Asian Business & Management, 2003, 2, (301–321) r 2003 Palgrave Macmillan Ltd 1472-4782/03 $25.00 www.palgrave-journals.com/abm

Path Dependency and Growth in Rural China Since 1978 Chris Bramall School of East Asian Studies, Arts Tower, Sheffield S10 2TN, UK. E-mail: [email protected]

The remarkable pace of economic growth in rural China over the last two decades cannot be understood without reference to post-1978 policy change. However, using a newly created data set that covers a third of China’s counties, this article shows that growth was path-dependent: those counties where the industrial base was well-developed at the time of Mao’s death grew rapidly over the next two decades, and vice versa. The continuities in Chinese economic growth across the ‘great divide’ of 1978 should be recognized: the growth of the Dengist era bore the imprint of the Chinese past. Nevertheless, the importance of path dependency should not be overstated. The industrial legacies of the Maoist and Republican eras were not always conducive to growth, and some counties supplemented their meagre inheritance by importing labour from the Chinese interior, or by attracting capital from abroad. Furthermore, despite the positive legacies of the past, the success of Chinese rural industrialization remains in doubt. Asian Business & Management (2003) 2, 301–321. doi:10.1057/palgrave.abm.9200057 Keywords: China; rural industry; growth; path dependency; skills; Third Front

Introduction It remains a moot point whether rural China followed the ‘involutionary’ growth path suggested by Philip Huang (1990) in the three decades after the 1949 Revolution. Official Chinese data on agricultural output show only slow growth, but they understate the true rate of increase in the late 1960s and 1970s by underestimating output levels at the close of the Maoist era. At best, however, per capita output increased slowly in the two decades after 1957. By contrast, official rural growth rates for the transition era portray an extraordinary output surge. Real agricultural value-added almost tripled between 1978 and 2000. Total industrial value-added increased 10-fold over the same period and, though we do not have data that make possible a precise rural–urban disaggregation, we know that it increased more rapidly still in rural areas as a result, per capita rural consumption rose no less than four-fold during the post-Mao era (NBS, 2001: 52, 66). Of all the many

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remarkable changes that occurred during the Dengist era, it is this economic transformation of the Chinese countryside that is most in need of explanation. It is well-known that industrialization was the engine that drove rural growth (Byrd and Lin, 1990; Findlay et al., 1994; Ho, 1994; Oi, 1999; Lin and Yao, 2001; OECD, 2002). Agriculture may have been the leading sector in the early years, but rural industry assumed centre-stage after 1984.1 The output of rural state-owned (guoying) industrial enterprises increased only modestly, but this was more than offset by the explosive growth of xiangzhen gongye qiye (town and village industrial enterprises). These enterprises recorded annual output increases of around 15 per cent during the 1980s and 1990s, a remarkable rate even after stripping out a considerable degree of over-reporting of output in the official data. Xiangzhen employment also rose dramatically, climbing from 28 million in 1978 to 135 million in 1996; a further 38 million were employed in the non-farm private sector or were self-employed (NBS, 2001: 111). (Guojia tongjiju (National Bureau of Statistics) is abbreviated here as NBS.) Even the Party leadership was surprised. As Deng Xiaoping admitted in June 1987: ‘In the rural reform our greatest success — and it is one we had by no means anticipated — has been the emergence of a large number of enterprises run by villages and townshipsythis result was not anything that I or any of the other comrades had foreseen; it just came out of the blue’ (Deng, 1994: 236). Most explanations of this remarkably rapid rural industrialization have focused on the role played by policy changes, and in particular the favourable effect on incentives of the gaige kaifang (reform and opening-up) package introduced after the Third Plenum of the Chinese Communist Party in December 1978 (Findlay et al., 1994; Oi, 1999). However, these assessments neglect the possibility that those parts of the People’s Republic, which grew most rapidly in the 1980s and 1990s, did so because they enjoyed relatively favourable ‘initial conditions’. This notion that Chinese rural growth was path-dependent is the central focus of this article. In what follows, the contribution of prior industrialization to post-1978 rural growth rates is explored using a large 757county sample, and by abandoning the distinction usually made in the literature between local guoying and xiangzhen industrial enterprises; in this article, both types of enterprise are classified as rural. The evidence considered supports the path dependency hypothesis: rural growth rates between 1982 and 1997 were positively correlated with the degree of prior industrialization (as proxied by 1982 industrial employment rates). However, the nature of the linkage was complex and, as will be seen below, defies simple all-China generalization. Asian Business & Management 2003 2

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The Path Dependency Hypothesis There is no doubt that policy change played a crucial role in the acceleration of Chinese rural growth after 1976. A combination of deregulation, higher procurement prices and decollectivization revived agriculture. This revival in turn boosted consumer demand for manufactured goods in rural areas and provided a ‘surplus’, which could be invested in the creation of new rural enterprises, and the expansion of existing ones. At the same time, fiscal decentralization allowed local jurisdictions to retain a larger proportion of this surplus, boosting investment levels still further. As importantly, the opening up of the economy provided access to imported technology, foreign capital and overseas markets. And restrictions on the private sector were also gradually removed as the 1980s progressed. Taken together, these changes invigorated the industrial sector by intensifying competition, increasing productivity and by providing local government officials with a powerful incentive to establish and run profitable companies. This gaige kaifang package was undoubtedly instrumental in raising the rural growth rate; without it, the slow growth of the Maoist era would assuredly have continued. Nevertheless, an exclusive focus on policy change is firmly ahistorical and positively misleading, because it implies that Chinese rural industrialization commenced only in the late 1970s. Nothing could be further removed from the truth. We know that an array of rural industries was created across China during the Republican and Maoist eras, and that this industrialization left a legacy of industrial skills and physical capital in its wake. We also know that the extent of these legacies varied across the Chinese hinterland; the proto-industry of the Republican era was most developed in the Yangzi delta, whereas the Maoist development strategy accorded high priority to the development of Third Front industry in western China and in the mountainous interior of coastal provinces.2 Precisely because the industrial legacies of the past were significant and yet differed markedly across China, they provide us with a plausible explanation of differences in post-1978 rural growth rates. This a priori case for path dependency is strengthened by the nature of the Chinese economy at the end of the 1970s and throughout much of the post1978 period. All theories of path dependency are premised on the assumption that economies (both regional and national) are characterized by some form of rigidity that impedes the movement of factors of production. As a result, an economy that enjoys favourable initial conditions can ‘lock in’ its success and grow quickly. Conversely, an economy with unfavourable initial conditions is condemned to develop along a sub-optimal growth path. Given that the post1976 Chinese economy was characterized by all manner of rigidities, much more so than many other economies, path dependency theory appears well Asian Business & Management 2003 2

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suited to explaining patterns of growth in the People’s Republic. These rigidities are most apparent in respect of obstacles to labour migration. Stateimposed restrictions on labour migration via the hukou system have long restricted in-migration to fast-growing regions. These restrictions have been reinforced by cultural obstacles; open discrimination against workers born in Subei, the northern part of Jiangsu province, is widespread in other parts of Jiangsu and even in neighbouring Shanghai. Indeed, location operates in Jiangsu and across China in the same way as ethnicity in other contexts — migrants are discriminated against on the basis of geographically defined identity (Finnane, 1993; Honig, 1996).3 Nevertheless, existing accounts of the link between the industrial legacies of the Republican and (especially) the Maoist eras on the one hand, and the rural industrialization of the 1980s and 1990s on the other, are unconvincing. It is not difficult to document either the scale of pre-1978 industrial development, or the pace of post-1978 rural growth, but little has been done to link the two phenomena. The arguments advanced for path dependency in the writings of (inter alia) Putterman (1997) and Perkins (1998) are plausible, but the evidence they present for industrial path dependency is fragmentary (as Perkins himself admits). There is in fact no systematic account of the links between post-1978 rural growth and the development of the Maoist and Republican eras. The first step to be taken in putting this right is to identify more precisely which legacies of the rural industrial past might have affected growth. Three legacies come to mind; an abundant supply of (unskilled) labour, a significant cadre of skilled workers, and an abundance of physical capital, and on the impact of all three, the literature is divided.

Unskilled Labour Much of the literature on China has employed, whether implicitly or explicitly, the type of classical model developed by W.A. Lewis, in which ‘unlimited supplies of labour’ are the key to economic growth. In this type of model, a pool of under-employed agricultural labour promotes growth by holding down real wages and hence boosting industrial profits. We can therefore infer that Chinese regions that ended the Maoist era with a large agricultural sector were advantaged because that inheritance gave them a vast pool of unskilled labour, which could be combined with increasingly abundant private and foreign capital to develop new industries. By contrast, those regions with a small ‘reserve army of labour’ — mainly areas where Republican and Maoist industrialization had been most extensive — were at a disadvantage at the end of the 1970s. Much of their labour was employed in inefficient state-owned enterprises (SOEs), and yet was reluctant to leave these enterprises because of Asian Business & Management 2003 2

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the loss of welfare benefits involved. Regions with a large farm workforce laboured under no such handicap because their under-employed agricultural workers had little to lose by jumping into the sea (xia hai) of private and xiangzhen enterprises. The central conclusion to be drawn from this analysis is that Chinese growth was indeed path-dependent, but in a negative sense; those parts of the People’s Republic where unskilled labour was abundant grew quickly, and vice versa. Prior industrial development positively hindered growth by absorbing labour. This is the essence of the famous Sachs and Woo (1994) ‘Russification’ hypothesis. According to them, Manchurian growth after 1978 was slow because of the very success of Maoist development. In consequence, a large proportion of the workforce was employed in inefficient state-owned heavy industry by 1978 and yet was not ‘surplus’ in the sense that these industrial workers were reluctant to abandon the welfare benefits associated with such employment for an uncertain future in the private sector. Sachs and Woo thus draw a clear parallel between slow growth in Manchuria and across Russia during the 1990s. By contrast, south-eastern provinces like Guangdong and Fujian were advantaged. Their industrial sectors were under-developed by the close of the Maoist era and thus both provinces enjoyed abundant reservoirs of surplus labour. The absence of industrialization in these areas therefore paved the way for rapid future growth.

Industrial Skills Yet even if we accept that unskilled labour helps to promote growth, we must recognize too the importance of skilled labour. Human capital — both formal education (which is not discussed here) and the more informal skills and practices that workers and managers acquire from ‘learning by doing’ — is critical for economic growth. Experience of factory work is argued to be important because farm work is qualitatively different from that on an assembly line in being outdoor, seasonal, and characterized by the absence of close supervision. The working habits acquired by farm workers are hard for manufacturers to break and the transition from farm to factory is a profoundly alienating experience for those involved. So, it was in Industrial Revolution Britain (Thompson, 1968), Meiji and interwar Japan (Tsurumi, 1990) and in ‘the Rest’ (those countries in Latin America and Asia that have successfully developed modern manufacturing production since 1945) (Amsden, 2001). Accordingly, an extended process of learning and habituation is essential before farm workers are able to achieve high levels of productivity; there is no substitute for experience of industrial employment and in this sense the Lewis model is far too sanguine in its assumption that labour can be transferred easily Asian Business & Management 2003 2

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from farming to industry. Indeed, learning and habituation are just as important for industrial managers and government officials as for ordinary workers, and therefore farm workers have to go through an even more demanding process of ‘learning by doing’ before they are able to manage industrial production efficiently. The more experience of industrial production that has been acquired, the more easily a region or country can close the ‘ideas gap’ (Romer, 1993) between itself and its more advanced neighbours, and grow rapidly. In Amsden’s (1989) phrase, human capital makes possible ‘industrialization by learning’. The importance of skills for the development of rural industry features prominently in the literature on China. For example, many scholars have argued that pre-war proto-industrialization paved the way for the development of light industry across China in the 1980s (Gates, 1996; Li, 1998).4 It was no accident that Jiangsu and Zhejiang provinces pioneered the rural industrialization of the Dengist era; the two were in the van in developing proto-industry in the 1920s and 1930s, and the skills acquired by their workforce in the process stood them in good stead half a century later. The long-run significance of prior proto-industrialization in Jiangsu is often illustrated by the example of Shengze, a silk-weaving centre in Wujiang county. Shengze was one of the main centres of silk weaving in the 1920s and 1930s. There were, for instance, 8000 handlooms and 1100 power looms in operation in 1936–37 (SJY, 1991: 124) and silk weaving provided the principal source of income for some 20,000 families (Bureau of Foreign Trade, 1933: 406). Growth was slow during the war years and the Maoist era, but Shengze’s fortunes rapidly revived after 1978. Silk production was initially the preserve of guoying enterprises, the output value of county-run factories doubling between 1978 and 1982. However, the xiangzhen sector dominated by the late 1980s, its share in output rising from barely 12 per cent of output in 1982 to 75 per cent by 1994 (Ju and Wu, 1986: 303, 307). In that same year, the two largest xiangzhen enterprises each produced more than 2 billion yuan of output, about five times more than the largest SOE (Ho and Kueh, 2000: 99, 104–107). More significantly from our point of view, inherited skills appear to have played a crucial role in this growth. For example, a survey of 268 households found that 57 per cent of households had worked in the silk industry for two generations and 6 per cent had worked for three; it also apparently found that young women entering the industry with a silk weaving family background acquired the necessary skills some four or five times faster than the norm (Ju and Wu, 1986: 305). The Maoist development strategy too played its part in creating a pool of industrial workers and managers in rural areas. The creation of shedui industrial enterprises by China’s communes dates from the start of the Great Leap Forward in 1958, but the majority of them were founded during the late Asian Business & Management 2003 2

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1960s and 1970s; in all, these enterprises employed a far-from-insignificant 17.3 million workers by 1978 (Nongye bu, 1989: 292). SOEs were also an important source of rural employment. Even in Jiangsu’s Wuxi xian (county), where xiangzhen industry was especially well developed by the late 1970s, 20,000 of the xian’s 120,000 industrial workers were employed in county-run factories (WXG, 1990: 28). Gansu province, where much of the industrial employment was provided in enterprises run by the provincial government or the central ministries, was at the other end of the spectrum. However, even in Gansu, county-run factories — that is, rural SOEs — employed 349,000 workers in 1985, over a sixth of all state sector workers in the province (GSQ, 1988: 375). Even if these sorts of industries were as inefficient, as alleged by Wong (1991) and others, their very existence allowed the rural population to acquire skills and gain invaluable experience of industrial employment. This evidence on the scale of the rural industrial sector at the end of the 1970s, together with what we know of obstacles to factor mobility in China, has led a number of scholars to conclude that it was the skills legacy bequeathed by Maoist rural industrialization that laid the foundations for the growth of the 1980s (Putterman, 1997; Perkins, 1998). Given that rural industrial employment rates varied considerably across China — barely 5 per cent in the interior provinces of Guizhou and Gansu but close to 20 per cent in coastal Jiangsu and Zhejiang — we have a potentially potent explanation of spatial differences in rural growth rates. Nevertheless, a degree of scepticism is in order. Were the proto-industrial skills acquired during the process of straw-plaiting and grass mat production really of much use in the new industries of the 1980s and 1990s? How much damage was inflicted by the Cultural Revolution on skill levels in the countryside? Can we not argue that the cadres who ran the rural industries of the late 1970s were much better acquainted with minutiae of Mao’s writings than with the intricacies of industrial production? However, before we look at the evidence, the third potentially important industrial legacy of the past needs to be outlined.

Inherited Stocks of Plant and Equipment It seems reasonable to hypothesize that any region that had built up an abundant supply of plant and equipment by the close of the Maoist era was advantaged because of the gestation periods involved in developing industrial capital from scratch. Of course, a locality could in principle transform savings into investment after 1978 and thereby supplement any capital stock inherited from Maoist and Republican periods, but few would deny that this is usually a lengthy process. In any case, an increase in the Asian Business & Management 2003 2

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savings rate in a poor locality necessarily implied a short-term reduction in an already inadequate level of consumption. State subsidies offered a potential solution, but as fiscal decentralization gathered pace after 1978, the problem of financing investment became more acute, especially in the absence of private capital markets. We can therefore hypothesize that local economies across China remained highly dependent upon the industrial plant and equipment they had built up by the end of the Maoist period. Nevertheless, the bulk of the literature is frankly sceptical of the value of the rural capital stock built up by 1978. Such capital, it is argued, was either of low quality or not suited to satisfying market demand during the 1980s and 1990s. Perhaps the best-known work is that of Naughton (1988). According to him, the bulk of late Maoist investment went into the Third Front and as a result was largely unproductive after 1978; Third Front enterprises were too often located in caves, poorly connected to transport networks and too small to exploit economies of scale. Christine Wong has been equally scathing of the quality of the county, commune and brigade industries established during the late 1960s and 1970s (Wong, 1982, 1988, 1991). The capital stock of many of the ‘five small industries’ (producing iron and steel, cement, chemical fertilizer, machinery and power) was of such low quality, she argues, that many of the industries were simply closed down during the ‘readjustment’ of the early 1980s. Even Lin and Yao (2001: 179), who are positive about the rural infrastructural programmes of the 1960s and 1970s, accord little significance to the industrial legacies of the Maoist era: according to their econometric analysis ‘ythe initial size of the RE [rural enterprise] sector is shown not to matter very muchy..’ If these assessments are correct, we can dismiss any notion that Maoist plant and equipment laid the foundation for the growth of the 1980s and 1990s.

Empirical Analysis The preceding discussion has dwelt upon the divisions in the literature on the impact of the industrial legacies of Maoist and Republican periods. As we have seen, some see the antecedents of the growth of the 1980s and 1990s in the rural industrialization of the half-century up to the death of Mao. For others, this prior industrialization contributed little to subsequent rural growth: the Third Front and commune-run industries were at best an irrelevance, and at worst a millstone around the necks of an impoverished Chinese peasantry. Yet none of this suggestive and controversial literature makes any systematic attempt to analyze the empirical evidence on the link between the level of rural industrialization in the late 1970s and the growth of the Dengist era. We need to make good this omission. Asian Business & Management 2003 2

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Methodology The first task in attempting to link post-1978 rural growth to the industrial legacies of the Republican and Maoist eras is to assemble data on the extent of China’s rural industrial development at the close of the 1970s. It is tempting to assume that SOEs were urban and that xiangzhen (township and village) enterprises were rural, and to use the provincial-level data that are available on the latter to proxy rural industrialization. This classification has often been used in the literature (Findlay et al., 1994: 9; Lin and Yao, 2001), but it is misleading, because many SOEs ought to be classified as rural. To be sure, many Chinese SOEs (especially the larger ones) were located in urban areas. However, a significant proportion was owned by prefectural or county-level jurisdictions, and therefore located in the countryside. Consider the position in 1978. Of the 74.5 million workers employed in SOEs in that year, 19.7 million worked in enterprises owned by prefectural-level jurisdictions, and a further 24 million in county-level enterprises. In other words, well over half of all SOE employees worked in rural enterprises, not the urban enterprises run by China’s central ministries or its provincial governments (NBS, 1989: 40). The size of the xiangzhen sector alone is therefore an unreliable guide to the scope of industrial activity in rural China, precisely because it excludes such rural guoying enterprises. In order, then, to measure total rural industrial activity, we need to add the rural guoying figure to that for xiangzhen enterprises. Unfortunately, the provincial data on employment in state-owned industry are not disaggregated by location; Chinese provinces include both rural and urban jurisdictions, but provincial-level data do not disaggregate industrial production along these lines. We must therefore use county-level data to measure the true extent of rural industrialization. This enforced reliance on county data generates problems of its own; countylevel statistics for industrial output or capital in the late 1970s are not unobtainable, but they are rare and often inconsistent. The solution adopted here is to use the employment data collected during the course of the 1982 Population Census. These figures are both comprehensive and reliable, and they include all types of rural industrial employment — guoying (state owned), jiti (collective), shedui/xiangzhen (township and village), geti (individual or selfemployment) and siying (private) (NBS, 1988). They also allow us to kill two birds with one stone because industrial employment data measure both the extent of informal skill acquisition, and serve as a proxy for industrial output and capital. To be sure, these county-level industrial employment data are not ideal. It would be better to have data for the late 1970s than for the early 1980s, and employment data do not tell precisely the same story as data on output or the capital stock. Even Chinese counties are not unambiguously rural because they include urban areas (zhen or towns) within their boundaries.5 However, it Asian Business & Management 2003 2

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is hard to believe that these and other simplifications will generate results that are very misleading. County employment rates in 1982 are therefore used in the remainder of this article as a proxy for industrial activity. Second, we need data on the growth of rural output if we are to connect it to the size of the industrial sector in 1982. This causes considerable difficulties of its own because comprehensive data on GDP by county for the early 1980s have not been published, and may not even exist. Soviet-style material balance national income accounting was in operation across China at the time and one result was that data on ‘unproductive’ activity were not collected in any systematic way. Nevertheless, we can estimate county-level GDP with a fair degree of precision. This is because the published 1982 population census returns include data on per capita gross industrial and agricultural output value (GVAIO) (NBS, 1988). These GVAIO figures can be used in conjunction with data on the occupational composition of the population (to estimate the size of the tertiary sector) in order to calculate per capita GDP for every county. We can then compare the resulting estimates for 1982 with 1997 GDP per capita data (which have been published in a single volume; see Li et al., 1999) to calculate county growth rates between 1982 and 1997.6 In order to make manageable the calculation of county GDP, I have restricted the analysis to 757 of the 2,137 county jurisdictions that existed in 1980.7 These counties were drawn from nine provinces to provide a sample broadly representative of rural China in 1978. Four provinces — Guangdong (including Hainan), Jiangsu, Jilin and Zhejiang — were affluent by Chinese standards, but the sample also includes Guizhou and Gansu, China’s poorest provinces. The other three provinces selected, Sichuan (including Chongqing), Hunan and Shanxi, were closer to the middle of the income spectrum. Median GDP per head for the nine in 1978 was 348 yuan, close to the median (332 yuan) for all China’s provinces (NBS, 1997). This nine-province sample also offers reasonable geographical coverage; three of the provinces are drawn from north China and six from the south, and the east–west mix is also balanced.

Results The evidence for these 757 counties is summarized in Tables 1 and 2. Table 1 provides averages for the whole sample, as well as data on its 20 fastest- and 20 slowest-growing counties. Table 2 gives county data on industrial employment and growth aggregated by province. At first glance, it appears that 50 years of industrialization had made little impression on the Chinese countryside by the early 1980s. Only around 10 per cent of the rural population was employed in rural industry in 1982 across the nine-province sample. However, given the very low base of the 1950s, this Asian Business & Management 2003 2

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311 Table 1 Growth and Employment in Rural China, 1982–1997 Industrial employment rate, 1982 (per cent)

Agricultural employment rate, 1982 (per cent)

Per capita GDP growth, 1982–97 (per cent per annum)

Fastest-growing 20 counties Slowest-growing 20 counties

22.6 4.0

68.1 88.7

25.4 9.3

Average for all 757 counties

10.2

81.7

16.5

Source: NBS (1988); Li et al. (1999). Note: the data cover 757 xian. Employment rates show percentages of total employment. Per capita GDP growth rates are measured at current prices. Of the fastest-growing 20 counties in the 757 xian sample, eight were located in Guangdong province, and five in each of Jiangsu and Zhejiang. Of the slowest-growing 20, eight were in Gansu and six in Shanxi. The data used in this table are not ideal. As discussed in the main text, the county-level GDP data are estimates based on industrial and agricultural employment, and the structure of employment. In addition, we have no figures on county inflation rates; the GDP figures used are therefore at current prices and this probably overstates relative growth rates in the coastal provinces. Moreover, estimates of GDP growth rates between 1982 and the late 1990s are distorted by county boundary changes. These are impossible to adjust for fully, but the use of per capita GDP data minimizes the distortion. Finally, any calculation of growth rates that relies solely on two end points is problematic because of the potentially distorting effects of local ‘shocks’, for example, flooding. Nevertheless, sensitivity analysis suggests that the results are not dependent on the choice of end year. To check this, I experimented with data from respective provincial Statistical Yearbooks for Guangdong (for 1998), Zhejiang (for 1995) and Gansu, Jiangsu, Guizhou and Sichuan (for 1996). In each case, the results essentially replicated the findings in Table 2 The overall results are further confirmed by analysis of trends in Jiangsu, where (unusually) time series data on GDP are available in the provincial Statistical Yearbooks by county for every year during the 1980s and 1990s.

represented no small achievement; even in relatively advanced Wuxi, only about 9,000 workers were employed in industry in 1952 (WXG, 1990: 5). By the time of Mao’s death, however, almost a fifth of the rural workforce was employed in the industrial sector in the most advanced provinces. For good or ill, the impact of Republican and Maoist development in the countryside was far from negligible. More significantly, high levels of rural industrialization in the late 1970s seem to be associated with rapid subsequent growth. As Table 1 shows, the fastest-growing 20 counties of the Dengist era entered it with industrial employment rates well above the sample average, suggesting that their growth was helped by their inheritance. Conversely, the evidence for the slowestgrowing 20 counties in the sample suggests that growth was hindered by low levels of prior industrialization; the slowest-growing 20 had an industrial employment rate that was barely a fifth of that for the fastest 20. The provincial patterns set out in Table 2 point to the same conclusion. Rural Asian Business & Management 2003 2

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312 Table 2 Rural Growth Rates and Initial Employment Rates by Province (sampled provinces ranked by growth rate of GDP per capita) Province

Zhejiang Jiangsu Guangdong Jilin Hunan Sichuan Shanxi Guizhou Gansu

Number of counties

Industrial employment rate, 1982 (per cent)

Agricultural employment rate, 1982 (per cent)

Per capita GDP growth, 1982–1997 (per cent per annum)

60 64 96 36 84 173 98 74 72

23.7 19.1 10.2 18.2 7.7 7.2 9.4 3.6 4.8

67.1 74.0 80.3 67.4 85.3 85.4 81.5 90.6 87.4

20.9 18.8 18.4 16.3 16.3 16.0 14.5 14.4 14.1

Source: as for Table 1. Note: these provincial averages are for the counties of each province; all county-level cities are excluded.

industrial employment rates in rural Zhejiang and Jiangsu were well above the sample average in 1982: both enjoyed rapid subsequent growth. By contrast, the under-industrialized provinces of Guizhou and Gansu experienced significantly lower growth rates. Thus, the evidence presented in Tables 1 and 2 strongly suggests that rural development in the 1980s was pathdependent: growth was most rapid in those rural areas where Republican and Maoist industrial development had been most extensive. Other evidence points to the same conclusion. Take Jiangsu province, which accounted for about 12 per cent of national xiangzhen industrial output value in 1971, even though the province’s share in China’s rural population was less than 7 per cent. Jiangsu thus enjoyed an extensive rural industrial base by Chinese standards, and in the next 14 years the province pulled even further ahead, increasing its share of national production from 12 to 25 per cent in 1985 (Mo, 1987: 321–22). Jiangsu’s experience thus provides an especially striking example of the sort of cumulative causation that underpins theories of path dependency. These findings receive broad confirmation from an examination of subprovincial patterns. Within Jiangsu, for instance, there was a clear demarcation in post-1982 growth rates between the north and south of the province. Per capita GDP in the counties of Sunan (defined literally here as the counties of Jiangsu south of the Yangzi) grew at 23 per cent compared with 17 per cent in Subei, seemingly reflecting the 1982 industrial employment differential of 27 to 16 per cent between the two regions. Looking further west to the fertile Chengdu plain in Sichuan, we see a similar pattern. Industrial employment Asian Business & Management 2003 2

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averaged 10 per cent among the counties located there, whereas the counties of the Sichuan basin averaged below 6 per cent; the average growth rate for the former was almost 5 percentage points faster than in the latter (20.2 compared with 15.5 per cent). In Hunan, the counties located in the south and south-east of the province (the Xiang river valley prefectures of Changsha, Xiangtan, Chenzhou, Lianyuan and Hengyang) registered an average industrial employment rate of nearly 11 per cent in 1982, approximately double the figure for the rest of the province. Again, these favourable initial conditions appear to have contributed to a higher growth rate; the Xiang valley prefectures grew by about 2.5 percentage points more than the rest. Finally, although the disparity in the growth rates achieved in rural Wenzhou and the rest of rural Zhejiang is less marked than in the other comparisons, it is still there. Wenzhou’s industrial employment rate in 1982 averaged 30.4 per cent, some 8 percentage points greater than elsewhere in the province. And Wenzhou averaged GDP per capita growth of 21.5 per cent between 1982 and 1997, about 0.7 percentage points faster than the rest of the province. Table 1 also casts doubt on the Sachs-Woo surplus labour hypothesis discussed earlier. If surplus labour is proxied by the share of the population employed in agriculture, the evidence for the 757 county sample suggests that its existence was more of a hindrance than a help to rural growth. For the fastest-growing 20 counties in our sample, the agricultural employment rate of 68 per cent was well below the sample average of 82 per cent. Conversely, 1982 agricultural employment rates were much higher in the slowest-growing 20 counties. This suggests that the costs of training and absorbing farm workers outweighed any advantages derived from the availability of cheap labour; the low productivity of farm workers more than offset their low cost to employers. To be fair, we cannot dismiss the Sachs-Woo argument entirely. For example, rural Jilin’s growth rate was rather modest given that industrial employment was so widespread there in the early 1980s; the ‘growth dividend’ to prior industrialization in this case appears to have been rather small. Nevertheless, the evidence as a whole provides little firm support for the surplus labour hypothesis; in general, high rates of agricultural employment were associated with slow rural growth across China during the 1980s and 1990s.

Some Qualifications: The Third Front, Factor Mobility and the Problems of the 1990s The data discussed above strongly suggest industrial path dependency; those parts of rural China that grew most rapidly after 1978 were those that had benefited most from the industrial development of the Republican and Maoist periods. However, when we look closely at patterns of growth, a more complex picture emerges. Asian Business & Management 2003 2

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One interesting feature of our sample is the existence of clear regional exceptions. Most obviously, growth was rather slow in Third Front regions such as Ya’an, Aba, Garze and Liangshan prefectures in western Sichuan, Xiangxi prefecture in western Hunan, and across Gansu province. Third Front investment had been pumped into these regions during the Maoist era to exploit their vast mineral resources. As a result, industrial output surged in all of them. In Gansu, for example, industrial output increased almost 40-fold between 1952 and 1978, compared to only 14-fold nationally (NBS, 1997). The impact of the Third Front also transformed Gansu’s industrial structure; heavy industry (principally oil, metallurgy and machinery) accounted for 82 per cent of gross industrial output in 1978 compared with a national average of 57 per cent (NBS, 1990; GSQ, 1988: 179). Yet the long-term impact of this extensive industrial investment was modest: the post-1978 growth rate achieved in rural Gansu was well below the national average. As for Sichuan, the industrial employment rate by 1982 averaged 9.2 per cent in the western prefectures, barely below the figure for the prosperous Chengdu plain (10 per cent) and well above the Sichuan basin (5.7 per cent) — a remarkable outcome given the mountainous topography of the western part of the province. In fact, industrial employment rates of over 30 per cent were recorded in Markam and Shimian (the Asbestos County made famous in Jung Chang’s book Wild Swans), rates more typical of (say) southern Jiangsu than Sichuan. Yet despite this prior industrialization, the 15 per cent growth rate recorded in rural western Sichuan after 1982 was below those of the Sichuan basin (16 per cent) and the Chengdu plain (20 per cent). Shimian and Markam did not do badly after 1982, achieving growth rates of 20 and 17 per cent, respectively, but these rates were well below the rates achieved in southern Jiangsu (around 25 per cent), where the industrial employment rate in 1982 was comparable. Western Sichuan, like Gansu, does not appear to have benefited much from the rural industrialization of the Maoist era. The same is true of mountainous Xiangxi prefecture in western Hunan. Third Front construction began there in 1965, and accelerated in 1969 as China’s relations with the Soviet Union deteriorated; no fewer than 2 million workers were transferred to the prefecture from other parts of Hunan, and a wide range of machinery, hydroelectricity and mining projects commenced. Not surprisingly, ‘the size of the programme and the number of people involved was unprecedented in the history of economic construction in Hunan’ (Liu, 1990: 163). The gestation period for such projects was long, but industrial production in the prefecture was beginning to rise by the late 1970s. Once again, however, the post-1982 growth dividend was relatively small. Annual rural growth in Xiangxi was only about 14 per cent between 1982 and 1997, Asian Business & Management 2003 2

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significantly below the rural average in Hunan. In Xiangxi as across China, Third Front construction appears not to have laid the foundation for rapid post-1978 growth. In the coastal region, meanwhile, rural growth was often rapid despite the absence of a broad industrial base at the close of the 1970s. The experience of such counties thus provides a second exception to the industrial path dependency hypothesis — growth was faster than might have been predicted from their initial degree of industrialization. Take the experience of Jiaxing prefecture, located in Zhejiang province immediately south of Tai hu. There, rapid rural growth was achieved despite Jiaxing’s low levels of industrial employment in 1982. The rate of industrial employment in the prefecture’s eight counties averaged 19 per cent in 1982, well below the average for the rest of Zhejiang (24 per cent). Yet per capita GDP growth, at 22 per cent, was faster than the 20.8 per cent provincial average. In Jiaxing at least, an above-average initial industrial employment rate was not a necessary condition for aboveaverage growth. Jiaxing’s experience was replicated on a grander scale across Guangdong province. Much of the Maoist industrialization effort (especially the ‘little’ Third Front programme) was concentrated in Shaoguan prefecture in northern Guangdong (Vogel, 1989). Yet the average growth rate of Shaoguan’s counties was only 14.7 per cent after 1982, well below the Guangdong rural average and supporting our earlier conclusion that Third Front regions fared poorly after 1978. Instead, the provincial growth pole was the Zhujiang (Pearl River) delta region centred around Guangzhou, Shenzhen and Hong Kong. Across the delta, industrial development pre-1978 had been comparatively limited, but the growth rate achieved was well above the provincial norm after the 1978 climacteric. This is shown most vividly by the presence of no fewer than eight Guangdong counties, all located in the Zhujiang delta, in the top 20 listed in Table 1. Yet the industrial employment rate in the least industrialized five (Huiyang, Zengcheng, Gaoming, Puning and Heshan) of the Guangdong eight was less than 10 per cent in 1982, far below the average for our national sample. Huiyang county provides the most vivid illustration: it was the fastest growing county in the entire 757 xian sample despite an industrial employment rate of only 4.4 per cent in 1982. Table 2 shows the same general result. Rural Guangdong grew very quickly in the 1980s and 1990s even though its industrial employment rate averaged only 10.2 per cent, which was well below the figures for Zhejiang and Jiangsu, and even below the average for the whole 757-county sample. In Guangdong too, it seems, the spatial pattern of post-1978 growth bore little of the imprint of prior rural industrialization. Two clear conclusions emerge from all this evidence on rural China. Firstly, post-1978 growth rates were significantly affected by the type of Maoist Asian Business & Management 2003 2

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industrial development. Thus, rural Gansu, Xiangxi prefecture and western Sichuan all seem to have fared badly after 1978 because too much of their industry was militarily orientated; the capital stock was of limited use in the production of civilian goods, and many of the skills acquired by their labour force were redundant. Although many Third Front industries were converted to civilian use in the 1980s (Bro¨mmelho¨rster and Frankenstein, 1997), the costs were high and the industries continued to absorb scarce resources well after the programme was formally ended in the late 1970s when improving relations between China and the USA meant that the raison d’eˆtre for the Third Front had disappeared. The weakness of Third Front industries is shown by the fact that Hunan’s industries were able to meet only about 50 per cent of local demand for consumer goods at the start of the 1980s at a time when such demand was beginning to soar (Liu, 1990: 179). In other words, Naughton’s strictures against Third Front construction seem borne out by the evidence: it provided at best a weak industrial foundation for future growth. The experience of the Third Front regions thus qualifies the general inferences drawn from Tables 1 and 2. In much of the country, the rural industrialization of the Republican and Maoist eras may have facilitated future growth, but the experience of Third Front regions was much less positive. The second conclusion is that factor mobility appears often to have compensated for limited prior industrialization. The counties located in Guangdong’s Pearl River delta were not constrained by their limited Maoist industrial development because they were able to attract capital from Hong Kong and Taiwan, which in turn allowed them to absorb skilled labour from inland provinces like Guangxi and Hunan (Cheng, 1998). The size of the ‘temporary’ population in Guangdong was well above the Chinese average, a clear sign of the province’s capacity for attracting labour from elsewhere. Factor mobility was also higher in Zhejiang and Jiangsu than the China norm. In the 1980s, labour migration there was essentially occupational. Farmers increasingly abandoned agriculture, but they did not usually leave their registration district in entering the new rural industries; the well-known Chinese phrase litu bu lixiang (leave the land but not the countryside) accurately describes the process. By the end of the 1980s, however, growing labour shortages meant that the counties of Jiangsu and Zhejiang were forced to look further afield for recruits, setting in train a process of spatial migration; the fast-growing counties of Sunan and Wenzhou were particularly successful in importing labour to relieve their skilled shortages during the 1990s (Ho, 1994).8 This mobility, and the proximity of the prefecture to Shanghai, appears to explain Jiaxing’s relative success despite its scanty industrial inheritance and its inability to attract foreign capital on the scale enjoyed by Guangdong. Asian Business & Management 2003 2

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Conclusion The policy changes introduced after 1978 under the slogan gaige kaifang were instrumental in driving Chinese rural growth during the 1980s and 1990s. Nevertheless, the evidence discussed in this article suggests that the extent of prior industrialization also determined the pace of rural growth. Wellentrenched obstacles to factor mobility meant that those rural areas which entered the 1980s with large reservoirs of skilled labour and an extensive stock of industrial capital fared well, and vice versa. Thus, although economic policy changed dramatically after 1978, the continuities in rural industrialization remain apparent. The proto-industrialization of the 1920s and 1930s helped to fashion early Maoist rural industrialization, just as the commune-led industrialization of the late Maoist era shaped the rapid rural development of the 1980s and beyond. No such premium attached to unskilled labour, despite what is claimed in much of the ‘surplus labour’ literature: rural growth rates in the Dengist era were negatively correlated with the size of the agricultural workforce. The evidence discussed here does not allow us to determine whether it was Republican proto-industrialization or Maoist rural industry that made the decisive contribution; distinguishing between these two is a task for future work. Their combined influence, however, was often dramatic. Yet prior rural industrialization was not sufficient for growth. The Third Front programmes greatly improved the infrastructure of western China but left few positive industrial legacies; even Maoist industrialization had limited transformative powers when confronted with the geographical realities of the Himalayan plateau. Furthermore, rural growth was much less path-dependent in coastal provinces such as Jiangsu, Zhejiang and (especially) Guangdong because they were much less circumscribed by limited factor mobility. By attracting foreign capital and skilled labour from other parts of China, the Pearl River delta region of Guangdong in particular was able to forge ahead despite the limitations of its Maoist industrial inheritance. More generally, insofar as Chinese rural growth during the Dengist era was path-dependent, it depended upon much more than the degree of prior industrialization. Transport costs, educational attainment, population density, and agricultural fertility were all important in configuring spatial outcomes independently of their impact on industrial employment. Jiaxing prefecture, for example, grew quickly in part because of its proximity to Shanghai. Conversely, many poor Chinese regions were hampered by high transport costs, low-yield agriculture and sparse populations. It also needs to be observed that, whatever the successes of the 1980s and 1990s, post-Mao rural industrialization had run out of steam by the late 1990s. Employment in xiangzhen enterprises peaked at 135 million in 1996 and was Asian Business & Management 2003 2

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down to 128 million by 2000 as state-owned rural enterprises were privatized and re-structured (NBS, 2001: 111). The most pessimistic interpretation of these developments is that the very scale of local state involvement in the process of rural industrialization guaranteed its ultimate failure because local governments across China succeeded only in creating inefficient enterprises. From this perspective, the privatization programmes of the late 1990s are a belated, but entirely necessary, response to the spiralling inefficiency of rural industry. Local state corporatism may have made possible the rapid growth of the 1980s and 1990s, but it was unable to create a viable, internationally competitive, industrial sector in rural China. Nor can the Sunan model be applied even as a short-term panacea in western China: the excess consumer demand and limited competition which together allowed rural industry to thrive during the 1980s no longer exist (Nyberg and Rozelle, 1999: 87–94). An alternative (though scarcely more optimistic) interpretation starts from the premise that pre-1997 rural industrialization offers eloquent testimony to the effectiveness of the ‘developmental state’. Oi (1999: 2) is hardly alone in concluding that ‘The rapid takeoff of China’s rural industry was the result primarily of local government entrepreneurship.’ One might go further and argue that the gradual abandonment of industrial policy in the late 1990s by both local and central government is simply a mistake. From this standpoint, the atrophy of local state corporatism will ensure the ultimate failure of rural industrialization, and thus guarantee the persistence of rural poverty. Just as Republican proto-industrialization and Maoist rural industrial development ended ultimately in failure (in the sense that neither made possible a lasting ascent from poverty for the Chinese peasantry), so the policy reversals of the post-1997 era may have sealed the fate of Dengist rural industry. A tradition of failure spanning the great historical divides of 1949 and 1978 may yet be the most salient continuity in Chinese economic history. Notes 1 ‘Rural industry’ is used below to refer to all types of industries located within county boundaries; the term therefore encompasses what are usually called state-owned (guoying) enterprises or SOEs and collectively-owned (jiti) industries operating in rural areas, as well as xiangzhen (township and village) enterprises. Township and village enterprises were designated shedui (commune and brigade) industries before 1984, and xiangzhen industries thereafter. In this article, however, I use the terms xiangzhen and shedui interchangeably to refer to rural industries owned privately, individually (geti qiye), or by sub-county governments, during both the Maoist and post-1978 periods. 2 The Third Front was a massive programme of defence industrialization initiated in 1964 (Naughton, 1988; Bachman, 2001). Initially driven by the perceived threat posed by US involvement in Vietnam, it was increasingly orientated towards the possibility of a Soviet attack by the late 1960s and early 1970s. Most Third Front enterprises were located in western China, but even coastal regions developed Third Front industries; for example, Shanghai’s Third Front Asian Business & Management 2003 2

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3 4

5

6

7 8

was in Anhui and Guangdong’s Third Front was located in its mountainous Shaoguan prefecture. However, as will be discussed later, it is easy to exaggerate the extent of these obstacles in the coastal provinces. Proto-industry is used here to refer to handicraft industry selling goods to non-local markets. The idea that proto-industrialization paved the way for the development of modern industry in China and elsewhere, is of course, controversial (Mendels, 1972; Xu, 1988; Huang 1990; Ogilvie and Cerman, 1996; Wong, 1997). This is not the place for a full examination of the respective contributions of proto-industry and Maoist rural industries to the growth of the 1980s, but clearly there is a marked difference between the (strong) argument that the industrial development of the 1930s would inevitably have pioneered the emergence of capitalism in China but for the 1937 Japanese invasion, and the (weaker) argument that prior industrialization facilitated future growth. Those who argue that post-1978 industrial development was pathdependent tend to subscribe to the latter, rather than the former. However, the population of such towns rarely exceeded 10–15 per cent of county totals in the early 1980s; Kunshan county in Jiangsu province, for example, contained three towns and 21 communes (xiang or townships after 1984) in 1982 (KXZ, 1990: 140–41). Full details of the methodology used to calculate county GDP in 1982 are available on request from the author. The analysis could be extended beyond 1997, but there is some evidence that Chinese GDP data for the post-1997 period are especially unreliable (Rawski, 2001). Only jurisdictions classified as counties (xian) in Administrative Divisions of the People’s Republic of China (1981) are included in the sample. Econometric analysis for Jiangsu and Zhejiang (not reported here) suggests that industrial employment was not significant at the usual 5 per cent level as a determinant of growth.

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