lt added fi sed asseiv ol material and non-material sectors (less depreciation of tite issued as direct mandatory administrative require- total fixed assets) and the neu ly acquired circulating fund in kind by ments, rather than as indirect instructions designed to the material sectors during the sear[State Statistical Bureau set parameters within which enterprise managers 1983:5 79-80 j.

6 between 1952-80, with the advance of hèavy industry Second, not only did state-owned industry formally (13 per cent) outpacing that of light (9.5 per cent) holdthedominantpositioninindustry(and [Ishikawa 1983:2456].2 State industry dominated the commerce), but state organs gradually encroached on collective sector - the respective proportions were the non-state sector, converting formally independent 77.8 per cent and 21.4 per cent of gross industrial collective enterprises into de facto state enterprises output value in1982 [SSB1983:222]. However, (the same process of state encroachment also affected though the industrial proportion of net output value in agriculture, as Gray's contribution to this Bulletin industry and agriculture rose from 25.3 per cent in shows). Behind this lay a conception of socialist 1952 to 54.1 per cent in 1979, China had hardly been development which equated étatisation with a higher transformed into an industrial society. As of 1979, level of 'socialism'. Similarly the replacement of 84.9 per cent of the total industrial and agricultural remaining market elements with directive 'planned' workforce still worked in agriculture [Yang and Li regulation was equated with 'socialist transition'. 1980:103-4]. Third, the system of centralised directive planning was Impressive though these achievements appear, they defined as an increasing impediment to more efficient concealcertainbasicproblems which became utilisation of resources and greater economic and increasingly acute during the1960s and1970s. technical dynamism. Though these factors are closely Respectable (though fluctuating) statistical growth interrelated, for reasons of space we shall concentrate figures were purchased at the cost of heavy constraints on the third in the remainder of this article. on popular consumption. Levels of per capita earnings and consumption of non-agricultural workers rose sluggishly up to the mid-1970s, remaining static or declining in certain periods (for varying estimates see Ishikawa 1983:252-3 and Field 1983:652). While levels Chinese Industrial Planning: the market of capital intensity in state industry were steadily reform critique rising [White 1982:617], labour productivity and Chinese market reformers inthe post-Mao era efficiency of capital utilisation were falling. Marginal concentrated their fire on the economic irrationalities capital-output ratios decreased significantly [Ishikawa of the previous pattern of state involvement in 1983:253-60] and the net value of output per industrial industry (for a more detailed discussion, see White worker declined from 2763 to 2593 (current) yuan l983b). They have identified two crucial sets of between 1965 and 1975 [Nolan and White 1984:Table problematic relationships between state and economy: 8; compare Field 1983]. first, between administrative systems and economic processes and, second, between state organs of Whiletherewereanumber ofbasicfactors economic management and basic-level productive contributing to this increasingly problematic per- units. formance - such as political instability, international isolation, and the intractability of the problem of According to the first set of critical arguments, direct raising agricultural productivity - perhaps the main state involvementinindustry createsa tension factor identified by Chinese economists in the post- between the different (but not necessarily contra- Mao era was the negative impact of the state, both on dictory) social logics of the state and of 'natural' the structure and the functioning of the industrial economic processes. Pervasive state intervention can economy. First, there was a 'state bias' in development impede economic development because it imposes an strategy which privileged accumulation over con- inflexible network of administrative subdivisions sumption, 'productive' over 'unproductive' investment which break up the 'natural relations of the objective and heavy over light industry and agriculture (for economy'.Economicdevelopmentinvolvesan 'state bias' in Chinese rural-urban policy, see Nolan increasingdensity ofeconomicrelationships, and White 1984; for a Chinese critique of investment ('socialisation of production' in marxist terms) with an strategy,see Dong 1982).If accumulation and increasingly complex pattern of differentiation and industrialisation constituted the original raison d'être coordination between economic units. To the extent of state control over industry, they were increasingly that adminstrative units cut across these proliferating converted into raison d'état, the means whereby the 'organic connections' of specialisation and exchange, state apparatus (and state workforce) expanded and they may distort and obstruct economic progress [Xue legitimised their dominance in society (this 'over- and Ma 1982; Ma Hong 1981]. accumulation' or 'accumulation bias'is a familiar featureofstatesocialisteconomies;seeNuti This administrative segmentation of the economy has 1979: 246-52). two basic forms, regional and departmental. Each For the oÍhcia! Chinese definitions at heas s' and 'light' ndustrv. politico-administrative level - be this provtnce or see SSB 1983;585-6. township - restructures the economy in its own image

7 and tends to operate as an independent entity, allocation', which caused shortages and delays in adopting 'protectionist' measures against competing production [Ji and Rong 1979; Koziara and Yan 1983]. regions and striving to strengthen local autarky. The On the sales side, although output was theoretically policy issues thus raised are miniaturised versions of linked to demand through planning calculations, debates about self-reliance and integration which are responsibility for selling rested not with the enterprise usually posed at the national level. Turning to vertical itself but with state commercial organs which had to or departmental segmentation, industrial admini- 'sell what they produced'. The hiring of labour was stration exercised by central departments on the subject to strict administrative controls, so that 'branch principle' creates bureaucratic 'systems' (the enterprises with idle material and equipment found it Chinese word is xitong), each of which has a tendency difficultto reallocateor take on extra labour. tobecome an'independentkingdom',thereby Enterprise managers' lack of financial power in the impeding intersectoral coordination and technical context of 'unified receipts and unified expenditures' change. meant that efficient enterprises often failed to gain rewardsfor goodperformance andinefficient This departmental and regional segmentation has led enterprises received state subsidies for losses - this Chinese economists to propose two broad avenues of form of redistribution was known as 'eating from the reform. First, they argue that administration and same pot'. Since the discretionary funds of enterprise economy, politics and economics should be separated managers were so limited, moreover, they were unable more clearly and thelatter allowed to operate to desïgn incentive schemes to improve labour according to their own 'organic' logic. On the one side, productivity. this implies less state involvement and a change in the nature of regulative procedures from direct to indirect, The central theme running through these criticisms 'administrative' to 'economic'. On the other side, it was the severe economic cost of a system of industrial involves a revitalisation of markets and greater management which either reduced enterprises to awareness on the part of economic policy-makers of passivity or, where it did stir their initiative, drove the commoditised character of a socialist economy. them in unproductive directions. The 'key link' in Second, to the extent that directive state regulation reforming this system, argued Chinese economists, remains appropriate in selected areas, ils efficiency was the need for greater decision-making power for should be improved by strengthening the ability of enterprisemanagersvis-à-vistheirbureaucratic planning departments to curb 'departmentalism' and superiors [Jiang 1980], in a context of increasing inter- establish a more rational division of labour between enterprise linkages and market signals. central and local .

Turning to the second main set of critical arguments, Industrial Reforms in Action: progress and Chinese reformers have held that directive planning, prospects whether by central or local state organs, has robbed industrial enterprises of all initiative, turning them The overall strategy economic reforms which emerged during 1978-79 contained four major sets of measures. into beads on an abacus pushed hither and thither by First, bureaucraticfingers[Ma 1981:19]. Undertheprevious the national planning system was tobe system of industrial planning, the level and type of streamlined, taking on a narrower range of macro- output and key elements of the production process economic functions, notably determination of the size were determined by mandatory administrative fiat. and growth-rate of national income, the ratio between Investment funds were disbursed as (interest-free) investment and consumption and the allocation of strategic investments. The state was to continue to budgetary allocations; technical innovations and new products needed approval from above; sources of play the crucial role of maintaining overall balances in materials supply and sales outlets were arranged by physical and financial, domestic and international terms, and overseeing major changes in the industrial state organs, which also fixed prices; nearly all profits structure. Second, planners were to make greater use were remitted to state financial organs and most of the of 'economic levers' (such as credit, taxation, subsidy, enterprise depreciation funds reverted to the state. etc) to achieve their objectives in place of mandatory targets. Third, 'natural' economic linkages were to be On the production side, the target of total output value allowed greater scope in defining relations between tended to outrank other (efficiency oriented) targets enterprises and in setting the context for governmental - Chinese economists callitthe 'father of the regulations (through the emergence of 'economic emperor' [He 1979]. As a result, enterprises were regions' which cut across administrative boundaries). impelled to seek increased output value without Fourth, enterprises managers were to be granted sufficient regard for cost or quality. On the materials greater decision-making autonomy and their per- supply side,industrialenterprises suffered from formance 'verified' by increasing involvement in defectsinthe state-organised system of 'unified competitive markets.

8 Though considerable progress has been made over the The prospects for moving towards a more productive past five years, it has been very uneven, both over time relationship between state and economy and greater and across sectors and policy areas (for a more complementarity between plan and market are very detailed analysis, see White 1983b1. The statistical uncertain. While the past five years has brought basis for accurateindustrial planning has been greater clarity about the analytical and practical improved and greater attention has been paid to problems of combining plans and markets, the refining macro and micro planning techniques, constraints on reform have also become clearer. drawing on Eastern European, Japanese and Western Efforts to implement reform policies ran into serious experience. There was substantial progress towards economic problems,notablybudgetarydeficits, clarifying the spheres of market and plan. The CCP's inflation, hyper-investment, price instability. There 12th party congress in September 1982 stipulated that was also formidable political opposition from former in future, industry should be regulated in three basic supporters of radical and from entrenched ways: 'directive' (zhilingxing) plans (with mandatory within the state apparatus. targets) for key sectors and products (mainly strategic producer goods, basic materials, and certain key Indeed, the last five years have highlighted one of the consumer goods), 'guidance' (zhidaoxing) plans with basic dilemmas of a socialist developmental state. The referencetargets,fornon-strategic or relatively record of the 1960s and 1970s suggests the growing plentiful producer goods and a considerable pro- incapacity of the stateinstitutions to direct the portion of consumer goods, and 'market' (shichang) economy in socially productive ways through the allocation for non-staple foodstuffs and smaller traditional mechanisms of political mobilisation and consumer items [White 1983a:9-ll]. Each of these bureaucraticcontrol.To respondtoescalating processes involved progressively greater amounts of economic problems by strengthening traditional enterprise autonomy and market links, the second methods could only make matters worse. On the other category, 'guidance planning', being a hybrid with hand, to embrace the reform programme fully would both plan and market elements. bring about such a radical shift in relations between state and society as to undermine the very basis of Given the continued complexity of the tasksit leninist socialism. The state as problem-solver thus continues to tackle, however, the industrial planning confronts the state as an organised interest; the path to system is still basically unreformed. The scope of reform will probably be tortuous and long. 'directive' plans has not contracted as much as reformers would have liked - the 'eight targets' still Conclusion remaindominant.Thoughtheimportanceof What, if any, lessons can be drawn from the experience 'guidance' planning is strongly asserted, there is still a of the Chinese state's role in the industrialisation considerable lack of clarity about what this means in process? First,it may help to resist any simple, both theory and practice. Thus the fundamental ahistorical generalisations about the economic impact relationshipbetweenstateandenterpriseshas of state intervention and support a case that different changed little. Though there has been some progress in forms and degrees of state involvement are appropriate financial reforms (towards imposing capital charges at different stages of the industrialisation process, with on investment funds, expanding the discretionary traditional directive methods having greater relevance fundsofenterprisemanagers andsubstituting and effectiveness in initial periods of basic construction taxation for the old system of remission), in of structural change. Chinese experience also argues other areas change has been relatively marginal that at all stages, not merely in more 'mature' phases (productionplanning andmarketing,materials of industrialisation, state involvement needs to be procurement and labour recruitment). more selective in its scope (whether in terms of types of economic decisions or of different economic sectors) Nor has the range of market processes expanded as and more flexible in the forms of involvement adopted much as some of the original blueprints of 1978-79 (notably between 'directive' and 'guidance' methods). envisaged. Though the scope of markets varies across The Chinese case also points to the importance of sectors, in general they have not generated the salutary strikingabalance betweenstateagencies and efficiency pressures and productive competition which productive units (whether state collective or private reform analyses promised. In particular, the authorities enterprises) and developing a lively microeconomy have still to tackle the thorny problem of price reform; which can be channelled and not stifled by state without this, any serious expansion of the sphere of action. Finally, the Chinese experience illustrates the 'market regulation' is unthinkable. Without market general point that questions of economic management pressures working through price signals, the expansion and reform instate socialist contexts are deeply of decision-making autonomy for industrial managers political and not susceptible to merely technical is hardly likely to bear fruit in terms of increasing solutions they are problems of political economy in enterprise efficiency. the full sense of the term.

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