The Rural Frontier as Safety Valve:<P> The Industrialization of the Chinese Regions

The Rural Frontier as Safety Valve:

The Industrialization of the Chinese Regions

Roger A. Roberge and Xiaoping Shen

Department of Geography, University of Ottawa

Ottawa, Ontario, K1N 6N5

* Paper presented at the Conference of Regional Development: The Challenge of the Frontier at the Negev Center for Regional Development, Beer Sheva, Israel

The restructuring of the world economy presently underway is touching every national economy to some degree not the least the formerly centrally planned socialist economies. This phenomenon is changing international economic relations, the global political map, and the spatial organization of national economies. China, often cited as the envy of socialist countries, has been introducing fundamental reforms for 14 years. The reforms, which are described as the 'second revolution' by Deng Xiaoping, have accelerated China's economic growth. The question which many observers are asking however is why China and the Soviet Union have come to such different economic outcomes? Both countries introduced economic reforms during the 1980s, but their reform strategies were completely different. Deng attempted to carry out economic reforms without political reforms. By contrast, Mikhail Gorbachev decided that the only way to accomplish economic reforms was to introduce political reforms first. Shirk has reviewed the various interpretations that a variety of scholars have provided. (Shirk{XE "Shirk"}, 1993,).

The practical challenge of reforming a communist economy is how to manage politically the major redistribution of funds and power involved in the transition from central planning to market competition. Reform leaders need simultaneously (1) to mobilize groups who will benefit from economic reforms into an effective coalition of support for the reforms and (2) to win over or render ineffective the groups who will lose as a result of the reforms. Otherwise, reform policies will be blocked by the groups most threatened by them. The classical form in which this issue confronts reformist leaders in communist states is how to create an effective political counterweight to the center, the central communist party and government bureaucracies. The center has a strong vested interest in perpetuating central planning because it has the most to lose from reforms moreover, it dominates the policy-making process in communist states. Although Deng Xiaoping never publicly articulated his political strategy of economic reform, his actions show a very different calculation. He opted to retain the traditional communist bureaucratic polity with only minor modifications. He apparently believed that he could use local officials as an effective counterweight to the center without changing the political rules of the game. As a consequence, the Chinese processed economic reforms through the old decision-making channels.

Why did Deng and his political allies decide to stick with the authoritarian, bureaucratic system? Obviously, the political status quo was less risky than was a process of political change that might go out of control and subvert communism. From the perspective of Deng Xiaoping and his elderly colleagues in the founding generation of the CCP, what they feared most was what actually occurred in 1991 in the Soviet Union, namely, the overthrow of communist party rule.

Another reason that Deng's strategy of reform differed from Gorbachev's was that China and the Soviet Union, although structurally very similar, differed in one important respect: in China, political and economic authority was more decentralized and less institutionalized than it had been in the Soviet Union. MaoTse Tung's previous deliberate efforts at decentralization had left the Chinese center a less formidable threat to economic reform than its counterpart was in the Soviet Union. Of particular importance for the policy of economic restructuring are the following two questions posed in Shirk's monograph (Shirk, 1993, 10):

1. Who gets to sit around the bargaining table? In China, economic decisions are made by ministries organized by function (e.g., education) and sector (e.g., machinery), and by province.

2. What are the rules of collective choice? Chinese economic policy-making operates according to delegation by consensus. If lower-level bureaucrats agree, the policy is automatically ratified by the upper level. If some lower-level bureaucrats refuse to agree, effectively vetoing the policy, it is referred to the upper level for resolution or tabled indefinitely.

These two features of Chinese communist institutions, Shirk argues, shaped the behavior of the officials who made economic reform policies from 1979 to 1989. Interesting as these institutional questions may be, it is not the focus of this paper. Rather here the emphasis is placed on one particular aspect of the economic reforms, the drive to industrialize the rural areas. Given the above parameters, it is clear that the introduction of market reforms would require the collaboration of the regional party bosses and lower level bureaucrats. Any policy that would have reduced their power or not made them stakeholders in the reforms, would have been effectively vetoed.

Rural industry has existed since 1949 and had some booming periods such as the Great Leap Forward and Rural Industrialization movements 1958-1960, and the movement of Accelerating Mechanization of Agriculture in the early of 1970s. Because production was centrally planned, rural industry was not allowed to exploit centrally controlled resources, to produce certain kinds of products and sell them in centrally controlled commercial channels. At that time, rural industry was typically characterized as being small scale, depending on local resources and serving local markets. There was little interaction between rural industry and state owned industry. The condition is described as the stage 1 or stage 2 in Fig. III-3.

After economic reform, central control was reduced, markets opened, and many favorable policies have been adopted since 1979. Among them, there are the relaxation of rules for enterprise registration, access to bank loans, and tax exemptions. (Byrd 1990, pp.57-59; Gao, 1991) Furthermore, state owned industry was allowed to subcontract its standardized parts or mature products and sell equipment to rural industry. Interactions between the two sectors are indicated as the third stage in Fig 1. They have become not only competitors but also collaborators in some type of production. Taking into consideration that over 30% share of total national industrial output was produced by rural industry in 1990, the interaction, competition and collaborations, can be found universally in modern China.

Two forms of competition, for goods in short supply and in a buyer's market, are identified by Byrd (1990). Firstly, for goods in short supply at low-government prices, rural industry may sell their goods at a higher cost, although at a somewhat lower quality. One example is aluminum products. Because of serious shortage of aluminum products, government controls production by mandatory plan. The fixed price of aluminum in 1988 was Y4,000 Y6,000 per ton and sales were allocated by government. Shortages raised the price to Y14,000 Y16,000 in the black market. The possibility of super-profits motivated many new producers. Rural industry stepped in to fill the demand since it is not constrained by sectoral or scale consideration such as those fared by private and foreign entrepreneurs.

In a buyer's market, rural industry also takes advantages of lower labor cost, diversified products and occasional use of substitute cheap materials. The clothing market is a good example. When one shops in any department store or supermarket, two types of clothing can be easily observed. On one side, the clothing produced by rural or private industry is in diverse styles, relatively fashionable and colorful, acceptable in price, but some of them are of poor quality. On the other side, the clothing, produced by the state owned industry, has fewer designs, colors, and are unfashionable, but are of good quality and of acceptable price.

As collaborators, the two sectors interact mainly through subcontracting. As a result of subcontracting, state owned industries can take advantage of low-cost labor, available land, and avoid the strict pollution discharge regulations of big cities. They also can transfer simple mature products and dump old equipment onto rural industry. They in turn can adopt new technology, update their old equipment, and produce new products. On the other hand, subcontracting makes it possible for rural communities to start a business and thus employ their surplus labor. They are also motivated by the need to gain access to certain technology, materials and markets that can not be easily developed. Rural industries in suburban areas or near a big city thus obtain more of these contracts than remote rural areas. The rural industrial sector in the Beijing region received 163 new subcontracts in 1990. In suburban area of Wuxi city, where rural industrial output per rural population was the highest in 1989, rural industrial output largely consisted of subcontracting and was 70% of total rural industrial output in 1978. (Byrd, 1990)

Rural industrial development, its relation with modern industry, spatial distribution, and influence on core-periphery relations reflect the characteristics of market economic development in China. It has become an important economic phenomenon and is interesting not only because it throws light on the link between political shifts and industrial change, but also because it promises to enhance our empirical understanding of the restructuring process in a socialist country.

China's rural industrial location policy is also evidence of a "bottom-up" strategy. Reformist leaders such as Deng learned to play to the provinces by observing MaoTse Tung who had pioneered this strategy. Mao had sought to promote to overcome the central bureaucracies by appealing to provincial officials over the heads of the central bureaucrats. Deng, promoting a very different view of change, used this same approach.

II. China's regional policies

China's regional policies both on national and regional level have changed since 1978. The development policies bear witness to mixed "top-down" and "bottom-up" strategies (Wu and Lp, 1981; Lo, 1989). Rural industrial development is influenced by central-down policies. At the national level, economic reforms emphasize a decentralized, economic efficiency-oriented, or polarized development strategy. The key policy is to encourage some areas, enterprises and individuals to become prosperous first. The decentralized policies include transferring centrally controlled enterprises to local management and increasing regional authorities in revenue and expenditure. The Seventh Five-Year Plan (1986) has designated different development strategies for three different developed regions:

During the period of the Seventh Five-Year Plan and in the 1990s, development was concentrated in the east coast region, building up the energy and raw and semi-finished materials industries in the central region, and making active preparations for further development in the western region. (Guo, 1988). In addition, interregional exchange and cooperation was encouraged after 1978. It is clear that China wanted to make the east coastal region a center of national development and diffusion to bring about the national development. (Lo, 1989)

At the regional level, China's economic planners encouraged `spread effects' by a "core city" policy. The policy designated some adjoining counties administered by an "core city" in hope that the "core city" could bring about development of the periphery. In 1989, more than 300 cities of total of 450 cities had counties under their administration (SSBC, 1989). Two provinces, Jiangsu and Liaoning, have designated all the rural counties to cities. Lo (1989) has indicated that "the Chinese government is clearly following some form of growth pole strategy in spatial development".

Both on the national and regional levels, China's regional development and urbanization policies are distinctive in that there are strict controls on migration from backward regions to developed regions, from a small city to a large city, and from rural to urban areas. The basic urbanization policy in China is to "control the scale of large cities, develop medium-sized cities and actively expand small ones". These policies have been adopted to minimize the urban infrastructure investment and to narrow the differences between urban and rural areas. These policies have been carried on since 1950s by the household registration system. China's urbanization experiences are very different from other Third World countries where rural to urban immigration is major factor in urbanization.

China's rural industrial location policy is a further evidence of "bottom-up" strategy. After 1984, rural industry can be built within the community that the owner lives or in a market town near his community, but is not allowed to build in city proper. Rural workers and their dependents are only allowed to move into a market town (but not a designated town or a city proper) with their grain ration for employment (PRC State Council, 1984). The best expression of the policy is the government slogan "leave the land but not the countryside, enter the factory but not the city (litu bu lixiang, jinchang bu jincheng)". In many ways this appears to be squaring the circle because it encourages an urban based industrial bias in a regime that had always prided itself on its rural political roots. Since both labor and industry are constrained within the relative closure of a rural region, accumulation from the region will be reinvested mostly in the region. This is quite similar to the Friedmann's "agropolitan model".

Although promoting decentralization is a deep concern and a strict control system is adopted by Chinese government, rural industrialization is not equally distributed throughout all the regions. As Friedmann (1966,pp.207-208) points out: "the search for decentralized activity locations, however, does not occur at random. Investors will seek out locations which, among other things, will have the following characteristics:

a. good accessibility to regional, national, and/or international markets;

b. a wide range of diversified, specialized services and the possibility of establishing functional linkages to already existing firms in the locality;

c. organized industrial estates including basic utility and transport facilities;

d. a high level of urban service facilities, including schools, research centers,

hospitals, recreation facilities, housing, and public administration."

China's rural industry faces similar market competition and is responsible for losses. The location criteria indicated by Friedmann influence the distribution of China's rural industry as well. According to behavior theory, a large number individuals making random decisions at a certain time, the survivors' distribution should represent viable or even optimum location pattern, even if the decision makers themselves do not know the location conditions of success or try to achieve them by changing locations. (Alchian, 1950; Souza, 1990) The development of China's rural industry is the result of a large number of individual decisions over the last 10 years. Moreover, it is the first national scale industrialization that left the decision to millions of individual entrepreneurs after the foundation of the People's Republic of China in 1949. The spatial distribution of rural industry not only reflects the characteristics of rural industry itself, but also tests the regional disparity, city hierarchy, and the influences of different cities on peripheral regions. Some work has been done on the topic.

III. Review of Past Empirical Findings

Although there has been a considerable volume of research on rural industry recently, only a few studies have dealt with regional characteristics of rural industry. Lu (1990) has described regional differences of rural industrial development in the east coastal, interior and west regions, emphasizing the relationship with regional urban industry, and rural industrial development potential. Wang (1990) has developed a good empirical set of indicators by using provincial data to define the regional imbalance of rural industry and divided China to three regions by the relationship of indicators to national average. But the relationship between rural industry and regional structure have not been analyzed. Pang (1991) has pointed out the links between the spatial disparity of rural industrial location and the differences of regional characteristics on economic development and industrial structure. Since her research focuses on rural industrial distribution, the links are only described by examples, and no systematic analysis was attempted. Other research has appeared as part of broader work on rural development in China, such as Walker (1990); Leeming (1985); but these works concentrate on the relationship of rural industry and agricultural development. For instance, Walker (1990) has analyzed the relationship between per capita rural social value of output (RSVO) and the share of rural industry in RSVO, and the relationship between rural industry's contribution to RSVO and to rural employment using provincial data and two dimensional graphs. Obviously, there is more that can be done on the topic of regional structure and rural industrial development even at the aggregated level of the province.

IV. The Empirical Analysis of Levels of Rural Industrial Development

At the provincial level, the research area includes 22 provinces, 5 autonomous regions, and 3 municipalities, for a total of 30 provincial level administrative regions (Table 1). Rural industry, which develops in space, is characterized by great regional imbalances. Generally speaking, it is concentrated in east coast region and the development level decreases from the east to the west. Table 1 presents the twelve indicators of rural industrial development used an orthogonal factor analysis. is presented.

Table 1 Indicators of Rural Industrial Development

1. EMPPRL: Percentage of rural industrial labor force in total rural labor force (%)

2. ASIZEFTY: Average size of rural industrial enterprise (employees/enterprise)

3. TOTEMP: Total rural industrial labor force (employees)

4. TOTOUT: Total rural industrial output value (0,000,000 Yuan)

5. OUTPEMP: Rural industrial output per employee (Yuan)

6. TAXPRFPE: Tax and profit per rural industrial employee (Yuan)

7. FIXCPTPE: Fixed capital per rural industrial employee (Yuan)

8. EXPORPE: Export value per rural industrial employee (Yuan)

9. COALOUT: Coal consumption of rural industrial output (Ton/1000 Yuan)

10. ELECOUT: Electricity consumption of rural industrial output (kwh/1000 Yuan)

11. WOODOUT: Log consumption of rural industrial output (m3/10,000,000 Yuan)

12. CMNTOUT: Cement consumption of rural industrial output (Ton/1000 Yuan)

Eigenvalues dropped below 1 after factor 4 (0.82) so further analysis was concluded. The first three factors account for more than 80% of cumulative value. Since most statistical analysis is based on the assumption of normally distributed data, skewness in the data was reduced by logarithmic transformations. Strong groupings of variables on the three components can be observed.

A) Value added of rural industry (Factor1)

This indicator is defined by the high component loadings of TAXPRFP (log tax and profit per employee) and OUTPEMP (log output per employee). As a value added indicator, it is reasonably well correlated with fixed capital per employee, export per employee, size of enterprises, and total output. Another group of variables that this indicator reflects is low cost raw materials. Clearly it is the value added industries that predominate. High component loading of EMPPRL (percentage of industrial employee in total rural labor force) indicates that higher value added rural industries occurs in places where a higher proportion of the rural labor force is involved in industrial activities. In another words, the more industrialized regions have rural industries that are characterized by high value added products.

B. Employment of Rural industry (Factor2)

The high component loading of TOTEMP (log total employees) reflects the major characteristic of this component. The component loadings show that the total industrial output ( TOTOUT) is associated with total employees, but not value added variables, such as tax and profit per employee ( TAXPRFP) or output per employee ( OUTPEMP). The large negative loading for FIXCPTP (fixed capital per employee) represents the basic nature of this labor intensive group of rural industries.

C) Energy-intensive rural industry (Factor3)

Two variables, COALOUT and ELECOUT (coal and electricity consumption of rural industrial output), are significant on this component, although the value of the variable loadings is not very high. Because electricity and coal are the major energy sources for certain types of rural industry in China, this indicator is reflects the energy intensive industries associate with mining and aluminum smelting.

D. Spatial Variation of the Dimensions of Industrial Structure

Factor scores for the 29 provinces on each of these three factors were obtained. The scores are mapped in Fig 2, 3, 4. The spatial distribution of rural industrial development level in 1989 can be observed from the figures. Fig 5, 6, 7 are contour maps of those factor scores. Although the contour lines do not represent the real gradient of rural industrial development in the space, they do provide some indication of the rate and direction of change on these key indicators. The value added maps of Factor 1 clearly display the differences in rural industrial development.. Three municipalities' (Beijing, Tianjin and Shanghai), Jiangsu and Zhejiang provinces achieved the highest value added in 1989. Obviously, the value added level is higher in the east coast region, and a high score corridor emerges from Liaoning to Guangdong. Generally speaking, from east to west, the level of development of high value added industries decreases. Nevertheless some provinces in the interior region have relatively good performance on value added, such as Shaanxi, Ningxia, Gansu, and Xinjiang while the lowest productivity levels can be observed in Neimonggu, Qinghai, Guizhou and Guangxi.

The employment maps present the spatial distribution of labor intensive rural industries. The highest factor scores are concentrated mostly in the provinces adjoining the east coast region. Another large center is Sichuan province with the largest population in China. Conversely the lowest factor scores on this component can be observed in Beijing, Tianjin, Shanghai, Ningxia, Qinghai, and Xinjiang. The factor scores on the energy consumption maps are achieved by the provinces with the largest coal production such as Shanxi, Ningxia and Henan, and the hydro producer Qinghai province. E. A Typology of Industrial Development

Study of the six maps can not only identify the distribution of rural industrial development but also the development stages of rural industry in China. Four development stages are identified.

1) Highly developed regions

The regions in this category identify areas where capital intensive enterprises are emerging. Almost all surplus rural labor is involved in non-agricultural activities. In some cases they even face labor shortages as in the case of the three metropolitan regions.

2) Semi developed regions

These regions have reached the level of relatively stable production, and market share. Most of the surplus rural labor is working or looking for jobs in rural industry. The provinces such as Jiangsu, Zhejiang, Shandong, Liaoning, Guangdong, are in this stage.

3) Emerging regions

Massive rural industrialization has started in these regions and more and more people are involved in rural industrial activities, but the enterprises are at a very small scale, unstable, and the value added is low. As indicated on the maps, these regions are in the third or fourth level on Factor 1 (scores are below zero). The labor intensive industries in regions such as Henan, Hebei, Anhui, Jiangxi, Sichuan, Shanxi, Hubei, Hunan, Jilin, Heilongjiang, and the Guangxi autonomous region can be included into this category.

4) The pre-industrial regions

These regions' rural industries are mostly resource based and the establishments were previously owned by communes or villages. Entrepreneurs have not yet mobilized rural laborers and started their own businesses as yet. On the maps, those regions that have low value added scores, low rural industrial employment, but high energy consumption such as Qinghai, Ningxia, Gansu, Guizhou, Yunnan fall in this category.

As described above, China's rural industry is distributed throughout China but at clearly different levels of development. In this research, the developed region is assumed to have higher levels of agricultural productivity, more surplus labor, financial funding, larger markets, better industrial infra structure, transportation facilities, and an educated labor force.

Conclusion

The process that we have described resembles the model developed by Friedmann. The process of interaction between cores and their peripheries has been described by him as a spatial evolutionary model where the stages are :

"1) A pre industrial phase, characterized by a number of small independent urban centers spread throughout a large region.

2) A period of incipient-industrialization, characterized by a primate city which dominates a large region and exploits the natural resources of its periphery.

3) A transitional stage toward industrial maturation in which the primate city still dominates the large region, but not to the extent that it did previously.

4) A final stage consisting of a fully-fledged spatial organization based on the hierarchy principle and encompassing the entire national territory." (Cited from: Souza, 1990, p.446)

The model described above suggest that a major city's continued urban-industrial expansion will have an effect on surrounding regions. The convergence and diffusion between center and periphery in the final stage will fulfill internal spatial organization goals such as national integration, high degree of interregional balance, and maximum growth potential.

There is a prior ground for expecting these activities to be developed more in economic developed areas. The core-periphery model is "a conceptual model that divides the space economy into a dynamic, rapidly growing central region and its periphery." (Friedmann, 1966, p.xv) The four orders of core regions suggested by Friedmann are national metropolis, regional capital, sub-regional capital and local service center. This appears to be the case in the Chinese example as well. Those metropolitan regions which have the highest levels of development are the ones which have rural peripheries that have the highest levels of rural industrialization. What appears clear is that the Chinese economy, although policy was ostensibly attempting to diffuse the process of rural industrialization as much as possible throughout the national territory, did not escape the concentrating effect of market forces.

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