Economic Incentives In China

Economic Incentives In China

It is difficult to believe that an economic system serving more than 800 million human beings could disappear from observation for a decade, but that is largely what happened to the People's Republic of China during the 1960s. In part the lack of information resulted from continued U.S. recog­nition of the Nationalist government in exile on Formosa. More important were the cataclysmic political and economic events of the Great Leap For­ward (1958-1960) and the Great Proletarian Cultural Revolution (1966-1969), which obscured internal developments in Mainland China. In recent years economic data and eyewitness accounts allow an appraisal of the re­markable incentive system the Chinese have created.

They're not trying merely to revolutionize people and establish a sense of social conscience; they're trying to change the character of these people. The place is one vast school of moral philosophy. I think that's the main thing; whether they make it or not, it's a heroic attempt. I don't think anything in the Soviet revolution or even in our own compares in magnitude with trying to change a quarter of the human race.

A bit of history is necessary to understand how the current situation arose. The Manchus, the last of the succession of dynasties that had ruled China since ancient times, fell in 1912. Sun Yat-sen and his fellow revolu­tionaries became the government of China. The Constitution of 1924 made the Kuomintang the only legal party, but an internal split within the Na­tionalist Kuomintang between Chiang Kai-shek and the Communists in 1927 began a long civil conflict for control of the country. There was an uneasy alliance during World War II against the invading Japanese. After the close of the war, however, Communist forces controlled more and more of the country until at last Chiang Kai-shek resigned as premier and even­tually removed his remaining troops to Formosa. Soon afterwards the com­munist People's Republic of China, led by Chairman Mao Tse-tung and Premier Chou En-lai, declared itself to be the only legal Chinese govern­ment. The United States did not initiate direct diplomatic relations with that government until 1971.

Economic Planning in China

Great damage had been suffered by the Chinese economy during almost a half-century of political turmoil before 1949. Communication was dis­rupted, industry at a standstill, and the agricultural sector constrained by traditional land ownership and techniques of production. The tremendous natural-resource base and manpower supply could alleviate this dire situa­tion, but only if they could be effectively mobilized. As in Yugoslavia, a beginning was made on the classic pattern pioneered in the Soviet Union— government ownership of major facilities, a Five-Year Plan, and movement toward collectivized farming. Agriculture occupied four out of every five workers in 1950 and directly accounted for about half of total output; much of the industrial sector, moreover, was dependent on agricultural raw materials.

The Communist Party of China adopted the solution of collectivization as a means of increasing the size of the operating unit because it was, and still is, ideologically opposed to the emergence of a "rich peasant" economy. However, for political reasons it went about col­lectivization in a roundabout manner, first advocating and then carrying out a land-redistribution program. The advocacy of land reform earned the Communists the reputation of being agrarian reformers, which was exceedingly helpful in foreign as well as domestic propaganda. The implementation of the land-reform program, carried out in most parts of the country during 1950-52, was instrumental in redistributing wealth as well as political and economic power in rural areas. The process of collectivization or formation of cooperatives, carried out largely in 1954-56, was spearheaded by the formation of "mutual aid" teams. In 1958, the cooperatives were further merged into communes, although the operating unit was the "production brigade," which corresponded to the cooperative farm in size.

At the same time, a concerted effort was made to build up heavy in­dustry. With the help of Russian equipment and technical assistance, new plants were constructed incorporating modern technology. Impediments to increased efficiency and productivity were progressively removed.

The First Five-Year Plan (1953-1957) was a solid success. The small in­dustrial base inherited by the new government and located mainly in Manchuria and a few major port cities was rapidly expanded, and a beginning was made on the development of major industrial centers in the interior. Overall industrial production doubled, led by advances in key industrial materials—coal, steel, cement, and crude oil.

The Second Five-Year Plan, which was to cover the years 1958 to 1962, never materialized. Instead, the government under Mao embarked upon an ill-fated Great Leap Forward, attempting to speed up the already-impressive rate of industrialization achieved during the previous period. There was a realistic basis for expecting gains from the newly constructed plants coming into production and from extensive irrigation and land-reclamation projects in agriculture, but these factors were completely over-whelmed by a frenzy to achieve, or at least announce, ever-larger produc­tion norms inspired by the example and teachings of Mao Tse-tung. In the process, statistical reporting became so exaggerated that the economic bureaucracy was unable to plan realistically or to coordinate supplies with output requirements. Decentralized planning meant lack of coordination between local units. On top of all this, an ideological dispute between China and Russia resulted in the 1960 withdrawal of Soviet technicians and discontinuation of Soviet-backed aid projects.

The situation was equally bleak in agriculture. The abundant harvest of 1958 was followed by three extremely bad years, necessitating massive grain imports that were both an embarrassment to Chinese leaders and a drain on precious foreign-exchange reserves. The giant communes formed in 1958 were designed to equalize rural consumption (at a modest level) and to assume planning responsibilities as part of a move toward economic decentralization. They proved to be administratively unwieldy and an in­adequate source of motivation for the peasant working in production teams. Some labor-intensive efforts at building irrigation systems and other agri­cultural capital were carried out by communes, but the policy known as "walking on two legs," which aimed to build up small-scale industry, largely failed owing to lack of technical know-how and inability to meet quality standards. The "backyard furnace" movement to produce iron and steel has come to symbolize the excesses of the Great Leap period.

Between September 1958 and February 1959, we experimented producing iron by our local method. We have, of course, both coal and iron-ore up in the hills. We built a blast furnace and I was responsible for organizing the work. There were seventy of us working on this. We were given work points for all other work. But this was a non-recurrent phenomenon. I can't remember the exact figures now, but as far I can remember, it didn't pay.

The strengthening of the Communist Party at the local level, which had been counted upon to provide coordination, proved inadequate to the task. Beginning in 1961, the central communist leadership drastically redi­rected industrial and agricultural policy. Communes lost their nonagricul-tural functions to the central bureaucracy, and the operational responsibility for agricultural production was located below the commune level. Pri­vate plots were returned to peasants, and compensation was brought more into line with the amount of work performed. Agriculture was granted priority for investment funds, reversing the industrial emphasis prevailing previously. Industrial production was geared to chemical fertilizers and agricultural machinery.

Thus the situation of the economy at the beginning of China's Cultural Revolution had more than made up the ground lost during the Great Leap Forward; it appeared that rapid growth could once again proceed on a more realistic basis in the agriculture and raw-material sectors. The ex­treme attempts to create small-scale heavy industry had ended, and Japan and Western Europe began to supply some of the modern industrial facili­ties that had been curtailed by the Russian pullout.
"In 1964 it was announced that the Third Five-Year Plan was being prepared and would start in 1966. But by 1964 the Maoist pendulum had begun to swing back to the Great Leap Forward strategy." The events of the Cultural Revolution that followed represent a mixture of ideological dispute, political factionalism, and economic development strategy that is almost impossible to disentangle. While postponing a discussion of the im­pact on economic incentives, we can briefly state the rationale and imme­diate economic effects of the events of 1966-1969.

According to the Chinese view, Russian experience shows that a capitalist-type superstructure can grow up on a socialist base. When there are no capitalists to run industry and direct investment, the State de­velops organs to take over these functions, and the individuals put into control of them may suffer deformations of character sometimes even more unpleasant, from the point of view of socialist ideals, than those of the old bourgeoisie....

In China the Party persons in authority taking the capitalist road, whom we may call Rightists for short, were accused of imitating the So­viet model. They were accused of carrying out their work in an authoritarian manner, developing a superior attitude toward the workers, forming gangs to protect each other, and taking advantage of their position to gain privilege and amenities for themselves. They were taking the capitalist road in the sense that they obstructed socialism in the superstructure
From the initial skirmish between students and the head of Peking University in June 1966 until the new stage of consolidation was instituted in 1968, the vortex of the Cultural Revolution was the Red Guards, 15 to 20 million students organized on the basis of their educational institutions. Intellectuals, Party officials, and former members of the landlord class were subjected to harassment, occasional violence, and public humiliation. Often they were demoted or sent to rural areas for ideological reindoctrination. History has few, if any, examples of a political leader encouraging rebellion against his own regime, but that, in effect, was what Chairman Mao did during this period. His Sixteen Points, adopted August 16, 1966, provided guidelines for the Great Proletarian Cultural Revolution supporting pri­macy for workers and peasants over bureaucrats and for the countryside over cities. In all this, Mao Tse-tung's thought was to serve as a source of inspiration and guidance.

This political turmoil and challenge to authority unavoidably led to economic losses. The leaders of economic-planning agencies, factories, and local government units were all targets of the Red Guards. Many factories were shut down by strikes and shortages of power and raw materials. In­dustrial output fell by some 15 to 20 percent during 1967 and 196814 but unlike the situation during the Great Leap period, agricultural output and industrial construction were only slightly affected. Industry rebounded quickly once order was restored (in mid-1968, when the Army was called out in a nonviolent show of force and many of the Red Guards were dis­patched to work in remote rural areas).

"Three-in-one" revolutionary committees were established at all levels of planning. Revolutionary Party cadres, army representatives, and the workers themselves were joined in the actual management of farms and factories to prevent the reappearance of "capitalist road" behavior among higher officials.

The struggle-criticism-transformation in a factory, on the whole, goes through the following stages: establishing a revolutionary committee based on the "three-in-one" combination, mass criticism and repudiation, purifying the class ranks, rectifying the Party organization, simplifying organizational structure, changing irrational rules and regulations and sending people who work in offices to grassroots levels.

Little is known about the economic-planning apparatus currently op­erating in China. It would seem that the new emphasis on self-reliance at the enterprise level should reduce the bureaucratic input to more of a coor­dinating role. In 1970 references to the Third Five-Year Plan (1966-1970) reappeared, and an unpublished Fourth Plan exists for 1971-1975. What­ever its targets, an excellent start has been made in the years following the transformation of the Cultural Revolution into a more constructive phase. Barring disastrous harvests, it appears that a basis for sustained economic growth has been established.

The Chinese Incentive System

The Maoist incentive system, which is now becoming institutionalized in China, is subject to varying interpretations depending on the view taken of the optimal form of economic planning. If one happens to exalt order­liness above zeal, for instance, Mao appears to have been the despair of economic planners. He seems to have been bored by the economic affairs, and by his own testi­mony did not involve himself deeply in economic work for 13 of the 16 years of PRC existence up to 1966. Yet in this period he has brought to a halt two soundly functioning economic programs and strategies. His calculus differs from the planners'. He is not concerned with the return on invested resources, but rather with how many people were affected and how it did alter their thinking. His predilection for political campaign disrupts orderly development.

The basic contrast between Mao's views and a system stressing mate­rial incentives can begin by exploring the emphasis on the latter during the 1953-1957 First Plan. In industry increased labor productivity was to be achieved by creation of piece rates that directly related reward to perform­ance. Egalitarian features in the wage system were regarded as barriers to increased production. "Some of the wage increases given in June, 1956, were aimed at widening skill differentials and making readjustments for groups whose activities were important to society."17 The organization of agricultural collectives during this period was also based on the socialist principle of reward according to labor. The initial dividend for labor and equipment pooled into the collective was to be gradually reduced so that income would eventually be based on labor input alone.

It is interesting to compare the forms of nonmaterial incentives that appeared during the Great Leap Forward with those of the Cultural Rev­olution. During the Great Leap period of 1958-1960, the emphasis was on decentralization and the formation of giant agricultural communes.

The Water Conservation Campaign was built on moral rather than material incentives; the idea of sharing things in common, irrespective of the individual's contribution, made progress in the communes. The August, 1958, Resolution spoke of the need to promote "the social consciousness and morality of the whole people to a higher degree," to institute universal education, and "to break down the differences be­tween workers and peasants"; and later in 1958, shipbuilding workers in Shanghai abolished the systems of bonuses and piecework. All of these became central motifs again during the Cultural Revolution.

Piece-rate wages largely disappeared from the industrial sector during the Great Leap period. In their place emphasis was shifted to group per­formance as the basis for bonus incentives, if bonuses were given at all.

Competition between production teams, between factories, or between regions was established, with banners and titles serving as the prizes in most cases, instead of material incentives. Outstanding efforts received wide­spread publicity and resulted in challenges from other production units. This frenzy of enthusiasm could not be maintained permanently, especially in the face of food shortages resulting from harvest failures, and piece-rate wage systems reappeared after 1960. Just as an adequate industrial raw-material supply system did not exist to sustain the Great Leap ideology, a basis for sustaining incentives beyond the first burst of enthusiasm was not established either.

The failures of the Great Leap mentality were most apparent in agri­culture. Although the precise division of blame between disastrous harvests in three consecutive years (1959-1961) and shortcomings in the incentives provided by the newly formed communes is a moot point, it appears obvi­ous that nonmaterial incentive schemes were not readily applicable to peasant agriculture. As in Russia, the abolition of small private plots had serious demoralizing effects. The "free supply" system of providing meals and other consumption goods on an egalitarian basis removed the link be­tween work and living standard for the commune, and the decision to use the commune as the accounting unit to judge productive effort instead of smaller work teams diffused responsibility for failure. The inability of non-material incentives to persuade agricultural workers is shown in this state­ment by the leader of the Liu Ling village production brigade:

We had heard about that business of free food. But we didn't think it would be suitable here with us. We simply did not believe in it. We were afraid that it would undermine our members' trust in the prin­ciple of the day's work as the unit. It would make consumption in­dependent of the work contributed, and we did not think that would work well. ... If any such discussion was to start [among the members], we could check it. But no one took the idea up.

It became increasingly evident that neither productive capacity nor ideological purity existed to make moral incentives a sufficient basis for diverting investment funds from agriculture to heavy industry. With the shift in emphasis toward the rural sector came a new incentive policy. "In the communes the policy had two main patterns: a sharpening of the effect of money payments for collective work and a return to individual initiative in side-line activities including use of small private plots again. The aims were to boost production and deliveries to the State and to raise peasant income and enthusiasm."21 Thus for both industry and agriculture the years after 1961 until the Cultural Revolution represented a de facto return to material incentives in spite of the veneer of rhetoric that continued to appear in pronouncements concerning economic development policy. "With this came the reemergence of intellectuals, technocrats, and managers—all with close connections with regional Party authorities. 'Expertness,' rather than 'redness,' was what counted in making economic decisions."

It is no coincidence that Mao Tse-tung was gradually being reduced to an honorific role during this period. Although he continued to make statements criticizing the policy of reactivating material incentives, it was not until the Cultural Revolution that Mao's return to supreme political authority made slogans like "Learn from Tachai" the watchword for the new incentive policy.

Tachai Brigade in North Shansi operated in the worst possible condi­tions—stony hills and eroded gullies. The brigade painfully and success­fully terraced the hillsides and filled them with desperately scarce soil. In 1963 a deluge destroyed the terraces. However, the brigade refused state aid (to which it was entitled) and rebuilt its cultivation plots, achieving very high yields. In 1965, opponents of Mao challenged the figures of crop yields put out by Tachai, but after an expert team was sent in by Chou En-lai to measure every plot and count every grain, the brigade was vindicated.

The Cultural Revolution

The Great Proletarian Cultural Revolution (to use its full official title) re­asserted the role of people's thoughts and motivations in achieving eco­nomic goals. Instead of giving mere lip service to the unity of interests be­tween the ruling elite and the masses, the Cultural Revolution appeared as a genuine attempt to erase both the overt and the unconscious symbols of rank and privilege from Chinese society. As Westerners, we are skeptical of such drastic changes in what we regard as basic human nature. "But the opportunity to hear the words in person, even on a carefully controlled tour of the country does make a difference. One discovers that real people not only mouth the stock phrases and depict the stock situations described by official releases for the outside world, but actually live them from day to day and, moreover, can be pressed for details and amplifications," concluded one of the reporters from the New York Times group that visited China. Where else would it happen that "the new Ambassador to Canada and his wife have just returned from protracted work-study in Hunan, where they spent much of their time laboring in the rice fields."?

Eyewitness accounts of Western visitors allow a far better basis for judging the continuing impact of the Cultural Revolution than would be possible if China's virtual blackout on economic information had not been lifted. We will consider briefly how the incentive system is currently affected by wage policy, internal management practices, and efforts to eliminate what one group aptly termed "the manipulative character of expertise."

"We are still in the stage of struggle-criticism-transformation on this matter [of wages]," Liu Wentao, the 44-year-old deputy chairman of the factory's Revolutionary Committee, said. Struggle-criticism-transforniation is the phrase used to describe the discussions under leadership guidance that go on in the process of working out agreements with a group.
The wage question came up when Mr. Liu and others in the factory management were asked what had been done about the system of bonus incentives that prevailed for workers before the Cultural Revolution. .. .

More pay for extra output and overtime work appears to have been eliminated everywhere and it has been a fairly general policy to increase base pay to some extent to make up for the disappearance of incentive pay.

The machine plant management declined to say specifically what the problem was in the wage debate, but the wage level after elimination of incentive pay seemed to be the issue.

In both industry and agriculture, wage differentials based on skill levels have been reduced but not eliminated. How this system works in agriculture is demonstrated by Hongqiao, a prosperous vegetable-growing commune near Shanghai visited by American scholars.

Hongqiao also follows Tachai's system for determining wages. Under the "Tachai system" peasants work together on tasks determined by team leaders. Meetings are held at regular intervals in which peasants evaluate their own work and suggest a work-point rating for them­selves. Then other peasants discuss the ratings and adjust them if neces­sary. The factors considered in determining work points for each person are first that person's attitude toward work and then his or her level of skill and degree of strength... .

The value of the work point is figured on the annual income of the production brigade (at Tachai) or team (at Hongqiao or Huadong). The total number of work points is divided into the income left after all other expenses are met. In Hongqiao, for example, 60 percent of the total income is distributed to the workers; 5 percent goes to the state for tax; 7 percent for capital improvements to the commune; 3 percent to a fund for public benefit (medical services, social welfare for the aged and disabled, nurseries, and schools); and the remaining 25 percent meets the costs of production... .

Peasants also maintain small private plots to grow vegetables for their own consumption. Government policy has never been to completely work for the collective. In Huadong each family head is allowed Vs mu [i.e., %8 acre]. In addition some raise their own hogs, ducks, and abolish these small bits of land which the peasants till in addition to their chickens. Twenty-five percent of the families' income was said to come in this way.

The Cultural Revolution has produced a significant increase in worker participation in economic affairs. Workers are included prominently on the revolutionary committees that form the basic administrative unit for each farm and factory; party committees coexist with revolutionary committees at each level but are only minimally involved in day-to-day operations. The campaign slogan of "self-reliance" has produced many innovations by workers; a cotton-textile mill in Shanghai, for instance, invented a knot-tying machine that doubled productivity.29 In addition, schools have been established in factories to produce technicians from the ranks of experi­enced workers. All of these measures are aimed at breaking down distinc­tions between professional managers or engineers and ordinary workers. Although it appears that the role of workers in managerial decision making is limited in many instances, the Chinese system, by all reports, has given workers a feeling of direct involvement in the production process without reliance on individualistic enrichment as in the Yugoslav experiment with worker self-management. Just how important worker participation is to be in China will become clearer as the three-in-one principle of organization becomes more firmly rooted.

Equally important for China's future is the effort to abolish traditional distinctions between city dwellers and the rural population. Millions of young Chinese have gone to "reform themselves through labor" on com­munes. Some will be chosen for further education partially on the basis of their work performance, but for most it represents a permanent move away from overcrowded cities. In addition, schools training new party leaders are now located in the countryside and are essentially farms with cadre students providing the needed labor. "Why should bureaucrats plant corn? The idea is that they learn to respect and understand the vast majority of Chinese people who do manual labor, break down their own attitudes of white-collar superiority, and become more physically fit through labor."

Imagine a similar program for civil servants, professors, doctors, and other professionals in the United States!
One of the most interesting manifestations of this movement arises from Chairman Mao's slogan, "In medical and health work, put the stress on rural areas." Not only do doctors routinely spend part or all of their careers in rural areas, but they are also training "barefoot doctors"—com­mune members selected for training as the first level of the medical system.

Miss Chang has had a year of medical schooling over a period of three years and says she knows how to diagnose and treat most common illnesses and even how to set simple fractures and to stitch up cuts. If she thinks the illness is one she cannot deal with, she sends the patient to the commune hospital where university trained doctors are on duty.

When Miss Chang is not administering to the sick, she works in the fields like other members of the collective. She is credited with work points—the index of how much she will get of the collective's earnings at the end of the year—equivalent to the number given to a full-time field worker. This comes to about $15 a month.
It is now time to attempt an impossible task—a summing up of the Chinese experience. Monumental changes have occurred in China in recent years. It appears that a vast majority of the Chinese people, especially the young, really believe and practice the precepts of the Cultural Revolution. Maoist thought will undoubtedly survive Mao, regardless of the struggles over succession that may follow his death. "The People's Republic of China has become an economically strong, unified nation. Its capability simultane­ously to meet requirements of feeding its population, modernizing its mili­tary forces, and expanding its civilian economic base must now be assumed from its record to date."

Can China sustain its economic performance while continuing to rely heavily on moral or nonmaterial incentives? We all recognize the value of enthusiasm and high morale in a family, classroom, or athletic team; why not for an economic system as well? Economists have begun to realize that motivation factors may play a larger role in economic development than marginal shifts in resources.33 The Chinese appear to be attempting to institutionalize a system of moral incentives on an economy-wide basis in the most populous nation in the world.
Is the Chinese road to socialism a "reasonable" economic system, given conditions and attitudes prevailing there? Perhaps Western standards of reasonableness are not easily applied to China. One sympathetic American scholar points out that much of what is happening in China does not show up in conventional measures of economic performance. "Maoists believe that rapid economic development is not likely to occur unless ev­eryone rises together."34 Efficiency is thus sacrificed by building on weak­ness rather than strength and by forgoing the benefits of extreme division of labor. In addition, many of the gains of insuring against famine, taking preventive public-health measures, and spreading educational opportuni­ties are not measurable in terms of the human satisfaction provided. "Most surprising perhaps, was the contrast between physical China, which to an American is still a very poor and struggling country, and the people of China. For the overwhelming impression of China is vitality—the enthusi­asm, the humor, and the tremendous commitment of her people to this new China."