Chu-yuan Cheng - Chinas Allocation of Fixed Capital Investment, 1952-1957

THE UNIVERSITY OF MICHIGAN CENTER FOR CHINESE STUDIES

MICHIGAN PAPERS IN CHINESE STUDIES

NO. 17

CHINAS ALLOCATION OF FIXED CAPITAL INVESTMENT, 19521957

By

Chu-yuan Cheng

Professor of Economics

Ball State University, Indiana

Ann Arbor

Center for Chinese Studies

The University of Michigan

1974

Open access edition funded by the National Endowment for the Humanities / Andrew W. Mellon Foundation Humanities Open Book Program

Copyright 1974

by

Center for Chinese Studies

The University of Michigan

Printed in the United States of America

ISBN 978-0-89264-017-1 (paper)

ISBN 978-0-472-12822-8 (ebook)

ISBN 978-0-472-90222-4 (open access)

The text of this book is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License: https://creativecommons.org/licenses/by-nc-nd/4.0/

ACKNOWLEDGMENTS

Much of the basic research and writing of this monograph was completed while I was a Senior Research Economist at the Center for Chinese Studies at The University of Michigan. As is generally the case, this paper could not have appeared in its present form without the aid of many friends and colleagues. Particularly, I must single out the unstinting efforts of Professor Albert Feuerwerker in providing the inspiration as well as arranging the myriad of details necessary for publication. I would be immodest indeed if I failed to mention my indebtedness to Professor Alexander Eckstein whose critical acumen saved the author from many a pitfall. Errors of omission and commission, however, are solely my responsibility.

I would also like to thank my colleagues at Ball State University who provided me with the constant encouragement and a lightened teaching load that enabled me to revise and update my initial work.

C. Y. Cheng

Muncie, Indiana

June 1974

TABLE OF CONTENTS

LIST OF STATISTICAL TABLES

24. Ratios of Investment in Metals and Metal Products Industries to Investment in All Manufacturing, Mainland China, Japan, the Soviet Union and the United States

25. Official Data on Railway Investment, 1952-57

31. Planned and Actual State Capital Investment in Agriculture, 1952-57

33. Distribution of State Investment in Agriculture, 1952-57

36. Imputed Rural Labor Investment, 1952-57

The significance of capital formation for economic growth has been widely discussed in the economic literature over the past two decades. Its importance has now become almost a self-evident fact requiring no further elaboration. In recent years, the study of capital formation in Mainland China has attracted growing attention from scholars in the field of Chinese economy. Most of the available studies, however are concerned primarily with problems relating to the measurement of the aggregate levels of capital formation, the overall rates of investment and the relationships between capital formation and the changing rates of economic growth. The allocation of investment among different economic sectors, and among various branches within each sector, has been only touched peripherally without delving in detail. The purpose of the paper is to fill this gap. It aims at studying primarily the allocation of fixed capital formation in Mainland China.

In an early study comparing capital formation in the Soviet Union and in the United States, Norman Kaplan observed that the Soviet Unions greater rate of increase in industrial output and economic growth has been due, basically, not to the differences in USSR and United States rates of investment.

Similar conclusions were derived by Simon Kuznets in his extensive study of capital formation covering a wide range of countries. Kuznets noted that the distinctive intersectoral allocation of capital formation in the Communist countries has a significant bearing on their growth rates.

Against this background, we would like to explore what role did the intersectoral pattern of investment lay in Mainland Chinas economic growth. For this purpose, we need detailed information on the distribution of capital investment not only among the various economic sectors, but also among various branches within sectors. Such a study requires a large amount of disaggregated data. Because of the extreme paucity of relevant data, we are forced to limit our study to domestic fixed capital investment.

By domestic fixed capital investment we mean the additions to (1) construction and improvements attached to the land, and (2) producers durable equipment. We exclude inventories and net balance of claims upon other countries. The concept of capital formation thus defined is narrow indeed. Moreover, the study also excludes consumer durables (except housing), and military equipment and installations.

This study covers only the 1952-57 period, when statistical data were comparatively abundant and the rapid growth rates which require explanation were experienced. Years before 1952 are not included because of the poor quality of the data and because this is mainly a recovery rather than a development period. For the post-1958 period information is particularly scarce. Therefore a detailed analysis becomes infeasible.

While the focus of this paper is on the allocation pattern of investment, it must first of all, select one set of aggregate investment estimates to work with. Unfortunately, the official data on basic construction investment is conceptually different from the standard concepts of fixed capital investment. Also, there are many fundamental defects in the official statistics of investment aggregates which are difficult to correct. Among the half dozen estimates of aggregate capital formation for China by scholars outside the mainland, there is not yet one commonly accepted. A major study of this problem was undertaken by K. C. Yeh. Chaos estimates represent the first major effort to derive an independent estimate bypassing the official investment data.

Despite his ingenious innovations in solving many data problems, Chaos estimates suffer from two basic biases. First, since major repairs of machinery and machines turned out by handicrafts were excluded, the machinery component of the estimate is understated. Second, since a sizable private investment in rural housing was imputed and which was possibly overestimated, the investment share between farm and non-farm sectors is grossly distorted.

Confronting these problems, we begin our study with a brief survey of official investment statistics and those made by economists outside mainland China. A detailed review is devoted to Chaos estimates, which are used as a basis for this study. Necessary adjustments are made to eliminate the biases embodied in Chaos aggregates.

Based on the adjusted aggregates, the study will turn to the allocation pattern of investment. The aggregate investment in fixed capital will be first broken down into five major economic sectors: agriculture, industry, transportation and communications, residential construction and other services. An attempt is then made to measure the sectoral average and incremental capital-output ratios, as a basis for analyzing Chinese investment policy. Fixed investments in the industrial sector are then again disaggregated into thirteen industrial branches: iron and steel, building materials, chemical, non-ferrous metals, machine-building, metal-processing, coal, textiles, electricity, petroleum, food-processing, paper-making and others. This will be followed by an effort to distribute the aggregate investment in the agricultural sector into six major components: water conservation, livestock, farm implements, afforestation, land reclamation, and others.