The economic development of China and Japan 9780415381512, 0415381517, 9780415607735, 0415607736, 9781315888996, 1315888998, 9780415381109, 9780415286190

Table of contents :
Content: Introduction1. The Kiakhta Trade, Mark Mancall2. British-Chinese Steamship Rivalry in China, 1873-85, Kwang-Ching Lui3. China's Nineteenth Century Industrialization: the Case of the Hanyehping Coal and Iron Company Limited, Albert Feuerwerker4. The Chinese Labour Force in the First Part of the Twentieth Century, Jean Chesneaux5. Sino-Soviet Economic Relations: A Re-appraisal, Alexander Eckstein6. A Chinese Discussion on Planning for Balanced Growth. A summary of the views of Ma Yin-ch'u and his Critics, K.R. Walker7. Factors in Japan's Economic Growth, G.C. Allen8. Capital Formation in Pre-War Japan: Current Findings and Future Problems, Henry Rosovsky9. Economic Development and Foreign Trade in Pre-War Japan, Miyohei Shinohara

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Economic History

The Economic Development of China and Japan Edited by C.D. Cowan

ECONOMIC HISTORY

T H E E C O N O M IC D E V E L O P M E N T O F C H IN A A N D JA P A N

ASIA

T H E E C O N O M IC D E V E L O P M E N T O F C H IN A A N D JA P A N

Edited, by C.D. COWAN

H

Routledge Taylor&FrancisGroup

LONDON AND NEWYORK

First published in 1964

Reprinted in 2006 by Routledge 2 Park Square, M ilton Park, Abingdon, Oxon, 0 X 1 4 4R N or 270 Madison Avenue, New York, NY 10016 First issued in paperback 2010

Routledge is an imprint of Taylor & Francis Group © 1964 Routledge All rights reserved. N o part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, w ithout permission in w riting from the publishers. The publishers have made every effort to contact authors and copyright holders of the works reprinted in the Economic History series. This has not been possible in every case, however, and we would welcome correspondence from those individuals or organisations we have been unable to trace. These reprints are taken from original copies of each book. In many cases the condition of these originals is not perfect. The publisher has gone to great lengths to ensure the quality of these reprints, but wishes to point out that certain characteristics of the original copies will, of necessity, be apparent in reprints thereof.

British Library Cataloguing, in Publication Data A CIP catalogue record for this book is available from the British Library

The Economic Development of China and Japan ISBN 978-0-415-38151-2 (hbk) (Volume) ISBN 978-0-415-60773-5 (pbk) (Volume) ISBN 978-0-415-38110-9 (subset) ISBN 978-0-415-28619-0 (set) ISBN 978-1 -134-56107-0 (ebk) R outledge Library Editions: Economic History

S C H O O L O F O R IE N T A L A N D S T U D IE S

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A F R I C A N S T U D IE S

A S IA

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A F R IC A

No. 4

THE E CO N O MI C D E V E L O P M E N T OF C H I N A A N D J A P A N

STUDIES ON MODERN ASIA AND AFRICA NO.

1 P O L IT IC S

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S O C IE T Y

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IN D IA

edited by C. H . Philips NO,

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C H A N G IN G

LAW

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D E V E L O P IN G

C O U N T R IE S

edited by J . N . D . A nderson NO.

3 THE

E C O N O M IC

D EV ELO PM EN T OF SO U TH

EAST A SIA

edited by C. D . Cowan NO.

4 T H E E C O N O M IC D E V E L O P M E N T O F C H IN A A N D J A P A N

edited by C. D . Cowan

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN ST U D IE S IN E C O N O M IC H IS T O R Y A N D P O L IT IC A L EC O N O M Y E D IT ED

BY

C. D . CO W AN Professor of the History o f South-East Asia School o f Oriental and African Studies University o f London

LONDON

G EORG E ALLEN

& U N W IN L T D

RUS KIN HOUSE MUSEUM STREET

FIRST PUBLISHED IN

1964

This book is copyright under the Berne Convention. Apart from any fair dealing fo r the purposes o f private study, research, criticism or review, as per­ mitted under the Copyright Act, 1956, no portion may be reproduced by any process without written permission. Enquiry should be made to the publishers. © George Allen & Unwin L td, 1964

CONTENTS in tro d u c tio n

page

9

1. The K iakhta Trade MARK MANCALL

19

2. British-Chinese Steamship Rivalry in China, 1873-85 K W A N G -C H IN G LIU

49

3. China’s Nineteenth Century Industrial­ ization: the Case o f the Hanyehping Coal and Iron Company Limited ALBERT FEUERW ERKER

79

4. The Chinese L abour Force in the First Part of the Twentieth Century JEAN CHESNEAUX

111

5. Sino-Soviet Economic Relations: A Re-appraisal ALEXANDER ECKSTEIN

128

6. A Chinese Discussion on Planning for Balanced Growth. A Summary o f the Views of M a Yin-ch‘u and his Critics K. R . W ALKER

160

7. Factors in Japan’s Economic G row th G . C. ALLEN

192

8. Capital Form ation in Pre-W ar Japan: Current Findings and Future Problems HENRY ROSOVSKY

205

9. Economic Development and Foreign Trade in Pre-W ar Japan MIYOHEI SHINOHARA INDEX

220 249

IN T R O D U C T IO N C. D. COWAN

Some of the most important of the world’s problems today concern affairs in Asia, and the relations between Asia and the West. To deal adequately with these problems it is necessary not only to master their more obvious elements as they present themselves today, but to go to their historical roots. In particular it is necessary to study the economic history of modern Asian society. This is not only because large parts of Asia are today economically underdeveloped, so that ways of stimulating development and raising living standards are in the forefront of the minds of economists and governments. It is also because, whilst western governments are alive to the role they can play in fostering economic development in Asia, and are in general willing to play this role, their relations with Asian countries are bedevilled by the heritage o f the past. The history of relations between Asia and the West which has so far been written is mainly concerned with governments. But in fact western interests in Asia in the past have to a very great extent been concerned with trade and production, and westerners and Asians have met most frequently in the economic field. Many current problems, even outside the strictly economic field, hark back to the growth of trading ports and export crops, the importation of western colonial regimes and western funds and skills, the related development of indigenous trading communities, and the economic bases of unrest underlying the nationalist movements of the late nineteenth and twentieth centuries. Very little detailed and systematic work has been done on these topics. They are commonly spoken of under the loosely generalized concept of imperialism, a word with strongly emotional overtones, the use of which tends to impede the objective assessment and analysis of facts. Such assessment has been neglected in the past, partly because many of the facts are contained in the records of commercial firms who were not eager to make them public, partly because historians were more interested in politics; equally, the leaders of Asia themselves were more impressed with, and absorbed in, the struggle for political independence than problems of economic development. Economics and economic history have developed in the West as studies of what are now complex industrialized societies. This has taught us a great deal about the conditions of economic growth in western settings. But much is still obscure so far as the factors which have retarded or fostered growth in parts of the world like Asia, 9

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

and factors which may foster it there in future. We still lack an adequate understanding of the traditions, institutions, resources, social attitudes and values, and other factors which have helped to shape Asian economic history. It is against this background that studies in the economic history and development of Asia have grown up in the West in the last decade, practically as new fields of research. In London the School of Oriental and African Studies, with the generous assistance o f the Ford Foundation, began in 1959 a research programme on the economic history of East and South-East Asia. As part of this programme an international study group, composed o f scholars from America, Europe and Asia, was held at the School in July 1961. This volume contains a selection of the papers presented to the study group. The remainder of this Introduction seeks to survey briefly for non-specialists the course of East and South-East Asian history against which these specialist papers must be read, and to indicate the nature of the questions at issue in the study group’s discussions. One of the most obvious things which strikes anyone surveying the economic development o f East and South-East Asia in modem times is the very short time span within which the traditional societies o f this area were transformed, and current problems of economic development emerged. Little more than a century ago most of these countries had only just begun to be exposed to largescale international trade, and the influence of the outside world. Within fifty years almost all of them had been fully integrated into the international trading economy. With one exception, the coun­ tries o f South-East Asia had come under the administration of the colonial powers; and Japan had emerged as a rapidly developing industrial state operating on more or less equal terms with the countries of the West. In China, economic development was still largely confined to the area in and around the treaty ports, but following the division of the country into spheres of influence, and the overthrow of the Manchu dynasty by the nationalist revolution of 1911, it appeared that development would spread inland, and that the Chinese, liberated from the bonds of tradition, might react to this stimulus in somewhat the same way as Japan. Yet in the half-century which followed the outbreak of World War I an equally swift and almost as radical transformation has again taken place. Colonial regimes have almost completely disappeared from South-East Asia, and most of the independent states which have replaced them are trying to refashion their economies along national­ ist and socialist lines. Japan, it is true, is still economically the strongest state in the area, and the direction of her development, her high rate of investment and high per capita income, are such as might reasonably have been predicted in 1914. Between then and 10

INTRODUCTION

now, however, she has met with complete failure in her attempt to create by conquest an economic empire in East Asia, and experienced overwhelming defeat in war and rehabilitation partly through the efforts of her conquerors. But it is in China that the swiftest and most profound transformation has occurred. There the attempts of the nationalist or Kuomintang regime to contain the spread of western enterprise, and use it as the starting point of indigenous economic development, were halted by the Japanese war, and finally both Kuomintang and western enterprises were swept away by the victory of the communists in 1949. Instead we are seeing now the most ambitious experiment yet undertaken in Asia, an attempt to transform Chinese society on Marxist lines on the same scale as in the Soviet Union after 1917. Implicit in this summary of the course of development over the last hundred years is the picture of the countries of East and SouthEast Asia before this as traditional societies, shut off from regular contact with the outside world. Many of them were so, with develop­ ment limited by political instability, war, and the ravages of disease and natural disasters. It was limited too by a high degree of im­ mobility between social classes, and by the grip of custom and tradition. Production was concentrated mainly on food-crops, and these together with such manufactures as developed were, because of poor communications, limited by the capacity of local markets to absorb them. External trade was either small and uncertain, or else in the hands of groups who devoted its profits to unproductive ends, such as the hoarding of jewellery and precious metals, war, or religious rites. This simple concept, however, needs some qualification in detail. In the first place there were, in the middle of the nineteenth century, a number of areas which had already been in regular contact with the outside world, and with international trade, for some time. We need mention here only the South-East Asian colonies of Britain, Holland and Spain, and, in a somewhat different category, China. Of the colonial areas, by far the most significant was Java. Under the so-called Culture System the government since 1830 had directly controlled the large-scale cultivation and export of crops such as coffee, sugar, indigo and tea. As a result large areas had by the middle of the century already been exposed to the introduction of cash crops and the demands of an export economy, although this had occurred in such a way as to lead to few changes in the traditional pattern of Javanese society. The other parts of South-East Asia which at this stage had already been exposed to the outside world are of minor significance in this context. In the Philippines the exclusive and restrictive nature of Spanish colonial policy resulted in com­ mercial stagnation, and until the third decade of the nineteenth 11

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

century the main importance of Manila was as an avenue for the supply of American silver to the China trade. It is true that the British settlements of Singapore, and to a lesser extent Penang, were important and thriving commercial centres. But the major part of Singapore’s entrepot trade was with Europe, India, Netherlands India and China. For the most part her trade with South-East Asia was carried out on a more modest scale, largely in small native craft; the Straits Settlements, links with these countries, even in the case of Malaya, were not such as to stimulate development there. In China there was a long history of contact with western trade, going back in the case of western maritime nations to the Portuguese establishment of a foothold at Macao in the sixteenth century, and in the case of overland trade with Russia to the end of the seven­ teenth century. This trade was not on such a scale or of such a nature as to cause us to regard China, in this respect, as an exception to the generalized picture of traditional societies which we have drawn above. In the case of maritime trade it was restricted geographically to Macao and Canton. It was further restricted by limitations placed upon it by the Chinese authorities, and by economic factors. It was illegal for a foreign merchant to deal with any Chinese other than a member of the Cohong, a small group of authorized merchants whose financial and commercial resources were limited. There was, moreover, a very small market in China for the manufactures of Europe, so that most of the shipments of tea, which constituted the bulk of the exports, had to be covered by payments of silver. The nineteenth century brought a change in this situation, partly because o f the discovery o f opium as a commodity for which there was a large market in China, partly because the abolition o f the East India Company’s monopoly of the China trade in 1833 brought a large increase in the number of private British merchants in Canton. The Cohong system and Chinese official obstruction of trade then appeared the only barrier to the development of a large market for British manufactures, and for that reason the more intolerable; the Chinese government’s attempt to enforce a prohibition on the importation of opium was therefore the signal for the outbreak of the so-called Opium War in 1839. The outcome, in the treaty of Nanking (1842), was the cession of Hong Kong to Britain, the opening of China to foreign trade, and the inauguration of the treaty port system. The operation of this system up to 1855, however, fell far short of inaugurating a wave of economic development in China, or even of fulfilling the hopes of western traders. For one thing there were only five treaty ports, and the rights of foreigners under the treaty of Nanking did not extend to freedom to travel and trade outside their limits. More fundamental, however, was the fact that per capita income was too low to provide a worthwhile market for 12

INTRODUCTION

western imports. Both the weakness and administrative incompetence of the Imperial officials and the unsettled conditions which resulted, and the traditional attitudes and policies of the government, pre­ vented any response to the stimulus of foreign trade, and this trade remained peripheral to the Chinese economy. A part from these particular exceptions to the generalized concept of East and South-East Asia in the mid-nineteenth century as an area as yet unaffected by the outside world, we must also note the existence in some places of factors conducive towards development, which indicate that the traditional society may already have been about to transform itself. For instance, in countries such as Burma and Thailand, it is clear that factors such as royal monopolies o f the trade in particular commodities, and ethical and social systems directing profits into non-productive investments, operated against the evolution of an active and prosperous commercial middle class, and against the accumulation o f capital in their hands. But in some other countries one can discern signs of the emergence of such a class, and of the accumulation of capital which could find insufficient outlet within the existing traditional society. Japan is a well-known case in point. There the grain merchants, acting often as the agents of the daimyo, had become wealthy upon the profits of agriculture and were financially far stronger than their social and political superiors, the impoverished samurai. Similarly in the Philippines one may note the rise in this period of a prosperous indigenous middle class who were either the proprietors of extensive estates, or merchants associated with what was technically illegal foreign trade. Many were mestizos of mixed Philippine, Spanish and Chinese blood, but in all cases their interests lay in the expansion of trade and the cultivation of export crops, rather than in a continua­ tion of the existing restrictive system. Even in China, as the paper on the Kiakhta trade by M r Mancall shows, there could, within the limits of the old order, be a wider response to economic opportunities than that indicated by the reaction of the Manchu authorities to western trade at Canton. But if the concept of the traditional society with a limited and shut-off economy becomes somewhat blurred upon closer examina­ tion, there can be no doubt that the years between 1855 and 1875 constitute a period of transition. During this time almost all the countries of East and South-East Asia were exposed to events which eventually altered the basis of their economy, in many cases indeed their whole political and social structure. In some cases, as in Burma, Thailand, Vietnam and Japan, the agent of change was the intervention of a western power or powers, and western commercial enterprise. In others, such as Indonesia, Malaya, the Philippines and China, it was the intensification of such western influences 13

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

already operating within, or upon the periphery of, the country concerned. Burma and Vietnam present perhaps the simplest and clearest examples of this transition. In both cases military invasion was followed by annexation. In both the result was the expansion of the traditional industry, rice production, and its transformation into one producing primarily for export. In Thailand, though the economic end was the same, the means were different. The far-sighted King Mongkut, having observed the powerlessness of China and Burma to resist western pressure, did not wait for his country’s doors to be forced in, but threw them open to foreign trade himself in a series of treaties negotiated with the major western powers between 1855 and 1868. In Japan, though the process by which the ports were opened to foreign trade was a composite of the Thai and the Burmese and Vietnamese examples, the end result was radically different from either. The commercial treaties of 1858 were wrung from Japan by force or the threat of force. The internal upheavals which followed not only released the forces of change already, as we have noted above, incubating within the economy, and swept away the feudal regime. They also, through the restoration of the Imperial dynasty to power in 1868, brought into existence a government not only strong but associated with change. Only this made possible the whole­ hearted acceptance of western techniques as a means of producing a new order in Japan without losing social cohesion or the thread of continuity with the past. The changes which took place in Malaya, Indonesia and the Philippines, though perhaps less spectacular, were not for that reason less decisive for the countries concerned. In Malaya the movement of Chinese trading capital and Chinese labour into the development of the tin industry of the western Malay states, which had begun in the 1850’s, was accelerated and reinforced by European enterprise after 1874, when these states were brought under the control of British Residents. In Indonesia in the same period the progressive dismantling of the Culture System was accompanied by the liberali­ zation of the tariff system, the increasing entry of private Dutch and foreign enterprise and capital, and the extension of development from Java to large areas of the other islands of the archipelago. In the Philippines the years between 1855 and 1873 saw the opening of six more ports to foreign trade in addition to Manila, the influx of foreign commercial houses, and the widespread development of export crops, especially hemp and sugar. In China these years saw an acceleration of the penetration of the country by western commerce, rather than a change in the direction of events. The treaties with western powers which followed the second China war after 1858 trebled the number of treaty ports, and 14

INTRODUCTION

extended the extraterritorial jurisdiction of the powers within them. They also established the right of foreigners to trade freely in the interior of the country on privileged terms. A t the same time the placing of the Chinese maritime customs under an international inspectorate also did much to expedite the flow of foreign trade. This gradually grew more diversified, and less dependent on the exporta­ tion o f tea and silk, and the importation of opium, and western manufactures, particularly textiles, began to find an increasing market. Internal disorder and civil war, particularly the so-called Taiping rebellion, was a limiting factor in this process, but it also drove large numbers of Chinese into the security of the foreign settlements, and aided the development of prosperous commercial enclaves there. The increasing revenues from foreign trade and the prospect of western loans did much to reconcile the Chinese govern­ ment to this state of affairs, particularly since the development of Russian pressure on Chinese northern boundaries after 1858, added to the great efforts needed to maintain internal security, placed an increasing strain on state finances. The process of the integration of these countries into the inter­ national trading system was also assisted at this time by develop­ ments in the sphere of transport and communications. The opening o f the Suez canal (1869), and the extension of the European telegraph to all the major countries of East and South-East Asia between 1871 and 1875, played an important role in this respect. So did the appearance, after about 1865, of the steamship as a reliable and economic freight-carrier. Its importance was not confined to the traffic along the main trade routes with the outside world: the regular steamer services of the shipping companies in the coasting trade, particularly in the Malayan and Indonesian area, and in China, also played a major part in the development of internal trade, and in the creation of new commercial centres. I f the significance of the decade on each side of the year 1865 as a milestone in the economic history of East and South-East Asia is clear, the causes of the different courses o f development in different countries after this point are less obvious. It was to questions arising from attempts to identify and explain these differences that the dis­ cussions of the study group were largely directed. These questions, of course, are numerous, and cover a wide range of topics. Most of them, however, may in one way or another be subsumed under one general question: why was development in Japan different from that in every other country, so that she became relatively quickly an advanced industrial society? It may be to some extent possible to explain this difference by reference to the fact that Japan, unlike most of the other countries in the area, did not become a western colony, but retained control 15

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

over her own economic policy. Like the colonial territories, Japan’s foreign trade at first after 1865 was characterized by the exportation of agricultural products and raw materials, especially silk and tea. But she was able to make use of the earnings of this foreign trade to develop new industries, and eventually to achieve a very high annual investment rate in the industrial sector. The colonial territor­ ies were unable to take this second step. It may be held that this was a direct result of the colonial relationship, in that the interest of the metropolitan powers lay in discouraging colonial industrialization, and retaining the colony as a market for metropolitan manufactures and a supplier of raw materials. Moreover, in colonial territories a very high proportion of the profits of trade, and of such industries as were founded, was exported both by western enterprises, and by alien Asian entrepreneurs and labour forces, mainly Indian and Chinese, whose presence was a feature of the dual societies which were especially prominent in these territories. It was not therefore available for re-investment in industry. The colonial relationship tended to perpetuate a situation in which a very large proportion of key positions in government and commerce was filled by western, or at any rate foreign, administrators and technicians, and this acted as a depressant to indigenous education and technical training. There were also, of course, until their numbers or relative importance began to decline in the 1890’s, an appreciable number of foreign experts and traders operating in Japan. Their presence, however, did not hinder, but rather acted as a spur to the training of Japanese, since it was obviously implicit in government policy that the use of foreign technicians and the predominance of foreign merchants was regarded as a temporary phenomenon. Concentration on education indeed was an important aspect of Japanese development, and by 1906 school attendance had already reached 96 per cent of those of school age. It has also been suggested that the colonial relationship in some cases operated so as to reduce the value for development of foreign trade, in that a high proportion of it was tied to the metro­ politan power against the interest of the colony. In addition, particu­ larly because of the high number of foreigners in the colony, it may have shaped the composition of imports towards consumer goods, and away from capital investment items. The advantage which Japan possessed in this respect may well have been increased by the vigour and depth of Japanese culture, which for long resisted the demonstra­ tion effect of the impact of western enterprise, so that profits and increases in wages tended to be spent on indigenous products rather than on exotic western imports. Whatever the merits of a hypothesis which seeks to explain the wide gap between the performance of the Japanese economy and that of the other countries of the area by reference to the latter’s colonial 16

INTRODUCTION

status, and whatever insight it may give us into the actual pattern of development in these countries, it fails to cover one important point. It fails to explain why China, which was not a colony, yet was not able to respond to the stimulus of the western impact in the same way as Japan. Mao Tse-tung explains this Chinese failure as the result of the Imperialist aggression of the nineteenth century. One must indeed admit that China was unlucky in this part of her history. The fact that she, and not Japan, was subjected to western pressure first, gave the latter country time to observe the result of the opium war, and to conclude that it was necessary to temporize and to acquire western economic and military techniques in order to survive. The discussion in the study group, however, tended to place more weight on the different roles adopted by government in the two countries, and to contrast the prominent part played in economic development by government in Japan, and the way it provided political stability, with the incompetence shown in both these fields by government in China. Both D r Liu’s paper on British-Chinese steamship rivalry in China, and Professor Feuerwerker’s study of the Hanyehping Company, demonstrate that there were considerable Chinese resources available, both in capital and in men trained in the treaty ports in western management techniques. There was also considerable official activity in mobilizing these resources. The weak point lay in the reluctance of the Chinese bureaucracy, imbued with the ethical standards of the mandarin system, either to allow effective management to pass into the hands of those competent to exercise it, or to adapt their own ideas to changed circumstances. It was exacerbated by the inability of Chinese government to maintain order and political unity, a defect which persisted until 1949. There remains, however, one country which was neither a colony nor subject to political instability and the inhibitions of a reactionary government. This was Thailand. Under the progressive Chakkri dynasty Thailand’s rice industry responded to the international market against a background of stable government under the guidance of western advisers, sound financial institutions, a rational taxation system, and social reform. Her initial development was not greatly different from that of Japan. Yet the second stage of develop­ ment, that of industrialization, never took place on any scale, and Thailand remained effectively a mono-culture economy. One explanation of this phenomenon is that Thailand’s economic development was essentially colonial in type. Foreign trade was largely in foreign hands, indeed the rice trade was until 1924 domin­ ated by Chinese millers and exporters, and there was very largescale immigration of Chinese labour, whose remittances home were a form o f capital export. Another point to be considered is the rate of population growth. The rate of growth in South-East Asia in the b 17

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

last hundred years has been much higher than in China and Japan; one wonders indeed whether Japan could have sustained her economic development in the twentieth century if her rate of popula­ tion growth had not been lower than that in South-East Asia, or for that matter in China today. It was also suggested in discussion that climate may have played a part in the failure o f Thailand to develop along similar lines to Japan. Climate, however, has not prevented the Chinese in South-East Asia from very vigorous entrepreneurial activity when freed from the social and political environment of their homeland, though it is possible that in two or three more generations this vigour may be seen to decline. The papers printed in this book and its companion volume on South-East Asia1 vary a good deal both in size and character. N or taken together do they make up a coherent study of the whole of the subject. This is inevitable, since they were not written for that purpose, but for discussion by a group of specialists interested in particular aspects of the subject. Other specialists will be able without much difficulty to relate them to the existing literature in the field, and will, it is hoped, find them of value. For the non-specialist reader, or for those whose familiarity with the subject covers only part of the field, this Introduction seeks to provide the means of placing them in their historical context. 1 The Economic Development o f South-East Asia, edited by C. D. Cowan, Allen and Unwin, 1964.

18

1 T H E K IA K H T A T R A D E MARK MANCALL Instructor in History, Harvard University

Russia and England developed their contacts with China from opposite directions, by land and sea respectively, and in different political contexts. Yet each had to work out an institutional frame­ work for its China trade, on terms that deserve comparison. England and Russia were similarly affected by contact with China. Russian cossacks, explorers, and merchants in 1581 began the trek across Siberia and quickly arrived at the shores of the Pacific Ocean, paralleling the movement of the western powers—Portugal, Spain, England and France—through the southern oceans to China, with similar results: colonization, empire, and trade. As with England, so with Russia: this movement across Siberia brought Russia—a specialized instance of western culture, in comparison with the Far East—into contact with alien populations living at a lower level of technical development. This contributed to the ease of conquest. Intensive contact with the new populations o f the East, on the coasts of the Asian continent as well as on China’s Inner Asian frontiers, created new markets and new sources of supply and wealth. This early inter-cultural contact also created new demands in the home countries: both Russia and England became great con­ sumers of tea. Both Russia and England sought to place their relations with China in an institutional framework which would facilitate the realization of their chief goal, trade. However, special attention must be paid to the difference in the English and Russian approaches to China if we are to account, in some measure at least, for the differences in the Chinese response. Western Europeans reached China during the decline of the Ming Dynasty, before 1644, while the Russians came into contact with China thereafter, at the beginning o f the rise of Manchu power in N orth China. This difference in their time of arrival in the Chinese cultural world was to result in differences in the nature of the contact which these two western societies had with China. Institutionally, as far as China was concerned, England and Russia presented differ­ ent problems. The English were unwilling to fit into the established Tribute System, but still demanded trade. A compromise was necessary, and the Canton System was the result. English trade was thus institutionally and geographically restricted to Canton. The Russians 19

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

arrived at China’s frontier from a north-westerly direction at a time when the Manchu Empire was engaged in a strenuous effort to pacify the Jungarian tribes of Central Asia. Fearing that Russia might participate in the struggle on the Jungarian side, the Manchus sought a means to neutralize the Russians, to limit their desire for (and the possibility of interference in) the conflict. The means was the Russo-Chinese treaty system, initiated in 1689 with the Treaty of Nerchinsk. This first treaty dealt with political problems (England, on the south-eastern coast, was not yet a political problem) and estab­ lished the basis for the development of a trade system which, especially after 1727, was to prove of benefit to both parties and to satisfy the political and economic demands o f both. This I call, for convenience, the Kiakhta System, since Kiakhta fulfilled a function not dissimilar to Canton in the Canton System. Unlike the Canton System, the Kiakhta System of trade developed within the political con­ text of the Russian-Chinese treaty system, which preceded the initia­ tion of the unequal treaty system between China and the West in 1842. The study of the Sino-Russian trade system at Kiakhta has been almost totally ignored by western, as well as by Japanese and modern Chinese, scholars. This is probably because the northern trade did not have the immediate social and economic impact on China and on Chinese society that the Canton trade had. This was partly due to the fact that Kiakhta was considerably removed geographically from the centres of Chinese population. But even more important, it was a result of the fact that the forms developed at Kiakhta for international political and commercial intercourse were of a nature which allowed the preservation of the native institutions on both sides. The Russians did not seek entry into China (they already had access to Peking) nor to force concepts of free trade on the Chinese, concepts the Russians themselves held, at best, only weakly; the Chinese, in turn, did not insist on the all­ importance of Chinese customary forms for this intercourse, as they did at Canton. Measures were worked out early for mutual forms of address and approach, and these measures obviated the necessity of conflict such as occurred in Canton. Nevertheless, the long-range consequences of the Kiakhta System, as viewed from our vantage-point in the contemporary world, may have been as important as those of the Canton System. The institu­ tions created by the treaties of 1689 and 1727 not only developed into a treaty system which ante-dated the Treaty Port System on the coast by 153 years, but they also created a relationship which, with minor modifications, was to endure 169 years down to 1858, pre­ cisely because these institutions satisfied the needs o f the two greatest empires on the Asian continent. Because of its long duration and comparatively peaceful nature, 20

THE KIAKHTA TRADE

this institutional experience undoubtedly created a Chinese attitude towards Russia that differed markedly from the attitude towards the rest of the West. Because of this, Russia’s actions in consonance with the allied powers in 1860, for instance, appeared to the Chinese in a different light than the actions of England and France.1 Dealing with Russia from a position of strength in the eighteenth century was a somewhat different experience from dealing with the West from a position of weakness in the nineteenth and twentieth centuries. The results of this experience deserve extensive research. The Kiakhta trade system was established by the Treaty of Kiakhta in 1727 to replace the inefficient and perhaps, from the Chinese viewpoint, undesirable Peking caravan trade which had developed on the basis of the Treaty of Nerchinsk. Although in the details of organization it was a totally different system, it was essentially an extension of the principles on which Sino-Russian relations had been based previously. The system lasted until the latter half of the nineteenth century, when it began to decline in competition with the newly opened sea routes (from Odessa via Suez), and, finally, it received the coup de grace from the TransSiberian Railway at the end of the nineteenth century. Until 1854, the trade at Kiakhta was based on a strict barter system. As a result of the careful control of prices on both sides and mutual agreements on the evaluation to be made of goods offered for trade, the value of the goods traded was approximately equal year by year up to 1854. In that year, however, the Tsarist government modified the rules of the trade to permit the settling of accounts in gold and silver, as a result of which the balance of trade immediately went in China’s favour. In the period 1854-61, the annual export value of goods through Kiakhta to China was 4,825,000 silver rubles, while the export of silver and gold came to an annual average of 2,264,000 silver rubles.2 From this one may assume that the balance of trade throughout much of the history of Kiakhta up to 1854 would have been in favour of China, given the facts that tea consumption grew in Russia so rapidly, that Kiakhta was the major source of tea for the Russian Empire, and that Russia could not rely on a commodity such as opium to balance the trade. After the beginning of the decline of Kiakhta in the 1860’s and 1870’s, Kiakhta merchants began to move out into Mongolia, under the protection of the Peking treaties of 1860, in search of supplies 1 Masataka Banno, ‘The institutional change in Sino-Russian contact at Peking from the signing of the Tientsin Treaty of 1858 to May I860’, Studies on Modern China, Vol. 3 (Tokyo, 1959), pp. 1-67. In Japanese. Mark Mancall, ‘Major-General Ignatiev’s Mission to Peking, 1859-60’, Papers on China, 10; 55-96 (October 1956). 2 M. I. Sladkovskii, Ocherki ekonomicheskikh otnoshenii SSSR s Kitaem, (Moscow, 1957), p. 116.

21

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

for the growing Siberian population. By 1900, Kiakhta had all but disappeared as a trade emporium, and its place was taken by a combination of rail and sea transportation. The very condition which made it so valuable in the eighteenth and early nineteenth centuries—its location on China’s Inner Asian frontier—dictated its disappearance in the twentieth century. 1. THE KIAKHTA SYSTEM

History. Although Russian-Chinese trade relations were formally inaugurated with the signing o f the Nerchinsk Treaty of 1689 and the establishment of rules for a caravan trade to Peking, it is im­ possible to determine the precise date when Russians and Chinese first came into contact. Undoubtedly, this took place during the period of the Mongol invasions, when Russia and China both formed part of the Mongol Empire. Yaroslav, Grand Prince of Vladimir, and his son, Alexander Nevsky (1220-63) are both sup­ posed to have visited the capital of the Mongols, and it is not impossible or improbable that they came into contact with Chinese at Karakorum. It is known that goods from the Caucasus, Persia, and China were to be found in the markets of the Golden Horde, but whether these were passed along the silk routes or brought by Chinese merchants themselves is not known. In the first half of the fifteenth century, Russians were seen in Samarkand (in 1404), where they were ‘recognized as on a level with the merchants of India and China; consequently, their trade was quite respectable’.1 By the sixteenth century, Russia was already beginning to be aware of China as a possible source of an important trade. In 1557, Ivan the Terrible gave an Englishman, Anthony Jenkinson, permission to cross Russia to Bukhara, where Chinese goods were said to be available. By the time of his arrival, however, Chinese caravans had ceased coming to that city.2 Throughout the seventeenth century, numerous expeditions were sent to Mongolia and to China with diplomatic tasks, in search o f information, and to trade.5 Those expeditions which reached Peking on diplomatic or commercial trips traded goods at considerable profit. To cite but one example, at the end of the seventeenth century the merchant Nikitin brought back silk, cotton cloth, raw silk, pearls, gold, tea, medicinal herbs, porcelain, faience ware, and other goods.4 1 N. Aristov, Promyshlennost'drevnei Rusi (St Petersburg, 1866), p. 194. 2 Yu. Got’, trans., Angliiskie puteshestvenniki v Moskoviskim gosudarstye v X V I veke (Moscow, 1938), p. 19. 3 For translations of basic documents, see John F. Baddeley, Russia, Mongolia, China, 2 vols. (London, 1919). 4 For a study of this subject, see ‘Torgi gostya Nikitina v Sibiri i Kitae’, in S. V. Bakhrushin, Nauchnye trudy, Vol. 3 (Moscow, 1955), pp. 226-51.

22

THE KIAKHTA TRADE

By the end of the seventeenth century, Russia was firmly entrenched in Siberia. At the same time, she became deeply involved in the struggle with Sweden and Turkey. To the south of Siberia, the Manchus had come to power in China after 1644 and grew particularly strong after the defeat of the San-Fan Rebellion in 1681. The Nerchinsk Treaty, which regulated the frontier and the caravan trade to Peking, was prompted by the Russian need to solve the outstanding diplomatic problem in Siberia—relations with the Manchus—so that Russia could devote her full attention to the West. At the same time, the newly-regulated caravan trade provided lucrative income for the Russian state treasury in a time of inter­ national stress. The Manchus, in turn, were faced with the problem of building their administration in China, where they were greatly outnumbered by the people they had just conquered. Faced with the rising power of the Jungarians in Central Asia and motivated in part by their desire to preserve Manchuria from Russian encroachment (in case that territory were needed for withdrawal from China), the Manchus, too, needed to find a modus vivendi with the Russians which would neutralize them in the struggle in Central Asia, preserve the inviolability of Manchuria and, at the same time, satisfy the chief Russian demands for trade. Consequently the Treaty of Nerchinsk, China’s first treaty with a non-Asian power and a treaty signed on totally equal bases (indeed, it could be argued that it was favourable to the Chinese, since the Russians were forced to leave the Amur river basin area), satisfied the needs of both the powers concerned.1 Under the regulations of the Treaty, caravans were permitted to come to Peking once every three years, numbering not more than two hundred men. These caravans provided a valuable source of income for the Russian merchants as well as for the Russian state. This dual interest was reflected in the fact that they were state caravans conducted by licensed merchants. Having gained official permission to send trading caravans to Peking on a regular basis, the Russian court began to conduct the trade as a monopoly.2 Russian merchants had to obtain licences from the government before they could go to the East. The goods des­ tined for trade and the routes to be followed were all closely regu­ lated by the government. * The reports o f these caravans, though not 1 For a detailed Soviet study of the Treaty of Nerchinsk, see P. T. Yakovleva, Pervyi Russko-Kitaiskii dogovor 1689goda (Moscow, 1958). 2 The standard study of the state monopoly caravan trade to date is B. Kurts, ‘Gosudarstvennaya monopoliya v torgovle Rossii s Kitaem v pervoi pol. XVIII S t.’, Naukovi zapiski Kievskogo instytutunarodn'ogogospodarstva,9; 59-134(1928). 3 The standard collection of Russian laws, regulations, including diplomatic documents of a limited nature, is entitled Polnoe Sobranoe Zakonov Rossiiskoi Imperii. This covers almost the entire length of the Romanov dynasty.

23

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

published, are known to be in the archives of the Soviet Union and will provide valuable source material if they become available to the scholarly world. Between 1698 and 1718, some ten state caravans made the journey to Peking. After the establishment of the Kiakhta trade, however, the caravans began to lose their economic value, and in 1755 the last purely commercial journey was made to Peking. This form of trade was officially terminated in 1765. By the twenties of the eighteenth century, Russia once again felt the need to secure her Siberian frontier before attending to serious problems in the West. Catherine I, coming to power with the aid o f a small group of people who had risen to influence under Peter the Great, feared the reaction of the remnants of the old Boyar class; her first measures were directed at strengthening her own position on the throne. In August 1726 Russia formed an alliance with Austria against France, England and Prussia, hoping, in turn, to obtain aid from Austria against Turkey. Faced with this developing situation, a year earlier, in July 1725, Catherine I had appointed Sava Vladislavich Raguzinskii as ambassador plenipotentiary to meet with Chinese envoys in order to settle outstanding questions of frontier management and trade relations. The Kiakhta Treaty, signed by Raguzinskii in October 1727, created a new system of trade which endured until 1860. With regard to the Peking market itself, the Russian government retained the right to continue sending trade caravans to Peking once in three years.1 This was, essentially, a reaffirmation of the older caravan trade system. During their sojourns on Chinese territory, the caravans were to be responsible for their own expenditures, but they were entirely free of duties in Peking, where they were allowed to remain for eighty days to conduct trade. All arguments arising between members of the caravan or between them and the Chinese residents were to be decided by the leader of the caravan or by the Chinese official accompanying it. This is the first instance of extra­ territoriality being formally incorporated into a treaty between China and a western nation. The quality of this extraterritoriality, however, should probably be understood in terms of mutual con­ venience, rather than in terms of the later unequal treaty system, since the treaty itself was a mutual convenience, not an instrument imposed by force on a defeated government. The caravan merchants were to be licensed in order to prove that they were appointed members of the particular caravan, and upon arrival at the frontier the caravan was to notify Peking in writing of its arrival, whereupon an official would be dispatched to accompany the merchants to the capital. 1 Russko-Kitaiskie otnosheniva 1689-1916: ofitsial'nye dokumenty (Moscow, 1958), pp. J7-22.

24

THE KIAKHTA TRADE

In addition to the caravans, trade was permitted at two frontier points: Kiakhta and Tsurukhaitu. The latter never developed as a serious centrc of intercourse due to its poor geographical location and its proximity to the well-situated Kiakhta. At Kiakhta, officials were to be appointed on both sides to superintend the trade.1 In addition to trade, the Kiakhta treaty also dealt with the frontier and refugee problems, and it made arrangements for the permanent residence of Russian Orthodox clergymen in Peking, out of which grew the Russian Ecclesiastical Mission in Peking. After several months of indecisiveness on both sides, the Kiakhta trade was finally initiated at the end of September 1728 in a fashion which foretold its rise and the decline, in turn, of the Peking caravan trade. At that time, a large Russian merchant-caravan which Raguzinskii had sent to Peking immediately upon conclusion of the treaty returned, having been unable to sell a large quantity o f furs in the capital due to a glut of Siberian furs on the market during the caravan’s sojourn in Peking. The leader of the caravan turned the furs over to the chief of the new Kiakhta outpost for bartering to the Chinese merchants who were beginning to gather in the area. The trade went well because Kiakhta had begun to attract merchants from various areas in N orth China, in addition to Peking, and it provided a focal-point for a wider area of distribution than had Peking alone.2 From that time on, the caravan trade was unable to compete with the trade at Kiakhta and by the fifth decade of the eighteenth century, it had ceased almost completely.^ The last Russian state caravan went to Peking in 1755, but the lack of success in the trade caused the cessation of the state monopoly in the caravan trade and o f its chief item of commerce, fur, with the result that the trade became totally centralized in Kiakhta. Fur continued to be sent to Peking, however, to the Russian religious mission there, but the profits of this minor commercial activity were, by and large, devoted to the needs of the members of the Mission itself, and it became a form of subsidy rather than an aspect of international trade.4 After 1755, Kiakhta came com­ pletely into its own. With the exception of three major and several minor, interruptions, the trade continued until 1854 on a barter basis. 1 Russko-Kitaiskic otnosheniya 1689-1916: ofitsial'nye dokumenty (Moscow, 1958), p. 19. 2 As only one example of the growth of trade which took place with the establishment of Kiakhta, we cite the fact that furs exported to China through Kiakhta in 1735 amounted to 423,035 rubles, while in 1759 this figure had reached 1,175,364 rubles. See Kh. Trusevich, Posol'skiya i torgovvya snosheniya Rossii s Kitaem (do X IX veka), (Moscow, 1882), p. 272. 3 For statistics indicating the decline of profits from the caravan trade, see Kurts, p. 133. 4 P. Golovachev, Irkutskoe likholet'e 1758-1760 gg. (Moscow, 1904), p. 25.

25

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

Eight interruptions in all took place during the second half of the eighteenth century, and they lasted altogether fifteen years and seven months. These were caused by varied problems, including the return of fugitives from justice, the levying of customs duties, and personal conflicts between merchants in Kiakhta itself. The interruptions were generally caused by secondary aspects of the Sino-Russian relation­ ship rather than by the trade itself. In order to adjust these problems two more agreements were signed, in 1768 and 1792, which sought to remove from the area of contention the more pressing problems facing the two empires in their mutual relations. The agreement of 1768 dealt chiefly with the frontier problem and that of 1792 with the trade regime. In 1851, a further treaty was negotiated which ex­ tended the trade to the region of Sinkiang, at Kuldja and Chuguchak, but this in no way modified the regime obtaining at Kiakhta. The Kuldja Treaty of 1851 was simply an extension of the trade to a new area which had grown in importance as Russian interest in Central Asia had developed. Of the eight interruptions in Kiakhta, the fact that only three were of any considerable length testifies to the essential stability of the relationship institutionalized in the Kiakhta trade. The return of the Russians to the Amur Valley, which they had left as a result of the Treaty of Nerchinsk, and the concerted effort to lay hold on the lands lying towards the Pacific in the middle of the nineteenth century, raised anew the problems o f revising the trade and frontier arrangements. This was undertaken by the energetic Siberian pro-consul, Count Nikolai Muraviev. This period of Russian expansion to the East coincided with western foreign economic and military activities along the China coast and the beginning of the observable decline of the traditional Chinese social and economic systems. A new situation was created in which the stable arrangements which had developed out of the Treaty of 1727 could no longer satisfy the requirements of a new era, an era of active imperialism. (It should be noted that Muraviev’s activities in Eastern Siberia were not undertaken with the full blessings of St Petersburg, but rather represented the energy of a remarkable individual whom Petersburg came to follow.) Kiakhta did not long survive the new treaty system built up on a broad basis between Europe, including Russia, and China in the years 1858-60. Essentially, it can be said that Kiakhta answered the needs of a traditional China and a Russia which had not yet reached the sophisticated capitalist development evident in England, in an age of limited communica­ tions capacities on both sides. The breakdown of traditional China and the advance of capitalist development in Russian industry, the settlement of Siberia and the creation of better means of communicacations (both politically and geographically), deeply affected the 26

THE KIAKHTA TRADE

relationship of the two empires and Kiakhta no longer satisfied their mutual needs as an institutionalized means of intercourse. Commodities o f Trade. The Sino-Russian trade system at Kiakhta answered the economic as well as the political needs of its time. In nature, it was a bilateral diversified trade. Both countries had commodities of value to offer the other. China needed Russian furs, and Siberia and Russia needed Chinese teas and other goods. The conquest of Siberia had opened to the Russians vast resources of fur. The quantity of fur available far exceeded internal demands. The harsh winters of N orth China created a significant demand for Siberian furs and provided a market close at hand. The caravan trade was based on the need for fur at Peking. Later, throughout the eighteenth century, the most important market for this chief export of Siberia was Kiakhta. Europe and the Near East were too far from the sources of supply and the costs and inconveniences of trans­ portation were too great to overcome the attractiveness of the Chinese market at Kiakhta, where fur was in great demand and a quick and profitable trade was available. The abolition of the state caravan trade monopoly and the creation o f a private trade in furs at Kiakhta contributed to a sharp rise in the Kiakhta fur trade during the reign of Catherine II (1762-96). I'his was even more advantageous for the Russian merchant, who was now relieved of the costs of transportation from the frontier to the Peking market. Fur con­ stituted about 85 per cent of the Russian participation in the trade between the years 1768 and 1785, while the remaining 15 per cent consisted of leather goods and manufactured items. After 1792, however, as the trade itself increased, the export o f furs remained fairly constant in volume, and between 1792 and 1800, it constituted only 70-75 per cent of the total trade. Although squirrel, ermine, sable, and fox skins were popular in the trade, the most valuable fur exported at Kiakhta was the otter and the sea beaver. When the Siberian supply of these skins did not satisfy the demand, Russians penetrated to Kamchatka and the Kurile Islands and, eventually, to the Aleutians and Alaska, where they found new sources of supply. Beaver was especially important in this regard. As the demand grew, it became necessary to import American skins, which were sent to K iakhta via Petersburg for re­ export. The close relationship between the Kiakhta trade, internal Russian consumption, and fur imports from the West can be seen in the fact that at the time of the interruption of the trade which lasted from 1785 to 1792, the interna! Russian market was unable to absorb even that quantity of beaver skins imported during the month just preceding the interruption. As a result, the importation of skins from the West completely ceased. Another significant item of export to China was wool cloth. The 27

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

export of cloth began during the reign of Peter I, who paid great attention to the development of the cloth industry inside Russia through a system of patronage. The production of cloth increased and from 1762 to 1775, the number of cloth factories increased from 46 to 76, or by 60 per cent. This, however, was not able to meet even the demands of the internal market. As a result, large quantities of Western European cloth were imported from England, Holland, Prussia, France, Spain, etc., for export to China as well as for internal consumption, and observers at the time were quite aware of the fact that it was foreign, not Russian, cloth which was being traded at Kiakhta. One writer remarked that ‘If the established cloth factories in Russia would be brought to a better condition on the example of foreign states, it might be hoped that their cloth would have quite a large distribution in Siberia as well as in China and the Kalmuk country’.1 It is of interest to note that by the nineties of the eighteenth century, a factory located on the Tel’ma river in the neighbourhood of Irkutsk was producing cloth almost exclusively for the Chinese market. Nevertheless, the demand at Kiakhta was so great that Prussian cloth continued to dominate the market until 1819.2 After that year, as the internal production of cloth began to increase, the transit trade in foreign cloth to satisfy the demands of the Chinese market began to decline, and by 1849, 1,525,155 yards were sold at Kiakhta, exclusively the production of Russian mills. In this regard, it is interesting to speculate on the relationship of the sale of wool cloth to China through Kiakhta and through Canton. The failure of the British to develop an export market for cloth in China might, I suggest, be the partial result of the fact that the chief market for British woollens would have been N orth China, for obvious climatic reasons. The fact that the Russians had better access to this market before 1842 than the British, had tended to exclude the latter from the trade. It is known that British cloth participated in the Kiakhta trade, but this was in the form o f re­ export and was eventually replaced by cloth of Russian origin. Consequently, it cannot be considered as the development of a British market per se. During the same period, the second half of the eighteenth century, Chinese imports into Russia consisted chiefly of cotton cloth. Nankeens (kitaika in Russian) played an especially important role. 1 M. Chulkov, Istoricheskoe opisanie Rossiiskoi kommertsii pri vsekh portakh i granitsakh ot drevnikh vremen do nyne nastoyashchego i vsekh preimushchestvennikh usakonenii po onoi gosudarya imperatora Petra Velikogo i nyne blagopoluchno tsarstvuyushchei gosudaryni imperatritsy Ekateriny Velikoi, 3 vo!s. (St Petersburg, 1782-85), Vol. 3, Bk. 1, p. 116. 2 Brat’ev Butinykh, ‘Istoricheskii ocherk snoshenii Russkikh s Kitaem’, Izvestiya Sibirskogo otdela Imp. Rus. Geogr. Obshchestva, 1-4-5: 80 (1871).

28

THE KIAKHTA TRADE

In fact, at this time the barter trade was carried on by means of the use of nankeens as units for determining the relative prices of Russian and Chinese goods.1 Following cotton cloth in importance was silk cloth, which was an item of consumption especially favoured by the court nobility and by merchants in Siberian cities. A t the time, great efforts were made, through the importation of foreign silk exports from Western Europe, to encouiage the development of a native silk industry in Russia. This resulted largely from the high prices charged at Kiakhta by the Chinese for silk. Pallas, who travelled to Kiakhta in the seventies of the eighteenth century, remarked that the silk available at Kiakhta was not only expensive but was of low quality as well.2 Consequently, by 1762 there were already 150 silk factories inside Russia itself, and the importation of Chinese silk began to decline; in 1751, it constituted 23-5 per cent of the total import from China, in 1761 it was only 20-5 per cent, and under Catherine II it fell to 12-4 per cent.3 In the silk import, the relation of the China trade to Russia’s Western European trade is again illustrated. During the interruption of 1785-92, Chinese silk consumption in Siberia was re­ placed by Russian and even French stuffs. This favourably influenced the development of Russian silk manufactures. One of the most interesting commodities of Russian import from China was rhubarb, which throughout the eighteenth century remained a state monopoly inside the Russian Empire. Undoubtedly, it was the great Russian consumption of rhubarb which persuaded the Chinese to the belief that it was an essential item for westerners and encouraged them to believe that they could utilize the stoppage of the sale of rhubarb at Canton to their advantage, as a means of influencing western behaviour. At the same time, despite their perhaps hazy concepts of western geography, the Chinese were not unaware of the interrelationship between Russia and the rest of Europe. When an interruption occurred in the trade at Kiakhta, the Chinese restricted the sale of rhubarb in Canton, lest it be trans­ ported to Russia through Western Europe. In this fashion, they hoped to put pressure on the Russians at Kiakhta. The beginning of the nineteenth century saw some significant changes in the structure of the Kiakhta trade, although its barter form was retained until 1854. The barter system was by mutual agreement o f both governments, and while nankeens remained the official unit of exchange until about 1800, their decline as an impor­ tant item in the Chinese export trade to Russia was symbolized by the ! Trusevich, p. 173. 2 P. S. Pallas, Puteshestvie po raznym provintsiyam Rossiiskogo gosudarstva, 3 parts in 5 vols. (St Petersburg, 1773-88), chast’ 3, polovina pervaya, p. 195. 3 Trusevich, p. 171.

29

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

fact that after the turn o f the century tea became the chief unit of exchange accounting, due to its tremendous growth in importance. It is curious to note, however, that in both cases it was a Chinese, not a Russian, commodity which was the accepted unit. On the Russian side, the new structuring of the trade consisted chiefly in the decline of furs, partly due to a decline in resources inside Siberia as a result of predatory hunting, and partly due to increased American competition directly at Canton. By 1826 the fur export had declined to 47-5 per cent of the total trade volume; by 1836-40, it constituted an annual 34-5 per cent and continued to decline. On the other hand, the export of Russian wool cloth to China increased steadily, so that by 1850 cloth made up 65-2 per cent of exports from Russia and furs only 23-7 per cent.1 The most significant change in the trade structure, however, took place in the growth of tea as the major item of import from China into Russia. As Russians moved into Siberia in the seventeenth century and came into contact with tea-drinking Mongols, they undoubtedly passed the word about this new beverage back to Moscow. However, Moscow itself only became directly acquainted with tea in 1683. In that year, a Russian embassy to the Mongo! Altyn-khan on Lake Ubsa was entertained with tea, and tea was included among the gifts which were sent back to Moscow. Baikov, who went as Russian envoy to Peking in 1654, described the fact that the Chinese entertained him with ‘tea cooked with butter and cow’s milk’ and told him that ‘the tea was sent from the emperor’.2 By the end of the seventeenth century, tea was being sold in Moscow, but this tea, evidently, was imported by the Dutch and Portuguese merchants through Arkhangel’sk, rather than from China directly. In 1706, when private Russian merchants stopped participating in the state caravans to Peking, they established permanent tradingplaces in Urga and there, it may be assumed, these merchants became directly acquainted with the drinking o f tea and spread the consumption o f the beverage among the Russian residents in Siberia. The establishment of a permanent trading-post at Kiakhta, which guaranteed a steady supply of tea, encouraged the spreading of the habit not only in Siberia but in European Russia as well. Nevertheless, the importance of tea in the trade structure at the time was such that between 1762 and 1785 it constituted only approxi­ mately 15 per cent of Russia’s imports from China. The growth of the importation of tea at the end of the eighteenth 1 Sladkovskii, p. 91. 2 I. P. Sakharov, Skazaniya russskogo naroda o semeinoi zhizni svoikh predkov, 3 parts (St Petersburg, 1836-37), Vol. 2, Bk. 8, p. 130.

30

THE KIAKHTA TRADE

century was so rapid that in the three years from 1798 to 1800 inclusive, the amount of tea imported increased by 49 per cent.1 Between 1802 and 1830 it increased in weight of tea imported by 91 per cent and in 1825 it amounted to 87-3 per cent of the total value of Russian imports from China. (It may be suggested that the Napoleonic disturbances in Europe cut off Russia’s sea-borne supplies of tea which, in turn, gave an impetus to the development of land-imports through Kiakhta.) At the same time, between 1815 and 1826, the value of cotton cloth fell 84 per cent to only 8 per cent of the total value of Chinese exports at Kiakhta.2 By 1850, tea con­ stituted 95 per cent of the value of imports from China to Russia. This remained fairly steady through the rest of the century. In 1893, of the total value of Chinese exports through Kiakhta, tea still constituted 94 per cent.5 By that late date, however, Kiakhta had declined and lost its position as sole Sino-Russian emporium. Con­ sequently, in 1895, of the total value of all imports from China to Russia by all routes, tea made up 85 per cent. Even as early as 1890 Russian consumption constituted 35-15 per cent of the total tonnage of tea exported from China to the entire world.4 It can be seen from the description of the structure of the trade that the Sino-Russian trade at Kiakhta was a bilateral trade. While it came to be dominated by tea on the Chinese side, it was dominated by cloth on the Russian side and did not depend on anything resembling opium as a means of supporting the trade. Due to the barter nature of the trade, the values exchanged approached an, albeit perhaps artificial, equality until 1854. Organization o f the M arket. Among the Chinese merchants, the organizational forms which the Kiakhta trade took appear to have developed out of Chinese experience with Central Asia and, prob­ ably, the organization of such institutions as the salt monopoly in the internal trade. When at the beginning of the Ch’ing Dynasty, the Russian envoys first began arriving in Peking, they were received by the L i Fan Yuan, that institution of the central government in Peking which dealt with Inner Asian relations. The early Peking trade was carried on under the jurisdiction of this body. As far as can be determined, no comprehensive set of regulations governing the trade was promulgated. Rather, the Ch’ing regulations such as those found in the Ta~Ch'ing Hui-tien reflect the treaty system. Certain ad hoc regulations were developed too, as particular situations arose (for instance, regulations dealing with fodder for the caravans, etc.). The Li Fan Yuan would send officials to the O-lo-ssu-kuan (Russian 1 A. M. Samoilov, ‘Istoricheskie i statischeskie issledovaniya o Kyakhtinskoi torgovle’, Sbornik statisticheskikh svedenii o Rossii (St Petersburg, 1854), pp. 13 and 17. 2 Sladkovskii, p. 843. 3 Ibid., p. 118. 4 Ibid., p. 165.

31

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

Inn), a special caravanserai for the Russian merchants which later became the location of the Ecclesiastical Mission, where the Russians were domiciled and where they carried on their trade. These officials superintended the various problems which arose with regard to the management of the trade and the welfare of the Russians. The only specific regulations, repeated over and over again in the Chinese materials, refer to the 200-men limit on the size of the caravans and the eighty day limit on residence in Peking. The Russians were forced to comply with these regulations, though they did not observe too closely the added regulation that only one caravan could come to Peking each three years. When the trade was moved to Kiakhta, a pan-shih-ta-ctien (Superintendent of Affairs, Amban) was established in Urga with the specific duty of superintending trade. Usually, two men filled this post simultaneously. The superintending of the trade was their responsibility. In Ch‘ien-lung 27 (1762), the L i Fan Yuan decreed that one of these officials was to be appointed from among the Manchu and Mongol officials resident in Peking, and the other was to be chosen from among the Khalkha Mongol jasaks (local Mongol officials). According to the regulations, they served a three-year term of office and were then replaced. They reported to the L i Fan Yuan and received their instructions from it. By Chia-ch‘ing 7 (1802), the duties of these Chinese officials were expanded to include a personal inspection of the frontier once every ten years. They were also charged with consultations with other officials in the region, specifically in Hei-lung-chiang and in Kobdo, in managing frontier relations. In this way, a semblance of co­ ordination was provided for the length of the Sino-Russian frontier. Since the pan-shih-ta-cKen were the general controllers or super­ visors of affairs in Mongolia, including the frontier region, under them were officials who were appointed to attend to the specific management of the trade system. Two of these had offices in Urga and one in K iakhta; they too were appointed by the Li Fan Yuan directly. The Urga Superintendent of Trade was established in K ’ang-hsi 59 (1720), and the Kiakhta Overseer (known in the Russian materials under the Manchu title of dzarguchei, and in Chinese as chien-shih kuan), was established in Yung-cheng 7 (1742).' They too were replaced once in three years. Each official was given a daily allowance of one liang (ounce) o f silver. In origin, the positions of Overseer of Trade may have grown directly out of the Russian Peking caravan trade. Originally, such officials were sent to the frontier to meet the Russian caravans and to accompany them on the road to the capital.2 When the Peking trade 1 Ta-Ch'ing hui-tien Shih-li (Chia-ch‘ing edition), 746: 4b-6. 2 Ibid., pp. 5b-6.

32

THE KIAKHTA TRADE

declined, and finally ceased, and the focal point was transferred to Kiakhta, their functions and offices were located permanently in the latter city, and they were entrusted with the management of the market and the control of frontier affairs in general. Kiakhta was, in reality, two cities, divided by the frontier. The Chinese town was known in Russian as Maimachen (Mai-maich'eng), and it was there that the Chinese officials had their offices and the merchants their residences. By the seventies of the eighteenth century, the city had about 200 permanent residences and a per­ manent population (excluding merchants resident in season only) of some 400 persons. It was constructed in the form of a quadrangle, with three parallel streets going north and south, and surrounded by a low wooden wall with gates and towers for guards.1 As the trade developed, social life at Maimachen became typical of trade entrepots elsewhere, being centred around merchants and their commerce. Michie, a traveller who visited both Kiakhta and Maim­ achen, remarked that on the streets one could meet, in addition to Russians and Chinese merchants, Mongols, Siberian peasants, Kalmuks, and Buriats.2 The civil government was in the hands of the above-mentioned dzarguchei. Pallas remarked that some of the dzargucheis were ‘high and reasonable people and often mandarins themselves’. He reported that they served in Maimachen as a form of exile ‘for not carrying themselves well in other places’.3 Be this as it may, the dzarguchei was in a position to make considerable profit, and it was a position sought after in Peking, since he was the recipient of the usual bribes and presents which, as in Canton, came to be a function o f the trade. Pallas says that when he was in Kiakhta, the dzarguchei received a fixed salary (one liang per day) but that the gifts and bribes he received from the merchants ‘exceeded this by far’.4 All aspects of urban life were under the control of the dzarguchei, including the police who were Mongols hired for this duty, taxation, trade, and judicial matters, with which he dealt directly himself. Taxation for infringements of the law was, evidently, a major source of income for the officials.5 One of the chief concerns of the Russian administration in Kiakhta was to maintain relations with the dzarguchei in Maimachen on such a level as not to endanger the trade. Consequently, on the appoint­ ment of a new dzarguchei, the Kiakhta merchants, or more often the administration itself, would send a representative to present gifts. There is, however, no record of a reverse situation. The interrelationship between the two towns was, not unnaturally, 1 Pallas, p. 156. 2 Alexander Michie, The Siberian Overland Route from Peking to Petersburg (London, 1864), p. 208. 3 Pal&s, p. 170. * Ibid., p. 171. s Ibid., p. 178.

c

33

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

a close one in more ways than just trade. For both countries, it served as an observation post on manners and morals in the other empire. From Kiakhta, a cult of chinoiserie spread among the merchants in other areas of Siberia. This interrelationship found expression in concrete situations as well. In 1802, for instance, a fire broke out in Kiakhta, and the dzarguchei is reported to have sent ‘fifty men, Chinese and Mongol, with many buckets’ to fight the fire. In response, the Russian administration, at the direct suggestion of Irkutsk, which was the next higher administrative centre in the area, rewarded the dzarguchei, his secretary, and the proprietors of the eight largest Chinese shops with gold and silver watches. The fire-fighters themselves received five yards of black Breslau cloth apiece.1 The Manner o f Trade. The trade was conducted in the best tradi­ tions of bargaining and commercial sculduggery. It is reported, for instance, that on one occasion a Chinese merchant tried to sell a piece of wood covered with pigskin as a ham and some chickens stuffed with bones and sawdust instead of meat. Nevertheless, Chinese and Russians visited each other socially after hours, and Russian travellers remarked that both sides would entertain the other at feasts, during the course of which they would try to gather trade information. Michie describes the socio-cultural origins of this relationship in interesting terms: ‘The Russians and Chinese are peculiarly suited to each other in the commercial, as well as in the diplomatic departments. They have an equal regard for truth, for the Russian, in spite of his fair complexion, is at the bottom more than half Asiatic. There is nothing original about this observation, but it serves to explain how it is that the Russians have won their way into China by quiet and peaceable means, while we have always been running our head against a stone wall, and never could get over it without breaking it down. The Russian meets the Chinese as Greek meets G reek: craft is encountered with craft, politeness with polite­ ness, and patience with patience. They understand each other’s character thoroughly, because they are so closely alike.’2 This state­ ment contains, both implicitly and explicitly, a most interesting comparison with the relationship at Canton. The Russian and Chinese merchants constructed a mutual relationship at K iakhta; the British at Canton felt they had to break down the Chinese wall. Although trade was carried on throughout the year, the most im portant season was from December to March. At this time, most of the goods intended for sale were brought to Maimachen from 1 D. Uspenskii, ‘Iz istorii Russkikh snoshenii s narodami Vostoka’, Russkaya M ysl\ Kniga TV za 1904 g., pp. 60-1. 2 Michie, p. 210.

34

THE KIAKHTA TRADE

Urga and Kalgan, where they were stored. For trade itself, the Chinese first crossed over to Kiakhta where they would negotiate in the houses occupied by the Russian merchants. The Chinese goods were kept on the Chinese side, and the Russians would cross over to Maimachen to examine them.1 The Chinese merchants, according to Russian reports, would send the Russian goods to Urga and Kalgan, because Maimachen suffered from an insufficiency of warehouse space. Furthermore, duties were paid in Urga and Kalgan, since according to the Kiakhta Treaty, duties were not to be levied in Kiakhta or Maimachen itself. Merchants from all over N orth China would gather in Urga and Kalgan to purchase Russian goods, from where the distribution system extended over a wide area.2 All Chinese merchants going to K iakhta to trade were required to obtain passes at certain checkpoints from officials who were res­ ponsible for their issuance, on the basis of their place of origin. Those passing through Kalgan were to obtain passes from the Ch‘a-ha-er tu-t'ung (Manchu General-in-Chief of Chahar); those from Shansi were under the control o f the Kuei-hua-cHeng chiangchun (Manchu General-in-Chief at Kuei-hua), and those in the east under the Dolon-nor sub-prefect. The licence was itemized, including the first and last names of the merchant, the goods he had for trade, listed by kind and quantity, his origin, as well as the time he started his journey. Upon his arrival at Urga, and again at Kiakhta, the licence had to be presented to the officials in charge o f the trade.3 Each official would examine the licence (p‘iao) and make sure that the goods and data tallied with the recorded data on the licence. If a merchant arrived at Kiakhta without the Urga counter-signature on his licence, he was not allowed to enter the trade.4 These licencetickets were valid by regulation for one year only, and if a merchant exceeded the time-limit, he had to request a new licence. If, on the other hand, the trade in Kiakhta was not profitable, and the merchant desired to proceed to another place, he was required to report to the yamen, where he was given a new licence, again itemized as above, and stating the new place of destination. Strict punishment awaited those who tried to trade privately without possession of a licence-ticket. They were sentenced to two months in a cangue, followed by forty strokes of the bastinado; upon completion of their sentences, they were returned to their native provinces, half of their goods being confiscated by the officials.5 Shansi merchants, it appears, were most important in the trade, and it was their wide commercial connections elsewhere in N orth i Pallas, pp. 182- 3. * Ibid., p. 182. 3 Ta-Ch'ing Hui-tien Shih-li (Chia-ch‘ing edition), 746 : 8b~9b. 4 Ibid., p. 7a. 5 Ibid., pp. 8b~9b.

35

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

China that provided a network for the distributio n of Russian goods. Undoubtedly, the existence of the Shansi banks not only facilitated the trade but enabled the Shansi merchants to occupy an important position in it. The Trade Network. The structure of the K iakhta trade in terms of goods and organization developed, as we have said, out of the fact that China was the logical and best m arket for Siberian furs, and that China itself, in turn, could supply go ods which were necessary to Siberia and Russia. In certain respects, th is was not simply a direct outcome of the development of the trade at Kiakhta itself. Trusevich remarks that already in the third quarter of the s eventeenth century— considerably before the time of the establishment of the Kiakhta trade—such nationalities as the Bashkirs, Tungus, Buriats, and others who lived in close proximity to the Chinese frontier were wearing articles of clothing made out of Chinese cotton and silk. As Russians settled the Siberian territories, they also began to consume such materials for clothing. The same can be said of tea, which was already known to pre-Russian inhabitants o f the territories just beyond the Chinese frontier. Tea became such a staple drink among Russians in Siberia that at times of interruptions in the trade the Siberian inhabitants can be said to have suffered not only economic­ ally but in matters of habit as well. The whole question of preRussian contact between China and the tribes beyond Central Asia deserves further study. The requirements of the Kiakhta trade, however, resulted further in the development or acceleration of the development o f a trade network within the Siberian regional market, and, moreover, in connecting the Siberian regional market with European Russia in a trade network chain which led directly to Kiakhta. Far-flung areas were tied into an over-all trade relationship. Trusevich des­ cribes this in some detail. Merchants from Moscow would leave in the spring for the M akar‘ev market. There they sold their Moscow goods and bought other goods; by the beginning of the year they would arrive in lrbit, where they would exchange these goods for furs and other goods suitable for the Chinese market. Unsold Moscow and M akar‘ev goods could be sold farther on in Tobol‘sk. Along the trade route they would continue to buy and sell goods suitable for the local market or for trade farther on, deeper into Siberia. Furs and broadcloth were purchased in Eniseisk and Irkutsk. These two cities became the centres for a group of merchants who would buy goods from the merchants travelling from European Russia. These latter, with the money realized from these trans­ actions, could then travel to such places as Berezov, Surgut, Mangazei, Yakutsk, Nerchinsk, and even to the (Russian) Far East, where furs of superior quality were obtainable closer to the sources 36

THE KIAKHTA TRADE

of supply. Other merchants by-passed Eniseisk and Irkutsk and arrived in Kiakhta by autumn, where they immediately traded their goods for Chinese commodities. With these they would travel to Irkutsk or Yakutsk, where they sold them for furs and would then once again hurry back to Kiakhta to trade for Chinese goods during the height of the season. From Kiakhta the merchants returned to Moscow through Irkutsk, Eniseisk, Tomsk, ToboPsk, Irbit, and Makar’ev, continuing to buy and sell along the road. Trusevich suggests that in such a trade network system, the capital of any given merchant or group of merchants may have turned over three or more times, thus allowing a significant expansion of trade. This system resulted in a peculiarity that deserves brief mention. Chinese goods were cheaper in Irkutsk, at times, than on the market itself at Kiakhta. This resulted from the fact that the merchants who traded in the spring at Kiakhta, or in the early autumn, would return to Irkutsk, where they could sell their Chinese goods cheaply to those merchants who did not travel all the way to Kiakhta or who resided permanently in Irkutsk. With the proceeds from this tangen­ tial trade they then purchased furs and returned to Kiakhta to trade again. It is probable that with the daily and seasonal fluctuations of prices on the Kiakhta market, profits could be made based on the possible rise of prices towards the end of the trading season. Many merchants, evidently, lived by participating in this local KiakhtaIrkutsk trade. They, in turn, supported and were supported by a group of merchants who lived only in Irkutsk, not travelling to Kiakhta, where they bought Chinese goods and sold furs. These latter merchants filled a position akin, perhaps, to wholesalers in the trade network. The Kiakhta trade also aided the development of Russian foreign trade in other areas. We have already mentioned that the demand for furs at Kiakhta resulted in the importation of fur from Europe and North America. At the same time, the increased demands for items of Chinese production caused the Russian re-export of Chinese goods, such as tea, sugar, silk, and other materials, to Europe. This may have been, in part, a transit trade, particularly with Prussia (where Prussian cloth was an important item on the Kiakhta market before the nineteenth century), but undoubtedly a large proportion of this trade was in Russian hands. Central Asian peoples were also brought into this trade system. The Kiakhta demand for the products of the animal economy of Central Asia (lambskin, for instance), resulted in their importation from Central Asia and re-export to China. The Bukharans in particular participated in this trade, both directly and indirectly. Directly, they were the chief merchants operating the Russian side of the rhubarb trade. Indirectly, they would re-export to Russia Chinese cloth, gold, silver, and other goods 37

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

which they obtained in their own trade with China. (ChineseCentral Asian trade requires further research.) China in Russia's Foreign Trade. The total effect o f this network on the development of Russian foreign trade can be seen, to some extent, in the fact that the Chinese trade occupied an important place in the foreign trade of the Russian empire.1 (See Table I.) T able I

THE ROLE OF CHINA IN GENERAL RUSSIAN FOREIGN TRADE*

Year

1758-60 1760 1775 1792

Year

General turnover of Russian trade

1758-60 1760 1775 1792

19,058,789 r. 18,600,000 r. 32,196,000 r. 58,711,322 r.

General turnover of Russia’s Asian trade

2,435,587 r.

Per cent of China in general Russian trade

8-7 7-3 8-3 7-4

Turnover of Russia’s Per cent of China in China trade Russia’s Asian trade

1,642,000 r. 1,358,271 r. 2,316,183 r. 7,054,299 r. 4,316,183 r. * Trusevich, p. 214.

67 -6 61 -3

The Chinese trade constituted, in the second half o f the eighteenth century, 7-9 per cent of the entire foreign trade turnover of Russia, and in the Asiatic market it occupied first place at 67 -6 per cent. This table also shows that Chinese trade developed generally in the same proportion as the general foreign trade of Russia. A t the same time, the proceeds of customs collection from the Russian-Chinese trade played a disproportionately large role in total Russian customs collections. In 1760 the customs proceeds from Russian foreign trade were approximately 1,154,000 silver rubles, and in 1775, 1,170,000. Chinese trade accounted for, respectively, 238,155 and 453,278 silver rubles, or 20-4 per cent and 38-5 per cent. The Sino-Russian trade affected the lives of the local Siberian inhabitants, particularly among the upper classes. Trusevich claims that many Russian merchants in Einiseisk, Irkutsk, and even as far away as Toboi'sk, lived to a considerable extent on the use of Chinese goods in their daily lives.2 Furniture, pictures, dolls, vases, china, enamel, lacquer-ware, clothing—all of Chinese origin—were regularly consumed. Even Chinese sweets became standard in Siberian homes, not to speak of tea. 3 The introduction and developi Trusevich, pp. 207 and 214. * Ibid., p. 215. 3 Ibid., p. 216. 38

THE KIAKHTA TRADE

ment of the trade resulted in a fairly steady decline of prices for Chinese goods in Siberia which, in turn, must have made goods more available to greater numbers as supplies increased. Tables show that this decline in the price level was in direct relation to the growth of the trade.1

II. KIAKHTA AND CANTON

The presence of the K iakhta trade in the north and of the Canton trade in the southern part of the Manchu Empire during the second half of the eighteenth century provides an opportunity, once suffici­ ently detailed research on the K iakhta trade has been accomplished, for making comparisons between the two which may serve to cast new interpretive light on both and on the role each played in the internal economy of China. A comparison of the institutions and forms of trade, from the Chinese as well as from the foreign point of view, should in the end cast further light on the Chinese reaction to the coming of the barbarians, and on the Ch’ing conduct of foreign trade and the attitudes and theories behind such conduct. A thorough study of the new element o f Russia (new from the point o f view of research) in Chinese foreign relations before 1842 may also result in some modification of the traditional western conception of the traditional Chinese tribute system for the conduct o f foreign affairs. A similar type of comparison is possible in terms of the relation­ ships between these two markets and between both of them and the internal economy of the Manchu Empire by use of the statistical data available on the trade. Through a comparison of the data of the Canton trade with that of the Kiakhta trade, it is possible to suggest in which areas these two markets influenced each other and, indeed, even competed; further, such a comparison may suggest the responsiveness of the internal Chinese market to the conditions prevailing in Canton and Kiakhta, at least in terms of certain commodities. The Fur Trade. At the present moment, the data on the Kiakhta trade is still too sparse and too insufficient to allow o f anything more than the most tentative suggestions about a relationship between these two markets which are geographically so separated. The comparison of data currently available, however, tends to suggest the existence of a national market in China for furs, a market sufficiently sophisticated that it sought alternative sources of supply to compensate for the supply of an imported good cut off at its original source. This alternative source was provided by the existence 1Trusevich, pp. 216-17.

39

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

o f two emporiums, widely separated on China’s frontiers, the one at Kiakhta and the other at Canton. The interrelationship between Kiakhta and Canton is primarily, and most clearly, seen in the area of the fur trade. The English and the Russians were almost the sole providers of fur for the China market until the first years of the nineteenth century. Until 1804, hardly any fur was transported to Canton in American bottoms, according to available statistics. The first ship from the new United States to Canton was the Empress o f China, sailing in 1784-85. It made a profit on its voyage of $37,727, a rather insignificant sum in terms of the China trade of England and Russia.1 The Empress o f China was followed soon afterwards by the Pallas, which made a profit of $50,000.- In 1797-98 the Betsy made a net profit of SI 20,000.3 A cargo manifest of 1785 includes almost everything except fur, as Dennett lists it: pitch, tar, flour, rice, tobacco, butter, wine, bar-iron, sugar, oil, chocolate, prunes, brandy, beef, rum, hams, candles, soap, cheese, fish, beer, porter, port, and ginseng, as well as some specie. Dennett correctly remarks that ‘For many of the commodities in the above lists, there could be only a limited demand; they were obviously intended to supply the needs of Europeans rather than of Asiatics’.4 The first American ship to carry furs to China was the Columbia, out of Boston via Nootka Sound, which made the voyage in 1789-90. It was not, however, a financial success. The Columbia's second voyage, beginning in September 1790, established as profitable the route Boston-north-west coast-Canton-Boston.s The first American ship to carry a significant amount of furs was the Tryton, which sailed from New York in 1804. It carried a capital investment in merchandise amounting to $120,000, of which $47,665 was invested in fur pelts. Consequently, until at least 1804, the fur demand in China was satisfied in the main from two sources only, Russia and the English trade at Canton. The interruptions, for non-commercial reasons, in the Kiakhta trade which took place during the years 1778-80 and 1785-92 make possible the study and illustration of the interrelationship between the Kiakhta and Canton trades by measuring the growth, or lack of growth, in various key commodities which were to be found in both markets. The interaction on the occasion of these interruptions is observable, at this stage of our research at least, in terms of specific commodities rather than in terms of market behaviour taken as a whole. Statistics for the Canton trade are more complete and available at • Tyler Dennet, Americans in Eastern Asia (New York 1922), p. 7. 2 Ibid., p. 8. 3 Ibid., p. 11. 4 Ibid., p. 19. 5 Samuel Eliot Morison, The Maritime History o f Massachusetts 1783-1860 (Boston 1922), pp. 44-50. 40

THE KIAKHTA TRADE

present than they are for the Russian trade at Kiakhta. The statistics available for Kiakhta only provide an indication of volume, values, and the trend of change. (It is probable that more complete statistical information for Kiakhta will become available as Soviet archival materials are released.) In order to make a comparison possible, it is necessary to use a common currency denominator, and the tael has been chosen, in view of the fact that the fuller English statistics are quoted in terms of that imaginary currency. The Russian statistics provided by Trusevich1 have been converted into taels by means of a formula dictated by the exchange information available; the formula takes into account fluctuations in the value of the silver ruble in which Kiakhta statistics are quoted.2 The average annual value of furs exported to China at Kiakhta during the years between 1768 and 1785 (i.e. up to the beginning of the longer of the two breaks in trade under consideration here) was 1,641,790 silver rubles, or 932.742 taels. (See Table II.) The average annual export in the years 1775, 1776, 1777, 1780 and 1781 (excluding the first two-year interruption) was 1,175,364 silver rubles, or 682,592 taels. The first year that the Kiakhta trade was re-opened in 1792, the amount exported jumped to 1,601,263 silver rubles, or 731,377 taels. By 1802-04, the annual export had declined to 1,247,974 silver rubles or 643,953 taels. The high figure for 1792 would indicate that the fur trade which had developed at Canton during the years the Kiakhta market was closed had been unable to satisfy the Chinese demand, which had accumulated for the re-opening of the Kiakhta market in 1792. The decline in Russian fur export evident by 1802-04 continued, as cottons and woollens became the more important Russian export to China due, in part, to a decline in fur resources in Siberia as a result of predatory hunting and trapping and, in part, to the newly developed American competition at Canton. The fur trade at Canton was carried on chiefly in the realm of private trade. The average annual English fur export to China in the years 1775-85, the first year of the longer interruption at Kiakhta, was 15,627 taels. It is worth noting, as a suggestion of what was to occur a few years later, that in 1779 the export of furs amounted to 9,940 taels, which rose, in 1780, to 11,203 taels. This remained fairly steady in 1781 at 11,793 taels, but in 1782 it dropped to 1,140 taels. Allowing for a two-year time-lag for the effects of the interruption at 1 Trusevich, pp. 270-99. 2 Due to the lack of tables of exchange between silver rubles, taels, pounds sterling, etc., the formula: Silver Rubles x paper kopeks divided by 100 equals paper rubles x pence value divided by 80 equals taels. The value of the Silver Ruble in terms of fluctuating paper rubles is known, as is the value of the fluctua­ ting paper rubles in terms of pence on the London market.

41

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

T able II

ENGLISH AND RUSSIAN FUR EXPORTS TO CHINA (IN TAELS) English furs* Year (private trade) Year Russian furst 1771-72 21,389 1775' 1772-73 8,484 1776 1777 > 682,592 (annual average) 1773-74 1774-75 1780 1781 1775-76 8,252 1776-77 13,911 1792 731,377 1777-78 10,509 1778-79 11,226 1768-85 932,742 (annual average) 1779-80 9,940 1780-81 11,203 1781-82 11,793 1802-04 643,953 (annual average) 1782-83 1,140 1783-84 31,200 1784-85 23,389 1785-86 39,336 1786-87 46,018 1787-88 55,267 1788-89 185,127 1789-90 211,949 1790-91 395,998 1791-92 396,168 1792-93 494,065 1793-94 474,964 1794-95 323,315 1795-96 110,908 1796-97 39,909 1797-98 46,991 1798-99 118,009 1799-1800 113,716 * From Pritchard, p. 401. + Trusevich, pp. 272-5. (Cited in full below, p. 47.)

K iakhta to reach Canton—a time-lag allowing for the development o f a supply of furs at Canton—this slight rise may be seen as a possible result of the 1778-80 Kiakhta interruption. This inter­ relationship, however, becomes very evident during the second interruption from 1785-92. In 1785 the English export of furs into China at Canton amounted in value to 23,389 taels, having dropped from a high in 1783 of 31,200. By 1787 this had risen to 55,267 taels, just two years after the stopping of the trade in Kiakhta. From 1785 to 1794, two years after the resumption of the Kiakhta trade, the figures climbed comparatively high, as can be seen in Table II. In 1794 the am ount of import of furs to China through Canton was 42

THE KIAKHTA TRADE

323,315 taels, a drop from 1793 when it stood at 474,964 taels. In 1795, however, the figure dropped drastically to 110,908 taels, and in 1796 still further to 39,909. By the end of the century, English fur imports at Canton had resumed the 1797 position, but they never again rose to equal the amounts of the years when the Kiakhta market was not functioning. The decline in English imports of fur into China cannot be accoun­ ted for by increasing American competition since, as I have mentioned above, American fur exports to Canton did not enter the scene seriously until 1804, and they were primarily a feature of the nine­ teenth century Canton trade. Broadcloth. Before the turn of the century, the Russian export of broadcloth to China at Kiakhta was considerably less important than its export of fur and almost constantly less than English exports of that same commodity through Canton. (See Table III.) The average annual export of broadcloth through Kiakhta to China in the years 1775, 1776, 1777, 1780 and 1781 was 215,834 silver rubles, or 125,345 taels. In 1792, the year the trade re-opened after the second inter­ ruption, the Russian export of broadcloth had dropped to 110,347 silver rubles, or 50,401 taels. In the next decade, however, it not only regained its former position but far surpassed any previous figures. In 1802-04, 1,659,611 silver rubles of broadcloth were exported through Kiakhta. It is reasonable to suggest that this increase was largely due to developing industrialization in this field and the consequent fall in price. From that time on, broadcloth became more important than fur as a staple item of Russian export to China. The East India Company’s import of broadcloth into China through Canton stood, in 1775, at 167,367 taels. This dropped, in 1776, to 97,307 taels, but it recovered itself again in 1777 to reach 150,172 taels. The next two years, 1778 and 1779, saw a general drop which reached, in the latter year, a low figure of 23,647. In 1780, the import of broadcloth recovered and slightly improved its 1775 figure, reaching 168,379 taels, but in 1781 it once again dropped, to 68,920 taels. In other words, with the single exception of the year 1780, the period from 1777 to 1781 showed a steady decline in the East India Company’s imports of broadcloth at Canton. It is important that the exceptional year, 1780, was the final year of the first interruption of the Kiakhta trade. I would suggest that the recovery seen in this single year may have been influenced by the fact that Kiakhta had been closed for two years, allowing English broadcloth to penetrate to those areas where Russian broadcloth had been sold previously. Beginning in 1782, however, the sales of English broadcloth began to grow considerably. The fact that this growth started well ahead of the year 1785, when the second impor43

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

T able III

ENGLISH AND RUSSIAN BROADCLOTH EXPORTS TO CHINA (IN TAELS) Year

Engtish broadcloth* (East India Company)

1772-73 1773-74 1774-75 1775-76 1776-77 1777-78 1778-79 1779-80 1780-81 1781-82 1782-83 1783-84 1784-85 1785-86 1786-87 1787-88 1788-89 1789-90 1790-91 1791-92 1792-93 1793-94 1794-95 1795-96 1796-97 1797-98 1798-99 1799-1800

228,505 93,058 167,367 97,307 150,172 147,607 23,647 168,379 68,920 234,150 226,942 226,229 282,336 201,874 292,420 234,793 301,088 416,765 416,336 462,066 440,296 390,764 320,464 196,531 186,750 449,752 Pritchard, p. 391.

Year

Russian broadclotht

1775'’ 1776 1777 1780 1781J

125,345 (annual average)

1792 1802-04

50,40! 856,359 (annual average)

t Tru Trusevich, pp. 274-5.

tant interruption in the Kiakhta trade took place, would indicate that the trend of growth itself was not influenced by the Kiakhta inter­ ruption. However, unlike fur, which reached a high sale in 1792 when the Kiakhta market reopened, the Russian export of broad­ cloth had dropped to an almost insignificant amount. This would indicate that the demand for broadcloth in those areas of China where Russian broadcloth had commanded a sale had been satisfied through the Canton market, unlike the situation in furs. It could further be suggested, on an extremely tentative basis, that while 44

THE KIAKHTA TRADE

some interaction between Kiakhta and Canton in a cause-effect relationship is observable in the interruption of 1778-80, almost none at all is observable during the 1785-92 period. Undoubtedly, increased industrialization in England and the consequent drop in prices allowed this great increase in English sales. At most, we might say that the sale of English broadcloth was encouraged by the lack of Russian competition during these latter years, but the influence was one of degree rather than one of cause. The evidence just quoted would suggest the possibility of a com­ petition inside the Chinese internal market between Russian and English broadcloth. That the competition was one-sidedly in favour of the English was, perhaps, a result of the quantity of broadcloth English merchants could supply rather than, say, the relative price levels. Harry Parkes stated that such a competition in woollens did exist in the nineteenth century: 'The importation of Russian woollens must be very large to supply the extensive demand which exists for them in the N orth and centre o f China. . . . Small parcels of Russian woollens are brought to Canton by the Teentsin [s/c] junks, and by merchants from the northern provinces. But although the annual supply for this vicinity [i.e. Canton] is limited, it is said, to 1,000 or at most 2,000 pieces, they meet the English goods at no great distance in the interior, and the result o f the competition between these rival manufactures appears to be unfavourable to the latter___’* Harry Parkes was writing in 1854, twelve years after the Treaty of Nanking had changed and improved the conditions of the British trade in China. The conditions of the Russian trade, however, had remained the same, since Russia signed no new treaties with China at that time granting her most-favoured-nation treatment. We can assume, therefore, that the trade routes and conditions in the area north of the Yangtze which allowed Russian broadcloth to compete with British broadcloth south of that area in 1854 may well have prevailed at the end of the eighteenth century as well. Tea. In a scale of descending intensity of interreaction between the two markets in certain commodities, tea comes at the very bottom as a commodity in which, for various reasons, there was probably no interaction or interrelationship at all. Tea did not become a primary Russian import at Kiakhta until the very end of the eighteenth century. In the years 1775, 1776, 1777, 1780 and 1781, an average annual import of 266,735 silver rubles, or 154,906 taels is reported, as against an average English import for those same years of 872,780 taels. (See Table IV.) The increase which becomes especially evident in the English tea trade in 1784 and later is almost certainly 1 Harry Parkes, 'Report on the Russian Caravan Trade with China’, Journal o f the Royal Geographical Society, vol. 24 (1854), pp. 306-12.

45

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

T able

IV

ENGLISH AND RUSSIAN TEA IMPORTS FROM CHINA (IN TAELS) Year 1775-76 1776-77 1777-78 1778-79 1779-80 1780-81 1781-82 1782-83 1783-84 1784-85 1785-86 1786-87 1787-88 1788-89 1789-90 1790-91 1791-92 1792-93 1793-94 1794-95 1795-96 1796-97 1797-98 1798-99 1799-1800

English tea* 498,644 689,894 904,739 712,314 524,604 1,125,983 1,144,633 401,640 1,498,024 1,480,014 2,564,701 3,841,000 4,315,879 3,804,698 3,770,049 4,103,828 3,010,926 3,046,047 3,480,986 4,235,256 3,126,198 5,890,729 5,188,050 2,590,029 2,545,624 * Pritchard, p. 395.

Year 1775' 1776 1777 V 1780 1781 „

Russian teat

1792

246,753

1802-04

154,906(annual average)

768,000 (annual average)

pp. 270-1. t Trusevich, Tn

explicable chiefly in terms of the Commutation Act of August 20, 1784. In 1792 Russian imports of tea at Kiakhta mounted to only 540,236 silver rubles, or 246,753 taels. There are other factors, particularly the composition of the tea export itself, which explain the apparent lack of interaction between the Kiakhta and Canton tea markets as observable from currently available figures. Out of an average annual Russian import in 1762-85 through Kiakhta of 29,500 puds (which is 1,062,000 lb.), 57-6 per cent consisted o f low quality brick tea which did not figure in English imports. The remaining 42-4 per cent was made up of teas of a higher quality than the English were importing.1 H arry Parkes observed this phenomenon in a later period and explained it as follows : T e a forms, as is well known, the principal article of the J Trusevich, pp. 270-1.

46

THE KIAKHTA TRADE

Kiakhta trade, and there appears no reason to doubt the general statement given by the Chinese that the Russians derive their teas from the same places that we d o ; viz. black teas principally from the province of Fulikeen [«‘c], and green teas chiefly from that of Ganhweh [s/c]. . . . it is also freely admitted that they purchase the finest qualities of tea, besides those of common or inferior des­ cription, forwarding the former to the markets of European Russia, and the latter, in the shape of brick tea, to Siberia.. . . The superiority of the tea consumed in Russia to the generality of that imported into the United Kingdom may be accounted for by the circumstances of its being a more costly kind. . . . For such teas in England there exists a very small demand; but were it otherwise it is doubtful whether they could be transported there by the ordinary long sea voyage, during which the tropics have twice to be crossed, without losing the delicate flavour which is preserved to them by the colder latitudes and land transit of Russia. . . Although this statement applies to a later period, we may assume that these conditions pre­ vailed in earlier years as well. Geography does not change that quickly. Consequently, it is to be presumed that Russia and England, though both purchasing tea in China, were purchasing different types of tea and were not in a position of direct competition, nor were they necessarily even operating in the same market. At the same time, the prices paid for tea in Kiakhta and in Canton, inter­ estingly enough, approached each other. This may be explained by virtue of the fact that the average price for low quality brick tea and superior qualities of finer tea at Kiakhta more or less averaged out to equal, approximately, the general prices paid for medium quality teas by the English at Canton. In the five-year period 1775-80, the British were paying an average of 0-195 taels per lb. at Canton,2 while the Russians were paying an average of 0-185 taels per lb. at K iakhta.5 The predominance of low quality brick tea in the Russian exports explains the lower K iakhta price as well as the fact that the greater transportation costs to Kiakhta appeared to be absorbed in this average. It is interesting to note, however, that both markets experienced a general rise in price by 1792. In that year, the English at Canton were paying an average of 0-23 taels per lb. and the Russians 0-28 taels. More data and research are required to explain the relatively greater increase in the price level at Kiakhta as com­ pared to Canton. It is possible that an increase in transportation 1 Parkes, pp. 308-9. 2 Earl H. Pritchard, T he Crucial Years of Anglo-Chinese Relations, 17501800’, Research Studies o f the State College o f Washington, 4.3 4: 166. 3 Trusevich, pp. 270-1. The Russian figure is arrived at by dividing quantity exchanged into value exchanged.

47

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

costs inside China itself contributed to this inversion of relative prices between Canton and Kiakhta. *

*

*

*

With the development of materials about, and research on, the Kiakhta trade between Russia and China, it should be possible to define more closely the historical development o f Russian-Chinese relations. By means o f a close institutional comparison with Canton, new light may be thrown on the nature of the Chinese response to the European world. Certainly it should prove possible to refine our understanding of this extraordinarily complex problem. Economic comparisons can result in elucidating problems of Chinese foreign trade before 1842, both in terms of the strictly economic aspects, such as products, market behaviour, etc., and in terms o f the development of some concepts concerning the nature o f Ch’ing foreign trade policy before 1842, for certainly the Ch’ing had a policy, though it may have been a negative one. The existence of a certain degree of interaction between Kiakhta and Canton through the Chinese market may point to the existence in China of more sophisticated concepts of the nature and role of foreign trade than have been thought to have existed before the Opium W ar of 1842. At the very least, it must be admitted that Kiakhta shows that the Manchu Empire’s institutional and economic response to foreign (European) trade was more varied than Canton alone evidenced.

48

2 B R IT IS H -C H IN E S E S T E A M S H IP R IV A L R Y I N C H I N A , 1 8 7 3 -8 5 1 K W A N G -C H IN G

LIU

Associate Professor of History, University of California, Davis

It has often been argued th a t the econom ic developm ent o f C hina was stifled by western enterprise, which, thanks to privileged status under the treaty system, long flourished on Chinese shores. Foreign ships were free to develop th e carrying trade between Chinese ports alm ost as soon as these were opened, an d after 1895, foreigners could establish m anufacturing enterprises on Chinese soil. W ith the advantages which the foreign firms enjoyed, particularly their large capital and their access to low-cost loans, it was inevitable th at such Chinese enterprises as com peted with them w ould stand little chance o f getting the upper hand. i A Note on Sources: An attem pt is made in this paper to use both Chinese sources and the manuscript records of western firms in China. O f the former, the most im portant are Li Hung-chang, Li Wen-chung kung cli'iian-chi (Complete papers; Shanghai, 1921), especially his letters to friends and colleagues. Writings of the China M erchants’ S.N. Co.’s managers, including reports, petitions, and memoranda, are found in llai-fang tang (Archives on maritime defence), the photo-offset reproduction o f Tsungli Yamen papers published by the Academia Sinica (Taipei, 1958); and Chiao-Vung shih: hang-cheng pien (History of com­ munications: shipping), compiled by a committee jointly sponsored by the Ministries o f Communications and Railways (Nanking, 1931). Two o f the managers wrote books: Hsii Jun, Hsii Yii-chai tzu-hsii nien-p'u (Autobiographical chronicle; Shanghai, ‘postface’ dated 1927), and Cheng Kuan-ying, I yen (Easy W ords, 1880) and Sheng-shih wei-yen (Warnings to a prosperous age, c. 1892). Part o f the manuscript records o f Russell and Company, the American firm that pioneered in the steamship business in China, are at Baker Library, Harvard University, part in the possession o f the Forbes family o f Boston. F or the purposes o f this paper, the great source o f information—for the Chinese steam­ ship company no less than for the British enterprises—are the Jardine, Matheson and Company archives at the University Library, Cambridge. I wish to thank M atheson and Company, Limited, for permission to do research in these archives. I am also indebted to John Swire and Sons, Limited, for access to information on the early history o f the China Navigation Company, Limited. The sources for the statistical tables in this paper are: (1) the annual reports o f the China Coast S.N. Com pany and the English translations of annual reports o f the China M erchants’ S.N. Company, both published regularly in the North China Herald; (2) the annual reports of the Shanghai S.N. Com pany (Widener Library, Harvard University); (3) shipping intelligence o f the North China Herald.

D

49

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

This argument neglects the fact that Chinese enterprises that competed with the foreign firms were often backed by the government. While the financial resources of the Chinese government were not ample, it could measure purse with any western firm in China. Moreover, was it necessarily true that Chinese merchants were unable or unwilling to commit their own resources to modern enter­ prises? In a study entitled Anglo-American Steamship Rivalry in China, 1862-1874,1 I described the early history of the steamship carrying trade in China. One conclusion I reached was that through the 1860’s, western firms in China that had large resources in hand or access to low-cost capital at home were reluctant to make heavy investments in steamships in Chinese waters. On the other hand, many local merchants—those attached to small British firms as well as the Chinese compradore-merchants—were eager to make such investments. It was for this reason that the largest steamship enter­ prise in Shanghai in the 1860’s was a local joint-stock concern, the Shanghai S.N. Company. Although this company was founded and managed by the largest American firm in China—Russell and Company—the paitners of the firm subscribed less than one-third of the share capital. Approximately half of the remainder was furnished by small British firms in Shanghai, and half by Chinese compradore-merchants. By the early 1870’s, the situation had indeed changed. With the growing profitability of the steamship business in China, large British firms with wide connections at home began to make more substantial investments in the trade. British firms were patently on the rise in the field, but it was at this time that a Chinese governmentsponsored enterprise emerged, for the express purpose of competing with foreign firms in Chinese waters. The present paper gives the story of Sino-Western steamship rivalry from 1873 to 1885, by which latter date the issue of the rivalry was practically decided. Within the space of a brief essay, I cannot hope to do more than to present an outline of what occurred. But such a survey would seem a necessary first step toward fuller analysis. As in my previous work, I have restricted myself to steamship operations that centred in Shanghai, without attempting to discuss enterprises based in Hong Kong nor those transoceanic lines which extended their services from Hong Kong up the China coast to Shanghai. Our concern, in other words, is primarily with steamship operations between the treaty ports, and it is this story that is least known to historians. i Harvard University Press, 1962.

50

BRITISH-CHINESE STEAMSHIP RIVALRY

I. THE ADVE NT OF THE T W O BR I T I S H COMP ANI ES AND OF THE CHI NE S E COMP ANY

Before discussing the period which began in 1873, it is necessary to hark back to the late 1860’s, when the steamship carrying trade in Chinese waters was still dominated by the Shanghai S.N. Company. In 1869 the fleet of this American-managed concern had grown to fifteen steamers, and at that time no other firm in Shanghai operated more than three steamships in Chinese waters regularly. The Russell enterprise easily dominated the three steamship routes on which it operated. Beginning in the spring o f 1867, the American company enjoyed virtual monopoly of the steam traffic on the Yangtze River. The only serious competitor, a small local company called the Union S.N. Company (managed by the British firm of Glover and Company), operated two steamers on the Yangtze under an agree­ ment with the American company to observe uniform rates and not to increase its fleet. The Shanghai S.N. Company likewise enjoyed the monopoly of the steamship traffic between Shanghai and Ningpo (100 miles to the south), and on a third route—between Shanghai and Tientsin (700 miles to the north)—the American company was also dominant. In 1868 another small, local joint-stock company called the North-China Steamer Company (managed by J. F. H. Trautmann, a British subject of German background) operated three steamers on this route, and the trade was soon shared by the senior British firm of Jardine, Matheson and Company, which operated two steamships. But the American firm had five ships on this route and was powerful enough to impose its will in the matter of freight rates. It was inevitable that the dominant position of the Shanghai S.N. Company on all these routes should be challenged. In the six years 1867-72, the company had built up considerable capital strength. Its fleet had increased from twelve to eighteen vessels (13,253 net tons), and at the latter date its accounts siiowed a cash reserve of more than Tls. 1,000,000 (c. £372,000), in addition to capital stock of Tls. 2,250,000. But the American company was evidently not strong enough to prevent the entry of new enterprises into the field. The heaviest blow to Russell and Company’s position was dealt by a concern organized in Britain. This was the China Navigation Company Limited, whose initial capital o f £360,000 was organized by John Samuel Swire in London in the spring of 1872. With this capital, the company purchased the two ships and the shore proper­ ties of the Union S.N. Company, the small British firm in the Yangtze trade, and, in addition, three new ships (to be built on American models) were ordered from A. and J. Inglis, shipbuilders at Glasgow. In Shanghai, these ships were to be managed by Butter­ field and Swire, the agency house which J. S. Swire established there

51

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

in 1867. It was, in fact, the plan of the Swire enterprise to break the monopoly enjoyed by Russell and Company on the Yangtze, and this intention was quickly realized. For most of the year 1873, there was a very intense rate war on the Yangtze between the American company and the new British undertaking. But the former soon saw the wisdom of making peace, since, in the words of Russell and Company’s senior partner, who was then in Europe: \ . . behind Swire there was practically unlimited supply of British pride and capital’. In Feb­ ruary 1874, when John Swire himself visited Shanghai, Russell and Company agreed to his proposal that the two companies should pool their earnings on the Yangtze river. They were to schedule an equal number of departures each month, and the pooled earnings (the exact figures to be checked against customs documents) were to be divided equally. Russell and Company partners were glad that the monopoly rates on the Yangtze could still be maintained, but they would henceforth have to divide the Yangtze steam traffic with the British enterprise. While the American firm thus lost ground to the British on the Yangtze, it faced a similar situation on another major route—again, the competition of a new British company backed by strong re­ sources. This was a local joint-stock concern founded on January 1, 1873, by Jardine, Matheson and Company, with an initial paid-up capital of Tls. 325,000, called the China Coast Steam Navigation Company. The Jardine partners were at this time still sceptical regarding the advisability of large investments in steamships in China. In organizing the China Coast S.N. Company, the firm had committed Tls. 191,750 of its own capital, but for the remainder of the initial capital, it depended on the subscriptions of Chinese compradore-merchants and on small British firms in Chinese ports. As of December 12, 1872, the Chinese subscribed a total of Tls. 59,775, and foreign subscribers, outside of Jardine, Matheson and Company, a total of Tls. 46,475. The total subscription of the China Coast S.N. Company was, to be sure, still comparatively small. But the company was able to maintain one steamer regularly between Shanghai and Foochow and five between Shanghai and Tientsin. In February 1874, the China Coast S.N. Company entered into agree­ ment with the American company to obseive uniform rates. By early 1874 the two British companies had thus gained a firm foothold in the carrying trade in Chinese waters. But it was at this very juncture that a Chinese steamship company appeared on the scene. Planned by Governor-General Li Hung-chang in 1872, the Chinese steamship company—known in English as the China Merchants’ Steam Navigation Company—already had four steam­ ships operating on the Shanghai-Tientsin route in the spring o f 1873. But it was not until summer of that year, when the company’s 52

BRITISH—CHINESE STEAMSHIP RIVALRY

operations were reorganized by two compradore-merchants, Tong King-sing and Hsii Jun, that the Chinese company began to compete in earnest with the western firms. The founding of the Chinese steamship company was undoubtedly a major event in modern Chinese economic development. This was the first instance of the scholar-officials of the T‘ung-chih reign taking action to compete against western enterprise in China. Governor-General Li’s immediate objective was to provide a reliable means of transport for the ‘tribute rice’—a tax-in-kind shipped regularly from the Yangtze provinces to Peking, to help solve the capital city’s problem o f food supply. But Li was also irked by the fact that an increasing number of Chinese traders were shipping their merchandise from one Chinese port to another on western steamships, and he wanted the Chinese to ‘share the profits of the foreigners’.1 F or his steamship project, Li established a ‘bureau’ in Shanghai— the bureau or chu being an ad hoc government agency, in this case under the control of Li himself and, also, at least theoretically, of the governor-general of Liang-kiang. Yet Li also intended the project to be taken up by merchants as a profit-oriented enterprise—in other words, as a ‘merchant undertaking under government supervision’ (this is the proper rendering of Li’s phrase, kuan-tu shang-pan, literally ‘government supervision and merchant operation’).2 In October 1872, Li appointed Prefect Chu Ch‘i-ang, an official who had experience in administering the junk transport of tribute rice, to be the commissioner in charge of the new bureau—called the Bureau for Inviting Merchants to Operate Steamships. Li arranged a government loan of Tls. 136,000 for the project. But he expected the merchant organization under Chu to take over the responsibility for the loan and to raise further capital. ‘Profit and loss are entirely the responsibility of the merchants and do not involve the government.’5 Li eventually found a Chinese merchant uniquely qualified to undertake the steamship enterprise. This was Tong King-sing, the 1 Li Hung-chang, Li Wen-chung kung ch'iian-chi, Chou-kao (Memorials), 19: 48. 2 This phrase has often been translated as ‘government supervision and mer­ chant management'. The difficulty is that as used by Li Hung-chang, Sheng Hsuan-huai, and others, the phrase referred not so much to the management of an enterprise as to its ownership—in other words, it referred to the fact that it was merchant shareholders, not the government, that assumed the risk. In December 1872, when Governor-General Li first used the phrase kuan-tu shang-pan in connection with the China Merchants’ S.N. Company, the promoter-manager in charge was actually an official (Chu Ch‘i-ang). After 1884, the company was again to be managed by an official (Sheng Hsuan-huai). Semantically, the phrase shang-pan was linked to another frequently used phrase: chao-shang ch'eng-pan, or inviting merchants to undertake a certain business—the risk as well as the work. J Li, 20: 33.

53

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

chief Shanghai compradore of Jardine, Malheson and Company. In June 1873, Tong resigned his Jardine compradoreship to become the ‘merchant chief’ of the Chinese steamship project, undertaking to organize joint-stock capital and to manage steamship operations. In July, he was appointed by Li as commissioner in charge of the bureau. Prefect Chu relinquished all responsibilities regarding the manage­ ment of steamship operations, but he remained as an associate commissioner in order to handle tribute rice affairs. In September, two other men were appointed by Li as associate commissioners— Tong King-sing’s friend Hsu Jun, who was to be Tong’s deputy in Shanghai, and Sheng Hsuan-huai, an official who had been in Li’s own entourage and would now help the steamship company in handling relations with the government. In the spring of 1873, Prefect Chu had already arranged to purchase four steamships and some shorefront property, mainly with borrowed funds, including the Tls. 136,000 loan arranged by Governor-General Li. These ships were now transferred to Tong King-sing, who paid Prefect Chu Tls. 54,000, besides taking over the responsibility for the government loan arranged by Governor-General Li. Tong then proceeded to organize joint-stock capital, and between July 1873 and August 1874 succeeded in raising a capital of Tls. 476,000, of which Tls. 240,000 was subscribed by Hsii Jun (who was a prosperous tea merchant and probably invested more in the new company than Tong himself). With these funds, the company ordered two new ships from Britain, which, in addition to Prefect Chu’s four ships, made a fleet of six vessels (4,204 net tons). It is important to note that Tong King-sing and several of his compradore friends had been developing a keen interest in steamship investments in the few years preceding 1873.1 In the mid-1860’s, Tong, while serving as the Jardine compradore, had made personal investments in several old-style Chinese enterprises that seemed to promise large returns—a pawnshop and three native banks in Shanghai. However, these enterprises proved to be disappointments and after 1868, Tong shifted some of his resources to steamships operated by western firms in Shanghai. He was a shareholder of two small British steamship companies—the Union and the NorthChina—and was in fact elected by the shareholders of both companies to serve as director. Tong invested in one of the steamers operated by Jardine’s in 1871-72, and in 1873, he was chosen as one of the three directors of Jardine’s new steamship company, the China Coast. An English-speaking Cantonese of considerable ability, Tong had also acquired a degree of technical knowledge regarding steamship operations. 1 Kwang-Ching Liu, “Tong King-sing: His Compradore Years’, Tsing Hua Journal o f Chinese Studies, New Series, II, 2 (1961), pp. 143-83.

54

BR1T1SH-CH1NESE STEAMSHIP RIVALRY

He now put this knowledge into use in a Chinese governmentsponsored enterprise. Tong appointed an American (and later a Briton) to serve the Chinese company as marine superintendent, and he employed westerners as captains and engineers. But for the management of the freighting business, he relied on his friends among compradore-merchants—particularly those who belonged to the Canton guild. Besides Hsii Jun, another former compradore who worked closely with Tong was Liu Shao-tsung (Seting), an energetic compradore formerly with the American firm of Augustine Heard and Company and now taking charge of the Chinese company’s branch office at the Yangtze port o f Hankow. I I. THE E XP ANS I ON OF THE CHI NES E CO M P A N Y AND THE EFFECTS UPON THE WE S TE RN COMP ANI ES

W ith the advent o f the Chinese as well as of the two British com­ panies, the situation in the steamship field in China altered con­ siderably. In 1874, the Russell enterprise owned seventeen steam­ ships, as compared with five operated by Butterfield and Swire, six by Jardine, Matheson, and six by the Chinese company. But the seventeen ships of the American company were spread over three routes—the Yangtze River, Shanghai-Tientsin, and ShanghaiNingpo. The Americans still had a near monopoly on the Ningpo route, but it now carried less than half the trade on the other two routes. As indicated above, both on the Yangtze and on the ShanghaiTientsin route, the Shanghai S.N. Company was able to enter into agreement with its British rivals so as to raise freight rates. But, as it happened, these rates could not be maintained because o f the Chinese competition. Moreover, the Chinese company was able to expand its fleet at the same time that it followed an aggressive freight policy. On almost every route in Chinese waters, the Chinese concern was a threat to foreign enterprises. Background o f the Chinese Company's expansion. The ambitious plans of the China Meichants’ S.N. Company must, first of all, be laid to the former compradores who were its managers. From the very beginning, Tong and his merchant friends had envisaged operations on a grand scale—over at least four routes. This policy was, in fact, criticized by some shareholders who believed that the company should concentrate on the Shanghai-Tientsin route alone, since for at least three months a year it could keep six boats fully occupied on this route in transporting the government cargo of tribute rice at high rates. But Tong King-sing and Hsu Jun decided against caution and instead embarked on a programme of fleet expansion. In the two fiscal years between the 7th moon, 1874 and 55

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

the 6th moon, 1876, the Chinese company purchased eight steam­ ships, besides adding to its fleet three ‘consignment steamers’ owned by Chinese merchants but managed by the company on a commission basis. How did Tong and Hsii arrange the financing o f the new steamers? It should first be pointed out that, after the initial year, the power of the compradore-managers to attract new susbcriptions diminished. In the two years ending with the 6th moon, 1876, the new sub­ scriptions totalled only Tls. 209,100—this, despite the fact that in the 6th moon, 1874, the company paid out a dividend of 10 per cent, and in the 6th moon, 1875, one of 15 per cent. Thanks to the high freight rates paid by the government for the carriage of the tribute rice, the China Merchants’ S.N. Company was able to make profits in the two years between the 7th moon, 1874, and the 6th moon, 1876. But these profits were nearly exhausted after the dividends had been paid, and in the two-year period, only Tls. 57,116 was credited to the depreciation fund. That the Chinese company was able to buy nine steamers in 1874-76 was due, in the first instance, to the mercantile standing and connections of its compradore-managers. For Tong and Hsii often ordered new steamships from Britain (through Jardine, Matheson and Company) with the anticipation that the ships could be paid for from future earnings or from new government loans, and when neither were forthcoming, they borrowed funds from the native banks in Shanghai. As a successful tea merchant, Hsii Jun had many connections with native bankers, and he himself owned a bank in partnership with Tong King-sing. In an account of the Chinese steamship company’s early history, Hsu Jun wrote that he could get funds from the native banks for the company ‘as if picking things up and carrying them away’.1 While Tong and Hsu thus had access to banking credit in Shanghai, their real hope was to arrange government loans to cover the cost of the new steamers. This was because the interest charged by native banks was generally high, often more than 15 per cent per annum, whereas it was the practice o f the Ch’ing government to charge 7-8 per cent on the loans made to business enterprises.2 GovernorGeneral Li’s letters show that as early as 1874, he had tried to persuade his colleague, the governor-general of Liang-kiang to make loans to the company, and in 1875 it received loans totalling Tls. 217,000 from the provinces of Kiangsu and Chekiang. In September 1876 Li finally consented to make a further loan to the company from his ' Hsii Jun, Hsii Yil-chai tzu-hsii nien-p'u, 88. 2 On the Ch’ing institution offa-shang sheng-hsi (entrusting funds to merchants to yield interest), see Professor Lien-sheng Yang’s account in Money and Credit in China, (Cambridge, Mass., 1952), p. 99.

56

BRITISH—CHINESE STEAMSHIP RIVALRY

own province of Chihli. This, together with a loan from the province of Shantung, amounted to Tls. 450,000. According to Tong Kingsing’s own account, it was this Tls. 450,000 that helped tide the company over a near-crisis created by indebtedness to native banks amounting to some Tls. 800,000. ‘The amounts due native banks were accordingly returned, and the company relieved from the previous position of embarrassment.’1 It must be pointed out that this mode of financing was fraught with undesirable consequences. For just as borrowing from the native banks was obviously uneconomical, loans from the government, although cheaper, created certain conditions inimical to the proper administration of the company. As the government loans increased, Tong and Hsu found it increasingly difficult to resist the demands on the part of government officials that the company should create jobs for personnel they recommended. Since in the negotiations for the government loans, Tong and Hsii often had to rely on the help of Chu Ch‘i-ang and Sheng Hsuan-huai, it was inevitable that those two officials now wanted a greater influence in the company’s affairs. Effects on the American and British companies. Whatever its inter­ nal effects, the Chinese company’s policy of expansion by borrowing enabled it to put on a bold front before its American and British competitors. In the three years 1874-76, the China Merchants’ S.N. Company indeed confronted the western enterprises with strenuous competition, and the American and British concerns were hard put to it to operate profitably. As indicated above, in February 1874, the American company had entered into agreement with the Swire and Jardine enterprises to maintain higher rates on the Yangtze river and on the ShanghaiTientsin route. However, the advent of the Chinese steamers led to an era of low rates. In March 1874, the China Merchants’ S.N. Company began to cut rates on the river—initially charging some 30 per cent less than whatever the American and British companies charged. By midsummer, the freight rates between Shanghai and Hankow had fallen to Tls. 2 00 per ton—less than half the rate which Russell and Company and Butterfield and Swire had agreed upon. Similarly, the rates on the Shanghai-Tientsin route declined. In February 1874 Tong King-sing accepted Jardine, Matheson and Company’s proposal that the three major companies on that route should observe a uniform rate for commercial freight. However, the Chinese company often got around this agreement by offering greater returns to shippers. Moreover, as a result of GovernorGeneral Li’s influence, shippers of tea on Chinese steamers were i China Merchants’ S.N. Company, ‘3rd Annual Report’, North China Herald, April 12,1877, p. 372.

57

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

granted exemption from internal taxes when this cargo was being transhipped through Chihli province. In view of the rather low elasticity of the demand for steam ton­ nage in Chinese waters, it is not surprising that the earnings o f all steamship companies were very low. In the first half o f 1874, for example, the profits of the China Navigation Company before deducting depreciation were only £8,500—a fact which brought ‘glum looks from shareholders’. In the second half of 1874, the company yielded larger earnings only because the Glengyle, one of its steamers, was removed from the Yangtze river for service on the China coast. In order to satisfy the shareholders, the China Navi­ gation Company declared an annual dividend of 5 per cent in early 1875. But that the company’s profits continued to be unsatisfactory is indicated by the fact that during 1875, John Swire had to arrange a loan of £57,000 from Alfred and Philip H olt for the China Navigation Company, at 5 per cent per annum. The resourcefulness of the Swire management is indicated by the fact that even at this time their attention was directed to a new steamship service in Chinese waters which held great potentialities— the carriage of bean products from the Manchurian port of Newchwang to the great market at Swatow, where sugar was loaded for a return cargo to the northern ports. In November 1874 John Swire found in Britain two steamers, the William Batters and the Teresa Batters, which were cheaply available (for a total of £32,000) and yet ideally suited for the Newchwang-Swatow trade because of their low draft and large capacity. Although the China Navigation Company itself was not in a position to make new investments, Swire was able to persuade John Scott, the shipbuilder at Greenock, and R. S. Butterfield to form a new partnership, identified in Swire’s books as the Coast Boat Ownery. The two ships, renamed Foochow and Swatow, operated so successfully in the Newchwang-Swatow ‘chartered trade’ (meaning the ships were chartered by Chinese merchants, a shipload at a time) that in the latter half of 1875, the Coast Boat Ownery decided to make a further investment of £40,000 and ordered two more steamers for the trade. It is interesting to note that in November 1874 the Chinese company had also purchased from London a boat suited for the Newchwang-Swatow trade—the Eleanor Batters, a sister ship of the two Swire purchased. Tong put her on the Shanghai-Swatow route, but for some reason he did not compete for the Newchwang-Swatow route at this time. Before 1877 the Chinese company did not compete either for the trade between Shanghai and Foochow, which continued to be Jardine, Matheson and Company’s preserve. But the China Mer­ chants’ S.N. Company’s operations had damaging effects on the China Coast S.N. Company’s Shanghai-Tientsin route. As can be 58

BR1TISH-CH1NESE STEAMSHIP RIVALRY

seen in Table I the China Coast S.N. Company’s operations were profitable in the period 1874-76. T able I

RATES O F R E T U R N O F T H E C H IN A COAST S.N. C O M PA N Y (Jardine, M atheson and Com pany, agents), 1874-76

1874 1875 1876

Net profits before deducting interest Total and depreciation capitalization Tls. Tls. 89,189 450,507 66,099 523,769 48,200 538,476

Rate of return

Dividends paid upon capital stock

% 197 12-6 8-9

% 10 5 0

But the profits of the China Coast S.N. Company were declining and were disappointing to the shareholders. As can be seen from the last column in Table I, the company was able to pay only a dividend of 5 per cent in 1875 and none at all in 1876. By September 1876 the company’s shares (Tls. 100 par value) were selling at Tls. 56. The prospects were so dim that the Jardine partners thought it would be best if the Chinese company could be persuaded to buy the China Coast S.N. Company’s fleet. In November 1876, the idea was in fact referred to Sir Robert Jardine in London and was approved by him. However, there was at that time a company even more eager to sell to the Chinese. This was the American company, which had encountered Chinese competition on all its three routes—the Yangtze river, Shanghai-Tientsin, and Shanghai-Ningpo. As can be seen by comparing Tables I and II, the rates of return of the American company were even less satisfactory than was the case with the China T able II

RATES O F R E T U R N O F T H E SH A N G H A I S.N. C O M PA N Y , 1874-76 Net profits before Dividends paid upon deducting interest Total Rate of and depreciation capitalization return capital stock Tis. Tls. % % 2,250,000 7 1874 188,372 8-3 2,250,000 1875 196,000 8-7 7 2,250,000 1876 178,925 7-9 7

Coast S.N. Company. For eight years, up to 1873, the shareholders of the American company had been receiving an annual dividend of 12 per cent. But for the three years 1874-76, they had to be satisfied 59

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

with a dividend of 7 per cent—and meanwhile the company had to pay out of its reserves for the necessary renovations for its fleet. By the autumn of 1876, when the value of the company’s shares (Tls. 100 par) had fallen to Tls. 70, Edward Cunningham, who had founded the Shanghai S.N. Company fifteen years before and who was now residing in the United States, suggested that it should try to sell out to the Chinese. An overture to the Chinese managers was accordingly made in December 1876. To the surprise of Russell and Company partners, the Chinese at once responded. Tong King-sing was away in Foochow, but Hsu Jun negotiated with Russell and Company and tentatively agreed upon the price of Tls. 2,220,000-Tls. 2,0(X),000 for the Shanghai S.N. Company’s fleet and properties and Tls. 220,000 for Russell and Company’s waterfront properties in Shanghai and three other ports.1 Tong King-sing was immediately sent for, and meanwhile Hsii Jun sought the advice of Sheng Hsuan-huai on the possibility of securing government loans. Tong, Hsii and Sheng now converged upon Nanking, where they sought audience with Governor-General Shen Pao-chen. According to Hsii Jun’s autobiography, it was thanks to Sheng Hsuan-huai’s ability to win the support of Governor-General Shen’s advisers and, moreover, to his show of rhetorical skill during the audience with the governor-general himself, that the latter consented to make a loan of Tls. 500,000 to the company from the funds controlled by his administration. Shen also agreed to memorialize the throne (joindy with Governor-General Li Hung-chang), recommending that the provinces of Chekiang, Kiangsi and Hupeh should together make a similar loan of Tls. 500,000 to the enterprise. On the basis of such pledges, Tong King-sing signed the final purchase agreement with Russell and Company in January 1877 and arranged to have the fleet and property transferred to him in March, upon payment of Tls. 1,220,000. The remaining Tls. 1,000,000 was to be paid Russell and Company in quarterly instalments over a period of five years, the outstanding sums to bear an interest of 8 per cent. I I I . S I N O - B R I T I S H C O - O P E R A T I O N AND THE G R O W T H OF THE BR I T I S H COMP ANI ES

With its purchase of the American fleet, the Chinese company emerged as the leading firm in its field. As can be seen from Table III, it now employed twenty-nine steamers on seven routes in Chinese i The purchase price of Russell and Company’s waterfront properties was actually Tls. 200,000. The Tls. 20,000 added included a commission, which, as far as is known was received by J. J. Buchheister, a Chinese-speaking broker who mediated between Russell and Company and the Chinese managers.

60

BRITISH—CHINESE STEAMSHIP RIVALRY

waters, and it even put one ship into the service from South China ports to Singapore, carrying Chinese emigrants. Particularly on the Yangtze river and the Shanghai-Tientsin route, the China Merchants’ S.N. Company’s tonnage outweighed that o f the two British com­ panies. T able III THE NUMBER OF STEAMSHIPS EMPLOYED BY THE THREE MAJOR STEAMSHIP COMPANIES IN SHANGHAI, 1877 China Navigation Company (Butterfield and Swire)

Yangtze river Shanghai-Tientsin (Chefoo) Shanghai-Ningpo Shanghai -Foochow Shanghai-Hong Kong (Canton) Swatow-ShanghaiNewchwang Shanghai-Swatow (Amoy) Shanghai-Newchwang (Chefoo) Amoy-Canton-Singapore

China Coast S.N. Co. (Jardine, Matheson)

China Merchants’ S.N. Co.

3 — 1 —

— 4 1 I

10 11 3 1

—

—

1

4 —

— —

— 2

— —

— —

1 1

Could the Chinese company, then, exert further pressure upon the British enterprises and break down their opposition ? As it happened, this was not possible, for the Chinese concern now faced mounting financial problems as a result of its grandiose purchase. Its managers were glad to take whatever advantage they could of their fleet and enter into agreements with the British firms in order to raise rates. Towards British -Chinese co-operation. Although the China Merchants’ S.N. Company had succeeded in obtaining the large fleet and property of the American enterprise, it is apparent that this was done by enormously increasing the company’s indebtedness. By the summer of 1877, its obligations to the government amounted to more than Tls. 1,900,000, while the balance due the Shanghai S.N. Company stood at Tls. 1,000,000. Meanwhile, the company had to raise funds to pay Russell and Company the Tls. 220,000 for the latter’s waterfront properties, as well as the quarterly payments for the Shanghai S.N. Company, and to meet the payment of interest and dividends due the summer of 1877. It had, therefore, to borrow again from the Chinese money market in Shanghai, and in the balance sheet for the 6th moon, 1877, we find the following items: ‘Advances from private persons, Tls. 335,776; Floating balances due

61

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

Native Banks, Tls. 593,448; Floating balances due private persons, Tls. 87,884.’ It should be noted that at this date, the Chinese company also owed Tls. 350,000 to the Jen-ho Insurance Company—a concern founded by Tong King-sing, Hsii Jun and their friends in 1875 and specializing in underwriting cargoes shipped on China M erchants’ vessels. It seems that the entire capital of this company was deposited with the steamship concern, at an annual interest of 15 per cent. That the China Merchants’ S.N. Company was not disposed towards a general rate war is indicated by the fact that in March 1877, Tong King-sing had made arrangements with Jardine, Mathe­ son and Company to observe uniform rates on both the ShanghaiTientsin and the Shanghai-Foochow routes—the Chinese company having meanwhile put a ship on the latter route. However, it was at this time that the China Merchants’ S.N. Company did find itself embroiled in a severe rate war against the Swire enterprise on the Yangtze river. At issue was the number of departures each company was to schedule on the river. Swire’s was willing to come to an agree­ ment with the Chinese on rates, if the two companies should run an equal number of boats, as provided for in the Swire-Russell pooling agreement. Tong King-sing, on his part, was willing to continue this pooling arrangement, but only on the condition that the Chinese company should make two-thirds o f the departures and receive a proportionate share of the pooled earnings. As the rate war progressed, both companies suffered great losses. The struggle spread to the Shanghai-Ningpo route, where Swire’s also decided to compete, and, meanwhile, rates on the Yangtze fell below 1 tael per ton between Shanghai and Hankow. In September 1877 John Swire himself journeyed from London to Shanghai to seek a settlement. Meanwhile, in October 1877, Tong King-sing appealed to Governor-General Li for further aid. ‘They [Butterfield and Swire] calculate that although the cost of their four river boats and four coastal boats amounts to more than Tls. 1,000,000, yet the interest rate in Britain is only 3 or 4 per cent per annum. They, therefore, want only a profit of Tls. 40,000 at the year’s end.’1 To enable the China Merchants’ S.N. Company to continue the freight war, Tong begged Li’s intercession to get the government’s approval of a moratorium on the company’s loans. Tong pledged that the Chinese enterprise would begin to repay the principal of the government loans in 1880. As a measure of Li’s concern for the company, it should be noted 1 Li Hung-chang, op. cit., I-shu han-kao (Dispatches to the Tsungli Yamen), 7 ,27b.

62

BRITISH—CHINESE STEAMSHIP RIVALRY

that he promptly took action to ensure endorsement of the plan. Tong was thus able to assume a confident attitude in his negotiation with John Swire in December 1877. Nevertheless, he made con­ cessions, and instead o f insisting on a two-thirds share, accepted Swire’s proposal that the division should be 55-45, with the Chinese company scheduling a proportionately larger number of voyages and likewise receiving the larger share of the pooled earnings. Rates on the Yangtze were raised to Tls. 5 per ton from Shanghai to Hankow and Tls. 4 from Hankow to Shanghai. Since such a ‘common-purse’ system was found more satisfactory than mere rate agreement, Tong proposed to Jardine, Matheson and Company in July 1878 that a similar arrangement should be estab­ lished with them. Earnings on the Tientsin route were to be divided pro rata, with the Chinese company running three boats to Jardine’s two; and on the Foochow route, work and earnings were to be divided equally. Through this series of agreements, the Chinese company and the two British companies thus achieved, at least temporarily, the elimination of competition on the routes concerned. The expansion o f the British companies. For the first time since their founding in 1873, the two British companies now enjoyed comfort­ able earnings. Both were soon to embark on a course of expansion. As indicated above, in 1874, at a time when the Yangtze steamers were barely paying their way, John Swire was able to make a start in the Newchwang-Swatow trade by founding a separate ‘Coast Boat Ownery’. By 1879, these owners had six ships in the trade, and these ships were already the favourites o f the Chinese charterers. Thus we find the commissioner o f customs at Swatow reporting in January 1880: ‘The trade between Swatow and those ports of China [i.e. Newchwang and Chefoo] is chiefly carried on by steamers of Messrs Butterfield and Swire. . . . They are gradually driving away the sailing vessels, taking cargo at very moderate prices, and giving great facilities to the Chinese merchants, who are beginning to charter them by the trip in the same manner as sailing vessels.’1 John Swire was so convinced of the potentialities of the trade that he made plans to build nine new ships. Swire also had a mind to rein­ force the company’s ‘berth trade’ between Shanghai and Tientsin, and even considered service between South China ports and Aus­ tralia. It was, however, the Newchwang-Swatow charter trade that chiefly inspired his building programme. Swire was able to persuade John Scott and R. S. Butterfield—who constituted the so-called Coast Boat Ownery—to invest in four new 1 Imperial Maritime Customs, Reports on Trade at the Treaty Ports, 1879 (Shanghai, 1880), p. 205.

63

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

ships. But on the strength of the large earnings yielded by its opera­ tions on the Yangtze and on the Shanghai-Ningpo route, the China Navigation Company itself was now prepared to make new invest­ ments. In 1880 the China Navigation Company took over two o f the Coast Boat Ownery’s ships, to be used on the Shanghai-Tientsin route. In 1881-82 the company itself invested in five new vessels designed primarily for the Newchwang-Swatow trade. Remarkably enough, all this expansion was achieved without having to increase share capital. It was only in March 1883, when the partners o f the Coast Boat Ownery finally decided to merge with the China Naviga­ tion Company, that the latter’s share capital was raised to £500,000— the new issue of £140,000 representing the Coast Boat Ownery’s assets transferred. In order to help finance the new coastal steamers, the company is known to have arranged a loan of £10,000 from Alfred and Philip Holt, ‘at 5 per cent interest payable twice yearly’, and secured by a debenture repayable at the end of 1885.1 But otherwise the expansion seems to have been achieved entirely through the ploughing back of profits. In 1883 the company owned five river boats and fifteen coastal ships—twenty steamers in all (22,151 net to ns). After 1877, there was also a marked increase in the profits of Jardine’s steamship enterprise. Whereas the China Coast S.N. Company’s profits in 1875 and 1876 amounted to only Tls. 66,099 and Tls. 48,200, respectively, its profits in the four years 1877-80 were as follows: T a b le

IV

RATES OF RETURN OF THE CHINA COAST S.N. COMPANY, 1877-1880

1877 1878 1879 1880

Net profits before Total deducting interest and depreciation capitalization Tls. Tls. 116,149 511,445 104,170 570,702 93,727 504,984 130,668 507,086

Rates of return % 22-7 18-2 18-5 25-7

Dividends paid on share capital % 7 9 6 11

It will be seen that in this four-year period, the China Coast S.N. Company paid a total of 33 per cent upon stock capital to its share­ holders. At the same time, the company was also able to buy two new ships, while building up a reserve o f Tls. 78,932. Encouraged by these 1 1 am indebted to Professor F. E. Hyde for information on the terms under which the Holts made the loan to the China Navigation Company. See also his Blue Funnel: A History o f Alfred Holt and Company o f Liverpool from 1865 to 1914 (Liverpool, 1957), p. 34.

64

BRITISH—CHINESE STEAMSHIP RIVALRY

results, Jardine’s meanwhile made plans to expand its steamship operations. Induced by the high freight rates on the Yangtze river, Jardine’s decided in 1879 to participate in this trade. In a joint venture with Boyd and Company, British shipbuilders in Shanghai, Jardine’s planned three small steamships for the Yangtze, to be built by B o y d each costing about Tls. 50,000. In October 1879 the first ship was put on the river, and in April 1880 the second was operating. Jardine accounts show that at the close of the year 1880, this ‘Yangtze Steam Navigation Company’ had yielded a net gain of Tls. 68,149. Mean­ while, spurred on by these results, Jardine’s began to plan operations on the Newchwang-Swatow route in competition with the Swire ships. Jardine partners had hoped that when the three Boyd steamers were completed, subscriptions could be sought from Chinese merchants in Shanghai who would take over a part of Jardine’s own invest­ ments. In planning new ships for the Newchwang-Swatow trade, however, the firm found that it was possible to obtain capital from Britain for the purpose. In December 1880 the Jardine partners in London were able to persuade James McGregor of the London and Glasgow Shipbuilding and Engineering Company to take over the major interest in three new ships to be built by the London and Glasgow concern for the Newchwang-Swatow trade. The first of these was put on the route in June 1881, and together with two chartered steamers, it competed vigorously with the Swire ships. It is noteworthy that despite its determination to expand steamship operations in Chinese waters, Jardine’s was wary of heavy commit­ ment of the firm’s own capital in this trade. The solution to the problem was now found in the organization of a company in Britain, in which the various steamship interests of the firm were to be merged. In the winter of 1881, William Keswick, Jardine’s Hong Kong partner, organized in London the Indo-China Steam Navigation Company, Limited. Of the initial capital of £449,800 planned for this company, £210,000 was taken by subscribers in Britain—including J. McGregor and another Glasgow merchant, Thomas Reid. Approximately £200,000 was allocated in Hong Kong and China, and of this Jardine, Matheson and Company itself retained £100,000. Five ships formerly operated by the China Coast S.N. Company and three of the Yangtze S.N. Company were taken over at a generous premium. The new company also absorbed the three Newchwang-Swatow steamships recently planned with J. McGregor, and, in addition, two ships which Jardine, Matheson and Company operated on the Hong Kong-Calcutta route. The new company thus had thirteen steamships (12,571 tons), and its operations now com­ prised the Yangtze river, three routes on the China coast, and the service between Hong Kong and Calcutta. E 65

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

The comparative stagnation o f the Chinese company. Like the two British enterprises, the Chinese company was able to strengthen its financial position in the few years after 1877. But the question was whether it could make the most of its advantages in tonnage and in government aid. The financial crisis of the China Merchants’ S.N. Company did not subside immediately. In fact, with the expansion of its fleet, the abuses o f the company’s internal administration became m ore patent: a great many more employees were planted in the concern by influential officials, and in a demoralized atmosphere, Tong Kingsing found that there was a system of corruption within the company that affected branch managers and clerks, foreign employees and steamer compradores. For many months in 1878-79, Tong and Hsu Jun were alarmed by the fact that the large gross receipts o f the company either never appeared on the accounts or were quickly exhausted by expenses. For the year ending with the 6th moon 1878, the concern’s accounts showed that it had paid Tls. 260,000 toward the retirement of the debt due Russell and Company, and beyond that could report a profit (before deducting interest and depreciation) of only Tls. 419,000—this despite the fact that during the year, as much as Tls. 272,000 had been received from the government for shipping tribute rice. And it seems certain that even the Tls. 419,000 profit was made possible by doctoring the accounts. In the China M erchants’ S.N. Company’s capital account, the item ‘sundry deposits’ mysteriously increased to Tls. 1,472,403, while the ‘money belonging to Jen H o and Po Shin insurance companies’ increased to Tls. 418,430. Meanwhile, a number of Chinese officials, including some imperial censors, had memorialized the throne on corruption and waste within the company. Under strong pressure to make the company show profit, Tong King-sing and Hsii Jun pushed forward a programme o f reform in early 1879. There was a general tightening up on expenditures. The captain of each steamer was made responsible for the spending on board his ship, with the company’s marine superintendent (Captain C. J. Bolton, a Briton), supervising major outlays such as repairs. Similarly, a system was established for the expenditures at the branch offices, restricting the budget o f each branch office to a certain percentage of the gross earnings—4 per cent of the outward freight, in addition to 1 per cent of the inward or transit freight. Under an arrangement reminiscent of Chinese tax-farming methods, the manager of each branch office was made responsible for a fixed annual am ount of receipts on the company’s warehouses and land in the port under his charge. It may be assumed that these reforms did not stop all the leakage and waste within the company. ‘They have effected many economies’, a partner of Russell and Company 66

BR1T1SH-CHINESE STEAMSHIP RIVALRY

observed, ‘but there are still far too many people with their hands in the bag’.1 Nevertheless, the company’s operations now began to show greater profits—as can be seen from the following table: T able V

PR O FIT S O F T H E C H IN A M E R C H A N T S’ S.N. C O M PA N Y , 1879-83

Y ear Y ear Y ear Y ear Y ear

ending ending ending ending ending

6th 6th 6th 6th 6th

m oon m oon m oon m oon m oon

1879 1880 1881 1882 1883

Profits before Paid to deducting decrease interest and loans due depreciation Russell & Co. Tis. Tls. 200,000 869,210 673,138 200,000 777,547 60,000 — 734,007 621,500 —

Paid to decrease loans due government Tls. —

25,000 485,002 300,899 253,676

It can be seen that at long last the Chinese company was able to reduce its indebtedness. The loan due Russell and Company was completely retired by 1881, and from that year on, the entire income earned from carrying tribute rice was applied to amortizing govern­ ment loans. By the 6th moon of 1883, the government loans out­ standing amounted to only Tls. 964,291. In the four years between the 7th moon 1878, and the 6th moon 1882, the company was able to allow for sizeable depreciation in its capital accounts—some Tls. 400,000 annually. The China Merchants’ S.N. Company’s fleet suffered heavy losses in the few years after 1877. Between 1878 and 1881, four vessels were wrecked in accidents, one was sold, and three old ships were dismantled. (In the same four-year period, the China Coast S.N. Company lost three ships in accidents, and Butterfield and Swire lost one.) However, the China Merchants’ S.N. Company fleet was still adequate for the requirements of trade on the routes where the company was well established. In the years 1878-81, the Chinese company purchased two new ships—one Yangtze steamer and a sea­ going vessel originally planned for a line to Honolulu and San Francisco (but which was used on the China coast when that project was abandoned in 1881). As can be seen in the following table —showing steamship departures from Shanghai in the typical month of August for 1878, 1880, and 1882—the company’s operations continued strong on the Yangtze river and on two coastal routes— Shanghai-Tientsin and Shanghai-Ningpo. (For a list of acquisitions 1 Frank Blackwell Forbes to William Howell Forbes, July 8, 1879, F. B. Forbes Letter Books.

67

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

and losses in the China Merchants’ S.N. Company fleet, see the Appendix.) T able VI FREQ U EN CY O F D EPA RTU RES O F T H E CH IN A M ERCHANTS’ S.N. COM PANY’S STEAMERS FRO M SHANGHAI FO R TH E M ONTH O F AU GUST 1878, 1880 AN D 1882 1878 14 15 1 27 3 3 4

Yangtze river Shanghai-Tientsin (Chefoo) Shanghai-Newchwang (Chefoo) Shanghai-N ingpo (Wenchow) Shanghai-Foochow (Wenchow) Shanghai-Swatow (Amoy) Shanghai-H ong K ong (Canton)

1880 18 10 3 13 5 1 10

1882 10 15 1 18 3 1 4

That the Chinese company’s position continued strong is indicated by the further development of the British-Chinese pooling system in 1881-82. With Jardine’s now operating ships on the Yangtze river and Butterfield and Swire on the Shanghai-Tientsin route, the three companies felt that the former pooling arrangements should be expanded to include all the parties. As negotiations progressed, it was evident that the China Merchants’ S.N. Company, with its large fleet and its firm hold on a large sector of shippers, should still be accorded the majority share of the pool earnings. ‘The C M Coy [China Merchants’ Company] are now beginning to realize the strong position they hold,’ wrote the Jardine partner William Patterson in November 1882,1 and in the final settlement (dated January 1883), Tong King-sing’s views largely prevailed. According to the new arrangement, the pool earnings on the Yangtze river were to be divided as follows: The China Merchants’ S.N. Company, 42 per cent; Swire’s, 38 per cent; Jardine’s, 20 per cent. On the ShanghaiTientsin route, the shares were to b e: China Merchants’, 44 per cent (not counting the receipts from carrying tribute rice); Swire’s, 28 per cent; Jardine’s, 28 per cent. That the Chinese company was expected to do its share under the common-purse system is indicated by Patterson’s remark, in a letter dated December 5, 1882: . I am of opinion there is little danger but they [the China Merchants’ S.N. Company] will do their fair share of the general cargo carrying. In fact, they seem to be anxious, on the Yangtze, to do more than their share and no doubt it will be the same on the Northern line—they would look upon it as losing face with their supporters were it otherwise.’2 * William Patterson to Francis Bulkeley Johnson, November 6, 1882, Jardine, Matheson and Company Archives. 2 Patterson to Johnson, December 5, 1882, J. M. Archives. 68

BR1T1SH-CHINESE STEAMSHIP RIVALRY

So as to reinforce their hold on the Tientsin and Yangtze services, Tong King-sing and Hsu Jun decided in 1881-82 to build one new ship for each route. But they also had their eyes on the Swatow trade, and in the same two-year period ordered three light-draft ships for that enterprise. The specifications for two of these boats were known to Jardine, Matheson and Company, which continued to handle some of the Chinese company’s orders:1 ‘The China Merchants’ are having a steel twin screw steamer built at home for the Southern trade—210 ft. long, 35 ft. beam—8 ft. depth of hold. She has to steam 10£ knots, & to carry 700 tons d.w. on 8-6 feet . . . (September 27, 1881). ‘I sent you a copy of a letter written by A. & J. Inglis to Messrs J. and J. Weir, Glasgow, regarding a letter from China Merchants’ Coy—250 x 39 X 28, to carry 1,200 tons d.w. on 14 ft.—990 on 13 ft.—770 tons on 12 ft. and to steam 13 knots on 12 ft. draft— this steamer to be perfect should draw 6 inches less water, but even as she is she stands out from all the plans of the builders. (October 4, 1881).’ That Tong and Hsu were still given to ambitious projects is indicated by the fact that in the spring of 1882, they revived the plans for a line from Amoy and Swatow to Singapore and Saigon, carrying Chinese emigrants abroad and bringing home rice from Annam. For this undertaking, they ordered two large steel steamers, ‘280 ft. in length, 39 ft. 6 in. beam, 3 decks, to carry 2,300 tons dead weight on 16 ft. 6 in. & with cargo to steam 11 knots. Cost £44,000 each’.2 They also sought to expand the company’s waterfront properties, spending some Tls. 200,000 in 1880-82 in new purchases in Shanghai and other ports. A project for filling out the company’s frontage in Shanghai and for erecting new and spacious godowns, costing more than Tls. 300,000, was carried out in 1882. How then did the company finance these new purchases? It is noteworthy that the China Merchants’ S.N. Company was no longer able to get government loans for the purpose. It could only rely on new investments or borrowing from private sources. As can be seen from Table VII, between 1879 and 1881, the company floated a new issue of some Tls. 200,000—mostly to Chinese in Hawaii and in the United States, in connection with the proposed service to Honolulu and San Francisco. But, in addition, the China Merchants’ S.N. Company borrowed increasingly large sums from two subsidiary enterprises—Jen-ho and Chi-ho. (The Jen-ho Marine Insurance Company, as we have seen, was founded by Tong, HsU, and a few 1 Patterson to Johnson, September 27 and October 4,1881, J. M. Archives. 2 Patterson to Johnson, April 12, 1882, J. M. Archives.

69

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

friends in 1875, and the Chi-ho M arine and Fire Insurance Company was established by the same group in 1878.) Beginning in 1880, the China M erchants’ S.N. Com pany paid only 10 per cent per annum for these funds. Loans from the two insurance companies were therefore comparable to the com pany’s stock capital, upon which a regular dividend o f 10 per cent was paid annually. T able

VII

INVESTED AND BORROWED CAPITAL OF THE CHINA MERCHANTS’ S.N. COMPANY, 1879-83

6th m o o n 1879 6th m o o n 1880 6th m oon 1881

Capital stock Tls. 800,600 830,300 1,000,000

6th m oon 1882

1,000,000

Due native Outstanding Due Jen-ho government and Chi-ho In­ banks or loans surance Cos. individuals Tls. Tls. Tls. 582,632 624,087 1,928,868 1,903,868 619,848 533,028 1,101,662 — 1,518,866 1,217,967

2,319,545

As the com pany’s operations were apparently more successful, there were indications that Tong, Hsii and their merchant friends were willing to increase their permanent investments in the enterprise. The com pany’s new wharves and warehouses in Shanghai were completed in 1882 and were widely admired. Meanwhile, as five steamships arrived from Britain and two more were anticipated for late 1883, the com pany expanded its operations on several routes. A new line was inaugurated between Shanghai and Wenchow (265 miles to the south), and the service between Shanghai and H ong K ong was made m ore regular. M ore significantly, a greater effort was now made to compete for the Newchwang-Swatow trade. Statistics o f the Imperial M aritime Customs show that the China M erchants’ S.N. Com pany’s ships entered and departed from Swatow 47 times in 1881, 69 times in 1882, and 120 times in 1883. D uring 1882, two ships o f the Chinese com pany operated from Amoy and Swatow to Singapore and Saigon, and Tong King-sing and Hsii Jun were encouraged by the profits obtained.1 So as to help pay for the two new ships for the Singapore-Saigon trade, they decided to increase the com pany’s capital stock to Tls. 2,000,000, the holder of each old share to have the option o f buying a new one. The new capital o f Tls. 1,000,000 was fully subscribed by February 1883— indeed a good portent for the com pany’s future. 1 ’In connection with the Southern steamer trade I may mention that C M Coy arc well pleased with the earnings of their vessels so far. I am told that the last steamer they despatched starting from Amoy, I believe, earned fully 510,000 on round trip.’ Patterson to Johnson, December 16, 1882, J. M. Archives.

70

BRITISH-CHINESE STEAMSHIP RIVALRY

But, as it happened, the China Merchants’ S.N. Company was moving toward a crisis—caused mainly by the personal business failures of Tong King-sing and Hsti Jun, and by an unfortunate situation created through Sino-French tension over Indo-China. In November 1883 Hsii Jun’s finances collapsed. Tong King-sing also lost heavily, and they nearly brought the company down with them. Tong and Hsu’s predicament must be ascribed to their having overextended their resources in personal ifivestments—both pro­ ductive and speculative. Since 1877, Tong King-sing had shown, in fact, an even greater interest in mining than in steamships. In that year, he invested some Tls. 300,000 in the K ‘aip‘ing coal mines—a successful ‘merchant undertaking under government supervision’, also initiated under Governor-General Li’s auspices. By 1883, the K ‘aip‘ing mines were already a going concern, producing some 75,000 tons that year and rapidly increasing in capacity.1 But meanwhile, Tong and his friends had also invested funds in at least three other mines—a silver mine and a copper mine in Jehol and a coal mine in Anhwei. Hsii Jun supported Tong in all these enterprises, while Tong, through his partnership with Hsii in a native bank in Shanghai, was associated with some of Hsu’s speculative ventures. In 1883, Hsii Jun had a total investment of Tls. 1,275,000 in the shares o f various modem enterprises in China—including Tls. 480,000 in the China Merchants’ S.N. Company, Tls. 150,000 in the Chi-ho and Jen-ho insurance companies, Tls. 150,000 in the K ‘aip‘ing mines, Tls. 280,000 in five other mining projects, Tls. 50,000 in a cotton textile factory, Tls. 25,000 in a silk filature, Tls. 30,000 in a glass works, and Tls. 20,000 in a paper mill. Hsii Jun was also co-owner of eight pawn­ shops in Shanghai, involving a total investment of Tls. 348,000. And he also developed a fateful interest in real estate in the foreign settlement in Shanghai, not hesitating to buy land with borrowed capital. In 1883, he owned real estate in Shanghai costing Tls. 2,237,000—2,900 mou, in addition to 320 mou on which houses had been constructed. But he also owed the native banks in Shanghai more than 2 million taels—partly secured by his land holdings and partly by shares.2 It is conceivable that, involved as they were in all these ventures, Tong and Hsii could still have persevered in their plans for the China Merchants’ S.N. Company’s expansion. However, except for K ‘aip‘ing, the various mining schemes proved to be failures, and as 1 Ellsworth C. Carlson, The Kaiping Mines 1877-1912 (Cambridge, Mass., 1957), p. 151. 2 Hsu Jun, op. cit., pp. 34, 81-82. Besides K'aip'ing, Hsii invested in the follow­ ing five mines: Kuei-chih (Anhwei) coal and iron mines, Tls. 100,000; San-shan silver mine, Tls. 60,000; P’ing-ch'uan (Jehol) copper mine, Tls. 60,000; Chinchou mines, Tls. 50,000, and He-feng-chou copper mine (near Ichang, Hupeh), Tls. 10,000.

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THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

early as August 1883, there were indications that Tong and Hsii were hard put to it to meet their immediate obligations to the native banks. On August 1, William Patterson, the Jardine manager in Shanghai, reported to his Hong Kong colleague: ‘From what I have lately heard the China Merchants’ Coy are hard up for ready money—they owe Chinese banks Tls. 1,750,000 and in addition to this Tongkingsing has advances to the extent of Tls. 3 to 400,000.1 believe he holds some 3,000 Kaiping Mine shares upon which he has received large advances from Native Banks. Six or eight months [ago] he went into the market & bought shares and Chinese at once followed him & the result was for a time a firm and higher market. He wired out the other day [from England, where Tong was on a visit] to buy shares to steady the market & some 500 were bought for him up to Tls. 120 per share, but instead of Chinese following, they were prepared at the finish to sell freely at Tls. 115 or less. There are other concerns that they have been throwing away money upon and I am now pretty confident that they must raise a certain amount of hard cash to maintain their credit with the Chinese Banks.’1 The China Merchants’ S.N. Company’s difficulties were apparently not serious in August 1883. But only a few months later, in November 1883, Tong, Hsu and many of their friends came to grief in a general financial crisis in Shanghai, created by the rumours of imminent French attack on the port. During the crisis, numerous Chinese firms suspended business, and the value of real estate and shares plum­ meted. From the evidence given in the Jardine papers, it seems that one factor contributing to the panic was the withdrawal by the Hong Kong and Shanghai Banking Corporation and other British firms of advances amounting to more than Tls. 2,000,000 from the native banks in Hong Kong and Shanghai. This created stagnation in the tea and silk trades. ‘The withdrawal of this sum following on losses incurred by Native speculators in land here, & in mining and other schemes in your part of the world’, wrote F. B. Johnson from Hong Kong to his colleague in Shanghai, ‘is quite sufficient to account for the collapse in enterprise’. On November 19, 1883, it was re­ ported that Hsii Jun was ‘very ill and not likely to recover’.2 He was under pressure to settle his debts with twenty-two native banks, and in order to meet his obligations of Tls. 2,522,000, he eventually was compelled to surrender titles to properties valued at Tls. 3,409,000— including almost all his real estate holdings, his pawnshops, and most of his stocks. Hsii also ‘borrowed’ Tls. 162,000 from the 1 Patterson to Johnson, August 1, 1883, J. M. Archives. 2 Johnson to8Patterson, October 25, 1883; Johnson to J. J. Keswick, November 19, 1883, J. M. Archives.

72

BRIT1SH-CHINFSE STEAMSHIP RIVALRY

treasury of the China Merchants’ S.N. Company in order to pay his personal creditors. Apart from his losses in mining investments, Tong King-sing also suffered heavy losses through the failure of two native banks of which he was co-owner—one of them in partnership with Hsii Jun. So as to meet the China Merchants’ S.N. Company’s obligations to the native banks, Tong’s brother—who acted for him until his return in January 1884— borrowed Tls. 743,000 from two British firms (Adamson, Bell and Company and Jardine, Matheson and Company) secured by some wharfage properties. Meanwhile, the company’s operations rapidly deteriorated. Taking advantage of its predicament, many Chinese shippers refused to pay their outstanding freight, while the managers seemed to have ‘lost all interest in running steamers’.1 In the autumn of 1883, the Chinese company’s two new ships, the Fushun (1,504 net tons) and the Kwanglee (1,508 net tons), arrived. But the projected line to Singapore and Saigon obviously had to be abandoned, and in fact several of the company’s steamers were laid up in Hong Kong after January 1884, for fear of seizure by the French navy. In February 1884, when demand for tonnage in the New­ chwang-Swatow trade was again on the rise, and when both Butter­ field and Swire and Jardine, Matheson were bending every effort to arrange for the chartering of vessels, the Jardine partner reported from Shanghai: ‘The C M Coy informs us that they have no steamers available for the Newchwang trade !’2 In May 1884, during another o f John Swire’s periodic visits to China, the managers of the three companies formed what was referred to as a ‘Coast Agreement’. Uniform rates were established for the Swatow-Newchwang route and pooling of earnings was arranged for the Shanghai-Hong Kong and Shanghai-Canton runs— the division to be pro rata according to the mileage contributed by each company. But the Chinese company was hardly in a position to take advantage of this. 3 In late July 1884, when full-scale war 1 Patterson to Johnson, January 23, 1884, J. M. Archives. 2 Patterson to Johnson, February 20, 1884, J. M. Archives. 3 On May 23, 1884, after he had conferred with Mr Swire and with Tong King-sing, Jardine’s William Patterson wrote to William Keswick that ‘from this you will see that matters promise to come all right. The three companies working together means the complete command of the coasting trade in two years’. To this, Mr Keswick replied on May 30th: ‘I therefore hope the understanding that so far has done so well will be maintained between the companies, for with it I quite agree with you that the whole coast trade would in time fall to them.’ That a pooling system had been established, at least for the Shanghai-Hong KongCanton route, is indicated by the following passage in Keswick’s letter, written after the Chinese company’s fleet was transferred to Russell and Company: ‘The Fushun [China Merchants’ S.N. Company’s steamer] yesterday had only a few packages from Canton & this [Hong Kong] and I question if her earnings altogether exceeded $100!! Of course the earnings of the Ch. Mer.’s boats for

73

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

with France seemed certain, a deputy o f Governor-General Li Hung-chang arranged to have the entire fleet o f the China Merchants’ S.N. Company transferred to the American flag, by means o f a fictitious sale to Russell and Company. It was not until a year later, in August 1885, that the fleet was returned to the Chinese. By that time, Governor-General Li had decided to remove both Tong King-sing and Hsii Jun from the Bureau for Inviting Merchants to Operate Steamships and instead put it under the charge of Sheng Hsuan-huai, who had emerged as Li’s most trusted adviser in business affairs. IV.

CONCLUDING

R E F LE CT I ONS

The twelve-year story of the Chinese steamship company, as detailed above, ended in a near disaster. But if we look ahead, beyond 1885, we find that the foundation of the Chinese company’s business, like that of the two British enterprises, was laid in the dozen years pre­ ceding that date. In 1885 Sheng Hsuan-huai was appointed directorgeneral of the Bureau for Inviting Merchants to Operate Steamships, ‘with complete authority over personnel and finances’.1 Sheng decided, however, to allow the enterprise to continue as a ‘merchant undertaking under government supervision’—in other words, to retain joint-stock ownership within the bureaucratic framework. Sheng never considered himself a merchant. But it was not difficult for him to buy enough shares in the company—the shares had fallen to Tls. 34 during the crisis of 1883-84— to bccome the largest share­ holder. A few o f the former shareholders held on to their shares— particularly those who continued to serve as staff members. Despite Sheng’s famed astuteness, however, the China Merchants’ S.N. Company did not expand during his administration. Thanks to the pooling system which Tong King-sing had arranged with the two British companies—which was renewed in May 1886 and again in March 1893—the Chinese company continued to yield large profits from operations on the Yangtze and the Tientsin route, and for ten years thereafter its published gross income from shipping varied some time back and now have been, at least between Shanghai and this, a hindrance and not an advantage or gain to the Pool, and I presume both Scott [J. H. Scott, of Butterfield and Swire, Shanghai] & yourself will take a decided stand against their movement counting for mileage.’ The earnings from the Coast Pool were actually never divided. In February 1886 J. J. Keswick wrote to J. Bell Irving: ‘I have hints from Aubert and Lang [of Butterfield and Swire] that they regard the Coast Agreement as only now existing as a tariff agreement, seeing that by mutual consent we never divided the “pool” but kept our own earnings.’ Patterson to W. Keswick, May 23, 1884; Keswick to Patterson, May 30 and August 12, 1884; J. J. Keswick to J. Bell Irving, February 1, 1886, J. M. Archives. 1 Chiao-t'ung shih: Hang-cheng pien, I, p. 156.

74

BRITISH—CHINESE STEAMSHIP RIVALRY

within 16 per cent of the sum attained in I885.1 The size of the China Merchants’ S.N. Company fleet remained static; while the fleets of its British rivals grew by leaps and bounds. In 1894 the Chinese company still had a fleet of only twenty-six ships (23,284 net tons). But by this time the China Navigation Company’s fleet had grown to twenty-nine ships (34,543 net tons), and the Indo-China S.N. Company’s fleet had grown to twenty-two ships (23,953 net tons). The reasons for the China Merchants’ S.N. Company’s stagnation after 1885 must be sought in the period of Sheng Hsuan-huai’s administration.2 But from the facts presented in this paper, it is evident that in the last two or three years of Tong King-sing and Hsu Jun’s management, the company was already losing ground to its British competitors. A few generalizations on this period of mandarin-compradore co-operation are therefore warranted. It is apparent, in the first place, that the Chinese company was not inferior to the British enterprises in capital resources. It is true that the Swire concern did occasionally obtain loans in Britain secured by a debenture at 5 per cent—£57,000 in 1875 and £10,000 in 1883. But these were small amounts compared with government loans totalling Tls. 2,000,000 (about £747,000), on which the Chinese firm for many years paid no interest at all. Moreover, it is not necessarily true that the mercantile Chinese always shunned investments in modem enterprises. By the late 1870’s, Tong King-sing and Hsii Jun had built up a complex of enterprises around the steamship business— insurance, freight-brokerage, wharfage, coal-supply. The freight rates on the major routes having been raised by the pooling agree­ ments, there was every prospect that steamship investment would continue to be lucrative. In fact, in 1881-82, Tong and Hsii continued to plan new steamships and increased the China Merchants’ S.N. Company’s capital stock to Tls. 2,000,000. On the surface, it was the Franco-Chinese crisis in 1883-84 that arrested the promising development of the China Merchants’ S.N. Company. But there were deeper underlying causes. Even before the 1 Decline of the China Merchants’ S.N. Company’s relative strength is indi­ cated by the fact that in the pooling agreement of 1893 the share of the two British companies increased. In the agreement of 1883, Jardine, Matheson had obtained a 20 per cent share of receipts on the Yangtze river and 28 per cent on the Shanghai-Tientsin route; in the 1891-92 negotiations toward a new agree­ ment, the firm demanded 25 per cent on the Yangtze and 31 on the ShanghaiTientsin route. In 1883 Butterfield and Swire had obtained a 38 per cent share on the Yangtze and 28 per cent on the Shanghai-Tientsin route. In 1892 it demanded 33J per cent on the latter route. J. MacGregor to E. Cousins, July 14, 1890; Herbert Smith to Tong Kidson, December 18, 1891, J. M. Archives. 2 See Albert Feuerwerker, China's Early Industrialization: Sheng Hsuan-huai (1844-1916) and Mandarin Enterprise (Cambridge, Mass., 1958), Chapters IV and V ; Kwang-Ching Liu, ‘Steamship Enterprise in Nineteenth-Century China’, Journal o f Asian Studies, XVIII (1959), pp. 435-56.

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THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

rumours of a French attack precipitated the financial panic of 1883, certain dcfccts of the Chinese company were already apparent. It is evident that the remarkable expansion of the Chinese company in the period 1874-77 was due, in the first instance, to government aid and loans. But under the circumstances, government aid and loans also had negative effects—they made impossible the company’s development as a healthy business concern. It is certain, for example, that the officials of Kiangsu province—those connected with the tribute rice transport and those who administered government loans —had considerable influence over patronage within the company. Despite Tong King-sing’s ‘reforms’, he could not rid the enterprise of corruption and waste. Consequently, profits were comparatively small, even though the China Merchants’ S.N. Company possessed the great advantage of a large fleet operating at monopoly rates. The benefits of government support were therefore dissipated. But the crisis of 1883 revealed another basic defect of the company. Its prosperity and growth had hinged on the fortunes of a group of merchants enlightened enough to see the future in such modern enterprises as steamships and mines. As long as this group made good, the company would expand. But with the collapse of their personal fortunes, the bold plans they had made for the China Merchants’ S.N. Company also fell to the ground. Despite the advantages that it once enjoyed, the Chinese company thus became prey to the inertia of mandarin management, deprived of the element of daring that marked the successes and the failures of the two former compradores. In the continuing struggle for expansion in the steam-navigation business in Chinese waters, it could hardly be expected that the British enterprises would not now push their own advantage. APPENDIX TH E FLEET OF TH E CH IN A M ERCHANTS’ S .N . CO M PAN Y,

Acquisitions Losses 1873 Aden, 507 net tons Yungch'ing, 661 Fusing, 532 Leeyuen, 734 Yungning, 324 1874 Tungting, 315 Hochung, 849 Fuyew, 920 Leehong, 131 1875 Hanyang, 404 Lost in accident: Tahyew, 419 (renamed Hsinghsing 1880) 76

1873-84

Fusing

BRITISH-CIflNESE STEAMSHIP RIVALRY

Acquisitions Losses 1875 Yehsin, 754 Howsang, 795 Pautah, 870 Fungshun, 863 Dismantled: Aden 1876 Hankwang, 838 Kiangkwan, 1,030 1877 (purchased from the Shanghai S.N. Company) Kiangwae, 1,172 Kiangpiau, 879 Kiangteen, 1,079 Kiangching, 1,084 Kiangyuen, 768 Chinse, 561 Chintung, 724 Haeshin, 763 Haean, 710 Hwaiyuen, 1,115 Haesan, 574 Haeting, 649 Kiangchang, 806 Me ili, 181 Kiangtung, 339 Kiangfoo, 857 Wrecked: Howsang 1878 Kiangping, 392 Kiangchang Dismantled: Kiangyuen Kiangwae Sold: Chinse 1880 Meifoo, 793 Wrecked: Hochung 1881 Hankwang Dismantled: Leehong Dismantled: Kiangching 1882 Chiyuen, 1,177 Haesan Poochi, 631 Tungting Kungpai, 692 Toonan, 942 Kiangyu, 2,270 Lost in accidents: Meili 1883 Fushun, 1,504 Hsinghsing Kwanglee, 1,508 Hwaiyuen Total in 1884: 26 ships (22,469 net tons)

SELECTED BIBLIOGRAPHY Allen, G. C., and Audrey G. Donnithome, Western Enterprise in Far Eastern Economic Development: China and Japan, London, 1954. Chapter VII.

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THE ECONOMIC DEVELOPM ENT O F C H IN A A N D JA PA N

Feuerwerker, Albert, China's Early Industrialization: Sheng Hsuan-huai (1844-1916) and Mandarin Enterprise, Cambridge, Mass., 1958. Chapters IV and V. Hou, Chi-ming, ‘The Oppression Argument on Foreign Investment in China, 1895-1937’, Journal o f Asian Studies, XX (1961), pp. 435-48. Liu, Kwang-Ching, Anglo-American Steamship Rivalry in China, 18621874, Cambridge, Mass., 1962. ‘Steamship Enterprise in NineteenthCentury China’, Journal o f Asian Studies, XVIII (1959), pp. 435-54. ‘Tong King-sing: His Compradore Years’, Tsing Hua Journal o f Chinese Studies, New Series, II, 2 (June 1961), pp. 143-83.

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3 C H I N A ’S N IN E T E E N T H - C E N T U R Y I N D U S ­ T R I A L I Z A T IO N : T H E C A S E O F T H E H A N Y E H P IN G C O A L A N D IR O N C O M P A N Y , L I M I T E D 1 AL BE RT F E U E R W E R K E R

Professor of History, University of Michigan I

Chang Chih-tung, the governor-general of Hupei and Hunan, and Sheng Hsuan-huai, the director-general (tu-pan) o f the Hanyang Ironworks, were exceedingly proud that the Chinese were manu­ facturing iron and steel at Hanyang with modern equipment pur­ chased in Europe as early as 1894— two years before the Japanese government even began its premier iron and steel works at Yawata.2 Yet the year 1910, when Hanyang produced 119,396 tons of pig-iron and 50,113 tons of steel while Yawata, which had blown in its furnaces only in 1901, produced 126,894 tons of pig-iron and 153,491 tons of steel, was the last in which the output of the Chinese plant came anywhere near rivalling that of its Japanese counterpart.3 The cumulative effects of poor management, an increasingly obsolescent plant, a weak domestic market, disadvantageous agreements with Japanese creditors, and the unsettled political milieu in China at the turn of the century led to the complete failure of Hanyang after 1 The author wishes to acknowledge the capable research asistance of Mr Richard Chang in a study in progress of ‘China in the Age of Imperialism’ of which this paper is a part. 2 Unless otherwise indicated, the sources of the data in this paper are the collected works of Chang Chih-tung and Sheng Hsuan-huai: Chang Wen-hsiangkung ch'uan-chi (Complete papers of Chang Chih-tung). Ed. by Wang Shu-nan, 120 vols., Peiping, 1928. Sheng shang-shu Yii-chai Is'un-kao ch'u-k'an (Collected drafts of Board President Sheng Hsuan-huai, first issue). Ed. by Lu Ching-tuan; 51 vols., Shanghai, 1939. Given the hundreds of documents relating to Hanyehping in the two collections, it has not seemed expedient to burden this relatively brief statement with detailed references. For a short history of the company up to 1908 see Ch'iian Han-sheng, ‘Ch‘ing-mo Han-yang t‘ieh-ch‘ang’ (The Hanyang Ironworks, 1890-1908), She-hui k'o-hsueh lun-ts'ung (Journal o f Social Sciences), 1 (April, 1950), pp. 1-33. 3 Seigusa Hiroto and Iida Kenichi, Nihon kindai seitetsu gijutsu hattatsushi: Yawata seitetsusho no kakuritsu katei (The development of modem iron manu­ facturing technology in Japan: the establishment of the Yawata Ironworks), Tokyo, 1958, pp. 645-55. F. R. Tegengren, The Iron Ores and Iron Industry o f China, Peking, 1924, p. 399.

79

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

World W ar I. Yawata, in contrast continued to grow, and down to the 1930’s manufactured as much as 70-80 per cent of the pig-iron and 40-50 per cent of the steel produced in Japan.1 The irony in the tale of these two companies is that in a sense the success of the Japanese government ironworks belonged to the Chinese firm. Between 1900 and 1914, for example, 61 per cent of the iron ore used by Yawata came from mines in China controlled by the parent company of the Hanyang Ironworks;2 and these Tayeh mines exported 64 per cent of their total output between 1893 and 1934 to Japan, largely to Yawata.3 Moreover, from 1903, Hanyang began to sell pig-iron in Japan through the agency of the Mitsui Bussan Kaisha. Soon 50 per cent of its total output was being exported; and large parts of this iron, especially after 1913, went to the Japanese government ironworks.4 Quantitative data for much o f the economic history of modern China are at best only gross approximations.5 The most recent and probably the best estimates that have been made suggest that prior to 1895 approximately 103 foreign-owned industrial enterprises, most of them miniscule firms, were inaugurated in China.6 They and the Chinese-owned firms to be discussed below were differentiated from local handicraft industries at least by the fact that they em­ ployed power-driven machinery. In a strict sense these undertakings were illegal under the treaties; but they existed nevertheless, for the 1 Seigusa and Iida, pp. 661, 685. 2 Calculated from tables in Siegusa and Iida, pp. 597 and Tegengren, p. 295; approximately 1,710,000 out of 2,801,000 tons. 3 Computed from table in Tezuka Masao, Shina jUkdgyd hattatsushi (History of the development of Chinese heavy industry), Tokyo, 1944, p. 231; approx­ imately 7,570,000 out of 11,767,000 tons. 4 Japan, Foreign Office, Nihon gaiko bunsho (Documents on Japanese foreign relations), v. 37, pt. 2, #915, May 22, 1904, and passim; v. 38, pt. 2, #1111, May 30,1905, and passim. John V. A. MacMurray, Treaties and Agreements With and Concerning China, 1894-1919, New York, 1921, pp. 1077-83. Between 1903-08, for example, 136,144 tons of pig-iron, or 47 per cent of the 287,140 tons produced, were exported to Japan. 5 See Albert Feuerwerker, 'Materials for the Study of the Economic History of Modern China’, Journalof Economic History, 21. 1 (March, 1961), pp. 41-60. * Tables I to VIII and the accompanying explanatory data are based upon Sun Yii-t'ang, comp., Chung-kuo chin-tai kung-yeh shih tzu-liao, ti-i-chi, 1840-1895 nien (Source materials on the history of modem industry in China, first collection, 1840-95), 2 vols., Peking, 1957; and Wang Ching-yu, comp., Chtmg-kuo chin-tai kung-yeh shih tzu-liao, ti-erh-chi, 1895-1914 nien (Source materials on the history of modem industry in China, second collection, 1895-1914), 2 vols., Peking, 1957. These are exceedingly valuable collections of qualitative and quantitative materials from sources that often are not otherwise accessible. They are also exceedingly tendentious in their arrangement. While it is easy to point to statistical errors and misleading interpretations in each of the volumes, I am of the opinion that they reflect gross developments in this sector of the nineteenth-century Chinese economy adequately enough.

80

C H IN A ’S NINETEEN TH -CEN TURY IN DUSTRIALIZATION

m ost part in the Shanghai foreign concessions with a smaller num ber at other treaty ports. As o f 1894 the estim ated num ber and capital o f these foreign industrial form s was as show n in T able I .1 T ab l e 1

ESTIMATED NUMBER AND CAPITAL OF FOREIGN OWNED INDUSTRIES IN CHINA, 1894* Type of Firm 1. Shipyards: construction and repairs

2. Tea brick factories 3. Machine silk reeling 4. Processing of exports and imports (other than 2 and 3) 5. Other light manufacturing 6. Public utilities Total

Number 12 7 7

Capital (S Mex.) 4,943,000 4,000,000 3,972,222

19 39 4

1,493,000 3,793,000 1,523,000

88

519,724,222

* Includes a small num ber o f firms based in Hong Kong.

Between 1895 and 1913, encouraged by the legalization o f foreign industry in the treaty ports in the T reaty o f Shimonoseki, 136 additional foreign-owned m anufacturing and mining enterprises (including 41 jo in t Sino-foreign firms) w ith initial capital investments in excess of $ 100,000 (except th a t all foreign-owned mines regardless o f the size o f their capitals have been included in the above figure) were started. The total initial capitalization o f these firms was $103,153,000, and some o f their characteristics are show n in Tables II-V . W hile the establishm ent o f the British, French, G erm an and Russian firms is fairly evenly distributed over the two decades, all but two o f the Japanese enterprises were begun in 1904 an d later— evidence o f Ja p an ’s increasing econom ic penetration o f M anchuria after the R usso-Japanese W ar. M ining was the biggest field o f investment, and Britain the largest investor. N ine o f the thirty-tw o m ining and smelting firms were British, representing a capital o f $37,930,000 o u t o f a total in this sector o f $49,969,000 and represent­ ing a sim ilar proportion o f the total direct British investment in i The dollar unit in Tables I-V III, and elsewhere in this paper when dollar ($) is referred to is the yang-yuan (‘foreign dollar’), m ost commonly the Mexican silver dollar, which had considerable currency in the treaty ports o f China. While the exchange between this dollar of between 370-380 grains o f fine silver and the tael (liang) varied according to time and place, a fair general average for the period under consideration would be Tls. 1 -0 equals SI -33. See Julean Arnold, ed., Commercial Handbook o f China, 2 vols., W ashington, 1919-20, I, 265-66; II, 167-80,187. F

81

T a b le

II

D I S T R I B U T I O N B Y N A T I O N A L I T Y O F F O R E IG N - O W N E D F I R M S I N A U G U R A T E D

N um ber C a p ita l (in S 1 ,0 0 0 's M ex .)

T otal 136 103,153

Britain 37 49,681

F rance 6 4,595

G erm any 12 7,681

Jap a n 49 26,330

R ussia 17 6,648

1895-1913 U nited S tates 8 3 ,240

O ther 7 4,978

T a b le III

D I S T R I B U T I O N B Y L I N E O F B U S IN E S S O F F O R E I G N - O W N E D F I R M S I N A U G U R A T E D

N um ber C a p ita l (in S 1,000’s M ex .)

T otal 136 103,153

M ining and Smelting 32 49,969

Engineering an d Shipyards 7 2,895

Public Utilities (W ater, Electricity) 19 11,514

Spinning and W eaving 16 12,515

1895-1913

F oodstuffs 39

O ther 23 17,148 9,112

T a ble IV

D I S T R I B U T I O N B Y L O C A T I O N O F F O R E IG N - O W N E D F I R M S I N A U G U R A T E D 1 8 9 5 -1 9 1 3 N um ber C a p ita l (in SI,OOO’s M e x .)

T otal 136 103,153

Kiangsu 44 23,622

Chihli 13 28,954

H upei 10 5,185

S han tu n g 6 3 ,595

Fengtien 38 18,873

C hilin 15 5 ,139

O ther 10 17,785

T a ble V

D I S T R I B U T I O N B Y S IZ E O F C A P IT A L O F F O R E IG N - O W N E D F I R M S I N A U G U R A T E D 1895-1913

N um ber C a p ita l (in $ 1,000's M ex .)

T o tal 136 103,153

Less than* XI 00,000 7 408

100,000-

250,000-

47 7,234

37 14,755

* All these were mines.

500,0001,000,000M ore than 250,000 500,000 1,000,000 5,000,000 5,000,000 23 19 3 19,975 28,163 35,618

CHINA’S NINETEENTH-CENTURY INDUSTRIALIZATION

industry. Britain and Japan accounted for all of the firms under ‘Engineering and Shipyards’, and for a very high proportion under each of the other categories, giving them together 86 out of 136 firms and $76 million out of the $103 million total capital. These 136 foreign firms were concentrated in Shanghai and the northern treaty ports, except that, from 1906 to the end of 1913, 43 firms were in­ augurated in Manchuria, largely by Japanese investors. The average size of the initial capital of the 136 enterprises was $758,000. About Chinese-owned manufacturing and mining enterprises at the end of the Ch‘ing dynasty (other than the joint Sino-forcign firms included above, which for all practical purposes were under foreign control), the data are even less satisfactory. There were, first, about nineteen government-owned arsenals and shipyards, the largest of which were located at Shanghai, Nanking, Tientsin, Foochow and Hanyang. Second, a number of official and semi-official mining, smelting and textile enterprises had been undertaken from as early as 1872. Of these pioneering ventures, the largest and best known, such as the K‘aip'ing Coal Mines, the Hanyang Ironworks and its coal and iron mines, Chang Chih-tung’s Hupei Textile Mill and Li Hung-chang’s Shanghai Cotton Cloth Mill, gradually passed out of the purview of the officials who had sponsored them and into the hands of private Chinese investors, or under foreign control as in the case of K ‘aip‘ing. No satisfactory estimate has been made of the size of the investment represented by the arsenals; and the data concerning the kuan-pan, kuan-tu shang-pan and kuan-shang ho-pan varieties of official and semi-official firms are not always clearly dis­ tinguished from those purporting to describe manufacturing and mining enterprises established by private Chinese entrepreneurs (shang-pan). As I have suggested elsewhere, the distinctions between semi-official and private undertakings of this type were in any case largely formal ones and of secondary significance.1 One estimate suggests that 419 private and 66 official or semi-official industrial firms with total initial capitals under each category of 588,552,367 and $43,776,710 respectively were inaugurated in the period 1872— 1911.2 A second set of data describes 549 private and semi-official firms started in the period 1895-1913 with a total initial capital of $120,288,000.3 While the two estimates are not wholly commensur­ able, there is enough of a ‘fit’ to suggest that they are referring 1 Albert Feuerwerker, China's Early Industrialization: Sheng Hsuan-hual (1844-1916) and Mandarin Enterprise, Cambridge, Mass., 1958, pp. 8-30. 1 Yen Chung~p‘ing, ed., Chung-kuo chin-tai ching-chi shih t'ung-chi tzu-liao hsuan-chi (Selected statistical materials on China’s modern economic history), Peking, 1955, pp. 93-9. 3 Wang Ching-yii, pp. 657, 869-919, 1041-42. On p. 730, there is also reference to 362 industrial firms with a total capital of S94,621,054 having registered under the Company Law of 1904 in the period 1904-12,

83

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

roughly to the same phenomena. Some of the characteristics of the 549 companies in the second estimate are shown in Tables VI-VI1I. In both numbers and capital the bulk of these new industries was concentrated in such light manufacturing fields as textiles and the processing of foodstuffs. Of the 160 firms in the textile line, 97 were mechanical silk-reeling establishments, often of petty size. The same smallness of scale was characteristic of the majority of these enter­ prises. Three hundred and three had initial capitals of less than $100,000. The average capital of the remaining 246 firms capitalized at $100,000 and over was $432,000 as compared with $758,000 for the 136 foreign-owned firms discussed above. Chinese-owned enterprises could of course locate in the interior, if they wished, as well as in Shanghai and other treaty ports. While a large proportion of the strictly manufacturing companies among the 549 were located in the treaty ports, the fact that a significant number of others were established inland suggests the possibility that there was a certain degree of complementarity between the markets served by foreign industries in China and Chinese-owned enterprises. The foregoing data are of value only as suggesting gross trends. Given the likelihood that some firms were counted more than once, that a significant proportion of those undertaken failed during the period under consideration, and that the initial capitals of many have been overstated in these estimates, it would be misleading to take a simple sum of the number of firms and the magnitude of their capitals under the several categories discussed above as the absolute magnitude of China’s nineteenth century industrialization. The best that can be said is that by the end of the Ch‘ing dynasty there were perhaps 500-600 foreign and Chinese mining and manufacturing enterprises employing mechanical power, and that the total capitali­ zation of these firms was in the vicinity of $200 million. Among these firms, it is estimated that 116 Chinese-owned enter­ prises and 40 foreign-owned employed 500 or more workers, with a total of 130,985 in the former and 109,410 in the latter.1 The 500 employee cut-off point is arbitrary of course, but if it is adopted these 240,395 workers may be considered the extent of the ‘modern’ labour force in China in the period 1900-10. The Hanyehping Coal and Iron Company, consisting of the abovementioned Hanyang Ironworks, the Tayeh Iron Mines, and the P'inghsiang Coal Mines, was the most ambitious industrial enter­ prise attempted in late-Ch‘ing China. With more than 10,000 workers employed in its three divisions, and with a paid up capital of $13 million and a net worth of $50 million,2 Hanyehping in the > Wang Ching-yii, pp. 1183-92. 2 Hanyehping financial report for 1913, in South Manchurian Railway, Shiryd izon (Documentary miscellany), 1915, No. 11, pp. 127-37.

84

T a b le

VI

D I S T R I B U T I O N B Y L I N E O F B U S IN E S S O F C H IN E S E -O W N E D F I R M S I N A U G U R A T E D 1895-1913

N um ber C a p ita l (in 5 1 ,000’s M ex .)

T o tal 549 120,288

M ining and Smelting 81 22,073

Public U tilities (W ater, Electricity) 46 21,600

Engineering 15 2 ,787

Spinning* W eaving, Silk R eeling Foodstuffs 160 125 3 0 ,246 18,885

O ther 122 24,707

T a b l e V II

G E O G R A P H I C A L D IS T R IB U T IO N O F C H IN E S E -O W N E D N um ber C a p ita l (in S I,0 0 0 ’s M ex .)

T o tal 549 120,288

Shanghai 83 23,879

C an to n 16 5,791

F IR M S IN A U G U R A T E D

W uhan 28 17,240

H angchow 13 1,552

W usih 12 1,422

1895-1913 Tientsin 17 4 ,2 1 9

O ther 380 66,185

T a b l e V III

D I S T R I B U T I O N B Y S IZ E O F C A P IT A L O F C H IN E S E -O W N E D F I R M S I N A U G U R A T E D 1895-1913

N um ber C a p ita l (in S I,0 0 0 ’s M e x .)

T otal 549 120,288

10,00050,000 214 5,899

50,000100,000 89 7 ,052

100,000250,000 104 17,731

250,000500,000 85 29,901

500,0001,000,000 40 2 7 ,9 8 0

1,000,000 a n d over 17 31,725

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

first decade of the twentieth century stood out among both Chinese and foreign-owned firms in the Manchu empire. Its brief success and its ultimate failure are critical facts for a comprehension of China’s modern economic history. II

N ot only was Hanyehping the largest industrial undertaking in Ch'ing China, from 1896 it was also a part of Sheng Hsuan-huai’s economic empire. The enterprises which Sheng founded and directed, both as a private entrepreneur and as an official of the M anchu government, represented a significant part of such success as pre-Republican China achieved in the sphere of economic moderniza­ tion. They were pioneering ventures and their kuan-tu shang-pan (‘official supervision and merchant management’) format was the model for succeeding attempts to inaugurate modem-style industry and commercial enterprise, and foreshadowed the ‘bureaucratic capitalism’ of more recent decades which must be counted as one of the principal obstacles to the modernization of China within a democratic framework.1 A t the time when Sheng assumed control and direction of Hanyehping in 1896 he already headed the China Merchants’ Steam Navigation Company, the first and by far the largest Chinese-owned shipping company; the Imperial Telegraph Administration, which monopolized domestic commercial wire communications; the Hua-sheng Spinning and Weaving Mill, the first successful modern cotton mill in China; and he was on the point of organizing China’s first modern-style bank, known before 1911 as the ‘Imperial Bank of China’. The funds thought to be available to Sheng through his many enterprises, and the fact that since 1877 he had controlled valuable iron deposits in Tayeh-hsien, Hupei pro­ vince, part of which he had transferred to the newly established Hanyang ironworks in 1890, probably made Sheng the most likely candidate when Chang Chih-tung, against his better judgment, was forced to turn over the government-owned ironworks to private management. Chang had first planned to establish a modern ironworks while he was governor-general at Canton. As a consequence of the famous railroad controversy of 1888-89, what had probably begun as a relatively petty project to capitalize on local handicraft skills in Kwangtung,2 blossomed into a major enterprise intended to produce 1 See Feuerwerker, China's Early Industrialization, passim. 2 Ironmaking in Kwangtung is one of the evidences invariably pointed to by Chinese Communist historians seeking to demonstrate the existence of ‘incipient capitalism’ in Ch'ing China. See Albert Feuerwerker, ‘From “ Feudalism” to “Capitalism” in Recent Historical Writing from Mainland China’, The Journal o f Asian Studies, 18, t (November 1958), pp. 107-16. 86

CHINA’S NINETEENTH-CENTURY INDUSTRIALIZATION

the rails for a projected trunk-line from Peking to Hankow. When Chang was transferred to Wuhan as Hu-Kuang governor-general at the end of 1889 in order to supervise the construction of the rail­ road, the location of the ironworks and the first instalment o f machinery which had been ordered in England in the summer of 1889 followed him northward. During the next six years, by constant importunities, Chang was able to scrape together more than Tls. 5,600,000 of official funds with which he erected and equipped a plant at Hanyang, across the river from his yamen, began digging at the Tayeh ore fields, and engaged in a vain search for a reliable proximate source of coking coal. After repeated delays the first blast-furnace was blown in on June 28, 1894. It operated fitfully until November of that year when it was shut down for lack of working funds and of coal, not to be fired again until the autumn of 1895. Chang had exhausted the provincial funds available to him and Tls. 2 million allocated by the Board o f Revenue (Hu-pu), had raided the Hanyang Arsenal and the Hupei Textile Mill1 to the tune o f Tls. 1,843,384, had benefited from Tls. 500,000 ‘contributed’ by the semi-official Liang-huai salt monopolists and from a like amount ‘borrowed’ from Kiangnan defence funds. As early as 1892 Sheng Hsuan-huai had offered to secure private funds for Hanyang from investors in his other enterprises. Chang at that time had not been enthusiastic either about the general proposition of having so strategic an undertaking as the ironworks in private hands (‘that certainly is not the true course of self-strengthening’) or about the desirability of the particular hands that were proffered. When, however, the Hu-pu refused to allocate additional government funds, and the Court on August 2, 1895 ordered Chang to dispose of the ironworks to private investors, Sheng was really the only potential taker. ‘Sheng’s character is known to all. You know it. I know it,’ Chang wrote to a colleague in the capital. ‘But the Hu-pu will definitely not give additional funds for the ironworks, and I have by now exhausted all other alternatives.’2 Sheng drove a hard bargain. In the spring of 1896 he was less interested in Chang Chih-tung’s white elephant than he had been in 1892 or in the winter of 1895 when, under attack for his performance as Tientsin customs taotai, he had earnestly contemplated placing himself and his affairs under the protection of the Hu-Kuang governor-general. In fact, as Chang learned, Sheng could not raise 1 Both were official enterprises inaugurated by Chang Chih-tung after his transfer to Wuhan. 2 Chang to I.i Hung-tsao, President of the Board of Rites, n.d. [Spring 1896], ms. letter in possession of Peking University Library, printed in Wang Ching-yu, pp. 470-72.

87

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

from private investors, including his other enterprises, anything near the Tls. 5,600,000 required to buy out the official investment in the ironworks and its mines. His plan was to provide the ironworks with critically needed working capital out of government railroad funds, that is from prepayments for rails by the projected Peking-Hankow (Lu-Han) trunk-line.1 Sheng would take over Hanyang only if he were simultaneously appointed the head of the newly established Imperial Railway Administration which would build Lu-Han and other lines. To this, Chang, who had supervisory responsibility for the Lu-Han railroad, reluctantly agreed. On May 24, 1896 Sheng formally assumed the position of director-general (tu-pan) of H an­ yang, and the plant and other assets as well as the problems of this hitherto official (kuan-pan) enterprise passed under his control. For this he paid nothing, except a promise in the new kuan-tu shang-pan regulations of the reorganized firm that the ‘merchant’ management would repay the official investment of Tls. 5,600,000 without interest by a levy of one tael per ton on all the pig-iron produced—an obligation that Sheng and his associates never had to meet. From the Tls. 1,900,000 prepayment for Lu-Han rails which Sheng secured immediately (together with an imperial edict ordering all govern­ ment railroads and arsenals to purchase iron and steel only from Hanyang), Tls. I million was returned to the Hu-pu against the Tls. 5,600,000 of official funds which had been spent on the iron­ works. The levy of one tael a ton was therefore to be deferred until after the ironworks had produced its first million tons of pig-iron. This was a milestone not reached until 1914, by which time the Ch'ing government had passed from the face of the earth and the situation of the Hanyehping Company had been many times trans­ muted. The new management had undertaken to solicit ‘merchant’ invest­ ment in order to provide working funds, expand and improve the plant, and develop a satisfactory source of coal and coke—the iron­ works’ most serious problem. But the investors were slow in forth­ coming. U p to 1904, only about Tls. 2 million in shares had been sold, and a large part of this consisted of transfers from the reserve and insurance funds of Sheng’s China Merchants’ S.N. Company or personal investments by Sheng and his close associates. Almost from the moment it left Chang Chih-tung’s hands the ironworks was forced to turn to short-term high-interest loans from such traditional credit sources as native banks and money shops or, with ultimately disastrous results, to borrowing from foreign lenders. Under Sheng’s direction, however, the firm did proceed to solve the problem of a lack of coking coal which had contributed to the 1 Although approved in principle in 1889, the Peking-Hanhow line was not actually begun until 1896. 88

CHINA’S NINETEENTH-CENTURY INDUSTRIALIZATION

continuous losses in its working account and thus probably to the reluctance of investors to purchase its shares. Extensive explorations by German experts whom Sheng employed led to the discovery of suitable coal deposits in P’inghsiang-hsien, Kiangsi province. Unfor­ tunately the mining area was about 300 miles south of the Yangtze river and 90 miles from water transportation. To the cost o f opening the mine and erecting coke ovens had to be added Tls. 3 million for the construction of a railroad from the mines to the Hsiang river whence, with difficulty, coal and coke were transported to Hanyang. The main section of this branch line was completed in 1903 and the remainder in 1905.1 Funds for the mine and railroad came initially from the Hanyang Ironworks, from the China Mer­ chants’ Company and from the Imperial Railway Administration, but these sources were insufficient. In 1902 Sheng borrowed 4 million marks (c. Tls. 1,500,000) with which to purchase equipment for P‘inghsiang from the German firm of Carlowitz and Company on the security of properties of the China Merchants’ Company in Shanghai. The expenses of developing P‘inghsiang were larger than Sheng had expected, but Hanyang had been paying 16 or 17 taels a ton for K.‘aip‘ing coke—when it could get it—and even more for imported coke. Over the period 1898-1906, for example, P'inghsiang supplied the ironworks with 388,000 tons o f coke at 11 taels per ton, representing a total saving of Tls. 2 million as compared with K ‘aip‘ing coke.2 It was in part to assure a supply of coke pending the completion of the P‘inghsiang railroad and also to obtain a market for Tayeh iron-ore that Sheng on April 7, 1899 concluded a contract with the Yawata works (revised in 1900) for the shipment o f 50,000 tons of ore to Japan annually in exchange for an equal value of Japanese coal and coke.3 In the course of these negotiations Sheng several times raised the question of a large loan from Japan for the purpose of installing modern coke ovens at P'inghsiang, but he had second thoughts in the face of what in effect were Japanese demands for control of Tayeh as a condition for the loan. While P'inghsiang was equipped with German funds on better terms, as I have noted, by 1903 Hanyang’s precarious financial condition had left Sheng no 1 See Tseng K'un-hua, Chung-kuo l'ieh-lu shih (History of Chinese railroads), Peking, 1924, pp. 621-36. 2 Ku Lang, Chung-kuo shih ta k'uang-ch'ang tiao-ch'a chi (A report on ten large mines in China), Shanghai, 1916, ch. 3, p. 13. 3 The discussion herein on the relations between Hanyehping and the Japanese is based principally upon the extensive documentation contained in Vols. 31-41 of Nihon gaiko bunsho (see p. 80, n. 4). These cover the years 1898 -1908; later volumes have not yet appeared. See also the works by Seigusa and Tezuka cited above, and Marius B. Jansen, 'Yawata, Hanyehping, and the Twenty-one Demands’, The Pacific Historical Review, 23.1 (February, 1954), pp. 31-48.

89

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

recourse but to accept Japanese funds which, significantly, he and Chang Chih-tung feared much less than loans proffered by European powers. On the Japanese side, too, there had been some retreat with respect to the security and terms on which loans to Hanyang would be made. The Japanese government, in order to guarantee the supply of Chinese ore for its Yawata works, undertook an explicit policy of gaining influence and eventually control over Tayeh by lending to Sheng Hsuan-huai through the government-sponsored Japan Industrial Bank or by backing loans from the Yokohama Specie Bank and the Okura and Mitsui interests. The immediate occasion for the first loan (January 15, 1904, for ¥3 million [Tls. 2,180,000] at 6 per cent for 30 years, to be repaid by the sale of ore to Yawata at a fixed price per ton) was the need for re­ equipping the steel plant at Hanyang. Rails manufactured from the Bessemer steel produced with Hanyang’s original equipment were found to have an excessive phosphorus content. Now that guaranteed sales to Lu-Han were coming to a close, Hanyang rails would have to compete with superior foreign products. On the advice of British metallurgists, the ironworks proceeded to replace its Bessemer con­ verters with Siemens-Martin process open-hearth furnaces, which went into operation in 1907. Subsequent Japanese loans, which followed in quick order and were all tied to the provision of ore by Tayeh at a fixed price, were also expended principally on new equipment, including new blast furnaces at Hanyang and an entire new smelting plant at Tayeh. But Sheng also engaged heavily in short-term borrowing of operating funds from Japanese lenders and others, a sign of continuing financial difficulty despite the relatively thorough renovation of the firm’s capital equipment. In 1908, Sheng Hsuan-huai took advantage of the newly promul­ gated Company Law formally to amalgamate his three enterprises into the ‘Hanyehping Coal and Iron Company, Limited’,1 and to reorganize the firm into a purely commercial concern (shang-pan), thus ending the kuan-tu shang-pan status it had enjoyed since 1896. This action was taken in part in the hope of attracting additional private Chinese capital, which would have greater legal protection under the new statute, to replace short-term funds borrowed at high interest. Alternatively, as a means of solving the firm’s financial problems, shang-pan status made possible closer ties with Japanese interests—even some form of joint operation which could only be arranged if Hanyehping discarded its semi-official skin. Following the reorganization, which gave shareholders for the first time a measure of control over the Board of Directors and over Sheng who had hitherto single-handedly dominated the company, new investment 1 So it was known in English; in Chinese: Han-Yeh-P‘ing Mei T'ieh Ch‘angkuang Yu-hsien Kung-ssu.

90

CHINA’S NINETEENTH-CENTURY INDUSTRIALIZATION

gradually increased about $5 million (Tls. 3,500,000) of ‘merchant’ shares of 1908 to $10 million by 1909 and to $15 million by 1913.1 But the authorized capital of $20 million was never sub­ scribed in full, and in the early Republican period the company had an outstanding, mainly short-term, indebtedness of at least $40 million. From the time that the Lu-Han trunk-line was completed in 1905, Hanyehping’s guaranteed market for rails was attenuated and, in any case, notwithstanding its higher costs, the Chinese plant had been forced to sell at a market price largely determined by competitive foreign suppliers. The resulting losses, the artificially low return on the ore and pig-iron sold to Japan, the importunate demands of creditors, and about $4 million lost by the company during the 1911 revolution due to the shutdown of the Hanyang blast furnaces from October 1911 to the end of 1912, combined with Sheng Hsuanhuai’s precarious personal position and the financial stringencies in which Sun Yat-sen’s revolutionary government found itself to produce a plan early in 1912 for joint Sino-Japanese control of Hanyehping. Having thus assured the perpetual supply of Tayeh ore to the Yawata iron and steel works, Japanese interests would augment the capital of the Chinese company with large loans. Part of these new funds would be made available to the Nanking govern­ ment, which in turn would withdraw its threat to ‘nationalize’ (i.e. confiscate) the property of Sheng Hsuan-huai who had fled to Japan for his life in October 1911 after his railroad nationalization pro­ gramme as Minister of Ports and Communications in the last Ch‘ing cabinet had brought on the Republican revolution. This scheme, however, collapsed in the face of the general protest that greeted it and forced the shareholders to reject it. Even more important, Yuan Shih-k‘ai, who had succeeded Sun Yat-sen as provisional president in March 1912, had little love for Japan and none at all for Sheng. It was Yuan’s plan, too, to ‘nationalize’ Hanyehping, but faced both by a shortage of funds and by vigorous Japanese opposition he was unable to do so. The 1912 plan for Sino-Japanese joint control failed, but Hanyeh­ ping’s financial problems remained undiminished. In December 1913 the company borrowed through the Yokohama Specie Bank ¥ 9 million for the purpose of erecting two new blast furnaces at Tayeh, and ¥ 6 million more to repay outstanding high interest indebtedness.2 These two loans were to be repaid by the sale of ironore and pig-iron at a fixed price per ton, and, in addition to the 1 After the reorganization of' 1908, Hanyehping accounts were kept in ‘dollars’ (see p. 81, n. 1) as well as in taels. 2 See MacMuxray, pp. 1077-88, for translations of the texts of the 1913 agreements.

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tonnage required for their repayment, Hanyehping within the fortyyear term of the loans was to sell to Yawata 17 million tons of firstgrade ore and 8 million tons of iron. Japanese financial and technical advisers were employed, and Hanyehping gave the Japanese bank a prior option on any additional loans it might seek during the life of the 1913 agreements. Between 1899 and 1913, in short, Japanese interests had transformed Hanyehping primarily into a supplier of raw materials for Japanese heavy industry—a relationship confirmed in fact, if not wholly in name, in the exchange of notes growing out of Group Three of the Twenty-one Demands of 1915. During World War I Hanyehpingdelivered to Japan, about 1million tons of ore and 300,000 tons of pig-iron at a profit, although at a price much below the war-time world market price. But the collapse of the demand for pig-iron at the end of the war was disastrous to the Chinese firm. In 1919, all of the open-hearth furnaces and two of the blast furnaces at Hanyang were shut down; by 1922 the Hanyang plant had closed entirely, never to operate again. The two new smelters at Tayeh built with the 1913 Japanese loan were blown in respectively in 1923 and 1925 but operated only briefly before being shut down. Because there was no more demand for coke by Hanyang, the P‘inghsiang coal mines ceased operation at the end of 1925 and were permanently crippled.1 While the Tayeh iron mines were some­ what less hard hit, having the Japanese market to fall back upon, output dropped almost to nothing in 1926, principally due to the beginning of the Kuomintang Northern Expedition. Although it soon revived, it never again reached the level achieved in the first decade of the Republic. These unhappy developments are reflected in the record of the company’s profits and losses for the years 1912-23 as shown in Table IX.2 In 1908 when Sheng Hsuan-huai established the Hanyehping Coal and Iron Company Limited, Hanyang was equipped with the two original blast furnaces which Chang Chih-tung had purchased some twenty years earlier. Although remodelled to increase their capacity to 75 tons daily each, they were nearly obsolete. A new blast furnace of 250 tons daily capacity was blown in in 1910, and a second of equal capacity in 1915. In 1923 and 1925 two 400 ton daily capacity blast furnaces were blown in at Tayeh. The original Bessemer steel making equipment at Hanyang by 1907 had been replaced by 1 There was much talk, but efforts to revive iron smelting at Hanyang and Tayeh came to nothing. In 1937 what was left of Hanyehping was nationalized and in 1938 much of the machinery at Hanyang, Tayeh, and P'inghsiang was dismantled in the face of the Japanese advance and moved to Chungking. In the post-1949 period, the Chinese Communists are developing a major iron and steel complex at Tayeh, utilizing Tayeh ore and P'inghsiang coke. 2 Source of Table IX: Tesuka, p. 221. These figures in fact overstate the profits and understate the losses for these years; see p. 105 below.

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T able IX

H A N Y E H P IN G PR O FIT S A N D LOSSES, 1912-23 Year 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923

Net Profit

(S Mex.)

Loss 2,872,076 1,538,390 100,968 388,106

1,878,496 2,801,872 3,779,904 2,918,464 1,279,588 511,835 3,666,876 2,952,610

basic open-hearth furnaces, seven of which were in operation by 1911 with a capacity of 30 tons of steel each. There were in addition at Hanyang two rail mills capable of producing 300 20-foot rails a day, a plate mill and bar mill, and supporting mechanical and electrical equipment. The annual production o f iron-ore, pig-iron, steel, coal, and coke, 1896-1934, which also reflects the failure of the company in the mid-1920’s, is shown in Table X .1 By way of comparison, until 1915 Tayeh was the sole producer of iron-ore in China. In that year what were in effect Japanese mines in South Manchuria came into production. From 1926 they rapidly outpaced Tayeh whose production, nearly all of which was exported to Yawata, stagnated from year to year. Similarly, until 1914 Hanyang was the only producer of iron and steel. But from 1915 the Japanese-operated South Manchurian works at Anshan and Penchihu steadily overtook Hanyang, exceeded its output in 1923, and after 1925 had the field to themselves.2 Chang Chih-tung’s grand scheme o f ‘self-strengthening’ had come to naught. Neither Chang, who died in 1909, nor Sheng Hsuan-huai, who died in 1916, would have appreciated the irony in their boast that there had never been an industrial undertaking comparable to Hanyehping in all of East Asia. 1 Sources of Table X: Tezuka, pp. 220, 228, 231, 305; Tegengren, pp. 295, 379, 399; Wang Ching-yii, pp. 485, 488. 2 See Yen Chung-p‘ing, pp. 127, 129. In 1932, for example, the Anshan and Penchihu furnaces produced 352,000 tons of pig-iron; some 20,000 additional tons were produced by a small Chinese firm in Hupei. These figures do not, of course, take into account the output of low quality iron by native methods totalling perhaps 150,000 tons per annum.

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T able

Year 1896 1897 1898 1899 1900 190) 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934

X

HANYEHPING PRODUCTION 1896-1934 (TONS) Coal Iron Ore Pig-Iron Steel Coke 17,600] 39,000 1 data not I 80,471 37,500 , available 10,000 29,000 40,000 ; prior to 18,000 32,000 25,890 25,000 43,000 59,710' 1907 28,805 31,000 63,000 118,877 15,800 56,000 82,000 75,496 38,875 122,000 93,000 118,503 105,109 38,771 154,000 107,000 32,314 114,000 149,840 194,000 50,622 347,000 82,000 197,188 119,000 62,148 402,000 174,612 8,538 66,410 171,934 392,000 108,000 22,626 117,000 74,405 39,000 557,670 306,599 119,306 50,113 610,447 172,500 343,076 83,337 610,014 170,000 38,640 359,467 29,835 221,280 7,989 225,711 2,521 176,825 97,513 42,637 686,855 459,711 505,140 130,000 800,000 55,850 136,531 927,463 data not 544,554 48,367 available 149,929 45,043 950,000 557,703 946,080 subsequent to 149,664 n.a. 541,699 1913 139,152 26,996 694,433 628,878 794,999 686,888 166,097 4,851 824,490 126,305 38,260 824,500 124,360 808,971 650,000 46,800 — 148,424 827,870 580,000 — 73,018 666,939 n.a. — 26,977 648,527 448,921 — 53,482 315,410 512,300 — — 75,715 85,732 — — 243,632 183,349 — — 168,821 419,950 — — 233,311 344,939 — — 377,667 147,946 — — 163,144 314,359 — — 192,115 381,000 — — 172,874 366,339 227,064 382,800 — — in

Why had Hanyehping failed so ingloriously? Is the answer to be found in the implications o f the recurrent suggestion by foreign observers in the treaty ports that all problems could be made to 94

CHINA’S NINETEENTH-CENTURY INDUSTRIALIZATION

disappear ‘by handing over the entire working control of the mines, foundries, and all accounts connected therewith, to a competent foreign staff’?1 Or is the stagnation o f the modern Chinese economy, of which the demise of Hanyehping is a symbol, to be laid as Mao Tse-tung would have it to ‘imperialist aggression upon China . . . imperialist opposition to China’s independence and to her develop­ ment of capitalism’?2 I would suggest that we acknowledge the obvious; if an explanation is seemingly a platitude, it is not for that reason only less worthy of our attention. The internal or domestic causes of the collapse of Hanyehping were inextricably tied to the external or international causes. Only the existence of the former in fact made it possible for the latter to have their effects, and in turn without the latter the former might have been more easily overcome. Under the category of internal factors, consider in turn the manage­ ment, political milieu, and financial circumstances o f Chang Chihtung’s and Sheng Hsuan-huai’s Hanyehping. The critical consideration here is that the establishment of some­ thing outwardly so startlingly new as a modern western-style iron and steel plant did not in its essential managerial aspect represent a sharp institutional break with traditional forms of economic enterprise in Ch‘ing China. The factory building at Hanyang with its belching smoke-stacks undoubtedly awed the peasantry of the surrounding countryside, but little that went on in the ‘board room’ would have surprised the denizen of the official yamen. That Chang Chih-tung in planning the venture should have felt fully able to instruct Liu Jui-fen, the Chinese Minister in London, about the kinds of equipment to be purchased is only an example of the omnicompetence that every Confucian official claimed. That, without any analysis of the composition of Chinese ore and coal, he ordered Liu to obtain the type of equipment used in British works because the British were undoubtedly the leading producers of iron and steel, underlines sharply the nontransferability of competence in matters o f jen-ts'ai—selecting ‘men o f talent’, the traditional mark o f a superior official—to matters of modern industrial technology. Hanyang was long to be plagued with Bessemer converters unsuit­ able to the high phosphorus ore o f Tayeh, and by the discovery, too late, that Ma-an-shan coal on which it had counted, could not be coked. Similarly, it was Chang who decided that the plant should be located at Hanyang, without taking into account the high cost of assembly of ore and coke.3 To make matters worse, the site that he 1 North-China Herald (Shanghai), March 5, 1897, p. 406. 2 ‘On New Democracy’, Selected Works o f Mao Tse-tung, London, 1954-56, Vol. 4, p. 173. 3 Sheng Hsuan-huai, by the way, favoured locating at Tayeh—perhaps because he owned considerable land there.

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chose was low and almost marshy. Large unexpected sums had to be expended on drainage and extra-heavy foundations; and for all that the area was too cramped for efficient operation. Chang Chih-tung was not entirely unaware of the economic implications o f his choice o f site, but he made his decision primarily on a political basis. Given the passivity and demoralization of the Chinese bureaucracy in the late nineteenth century, it was desirable to have things where he could inspect them personally—where could be better than directly across the river from his yamen ? More generally stated, the industrialization effort in late Ch‘ing China was not accompanied by the emergence of autonomous economic and technical roles, clearly differentiated from the political roles which were accorded the highest prestige and power in Chinese society. In other environments, for example in contemporary Japan and Russia, where the national government was ideologically and politically capable of taking a lead in promoting economic develop­ ment, perhaps the emergence of a genuine entrepreneurial bourgeoisie was less critical. In China, however, the overwhelming political weight of the scholar-gentry elite was opposed or indifferent to industrialization. Even those few regional leaders who like Li Hung-chang and Chang Chih-tung promoted modern enterprises did not represent a real break with the Confucian disregard for secular economic development. They were rather, it seems to me, representatives of that pole of Confucianism which I have elsewhere termed ‘Confucian raison d'etat' in distinction from the opposite pole of ‘Confucian general will’.1 Li and Chang in their advocacy of active measures of ‘self-strengthening’ (tzu-ch'iang) in order to ‘enrich and strengthen the state’ (fu-eh'iang) were really only modernday Wang An-shihs. Like Wang, they emphasized those elements of the Confucian ideology that were primarily political, that corres­ ponded to the interests of the Chinese state as a highly organized bureaucracy. While the term ‘Legalist’ may be misleading, it carries the overtones that I want to convey. Theii opponents, those who resisted innovation, tended to oppose to the active prescriptive regulation of the bureaucratic state the Confucian ‘general will’—the old ideal of governing by moral example, by personal excellence, that was perhaps more in line with the interests o f the overwhelmingly large part of the educated 61ite who were not actually in office, or not in office at the political centre. That the issue between the activists and their antagonists should in this instance have been the intro­ duction of railroads and heavy industry is almost incidental. It is not anomalous therefore that Chang Chih-tung who advocated Chinese 1 Albert Feuerwerker, ‘The Paradox of Imperialism in Modem China’, 1959 Conference on Political Power in Traditional China, Conference Paper No. 9, dittoed, pp. 51-53.

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learning for t‘i (‘substance’, ‘essence’) and western learning for yrng (‘function’, ‘utility’) should have perpetuated the essence of Chinese bureaucratic practice in an enterprise whose function was alien to Chinese culture. This ‘compromise’ with traditional institutional arrangements was perpetuated in the kuan-tu shang-pan format in which Hanyehping appeared from 1896 to 1908, and on into the shang-pan period that followed. In the stable old society the dominant place of the gentryofficial was unchallenged and the stigma attached to the ‘merchant’ role unqualified. But in the late Ch‘ing, in the face of foreign en­ croachment, and with the development in the treaty ports of a new type of ‘merchant’ who had accumulated funds from foreign trade and its ancillary services, the relationship shifted somewhat. Under the ‘official supervision’ of regional or local officials ‘merchant management’ of modern-type enterprises might be attempted. The partnership was an unequal one, however, and not every compradore would risk his money in a firm dominated by official persons and practices. If kuan-tu shang-pan was a transitional step towards the modern case of clearly defined official and merchant roles, with both legal protection and social prestige now adhering equally to the latter, it was a transition manque. Sheng Hsuan-huai as tu-pan (director-general) of Hanyang held an official position; he had an appropriate seal issued by the Board of Rites (Li-pu) to prove it. In 1908 when he registered the newly amalgamated Hanyehping Company as a wholly private firm with the Ministry of Commerce, he requested and received another official seal, in replacement for the first, which designated him ‘Chairman, Board of the Directors, Hanyehping Coal and Iron Company, Limited’. Sheng at the head of Hanyang and of his other kuan-tu shang-pan enterprises was simultaneously the principal representative of the official supervisor (Li Hung-chang or later Chang Chih-tung) and the principal representative of the ‘merchant’ shareholders. And he was also the largest individual investor in each of these firms, holding for example 30-40 per cent of the shares of Hanyehping. The other shareholders prior to 1908 consisted largely of those who also had put their money into the China Merchants’ S.N. Company, the Hua-sheng Spinning and Weaving Mill, and Sheng’s bank and telegraph company. In addition, at times the corporate funds of these other firms were also invested in or lent to Hanyehping. The China Merchants’ Company, for example, in 1908 held 51,400,000 of the shares of Hanyehping, to which must be added several hundred thousand dollars of short-term notes. The principal investors were a small group, and in the case of Hanyehping at least there was little questioning of Sheng Hsuan-huai’s domination of the firm’s affairs. Why should there be? First as head of the Imperial o 97

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

Railway Administration and later as Minister of Posts and Com­ munications, was he not in a position to throw big orders the company’s way? And even without the orders, had he not arranged it when acquiring the ironworks for next to nothing in 1896 that the ‘merchant’ shareholders including himself would receive a guaranteed annual dividend on their shares of at least 8 per cent regardless of what the company’s books showed? After 1908 there was some new investment in Hanyehping and a new influx of shareholders. Share­ holders’ meetings were held which chose a board of directors to run the company. But, except on the very clear-cut issue of rejecting the 1912 joint operations agreement with Japan, Sheng until his death was never really challenged. There was much in the running of the company that was reminis­ cent of an official yamen. Chang-Chih-tung may have erred originally in ordering the equipment he did because of the lack of competent advice. Few Chinese trained in mining and metallurgy were available. Hanyang’s plant manager, V. K. Lee (Li Wei-ko), one of the few exceptions, was much sought after by Yuan Shih-k'ai and others who were anxious to staff their own enterprises and Sheng had a difficult time fending off the raiders. But of the variety o f official sinecurist there were many, as an observer in the early Republic reported: ‘Hanyehping’s mining and smelting operations are complex. Not only do these matters require engineering experts, but the company’s managerial functions also call for men versed in industry and com­ merce. But the men who run the company now are all incompetent ex-officials who came along on the coat tails of Chang Chih-tung and Sheng Hsuan-huai. They are out only to enrich themselves, and care nothing about the condition of the company.’1 Another report printed in the newpaper Shih-pao on March 4, 1913 stated: ‘Although Hanyehping is nominally a shang-pan company, its corrupt practices are more egregious even than those of an official bureau. Whenever the director-general of the company comes to the plant, the whole premises are elaborately decorated and refurnished. The company officials in their full regalia line up to greet him. Each time the wining and dining squanders two or three hundred dollars which is simply charged to the company’s accounts. Under the directorgeneral, there are also a general manager and an assistant manager, drawing monthly salaries o f as much as Tls. 1,000. In addition, the company pays for fancy sedan chairs, a host of private guards, placards, and all the furniture, equipment, food, tobacco, and wine used in their offices. 1 Quoted in Wu Ching-ch‘ao, Chung-kuo ching-chi chlen-she chili lu (The path of China's economic reconstruction), Chungking, 1943, p. 26.

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‘In the company’s three divisions—Hanyang, Tayeh and P'inghsiang—there are at least 1,200 officials and executives. Most of them are Sheng Hsuan-huai’s proteges, and the relatives o f his con­ cubines. Their only forte is enriching themselves. . . .’l Hardly startling to those of us living in an environment in which fat expense accounts are increasingly the order o f the day. The point is, of course, that Hanyehping never went through the prior stage, before the expense accounts, when a firm established itself sufficiently well to have the wherewithal to reward its executives so handsomely. From sharp practice and incompetence the step to deliberate corruption is a relatively small one. There is a difficulty, however, in that much of what the European denizens of the treaty ports con­ sidered ‘corrupt’ reflected not so much dishonesty as the traditional practices o f a society in which the particularism of personal relations and matters of ‘face’ had not yet succumbed to the universalism of the dollar. Nevertheless the personal profit that Sheng Hsuan-huai made, with Japanese blessings, each time he arranged a loan for the ironworks was manifestly misuse of the company’s funds. He was not alone. Hanyehping assets were used in private ventures by many and each covered up for the others. The Yangtze Machine Works in Hankow, for example, was established with machinery and funds simply transferred from Hanyang by officials of the ironworks; and the profits of the new firm were distributed among these men although not one had personally invested as much as a copper cash. The essence of the situation seems to be that neither Chang Chihtung nor Sheng Hsuan-huai really comprehended what they were getting into when they undertook Hanyehping. I see little reason to doubt the genuineness of their expressions of concern about China’s weakness and the threat of foreign encroachment, although in Sheng’s case at least this was not the only motive that set him on the path of industrial promotion. Chang was overwhelmed by the cost of opening and operating an iron and steel plant and got out. If Hanyehping proved profitable to Sheng both as shareholder and as manager, this could only be the case so long as he kept the company running. He certainly did not grasp how difficult that would be, ‘but once affairs had devolved into my hands, though I might want to put them down, I was not able to do so’. It may be that the gradual realization of how really unpropitious the economic and political environment was in late nineteenth century China for the long-term growth of the firm served to shift the balance ever more completely in the direction of practices which, in a vicious circle, further obstructed that growth. 1 Reprinted in Wang Ching-yii, p. 474.

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IV

Hanyang was the undertaking of a provincial official, Chang Chihtung. Chang, like Li Hung-chang, was not simply a local agent of the imperial government in Peking. Consequent to the great Taiping Rebellion of the mid-nineteenth century both had developed strong regional power structures which presented a sharp contrast to the passivity and weakness of the Manchu Court. But neither was Chang in a position to command all the facilities and resources potentially available to the central government. In Japan the highest officials of the Meiji government were intimately concerned not only with the establishment of Yawata, but even with the details of the negotiations with Sheng Hsuan-huai which sought to assure the government iron and steel works a stable ore supply. If Sheng was reluctant to borrow openly from the Japanese government, the government would oblige him, as it did for example in 1907, by lending to Japanese capitalists who in turn would lend to Hanyehping. In brief, the Meiji leadership considered Yawata of great strategic importance and made every effort to assure its success, while the Manchu government was unable even if it had been willing, to offer more than token help to establish Hanyehping on a firm foundation. Chang Chih-tung and Sheng Hsuan-huai were able to win a number of superficially important concessions from Peking on behalf of the ironworks: very favourable terms for the repayment of the official investment prior to 1896, a monopoly of the sale of rails and other iron and steel products to government railroads and arsenals, tax exemptions, prepayment for rails to be ordered by the Lu-Han rail­ road, the sole right to exploit the Tayeh-hsien ore deposits and the P‘inghsiang-hsien coal mines, and in 1908 the ‘investment’ of addi­ tional government funds as well as preferential rates on the P'inghsiang railroad which had now been nationalized. While these con­ cessions may well have served to guarantee or increase the yield to Sheng Hsuan-huai and his associates, they did not have an equally significant effect on the growth of Hanyehping into a major industrial enterprise contributing to the development of the Chinese economy. What kind of a backhanded help to economic development, for example, was it for a favoured firm to be exempted from a 10 per cent levy on manufactures that in theory was assessed on all foreign and Chinese factories but which the foreign-owned firms of course did not pay? And how much the worse when the exemption was granted in part in response to the specious argument that mining ore, smelting pig-iron, and making steel were not really ‘manufacturing’ because unlike the process whereby a cocoon is unwound to produce raw silk, the raw silk spun into thread, and the thread woven into cloth, etc., ‘the basic essence of the raw material has not been 100

CHINA’S NINETEENTH-CENTURY INDUSTRIALIZATION

altered’! Note also that apart from the Lu-Han line the company’s nominal monopoly of the sale of steel rails to government railroads was often limited in fact. China’s railroads were overwhelmingly built with foreign loans, and it was the rare loan contract that did not qualify the extent of Hanyang’s privilege in this regard with such clauses as ‘in case terms and prices (including freight and insurance charges) are such as though these materials and supplies had been ordered from abroad’ (Chengtingfu-Taiyuanfu railroad, 1902), or ‘provided price and quality are suitable’ (Shanghai-Nanking rail­ road, 1903). And railroads undertaken by provincial and local authorities, as the Hu-pu pointed out in 1896, could not in any case be coerced into buying from Hanyang unless its products were equal both in quality and price to European materials. Given Hanyang’s higher costs resulting from its small-scale, excessive cost of assembly of raw materials, and inexperienced and sometimes culpable manage­ ment, it was able to compete with foreign suppliers of rails only by selling at a loss. What the Peking government did not do for Hanyeh­ ping, in short, was more critical than what aid it was in fact able to proffer. Peking after the humiliating defeat by Japan in 1894-95 might verbally encourage the introduction of modem industry. But such measures as the 10 per cent excise on manufactures referred to above which in practice fell only upon Chinese-owned firms, did not foster the establishment of an expanding base of manufacturing establish­ ments which might have provided a domestic market for the iron­ works’ output. This was stupidity or more likely a sign that the dynasty’s conversion to western techniques was superficial indeed. But beyond the Court’s fatuity lay its very real weakness vis-4-vis both the foreigner and the local gentry. Negotiating from weakness, no better railroad loan terms were possible to Sheng Hsuan-huai who represented the Peking government in most of the railroad negotia­ tions with the European powers. Nor, having lost its tariff autonomy in 1842, could the Chinese government adopt a high protective tariff to shelter such an infant industry as Hanyang. And the danger of upsetting the central-local balance which, to the detriment of Peking, had evolved since the Taiping Rebellion was amply revealed by the consequences of Sheng Hsuan-huai’s schemes for railroad national­ ization. Putting under Peking’s direct control provincial railroad lines which were badly managed and which, moreover, often refused to buy their rails from Sheng’s firm might have seemed an ideal way to bring large orders to Hanyehping.1 But these plans instead brought 1 Hatano Yoshihiro makes a good deal of this point in Chapter 5, ‘The Establishment and Development of the Hanyang Ironworks and the Railroad Question’, of his Chugoku kindai kogyo hattatsushi no kenkyu (Studies on the early industrialization of China), Kyoto, 1961.

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on the 1911 Revolution which resulted in severe physical and financial damage to the ironworks. This was neither the first nor the last time when the inability of the government to guarantee mere civil order had serious consequences. It was in part due to the dis­ ruption of work on the Lu-Han railroad by the Boxer uprising of 1900 and the consequent large unsold inventory of steel rails, that Hanyang first considered selling part of its pig-iron output in Japan rather than converting it into steel. And the disruption of rail transport due to civil war between 1916 and 1927 added to a cost of assembling raw materials that was already very much out of line. In one other, perhaps most important respect—the provision of direct financial support—Peking was also helpless. The Ch‘ing government was almost bankrupt; it had little to invest in establish­ ing modern-type enterprises. If, as has been suggested, the situation before 1895 was already bad, the effects of China’s defeat in 1894-95 and of the Boxer uprising were disastrous. Repayment of the Japanese indemnity loans and the Boxer payments from 1896 until 1911 amounted to what was in effect a capital drain from the Chinese economy of 473,216,988 Kuping taels,1 three times the total estimated capital invested in all modem manufacturing and mining enterprises in China, Chinese and foreign-owned, at the end of the Manchu dynasty!2 Moreover, these payments were secured on the customs revenue with the result that the Imperial Maritime Customs came to exist chiefly as a collecting agency for China’s creditors, thereby immobilizing almost the only fiscal leverage with which economic development might have been assisted (had there been any real desire or ability to do so on the part of the Chinese government). Hu-pu allocations to the kuan-pan Hanyang ironworks ceased because of the fiscal demands of the Sino-Japanese War and the huge indemnity which followed it. Sheng’s semi-official firm could obtain no financial help for the same reason. And Yuan Shih-k‘ai’s plan to nationalize Hanyehping, which (if it had worked— surely a doubtful matter) might have reduced its dependence on Japanese loans, foundered on the same rocks. v Even after the P‘inghsiang colliery was discovered and expensive modern equipment (including 300 Otto-Koepe coke ovens and a 200-ton briquetting plant) installed with the aid of a large German loan, one of Hanyang’s chief problems continued to be the supply of 1 See Hsu I-sheng, Tsung Chia-wu chan-cheng tao Hsin-hai ko-ming shih-ch‘i Ch'ing cheng-fu ti wai-chai (The foreign indebtedness of the Manchu govern­ ment, 1894-1911), Ching-chi yen-chiu (Economic research), 1957. 4, pp. 111-41; 1957. 5, pp. 134— 55; 1957. 6, pp. 137— 47 and tables. 2 See p. 84 supra.

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CHINA’S NINETEENTH-CENTURY INDUSTRIALIZATION

fuel for its furnaces. The ironworks no longer was forced to shut down periodically due to the lack o f coke, as was the case prior to 1900 or thereabouts, but P’inghsiang coke by the time it arrived at Hanyang had cost the company about 11 taels a ton ($14-00) before 1906, increasing to about $17*00 by 1919. While this was cheaper than K ‘aip‘ing and Japanese coke, and more certain of supply, onehalf of the total cost of producing a ton of pig-iron was still accounted for by coke. A Japanese controlled M anchurian ironworks in 1915 used 55-74 worth of coke to produce a ton of pig, but the cost to Hanyehping in 1919 for a similar amount of coke was S24-54.1 Since both firms obtained their raw materials from their own ‘captive’ mines, it is not likely that the difference was due to market fluctuations between the two dates. P'inghsiang coke was expensive because the costs of mining coal, transforming it into coke, and— above all else—transporting it to the ironworks at Hanyang were extremely high. Transportation charges to Hanyang, for example, were as much as $6-00 per ton of coke. And note that the cost of bringing iron-ore from Tayeh was also high. In sum, the location of the ironworks was poorly chosen. The choice, as we have seen, was a political decision by Chang Chih-tung rather than an economic one. Its untoward consequences were com­ pounded by the very slow progress in building the Canton-Hankow railroad which would have reduced the cost of transporting coke from P‘inghsiang. Even the existence of efficient water transport from the terminus of the P'inghsiang railroad would have helped, but as late as 1914, three-fourths of the coal and coke was shipped by native boats rather than steam tugs and lighters.2 The excessive cost of assembling coke, ore, coal and other raw materials at Hanyang meant that the price that the ironworks would have to get for its iron and steel in order to show a profit might well be in excess of the market price set by more efficient producers. Other factors also contributed to the cost pressure at Hanyehping, among them the large proportion o f short-term high interest in­ debtedness in the company’s capital funds. The cost of servicing this 1 In 1919, the cost of production of a ton of pig-iron at Hanyang was as follows: Coke $24-54 Ore 6-55 Manganese, Limestone, etc. 5-86 Direct labour 0-53 Supplies, repairs, replacement of tools, power, etc. 5 •82 Overhead charges 2-33 Interest on capital outlay 2-77 Total S48-50 See D. K. Lieu, China's Industries and Finance, Peking, 1927, pp. 207, and 197-219. 2 Ku Lang, ch. 3, p. 49.

103

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

debt in 1907 was estimated at Tls. 600,000-700,000 a year. Strictly speaking, interest is a reward to the creditor of a firm rather than part of the cost of production. But it would be misleading to ignore the fact that, whatever accounting theory might hold, Hanyehping needed a higher selling price to break even because of the burden of interest charges of from 9^ to 13 per cent. The company’s history includes several instances of major borrowing to pay interest on previous loans, thus setting up a vicious circle of indebtedness. Also serving to increase costs were the growing obsolescence of the plant and the relatively small scale of operation. Because Hanyeh­ ping did not have an adequate system of accounting, the deprecia­ tion of its plant was not reflected in the company’s financial reports before 1908. The annual depreciation charge of 5 per cent on the physical value of the plant adopted in later years (based on Gustav Leinung’s probably inflated 1909 appraisal of Tls. 48,170,000 [S64 million]) was not, however, an actual depreciation reserve from which the company’s old equipment could be replaced. While new blast furnaces were added at Tayeh after World W ar I with Japanese loans and largely with the purpose o f producing for the Japanese market, the plant at Hanyang and the P'inghsiang mining and coking installations grew increasingly antiquated without replace­ ment. Very low direct labour costs—only slightly more than I per cent of the total cost of iron production in 1919 and 3 per cent in the case of steel1—did not significantly counterbalance the high cost pressures just discussed. In any case the ‘cheap labour policy’ common to Hanyehping and other Chinese and foreign enterprises in the treaty ports probably had a negative long-run effect on China’s industrial development. Low wages of course are natural in the early stages of industrialization, if for nothing else because of the inexperience of the labour force and its low productivity. Retention of very low wage rates after the labour force has acquired a greater measure of experience, however, perpetuated a high labour turnover and made the worker reluctant to sever all ties with his agricultural village, which continued to offer him a measure of support and income in times of industrial slow down. This then neatly confirmed the employer’s belief that the worker ‘can live on a handful of rice’. Moreover, raw labour required larger expenditures on supervisors and management—often scarce (and thus expensive) foreigners, as at Hanyang and Tayeh where 15 per cent of the total expenditure on salaries and wages in 1913 went to non-Chinese technical and supervisory employees—and this became a further excuse for not raising wages. The convention of low wages in turn partly justified itself by preventing a rise in labour efficiency. The scarcity and 1 D. K. Lieu, pp. 204, 217-18.

104

CHINA’S NINETEENTH-CENTURY INDUSTRIALIZATION

expense of management inhibited the adoption of labour-saving production methods, and thus the growth of production in general. In the face of. a severely limited domestic market for its iron and steel products—limited by the absence of metal fabricating indus­ tries, by the relatively strong position of foreign imports, which in addition to having lower initial production costs were favoured by the treaty tariff, and by the extensive control which railroad con­ cessionaries had over the purchase of materials—Hanyehping was obliged to sell at or below a market price that was often less than its cost of production. Sheng Hsuan-huai’s plan, for example, to sell rails to Chinese railroad projects at prices in line with Hanyang’s higher costs with the promise of a refund when costs were reduced in the future could not be carried out. Deficits in the company’s operating account at the end of a year were common, and could only be partially concealed or minimized by alleged gains in its net worth which in fact resulted from the failure to depreciate fixed capital adequately. In 1913, for example, the company’s reported loss for the year was SI ,538,390 (seeTable IX). Actually the deficit between income (largely from sales) and all expenses (including dividends, interest, and nominal depreciation) was Tls. 2,943,658 (say 53,918,000). Only by deducting an alleged gain of Tls. 1,791,499 (say 52,380,000) in net worth was the figure $1,538,390 derived.1 Meanwhile, of course, the company continued to pay a guaranteed dividend to its shareholders, with special treatment to the holders of ‘Class I old shares’, i.e. to Sheng Hsuan-huai and his associates. In those years, such as 1916, when actual cash was not available, the dividend might be paid partly in cash and partly in stock.2 The insiders, in brief, continued to profit in this and other ways (see pp. 98-99 supra) even though it was well known to the public that Hanyehping was in trouble and the company’s shares were being quoted at less than half of their face value. In these circumstances how does one account for the repeated statement at the company’s meetings by its officers that Hanyehping’s problem was that its output of pig-iron and steel was too small for the potential demand, and that what the firm needed was increased capital to permit its expansion ?3 I would guess that in part such statements reflected the problem that Sheng Hsuan-huai faced in keeping Hanyehping in business. Nothing at all would be forthcoming to those with vested interests in the firm unless it could continue to operate. But operating funds were difficult to obtain. Outsiders, potential investors, were obviously 1 See p. 92, n. 2. 2 Wu Ching-ch‘ao, p. 28. 3 For example, to the annual meeting in Shanghai on April 13, 1912 at which 380 shareholders were present. North-China Herald, April 20, 1912, p. 174. At this meeting, Shcng was re-elected to head the company.

105

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

hesitant to sink their money into an enterprise that the insiders were milking, which operated at a loss, and which had incurred a heavy indebtedness since 1898 in order to increase its output capacity in anticipation of large purchases by provincial railroads which never materialized. Promises of a rosy future—at least 35 million tons of rails and accessories would be needed to give China a railroad net­ work comparable to that of the United States!—did not, however, attract any new investment. The company was forced, for working capital and to expand its plant to accommodate the Japanese market, to continue short-term borrowing in Shanghai and Hankow at high interest and to increase its commitment to supply ore and pig-iron to Japan in return for the loan of critically needed funds. The former meant a vicious circle of ever higher debt charges; the latter skewed the structure of the Hanyehping Coal and Iron Company making the Hanyang ironworks which would normally have been its core increasingly superfluous, and hindered the company from taking full advantage of the boom in the iron and steel industry that accom­ panied World W ar I. VI

Hanyehping’s borrowing from Japanese lenders during 1902-13 is shown in Table XI, with those loans for which repayment was to be executed by the sale of ore or pig-iron to the Japanese government ironworks at Yawata so indicated.1There was no such thing as a purely commercial or private loan to Hanyehping; at every point in the negotiations Japanese consular and diplomatic officials in China were in communication with the Foreign Ministry and the Ministry of Agriculture and Commerce. It was a decision taken at the highest level of the Japanese government that Japan would seek to secure control of the Tayeh and P‘inghsiang mines and to this end would advance loans to Sheng Hsuan-huai on favourable terms.2 The essen­ tial consideration on the Japanese side was to secure a permanent supply of iron-ore for the Yawata ironworks. Tayeh ore, the best of which had an iron content of 65 percent or more, could economically be shipped to Japan (in contrast to lower grade M anchurian ores which became quite accessible to Japan following the RussoJapanese War). In the usual form of loan agreement between the Yokohama Specie Bank—Sheng Hsuan-huai would not agree to a formal 1 Sources of Table X I: Ku Lang, ch. 1, pp. 95-97; Wang Ching-yu, facing p. 120; Hsu I-sheng, 1957. 6, pp. 137-47 and tables. There are many discrepancies among these sources, so that the data in Table XI are at present only provisional. Japanese loans to Hanyehping continued down to 1930; the company also borrowed in lesser amounts from other foreign lenders. 2 Katsura (Foreign Minister) to Sone (Finance Minister) and enclosures, August 22, 1905, Nihon gaiko bunsho, v. 38, pt. 2, #1117, p. 207.

106

T a b le

XI

J A P A N E S E L O A N S T O H A N Y E H P I N G , 1 9 0 2 -1 3 ( G O L D Y E N ) D ate 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

1902 J a n u a r y 15, 1904 J u n e 1905 F e b ru a ry 28, 1906 M a y 1, 1907 J u n e - N o v e m b e r 1908 S e p te m b e r 10, 1910 N o v e m b e r 17, 1910 D e c e m b e r 28, 1910 M a rc h 31, 1911 S e p te m b e r 30, 1911 F e b ru a ry 10, 1912 J u n e 13, 1912 D e c e m b e r 7, 1912

15. D e c e m b e r 2, 1913 16. D e c e m b e r 2, 1913

L ender

A m ount

O k u ra 250,000 J a p a n In d u s tria l B an k 3 ,000,000 O k u ra 300,000 M itsu i B ussan K a is h a 1,000,000 O k u ra 2 ,000,000 Y o k o h a m a Specie B a n k 2 ,000,000 Y o k o h a m a S pecie B a n k 1,000,000 Y o k o h a m a Specie B an k 1,227,125 M itsu i B u ssan K a is h a 1,000,000 Y o k o h a m a S pecie B an k 6 ,000,000 M itsu i B u ssa n K a is h a 100,000 Y o k o h a m a S pecie B a n k 3,000,000 Y o k o h a m a S pecie B a n k 500,000 Y o k o h a m a S pecie B a n k T ls.2 ,500,000 Y o k o h a m a Specie B a n k Y o k o h a m a S pecie B an k

6 ,000,000 9 ,000,000

R epaym ent

Interest ( %) 8

6 7i

7i 7} 7i 1 1

12 m o n th s 30 y ea rs. (S ale o f o re to Y a w a ta ) 2 y ea rs 3 y ea rs, 11 m o n th s 8 y ea rs 10 y e a rs. (S ale o f o r e to Y a w a ta ) 10 y ears. (S ale o f o re a n d p ig -iro n to Y a w a ta ) 15 y ea rs

9

?

6

15 y e a rs. (S ale o f p ig -iro n t o Y a w a g a ) 2 y e a rs 30 y ea rs. (S ale o f o re to Y a w a ta ) 5 y e a rs 30 y ea rs

8}

6 6}

6 7 7

40

e a rs ^ o re anc* pig~iro n to Y a w a ta y ea rs i , s a(j (jjt jo n a i s a je 0 f o re an(j p jg . 4 0 v ea rs I : j ir o n f o r 4 0 y e a rs.)

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

government loan—and Hanyehping, the Chinese company was granted a loan from the bank of a stipulated amount, for the repay­ ment of which certain of the properties of the company (and later its whole assets) were mortgaged. The funds paid for ore and pig-iron by Yawata were in turn deposited with the bank and from them principal and interest on the loan would be paid. Normally Yawata contracted to pay approximately the current market price for ore and pig-iron, but the price agreements might be relatively inflexible, running for a year or more at a time. And the market prices in the case of pig-iron might, as we have seen, be less than the Chinese cost of production. In later loans increased supervision of Hanyehping by Japanese advisers was provided for. The problem was that Hanyehping was unable to repay these loans in the manner provided. Take the 1904 agreement as an example. The first year’s interest on ¥3 million at 6 per cent would be ¥180,000. At the agreed-upon price of ¥3-00 for first-grade ore, Hanyehping would have had to export to Yawata 60,000 tons of first-class ore (or a larger tonnage of second-grade ore at ¥2-40 a ton) in order to pay the interest alone. The actual export of ore in 1904 was 38,703 tons. Add the 1908, 1910, 1911, 1912 and 1913 loans, the last including a provision for the additional sale of 17 million tons of ore and 8 million tons of iron, and it is obvious that Haneyhping could never export enough to repay both interest and principal. Yawata from 1900 on received an enormous quantity of ore from Tayeh and a smaller but significant amount of pig-iron, and Sheng Hsuan-huai in turn received funds with which to keep the company operating. But Hanyehping fell deeper and deeper into debt to its Japanese creditors, who thereby secured that control over the company which they had originally sought. It is estimated that as of 1934 the still out­ standing principal and interest on the loans numbered 2, 6, 7,10,12, 15 and 16 in Table XI was ¥44,195,381—one and one-half times the original principal!1 In addition, although the output of the company grew until the end of World War I, it played a less and less significant role in the domestic economy of China. The production of iron-ore and pig-iron for export became the sine qua non of Hanyehping’s existence. Over the years 50 per cent or more of Tayeh’s ore was regularly shipped to Japan—between 1893 and 1934, a total of 7,570,000 tons or 64 per cent of the aggregate production of 11,767,241 tons. And of the portion of the iron-ore output smelted at Hanyang, most of the pigiron produced also went to supply the steel plants of Japan. When the Japanese market for ore and iron collapsed in the early 1920’s, Hanyehping fell with it. 1 Wang Ching-yii, facing p. 120. The gold yen (Y) was approximately equivalent in value to the silver dollar ($) current in China’s treaty ports.

108

CHINA’S NINETEENTH-CENTURY INDUSTRIALIZATION

It has been asserted1 that foreign capital sent abroad to under­ developed areas in the past century has tended overwhelmingly to be invested in export industries in the recipient countries, or in non­ productive tertiary activity. This allegedly has had the effect of reinforcing the position of the native landowning class who were the chief gainers from the commercialization of agriculture. Their now increased income from tenant rents, however, was not invested in industrial development but was utilised in much the same way as in the past: in hoarding at home (real estate in the treaty ports, land concentration) and now also more safely abroad (in foreign banks and securities); and in luxury consumption (import surplus). The proliferation of foreign export industries is said to have the further effect of drawing native capital into intermediary tertiary activities, such as petty trade ancillary to the foreign firms, and as a consequence is alleged to short-circuit the rest of the economy by drawing off talent and capital that might have been employed in more productive investments. At the extreme, the result of this process is a lop-sided development of the recipient economy which comes to specialize in one or more agricultural or mineral exports, the market for which is extremely sensitive to foreign business cycles. As compared with such areas as Burma, Indonesia, and Latin America where specialized exports did occupy a major place in the economy, this formulation is hardly applicable to China. Yet while the Chinese macrocosm was barely touched by foreign trade and capital movements and little foreign capital went directly into export industries, at the microscopic level certain regions and some prom­ ising individual enterprises such as Hanyehping seem indeed to have been affected and distorted in the manner suggested. Hanyehping, it has been said, missed its biggest chance to get on to its own feet during World War I when, bound by pre-war agreements to supply ore and pig-iron to Japan at relatively inflexible prices, it was unable to take advantage of the tremendous increase in the world market price for pig-iron. This seems to have been only partly the case.2 The company did manage to negotiate a price increase with Japan. If it still delivered ore and iron at artificially low prices, these were high enough to yield large profits during the war (see Table IX)—profits which might have been used to repay in part the company’s indebtedness to its Japanese creditors, but which were instead distributed as extra dividends to its officers and shareholders or used to purchase worthless mining property. The lesson of Hanyehping is that the bite of the imperialist wolf is 1 For a summary of theories of economic ‘underdevelopment’ see Benjamin Higgins, Economic Development: Principles, Problems and Policies, New York, 1959, pp. 265-431. 2 See Wu Ching-ch‘ao, p. 24.

109

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

as bad as his bark, but who lets him in in the first place! ‘They themselves (the Chinese) let the Japanese in to begin with. They hopelessly mismanaged the business, refusing Japanese and other foreign advice as to its proper conduct. Their vanity prevented them from letting foreigners manage the business, and reckless borrowing, combined with corrupt methods, has ended in practically irretrievable m ortgage of property that ought for years past to have been pouring revenue into the public treasury, and which in the future would have proved a mine of wealth, ’i O f course, the Peking correspondent of the North-China Herald who is speaking here is put out that Japanese interests rather than, let us say, the British-controlled Peking Syndicate had gained an influence over Hanyehping. And he is all too sanguine, in the proper treaty port manner, about the ability and honesty of his brethren as com pared with the naturally avaricious Chinese. F o r all that, he summarizes this paper excellently.

SELECTED BIBLIOGRAPHY OF WORKS IN ENGLISH ON CHINA S EARLY INDUSTRIALIZATION Allen, G. C., and Audrey G. Donnithorne, Western Enterprise in Far Eastern Economic Developm ent: China and Japan, London, 1954. Carlson, Ellsworth C., The Kaiping M ines (1877-1912), Cambridge, Mass., 1957. Chen, Gideon, Tso Tsung-Cang: Pioneer Promoter o f the Modern D ockyard and the Woollen M ill in China, Peiping, 1938. Fairbank, J. K., Eckstein, A. and Yang, L. S., ‘Economic Changes in Early Modern China: An Analytic Framework’, Economic Development and Cultural Change, 9. 1 (October, 1960), pp. 1-26. Feuerwerker, Albert, China's Early Industrialization: Sheng Hsuan-huai (.1844-1916) and Mandarin Enterprise, Cambridge, Mass., 1958. ‘Materials for the Study of the Economic History of Modern China’, Journal o f Economic H istory, 21. 1 (March, 1961), pp. 41-60. Fong, H. D., Cotton Industry and Trade in China, 2 vols., Tientsin, 1932. Kent, P. H. B., Railway Enterprise in China, London, 1907. Levy, Marion J. and Shih Kuo-heng, The Rise o f the Modern Chinese Business Class, New York, 1949. Lieu, D. K., China's Industries and Finance, Peking, 1927. The Growth and Industrialization o f Shanghai, Shanghai, 1936. Liu, K. C., Anglo-American Steam ship Rivalry in China, 1862-1874, Cambridge, Mass., 1962. Remer, C. F., Foreign Investments in China, New York, 1933. Sun, E-tu Zen, Chinese R ailways and British Interests, 1898-1911, New York, 1954. 1 North-China Herald, March 14, 1914, pp. 759-60.

110

4 T H E C H IN E S E L A B O U R F O R C E IN T H E F IR S T P A R T O F T H E T W E N T IE T H C E N T U R Y JEAN CHESNEAUX

Docteur-es-lettres, Directeur d’Etudes k 1’EcoIe des Hautes Etudes (Sorbonne)

The Chinese labour force can draw the attention of the social and economic historian from many points o f view: one can take into consideration its economic relationship to the employers (wages, hours of work), its standard of life, its political capacity to play a role in national affairs, its ability to organize trade unions or political parties on a class basis. The following paper is only meant to under­ line various aspects of the recruitment, allocation and supply of this labour force in the first part of the twentieth century, namely during the period of the only serious attempt, and of the failure, of an industrial development in China—of course before the jiefang1 of 1949. At that time, the Chinese labour force was fundamentally ‘tran­ sitional’, and it closely reflected the uneven development of Chinese society at that time; some of its basic features already belonged to an industrial, modern society, but some others still connected it to a pre-industrial society o f the ‘old type’. I.

SOCIAL O R I G I N

OF THE W OR KER S

They are mostly of peasant origin, and much factual data supports this statement. We can for instance use several surveys made in the 1930’s. 189 printers of Shanghai, 1935 151peasants 985 miners from Zhongxing, Shandong (‘ligong’), 19312 503 1,025 miners from Zhongxing (‘waigong’) 768 51 rickshaw pullers of Shanghai, 1934 36 100 wharf coolies of Dairen, 1925 69 86 workers in a salt refinery near Tianjin, 1926 51

(79%) (52%) (75%) (71 %) (69%) (59%)

1 In this paper, the pinyin transliteration system, inthe form adopted officially in China since 1958, has been used by the author. Since 1958, this system has been the only one officially taught in the Paris Ecole Nationale des Langues Orientales. It has more generally the merit of providing a common basis for a unification of the many different systems used today in the various western countries. 2 For the meaning of these terms, see the appendix.

Ill

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

Similarly, the cotton mill hands in Shanghai were mostly peasants from the very poor rural area north o f the Yangzi (Jiangbei or ‘Kompo’ in the local dialect), and the women workers in the silk filatures near Wuxi came, 50 per cent at least from the villages around Lake Tai, and 30 per cent from the Kompo area. The workers of peasant origin did not by any means cut all their ties with their native land. Often, their families remained there and they sent a ‘family remittance’ every month which amounted to a rather high percentage of their earnings. Also, they frequently left the factory and went back to the village at the farming season. In a cotton mill in Tianjin, according to an investigation of 1931, the ratio of absenteeism rose from 6 per cent of the total manpower in winter, to 12 per cent in July, and the tin and antimony miners in Hunan had around 1925 the habit of hiring themselves as farm hands in the harvesting season. Sociological surveys also show that, in the budget of a working class family, travel expenses often amounted to a very high percentage, even among the poorest Shanghai workers. It is also significant that, at the time of a protracted strike, most of the workers went back to the villages, for instance during the shipping strike in Hong Kong in February 1922, during the mechanics’ strike in Hong Kong in 1920, or during the Japanese cotton mills strike in Shanghai in January 1922. In the case of the Japanese cotton mills in Qingdao in April 1925, the managers of the silk filatures o f this town found it more expedient, as a preventive measure, to send their workers back to their villages, with paid travel expenses. If the workers are mostly of peasant origin, a certain number of them also come from the skilled handicrafts. Among 32 old workers over 55 years of age the author had the opportunity to interview in China in the summer of 1957, in various places and various indus­ tries, six only were from a family of craftsmen: three railway workers o f the Jinghan line (one being the son of a Peking carpenter, one the son of a Peking blacksmith, and one of a Peking shoemaker), one sailor from Canton (son of a joiner from Hong Kong), one railway worker of the Lunghai line (son of a satin worker from the province of Henan), and one miner of the K.M.A. Company (son of a pottery worker from Tangshan). But, on the whole, the contribution of the handicraft workers to the modern working class is rather limited, for historical reasons related to the specific pattern of China’s industrial development. For the modem industries of China have not developed through a con­ tinuous process; they did not emerge step by step from the manu­ factures of the pre-capitalist period as was the case in Western Europe in the nineteenth century. These modern industries are the product of an outside intervention; whether created with foreign or national capital, they have been established as a general rule in the

112

THE CHINESE LABOUR FORCE

‘treaty ports’, often hundreds of miles away from the traditional centres of Chinese manufactures and skilled handicrafts, such as the textile towns of the province of Zhejiang or the pottery towns of the province of Jiangxi. This gap, both in terms of economic history and of economic geography, this lack of continuity between the Chinese pre-capitalist and proto-capitalist industries of the eighteenth century and the Chinese modern industries o f the twentieth century is very important in many respects; especially, it accounts for the small number of handicraft workers driven directly to the factory by the collapse of their guild economy, through a process which was common in western European social life a century before. The last, according to its traditional social status in China, but the second, according to its strength, of the social strata which gave birth to the Chinese modern working class, is the group of the ‘urban poor’, namely the many categories of non-qualified workers, un­ employed or underemployed, and destitutes of many kinds, who had settled in the big towns of the Far East long before their indus­ trialization, as in Canton or Wuhan, or at least some decades earlier, as in Shanghai at the time of the Taiping rebellion. They had to find a living as petty traders, coolies working with wheelbarrows or bamboo-poles, watchmen, boatmen, sweepers, surplus servants in the houses of the wealthy and powerful merchants or politicians. These destitute or semi-destitute elements of the working class are also fairly important, according to the various numerical surveys which are available for the 1930’s: 51 rickshaw pullers of Shanghai, 1934 12 persons (24%) 86 workers in a salt refinery near Tianjin, 1926 25 50 workers in a chemical plant near Tianjin, 1926 12 100 wharf coolies from Dairen, 1925 27

(29 %) (24 %) (27%)

Especially in Shanghai, this group gives a very peculiar social colouration to the industrial working class. On the other hand, industrial workers of true working class origin are very rare. Of the thirty-two workers who were interviewed in 1957 by the author, only two belonged to this category, namely two women workers of the B.A.T. factory in Pudong, opposite Shanghai, whose father had been a coolie in the same factory. It is likely that the scarcity of second-generation workers derives not only from the fact that many factories in China were established only in the earlier part of the twentieth century, but also from the social mobility of the working class and from the heterogeneous character of its recruit­ ment. II.

C O N D IT IO N S OF EMPLOYMENT

In many cases, employment is the result of direct bargaining between employer and employee on the basis of a certain amount o f money

H

113

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

paid on a piece-rate or a time basis. In this case, we have a completely free and completely open labour market of a capitalist character, where the labour strength of the worker is bought and sold, purely on the basis of supply and demand. But in China, all through the first half of the twentieth century, several other systems of employment are commonly found, which can easily be connected with the social structure and social relation­ ships of pre-capitalist China. Such is the case of the apprenticeship system, which for centuries had been in full strength in the Chinese guilds (gongsuo ). The work done by the apprentice was practically unpaid work, and he was bound to his master by a quasi-Confucian relationship of the fatherson type; but in return, he was trained in a certain trade, even initiated into its technical secrets, and the number of apprentices to the number of men was strictly limited by the guild, so as to avoid any overcrowding of that trade. In the twentieth century, the apprenticeship system survives, or rather has been transplanted to many modem factories, where child workers who are called yangchenggong (labour in process of education) receive very low wages, are submitted to a very strict discipline, but get no training at all and are just requested to play their part in the modern process of production like adult workers. This antique institution has thus completely lost its economic significance, and is a mere mask, or justification for unpaid or underpaid child labour. Typical is the case of the American and Chinese carpet factories in Peking, where the apprentices by far outnumber the adults, and sometimes completely replace them. Many figures illustrating this situation are quoted in the field survey conducted in 1920 by Th. Blaisdell and C. C. Chu, Peking Rugs and Peking Boys.

Still more significant of the impact of traditional China on modern industrial life is the baogong system. In this system (‘contract labour system’), the employer, owner or manager of the industrial concern does not deal directly with the workers. He does not pay them, does not know them and does not even know their number. He ‘contracts’ (bad) with a man who is responsible for the workers and for a certain amount of work. Such was the case for the large majority of miners in the foreign large-scale modern mines (K.M.A., Fushun), and in several Chinese-owned modern mines, for the wharf coolies in all the treaty ports, and for many of the sailors working for the foreign shipping firms. Often, a complex hierarchy of contractors-in-chief, second contractors and even third contractors (da-bao, er-bao, sanbao) came between the workers and the management; the men were paid by these contractors and were subordinated to them through links of a quasi-feudal type; in the mines, for instance, they had to eat in their canteens, to sleep in their dormitories, to gamble in their 114

THE CHINESE LABOUR FORCE

gambling houses, to borrow from them at usury rates when they were in need of cash; on the wharves, they had to present these contractors with expensive gifts on customary occasions. In the cotton mills, the contractors did not have economic responsibilities in the production process (whereas the contractors in the mines had to produce a certain amount of coal); the Shanghai contractors (baofanzuo, rice dealer) just had to bring the female workers to the mill every morning with their own guards and watchmen, and take them back to the dormitory at night (or morning in the case of a night shift); they usually kept for themselves the whole salary paid to them by the mill, as they had signed with the families of the girls or women a three-year contract, by which they were entitled to make full use of their labour capacity; in return, they had only to feed and accommodate them, having already paid a small sum (20 yuan usually) to the family. Whether the baogong system is merely a by-product of foreign enterprise in China, or whether it is deeply rooted in the Chinese traditional society, is a subject still wide open for speculation and research. On one hand, it is clear that this system was much in favour with the foreign mines and factories, as it shifted to a third party the burden of dealing with the workers; in this respect, it is quite parallel to the compradore system, which shifted to Chinese hands the relations with the public and the customers; it was not uncommon, incidentally, in some British firms, for compradore and contractor to be the same person. But on the other hand it seems that the baogong system dates back to a much earlier period of China’s economic development. It could be connected with the organization of the labour force, under official supervision, in the public works such as canals and dykes; in the twentieth century, it was still in use for the harvest on the large rural estates of the big landlords. Apprenticeship and baogong are two extreme cases of personal bondage of a traditional character, within the world o f modem industry. But even when the labour market was apparently free and open, some elements of personal subordination often remain, for instance between the worker and the foreman or overseer. These foremen had very large powers over the men; they accepted them or recommended them to the management, and in return extracted from them heavy ‘camshaws’ (in the Shanghai pidgin); they obliged them quite commonly to present them with gifts for a family event or a lunar festival, and also to do various jobs for them at home (looking after the children, cleaning, washing the laundry, etc.) outside or during the normal period of work. This unpaid labour for the foremen is also of a quasi-feudal character, though it is never mentioned in official statistics or surveys, which are generally based on the implication that labour relations in China in twentieth-century

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industry are already entirely ‘m odem ’. If a man refuses to submit to the foremen, to pay the ‘camshaw’ or to perform these various domestic duties, he is fired without any hope or right of appeal. Many strikes will be directed against ‘private labour’ or the right of the foremen to dismiss workers at will.

I I I . THE

UNEVEN

G EOGRAPHICAL DISTRIBU TION M ODERN LABOUR FORCE

OF

THE

As a result of the historical process already alluded to, the modern industrial workers, like the modern industries themselves, are con­ centrated in a few very limited areas. These industrial areas are distributed according to factors almost completely independent of the level reached by Chinese manufactures and proto-capitalist industries on the eve of the opium war. In most cases, they are concentrated in the treaty ports, which have been the financial, commercial, technical and political centres of Chinese life since the end of the nineteenth century. This geographical setting closely reflects the superior importance of China’s connections with the industrially advanced countries, over the inner network of China’s inter-regional economic relations. The six areas in which were concentrated more than 90 per cent of the total modern working class were: (a) The north-east: miners of Fushun and Benxihu, railwaymen of the s m r and of the c e r , mill hands of the Japanese and Chinese oil mills in Dairen, of the Chinese and Russian flour mills in Harbine, of the Japanese cotton mills and wool factories in Mukden, iron workers of the Japanese ironworks in Anshan. (b) The eastern fringe of the province o f H ebei: cotton mills, tobacco and match factories of Tianjin, railwaymen o f the Jingfeng, Jinghan, Jingsui and Jinpu lines, coal miners of the k m a at Tangshan, and of Mentougou, printers in Peking and Tianjin, textile workers. (c) The central depression of Shandong: coal and iron miners of Boshan, Zichuan, Jinlingzheng, mill hands o f the Japanese cotton mills, match factories and oil mills of Qingdao, railwaymen of the Jiaoji line. (d) The Lower Yangzi area: silk and cotton workers o f Shanghai and of the satellite textile towns, tobacco workers of Pudong ( b a t and Nanyang Tobacco Bros. Company), wharf coolies, workers o f the arsenal and dockyards of Shanghai, mechanics o f the small Chinese machine shops, printers of the Commercial Press and other Chinese and foreign printing firms. (e) The H unan-Hubei zone: textile workers of Wuhan and Changsha, printers, press-packing factory workers of Wuhan, tobacco workers 116

THE CHINESE LABOUR FORCE

of the b a t (Hankou Branch), workers o f the Hanyehping Company (Hanyang iron furnaces, Pinxiang coal mines, Daye ore mines), railwaymen of the southern section of the Jinghan line and of the northern section of the Yuehan line. (f) The Canton-H ong Kong group: silk workers, mechanics, rail­ waymen, arsenal workers of Canton, dockyard workers and wharf coolies of Hong Kong, printers, etc. An analysis o f the labour force of these six basic regional units would be worth a much longer study though it must be mentioned here only very briefly. The workers of these ‘key economic areas’ of modern industrial China differ among themselves in many respects; the predominance in Canton of small shops with strong craft traditions contrasts with the huge foreign enterprises of Shanghai or of the Japanese-controlled north-east; the high percentage of child and female workers in Shanghai and Tianjin contrasts with the pre­ ponderance of male workers in the north-east and in the H ubeiHunan area; the two latter regions are also predominantly devoted to heavy industries, whereas the four others are mainly centres of light industries and transportation; the migratory, temporary and un­ settled character of the working class in many enterprises in Shanghai, in Tianjin or still more in the north-east, contrasts also with the comparatively high degree o f stability o f the labour force in the south or in the Hunan-Hubei area. Actually, what is true of every aspect of Chinese life in the first part o f the twentieth century also applies to the labour force; namely that every statement of a general character must be shaded and diversified according to the regional situation. This is true for instance of the Chinese intelligentsia, as Peking with its classical and official background is not Shanghai with its modem newspapers, its foreign universities, its large modem publishing firms, nor Changsha with its strong radical tradition only slightly influenced by the West. It is true of the Chinese bourgeoisie. . . . It is also true of the labour force. All the remarks previously made could easily be re-evaluated according to this regional criterion: for instance, for reasons not very well known, the survival of the apprenticeship system in modern factories is quite common in the north of China, especially in Tianjin; in Shanghai, on the contrary, it is found only in a few cases, and firms just use ordinary child labour, without even covering it up with this traditional mask. Scattered as it is between these six groups, the Chinese labour force nevertheless shows quite a few interconnections from one area to another. With the possible exception of Guangdong, none of these groups is composed only of workers oflocal origin. The recruitment of Chinese workers, if considered now from the geographical point of view and not from the social point o f view or the economic point 117

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

of view as has been done above, shows the great importance of industrial migrations. These migrations of the industrial workers are of two kinds, and those who are mostly concerned with them are at two extremes: the highly skilled workers and the non-qualified coolies. On one hand, and this does not contradict the previous remarks on the paucity of industrial workers of handicraft origin, it is common to see highly qualified workers travelling from one end of the country to the other, according to need, especially towards the newly established factories, mines, and railway shops. When some British financial groups established the km a in distant Hebei at the end of the nineteenth century they brought with them Cantonese mechanics already trained in the Hong Kong dockyards and repair shops. When the French opened the Peking-Hankou railway (‘Jinghan’) at the beginning of the twentieth century, they brought skilled workers from Fuzhou, where they had been managing a military dockyard for many years. The workers of the Shanghai carpet factories established in the 1920’s came from Peking and Tianjin, where this industry had more ancient traditions. The mechanics of the antimony mines of Hunan, of the German iron mines in Shandong, of the Hanyang furnaces established by the viceroy Zhang Zhi-tong, were also of Cantonese stock; for Hong Kong had been, half a century before the rest of China, a centre for initiating the workers to modem industrial techniques. Completely different from these migrations of highly qualified workers are the large population movements of the peasantry to distant places, where any kind of industrial work is expected to be found. For instance, making use of the easy water transportation along the Yangzi, many peasants from Hubei reached Shanghai, especially in times of rural crisis. This applies to an even greater extent to the migrations of the Shandong and Hebei peasants to the Japanese enterprises of the north-east, both by rail and by sea. The result of these complex migration movements is the high degree of heterogeneity of the labour force at a certain place and at a certain time. The very strong provincialist feelings deeply rooted in any Chinese social group at that time, and also the provincial linguistic differences, contributed to the creation, among the workers of such centres as Shanghai, Wuhan or Tangshan, of divisions which were often very sharp. The Cantonese in North-East China, the men from Shandong in Shanghai, the men from Tianjin or from Fujian on the Hubei railways, often differentiated themselves very strictly from the workers of local origin. It was common for the workers of the same provincial origin to associate themselves in ‘mutual help societies’ (bang, bangkou, bang-hui), which were elementary units of self-defence against the hardships of life in a hostile huge industrial 118

THE CHINESE LABOUR FORCE

town, and which often clashed with each other in a very bitter way. These regional feelings, deriving from these labour migrations, were so strong that in 1922, just before the first Chinese national Labour Congress, a communist trade union leader found it necessary to expand the meaning of Marx’s famous statement in this way: ‘the labourers have no motherland, not even a provincial or regional one’. It is also interesting to note that, according to a social survey made in Shanghai in 1928, among 230 families of the Caojiadu industrial suburb, the general rule as far as the workers’ matrimonial choice was concerned was marriage between persons of the same provincial origin, whereas inter-provincial marriage was very rare. IV. THE LOW LEVEL OF LABOUR Q UALIF ICATION

This question has to be very carefully dealt with. The very low labour productivity of the Chinese labour force was at that time a common by-word of practically all the western community in China, em­ ployers and officials. For instance, the report from the Ewo cotton mill (an appendix of Jardine, Matheson) included in the ‘Memoran­ dum on labour conditions in China’, Foreign Office, February 25, 1927, said: ‘Average workers in the mills in China in the spinning departments although working for eleven hours and three quatters, cannot produce more than 25 per cent of the work turned out by an average Lancashire operative working eight hours. Quality of work far inferior.’ It would be easy to produce a huge mass of evidence of such quotations, all being impregnated with a rather strong political and racial prejudice against the Chinese workers as such. To consider this very low productivity as an ineluctable and permanent charac­ teristic of Chinese labour is to be easily refuted when one remembers the amazement of Marco Polo visiting the Chinese industrial con­ cerns of his time, or more recently the technological achievements of the recent years under the present government. But to study this low productivity as a limited historical phenomenon is nevertheless quite justified. Except in limited trades where a high qualification is needed as essential to the trade itself, as in printing, machine repair-shops, railways, etc., the Chinese labour force was predominantly un­ qualified or had very little qualification. From an estimate of 1926, the b a t factory in Tianjin had only 350 qualified men, against more than 2,000 unqualified women and children. In Shanghai, in the silk factories, only 5 per cent were qualified workers, called ‘officers’, the rest were divided between the reelers, women with a very low qualification (60 per cent), and the sorters and peelers (35 per cent) 119

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

with no qualification at all. In the Zhongxing mines in Shandong in 1925, there were 212 mechanics, 234 electricians, 913 semi-qualified underground miners, and several thousands of non-qualified coolies, recruited through baogong. It is relevant for the social scientist, as well as for the linguist, that the terms in Chinese for these unqualified labourers were nearly as numerous as the coolies themselves: kuli (hard labour), xiaogong (lower workers), zagong (miscellaneous workers), cugong (coarse labour), etc. No detailed research study has ever been made on this problem of labour qualification in modern China. One can only mention, as a preliminary contribution, the attempt of the Chinese economist Tang Hai, who analyses in his book Zhong-guo lao-dong wen-ti (Chinese Labour Problems) the factors involved in this phenomenon. He has counted eleven of them : low wages, the fact that the workers have no faith and that they work only for their elementary living, the hardships of the work at the machines, the long hours, the antagon­ ism between labour and management, the fact that the workers’ demands are never satisfied, the bad hygiene and bad nutrition, the low quality of raw materials, the bad organization of machine shops, the severe climate of China, the lack of proper training. Though it was not mentioned by Tang Hai, the high percentage of female and child labour is directly connected with these questions of qualification and productivity. In the silk filatures of Shanghai, adult males were only 9 •6 per cent in the Chinese firms, and 3 •5 per cent in the foreign firms. This situation is fairly well known, thanks to the reports of the famous ‘Child Labour Commission’ of the Shanghai municipal council in 1923-24, and these reports take the social historian back to the horrors of the well-known ‘Villermd Report’ on the textile factories in Normandy in the 1840’s, or those of the Factory Inspectors in Britain at the same time. Together with the textile industries (silk, cotton, knitting and hosiery, etc.), the tobacco and match factories were the second sector of predominantly female and child labour. The third sector was the industries dealing with the conditioning of raw materials for export, such as the presspacking of cotton and wool (in Tianjin, Shanghai and Hankou), preparation o f the various oil seeds, of pig bristles, etc. V.

I N S T A B IL IT Y AND H I G H DEGREE OF T U R N O V E R OF THE LABOUR FORCE

Two individual cases, selected from the interviews obtained in 1957 will be a good introduction to this phenomenon. One of these workers had been successively, a boatman on the Hoangpu, a shop assistant in Shanghai, a worker at the b a t in Pudong, a worker in a 120

THE CHINESE LABOUR FORCE

hosiery shop in Shanghai, an employee in the French Tramways in the French concession of Shanghai. Another had been an apprentice in a mechanics shop in Shanghai, then a worker at the Ewo cotton mill; he had then contracted for the British camps in Bassorah during World War I, had then worked in a French machine shop in Shanghai, then in the Chinese Jiangnan dockyard, then at the British (International) Power Station in Yangshupu, in the eastern part of the International Settlement. Several surveys were made at that time, on this aspect of industrial life. It is enough to quote a cotton mill (Japanese) in Shanghai, where 2,150 persons left the factory in 1923-24 (the average number of employees was not given by this survey); 257 wanted to go home, 168 left for ‘domestic affairs’, 129 because of a marriage or birth, 33 because of dissatisfaction, 280 because their work was not con­ sidered satisfactory, 105 because they were considered as lacking initiative and zeal, 91 for disobedience and bad conduct, 605 for excessive waste. From this instance, it is very clear that the high degree of turnover is connected not only with the peasant or semi-peasant origin of many workers, but with difficulties in adaptation to factory work and its technological problems. The result was that the average duration of stay of a worker in a particular factory was rather brief. In 1925, 85 -3 per cent of the miners of the Japanese coal mines of Benxihu, in the north-east, were in this employment for less than one year. The average age of these Chinese workers was also very low. Much data is available on the percentage of the different age groups in a certain category of workers. The workers under 25 years of age represented for instance, in various cotton mills around 1930, between 70 per cent and 80 per cent of the labour force. Miners and railwaymen were a little older, but there was always a large majority under 35. These young workers were probably more inclined to shift constantly from one factory to another, in the hope of better wages and treatment. Thus, the labour force was not only young as a social group (it has already been stressed that only a few workers were of working class origin), but also young as to its individual members. Connected also with the turnover and the unsatisfactory tech­ nological adaptation is the common pattern of dachang (attacking the factory). This is a peculiar type of machine-breaking, which can be found in a great many strikes and labour troubles in the first part of the twentieth century, especially in the Middle and Lower Yangzi areas and also in Tianjin. It differs from the western European ‘Luddism’ of the early nineteenth century in a fundamental way: it is not a movement of irritated handicraft workers to whom the new 121

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

machines have brought economic disaster. It is a movement of illiterate peasants who feel completely foreign to the modern industrial process of production, and even more so as these new machines have been brought and are mostly owned by foreigners. Actually, the dachang crises were especially common in British and Japanese cotton mills (on the other hand, the case of rickshaw coolies attack­ ing a Chinese bus line or trolleybus line is typically Luddite, and reflects only the economic conflict between individual labour and a large modern firm). This feeling of radical hostility toward modern industrial work is also shown by a story, told by a reliable observer, of a mine corridor where electric bulbs were first stolen by the workers quite frequently: when they were removed to a higher level, out of reach, the workers regularly threw stones at them and des­ troyed them. It must be added that the modern industrial unions, for instance the communist-led General Union of Cotton Mills Workers in Shanghai in 1925-27, took great pains to eradicate these dachang tendencies from the workers. Again, it would be a new field of research, which this paper can only slightly touch on, to examine the policy o f the industrial firms towards the high turnover rate and this unsatisfactory technological adaptation. On one hand, they accepted it, and for instance made quite officially a distinction between ‘permanent labour’ (changgong) and ‘temporary labour’ (linshigong) ; these terms were used for instance by the k m a mines, by the French Tramways and Electricity Company in Shanghai, and others; the practice of baogong, also, was not likely to improve the qualifications of the men and their stability. On the other hand, the firms, especially the foreign firms, seem to have made several efforts to stabilize the labour force, for example by awarding special bonuses for lack of absence over a certain period of time, say a fortnight or a month, and also by tight­ ening their control of the workers (through finger-printing, identifi­ cation discs, attendance medals, etc.), though the latter tendency appears mainly in periods of intense activity on the part o f the labour movement, and has therefore a political as well as an economic character. In the north-east, the Japanese policy was the ‘enclosure’ of a certain area by brick walls or barbed wire, armed guards and the forbidding of the workers to leave their barracks after certain hours. In contrast, there is very little evidence o f a systematic policy on the part o f the firms, of replacing men by imported machinery whenever possible. The b a t seems to have made some attempts in this direction in the 1920’s. But, as a general rule, the Chinese and foreign employers still preferred to use the Chinese labour force as widely as possible, in spite of its shortcomings.

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VI. THE IR R E G U L A R ITY OF THE LABOUR SUPPLY

Owing both to the demographic situation and to the underdeveloped character of the Chinese economy, it is very clear that the modern industries were never short of man-power as a whole, in the way that Russia, for instance, was throughout most of its modem industrial history, both before and after the Soviet revolution. No figures on employment or semi-employment are available on a national scale, as no institution, private or public, was able to deal with this prob­ lem. But it is beyond doubt that it was a permanent feature of the big Chinese industrial cities. In Canton in 1926, the municipality estimated the number of unemployed persons at 60,000; 123 trade unions (out of 180) reported unemployment among their members, and the oil mill workers’ trade union reported that nearly half of its 13,000 members were out of work. Nevertheless, the availability of the labour force has never been steady. At some periods, for instance after droughts or other rural calamities, there was a sudden influx of peasant labour to the industrial towns; thus, the so-called ‘calamity people’ (caimin) flocked to Tianjin at the time of the great famine of Hebei in 1920-21, or after the floods of Wuhan in 1925-26. In Fujian, in 1920-25, the spreading of banditry and insecurity in the countryside drove many destitute peasants to Fuzhou and Amoy. But it seems also (again here lies a subject wide open for further research) that at certain periods at least a relative contraction of the labour market could be noticed. One of the best instances of such a process is Shanghai in 1920 to 1922, when the boom in the Chinese national modern industries of World War I was not yet over, whereas the economic activities of the westerners had started again after the slack years of international trade in the Far East since 1914. The North-China Herald, a very authoritative mouthpiece of British financial interests in the Far East, was at that time full of complaints about the scarcity of man-power in the Shanghai industrial area. One writer went so far as to express editorially his anxiety about the chances of Shanghai ever again becoming ‘the happy hunting ground for cheap labour’ ( n c h , 27/7/1919). The Far Eastern Review, more con­ nected with American interests, expressed the same view at that time. This Shanghai situation in 1920 is probably not an isolated case. Similar instances could probably be found, especially in connection with the political and military situation in China. Civil and foreign wars, which left China with hardly a single year of peace between the fall of the Manchus and the jiefang of 1949, contributed certainly to disturb the home labour market. The rather brief and preliminary survey given above has been drawn from a long-term research on the Chinese labour movement 123

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

in the period 1919-27. This accounts for the fact that most of the concrete features mentioned so far are closely connected with this short period. But it is likely that the main trends underlined in this paper could also be found in other sections of the broader period which starts with China’s first steps towards industrialization and ends with the jiefang of 1949. For the anti-Japanese war, for instance, the two well-known investigations of Shi Guo-heng (Shih Kuo-heng), China enters the Machine Age, and I. Epstein, Notes on Labor Problems in Nationalist China, seem to support our remarks fairly well. They insist for instance on the importance of peasant labour in the factories of South-West China, often driven from the villages by the k m t forced conscription; at that time, the long-distance migrations of skilled workers already mentioned, took on an unprecedented importance when qualified mechanics or workers in other trades of Shanghai travelled as far as Chongqing or Kunming, to contribute to the industrial war effort of the nation. From these two surveys, it can also be seen that baogong (contract labour) was as im portant in the 40’s in South-West China, as in the 20’s in the northern and eastern part of the country. The low level of labour qualification also, seems as common at that time as before; and the same is true of the high rate of labour turnover, for instance between Chongqing and the rural areas of Sichuan and Guizhou. Epstein and Shi Guo-heng also make it quite clear that, against the general background of unemployment, the labour market was affected at that time by the same temporary contractions which have been mentioned as occurring in the 20’s. For instance, skilled workers were rather scarce in Shanghai, just after the operations o f 1937 had devastated the whole Lower Yangzi area; in the south-west, the same phenomenon occurred a little later in 1938-39, when some ‘refugee’ factories from the east coast tried to settle there and found it difficult to recruit workers with proper qualifications. The data collected in this paper might probably help the economic and social historian o f modern China to open the discussion on three interesting points, and possibly more. 1. To what extent can the various specific trends and characteristics of the Chinese labour force at that time be related to the general situation in China ? This labour force, like its social counterpart, the Chinese modem business class, was deeply impregnated with many social habits and kinds of behaviour in which the old precapitalist China still survived. In its process of development, it reflected the fact that modern history had developed in a few privileged areas under foreign pressure or influence, before the general economy o f the country had reached the same level and had become really ripe for such 124

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a move. No unified market then existed in China for any commodity, and this was also true of the labour force; hence its mobility, its uneven geographical distribution, its primitive systems of recruitment. 2. To what extent was the Chinese labour force at that time just another case of early industrial development, being very similar to the English labour force of the early nineteenth century, or to the Russian labour force of the late nineteenth century? Or on the contrary, did historical relationships and reciprocal influences prevent history from merely duplicating itself, and therefore account for a certain specific­ ness—if not uniqueness—of the Chinese labour force during the first part of the twentieth century? The Chinese workers were partly working for Chinese employers engaged in the process of industrialization, but partly also for foreign employers established in China, who had gained experience and strength in their native countries for many years. The com­ petition between these two groups was very keen, but very uneven. The foreign industrialists were backed by foreign political and military dominance, and enjoyed many privileges (exemption from li-jin, guarantee by treaty against any attempt on the part of the Chinese to use the weapon of protectionism, etc.). Even in the interior, the competition was not in favour of the Chinese employers. In such an economic context, the Chinese labour force had no chance to stabilize itself, to get rid of the baogong system, to raise its labour qualifications, to enjoy better social facilities. The foreign employers were looking for immediate profits and the Chinese employers for immediate survival; neither cared much for long-term prospects, with a view to improving steadily the lot of the workers as had been done in Britain or France since the end of the nineteenth century. 3. As often happens in historical research, not only does the past help toward an understanding of the present, but the present helps an understanding of the past. It would therefore be worth considering how, in the People’s China, the industrialization policies have been able to deal with the labour force as it was, and what changes have been considered as most urgently needed. In this respect, it is enough to quote the Trade Union Law of 1950, which requests the workers to adopt ‘a new attitude towards work’; this short sentence probably carries much significance, not only for the industrialization of People’s China, but also for the period during which China had not yet succeeded in becoming a modern industrial power. APPENDIX 1 Chinese terms mentioned in the paper, listed in the order in which they appear, with their ‘Wade-Giles’ forms and English meanings. jiefang = chich-fang: 1949 Liberation. 125

THE ECONOMIC DEVELOPMENT O F CH IN A AND JAPA N

APPENDIX 1— (continued) ligong = li-kong: qualified workers, directly under the management of the

firm (‘internal labour’). waigong = waikong: non-qualified workers, recruited through contractors

(‘external labour’). gongsuo = kong-suo: guild. baogong = pao-kong: contract labour. yangchenggong = yang-ch‘eng-kong: apprentices. dabao = ta-pao: chief contractor. erbao = eul-pao: second contractor. sanbao = san-pao: third contractor. baofanzuo = pao-fan-tso: labour contractor (in Shanghai cotton mills). bang — pang 1 elementary mutual-help societies, often of a bang-kou = pang-k ou V inciaHst characler. bang-hui = pang-huei J k u li = ku-li zagong = tsa-kong non-qualificd labour. xiaogong = hsiao-kong cugong = ts‘u-kong dachang = ta-ch‘ang: riot in a factory, of a semi-Luddite type. changgong = ch'ang-kong: permanent labour. linshigong = lin-shih-kong: temporary labour. caim in ~ ts‘ai-m in: peasant victims of a calamity. lijin = li-kin: inland circulation tax (from which foreigners were exemp­

ted). APPENDIX 2 Chinese personal and geographical names mentioned in the paper (Pinyin and ‘Wade-Giles’ or ‘postal’ forms). Benxihu: Pench'ihu Boshan: Poshan Daye: Tayeh Fujian: Fukien Fuzhou: Foochow Guizhou: Kueichow Hankou: Hankow Hebei: Hopei Hubei: Hupei Jiangbei: Kiangpei Jiangxi: Kiangsi Jiaoji: Chiao-chi (Tsingtao-Tsinan line) Jingfeng: Chingfeng (Peking-Mukdcn line) Jinghan: Chinghan (Peking-Hankow line) Jingsui: Chingsui (Peking-Suiyuan line) Jinlingzheng: Chinglingchen Jinpu: Chinpu (Tientsin-Pukow line) Longhai: Lunghai

126

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APPENDIX II—(continued) Mentougoo: Mentoukou Pudong: Pootung Qingdao: Tsingtao Pingxiang: Pinghsiang Shandong: Shantung Sichuan: Szechwan Tianjin: Tientsin Wuxi: Wusih Yangzi: Yangtze Yangshupu: Yangtzepoo Zhang Zhi-tong: Chang Chih-tung Zhejiang: Chekiang Zhongxing: Chunghsing Zichuan: Tzuchuan Note: For some terms the list given above includes the transcription most common used in English (such as Tientsin, Chekiang) though it is not a Wade-Giles orthodox transcription at all. Some source references: North-China Herald, Shanghai. China Weekly Review, Shanghai. Far Eastern Review, Shanghai. Chinese Economic Bulletin, Peking. Chen Da, The Chinese Labour Problems, Shanghai, 1929. Tang Hai, '/lie Chinese Labour Problems, Shanghai, 1926. Wang Qing-bin, First Chinese Labour Yearbook, Peking, 1928. C. C. Chu and Th. Blaisdell, Peking Rugs and Peking Boys, Peking, 1923. H. D. Lawson, Social Pathology in China, Shanghai, 1935. Shih Kuo-heng, China enters the Machine Age, Harvard University Press, 1944. I. Epstein, Notes on Labor Problems in Nationalist China, New York, 1949. S. Yang and L. K. Tao, A Study o f the standard o f living o f the working families in Shanghai, Peking, 1931. See also J. Chesneaux, Le Mouvement ouvrier Chinois de 1919 a 1927. Part I, Paris, 1962.

127

5 S IN O -S O V IE T E C O N O M IC R E L A T IO N S : A R E - A P P R A IS A L 1 AL EX A N D ER E C K S TE IN

Professor of Economics, University of Michigan I N T R O D U C T IO N

The ideological and political disputes between the Russian and Chinese Communist Parties brought into the open within the last year, suggest the need for a thoroughgoing re-examination o f the character of the Sino-Soviet alliance. This would necessarily require a careful analysis of the relative strength of centrifugal vs. centripetal forces in this alliance. Such a broad re-appraisal, however, is beyond the scope of the present study, which will focus instead only on the economic aspects of the total problem. In this context one of the central questions is what role did economic relations play in shaping the alliance. Are the economic relations themselves such that they may have been a major factor in producing the tensions, or alternatively did they serve to tie the two partners to each other? Has politics really been a handmaiden of economics, or has economics been playing merely a passive role? Most studies of the Sino-Soviet alliance have tended to ascribe a major importance to the economic ingredient, although frequently from two opposite points of view. Some have emphasiezd the fact that Soviet grants or loans to China have been quite limited so that Russian assistance to Mainland China’s economic development must necessarily be considered as modest.2 This fact coupled with largescale Soviet aid to other countries has produced dissatisfaction and resentment on the part of the Chinese Communist leadership and has thereby served as a perpetual source of tension in the alliance. In a most interesting and provocative paper, Professor Galenson, on the other hand, holds that Sino-Soviet economic relations are quite disadvantageous to the Russians. For them, ‘Chinese trade meant a forced transfer of resources from growth to consumption, 1 This paper was prepared in June 1961. It is based on material available at that time, and is thus necessarily out of date. 2 See for instance F. H. Mah, ‘The First Five-Year Plan and its International Aspects’ in International Economics o f Communist China, ed. C. F. Remer, Ann Arbor, 1959 and C. M. Li, Economic Development o f Communist China, Berkeley, 1959, Ch. V and VII.

128

SINO-SOVIET ECONOMIC RELATIONS

to the extent that they were not able in turn to re-allocate their resources’.1 In effect, Chinese growth was being substituted for Soviet growth to an increasingly irksome extent from the Russian point of view. Thus the apparent strains in the alliance are not borne out of Chinese dissatisfaction, but out of Soviet resentment of the economic burdens imposed by the relationship. As I will attempt to show in this paper, both of the conclusions are based on a too narrow reading of the evidence; exclusive concentra­ tion on Soviet loans and grants—rather than on the flow of goods and services in all its forms—in the first case, and an inadequate examination of changing Soviet economic policies and production capacities of the last decade in the second case. There is no question that in the absence of large-scale Soviet exports of capital goods, particularly in the form of complete plant installations, and of technical assistance, Mainland China could not have achieved any­ where near the rates of industrial growth actually attained. This does not, however, mean that such capital goods exports necessarily represent a substitution of Chinese for Soviet growth. A significant component of Soviet economic growth during the last decade has been growth in per capita consumption and in consumer goods production. Imports of consumer goods from China may have thus facilitated the implementation of post-Stalinist economic policy which accords the consumer a higher priority than was the case in the ’thirties and ’forties. Therefore, an appraisal of the economic aspects of the alliance must be based on an assessment of the relative costs and benefits to each of the partners in the relationship. The essential thesis developed in this paper is that given'the underdeveloped state o f the Mainland Chinese economy and the fact that the Chinese are economically more dependent on the Russians than vice versa, both the costs imposed by, and the benefits derived from, the economic relationship are much more significant for the former than for the latter .2 This pattern of dependence provides the Soviets with superior bargaining power in the economic sphere; however, there is no evidence to suggest that this is reflected in economic exploitation of the Chinese. An attempt will be made to illuminate this range of questions by • Walter Gatenson, ‘Economic Relations Between the Soviet Union and Com­ munist China’, in Study o f the Soviet Economy, ed. Nicholas Spulbcr, Blooming­ ton, 1961, p. 38. 2 In an earlier study I advanced a somewhat similar view, which, in the absence of foreign trade data at the time, had to be necessarily more tentative and qualified. See Moscow-Peking Axis: Strengths and Strains by Boorman, Eckstein, Mosely and Schwartz, New York, 1957, pp. 75-109.

I

129

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

examining: (1) China’s economic development since 1949, (2) the role of foreign economic relations in this development, (3) the specific role of Soviet aid and trade and (4) the costs and benefits of Sino-Soviet relations to both economies.

M A IN L A N D C H I N A ’S E C ONOM IC D E VELOPM ENT SIN CE

1949

Economic development of Mainland China during the first decade of Communist rule was characterized by very marked industrial growth amidst relative agricultural stagnation. As shown by the data in Table I, this expansion was particularly rapid in basic raw materials for industry and construction (e.g. electric power, steel, coal, cement), in producer goods, and in industrial chemicals. On the other hand, as one descends towards the bottom of the table where consumer goods are listed, the rate of increase slows down con­ siderably. This general pattern is confirmed by the industrial value aggregates cited in Table I. Thus total industrial production seems to have grown at an average annual rate of 20 per cent during the First Five Year Plan period rising apparently even higher in 1958-59. A t the same time, producer goods output increased even more rapidly, approximating a 30 per cent rate, while consumer goods production seems to have risen by less than 10 per cent a year. This rapid industrial growth was made possible by high rates of investment, the bulk of which were channelled into expansion of producer goods capacity. While rates of investment averaged around 20 per cent during the First Five Year Plan period, 56 per cent of this investment total was allocated to the industrial sector, close to 90 per cent of which was, in turn, devoted to laising producer goods capacity.1 As will be shown below, Soviet deliveries of complete plant installations played a crucial role in this significant rise in productive capacity. In the meantime, low investment rations, combined with an un­ favourable incentive structure prevented any sizeable expansion in the productive capacity of agriculture. According to official statistics farm production rose at an average annual rate of 4 •5 per cent during the First Five Year Plan period, by 25 per cent in 1958 and close to 17 per cent in 1959.2 If one could take these figures at their face value, they would provide more than an adequate margin for increases in per capita food consumption, even with an average annual rate of 1 A. Eckstein, ‘The Strategy of Economic Development in Communist China’, American Economic Review, Papers and Proceedings, May 1961, p. 509. 2 Niu Chung-huang, ‘Problems Concerning Agricultural Technical Improve­ ments in China’, Jen-min Jih-pao, August 16, 1960. 130

SINO -SOVIET ECONOMIC RELATIONS

T able

INDICATORS

OF

I

INDUSTRIAL GROWTH CHINA, 1949-59

Kind of Item

IN

MAINLAND

Industrial Production (1952 = 100)*

1949 60 49 28 12 11 54 17

Electric Power Coal Crude Petroleum Steel Ingots Metal Cutting Machines Railroad Freight Cars Bicycles Spindles Looms Ammonium Sulphate Sulphuric Acid Caustic Soda Tyres Cement Timber Cotton Yam Manufactured Cotton Cloth Paper Sugar Salt Cigarettes Vegetable Oil Rubber Footwear Matches Total Industrial Productf Total Producer Goods O utputt Total Consumer Goods Outputf

— —

15 21 19 62 23 51 50 49 42 44 60 60 45 47 74 — — —

1957 266 195 334 396 204 126 1,001 126 —

349 333 251 209 240 249 128 151 226 191 167 168 112 209 114 246 347 148

1959 572 523 846 990 510 —

(1,872) 365 338 736 556 456 — 429 368 228 196 396 250 223 208 149 — —

385 594 182

* Indices based on official data compiled by Chao Kang as part of his study of an index of industrial production for Mainland China. These commodity indices are based on production statistics expressed in the appropriate physical units. t These are value-added aggregates based on estimates presented in T. C. Liu and K. C. Yeh, ‘Preliminary Estimate of the N ational Income of the Chinese Mainland, 1952-59’, American Economic Review, Vol. LI, N o. 2 (May 1961), Papers and Proceedings, pp. 489-98.

population growth o f 2-2 to 2-5 per ccnt. Unfortunately, however, a host of indications point to the inadequacy and unreliability of Chinese Communist agricultural statistics. This unreliability seems 131

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

to be due to the interplay of several different type of factors. The First Five Year Plan years were marked by a visible improvement in the quantity and quality of all kinds of statistics. As part and parcel of this process, crop reporting was broadened considerably and its statistical coverage was thus extended. As a result a certain, although unknown, portion of the rise in farm production is statistical rather than real.1 The ‘Great Leap Forward’, on the other hand, produced statistical problems of almost an opposite sort. Standards of statistical integrity seem to have deteriorated considerably in 1958 and 1959, while the enormous pressure to fulfil and overfulfil unrealistically ambitious targets led the cadres to overstate accomplishments. Unfortunately, while it is relatively easy to reject the official figures, it is much more difficult to derive a realistic estimate of agricultural production trends in Mainland China. In the absence of such estimates one can only wonder whether food production has kept significantly ahead of population growth. A number of indications would tend to suggest that it has not. On the one hand, the food ration of urban or rural consumers has not been raised in recent years. At the same time, there is no evidence of a marked rise in China’s food exports. This leaves the possibility that the large increases in farm production officially claimed for 1958 and 1959 may have been used for building up reserve stocks of food­ stuffs. However, this then should have provided an ample cushion for a poor harvest just such as that of 1960. On this basis alone, it is very difficult to reconcile the 1958-59 claims with the 1960-61 realities. On the other hand, the agricultural production claims are also difficult to reconcile with what we know about the allocation of inputs to agriculture. During the First Five Year Plan period, only about 8 per cent of total investment resources were allocated to agriculture.2 At the same time, agriculture is estimated to have borne the major burden of financing total investment.3 This required the institutionalization of high rates of agricultural saving through taxation, compulsory procurement of farm products at fixed prices and the creation of various control mechanisms to keep consumption in check. This was one of the prime tasks of collectivization. However, there is no question that such a programme tended to undermine farmers’ production incentives. Moreover, perpetual changes in farm organization could not help but disrupt agricultural production. 1 C. M. Li, ‘Communist China’s Statistical System, 1949-57’, American Economic Review, Papers and Proceedings, May 1961, pp. 499-507, and Econ­ omic Development o f Communist China, op. cit.. Ch. III. 2 A. Eckstein, ‘The Strategy of Economic Development . . op. cit., Table I, p. 509. 3 F. H. Mah, The Financing o f Investment in Mainland China, r a n d , 1960.

132

SINO-SOVIET ECONOMIC RELATIONS

The above cited percentage increases in farm production represent official claims based on gross value of total agricultural output stated in 1952 prices. But, even the official figures for food crop production alone show slower rates of increase, i.e. about 13 per cent for the First Five Year Plan years.1 Yet as indicated earlier, even these figures represent an overstatement considering that crop output was under-reported in 1952 and 1953. With a population increase of about 11 to 12 per cent during the same period, this does not allow much of a margin—if any—for rises in per capita food consumption. This hypothesis is reinforced by the fact that during this period the Chinese Communist leadership became very conscious of the dilemmas posed by rapid population growth amidst relative agri­ cultural stagnation. Beginning in 1957, the Mainland Chinese press places increasing emphasis upon the critical need to expand agricultural production. This, in turn, gives rise to the search for an escape from this ‘lowlevel equilibrium trap’, but an escape which will be capital cheap and therefore demand only modest diversions of investment funds to agriculture. Against this background, the mass labour mobilization schemes of 1958 and 1959 clearly represent an attempt to find just this kind of a solution. However, the developments of 1960 and 1961 would suggest that primitive earth dams and poorly constructed irrigation projects are no match for major floods or droughts. As a matter of fact these measures may have actually been counter-productive. To mount the mass mobilization schemes in such a way as to prevent increases in production leading to increases in consumption, new institutional forms had to be devised. The small collectives of around 100 households were not suitable for this purpose; larger adminis­ trative and control units capable of managing huge integrated pro­ jects had to be developed. This was one of the essential functions of the commune. However, institution of the communes entailed much more far-reaching reorganization of agricultural modes of produc­ tion and institutions than the collectives did. Moreover, their introduction was accompanied by experimentation with various types of agricultural wage systems. The communes therefore led to a most serious disruption in the system of farm production and to a marked deterioration in the incentive structure. For all these reasons, the harvest failures of 1960 and possibly 1961 cannot be ascribed only to weather. Poor planning and mismanage­ ment must bear their share of the responsibility. For instance, agricultural planners, falling victim to their own claims concerning 1 Helen Yin and Y. C. Yin, Economic Statistics o f Mainland China, 1949-1957, Cambridge, Mass., 1960, p. 31.

133

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

1958 unit yields, thought that China’s food requirements could be met by intensive cultivation on a much smaller acreage. Thus the area sown to winter wheat and other small grains in the fall of 1958 declined substantially.1 This was one of the factors contributing to a poor crop in 1959. Inadequate incentives combined with mis­ directed allocation of labour seem to have produced considerable weed damage of fields in 1960.2 This brief analysis of agricultural developments in Mainland China during the last decade points to the conclusion that the 1961 agricultural crisis is not a momentary phenomenon. It is rather a symptom of certain deep-seated conditions endemic to Chinese Communist agriculture. Temporary and short-run factors occasioned by unfavourable weather and mismanagement have only aggravated the more fundamental structural difficulties. Chinese Communist policy makers, just like their Soviet precursors, have repeatedly tried to find a way of increasing farm production without investing in agriculture and without improving farm labour incentives, only to discover again and again that this cannot be done. This is not intended to suggest that there has been no growth in agricultural production, only that it has been much more modest than the official figures would suggest. According to some estimates, food crop production was around 205 million tons in 1958, which would represent an approximately 10 per cent increase as compared with 1955 and a total rise of almost 25 per cent between 1952 and 1960.3 Practically all of this expansion seems to have been produced by the three bumper harvests of 1952, 1955 and 1958. Each of these was apparently followed by at least two years of more or less station­ ary output. Most significantly, all the major programmes and policy moves were inaugurated either immediately preceding or following these good harvests: the First Five Year Plan in the first case, the drive for collectivization and nationalization of private enterprise in the second, and the ‘Great Leap Forward’ in the last. THE ROLE OF FOREIG N ECONOMIC RELATIONS IN C H I N A ’ S TRANS FORMATION

As was noted above, Mainland China’s economy has been in the process of profound structural change in the last decade. The unusually rapid expansion in industrial capacity and in rates of 1 Cf. u s d a , Foreign Agricultural Service: Food Shortages in Communist China, Foreign Agricultural Circular, Washington, D.C., March 1961, p. 3. 2 See for instance articles in Ajia Kenkyu (Tokyo), No. 233, 234 and 236 dated September 6 , 13 and 27, I960, translated in j p r s No. 6959 (March 19, 1961), p. 7. 3 Bernhard Grossmann, Die Wirtschaftliche Entwicklung der Volksrepublik China, Stuttgart, 1960, Table 32, p. 174.

134

SINO—SOVIET ECONOMIC RELATIONS

industrial growth would have been inconceivable without the im­ portation of new technology embodied in manufacturing equipment, machinery and installations of all types which could not be produced in China, new plant design, and new scientific and technical know­ ledge. This was augmented by imports of industrial raw materials and semi-manufactures with some of which China was poorly endowed. China’s experience would suggest that it would be no exaggeration to conclude that large-scale industrial imports made the difference between what in retrospect will undoubtedly turn out to be the country’s industrial revolution (‘breakthrough’ or ‘take-off’ as some prefer to call it) or very slow growth. It was shown, however, that this rapid industrial growth was bought at the price of relative stagnation in agriculture. This fact necessarily limited China’s export capacity and therefore her ability to import. Prior to 1955, the pressures on agriculture thus created were to some extent alleviated by sizeable foreign aid allotments to China. Although Soviet aid almost ceased after that and the Chinese started amortizing their debts to the Soviet Union, the export burden placed on agriculture did not rise. This was largely due to the fact that as Mainland China’s industrial capacity grew, her import dependence began to diminish while her capacity to export manu­ factured goods—especially textiles—expanded. The close interrelationship between agricultural development, export capacity and imports was brought forcefully home again by the poor 1960 harvest in Mainland China. It is now clear that China did not meet its export commitments in 1960 so that if the Soviet Union had not been willing to extend short-term credits to cover the deficit (which has now been converted into a five-year loan), Main­ land imports would have had to have been drastically curtailed.1 Depending on what criteria are used, the importance of foreign trade in the economic development of a country can be assessed in several ways. First, an aggregative indicator is derived by estimating foreign trade to national income ratios for different years in Table II. Then, leading import and export items are compared with domestic output as a means of appraising the role of foreign trade in structural terms. The T/Y ratios derived in Table II show that the importance of foreign trade was in aggregative terms roughly comparable to that of the United States at the turn of the century and of Russia on the eve of World War I.2 However, these ratios are well below those for 1 Communique o f Trade Talks Between the USSR and the CPR, n c n a in English, April 8, 1961. 2 It should be noted that the ratios in Table II may be overstated since no adjustment was made for possible divergence between prices in terms of which national income is valued.

135

TH E ECONOMIC DEVELOPMENT O F C H IN A A ND JA PA N

Western Europe, Japan and the Latin American countries. In this connection many students of economic development advance the proposition that M/Y, E/Y and T/Y ratios are inversely correlated with the stage of development, i.e. that low income countries tend to be foreign trade oriented and that therefore their ratios will generally be significantly higher than those for high income areas.1 Neither the data for China or India bear out this generalization, nor for that matter do those for the European countries. Intertemporal and interspatial comparisons of the foreign trade and national in­ comes of a number of countries show that while these ratios tend to decline in the course o f industrialization, at any one point in time the dom inant variable does not seem to be per capita income, but size of country.2 Thus the ratios for the United States and M ainland China are much closer than those for the United States and the United Kingdom on the one hand, or for China and Burma on the other. As pointed out above, it would be grossly misleading to conclude from this that foreign trade was unimportant to Mainland China’s

T a b le

II

FOREIGN TRADE AN D NATIONAL INCOME OF MAINLAND CHINA, 1953-1957 Year

Im- Ex- Total Im- Ex- Total GNP ports ports Trade ports ports Trade M X T in millions of in millions of yuan U.S. dollars 1953 1,192 1,085 2,277 2,932 2,669 5,601 82,380 1954 1,347 1,184 2,531 3,179 2,794 5,973 88,990 1955 1,365 1,391 2,756 3,221 3,283 6,504 92,100 1956 1,490 1,668 3,158 3,516 3,936 7,453 106,430 1957 1,411 1,682 3,093 3,330 3,969 7,299 114,450

M/Y E/Y

in 35 6 3-57 3-50 3-30 2-91

T/Y

per cent 3-24 6-80 31 4 6-71 3-56 7-06 3-70 7 0 0 3-47 6-38

Sources: All foreign trade data were pieced together from the statistics of China’s trading partners and then converted into dollars at the official rates of exchange. The dollar figures are then converted into yuan at the official yuan-dollar rates so as to make them comparable with the data for GNP. Gross National Product (GNP) estimates were adopted from W. W. Hollister: China's Gross National Product and Social Accounts, 1950-57, Free Press, 1958. 1 See, for instance, G. M. Meier and R. E. Baldwin, Economic Development, New York, 1957. 2 Karl W. Deutsch and Alexander Eckstein, ‘National Industrialization and the declining Share of the International Economic Sector, 1890-1959’, World Politics, January 1961, Table 13, p. 291.

136

SINO—SOVIET ECONOMIC RELATIONS

economy. There is only too frequent a tendency among many writers to draw just this conclusion on the basis of T/Y ratios alone, thereby ignoring the innovating and structural impact of imports and exports. Viewed in these terms perhaps the single most important statistic is the statement that 50 per cent of Mainland China’s machinery and equipment requirements for the First Five Year Plan had to be imported.1 This in effect means that the import component of investment must have been almost 20 per cent.2 There are, of course, many categories of equipment in which China had no manufacturing capacity at all and for which the import dependence was complete. However, even for other types of capital goods China had to rely in significant part upon imports as illustrated by the data in Table III. At the same time, one of the interesting things brought out by this table is China’s decreasing dependence on outside supplies. To the extent that these imports were not foreign aid financed, they naturally had to be paid for primarily by agricultural exports and in more recent years to an increasing extent also by textile products. In this connection, it is frequently argued that the acute food shortages in Mainland China can be ascribed in large part to continued largescale exports of foodstuffs. However, an analysis of the available data does not seem to bear out this conclusion. As was pointed out earlier, strains in Mainland food supplies are primarily due to failure of food production to keep sufficiently ahead of population growth. Even if all food exports were retained for domestic consumption, the T able

III

T H E IM PO RT SHARE IN TH E TOTAL SUPPLY O F CERTAIN GOODS AVAILABLE TO M A INLAND CHIN A, 1953-56 Commodity Category

1953

M etal-cutting tools Forging-prcss equipment Rolled steel Non-ferrous metals Mineral fertilizer Soda products

35-8 31 -6 36-4 38-2 31 19-6

1954 1955 in per cent 40-8 291 27-7 26-9 24-7 28-8 34-2 11 *9 21-4 61-3 11 -2 —

1956 24-1 28-1 14-2 8-2 57-7 0-7

Sources: T'ung-chi kung-tso, No. 13, 1957. Jen-min Jih-pao, September 30, 1957. 1 Tsou Tsung-i, ‘The Ratio Between the First and the Second Type of Social Production during the Transitional Period’, Ts'ai-ching yen-chiu, 1957, No. 4, p. 35. 2 This estimate is based on a study of mine on The National Income o f Communist China, Free Press, N.Y., 1961.

137

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

average per capita ration could not be significantly increased for the major staples, i.e. rice, wheat and other food grains. Between 1952 and 1957 about 5 to 6 per cent of final agricultural product was exported.1 However, a large share of these consisted of agricultural raw materials such as hides and skins, hog bristles, casings, tung oil, leaf tobacco, or products which are truly in surplus in relation to domestic demand. In addition, flour, a certain quantity of un­ processed grain, soybeans and other oilseeds, eggs and egg products, and meats loomed quite large in the export bill. O f these, in terms of domestic consumption the most significant items are grain, soybeans, peanuts and some other oilseeds, and the products of all o f these. Looking at the problem in these terms one finds that about 1 -5 per cent of total food crop output (excluding soybeans), and 10 to 15 per cent of the soybeans produced, was exported between 1953 and 1957. At the same time, exports of pork were equivalent to about 5 per cent of the hogs slaughtered.2 These illustrative data thus show that exports did significantly curtail domestic supply availabilities of soybeans and its products, of vegetable oils and of livestock pro­ ducts. On the other hand, its effect on food grains was quite marginal.

T HE ROLE OF THE SOVIET U N ION IN M A IN L A N D C H I N A ’S F O R E IG N T RADE

1. The T ren d in Foreign Trade

Practically since the advent o f the Communist regime, the Soviet Union has been China’s most important—and for much of the period its dominant—trading partner as illustrated by the data in Table IV. The close economic reliance of China on Russia and on the Soviet Bloc as a whole may be ascribed to the political and ideological intimacy which characterized Sino-Soviet relations in the past decade. It is against the background of these relations that the Soviet Union extended large-scale military and economic loans to China and at the same time stood ready to supply her with machinery, equipment, industrial raw materials and military material, the deliveries of which were embargoed by the West. This, in turn, naturally increased China’s economic dependence on the Soviets. While there is no question that for most of the past decade about 50 per cent of China’s trade was with the Soviet Union, with another 1 This estimate is based on T. C. Liu’s and my estimates of agricultural product on the one hand, and the export composition ratios given in Ten Great Years, Peking, 1960, pp. 175-76, on the other. 2 Cf. Y. N. Kapelinskiy et at.. Development o f the Economy and Foreign Economic Contacts o f the People's Republic o f China, Moscow, 1959, translated by jprs, No. 3234, May 1960, pp. 408-10.

138

SINO-SOVIET ECONOMIC RELATIONS T able

IV

D IR E C T IO N O F M A IN L A N D C H IN A ’S TO TA L T R A D E, 1950-60 Year Soviet Union Other Bloc Total Bloc Non-Bloc Total Official Derived Official Derived Official Derived Official Derive< in per cent 1950 (23-4) 260 740 (2-6) 1951 (38-5) (22-5) 390 61 0 1952 51 -5 20-5 720 28-0 1953 560 190 180 69-5 51-5 75-0 250 30-5 1954 58-0 52-8 220 21-5 800 74-3 200 25-7 570 50'5 250 71-9 180 1955 21 -4 820 28-1 53-7 47-4 19-7 67-1 1956 21 -3 750 250 32-9 1957 (41-0) 41-4 (24-1) 22-5 63-9 35-9 64-1 36-1 1958 (40 0) 39 I (24-2) 22-6 61-7 38-3 64-2 35-S 1959 48-1 20-9 69-0 31 0 43-0 1960 22-7 65-7 34-3 Sources: The ‘derived’ estimates were compiled by the author and are based on the trade returns of China’s trading partners all converted into U.S. dollars. The ‘official' percentages are based on Chinese Communist data culled from the following: Jen-min Jih-pao (People's Daily), July 7, 1953; February 19, 1954; April 29, 1954. M. I. Sladkovskii, O cherki Ekortomicheskih Otnoshenii S S S R s K itaem , Moscow, 1957. Institut fuer Asienkunde, Hamburg, Die W irtschaftliche Verflechtung der Volksrepublik China m il der Sowjetunion, Frankfurt am Main and Berlin, 1959. A. Eckstein, ‘Moscow-Peking Axis, the Economic Pattern’, in M oscow ■ Peking A x is by Boorman, Eckstein, Mosely and Schwartz, New York, 1957. Department of State, Communist China's Trade with Non-Bloc Countries in 1958, November 1959, Table 3, p. 3.

20 to 25 per cent carried on with other members o f the Bloc, it is clear th a t C hina’s dependence was greatest in the mid-fifties.1 A s a m atter o f fact, it to o k the new regime apparently only two to three 1 It must be emphasized that these percentage figures are subject to a con­ siderable margin of error since they had to be compiled from a wide variety of sources. The Chinese Communist authorities publish no detailed or systematic statistics on direction of trade, or on foreign trade in general. All one can find are scattered percentages, frequently mutually inconsistent. However, practically all of China’s trading partners published detailed returns, from which in fact most of the information concerning China’s foreign trade must be obtained. This, however, gives rise to difficult problems of currency conversion, incompara­ bilities of coverage and definition, etc. The discrepancy between the official and derived series in Table IV is largely due to the fact that trade between China and its Bloc partners is accounted for on the basis of a yuan-ruble exchange rate of 1 : 1, which is clearly inconsistent with an official yuan-dollar rate of 1 : 2 •36 on the one hand and a dollar-ruble rate of 1 : 4 on the other. As a result, the official series overvalues the share of Soviet Bloc trade.

139

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

years to accomplish China’s far-reaching reorientation of trade. This process was unquestionably accelerated by the Korean War, both because of China’s need for military imports and the United Nations embargo on export of ‘strategic goods’ to China. These needs, reinforced by China’s inauguration of its First Five Year Plan and by the availability of Soviet credits, tied her increasingly to the Soviet Union till the end of 1955. However, by that year the credits were more or less exhausted as will be shown below, while a number of non-Bloc countries began to relax their controls on China trade. As a result, the earlier trend was reversed so that since that year trade with the non-Soviet areas has been growing in importance at the expense of trade with the Soviet Union itself, while other Bloc areas held their own. One of the most essential features of the Sino-Soviet economic relationship has been China’s overwhelming trade orientation toward the Soviet Bloc, which was nowhere to the same degree reciprocated by the Soviet Union. This could not help but contribute significantly to a pattern of economic dependency by China upon Russia, which was only reinforced by the structure of trade between the two countries, as will be shown below. In many ways this is a pattern reminiscent of Germany’s trade relations with Central and Eastern Europe in the ’thirties. As shown by the data in Table V, just as China is much more tied to the Soviet Union than to Eastern Europe, the reverse holds as well. If anything, even relative to the degree of Chinese economic dependence, Eastern Europe is less oriented toward China than is the Soviet Union. For most of the past decade, China was the Soviet Union’s most important trading partner, although East Germany was not too far behind. As a matter of fact, in 1957 and 1958, the latter country took the lead only to be edged out again by China in 1959. On the other hand, the foreign trade of the East European countries was preponderantly oriented toward the Soviet Union and toward each other rather than China. Therefore, it is not too sur­ prising that China did not loom very large in the foreign trade of any of the East European countries. This finding would apply just as much, or even more, to Rumania, Bulgaria and Albania for which no data are given in Table V. Having established the relative— though unequal—importance of mutual trade for China and the Soviet Union, the rest of this paper will be devoted to a more detailed analysis of this interchange and o f the other aspects of ChineseRussian economic relations. The volume and value of Sino-Soviet trade grew markedly during the ’fifties as part and parcel of a two-pronged process: expansion of Chinese and Soviet trade accompanying the recovery and growth of both economies, and a marked reorientation of the foreign trade of 140

SINO-SOVIET ECONOMIC RELATIONS

T able V

ROLE OF CHINA IN SOVIET BLOC FOREIGN TRADE, 1950-59 Year

USSR

1950 1953 1954 1955 1956 1957 1958 1959

17-7 20-4 21-4 21-3 20 0 15-4 17-5 19-5

Hungary

6-4 5 -6 5-7 6 -2 5-2

Poland in per cent 3-7 3-7 3-8 4 -3 3-7 4 -7

East Germany

5-8 69 7-5 6-5 5 -7 6 -6

CzechoS l o v a k ia

5 -2 5 -9 70

Sources: Vneshniaia Torgovliia SSSR za 1956 God, Statisticheskii Obzor; the same yearbooks also for 1957, 1958 and 1959. A. Netrusov, ‘Ekonomicheskoe Sotrudnichestvo Kitaiskoi Narodnoi Respubliki s Evropeiskimi Stranami Narodnoi Demokratii’, Vnesh­ niaia Torgovliia, Vol. XXVIII, No. 10 (October 1958), pp. 2-9. Hungarian Central Statistical Office, Statistical Yearbook 1957 (in English), Budapest, 1959. Rocznyk Statystyczny, Warsaw, 1959. Statistisches Jahrbuch der Deutschen Demokratischen Republik, 1955, Berlin, 1956 and 1958, Berlin, 1959. Institut Fuer Asienkunde, op. cit., p. 25.

both countries. As a result, the value o f total trade turnover in­ creased about three and a half times, with China’s exports to the Soviet Union expanding much more rapidly during the decade than her imports. This was principally due to the fact that in the first half o f the decade China maintained a sizeable trade deficit, which in the second half was converted into a surplus. The deficit was largely financed by Soviet loans, while the surplus which first appeared in 1956 was used as a means of amortizing the loan. A t the same time, the availability of Soviet loans during the early p art o f the period, facilitated and accelerated China’s recovery from war devastation, contributed to plant rehabilitation, helped to ease the burden im­ posed on the Chinese Com munist economy by the K orean W ar, and served to finance part of the new investment in plant extension and in increasing plant capacity. Thus Soviet loans enabled China to augm ent her domestic resources at a time when she most needed to do so. There is no question th at longer-term loans with later starting dates for, and slower rates of, am ortization could have considerably eased the repayment burden on the Chinese economy. Yet by the

141

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

late ’fifties China was in a relatively more favourable economic position, with a greatly enhanced manufacturing and mining capacity and thus a significantly increased ability to export non-agricultural goods. T a b le

VI

T R E N D S IN SIN O -SO V IE T T R A D E , 1950-59

Year

Total Trade

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959

2,317-9 3,238-7 3,781-9 4,689-2 5,350-5 5,567-4 5,989-0 5,128-9 6,061-0 8,219-4

in millions of rubles Soviet Exports to China 1,552-8 1,913-7 2,216-9 2,790-3 3,037-1 2,993-4 2,932-1 2,176-4 2,536-0 3,818-3

Soviet Imports from China 765-1 1,325-0 1,665-0 1,898-9 2,313-4 2,574-0 3,056-9 2,952-5 3,525-0 4,401-1

Balance 787-7 588-7 551-9 891-4 723-7 419-4 -1 2 4 -8 - 7 7 6 -1 - 989-0 -5 8 2 -8

Sources: M. I. Sladkovskii, 'Razvitie Torgovliia Sovetskogo Soiuza s k n r ’, Vneshniaia Torgovliia, Vol. XXIX, No. 10 (October 1959). Vneshniaia Torgovliia SSSR za 1959 God, Statisticheskii Obzor, Moscow, I960, p. 9.

In a sense, China’s eagerness to extend foreign aid on an appreciable scale in and of itself is an illustration of this fact, even allowing for the subordination o f economic to political and prestige considera­ tions. Moreover, it would be somewhat paradoxical for China to extend foreign aid to other countries while continuing to draw on Soviet credits or failing to amortize them. This in effect would then represent Soviet rather than Chinese foreign aid, however, with the Chinese reaping all of the benefits therefrom. In this connection it has been generally assumed that it was Russian failure to renew and extend the credits when they were exhausted that imposed the heavy repayment burden on the Chinese economy. However, it is an equally tenable hypothesis that the Chinese Com­ munist leadership was anxious to see these debts amortized as quickly as possible, in order to emancipate China from Soviet economic— and therefore political—dependence as quickly as possible. Which of these two approaches represent a more realistic assessment of the Sino-Soviet relationship is very difficult to say. One can find docu­ mentation in Chinese or Soviet statements and writings to support either hypothesis. 142

SINO-SOVIET ECONOMIC RELATIONS

There are a number of factors that shaped the trends in ChineseSoviet trade in addition to the availability of Soviet credit. The most important of these were the quality of the harvest and the rates of investment in China. Thus it is interesting to note that while China’s exports to the Soviet Union increased year by year, almost without interruption, as shown in Table II, imports fluctuated much more markedly. As brought out by the data in Table II, this finding applies just as much to China’s total imports. The growth of imports was closely associated with a trade deficit which was maintained until 1954-55, i.e. until the Soviet credits were exhausted. Following that, strenuous efforts must have been made to save on imports as a means of assuring a trade surplus. In spite of this, imports did not signifi­ cantly decline until 1957 which was a year of retrenchment and investment cutbacks in China.1 As a result, the level of investment goods imports could be held more or less constant, while most of the other categories of imports were curtailed. However, with rapid economic expansion resumed with the ‘Great Leap Forward’ in 1958 and 1959, imports rose rapidly once more, significantly surpassing the earlier peak attained in 1954. 2. Commodity Composition o f Sino-Soviet Trade As pointed out earlier, Sino-Soviet trade has been characterized by imports of capital goods, petroleum and petroleum products, and certain metals, in exchange for foodstufTs, soybeans, oilseeds and oilseed products, raw materials of agricultural origin (e.g. hides and skins), non-ferrous metals, and textile products. However, as may be seen from Table VII, this pattern has been somewhat modified and changed in the course of the decade. The outstanding change in China’s deliveries to the Soviet Union has been the rapidly growing importance o f textile products, partic­ ularly finished manufactures, which by the end of the decade con­ stituted close to one-third of total export value. This was apparently accompanied by a relative decline in unprocessed foodstuffs and in raw materials for the manufacture of consumer goods. Still, even by 1959, over 80 per cent of Chinese exports to Russia were either finished consumer goods or raw materials and semi-manufactures for consumer goods production. Therefore, while Soviet exports were generally destined to augment, facilitate and accelerate investment in China, imports from there were channelled into consumption in the Soviet Union. On the Chinese import side, the most striking feature is the con­ i This was explicitly recognized in Soviet writings on China trade, e.g. M. I. Sladkovskii, ‘Razvitie Torgovliia Sovetskogo Soiuza s K.NR’, Vneshniaia Tor­ govliia, Vol. XXIX, No. 10 (October 1959).

143

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

stantly increasing importance of machinery and equipment, from about 10 per cent at the beginning of the period to over 60 per cent at the end. The most notable aspect of this development is the growing share of complete plant installations in the import totals. The significance of these capital goods shipments not only from the Chinese, but from the Russian point of view as well, may perhaps be gauged if one considers that in recent years China absorbed about half or more of Soviet machinery exports to the Bloc as a whole.1 China’s predominance was even more accentuated as a recipient of complete plants, with more than two-thirds of Soviet deliveries of this type being channelled to her.2 Between 1950 and 1959, the Soviets and the Chinese have con­ cluded a total of six special agreements for complete plant deliveries. These envisage the rehabilitation and modernization of 45 old plants and the construction of 246 new projects. Of this total of 291 enterprises contracted for, 68 were ‘partially or fully completed’ by the end of 1957, while the others are supposed to be ready for operation by the end of 1967.3 The character and financing of these complete plant deliveries have been perhaps subject to more misunderstanding than any other aspect of Sino-Soviet economic relations. This misunderstanding arises from the fact that (a) in Chinese and Soviet sources they are referred to as major ‘aid projects’, (b) they usually form the subject of special agreements and (c) the total value of the ‘aid projects’ contracted for is frequently coupled with the announcement of new agreements. As a result, it has often been concluded that these represent Soviet loans or grants-in-aid over and above those officially published as such by Chinese and Soviet authorities. The confusion arising therefrom is another instance of different people attaching different meanings to the same words. Deliveries of complete plant installations do not represent aid in our sense of that term. In effect they are no more than a particular form of commercial export from the Soviet Union to China. To the extent that such deliveries in combination with other Soviet exports may lead to a deficit in the Chinese balance of payments, this deficit could be financed by Soviet long-term credits as long as such credits were available. However, as was pointed out above, these credits were exhausted by 1957 so that since that time the Chinese had to pay for all of these deliveries. 1 B. Gordeev and A. Galanov, ‘Razvitie Eksporta Produktsii Mashinostroeniia’, V.T., Vol. XXVIII, No. 11 (November 1950), p. 32. 2 A. Smirnov, ‘Technicheskoe Sodeistvie Sovetskogo Soiuza v Stroitoelstve Predpriatii za Granitsei’, V.T., Vol. XXIX, No. 9 (September 1959), p. 11. 3 I. T. Chan, ‘Technicheskaiia Pomosch Sovetskogo Soiuza-Zalog Nashih Uspehov’, V.T., Vol. XXIX, No. 10 (October, 1959) pp. 18-22.

144

SINO-SOV1ET ECONOMIC RELATIONS

It would, however, be equally misleading to fail to recognize that the deliveries of complete plant installations represent a most important form of development assistance, using the latter term in a very special sense. It is development assistance in the sense that the same expenditure of foreign exchange on capital goods imports in its traditional form will almost certainly yield lower rates of industrial growth in the underdeveloped country which receives it than an equivalent outlay on complete plant installations. This is due to the fact that the latter is, figuratively speaking, a ‘cradle to grave’ kind of a proposition. That is, these are plants which are designed by Soviet engineers in the Soviet Union and according to Soviet specifications, the equipment is manufactured there, it is installed by Soviet engineers and technicians who come with the equipment, and it is operated in its initial stages by them. Although the salaries and expenses of these technicians are treated as a part of the project costs and thus are borne by the Chinese, there is nevertheless a very considerable net gain to the Chinese economy.1 In one sense this of course does not prove very much. It merely confirms the postulates of classical international trade theory that trade brings certain gains to each trading partner which otherwise would not accrue. However, the point to be made about this in the present context is that given the particular form of trade, the gains to China exceed what might be characterized as ‘normal’ inter­ national trade gains. Moreover, this kind of ‘project’ assistance on the scale described would be very hard to envisage without a close political tie between the two sides to the transaction. After all, the so-called Soviet aid projects constituted the very heart of the First Chinese Five Year Plan and almost the same can be said for the ‘G reat Leap’. Practically all of the basic industrial expansion plans were predicated on them; for instance the expansion of existing steel mills, the construction of new steel complexes, the building of new power plants, railway development, installation of new chemical plants, oil refineries, etc. THE F I N A N C I N G

OF S I N O - S O V I E T ECO N O M IC

RELA TIONS

Sino-Soviet economic relations involve the flow of goods and services between the two countries. This poses two sets o f questions which are not always clearly distinguished: what goods and services 1 ‘According to the Sino-Soviet credit agreement of February 14, 1950, all goods bought in the u s s r as well as technical aid received is to be paid for by exports of Chinese products to the u s s r , except for the equipment and material which were to be financed by the credits granted in the agreement’, M. I. Sladkovskii, Ocherki Ekonomicheskih Otnoshenii SSSR s Kitaem, Moscow, 1957, p. 314.

K

145

T a b le

VII

C O M M O D I T Y C O M P O S I T IO N O F S IN O - S O V IE T T R A D E A. SOVIET EXPORTS TO CHINA, 1 9 5 0 -5 9

Y ear

E xport T otal in m illions o f rubles

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959

1,552-8 1 ,9 1 3 -7 2 ,2 1 6 -9 2 ,7 9 0 -3 3,037 ■1 2,993*4 2,932*1 2 ,1 7 6 -4 2 ,5 3 6 -0 3 ,8 1 8 -3

M achinery a n d Equipm ent C om plete P lant Installations only T otal 10*7 2 2 -9 29*2 23* 1 2 6 -2 3 0 -7 41 -6 4 9 -9 50-1 6 2 -0

0 -2 —

7*3 7*1 12-3 18*9 29*6 3 8 -4 2 6 -2 41*8

F errous N on-ferrous M etals M etals in per cent 5 -2 10*4 120 9*8 1 1 -6 1 0 -9 8 -5 6*3 9*6 5 -0

0 -8 3 -5 2 -8 1*9 2*9 1 -7 2 -4 1*5 2*5 0*6

Oil and Oil P roducts

O ther

T o tal

2 -9 8 -1 5*8 6 -4 5 -9 10*6 11*7 16*6 13*8 12*3

80*4 55*1 51*2 5 8 -8 5 3 -4 46 1 3 5 -8 2 5 -7 2 4 -0 20*1

1 0 0 -0 100-0 100*0 1 0 0 -0 1 0 0 -0 100*0 100*0 100*0 100*0 1 0 0 -0

b . c h i n a ’s e x p o r t s

Y ear

E x p o rt T otal in m illions o f rubles

1955 1956 1957 1958 1959

2,577*0 3 ,0 5 6 -9 2 ,9 5 2 -5 3 ,5 2 5 -0 4,401 * 1

Sources:

C o tto n and W oollen Fabrics 6*7 8 -6 1 1 -6 9 -9 14-1

to

Soya Beans, O ther OilM etal Ore Seeds an d C oncen­ their trates P roducts 9 -6 9 -8 12 -2 8*4 6 -6

15-3 13*0 —

7 -0 7*2

the

s o v ie t

N onferrous M etals 7*1 6*6 7*0 5*5 5 -0

u n io n

, 1 9 5 5-59

Textile R aw M aterials a n d sem i­ m anufactures in p er cent 7*2 7*7 6*6 4 -2 8*3

C lothing an d Linen 2*0 3*7 6*8 111 18*0

F lo u r P roducts

—

3*8 6 -9 7 -5

O ther

T o tal

52*1 5 0 -6

100*0 1 0 0 -0 1 0 0 -0 1 0 0 -0 100*0

—

47*0 33*3

Sladkovskii, V . T . , N o . 10, (O ctobcr 1959). V .T . S S S R z a 1 9 5 9 G o d , M oscow, 1960. ‘R ussia a n d E astern E urope, M ore T rad e Less A id ’ in C h i n a S u p p l e m e n t , F a r E a s t e r n E c o n o m i c R e v i e w , Vol. X IX , N o. 13 (Septem ber 1960).

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

form the subject of these international transactions and how are these transactions financed? Looking at the problem in these terms, the Soviet Union exported goods and technical assistance of various kinds to China, while the latter largely confined itself to shipments of goods. Whether these transactions were based on pure barter, free gifts, or loans, will be discussed further below. The magnitude, character and composition of Sino-Soviet trade was discussed in the preceding sections. However, little has been said thus far about technical assistance. The subject can perhaps best be illuminated by the following quote from an authoritative Soviet source: ‘Soviet technical assistance takes a variety of form s: help to enterprises and establishments, scientific and technical institutes, assistance to Chinese specialists in the management of enterprises and establishments as well as in the training of technical cadres. Soviet organizations assume the obligation for rendering [technical] aid in the construction of enterprises. Soviet scientific, designing, and manufacturing enterprises render service to Chinese organiza­ tions in the Soviet Union by way o f consultations, project design, laboratory analyses, etc. [Furthermore] Soviet organizations surren­ der their licences and patents to Chinese organizations.’1 Within the context of these arrangements, 10,800 Soviet and 1,500 Hast European specialists and technicians were sent to China in the last decade.2 During the same period, about 8,000 Chinese engineers and skilled workers received training in Soviet enterprises and more than 7,000 Chinese students attended various Soviet educational institutions and scientific research institutes.3 Finally, Soviet institutes, establishments, and organizations transmitted to China a vast variety of technical blueprints and documents in accord with a special Sino Soviet agreement on scientific-technical co-operation of October 1954.4 As was pointed out earlier, Soviet sources explicitly indicate that technical assistance has to be paid for by the Chinese except for the exchange of blueprints, licences, and technical documents just referred to, which are transmitted free of charge. However, the economic importance of this technical assistance cannot be em­ phasized sufficiently, regardless of whether it is paid for or not. This type of assistance must have significantly accelerated the pace of technological progress in China. At the same time, it provided that 1 Sladkovskii, Ocherki Ekonomicheskih Otnoshenii SSSR s Kitaem, Moscow, 1957, p. 314. 2 Chou En-lai, Ten Glorious Years, Peking, 1960, p. 65. 3 M. I. Sladkovskii, ‘Kitaiskoe Ekonomicheskoie Sotrudnichestvo’ in Problemi Vostokovedeniia (July I960), pp. 108-17. * V. Skripnik, 'Nauchno-Tehnicheskoie Sotrudnichestvo’ SSR s Socialisticheskimi Stranaroi’, V.T., Vol. XXX, No. 2 (February 1960), p. 10.

148

SINO SOVIET ECONOMIC RELATIONS

small but essential margin of difference in know-how on which depended whether Soviet deliveries of capital goods could be and would be effectively and efficiently utilized. Throughout this paper it has been repeatedly reiterated that economic relations between China and Russia were carried on within a commercial framework, i.e. that Soviet exports of goods including complete plant installations, and o f services including technical assistance, were paid for by the Chinese. W hat has not yet been clarified is what means of payment were at the disposal of Communist China. As already noted, the Soviet Union has extended certain credits to China the precise character and value of which has been the subject o f considerable controversy. Utilizing recently published informa­ tion, it is now possible to reconcile many of the inconsistencies in the Soviet and Chinese data on this subject and the conflicting inter­ pretations arising therefrom. 1. The Extent o f Soviet Aid To the best of our knowledge, the Soviet Union has not made any free grants to China since the advent o f the Communist regime. However, according to official Mainland announcements there were sizeable credits, totalling 5,294 million yuan, extended over a period o f eight years, i.e. between 1950 and 1957. Of this total 2,174 million yuan were lent between 1950 and 1952, while the remainder of 3,120 million was extended during the First Five Year Plan period.1 At the same time, the annual rate of Soviet lending for 1952 to 1957 can be derived with a fair degree of precision from the official Chinese budget reports for these years. The difficulty arises from the fact that these figures are much larger than the credits granted in the published loan agreements. Thus the Sino-Soviet agreements of February 14, 1950 provide for a line of credit of S300 million to be paid in five annual instalments, which in later Soviet sources is cited as a 1,200 million ruble loan.2 In October 1954 a second loan agreement was announced for a long­ term credit of 520 million rubles.3 This then would be a total of 1,720 million rubles or the equivalent o f $430 million at the official rate of exchange. In contrast, the loan total given by the Chinese 1 Li Hsien-nien, ‘Report on the 1956 Final Accounts and the 1957 State Budget’, HHPYK (July 1957), pp. 16-28. 2 M. I. Sladkovskii, ‘Nerushimaiia Sovetsko-Kitaiskaiia Druzhba’, V.T., Vol. XXVII, No. 2 (February 1957), p. 2 and ‘Sino-Soviet Treaty and Agreements’, CB, Hong Kong, No. 62 (March 5, 1957), p. 8. 3 For texts of these agreements see Supplement to People's China, No. 21, November 1, 1954, p. 4 and N Y T of October 12, 1954.

149

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

Minister o f Finance would be equivalent to about S2.250 million, that is just about five times as much. Two quite different approaches have been utilized in an attempt to resolve this problem. Professor C. M. Li bases his solution on what may be termed as the ‘foreign exchange hypothesis’. According to this view, the official exchange rate of about 1 -7 rubles to the yuan is inapplicable to these credits, instead of which an exchange rate of two yuans to the ruble would be appropriate.1 On this basis, Soviet credits of 1,720 million rubles would be equivalent to roughly 3,440 million yuan; the difference between this amount and the official Chinese figure can be ascribed to the surrender (on credit) of the Soviet shares in the joint-stock companies and of the military stockpiles at the Port Arthur naval base. Professor F. H. Mah, on the other hand, accepts the Chinese loan figure but tries to show that the discrepancy arises from the fact that the $430 million (1,720 million rubles) credit represents economic aid while the rest went into financing military deliveries.2 On the basis of presently available evidence, it would seem that the ‘foreign exchange hypothesis’ cannot be validated. First of all, it is quite clear now that the Soviet Union has advanced credits to China on several occasions in addition to the two loan agreements an­ nounced.3 Moreover, collation o f loan and aid information given in Soviet sources suggests a credit total of about 5,300 million rubles extended to China by the beginning of 1956.4 Given the fact that (a) Soviet loans to China were quite small after 1955 (140 million yuan altogether) and (b) the effective ruble-yuan exchange rate in Sino-Soviet transactions seems to be around 1:1, the loan figures of 5,145 million yuan (Soviet credits up to and including 1955) and of 5,300 million rubles would appear to be equivalents. What is the evidence that the foreign exchange rate in Sino-Soviet transactions is close to 1:1 rather than 1:2 or 2:1 ? There are several ways of approaching this problem. One possibility is to calculate the unit exchange rate implicit in Sino-Soviet trade by comparing the yuan values of such trade derived from Chinese sources and the ruble values from Soviet sources. This is done in Table VIII. 1 C. M. Li, Economic Development o f Communist China, op. cit., Ch. VIII. 2 F. H. Mah, ‘The First f y p and its International Aspects’, op. cit.. Table 20, p. 86. 3 Li Hsien-nien (Minister of Finance) in his speech to the National People’s Congress delivered on June 29,1957 stated that ‘During the reconstruction period and during the early period of our new development, the Soviet Union helped us on several occasions with loans', Hsinhua, Peking, June 29, 1957. * According to Pravda of February 15,1956, Soviet credits to socialist countries in Asia amounted to about 8 (U.S.) billion rubles. Deducting from this, Soviet loans to North Korea of 1,200 million rubles (exclusive of Soviet military aid during the Korean War and exclusive of a gift of 1 (U.S.) billion rubles), to

150

SINO-SOVIET ECONOMIC RELATIONS

Before analysing the results o f this com putation, it must be re­ emphasized that the data for the Soviet U nion’s share in Com­ munist China’s trade are not fully reliable. Several and different percentage figures are found in Chinese sources for the same year. While the discrepancies are not very large, they could have some effect on the implicit exchange rate. This would be particularly true for the beginning and the end o f the period. However, if alternative percentage series were used for 1950-51 and 1957-58, the Soviet share in China trade would be raised and the implicit exchange rate for these years would be closer to 1:1. Bearing these qualifications in mind, the data in Table VIII suggest that as China’s trade became predominantly oriented tow ard the Soviet Bloc, Sino-Soviet trade began to be based on a special ‘internal’ exchange rate. Thus, as p art o f this process, apparently the

T able VIII

DERIVATION OF IMPLICIT EXCHANGE RATES IN SINOSOVIET TRADE, 1950-58

Year Col. I 1950 1951 1952 1953 1954 1955 1956 1957 1958

Mainland Mainland China’s Trade with the Soviet Union Implicit China’s Value of Trade with Exchange Total Trade As per cent the Soviet Union Rate in millions yuan / in millions of China’s in millions of yuan Total Trade of yuan of rubles ruble Col. 2 Col. 3 Col. 4 Col. 5 Col. 6 4,150 23-4 971 2,318 0-418 5,930 38-6 3,239 0-702 2,273 6,480 51 -5 3,782 0-885 3,337 8,090 560 4,530 0-966 4,689 4,912 5,350 0-918 8,470 580 5,567 10,980 570 6,267 1-125 10,870 53-7 5,837 5,989 0-975 5,129 10,450 41 -0 4,284 0-835 40 0 6,061 0-849 12,870 5,148

Sources: Col. Col. Col. Col. Col.

2 from Table II. 3 from Table IV. 4 derived by applying percentages in Col. 3 to the figures in Col. 2. 5 from Table VI. 6 derived by dividing figures in Col. 5 with those in Col. 4.

Mongolia of 1,100 million rubles, and to N orth Vietnam of 400 million rubles, leaves a residual of about 5,300 million rubles for China. For more detailed evidence see also Institut fuer Asienkunde, Hamburg, Die Wirtschafiliche Verflechtung der Volksrepublik China mit der Sowjetunion, Frankfurt am Main and Berlin, 1959, pp. 43-44.

151

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

‘trade ruble’ became the unit o f account in Sino-Soviet trade, the value of this ruble being pegged since April 1950 at 0-975 yuan to the ruble.1 The annual fluctuations in the implicit exchange rate derived in Table VIII may then be due to margins o f error in the percentages of column 2 and in discrepancies due to differences in valuation and aggregation o f the Chinese and Russian data. 2. The Utilization o f Soviet Credits to China Assuming that the Soviet U nion did in fact extend a total credit o f about 5,430 million rubles (5,294 million yuan converted at the aforementioned rate of 0 -975) to China between 1950 and 1957, how were these funds used? Can F. H. M ali’s hypothesis, i.e. that 1,720 million rubles of this total were for economic aid while the rest were military, be validated? In order to resolve this problem it would be necessary to draw up a total and a regional balance o f payments for M ainland China. This is a task which will not be attem pted here; instead we will try to illuminate this problem indirectly by com­ paring annual Sino-Soviet trade and credit flows and by analysing the circumstances under which the different credit agreements were concluded. As can be seen from the data in Table IX, Soviet credits primarily financed China’s trade deficit with the Soviet Union. This would be brought even into sharper relief if we could estimate and then deduct from the large 1955 credit figure the value o f (a) the Soviet shares in the four joint-stock companies and (b) the stockpiles o f Russian equipment and material left by them in Port A rthur when they turned the base over to China in M ay 1955. In effect, the Soviets sold these to China on credit, which was entered into the budget accounts as foreign aid received during th at year. However, this line o f credit— 1 Yeh Chi-chuang, the Chinese Minister of Foreign Trade, in a report before the National People’s Congress delivered on July 11, 1957 refers to a special exchange rate, an ‘internal rate’ termed as the ‘trade ruble’ (JM JP, Peking, July 13, 1957). Soviet sources also refer to a ‘trade ruble’ as the unit of account in the trade of the Soviet Union with the socialist countries and of the socialist countries with each other (A. M. Smirnov: International Currency and Credit Relations o f the USSR, Moscow, 1960, (in English translation), JPRS, No. 4147, October 31, 1960, pp. 26-27 and 77). Moreover, from the trade statistics of East European countries we know that for several of them the ‘trade ruble’ is pegged at 1:1 in relation to the domestic currency. What about the ratio between this special ruble and the yuan? On April 19, 1950—the date o f the first Sino-Soviet trade agreement—the official Peking quotation for the us dollar was 39,000 old yuan, which was then equivalent to 4 rubles. On this basis, 1 ruble would be equal to 9,750 old yuan o f 0-975 new yuan. This deduction and its application to Sino-Soviet trade relations is explcitly confirmed in A. A. Netrusov, The Econ­ omic Relations o f China with Foreign Countries (in Russian), Moscow, 1958, pp. 82-83 and in Inst. f. Asienkunde, op. cit., p. 35.

152

SINO-SOVIET ECONOMIC RELATIONS

unlike those for other years—did not finance the shipment of new goods to China that year or in future years. Thus, probably the bulk —if not all—of the discrepancy between the trade deficit and the credit totals in Table IX may be accounted for by these two loans. Examining the problem in these terms, it is apparent, however, that even if the deficit and credit totals for all the years are close this does not hold for the annual figures. While the reason for this is un­ certain, it is probable that for most years the actual deficit may have diverged from the planned deficit. These discrepancies could further­ more be due to non-comparabilities in Chinese and Russian foreign trade statistics. In analysing these credits, there is no way of separating economic and military loans for the decade as a whole and much less for individual years. All attempts to do so are predicated on three crucial assumptions for which no documentary support can be found, i.e. that (a) the 1,720 million ruble (S430 million) loans announced within the context of the 1950 and 1954 agreements are

T able

IX

SOVIET EXPORTS TO, IMPORTS FROM, AND CREDITS TO CHINA, 1950-59 in millions of rubles

Year

Soviet Exports to China

Soviet Imports from China

Excess of Soviet Exports

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959

1,553 1,914 2,217 2,790 3,037 2,993 2,932 2,176 2,536 3,818

765 1,325 1,665 1,899 2,313 2,574 3,057 2,952 3,525 4,401

788 589 552 891 724 420

Total

Excess of Soviet Imports

/

125 776 989 583 3,964

Soviet Credits

2,007 167 440 884 1,655 117 23 —

—

5,293

Sources: Table VI, Li Hsien-nien’s annual budget reports; in Hsin-hua panyueh-k'an of August 1955, July 1956, July 1957, and March 1958, and Economic Statistics o f Mainland China, 1949-1957, by Helen and Y. C. Yin, Cambridge, Mass., 1960.

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THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

economic, while the rest is military, (b) the 1,720 million ruble loan was actually paid in equal annual instalments and (c) the 1,720 million rubles were entered into the Chinese budget accounts at the official rates of exchange of $1 = 4 rubles = 2 -35 yuan. All indications point to the fact that military deliveries are included in the Soviet export totals. Thus if one adds up the value o f all exports to China detailed in Soviet foreign trade statistics, there remains a large residual which probably includes military shipments. Similarly, there is considerable evidence to suggest that the Soviets did in fact charge the Chinese for the Korean W ar deliveries.1 It should also be borne in mind that the first loan agreement for a $300 million credit was concluded in February 1950, several months before the outbreak of the Korean War, and almost a year before the Chinese intervened in it. Therefore, events quickly rendered this early agreement obsolete. However, the Korean W ar did not only create new problems of military supply, but also produced acute strains in the Mainland Chinese economy as a whole. This meant that not only the Russian deliveries of war material, but of consumer goods and industrial raw materials as well, had to be stepped up. For this reason alone, if for no other, it would be impossible to draw a distinction between deficits incurred on military vs. civilian account. In retrospect and on the basis o f the information that is available, it would seem that the Soviet credits of the past decade were simply designed to finance Chinese trade deficits. These deficits were, in turn, a function of the fact that the Chinese imported capital goods, particularly complete plant installations, industrial raw materials, military supplies and other products in excess of their export capacity.

ECONOM IC BE NEFITS A N D COSTS TO BOTH P A R T N E R S IN THE S IN O -S O V I E T R E L A T I O N S H IP

1. Benefits and Costs to Mainland China This analysis of Sino-Soviet economic relations shows that imports coupled with technical assistance made a decisive contribution to Communist China’s industrialization during the past decade. The significance of Soviet imports is further underlined if one considers that given the us and allied trade embargoes, China could not have obtained much of this machinery, equipment and complete plant installations from any other source. The same applies to technical 1 One of the indications of this is former warlord Lung Yun's statement during the ‘Hundred Flowers’ campaign.

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assistance with possibly even greater force. Even in the absence of embargoes and with a more favourable international climate, it is doubtful that China could have received, or indeed would have invited, technical assistance on this scale and for such highly strategic capital projects as the development of electric power, atomic energy and similar undertakings. The Soviet contribution to China’s industrialization is even more accentuated if one takes account of the credits advanced at a time when China most needed them. During the initial six year period (1950-55) these credits financed over one quarter of Chinese imports from the Soviet Union. A further perspective is gained in analysing the importance of these credits if one considers that those for the first few years (1950-52) were quite sizeable at a time when the Soviet Union was just completing its own recovery from war devastation, and when it was extending no loans to any other country. On the contrary, this was a period during which the Soviets were receiving substantial unrequited imports from East Germany, Hungary and Bulgaria on reparations account, while forcing the other satellites (e.g. the Poles) to sell their exports to Russia at well below world prices. Granting that there were these economic gains for China, at what price were they purchased? It was pointed out earlier that China was economically much more dependent on the Soviet Union than vice versa. Was the Soviet superiority in economic bargaining power in­ herent in this situation reflected in adverse terms of trade for China? It should, however, be noted, even if it could be shown that the terms of trade were adverse it would not constitute proof of Soviet exploitation of its bargaining power. It must be remembered that the Soviets export to China goods which are very high on the planners’ scale of preferences while they import comparatively low or lower priority commodities from China. The Chinese on the other hand are faced with a reverse situation; they export articles which are relatively low on the planners’ preference scale in exchange for what from their point of view too are high priority items. This then creates a set of scarcity relations on the basis of which the Russians would be justified to charge—in a bilateral context—higher than world prices for their capital goods exports to China and pay lower than world prices for their consumer goods imports from China. As a matter of fact, it could be argued that unless the Russians were doing just this, under the circumstances as described they would in effect be granting the Chinese a hidden subsidy. On the other hand, from a Chinese point of view adverse terms in their trade with Russia would mean that the pricing difference represented the cost of the embargo to the Chinese economy. What in fact is the evidence concerning Sino-Soviet terms of trade ? 155

TIIE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

A conclusive answer to this question would require a most detailed study of price comparisons in Sino-Soviet and world trade which would lie beyond the scope of the present paper. Fortunately, F. H. M ah is in the process of making just such a study for the r a n d Corporation. His preliminary results show some tendency towards overpricing of Soviet exports to, and underpricing of imports from, China. However, it is unclear to what extent this is due to transport costs or actually differential pricing. Regardless o f its origins, if further studies which he plans to undertake should confirm the pre­ liminary findings, this would indicate that China could obtain some economic gains by reorienting her trade from the Soviet Union to non-Bloc areas. 2. Benefits and Costs to the Soviet Union In the course of this paper it was pointed out that for most years of the past decade China was the Soviet Union’s leading trading partner. This trade was largely based on an exchange of capital goods exports for consumer goods imports. Given the fact that the Soviet Union continued on the path of heavy industry oriented development, did this then entail a sacrifice in Soviet growth for the sake of Chinese growth coupled with a forced and unintended transfer of resources from investment and growth to consumption as Professor Galenson believes ? The first question to be faced is what was the resource burden imposed upon the Soviet economy by the credits extended to China in the years between 1950 and 1955. Both as a percentage of invest­ ment and of g n p the resources committed in the form of Soviet credits to China were truly negligible—an average of less than fourtenths and one-tenth of 1 per cent respectively for the six years combined. Even for 1955, the year during which Soviet lending to China attained its peak, these ratios rise to only a little over 0-5 per cent in the first case and over one-tenth of 1 per cent in the second.1 Even if the aggregate resource burden was negligible, to the extent that a very large share of Soviet exports to China consisted of machinery, did not these shipments reduce so markedly the equip­ ment available for investment in the Soviet Union that it curtailed the rate of investment and slowed down the growth of reproducible fixed assets? In an attempt to illuminate this problem let us first see what share did machinery exports constitute of total equipment availabilities. 1 All of these percentages are based on the Soviet credit figures given in Table IX and the study of Soviet National Income and Product, 1949-1955 by Oleg Hoeffding and Nancy Nimitz, RM-2101, April 6, 1959, Table 4, p. 9.

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Were one to relate machinery exports to China not to the equip­ ment component of investment but to total domestic machinery out­ put, the percentages computed in Table X would not be appreciably raised, only from an average of I •6 for the period as a whole to about 2-0. In these terms then it would seem that these exports are not likely significantly to affect domestic capital goods availabilities in the Soviet Union. It is of course perfectly true that the Soviet Union has during all of these years been a net importer o f capital from western as well as eastern Europe. However, this cannot be interpreted as proof that machinery exports to China reduce Soviet investment capabilities. The Soviets do not import the same kinds o f equipment from Europe that they export to China. Moreover, as recent studies by e c e show, eastern Europe needs a market in the Soviet Union for its engineering products while it requires fuels and other industrial raw materials from the Soviets. Therefore, the size­ able equipment imports from eastern Europe may be viewed as at least as much an accommodation to the needs and realities facing the economies of that region, as an expression of the Soviet desire to augment their own machinery supplies.1 T able

X

THE SHARE OF SOVIET CAPITAL GOODS EXPORTS TO CHINA IN RELATION TO THE EQUIPMENT COMPONENT OF INVEST­ MENT IN THE SOVIET UNION Year

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959

Machinery and Equip­ Equipment Component ment Exports to China of Investment (2) 0) in millions of rubles 171 32,700 33,700 440 35,200 620 645 36,100 44,400 790 53,600 928 66,300 1,231 1,090 73,600 1,270 82,800 2,370 94,900

Col. (2) as a Ratio of Col. (1) (3) 0-52 1-30 1-76 1-78 1 -53 1 -73 1 -85 1-48 1-53 2-49

Sources: A Comparison o f Capital Investment in the US and the USSR, 1950-59, Central Intelligence Agency, February 1961, Appendix B, Table 2. Table VII above. 1 United Nations, Economic Commission for Europe, 'Foreign Trade and Economic Development in Eastern Europe and the Soviet Union’, Economic Bulletin for Europe, Vol. II, No. 1, June 1959.

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It was stated above that an export share of 1 -5 to 2-0 per cent for capital goods is not likely to affect domestic investment significantly. How can we be sure? How could we test whether this is or is not significant? One way of approaching the problem might be to explore whether there has been any perceptible decline in Soviet rates of growth of national income, investment, reproducible fixed assets, and industrial production during this past decade. Recent studies by Bergson, Moorsteen and Powell provide no evidence whatsoever that Soviet rates of investment and growth may have declined. On the contrary, they strongly suggest the possibility that they may have been increased in the ’fifties as compared to the pre-war period. At the same time, there seems to have been a rise in the late, as compared to the early ’fifties in spite of a stable, or even growing, export share for capital goods as shown in Table X. This finding seems to apply equally to the growth in national pro­ duct, in industrial production, and most importantly in reproducible fixed capital. This of course does not mean that in the absence of capital goods exports to China, growth in the Soviet Union may not perhaps have been even higher. Yet, that is not too probable for a number of reasons. In the most general and also most fundamental sense the reason is that ‘the factor endowments of the Soviet Union are capable of producing virtually all essential commodities and the share of international trade in its national income is already so small as to render relatively unimportant—from the point o f view o f the Soviet economy alone—the principles on which it plans and conducts its foreign trade’.1 We have thus far examined the question whether Soviet capital goods exports retarded the country’s economic growth. What about the reverse side of the coin? Did consumer goods imports from China represent an unintended bonus from the standpoint of the Soviet consumer and an involuntary re-allocation of resources from the standpoint of the Soviet planner? Available evidence lends no support to this view. Bergson’s and Janet Chapman’s studies show that both domestic consumer goods production and consumption have risen rapidly in the Soviet Union. This is particularly striking in the face of a decline during the pre-war period of forced-draft industrialization. The change is a symptom of the fact that the Soviet Union is much wealthier so that it can afford to raise investment and consumption simultaneously—although not necessarily at the same rate—and that the planners’ preferences have shifted, to some extent at least. Within the last decade Soviet policy makers have found it necessary to make a number of concessions to the consumer goods i ece,

ibid.,

158

p . 54.

SINO-SOVIET ECONOMIC RELATIONS

sector. Therefore the increases in consumption are rooted in domestic Soviet realities rather than in the necessities imposed by trade with China. In any case, consumer goods imports from China constituted such a negligible share of Soviet consumption—only about 0-1 to 0 •3 per cent between 1950 and 1958—that in any case they could not have affected the outcome.

159

6 A C H IN E S E D IS C U S S IO N O N P L A N N IN G F O R B A L A N C E D G R O W T H A S U M M A R Y O F T H E V IE W S O F M A Y I N - C H ‘U A N D H IS C R IT IC S K.

R.

WA L K E R

Lecturer in Economics, School of Oriental and African Studies, University of London

Contents: I. Introduction. II. M a Yin-ch'u's economic writings: weak links, disequilibria and planning; M a Yin-ch‘u on the law o f value, pricing policy and agricultural supplies; M a Yin-ch‘u and the question o f population. III. The critics: the ‘standpoint’ o f M a Yin-ch‘u; the question o f population; pricing policy. IV. A rejoinder by M a Yin-ch‘u. V. Concluding remarks. With the news that China has arranged to import wheat from Canada and Australia as an emergency measure, following two or more successive harvest setbacks, the entire question o f the relative importance of natural disasters and economic planning as influences regarding these agricultural difficulties becomes one of great im­ portance. W ithout a very great deal of research, based on full and accurate data (which are not available in the West) such a division o f influence cannot be made. But any discussions which have taken place inside China during the past few years and which deal with the broad questions of planning, especially with the place o f agriculture in the First and Second Five Year Plans, are clearly of interest. The aim of this paper is to summarize the contents of one such discussion. I.

INTRODUCTION

A t the end of 1956 and during the first half of 1957 M a Yin-ch'u1 who was one of China’s leading non-Communist Party economists, President of Peking University and the holder of many high-ranking i Economist Ma Yin-ch‘u was bom in Chekiang, 1884. He was educated in Shanghai and later at Peiyang University, Tientsin, where he studied metallurgy. In 1907 he went to Yale University where he studied economics for three years and took a Ph.D. at Columbia, again in economics, in 1914. In China he taught at several universities over a period of more than twenty years. Ma was one of the founders of the China Society for the study of Marxism but when this society provided the nucleus for the Chinese Communist Party in 1921, he withdrew

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public positions, published a series o f articles (later rewritten as a book1 in 1958) on the problems of planning for balanced growth in China, and on the question o f C hina’s population. His writings were written during the famous ‘H undred Flowers’ period2, following M ao Tse-tung’s call for criticism from the intellectuals and nonCom m unist officials o f the Com m unist Party’s mistakes. Judging from the statements o f several Chinese economists made at this time, the level o f economic discussion among intellectuals in China was singularly depressed. The famous economist Wu Pao-san,3 deputy director o f the Chinese Academy o f Science’s Institute o f Economics, along with several other economists, published a long and bitter docum ent4 on this subject in the Academy o f Science’s journal, Economic Research. In it they attack the rigid adherence to Marxist doctrine in economic discussions and renounce the view that M arx and Lenin drew up a universal form ula for socialist economic development in every country. The Chinese planners were said to be groping in the dark for guidance and to have blindly adopted Soviet techniques which did not work. Policies were not based on ‘objec­ tive economic laws’ and, indeed, the planners did not know which from it. From 1928 to 1947 Ma was a member of the legislative Yuan but during the Sino-Japanese War he criticized the Nationalist Government’s economic policies, condemning their bureaucratic and capitalist tendencies which, he claimed, hampered the war effort. He was arrested for leftist leanings and for a time was imprisoned. When the Communist Government came to power he was invited to attend the Chinese People’s Political Consultative Conference ( c p p c c ) in Peking in 1949 as one of the ‘non-partisan democratic personages’. He was elected as a member of the first National Committee of the c p p c c and in 1953 was promoted to the c p p c c Standing Committee. Ma held many posts in the field of economics including the following: Vice-Chairmanship of the Standing Committee of the Preparatory Committee for the Chinese New Economics Research Institute; membership of the Committee of the New Economic Associa­ tion; 1952—membership of the China Committee for the Promotion of Inter­ national Trade; membership of the Standing Committee of the Board of Directors of the Bank of China (1945); 1956—membership of the Arbitration Committee for Foreign Trade under the China Committee for the Promotion of International Trade. In 1950 he became President of Chekiang University and in 1951 President of Peking University, a post he held until a short time ago. In the world of politics he held a long list of appointments and has travelled abroad on a number of occasions, usually in his capacity as a member of the World Peace Council. This information is drawn from a study of Chinese biographies being under­ taken at Columbia University. I am grateful to Y. C. Yin for sending the in­ formation. 1 Ma Yin-ch‘u: My Economic Theory, Philosophical Thoughts and Political Standpoint, Peking, 1958. All page references will refer to the book and not the articles. (Chinese text.) 2 For a detailed account of this see R. MacFarquhar (Ed.), The Hundred Flowers, London, 1960. 3 Author of a two-volumed work on China’s National Income in the 1930’s. 4 Wu Pao-san and others, ‘Some of our views concerning the present work in economics’, Economic Research, 1957, No. 5, pp. 123-33. (Chinese text.)

L

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laws to depend on and to follow. According to Wu and his co­ authors, planning officials seldom discussed problems with academic economists, who had neither access to the administrators nor the opportunity to influence policy. Commenting on the economic and statistical techniques used by the planning officials, the authors state that tools developed by capitalist economists were usually discarded as if they were useless. In statistical work, for example, the methods of sampling, normal curves and time-series were not used, leaving little other than addition, subtraction, multiplication, division and simple averaging. The authors go on to claim that ‘creativeness’ of scholars was stifled, for they constantly feared being called ‘revision­ ist’. The classics were the all-important thing in Chinese economic thinking, but even they, write the critics, were not read to be studied and understood—but to be quoted: \ . . the present form is to offer every word, every sentence in classical works as something golden and precious, and we can only comment on them by repeating from memory what has been said in them.’1 This echoes the words of another scholar who had protested2 as early as 1954 that 50 per cent of articles published consisted of live quotations, another 40 per cent of indirect quotations while the remaining 10 per cent of every article was written in the words of the author—words which should be grasped as rarities, even though they were frequently mistaken. According to Wu Pao-san, in a solitary comment on economic thought,3 it was well-nigh impossible for scholars of his generation to rid themselves of the title ‘old in­ tellectual’, even though they devoted long periods to studying Marx and Lenin. Few topics of research were now open to him, and his study of national income had been abandoned in favour of the history of economic thought, which, says Wu, is ‘a loss’. Though Ma Yin-ch‘u clearly felt the same as Wu Pao-san and his colleagues on the state of economic thought, he is much less bitter in his discussion of the problem and makes his points fairly gently and discreetly. In his book he states that in writing the two essays on balance in planning he wants young readers to understand ‘the most important two principles in political economy’4—‘comprehen­ sive balance’ ( = general equilibrium) and the ‘law of proportional development’. The author claims that in the past years, many young readers had not understood these principles and some had not even recognized their existence, primarily because economic discussions bore little or no relation to actual conditions in China. The greatest i Wu, op. cit., p. 133. 3 Kwangming Daily, May 1, 1957. (Chinese text.)

162

2 Ibid. * Ma, op. cit., p. 141.

PLANNING FOR BALANCED GROWTH

proportion of examples in textbooks were ‘slavishly copied’ from foreign countries and were simply not apposite. Students could not see their relevance, and the subject of economics had become dry and uninteresting to them. M a states that young people should under­ stand how the economic system works so that they will feel that their work is part of the whole: * ... you yourself are completing the construction of socialism and you are an engineer of socialist construction. How glorious! When you work you will work all the better, with more interest, and your work will seem more significant.’1 Ma Yin-ch‘u began to work on his essays in 1955. He wrote an essay on the socialist transformation of industry in China but did not publish it until 1957, because his friends told him that it defended capitalism. Similarly, his early work on China’s population problems was not well received. M a wrote his essay on population in 1955 and hoped to present it at the All China Congress of People’s Representa­ tives. He first discussed it with delegates to a small assembly in Chekiang Province in 1955 but several of them attacked its contents as Malthusian. Because ‘the atmosphere was not suitable for putting forward such questions’ M a ‘voluntarily withdrew’ the essay until 1957, when Mao Tse-tung and other leaders spoke on the same question. In this ‘matured’ atmosphere M a presented his essay at the All China Congress and it was published in the People's Daily in July 1957. The essays on balance in growth were written in 1956 and 1957 during the ‘Hundred Flowers’ period and they were not held back from publication. Before examining the contents of Ma Yin-ch‘u’s economic writings in detail perhaps it would be useful to have a very brief sketch of the China he is writing about. He wrote his essays toward the end of the First Five Year Plan which, though formulated in 1955, was said to run from 1953 to 1957, 1952 marking the end of the period of reconstruction and stabilization. C. M. Li,2 who has provided the western world with the most thorough and reliable account of the recent economic development of China so far avail­ able argues that in some ways the First Five Year Plan was illconceived. In particular he claims that the State’s allocation of investment funds was too heavily weighted in favour of heavy in­ dustry, giving too little to agriculture, forestry and water conserva­ tion. Under the original provisions of the Plan, agriculture, forestry 1 Ma, op. cit., p. 141. 2 Choh-ming Li, Economic Development o f Communist China. An Appraisal o f the First Five Years o f Industrialization. Berkeley, 1959. The similarity between Professor Li’s general view of the problems impeding China’s development and that of Ma Yin-ch‘u is very striking.

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and water conservation were to receive only 7-6 per cent of all government investment, whereas industry, mining and electric power were to have 58 •2 per cent. Despite the fact that the govern­ ment called upon the peasants themselves to invest 10,000 million yuan, compared with the government’s 2,680 million, Li argues that total investment envisaged for these crucial sectors was still too low. But all plan provisions are adjustable and, with skilful planning, errors regarding target setting and investment plans could be rectified to some extent. It seems clear, however, that during the plan period the adjustments made were not adequate to prevent serious dis­ locations from developing. The statistical and planning services were weak and ‘balancing work’ failed to cope with the disproportions which appeared. Bottlenecks in power, basic construction materials and agricultural supplies repeatedly dislocated the economy. During this period China had the added problem of feeding a population of approximately 600 million people (according to the 1953 Census) increasing at a rate of 12-13 million per annum. Li speaks of a ‘desperate struggle’ to increase agricultural supplies to feed this population, to guarantee the supplies of materials needed by in­ dustries and to satisfy heavy export requirements. In addition, this was a period of severe natural disasters. It is against this background that Ma Yin-ch‘u’s studies must be viewed. II. MA Y I N - C H ‘ u ’S ECONOMI C WRI T I NGS

The economic theory in Ma Yin-chVs writings is particularly simple, and, indeed, might be considered to be so obvious as to be trivial. But Ma is concerned with teaching what he considers to be some fundamental economic truths to his readers and, as he shows, even if the elementary theory is fully grasped, it is exceedingly difficult to apply it in practice. His writings are more empirical than theoreti­ cal and are more concerned with the problems of planning in China than with the achievements actually made, though he never attempts to belittle those achievements, which he frequently describes as ‘rarely seen in the world’. Ma starts out from the standpoint of dialectic materialism, and from Mao Tse-tung on ‘contradictions’ with the idea that everything in economic life is connected. He represents an economy in dynamic equilibrium by a rotating circle, which is made up of a series of ‘links’ (the ‘links’ being economic variables or sectors). An economy can only achieve general dynamic equilibrium if each ‘link’ is con­ nected to the next in accordance with the ‘law of proportional development’. This law states that between any two ‘links’ there exists an optimum or correct quantitative ratio and these ratios (or proportions) must be attained for all ‘links’ in the planning process 164

PLANNING FOR BALANCED GROWTH

if the sectors of the economy are to be fully integrated. Presumably in order to give the diagram a third dimension (representing growth), Ma further states that the circle rotates upwards in a spiral. This metaphor of circles and links appears to be an unnecessarily complicated way of making an elementary point—that everything in economic life is related in some way. Perhaps it has more meaning for the Chinese audience, or perhaps Ma is being deliberately obscure in order to bring in ideas which are politically unpopular. Whatever the reasons he has for using the idea, however, the main point is that he is proposing three rules of planning: 1. Recognize that all sectors are interdependent. 2. Discover what form the connections take. 3. Plan to secure those ratios, between all the sectors in the economy, that will produce a smooth, balanced growth. For example, if policy is to expand the production of steel, then this involves changes in the production of pig-iron, coal, transport and in labour, wages, consumption goods industries, agricultural raw materials and food___ This is Ma’s way of making the point that planning will minimize disproportion and waste if it can build an accurate input-output model of the economy, fitting in the correct magnitudes. He re­ iterates the importance of these basic points: \ . . the plan for socialist economic construction is built on the law of proportional development (at the same time it also uses the law of value), and if we rely on the law of proportional development we can produce a general equilibrium.’1 In any circle of links, however, Ma recognizes that some will be ‘rising’, some ‘falling’, some ‘progressing’, and others ‘regressing’, so that the whole circle is never balanced in practice. Partial disequilibria are bound to exist. This he calls a common and universal phenomenon: ‘Our real existence is developed in the contradictions of equilibrium and disequilibrium. Our responsibility then is that we must adopt, from the standpoint of development, active measures to discover continually new, weak links, and to overcome new disequilibria and cause the entire national economy, step by step, to move towards newer and higher levels.’2 The author poses himself the question: is general, dynamic equilib­ rium being attained by China? This, says Ma, requires empirical research. To rely on the Russian classics to answer such a question is clearly useless. It is no use ‘talking to the air’. 1 Ma, op. cit., p. 90.

2 Ibid., p. 105.

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\ . . we must take all aspects of social and economic activity in China and carefully and sincerely study them, analyse them, and then we can return to answer the question.’1 His method of dealing with the above question is to construct four circles, the links in which are chosen to illustrate the method of approach and the different problems in China. In this way Ma tries to reveal dislocating links and the key to balanced growth. The four circles are purely illustrative and do not involve any inevitable se­ quence. They are essentially a tool for teaching (the planners?) how to look at economic life. The four examples are very different. The first one starts and ends with agricultural development, followed by a circle beginning with a stable price policy. The third takes the balance between light and heavy industry as its start, while the fourth focuses on steel. In these four examples of links and balances Ma covers almost every possible problem of importance in China. Ma’s circles and their links are not interesting enough in themselves to warrant reproduction and analysis in this paper. Instead, the paper attempts to present a broad survey of the author’s work, in all four circles, on the subject of weak links, disequilibria and planning for better balance, following which two controversial and important topics covered by Ma are discussed in greater detail. These are pricing policy and the population question. Weak Links, Disequilibria and Planning Ma Yin-ch‘u compares planning with a game of chess. The reper­ cussions of each move must be foreseen, both in the short run and the long run, and the possible alternatives must be considered care­ fully. To what extent did the plans in China reflect the ‘laws’ of equilibrium and proportional development? After looking at the course of development in China since 1952 Ma concludes that planning for general equilibrium was not successful so far: * ... what balance work existed was not, inevitably, comprehensive.’2 This was partly due to inexperience—a ‘temporary phenomenon’ in the eyes of the writer. In Ma’s opinion the agricultural sector is China’s weakest link and he stresses that in future more effort will have to be applied to solve its problems. Throughout, the author tries to show how closely related are the fortunes of agriculture and the balance of the entire economy. The need for efficient planning in agriculture is made more urgent by the high frequency of natural disasters in China—especially floods. In 1954 and 1956 flooding was very widespread. According to official Peking figures, 12-2 million tons of grain were lost in 1956 ' Ma, op. tit., p. 7.

1 Ibid., p. 90.

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because of this. How much greater agricultural production might have been, given different planning, is, of course, a question which is impossible to answer, and Ma does not attempt to deal with it. lie concentrates his attention on the serious imbalance existing between agriculture, light, and heavy industry. In particular he singles out the inadequate supply of raw materials for light industry, 90 per cent of which comes from agriculture. These include cotton, flour, sugar, tea, and edible oil crops. Other industrial raw materials too were a crucial bottleneck, especially s'eel, coal, pig-iron, alumin­ ium, copper, cement, oil, and also electric power. The level of investment in heavy industry was simply too high in relation to supplies of basic materials and power. Firms were held up waiting for materials at a time when, according to the target, they should be delivering their finished goods. At times the materials bottlenecks were caused by an inadequate and badly organized transport system with its irrational and long hauls. The materials supply crisis reached its peak in 1956, when the Chinese leaders decided to in­ crease the speed of heavy industrial investment. Ma Y in-chV s comment on this decision is: ‘undue haste prevents thoroughness’.1 Disproportions of a very serious kind, for example, between accumu­ lation and consumption, became acute. Following the increase in the incomes of the agricultural co-operatives in 1955 the demand for both consumer and producer goods by the agricultural sector also increased. But the proportions of basic industrial investment being allocated to light industry and heavy industry under the First Five Year Plan were on average 15 per cent to 85 per cent. The light industries were starting from what seemed to be an investment shortage but in fact their development was impeded more by shortages of materials from agriculture. In 1956 natural disasters and bad price and marketing policies contributed to a decline in the cotton harvest. In 1957, therefore, the cotton textiles industry was forced to operate at about 75 per cent of its capacity because of the cotton supply problem alone, and cotton rationing was greatly increased. Despite the severe internal shortages, cotton imports had to be cut in 1957 in view of a shortage of foreign currency while, the same year, following the tense materials position the level of invest­ ment in light industry was reduced. M a advocates expanding light industrial investment and considers that cuts influenced by materials shortages are short-sighted. Policy should build up capacity in light industry and should also ensure that the necessary materials are forthcoming. He argues that the emphasis given to heavy industry in the plans is too high and calls for a new balance between heavy and light industry, drawing on speeches by Liu Shao-ch‘i and Ch‘ien Chih-kuang, Minister of the Textile Industry (which make the same 1 Ma, op. cit., p. 109.

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plea) in his support. He does not indicate, however, what the precise nature of the new balance should be. What weaknesses in planning does Ma point to in his survey of imbalances? 1. First and foremost Ma concludes that the entire basis of target or ‘norm’ setting was extremely weak. Experience in this field was lacking, investigations and surveys as a guide to planning were few and badly done, while research into the relationships between the different sectors was neglected. The statistical services were in their infancy. In a word—planning was at a very crude level. In many instances planners did not ask the question: what constitutes an optimum rate of increase in the level of production for a given commodity and on what does such an optimum depend? And from the examples Ma presents it is clear that they had failed to use in their planning the concept of opportunity costs, nor had they been very careful to check the consistency in the planning, relating to materials balances. Many norms were set too high and the time allowed for fulfilment was often too short. Little room was left for unforeseen dislocating factors, such as natural hazards, or for un­ expected increases in demand so that stocks and reserve capacity, which are essential if smooth development is to be ensured, were grossly inadequate. The frequent revisions in targets and policies were, therefore, closely related to this weak basis of planning. 2. Ma gives great prominence to the question of centralization and the degree of co-ordination between the central planning authorities and local government. He criticizes the planning system for its over­ centralization, leading to rigidity, duplication and ‘bureaucratism’. Some targets which were handed down from the centre were adjust­ able by local planning authorities without permission, but too many target adjustments required this permission, which was often a timeconsuming process. Since, Ma argues, too little attention was paid by the centre to setting norms which were really suitable for the regions involved, repeated adjustments had to be made, apart from those which changing circumstances necessitated in any case. The time taken to secure permission was so long that serious disproportions appeared. The author gives examples, too, of cases where the pro­ jects of local planning authorities were actually duplicated in the same areas by the central planning agencies. The latter were opera­ ting completely independently, appaiently oblivious of local schemes. In one area, for example, sugar mills were constructed independently by central and local agencies with the result that capacity was con­ siderably oversupplied and some of the firms had to be relocated. In another area, which already enjoyed a surplus of repair and main­ tenance capacity, central authorities built new repair shops and later discovered that they were not required. Ma refers to the central 168

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authorities ‘going it alone over ten thousand questions’,1 to ‘blind development’ regardless of need, and to errors which come under the categories ‘rightist, deviationist and adventurist’. In making these points Ma is again careful to applaud statements of some of the leading Party officials which had recently been made, containing the same judgments as his. In particular he quotes a speech made by Liu Shao-ch‘i, calling for more powers to be given to local authorities and for greater flexibility in plan enforcement. Li Fu-ch‘un (on the same theme) is also quoted. Both called for a policy of ‘management at different levels’. 3. Departmentalism was widespread. Too many departments were only concerned with their own industries, regardless of the effect on the rest of the economy, and investment decisions were too often taken without reference to the needs of other departments. As an example of this Ma takes the large-scale schemes for water con­ servation. He names several2 which had lacked a central plan designed to co-ordinate the demands of all interested and affected parties and to secure the maximum output per unit of resouices. Many of these schemes were not truly multi-purpose in character and revisions in the work had frequently become necessary. In some cases the alterations were begun during the actual construction of the scheme, when, for example, it was discovered that certain factors had been omitted from the plan, but in other cases large-scale revisions were found to be necessary after the schemes had been completed. The body of embankments or the height o f the dams had to be raised to increase the capacity of reservoirs to take account of irrigation demands. 4. Planners had not fully learned how to manage prices, taxes, wages and profits as an instrument of policy. In these realms Ma considers that there is need for a great deal of study and research, particularly in their relation to agricultural development. As we shall see, Ma was very interested in pricing policy in agriculture, which he regarded as one of the most important problems facing China. Irrational prices had not been adjusted at the right time, while the price and tax structure in agriculture, in M a’s view, were important factors to be considered when assessing the causes of the serious supply deficiency of agricultural raw materials. This will be surveyed in more detail in a later section of the paper. 5. Research into designing machines and implements most suitable for the wide variety of Chinese conditions was not good enough nor adequate. In agriculture too many foreign implements and machines 1 Ma, op. cit., p. 42. 2 Ibid., pp. 18-19. The schemes named are: Kuant'ing; Ta Huo Fang; Fo Tzu Ling; Meishan; Huai River Reservoir; Panch'iao Reservoir; Pairsha Reservoir; Porshan Reservoir.

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had been imported or manufactured. Insufficient attention was paid to the versatility of farm equipment such as tractors, crop-picking machines and crop-sowing machines. Too many were single­ purpose implements and only usable for a limited time of the agricultural year. The result was that the mechanical equipment in agriculture was idle for long periods. Here M a stresses the need for more trial manufacturing—a matter which involved many departments, technical problems and different types o f raw materials. He calls for a unified attack on this problem, which should not be tackled piecemeal. Pilot schemes, models and trial manufacturing must be developed to ensure future efficiency and success, and particular emphasis should be laid on solving the problems of using Chinese materials to manufacture substitutes for scarce materials (for example man-made fibres) and also import substitutes. 6. Too much emphasis was placed on large-scale enterprise and schemes, especially in the steel industry and in the field o f large-scale water conservation projects. M a claims that projects such as the 15-20 year three-gorge multipurpose scheme in Szechuan are both impracticable and economically unsound. Investment is too high and even if adequate funds were available, supplies of cement and steel would be insufficient. He further doubts whether 15-20 years could witness the scheme’s completion and during this time serious flooding will occur every five or six years. A final disadvantage is that too much arable land would be flooded in the creation of the reser­ voirs. In M a’s view, emphasis should be placed on existing dikes, lakes and marshes, as flood outlets and on a vast number o f labour intensive small-scale drainage, irrigation and flood protection pro­ jects. He urges China not to neglect these solutions to an immediate and urgent problem in favour of remote, large-scale projects with their unrealist demands on resources. 7. Existing productive capacity was being neglectcd in the old in­ dustrial bases along the Chinese coast. Here again, Ma exposes1 a tendency of the planners to go to extremes. In this case it is the extreme of reversing the ‘malformation’ in China’s pattern of in­ dustrial location, resulting from her ‘semi-colonial’ status o f the past 100 years. Dispersion of the location o f industry was carried out so much that the coastal industries, with their many economic advantages, had been damaged. The new interior industries drew on 1 Ma, op. cit., pp. 118-21. It is interesting to note that Ma does not make as much of the neglect of coastal industries as he might have done. An article in the journal of the State Planning Commission, 'Planned Economy', 1956, No. 6, reveals some very interesting figures on the subject. In 1956 the average utilization of steel-rolling, caustic soda, rubber, shoes, matches equipment and knitting equipment firms was less than 50 per cent in Shanghai and below 40 per cent in Tientsin.

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the older industrial areas for a large proportion of their skilled labour force and were creating serious shortages for the coast. Ma proposes that certain types of skilled workers in greatest demand could be drafted to the new industrial areas for specific periods but that they should return to the coast when they have helped to establish the new bases and to train new workers there. This is not to say that Ma opposes a wider dispersal of industry. On the con­ trary he regards this as ‘one of the most important tasks’ facing the economy and discusses all the economic and strategic arguments in favour of such a policy. His point is that a balance is needed in this policy and he requests the planners to study the potentialities of existing industry, when planning for the construction of new industry, paying more attention to the required division of labour and specialization between regions. These are the major weaknesses in planning, according to Ma Yin-ch‘u. To overcome them will not be an easy task, he warns: ‘The formulation of national economic plans is an extraordinarily delicate work.’1 In future planners must co-ordinate and integrate the different types of economic activity more closely and Ma lists twelve tasks which should be the focus of balancing work. These tasks, which he calls ‘the twelve great co-ordinations’2 or ‘the co­ ordination of forces’ are: the co-ordination of large, medium and small-scale industry; state exploitation of resources and exploitation by the masses; centrally and locally managed enterprise; new and old enterprise; new techniques and old; mechanized, semi-mechan­ ized and handicraft work; handicraft producers’ co-operatives and agricultural producers’ co-operatives—in particular with respect to development of small mines and salt and alkali beds; all sources of investment which will increase agricultural development; flood prevention, drainage, irrigation, water and soil conservation; the work-rectification and anti-rightist campaign and the economy campaign; the promotion of mechanized and handicraft industry; all sources of accumulation. Ma Yin-chlu on the Law o f Value, Pricing Policy and Agricultural Supplies Ma Yin-ch‘u, throughout his writings, emphasizes more than any­ thing else the importance of designing a policy which will guarantee the required supply of agricultural products, the fountain of China’s development. Physical controls over marketing had been in operation since 1953 in the form of the planned purchase and planned supply scheme and others. Agricultural producers were required to fulfil sales quotas for government buying agencies and, in addition, to pay taxes in kind. A portion of the remaining produce might be sold by 1 Ma, op. tit., p. 112. 2 Ibid., pp. 62-3.

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the growers, not on the free market, however, but through the state commercial network. Some of the produce from the small ‘retained plots’ of the peasants were allowed to be sold on free markets. The success of the physical controls, of course, depended on how strictly they could be applied. It was necessary to exercise a tight control over agricultural consumption. As Ma points out, to each peasant an increase in grain or rice consumption by a single catty or an increase in the cotton cloth consumption by a square metre seems insignificant, but when viewed as a total increase in demand by 528 million peasants, the importance of tight control is at once apparent. But if consumption is held down too far, what Ma Yin-ch‘u fre­ quently refers to as ‘peasant activeness’ will be affected. Government authority has to be very powerful indeed to force peasants to plant, tend and harvest a given acreage of a given crop with care, and to sell it at grossly unfavourable prices in relation to those of essential consumer and producer goods. The limit of tolerance, beyond which peasant activeness will be affected, should not be reached, in Ma’s view. Reference has already been made to the supplies crisis of 1956. In agriculture it affected mainly the ‘industrial’ crops including grain and livestock. Inflationary pressure was so serious that the govern­ ment decided to open the free market to a greater proportion of agricultural products. More reliance was to be placed on the price mechanism as a balancing agent. The results were far-reaching. Some prices rose abruptly. Many peasants refused to sell to the government agencies and cancelled pre-arranged contracts. The ordinances relating to the limitations on free market operations were ignored and many products still subject to controlled marketing found their way onto free markets. Ma refers to ‘active speculation by merchants and pedlars’1 and to peasants being ‘seduced’ into dealing with them illegally. ‘Spontaneously developing firms’ (i.e. firms not planned for) grew up in towns such as Shanghai, making oil products, silk and leather. The free market was consequently curtailed again in 1957 and the size of the private plot doubled. Ma is convinced that ‘peasant activeness’ in China was delicately balanced, during 1956 and 1957 and that the ‘urban-rural alliance’ was in jeopardy, largely because of the government’s failure to adopt a rational price policy for agricultural products. He uses the word ‘rational’ or ‘logical’ many times, though he nowhere defines it. It is clear, however, that prices are irrational in his view if there are serious shortages of certain farm products. He is concerned with the floor of prices for different farm products and does not discuss the ceiling he would allow, or the question of raising prices to an equilibrium level. He presents evidence to show that peasants were i Ma, op. cit.y p. 87. 172

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greatly dissatisfied with the prices received from the State’s monopoly buyers. The latter were said to adopt a ‘take it or leave it’ attitude in pricing the agricultural products bought for sale. In some cases these buying agencies had the task of grading the crops and giving the price for that grade. Since they were often preoccupied with their own quantity and expenditure norms they tended to give low gradings and consequently squeezed prices to the peasants, a phenomenon appropriately known as ‘quality and price squeezing’. Ma calls for more use of price policy to increase incentive and he claims to provide some figures in support of his argument that the supply of farm products is price elastic. For example, a price in­ crease of 29-8 per cent (time period of increase not given) for tea oil seeds produced a ‘large’ increase in supply. The 1952-53 production of tea oil seeds of 1 - 8 million tons increased to 2-28 million tons in 1957. As it stands, this evidence is scanty, to say the least. The pig population of China was 98 million in 1956, considerably less than the required figure. Ma lists the following reasons for the deficiency: 1. purchase prices were ‘excessively low’; 2. prices of fodder were too high; 3. more profitable uses of labour had appeared after co-operativization had been carried out; 4. taxation on pig-rearing was too high. 1957 ‘farm gate’ prices were increased by 13-4 per cent, while the tax rate was decreased by 5 per cent. Ma does not say so, but presumably these changes were announced in 1956 to enable farmers to change their production plans for 1957. In 1957 the pig population increased from 1956’s 98 million to 118 million—about a 20 per cent increase. Ma does not give any details of changes in pig quotas or in physical controls adopted to increase the pig supply, so that it is impossible to make an assessment of the impact of the price and changes. With such a large change in the profitability of pig-rearing, however, it is safe to conclude that the monetary incentives played a large part. Ma points to ‘irrationalities’ in the prices of other products. Prices of peanuts, sesame, tea, and silk cocoons were des­ cribed as ‘low’ and output in some areas was below the pre-war level. The prices of tung oil and tea oil seeds, relative to grain, were less than before the war and in many cases the yield of tea oil seed per unit area was also less than before the war. This appeal to post-war price relationships is somewhat curious since one cannot tell how far such pre-war relationships were ‘rational’. Their relevance to 1957 or 1958 conditions seems obscure. However, the point Ma is trying to make is simply that prices of ‘industrial’ agricultural products, in particular, were so low, relative to other agricultural product prices, that serious shortages had occurred. If rational prices could be 173

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fixed \ . . then it will be easy to stimulate peasants to develop agricultural production’.1 Ma proposes that the prices of grain, cotton, and oil crops should be raised to encourage an interest in their production. Furthermore, he suggests that strict market management and control by govern­ ment monopoly buyers should be reformed. In its present form the marketing system was causing a freeze-up of inter-regional trade resulting in regional gluts and scarcities. Unified purchase and sale should be kept for the main industrial crops of agriculture, such as cotton and sugar, but many others should be freed for a more open market, which should be controlled by local, not central planning agencies. The monopoly power of the government buying agencies should be ‘destroyed’,2 while more price competition between buyers be allowed to take place. Finally, more attention must be paid to relating price to the quality of product. All this is rather vague and raises a multitude of questions. How high should the prices of specific crops be raised? What criteria should guide the price changes? What crops should be sold on an open market ? Would there be no limit set on prices formed in these markets ? If price competition between buyers of scarce commodities became intense, would this have serious and widespread repercussions throughout the economy? The rather sweeping and vague proposals made by Ma Yin-ch‘u viewed in relation to the alarming experience of the freer market in 1956, come as a surprise. Indeed, elsewhere in his writings, Ma attacks the peasants for their failure to study the needs of brother urban dwellers and criticizes their selfishness in desiring to increase their consumption. He also insists that the central buying policy must be rigidly imposed and that ‘sanctions’ must be taken against any who attempt to place products earmarked for quota deliveries on an open market. M a’s price policy is certainly confused, vague, and poorly expressed and clearly he has no ready­ made solution to this problem. His message, summed up briefly, seems to be that physical control over farm sales, by some state buying organizations (local or central), should definitely remain for most products. However, some should be freed for sale on more open markets, to encourage peasants to cultivate as intensively as possible their small retained plots and produce the maximum amount of crops. In view of the serious shortage of certain crops, their prices must be raised relative to others. This will encourage peasants to produce more. Ma does mention four important matters to be considered when using price policy in this way: 1. The question of demand. If agricultural purchasing power in­ creases through a rise in prices (assuming a less than proportional 1 op. cit., p. 91.

2 Ibid., p. 102.

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decrease in sales), this will affect the demand from agriculture for producer and especially consumer goods. This further strengthens M a’s argument for a rise in the ratio of investment in light, relative to heavy, industry. But as Ma also points out, the elasticity of supply in the consumer goods industries is probably very low, in view of the materials supply deficiency, which brings us back to the question of development in agriculture. 2. Wages in industry might have to be increased because a rise in the price of grain and agriculture’s industrial crops will affect the industrial workers’ cost of living. Wage increases will also stimulate demand for agricultural products. Ma does not take the analysis of the other effects of wage increases any further. 3. Higher prices paid to producers for farm products could affect government expenditure. Since the State is the buyer of most agricultural commodities, a rise in prices to producers could result in an increase in government expenditure and this might lead to necessary reductions in other fields, for example in industrial invest­ ment. 4. The effect of higher peasant incomes on the consumption of farm products. With a high income elasticity of demand for such items as pork, control over consumption will be all the more important if prices are raised. Ma recalls that when peasants’ incomes increased (no date given), consumption of pork on the farms also increased so much that not only was there a serious shortage of pork in the towns but also pork exports had to be cut. Here a problem for the planners would be to forecast the relative pull of the elasticity of supply of and the income elasticity of demand for such products as pork. Ma tries to exemplify his views of the entire problem of prices by discussing briefly why some industrial product prices cannot be de­ creased at the present time. He explains that demand is in excess of supply for most industrial goods. To lower prices would not result in a higher volume of sales because the elasticity of supply is low owing to materials shortages and to the difficulties involved in increasing the percentages of the national income which can be allocated to accumulation. The price system would break down and goods would disappear from the markets, to be sold on black markets. Prices would then rise again. Here, says Ma, we must learn a ‘valuable lesson’ from experiences encountered, such as these in 1953 when this mistaken policy of reducing prices was adopted. Ma concludes that prices ‘oppose regulation by men’—presumably meaning that any price fixing must have an eye on what the equilibrium price would be in the absence of control. But Ma is clearly no advocate of setting equilibrium prices. His point must be that price fixing cannot ignore the market forces too much, without serious effects. In this broader view of price Ma is, again, very cautious, making 175

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what seems to be a revolutionary point and almost immediately half withdrawing it again. In one place he writes: ‘Although in buying large quantities of agricultural products such as grain and cotton we have very greatly curtailed their free market exchange, yet we have also greatly restricted the role of the law of value. But we must still use the law o f value to carry out the planning o f the economy.'1 In another place, however, we read: ‘In capitalist countries when this [supply gets out of line with demand] happens, prices change; after the prices have changed, production changes. Price changes automatically carry out the function of evening [things] out. But in China all these things are in the hands of the State. The State has the power to control things, and provided that it truly carries out its control according to the law of proportional development it has no need o f a law o f value to lend a hand. The State can use this law to attain predetermined targets. . . . What controls this balancing work is not the law of value (but beyond all question the law of value is used as a supplement)—but it is the law of proportional development..........’2 Again, later: ‘In China, what controls our planning work is the law of proportional development and not the law of value, but still we must use the law of value to attain the aim of balance between supply and demand. The question is how to use it.’3 Finally: ‘. . . in China not only can price not control increases and decreases in production, but also price itself is opposed to men’s regulation. But we must unquestionably use price to maintain balance between commodity production and distribution, that is all. Everybody knows that only through commerce can the consumer goods manu­ factured by China’s state-run enterprises reach consumers’ hands. If you have commerce, you must have money; with money, you must have prices. But the rationality of men-fixed prices can determine whether commerce is established or broken down; whether pro­ duction and distribution become balanced or unbalanced, while at the same time this can also determine whether goods are over or undersupplied on the market.’4 J Ma, op. cit., p. 94. ^ Ibid., p. 114.

2 Ibid., pp. 109-10.

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3 Ibid., p. 111.

PLANNING FOR BALANCED GROWTH

Ma Yin-ch‘u’s contribution in this field then, is that he makes it obvious that the question of how to use price as an instrument of planning is a very difficult, serious and urgent problem, requiring more research. In view of his stress on the need to increase yields per hectare above all else in agriculture, it is very surprising that he does not discuss how a rise in farm product prices would affect this in particular. Would peasants respond to the price changes by increasing the area of land under the high priced crop—thereby reducing the area under other (equally important?) crops? Or would the pattern of land utilization remain unchanged while the peasants tried to increase yields per unit area? How could the planners be sure that the price increases made would not be too high—resulting in gluts of the products formerly in short supply—and comparable scarcities in crops formerly in adequate supply? Experience in other countries has shown how difficult it is to forecast the elasticity of supply for farm products. M a appears to pay no attention to this experience. Alternative incentives are not mentioned, incentives specifically designed to encourage land saving innovations. Fertilizer subsidies? Tax and price levels fixed on a scale which relates to yields? For complete success wouldn’t it be better for the government to concentrate on securing such control over agricultural organiza­ tion that the planners could direct the pattern of land use according to plans based on the economy’s projected demand for products and the knowledge of land production capabilities? This, of course, requires much more knowledge and organization than was possible in China during 1958 when Ma was writing. But it is surprising that he ignores these issues altogether. Perhaps he would reply that his aim—a time-honoured habit o f academic economists—was to raise problems rather than to solve them. He does admit that pricing policy is a ‘very complicated problem’ and requires a great deal of study. With this, few would be in disagreement. M a Yin-ch'u and the Question o f Population Ma Yin-ch‘u’s writings on the subject of China’s population in relation to her economic development have been the chief source of his fame and notoriety in China. In M a’s view this question over­ rides all others in importance when thinking about China’s future: ‘The relationship between population and production is more im­ portant than any other element___n He claims that, whereas in the past the ‘contradiction’ o f class was the one to be solved in China, at present it was that of ‘high popula­ tion, low level of investment funds’: 1 Ma Yin-ch'u, ‘My Philosophical Thoughts and Economic Theory’, New Construction (November 1959), pp. 21-5, p. 54. (Chinese text.) M

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‘There are still contradictions, and apart from the important ones spoken of by Chairman Mao concerning contradictions among the people, I consider that a high population with a low level o f invest­ ment is a very serious contradiction.’1 Ma expresses himself somewhat more cautiously than elsewhere in his writings and this is hardly surprising in view of his experience in 1955 when he tried to publicize his views on the subject. In many instances he is careful to quote the Chinese leaders’ pronouncements on this topic and to follow up such quotations by pointing out that he agrees with their views. However, later Ma does come out with the bald statement th a t: ‘China’s greatest contradiction is that population growth is too fast and capital accumulation seems to be too slow.’2 Ma quotes Mao Tse-tung’s speech of February 1957, which contained the following: ‘When we plan, carry out affairs, think about problems, all must start out from the fact that China has 600 million people, and at all costs we must never overlook this point. . . . China has 600 million people and [people] must recognize this as an objective fact, and that it is our capital. China’s large population is a good thing, but of course it has its difficulties.’3 Ma’s comment on M ao’s speech is that it is ‘extraordinarily timely and necessary’.4 He presses home his point that he is in agreement with the leaders on the population question, using a more subtle method. He quotes the comments of an Indonesian ‘population expert’. ‘Your outstanding point is that China’s party leaders have already noticed the importance of this problem, whereas if we only rely on scholars to discuss it we do not get much effect.’5 The Indonesian went on to state that Indonesia’s problem was greater than China’s but that the government was unconcerned. Ma calls his essay a ‘new theory of population’ which aims to provide a new theory for new conditions. His reasoning here is not found in his original essay, but in a 1959 article, when any pretence 1 Ma, op. cit., p. 142. 2 Ibid., p. 144. 3 Mao Tse-tung, Concerning the Correct Handling o f the Contradictions among the People (February 1957), p. 24. (Chinese text.) 4 Ma, op. cit., p. 145. 5 Ibid., p. 45.

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of restraint had been abandoned. Ma reveals that his ‘new’ theory is intended to replace the Marxist viewpoint which he considers to be outmoded. He states that Marxists consider the sufferings o f the poor to stem not from the stinginess of nature as Malthus argued, but from the social organization of a country. They usually quote the following phrase of Marx in support of this view: ‘Production relationships fetter the development of production’.1 Ma argues, however, that those who use this kind of reasoning for China in order to attack Malthus ‘do not know that conditions in China have greatly changed’.2 ‘This social-type theory has already lost its effect and cannot again be used against Malthus.’ M a describes the communes as an ‘advanced system’ and concludes: * ... we cannot again say that China’s production relationships have not improved, and that they are fettering the development of productive forces there.’3 Ma says that his ‘new theory’ is based on raising the level of labour productivity and scientific work. Birth control is necessary as a means o f increasing the ‘quality’ o f the population and of helping to solve the employment problem. The Marxist approach, he argues, is only valid for a given time, whereas his ‘theory’ is valid for ever. Before looking at M a’s survey of the problems created by China’s large population, it will be helpful to list a few relevant figures. According to the 1953 Census, China’s population on the mainland was 583 million. A sample4 of 30 million people in 1953 showed that the birth-rate on average was 3 •7 per cent per annum ; the death rate 1-7 per cent per annum, giving a natural increase rate of 2 0 per cent. A little evidence was available for Shanghai where, in the areas surveyed, the natural rate of increase was as high as 3-9 per cent per annum. Ma himself conducted surveys in Chekiang Pro­ vince and in Shanghai and collected data which led him to draw the tentative conclusion that the natural increase rate in Chekiang is approximately 2-2 per cent per annum, while in Shanghai it must be taken as higher than this. He refuses to accept the view that a population rise of 2 per cent per annum, widely taken as a national average on a basis of the 1953 samples, was tenable as the right figure in 1958. He believes that population growth is higher and gives seven reasons in suppoit of this point of view.5 Even at 2 per cent per annum, however, M a points out that this provides an addition of J Ma, New Construction, op. cit. (November 1959), p. 51. 2 Ibid., p. 51. 3 Ibid., p. 51. 4 Ma, op. cit., p. 143. 5 Ibid., pp. 133-4. Ma’s reasons: 1. More marriages. 2. Better care for preg­ nant women and for babies. 3. Falling death-rate associated with improved care for the aged. 4. Reduction of deaths through accident. 5. The change in the social system. 6. Higher living standards. 7. State support for families.

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12-13 million to the population each year. Ma does not mention the age structure of the population in statistical terms, despite its great interest and relevance. According to the Census 41 T per cent of the total population was under 17 years of age and 15-6 per cent under 4 years old. Ma’s thesis is that the high population and high rate of growth are bound to slow up China’s economic development, especially her industrialization and the speed with which she can attain Com­ munism. The higher demand for food necessitates a shift in the pattern of land use away from agriculture’s industrial crops to food crops—assuming that the increased demand cannot be met from increased yields and an increase in the area under arable farming. This will directly affect the rate of growth of light industry. The demands of a high number of children necessitate certain types of economic activity. For example, housing is urgently needed and other high-cost facilities. All this is bound to affect the use of invest­ ment funds: consumption as a percentage of the national income might have to rise markedly and productive investment fall. High home demand for consumption goods such as cotton cloth and food directly affects the level of exports and so imports have to be cut— again affecting the rate of growth of industry. Ma covers these topics in some detail. With a yearly increase in the labour force of approximately 12-13 million, and an industrial demand for labour of 1 million, the problem of employing an additional 12 million as well as the existing labour force is indeed a problem to be studied: ‘What China has is abundant manpower—and how to use this vast supply becomes the urgent problem of today.’1 The task is chiefly one for the rural areas, which must absorb the additional 12 million per annum and provide full employment for the existing labour force. In the long run, Ma continues, mechanization and electrification must come to agriculture, as well as to industry for these are the ways to secure a rise m labour productivity and this is how socialism is constructed. As these labour-saving innovations are adopted the employment problem will worsen, unless (1) China can limit the increase in population through the widespread use of contraception, and (2) she can develop her agricultural production more speedily. The solution, according to Ma, lies in the develop­ ment of all kinds of labour intensive works—especially relating to water conservation: flood prevention and irrigation. This is the ‘mass line’ of the party leaders—the line which takes as a slogan 1 Ma, op. cit., p. 76.

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‘rely on the masses’. Ma Yin-ch‘u argues that all areas must organize their own production and works teams on a basis of this line and must not continually look to the central government for funds. His expression here is worth recording: ‘There are still areas, however, which hold out their hand for state money: they do not see that peasant strength is like drops of water coming together to make a river.’1 The advantage of concentrating on small-scale water conservation works is ‘outlay small—results quick’—a phrase repeated many times by Ma and one which clearly covers two of his chosen invest­ ment criteria for agriculture and rural areas. He seems to have several investment criteria which he refers to as ‘principles’, favouring investment (especially in agriculture and allied industries) which will: 1. 2. 3. 4. 5.

only require simple techniques and designs; be easy to site or locate; not involve abandoning any arable land or movement of people; fit in with the production of the masses; mobilize the masses in construction.

Such investments, says Ma, will permit the attainment of the govern­ ment’s policy focussing on ‘size, speed, quality, and economy’ in production, a policy given prominence in the winter of 1957. He quotes the government’s policy: \ . . take small-scale as the chief, medium-scale as subsidiary, and under the necessary and possible conditions, build up large-scale works.’ Ma agrees that this policy is in accordance with China’s ‘overall conditions’. On the one hand we have a picture of China studying how to utilize its labour fully and adopting all kinds of labour intensive techniques in order to do so, countering the ‘agricultural under­ employment’ associated with underdeveloped agrarian economies. Ma certainly gives adequate recognition to this problem. On the other hand, Ma draws attention to the growing phenomenon of labour shortage in rural areas throughout China. He does not discuss this in relation to the increasing demand for labour under the organization of the communes (most of his writings were done before the communes were set up) but in i elation to the demand for labour by agriculture, especially when double cropping is attempted. 1 Ma, op. cit., p. 51.

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‘The present key problem in rural areas is that of uneven busy and slack periods, as in South China where the double rice crop is being extended. In the fifteen days which witness the cutting of early rice and planting of the late rice, peasants have more work than can be accomplished. The future key to rich increases in rural production is in mechanical assistance during the excessively busy period.’1 He also mentions the same problem in Chekiang Province and in the N orth China plain, where double cropping in grain (depending on irrigation) was being extended. The labour shortage was being exacerbated by the shortage of draught power. M a refers to areas where animals were dying in great numbers, largely because of their age and the lack of fodder, and he relates how men were obliged to perform tasks normally reserved for animals, for example, pulling ploughs. This was happening in the N orth China plain. It was definitely the case, according to Ma, that supplies o f labour (and draught) power were now acting as a serious bottleneck to further increases in production in some areas. In a curious statement, he refers to peasants ‘purposely emphasizing’2 the labour shortage in agriculture (or their excessive work burden ?) by deliberately failing to collect all the cotton harvest in 1958. Ma states that the double cropping system imposes a rigid pattern of activity if success, in terms of maximum yields, is to be guaranteed. The demand for labour is very high at various periods and jobs must be done at exactly the right time. For example, the yield of rice is said to be influenced very closely by the date on which the rice seedlings are transplanted. Ma quotes two sayings of the peasants to illustrate his point. The first runs: ‘In the morning yellow, in the evening green’, which means: ‘In the morning cut the early rice, in the evening transplant the late crop’s seedlings’. The other saying describes the peasants’ attitude towards this hectic period: ‘You need grain and have no thought for life’. In Chekiang Province, during 1956, inexperience led to the planting of too much land in relation to the labour available, with the result that no second crop rice seedlings were transplanted on 920,000 mou (about 151,500 acres). Seedlings which were transplanted after the beginning of autumn on 1*3 million mou (214,200 acres), produced very low crop yields. The solutions offered by M a include the development o f high yielding strains of crops, more rational use of labour and, the main one, use of more mechanical implements, especially rice seedling transplanting machines, crop cutting machines and water drawing machinery. M a quotes figures based on experiments at Nanking, where agricultural machinery designs were being studied. A trans­ planting machine can transplant 30 mou o f rice per day, in contrast 1 Ma, op. cit., p. 151.

2 Ma, New Construction, op. cit., p. 30.

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to a performance of I mou per man-day (assuming that the seedlings are transplanted 6 inches apart in each case). The horse-pulled cut­ ting machine developed at Nanking cuts 6 mou per day, compared with 1 mou per man-day. Ma criticizes the planners for not paying enough attention to machines such as these and calls for the develop­ ment of more like them, especially simple machines which peasants can easily use. The surprising thing is that Ma also advocates the use of more mechanical equipment on the grounds that it will result in an in­ crease in yields. Three reasons are given in support of this claim: 1. The machines plough deeply. 2. They are time saving and so ensure that work schedules, at the busy crucial periods, are accomplished. 3. They do their tasks thoroughly. For example, the rice trans­ planter plants the seedlings very evenly. Ma also argues that high grain and potato yields vary directly with the use of good mechanical harvesters, but presents no figures in support of this. He does stress that success depends on skilful management in using the equipment. This interesting policy proposal requires detailed study in future. Elsewhere Ma argues that a great deal of farm labour is wasted in labour intensive manure carrying networks in the fields, and in other forms of transport and carrying. He suggests that reforms here might set free a considerable amount of labour but again he presents no statistics. By how much could labour productivity be increased, through better management, without the use of more mechanical equipment? Does Ma only envisage a greater use of mechanized aids in certain limited areas of China? No answer is given to these important questions. Whatever the answers, Ma insists that to feed the growing popula­ tion and to provide the farm products necessary for exports and home industry, yields must be raised. He does not give serious consideration to the possibility of reclaiming large areas of land in the near future. He comments on the claim of some people that China has 1,500 million mou (247 million acres) which can be re­ claimed by remarking that the reclaimable area is not known and he is not too optimistic. Much land not now in use for arable farm­ ing is mountainous and dry, or is land owned by minority groups and used for prairies for many generations—land which ‘funda­ mentally cannot be reclaimed’. Does this mean that expansion of the arable area into the ‘autonomous regions’ is politically impossible? The remedy, in the foreseeable future, according to Ma is: birth control and an increase in farm output through higher yields from the existing areas of arable land. 183

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III.

THE C R I T I CS

During 1958 over two hundred articles were published in China, attacking Ma Yin-ch‘u’s economic views. In a rejoinder, published in 1959, Ma refers to his critics as being academics and journal and newspaper editors. Unfortunately I do not know if any replies were published by members of the State Economic or Planning Com­ mission, or by any high ranking party officials. The present discussion of M a’s critics is limited to twelve articles, ten1 of which were pub­ lished as a book, the other two2 being published as recently as spring 1960. These twelve articles involve eighteen authors and, again, I have not been able to discover anything about them, with one or two exceptions. Two, at the time of writing, held junior appoint­ ments in politics and economics at Peking University.3 One was a frequent contributor to the journal Economic Research. One was possibly4 a Party Secretary in Yunnan Party Provincial Committee, while another might have been a delegate to the National People’s Congress as well as being an alternate member of the General Council of the World Federation of Trade Unions and a member of the Executive Council of the All-China Federation of Trade Unions. Another author was perhaps a deputy director of the Commerce Department in Hunan Province, while I am informed that at least two of the names of the authors are in all probability pen-names. Their criticisms are very disappointing regarding their treatment of the economic questions raised by Ma, although interesting for the light they cast on the outward adherence to dogma in discussion of this kind and on the political atmosphere in China during the anti­ rightist campaign period, once the ‘Hundred Flowers’ period had ended. Most of the replies are taken up with long and, at times in­ comprehensible analyses of terminology and methodology, often obscuring the real issues raised by Ma. The three main attacks centre upon: 1. M a Yin-ch‘u’s ‘standpoint’. 2. His views on population, and 3. on pricing policy. 1 Collected Essays: A Critique of Ma Yin-ch‘u’s M y Economic Theory, Philosophical Thoughts and Political Standpoint, Peking, 1958. (Chinese text.) 2 Hsii Hsin-wen, ‘Critique of Ma Yin-ch‘u’s M y Economic Theory, Philo­ sophical Thoughts and Political Standpoint', New Construction (March 1960). (A reply to Ma Yin-ch‘u’s article in New Construction (November 1960). (Chinese text.) 3 Ma Yin-ch'u, New Construction, op. cit., p. 54. 4 I am grateful to Y. C. Yin for this information. The difficulty in identifying people in the biographies at present available is that they do not always contain the Chinese characters. Thus, although the romanized names appear to correspond to the names involved, if the characters were available it is possible that they would be found to be different.

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The ‘standpoint’ o f M a Yin-ch'u The main aim of the critics appears to be to show that Ma is a ‘bourgeois, reactionary economist’, opposed to Marxist-Leninist and dialectic materialist theory and that he is trying to destroy socialist planning and introduce capitalism once again. They frequently distort his views and when this does not involve straightforward, inaccurate reporting, it takes the form of grossly exaggerating his views to the point of making them look ridiculous. Thus, they carry his points to their ultimate end, saying, ‘M a’s logic’ is as follows . . . naming a conclusion to which Ma himself would never subscribe. Another device is to state that Ma is incorrect in his view on A (again, this may involve distortion) and to follow up by saying that because he is wrong on A he was bound to be wrong on B and C. All the critics agree that Ma is anti-Marxist-Leninist and antidialectic-materalist in thinking and that he is a ‘bourgeois’ econ­ omist. The evidence for these charges is drawn primarily from his ‘circular’ theory, which is the focus of attack. Ma is taken to task for not ‘putting out a single character’ on Marxist-Leninist theory, and for his infatuation with his circular approach, which, say the critics, he has stolen from the marginal utility school of Cournot and Marshall. Ma is said to use Cournot’s idea of general equilibrium as related to the theory of mutual dependence of economic elements, and also ‘M arshall’s idea’ of functional relationships. The critics insist that M a’s method cannot allow for a deep understanding of the complex and essential relationships in the national economy, nor can it even be used to describe the system precisely. It only deals with ‘external’ relationships and obscures the complexity of economic life: ‘we only see the trees not the forest’.1 The circular method, according to several authors, allows M a to neglect a discussion of very important links in the economic chain and instead he only discusses ‘empty, vague issues’2 in order to make the circle tie up. All this proves that if we once leave the Marxist-Leninist repro­ duction theory we have no method of understanding the repro­ duction process accurately: ‘The only scientific basis which studies these basic connections (i.e. in general equilibrium) and proportional relationships is M arxistLeninist reproduction theory.’ Whereas: ‘This is a bourgeois economist’s viewpoint, fundamentally opposed to the Marxist-Leninist theory of reproduction.’3 Repeatedly the critics ask Ma in what way is his circular approach useful? What problems can it solve? They do not reject the law of 1 Collected Essays, op. cit., p. 52. 2 Ibid., p. 36. 3 Ibid., p. 41. 185

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proportional development, however, as a law to be obeyed in planning. Indeed, they agree that it is essential to plan in accordance with its demands. But they criticize Ma for making the law too wide in its applicability—embracing capitalist as well as socialist societies. Only under a socialist system, they argue, where the means of production are publicly owned, is it possible to maintain suitable proportional development. This law is said to reflect the ‘special socialistics production relationships’. In capitalist societies the price system is the ‘regulator’ and economic ‘anarchy’ results. If the correct proportions between sectors do appear in capitalist societies —this is purely accidental. Ma is criticized for not bringing out this point. If we ignore the economic system, when discussing the law of proportional development, isn’t this tantamount to saying that capitalism can also carry out planning? If one is looking for lucid and sincere discussion of economic issues, one will be disappointed. But viewed in relation to the anti­ rightist campaign and other criticisms made during the ‘Hundred Flowers’ period of a more clearly rightist, anti-party, anti-planning type—the tone of the critics becomes more understandable. It does not matter that Ma was only saying the same as Mao Tse-tung and Liu Shao-ch‘i. For political purposes it was inevitable that he would be heavily criticized and branded a bourgeois, capitalist economist, and indeed one can sympathize with the critics when they attack his circular notion for its lack of clarity and relevance. The question o f population M a’s views on population are denounced by his critics as Mal­ thusian, and Ma himself is labelled a disciple of Malthus.They sum up Ma’s thesis as follows: with a high population and low level of accumulation China cannot industrialize, develop her agriculture and increase her standards of living. By quoting a host of absolute figures relating to production, national income, accumulation, the critics conclude that ‘all sentiments of pessimism, and absurdities regarding China’s large population and a high rate of growth have no foundation’.1 The critics further argue that the policies of the government, regarding birth control and the use of the ‘mass line’ in employment, have been adopted from choice and are in no way political and economic necessities. The motives behind them are different in principle from those leading Ma Yin-ch‘u to advocate the same. Chou En-lai’s statement of 1957 is quoted: ‘To protect women and children and to raise descendants properly, in the interests of national health and prosperity we agree to the proposition to increase control over births.’2 1 Collected Essays, op. cit., p. 71.

2 Ibid., p. 86.

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Mao Tse-tung’s famous phrase: ‘China’s large population is a good thing . . . of course it has its difficulties’ receives great attention. Apart from the Chinese leader’s views on birth control, the critics quote one of Engels’s letters to Kautsky which ‘indicated the way’, if it is required by planned development, to have birth control and showed that birth control was permissible in socialist societies: ‘If a Communist society, in future, has times when it cannot avoid controlling population growth, then this can only be realized without considerable difficulty if it is treated in the same way as previous control over material production.’ One author writes: ‘We believe that the planning of births throughout China certainly may, among the Chinese people, be thoroughly carried out. This kind of birth planning is certainly not because we cannot solve the employment question without it and are forced into adopting this action—but it is adopted in order to increase our people’s bodily constitution and to promote an even higher rise in the social pro­ duction of China.’1 The suggestion by Ma, that the population position creates employ­ ment difficulties is refuted with the following points: 1. Any employment problems existing in China are a relic of her capitalist and semi-colonial history. 2. Under the superior system of socialism the law of surplus population cannot operate. 3. Since the Great Leap Forward, China has a labour shortage, not surplus. 4. The large population of China cannot be separated from her ‘brilliant achievements’. It is a case of cause and effect. These views are summed up by the following quotation: ‘Everyone knows—according to the viewpoint of Marxism and Leninism on the population question—that unemployment and surplus population are the production of capitalists privately owning the means of production.2 Ma is criticized for failing to recognize the ‘superiority of socialism’ and for ‘debasing’ the peasants’ enlightenment, creativeness and activeness in promoting rapid development. His greatest mistake is to overlook the fact that man is primarily a producer and not 1 Collected Essays, op. cit., p. 72.

2 Ibid., p. 62.

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a consumer. This point seems to have originally been propounded by Liu Shao-ch‘i and in the articles under review it receives the greatest emphasis. Liu Shao-ch‘i attacks the pessimists: ‘They only look at man as a consumer; if there are more people then consumption is higher—but they do not primarily look at man as a producer. If there are many people then we can produce even more, accumulate even more. Clearly this is an anti-Marxist -Leninist viewpoint.’1 This unwillingness to differentiate between the level of population and the size of the labour force, or to look at the age structure of the population in any way, is general in all the articles. One of M a’s critics states: \ . . in fact a large population naturally may consume somewhat more but more im portant is the fact that it creates still more material w ealth. . .’2 Many statements could be cited to show how unanimous the writers are on this question. Perhaps one of the more balanced viewpoints (which closely follows the M ao pattern, however) may be included as a final example. ‘We ought to point out that we also advocate birth control and suitable control over the natural increase in population. But our proposal to control births and his (M a’s) new population theory are fundamentally different. We consider that a large population is a good thing and that China’s large population is a rich source of labour; under the same technical conditions it is possible to increase social accumulation relatively greatly, and develop socialist con­ struction more and quicker; moreover the large population supplies for China’s development a vast internal market which is lacking in other countries. Of course a large population also has its difficult aspects. This is because o f China’s poor basis, weak economic foundation, the increase in the output of producer and consumer goods having definite limits.’3 Pricing policy The essence of the attack on M a’s views on pricing policy is that Ma has taken two paths for economic policy—planning and the free market—as alternative choices which can be made. He denies the basis of the former and proposes the introduction of the latter. One author writes precisely this.4 Others are not so extreme in their 1 Collected Essays, op. cit., pp. 82-3. * Ibid., p. 35.

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2 Ibid., p. 74.

3 Ibid., p. 109.

PLANNING FOR BALANCED GROWTH

version of what Ma actually said. Some pose the question: is M a trying to abolish planning? Does he not know that the government’s use of pricing policy aims at strengthening and not weakening plan­ ning? M a is charged with having put forward the view that price is the entire basis of the economic plan for a general balance. M a certainly does not state these views as openly as this. He undoubtedly hints at them, however, covering up his fundamental criticisms under an umbrella of orthodox statements. The critics clearly interpret M a’s view to be that the price mechanism should be used much more than it had been and that prices should be supply prices as well as cost prices. The vehement attacks of the critics are to be expected once this interpretation is made. Whether this interpretation of M a is correct or not one cannot say. As we have seen, his statements on pricing are not very concrete. Probably a fair conclusion would be to admit that Ma does not want to abolish planning but that he does wish to see a much greater use of pricing in economic planning. When the critics counter M a’s statements with their own views, some vague and confused statements emerge, not unlike those made by Ma. For example: ‘Of course, if purchase prices are not appropriate we ought to adjust them under possible conditions, and moreover we have already done this kind of thing.’ * ... the only thing the law of value can regulate in the realm of circulation is demand and not production and supply . . .’• Another author provides the following: ‘To raise prices is not the motive force which promotes production and its balance. \ . . o f course we do not deny that price is one of the means of effecting the production process . . .’2 The general view is that prices have some role in the production and distribution process but that they do not determine and regulate either production or distribution. To the reader of the discussion the function o f prices still remains obscure. IV.

A R E J O I N D E R BY MA Y I N - C H ‘ u

M a was disappointed by the quality and nature of the replies. In two articles3 (which may well have been his last) published in November 1 Collected Essays, op. c it, pp. 12-13. 2 Ibid., p. 28’ 3 Ma Yin-ch‘u, New Conctructiort, op. cit., also Ma Yin-ch‘u, ‘I repeat my r e q u e s t New Construction (January 1960). (Chinese text.)

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1959 and January 1960, he comments that his critics are all alike and that none of them has warranted his serious study. In a final request for constructive criticism as a means of developing economic thought Ma sums up as follows: ‘I always hope that my critics will produce facts and apply reason; that they will win through reason and not rely on their greater superiority in numbers to overcome their opponents—and all the more because they cannot overcome arguments with numerical strength.’1 He appeals to them not to use the method denounced by Li Ta in the People's Daily during November 1958: ‘They play with terminology and concepts; their tone is obscure, the content is empty and they write with jargon.’2 Despite all the criticisms Ma considers his theory ‘indestructible’ and calls on those who say his views are bourgeois to write articles for his benefit using proletarian economic thought. V.

C O N C L U D I N G REMARKS

It may be interesting and informative to study Ma Yin-ch‘u’s economic viewpoint and to read the criticisms and views of orthodox Marxist academics and journalists in China. But this must serve only as a preliminary to studying the central question: what do the planners do and how has the Chinese economy been moving? Work has hardly begun on analysing policy statements, decisions and achievements in China. Do all the weaknesses listed by Ma Yin-ch‘u still exist or is the economy more in balance now? Does allegiance to Marxist doctrine really influence decisions in China? What kind of doctrine is most important—‘Maoist’? Has China learnt anything from Soviet planning experience ? Could Ma Yin-ch‘u have had any influence on policy? Ma paints a picture of the Chinese economy achieving a rapid rate of growth in certain sectors but also seriously dislocated by imbalances. He advocates more balance in growth, even if this is attained at the expense of a lower rate of growth. Much of what Ma writes seems to be unexceptionable and it is difficult to believe that the Chinese leaders and planners could not have kept the economy in better balance had they chosen to do so. Did they prefer to make the 1 Ma, New Construction (November 1959), op. cit., p. 22.

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2 Ibid., p. 22.

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economy go all out in certain directions, such as steel and heavy industry, even if this policy did bring with it serious disequilibria? Provided that the policy did not result in the complete breakdown of the economy it might appear to be more attractive to the leaders than a policy providing balance and a lower growth rate in what they consider to be key sectors. All of these questions, however, still await an answer.

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7 FACTORS IN J A P A N ’S E CO NO MI C G ROWT H G.

C. ALLEN

Professor of Political Economy in the University of London

Densely populated, underdeveloped countries with ambitions to join the ranks of the highly industrialized are nowadays strongly inclined to think of Japan as a model—as the classical example of how the task can be, and should be, accomplished. No doubt useful lessons can be learnt from Japanese experience—and not only by under­ developed countries. But I am sceptical about whether others, by treading Japan’s path or by using the devices that she found effective, can attain her success. Hers, I believe, is a special case. The more I hear of the conditions and problems of underdeveloped countries today, the firmer is my conviction of this truth. It is not merely that world economic conditions at the time when Japan set out on her modern career were very different from those of the present (and that fact itself has a close bearing on the course of development), but also that the institutional factors that contributed to Japan’s success (and these factors are of overwhelming importance in this context) cannot be duplicated by countries with a different historical experience. To echo Schumpeter’s comment on trade cycles, every case of economic development is a ‘historic individual’ and had better be treated as such. This does not mean, as I have already said, that useful lessons may not be learnt from Japan; but I fear that many of them are such as to awaken only grudging response in the modem mind. To reflect on the social and economic circumstances of Japan when her economic growth began is to be struck by the fact that there had been a remarkable convergence of influences congenial to develop­ ment, that events within her society had moved so as to prepare her for the changes to come, and that it would have been more surprising if those changes had not occurred than that they did. This, of course, is being wise after the event. Contemporaries had quite other views. Let me give some examples. The creation or enlargement of a sur­ plus of agricultural income, over and above what is necessary to maintain the agricultural population at a conventional standard of life, is generally considered to be a condition of capital formation in the early days of industrial development. We know, for instance, that the agricultural improvements in eighteenth-century England 192

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had an influence on the course of the industrial revolution. In Japan, as Mr T. C. Smith has recently shown,1 the surprlus had been en­ larged by the rise in agricultural productivity during the centuries preceding the Meiji Restoration—a rise brought about by changes in agricultural methods, systems of land tenure and village organiza­ tion. In feudal dmes the surplus was directed chiefly to the mainten­ ance of a class, or order, that was to a large extent economically functionless—the samurai. After the abolition of feudalism much of this surplus was diverted into the coffers of the new central govern­ ment by taxation, and so became available for investment in new industries and in the apparatus of the new society. Here then was a source of (as it were) already mobilized capital. Further, the changes in agricultural technique and organization had been accompanied by other, equally significant, changes—the development, within the fiefs, of commercial farming and tenancies (as happened on the lord’s demesne in fifteenth-century England), and the expansion in the villages of industrial by-employments organized on a ‘putting-out’ system. In a sense, as Mr Smith has emphasized, the peasants, and indeed the rural community as a whole, had for many years been prepared for commercial activities and industrial wage employments. The consequences were farreaching. The disposition of a peasantry towards modem economic processes and practices is, I suggest, no unimportant factor in mobilizing resources for what is now called the ‘take-off’. Other legacies from the feudal era are well known and I need only refer to them: a small but highly skilled class of craftsmen engaged in producing fine textiles, metal wares, pottery and lacquer wares for the daimyo and the rich merchants, a number of business houses experienced in large-scale operations, a commercial and financial organization of some sophistication. There were also the modern undertakings inherited from the daimyo and the shogun. Above all, there were the qualities of the Japanese themselves—their curiosity, their readiness to try everything once, the welcome that they gave to novelties in things if not in ideas, their strong sense of reciprocal obligation, their passionate personal loyalties that could be directed by political art into the task of nation-building. These are awkward matters for an economist to handle, but he is remiss if he ignores them. Finally, there were the samurai, a ready-made class of leaders, many of whom were intent upon change. As has often been asserted, it was this group in Japanese society that took command of affairs, not only political but economic, in the new era. This itself is odd. We are inclined to think of the ruling groups in feudal society as having been overthrown by a rising merchant class, or, as in England, per­ suaded to ally themselves with the merchants, exchanging gentility 1 The Agrarian Origins o f Modern Japan, Stanford, 1959.

N

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for wealth. A situation in which the initiative in economic change proceeded mainly from the former finds few parallels in history. The mechanics of the early development were also unusual. It is recognized that the Japanese government played an active part in introducing new factory industries and in importing western tech­ niques, financing the necessary investment from taxation or deficit financing. But we must not imagine that the State was working to a long-term programme. The Japanese government in the first decade of Meiji had many perplexities, but it was at least not exposed to economic planning. If it had any long-term policies at all, they were primarily political in content—the raising of Japan’s military power and the adoption of such western institutional forms as would persuade the outside world to accept Japan as a civilized State and to abrogate the ‘unequal treaties’. No doubt this implied a measure of modern economic development, but the particular economic policies that were adumbrated at that time were mainly the result of efforts to grapple with immediate practical problems. Some of these were, of course, strategic. But a powerful motive behind the State’s activity in setting up new industries was rooted in the necessity to find employment for the samurai, whose old privileges had gone and whose incomes had been reduced by the commutation of their rice pensions. It was a revolt of the lower samurai that had destroyed Tokugawa. The new regime could survive only if it enlisted their support. Moreover, they were believed to possess unique qualities. Clearly, new productive activities worthy of them had to be found. The banking system introduced in the early seventies was modelled on the national banking system of the United States. A few years later the government noted that the technical requirements of that system provided an opportunity for solving, in part, its most urgent social and political problem. It turned samurai into bankers by contriving that the bonds issued to them in place of their annual pensions could be used as cover for the new note issue. Similarly, samurai were found jobs in the new government factories—at the artisan as well as at the managerial level. They were assisted finan­ cially and in other ways to start new enterprises on their own. Nothing here bears much resemblance to economic planning, except in so far as the initiative stemmed from the government. Modern economists concerned with development have advocated the establishment of factory industries in underdeveloped countries not only because of the immediate contribution that these can make to the gross national product, but also because the industries can be expected to yield surpluses that can be applied to further investment; in other words, because they provide a means for accelerating capital accumulation in countries where savings from agricultural incomes 194

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are exiguous. It does not appear that the government factories in Japan during the seventies played any such role. Indeed, most of them earned no profits at all, and when at length they were trans­ ferred to private enterprise, they were sold at a heavy loss. Their contribution to Japan’s development lay chiefly in their educative effects; they provided a demonstration of new technical methods. This was of significance for the future, but they made no direct contribution to the increase of net savings. The government, however, was by no means the only source of industrial enterprise in those early years. With the opening of the country a host of small-scale undertakings came into existence, most of them based on traditional economic activities. These owed com­ paratively little to official help. They were the result of the impact of international trade on the Japanese economy and of the presence at that time of many alert individuals eager to seize new opportunities. It may seem paradoxical to suggest that the Western Powers, un­ wittingly, rendered an important service to Japan in imposing the ‘unequal treaties’ upon her. For these treaties ensured, inter alia, that Japan was unable to protect her industries by high import duties. The impact of international trade could not be cushioned. The consequence was that Japan was impelled to transfer quickly her resources from established trades that could not compete with foreign imports to those where she possessed the greatest relative advantages—a classical text-book effect. In the absence of these treaty provisions, Japan would almost certainly have striven to protect her old industries, and her development along new lines might have been handicapped. As it was, she could not be seduccd by the meretricious charms of a ‘balanced economy’ but had to go in for specialization, especially in her export trade. It is perhaps not accidental that the two countries in Asia that at one time or another have chosen the path of economic specialization are the countries that today enjoy the highest standards of life. In pursuit of this course, Japan was certainly favoured by fortune. It is well known that during the fifties the fortuitous foreign demand for healthy silk-worm eggs for re-stocking the disease-smitten silk industries of France and Italy opened up a source of foreignexchange earnings at a critical moment. But the fact that this trade served as a stepping-stone to a further advance can be credited to Japan’s own enterprise. By the time Europe had re-stocked her industry, Japan had begun silk exporting herself. This export grew by leaps and bounds, outstripping China’s trade by 1914 and, at its peak, accounting for over two-fifths of the country’s total exports. It lay at the foundation of much of the development be­ tween 1870 and 1929. W ithout it, Japan could hardly have found the foreign exchange necessary for purchasing the equipment, raw 195

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

materials and services needed for the creation of a modern industrial economy. It must be emphasized that the raw silk industry was not dependent upon elaborate and expensive equipment. The production of cocoons was a labour-intensive industry, a by-employment of the peasantry. The reeling of silk was carried out at first in the peasant household and then, to a steadily increasing extent, in small filatures equipped with improved, but still very simple power-driven machines. The investment in the industry was thus spread thinly over a large number of producers. This was true, as Professor Lockwood has shown, of much of the new investment in the early days. Japan invested in railways, steamships and mechanized industrial plants. But the capital-intensive undertakings, it is suggested, were less important in promoting development at that time than the vast number of small improvements and minor capital works—the construction of ‘dirt’ roads by village entrepreneurs and authorities, the introduction of rickshaws and of wheeled carts drawn by oxen, dogs, horses and men in place of packhorses and litters. Here is a lesson that countries well supplied with labour but short of capital might take to heart. Large highly capitalized plants may confer prestige, but, at a certain stage of development, they may represent a waste of scarce resources. Japan herself may not always have heeded the lessons of her own experience. A case can be made out for the view that an excessive share of the heavy industrial investment during the early 1950’s was directed into a few very large plants, with the result that the small- and medium-scale industries, which in the aggregate employ the greater part of the labour force, were starved of capital. It may be that the sewing-machines, which during this period became one of the most popular presents from the G.I.’s to their Japanese girl friends, made a weightier contribution to the raising of productivity than the investment of an equivalent amount of capital in such show­ pieces as the Hamamatsu cotton mill! I now turn to a rather more technical question, one that has received less attention from students of Japan’s economic develop­ ment than its importance can claim. Much has been written in recent years about the problem of steady growth. I am aware that in modern dynamic economic theory the concept of steady growth is to be regarded simply as an analytical device corresponding to the theory of equilibrium in static economics. But it has often happened in the history of economic science that propositions in theory, which merely describe relations between quantities, have tended to shade into prescriptions for policy. This is true of the subject under dis­ cussion. Policy-makers have been urged to aim at rapid development with stability—at a steady upward trend of production and incomes. Secular growth which is attended by violent fluctuations in income, 196

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prices and employment falls far short, it is asserted, not merely of the ideal type of progress, but also of what might, in fact, be accom­ plished if policy were guided aright. I am myself sceptical about whether it is possible to reconcile these objectives, at any rate in a country in the early stages of development. I do not think that history provides any case in which stability and rapid progress have gone together. Certainly, Japan’s development has been attended throughout the modern period by frequent and severe fluctuations. Hers has been an economy of ‘boom and bust’. I wonder if, without these alternations, her progress would have been so rapid and so spectacular. Many Japanese economists today, who are earnest students of contemporary western theories, deplore the violent fluctuations to which the economy is subject. They fasten their eyes on the instability of their system rather than on the pace and extent of growth both in the past and in recent years. To my mind, however, Japan’s progress is to be explained, in part, by her vigorous pursuit of an expansionist policy, despite the fact that it has led her into recurrent troubles with her balance of payments, and at the same time by her readiness, at certain moments in her course, to apply ruthlessly violent checks when the danger has reached a critical point. The recessions which this damping-down policy has from time to time produced have been accompanied by a reduction of costs which has prepared the way for an ensuing period of rapid expansion. I do not suggest that the policy has been followed consistently. There have been periods when the economy has been rescued from a position of grave disequilibrium by fortuitous external events. One such event was the outbreak of World War I which made it unnecessary for the government to apply remedies for an imbalance caused by heavy investment and excessively rapid expansion. Again, during the early 1920’s Japan hesitated to take the drastic steps which a succession of balance of payments deficits required. But, in the main, she has shown resolution in applying the checks as well as boldness in organizing expansion. Let me illustrate this proposition by two examples. I have already explained that in the early years of Meiji the Japanese government was able to find the resources for new investment by re-directing into its coffers the surplus agricultural income that had previously been used in maintaining the samurai, who were in effect transformed from a rentier to an entrepreneurial or otherwise active economic class. This was accomplished by means of the new land tax. After the middle seventies, however, the State was undertaking expenditure far in excess of its tax revenue, expenditure incurred in financing new industries, creating new social overhead capital, re-equipping its armed forces and suppressing rebellion. It issued paper money to cover the deficits and this addition to the money supply coincided 197

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

with the increased note issues o f the new national banks. An in­ flationary movement was, therefore, set in train. It seems probable that the ensuing steep rise in prices gave a sharp impetus to enter­ prise and assisted the transference of resources from old to new forms of activity. A particular instance of this general stimulus is to be seen in the distributional effects of inflation on the incomes of the rural population. By the Restoration land settlement the feudal dues formerly paid to the lords in kind were, in effect, replaced by a land tax paid in money to the State. As already mentioned, a good deal o f land in Tokugawa times has been farmed on commercial tenan­ cies and, under the new dispensation, while the landlords were res­ ponsible for paying the money taxes, the tenants continued to pay their rents in rice. Inflation was clearly to the benefit of the landlords. During the later seventies there were complaints of extravagance among the rural population. Nevertheless, it seems that many of the landlords applied their enhanced incomes, not merely to the purchase of additional land, but also to the financing o f new industrial enter­ prises in their localities. The profit or rent inflation was, obviously, at the expense of the tenants, the Exchequer and the rentiers left over from feudalism, but in so far as it encouraged entrepreneurship and investment, it helped to promote industrial development. In many countries in the early stages o f industrial growth, the bounties accruing from a profit inflation have been dissipated in luxurious living; this has recently happened, I am told, in Pakistan. It was otherwise in Japan. One might speculate on how far Japanese traditions of austerity were responsible at that time for keeping down the level of consumption among those who benefited from the inflation and so for preserving surplus incomes for investment. By the end of the decade inflation was getting out of hand and the country’s specie reserves were dwindling. At this moment of crisis, in 1881, Matsukata took charge of the finances and quickly imposed ruthlessly deflationary measures. Government properties were sold. Taxes were raised. The budget was balanced. The national bank note issues were halted and then steadily redeemed. The fall in prices that followed reduced the real incomes o f rural landlords and peasant proprietors, and many of the less efficiently conducted industrial undertakings collapsed. When Japan began to emerge from the depression, it was seen that a considerable concentration of enter­ prise had occurred. The zaibatsu began to assume their dominant role in the economy—their origins, of course, go further back. As a result of the deflation, they gained possession not only of government properties but also of the many bankrupt private businesses, trading, industrial, and financial, and in each successive recession phase of the trade cycle their dominance and scope increased. O f course, many factors other than those mentioned contributed to their growth, and 198

j a p a n ’s e c o n o m ic g r o w t h

this feature of Japan’s economy is open to various interpretations. But it can hardly be denied that the concentration of economic power in these ably managed enterprises biassed the distribution of income in favour of profits and assisted in the rapid accumulation of capital and its investment in new industry. However, I am not here concerned with the importance of the zaibatsu as instruments of expansion. What seems worth emphasizing is that both the inflation of the late seventies and the deliberately induced deflation of the early eighties were functionally related to Japan’s economic development. It is not obvious that ‘stable growth’ would have carried Japan so far or, at the end of the period, would have left her so well equipped for future expansion. The other example I take from the period of the ‘great depression’ and the subsequent reflation, more precisely, the years from 1927 to 1937. The circumstances are well known; their interpretation is a matter of controversy. After World War I Japan was determined to follow the British example and to restore her currency to its pre-war gold parity. But for various reasons she refrained from taking the measures necessary to prepare her economy for that step until the end of 1926. When she at last decided to restrict credit and balance her budget, the result was the financial crisis of 1927. From then until 1930, when she actually restored the yen to parity, business was under pressure to reduce its costs. The coincidence of her return to gold and the outbreak of the world depression meant that the deflationary policy had to be prosecuted even more vigorously. She persisted in the attempt to preserve gold parity until the end of 1931 when she was forced to devalue the yen. Thus the years from 1927 to 1931 constitute a period in which the economy was under deflationary pressure, at times ruthlessly applied. Now the policy followed in this period (which earned a bad name in Japanese economic history) had momentous consequences for the future. Deflation led to a steep decline in costs over a wide range of industries, partly as a result of wage reductions and partly through marked improvements in technical efficiency. Evidence for this con­ clusion has been provided elsewhere, and the detailed changes cannot be recounted here.1 But it can be stated with confidence that the improvements were particularly striking in the older, established industries, such as textiles and pottery. It was during this period that the spinning section of the cotton industry adopted high-drafting and that the weaving section (or the part of it conducted in com­ bined spinning-weaving mills) became equipped almost entirely with automatic looms. Output per employee which had risen com­ paratively little (especially in spinning) between 1913 and 1926 rose J See the present author’s contribution to E. B. Schumpeter (ed.), The In­ dustrialization o f Japan and Mancliukuo, esp. Chap. XIX.

199

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

very sharply, by 47 per cent in spinning and 118 per cent in weaving, between 1926 and 1931. The increase in productivity in the worsted, raw silk, and pottery industries was also very considerable. Output per man-shift in coal-mining rose from 0-7 metric tons (underground workers only counted) in 1928 to 1*2 metric tons in 1931. As to money wages, the Ministry of Commerce and Industry’s index fell by 24 per cent between 1926 and 1932.1 For spinning and weaving the decline exceeded the average. In the second place, the recession gave rise to forces which ultimately were to lead to a redistribution o f resources on a massive scale. Up to 1931 the most obvious effect was the reduction in the labour requirements of the established industries, especially those subject to rationalization. But the most remarkable feature of the period of the deepest recession, namely, 1930 and 1931 when prices fell very steeply, is that the total volume of industrial production was largely maintained, though this was not, of course, true of every industry. The published statistics are difficult to interpret and the various series are not altogether consistent with one another. D r Ohkawa’s figures suggest that while there was a heavy fall between 1929 and 1931 in the real income produced by primary industry (and it was of course agriculture that suffered most severely at this time), the real income produced by secondary industry continued to advance steadily. As the same author has stated: \ . . even in the 1930 period o f depression the growth rate of the Japanese economy did not show a serious decrease’.2 This is in sharp contrast to what happened in other industrial countries at that time. The way was thus prepared for the ‘leap forward’ o f the next five years. As is well known, in 1932 the finance minister, Takahashi, finding Japan with unemployed resources, set going, four years before Keynes’s General Theory provided him with a theoretical justification and despite bitter criticisms from orthodox financiers and economists, a ‘full employment’ policy which carried Japan to a new plane of industrial achievement. The ‘no loan’ policy of his predecessor was replaced by a regime o f cheap money, deficit financing on a great scale and a massive programme of public and semi-public invest­ ment. This policy was carried through without any significant rise 1 This index of the Ministry of Commerce and Industry covers the earnings (including allowances and the value of payments in kind) of skilled workers in both small-scale and large-scale industry in the whole country. Another index, that of the Bank of Japan, shows a less precipitous decline in earnings, namely, 17 per cent between 1928 and 1932. The latter index, however, covers only factories employing more than 40 (or, in some cases, 50) workers and is unaffected by changes in the wages paid in small and medium-sized establishments, which in 1930 accounted for about two-thirds of all industrially-occupied persons. See T. Uyeda, The Small Industries o f Japan, pp. 7-8, 297-300. 2 K. Ohkawa, The Growth Rate o f the Japanese Economy Since 1878, p. 22. 200

JAPAN’S ECONOMIC GROWTH

in money wages.1 Despite the fact that Japan had lost the main pillar of her export trade (raw silk), she was able to effect a notable increase in her total exports, at a time when international trade as a whole was stagnating, and greatly to develop her manufacturing industries, not only the older industries, such as cotton, but also wool, rayon, a wide range of miscellaneous consumption-goods trades, metals, engineering, and chemicals. Industrial production in 1936 was 40 to 50 per cent greater than in 1929. But it is questionable whether the whole of this achievement would have been possible without the discipline imposed by the previous period of depression when costs were so drastically reduced. For whereas in the newer sectors of industry the technical progress realized between 1927 and 1937 occurred mainly during the years of reflation, in the older industries, which even in 1936-37 were still the chief sources of exports, most of the advances in efficiency were associated with the deflationary period. I draw a line at 1936 when Takahashi thought that the time had come to call a halt—and when he lamentably failed to impose his will. But it is worth pointing out that in two periods since World W ar II much the same process has been repeated. The deflations of 1954-55 and 1957-58, which were pressed home in order to correct a serious imbalance in Japan’s international payments, were in both cases effective in reducing costs and in preparing the way for the great expansion that followed each of them. The question remains: how is it that Japan was able to carry out these policies so success­ fully? The facts themselves are interesting, but they set the inquirer the important task of explaining why the economy has proved to be so resilient, so responsive to the ‘aids’ of monetary and fiscal policy. So far as the recession phase of the period 1927-37 (and it is to this period that I am addressing myself), the facts are at first sight odd and apparendy inconsistent. One can understand that deflationary pressure on business should persuade or compel industrialists to use resources more economically, that it should oblige them to get rid of redundant labour and that it should eliminate the less efficient firms by bankruptcy. But the rise in efficiency cannot be wholly accounted for by such responses to economic pressure. There was also, as I have already indicated, heavy investment in new plants, and the re­ equipment of certain industries at that time was a leading factor in promoting efficiency. Heavy investment is something that we should not expect to occur during a period of deflation. In such periods both the inducement to invest and the financial resources available for investment are usually lacking. In seeking an explanation, I address myself chiefly to the structure of the economy. In particular, I regard, first, the small-scale trades 1 Average real wages declined. 201

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

which then comprised, and still comprise, a very large sector of Japan’s industry, and, secondly, the wage system. These phenomena are closely linked; indeed, they are mutually dependent. It is well known that the Japanese wage system presents, from a western standpoint, peculiar and, at first sight, inconsistent features. Convention, of recent origin, prescribes that an employer shall accept onerous responsibilities for his workers. He is, in effect, unable to discharge ‘established’ workers unless he provides them with sub­ stantial compensation, and this obligation has often led to the overstaffing of Japanese factories in times of bad trade. In these circum­ stances, how can a recession exercise its classical effect on wages, costs and the distribution of labour? The explanation is to be sought in several directions. First, not all workers are ‘established’; in most trades there is a margin of ‘temporary’ workers which is significant in a rapidly growing economy. The employer does not recognize the same obligations to them as to the ‘established’. Secondly, the normal working life of many classes of Japanese employees is short. During the 1930’s half the girls, who made up the greater part of the labour force in the cotton industry, spent less than three years in the mills.1 The labour force of any mill could, therefore, be quickly reduced merely by altering the rates of recruitment. The third and probably the most important reason, is to be found in the wage system itself. The idea of a standard rate was (and is still) alien to Japanese industry. The worker’s monthly earnings are made up of a wide variety of payments many of which have only an indirect relationship to his actual job. These comprise a basic wage together with pay­ ments for seniority, education, family responsibilities, length of service, personal character, regularity of attendance, cost of living— to mention only some of them. In addition, the annual earnings of the worker are linked with the firm’s profitability by the payment to him of bi-annual bonuses. These may be very small or zero, if the firm is making losses, and very substantial—the equivalent of one to six months’ wages—if the firm is doing well. This wage system has survived the appearance of a large trade union movement since its inception under the American Occupation. During the inter-war period when such trade unions as existed were very feeble, it can be understood that wages were extremely plastic. Thus whereas in Britain, as a result of the public regulation of wages, and of the extension over the greater part of industry of collective bargaining between strong trade unions and employers’ federations, wages were being rigidly held during depressions, in Japan they responded readily to changes in economic fortune. And it was not merely because of the method of wage payment that this plasticity existed. The abundant i This applied to the combined spinning-weaving mills. The corresponding proportion was one-third for the specialist weaving sheds. 202

j a p a n ’s e c o n o m ic

grow th

supply of recruits from the country districts, where incomes from agriculture and raw silk fell steeply after 1929, led to an intense competition for jobs. The argument might be extended to include a consideration of the effects of the rapid growth in the population of working age, but I must here be content with a mere reference to this important factor. If these conditions prevailed for factory labour, it can be well understood that among the small and medium firms there could be no resistance whatever to economic pressures exerted on wages. In that sector of industry the competition for jobs from a labour force constantly recruited from an over-populated and depressed country­ side was even keener than among the factory workers, as the wide disparities in wages between the small-scale and large-scale industries demonstrated. During the thirties the small and medium firms were responsible not only for the larger share of the textile output but also for most of the production of miscellaneous consumption goods and for many of the components and processes required for the growing engineering industry. In times of great activity bottlenecks were encountered by certain industries in the supply of specialized, skilled labour, and this placed a limit on expansion during the boom; but during depressions, such as that to which I have referred, wages could be compressed without meeting with any serious resistance. The extreme plasticity of wages explains how it was that Japan was able to maintain her industrial output during the depression years. It also accounts for her ability to finance a high rate of investment in improved equipment at that time, for the steep reductions in wages, supplementing the other economies which manufacturers were able to realize, permitted firms that survived to earn high profits (though, of course, not as high as in the boom periods), despite the heavy fall in the prices of their products. The structural conditions that I have described persist even today. The Japanese economy has retained its resilience, and the remarkable progress of the post-war years has been accompanied by a swift and extensive transference of resources from old to new industries. The dichotomy between the large- and small-scale sectors is still present. The continuing responsiveness o f Japanese costs to deflationary pressure has been demonstrated on at least two occasions in recent years, and readiness to apply that pressure when danger-points are approached has made almost as important a contribution to the country’s rapid secular progress as her capacity to invest a high proportion o f the national income. But there are signs of change. The marked reduction in the size of the agricultural population has raised the supply price o f all types of labour, and as prosperity laps over into the small-scale sector of the economy the wage-disparities are likely to diminish. Ultimately the plasticity of 203

TIIE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

industrial wages and the resilience o f the economy may be reduced and, when that time comes, the policy o f ‘boom and bust’ may pay less handsome dividends in economic progress than in the past. B IB L IO G R A P H Y 1. For data relevant to certain points made in the first part of my paper, see T. C. Smith, The Agrarian Origins o f Modern Japan (Stanford, 1959) and Political Change and Industrial Development: Government Enterprise, 1868-1880 (Stanford, 1955). C. D. Sheldon, The Rise o f the Merchant Class in Tokugawa Japan (J. J. Augustin, New York, 1958). 2. For a convenient source of foreign trade statistics, see Oriental Economist, The Foreign Trade o f Japan: A Statistical Survey (1935). For statistics of the silk industry, The Japan Silk Year Book (various years) is useful. 3. On the point made in para 2 of page 196, see W. W. Lockwood, The Economic Development o f Japan (O.U.P., 1955), especially p. 107; and ‘Economic Growth in Japan, 1868-1938’ in Economic Growth: Brazil, India, Japan (ed. S. Kuznets and others: Duke University Press, 1955), especially p. 147. 4. For the latter part of the paper, the following may be of interest: K. Ohkawa, The Growth Rate o f the Japanese Economy Since 1878 (Kinokuniya, Tokyo, 1957). S. Tsuru, Essays on Japanese Economy, Part II (Kinokuniya, 1958). T. Uyeda, The Small Industries o f Japan (I.P.R., New York, 1938). K. Seki, The Cotton Industry o f Japan (Japan Society for Promotion of Science, 1956). E. B. Schumpeter (ed.), The Industrialization o f Japan and Mancliukuo, 1930-40, Chap. XIX. G. C. Allen, Japanese Industry: Its Recent Development and Present Condition (I.P.R., New York, 1939), Chap. IV.

204

8

C A P IT A L F O R M A T I O N I N P R E - W A R J A P A N : CURRENT FINDINGS AND FUTURE PROBLEMS H E NR Y ROSOVSKY

Professor of Economics, University of California, Berkeley

The purpose of this paper is to present a summary and critique o f one important aspect of Japanese economic development: the historical pattern of capital formation. I have divided this topic into three parts: a r6sum6 of the quantitative findings; a review of related stastical problems; and a discussion o f some questions raised by these findings. A S UMMARY OF F I N D I N G S

By capital formation we mean public and private investment in construction and durable equipment. In recent years some economists have advocated broadening this definition to include the formation of human capital. Thus, we might now be inclined to consider expendi­ tures on education or public health as forms o f human investment. I do not know of any studies dealing with Japan which have attempted a broad and systematic combination o f ‘real’ and ‘human’ invest­ ment, and therefore take it for granted that the ‘old-fashioned’ definition used here may still be considered valid.1 The four tables which follow provide the background, and I will begin by trying to state certain propositions concerning capital formation in Japan about which there exists rather general agree­ ment.2 1. The last four columns of Table I show the proportions o f capital formation to national product according to four concepts: gross and net, and domestic and national.3 1 However, a very interesting beginning has been made by Anthony M. Tang in his ‘Education and Research in Japanese Agricultural Development’, a paper presented to the Econometric Society, August 1960. 2 Tables I, II and III are taken from my recent book Capital, Formation in Japan, 1868-1940 (New York: The Free Press of Glencoe, 1961). Table IV was computed by Simon Kuznets (using Kazushi Ohkawa’s figures for national income and my estimates of capital formation). See Kuznets, ‘Quantitative Aspects of the Economic Growth of Nations, Part VI’, Economic Development and Cultural Change, Part II, IX, 4 (July 1961). 3 All the ratios show the proportion of current product used for investment. The following definitions apply throughout: G d c f : Gross domestic capital formation, i.e. additions to capital stock within the

205

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

These rather technical differences, important and interesting though they are, need not detain us now. It should be noted, however, that the four sets of proportions show a more or less similar development of considerable historical interest. According to these figures, the long-run Japanese investment pattern can be divided into four periods. Beginning when the measurements start1 and approxi­ mately until World War I we find a rather steady level of investment averaging about 12 per cent (in terms of g d c f / g n p ). Then, during the decade which includes World W ar I—let us say the first ten years of Taisho—there takes place a great spurt of capital formation, bringing the ratio into the 18 per cent range. During the 1920’s a plateau is maintained at the level reached shortly after World W ar I. (The situation during the 1920’s may resemble the one which pre­ vailed before the great spurt of the ’teens. But it should be noted that the level of investment was now much higher.) The final period opens during the last decade of analysis: another rapid spurt o f investment during the 1930’s with the ratio reaching an all-time high2. Economic historians of Japan will, I think, find these periods rather familiar. They will know that the period of World W ar I represented a unique opportunity for Japan; that the 1920’s were unsettled and difficult; and that the military adventures of the 1930’s produced a boom for heavy industry. They will also know that these periods are reflected in a wide variety of economic indicators such as price indexes, growth of the factory labour force, etc. There may, however, be some question about the steady level o f investment prevailing until World War I. These are the years which W. W. Rostow has country gross of capital consumption, and disregarding capital exports or imports. Equals the sum of construction, producers’ durable equipment, and inventory accumulation. c. n c f : Gross national capital formation. Same as g d c f , but after subtraction of capital imports or addition of capital exports. n d c f : Net domestic capital formation. Same as o d c f , but net of capital con­ sumption allowance. n n c f : Net national capital formation. Same as g n c f , but net of capital con­ sumption allowance. g n p : Gross national product, i.e. total output originating within the country gross of capital consumption, with the addition of net balance of factor payments across boundaries. n n p : Net national product. Same as g n p , but net of capital consumption allow­ ance. g d f c f : Gross domestic fixed capital formation. Equals the sum of construction and producers’ durable equipment. See Kuznets, op. cit., p. 2. 1 Before the 1880’s data are too scattered to arrive at a meaningful total. 2 In the post World War II period even higher levels of investment have been achieved, indicating a new phase in economic development. See Japan, Keizai Kikakucho (Economic Planning Agency), Kokumin shotoku hakusho (White Paper on National Income), 1961, pp. 178-80.

206

T a b le

I

G R O S S D O M E S T IC A N D N A T I O N A L C A P IT A L F O R M A T I O N P R O P O R T I O N S (O v e rla p p in g D e c a d e A v e rag es) u n it: "f 1 m illion

(7)

1 8 87-96 1892-01 1 8 97-06 1902-11 1 9 0 7 -1 6 1912-21 1 9 1 7 -2 6 1922-31 1 9 27-36 1 9 3 1 -4 0

0)

(2)

GDCF

NBFC

119-4 1950 2 6 1 -3 390 1 537*1 1,2 8 9 -6 2 ,2 5 3 -5 2 ,4 4 0 -5 2 ,5 9 6 -3 5 ,1 2 8 -0

-2 * 6 -2 9 -0 -5 1 * 5 -4 2 -9 18*1 39*0 -1 9 9 -6 -2 6 7 -7 -8 7 -6 — 41

(3) 2/1 % -2 -2 -1 4 -9 -1 9 -7 -1 1 0 3 -4 3*0 -8 -9 -110 -3 -4 —

(4)

(5)

(6)

GNCF

NNP

GNP

0+2) 116-8 1 66-0 2 0 9 -8 3 4 7 -2 5 5 5 -2 1,328-6 2 ,0 5 3 -9 2,172*8 2,508*7 5,123*9

925*5 1,492*1 2 ,0 8 8 -7 2 ,7 2 0 -4 3 ,6 7 2 -3 7 ,2 8 8 -3 11 ,4 7 5 -5 12 ,4 7 3 -5 13 ,4 3 3 -7 1 9 ,2 1 6 -3

9 7 1 -0 1 ,5 6 8 -9 2 ,2 0 0 -4 2 ,8 7 2 -0 3 ,8 8 5 -0 7 ,7 3 0 -2 12,192*3 13,278*2 14 ,3 3 2 -5 2 0 ,5 4 5 -5

A b b rev iatio n s: g d c f : G ro ss D om estic C apital F orm ation n b f c : N et B alance o f Foreign Claim s g n c f ; G ro ss N a tio n al C apital F orm ation n n p : N et N a tio n al P roduct g n p : G ro ss N a tio n al P roduct n d c f : N e t D om estic C apital F orm ation [ n d c f n n c f : N e t N a tio n al C apital F orm ation [ n n c f =

— ( g n p — n n p )] — (g n p — n n p )]

g d c f g n c f

P ro p o rtio n s (% ) (8) (9)

(10)

GDCF

NDCF

GNCF

NNCF

GNP

NNP

GNP

NNP

12-3 12*4 1 1 -9 13*6 13-8 16*7 18*5 18-4 181 2 5 -0

8 -0 8 -0 7 -2 8*8 8*8 1 1 -6 1 3 -4 13-1 1 2 -6 1 9 -8

1 2 -0 1 0 -6 9 -5 12-1 14*3 17-2 1 6 -8 1 6 -4 17*5 2 4 -9

7 -7 6 -0 4*7 7*2 9*3 12*2 11*7 11 0 120 19-7

T a b le

II

S T R U C T U R E O F G R O S S D O M E S T IC C A P IT A L F O R M A T I O N P rivate (1) RC

2 0 -6 1 5 -9 1 2 -2 7 -7 91 9 -9 8 -9 7 -3 5*9 3*4

1 8 87-96 1892-01 1 8 9 7 -0 6 1902-11 1 9 07-16 1912-21 1 9 17-26 1922-31 1 9 2 7 -3 6 1 9 31-40

(2)

(3)

NRC

DE

151 1 5 -6 1 5 -6 1 5 -7 15-1 18*2 19*4 20*2 17*6 12*2

7*2 51 10-6 141 15*8 19*7 156 12*5 17*9 28*9

* M ay n o t add u p to 100 because o f rounding. A b b re v iatio n s: R esidential C onstruction N on-residential C o n stru ctio n D u rab le E quipm ent d e : C onstruction c: G ross T o tal U nadjusted g t u : A griculture A g: Inventories In v : A dj T : A djusted T otal

r c

:

n r c

:

(4) T otal (1 + 2 + 3 )

(5) c

42*9 36*8 38*5 37*5 400 47*7 43*9 40*0 41*5 44*5

200 2 5 -5 2 5 -5 27*9 27*6 19-9 23*5 28-3 26-3 12*4

Public (6) DE

11*7 21*2 26*2 22*3 21 *8 2 2 -5 20*2 18*8 22*1 35*9

(8)

(7) T o tal (5 + 6)

(4 + 7 )

31*7 4 6 -7 51*7 50*3 4 9 -5 42*4 43*7 47*2 48*4 4 8 -3

7 4 -6 83*5 90*1 8 7 -8 89*5 90 0 87*6 87*2 89*9 92*8

GTU

u n it: %

(9) Ag

(10) Inv

(11) A d j T« (8 + 9 + 1 0 )

9*7 3*9 2*3 2*8 1*4 1 -4 2 -3 1*4 0*9 0*1

15*6 12*6 7*5 9*4 9*1 8*5 101 11*4 9 -1 5*8

1000 1000 100 0 100 0 100 0 1000 1000 100*0 100*0 1000

T a b le

III

C A P IT A L F O R M A T IO N P R O P O R T IO N S A N D S T R U C T U R E E X C L U D I N G M IL I T A R Y

(I)

(2)

(3)

(4)

% Of M

GDCF

NDCF

GNCF

tO G D C F

1 8 87-96 1892-01 1 8 97-06 1902-11 1 9 07-16 1912-21 1 9 1 7 -2 6 1922-31 1 9 2 7 -3 6 1 9 3 1 -4 0

101 19*3 2 1 -5 161 140 150 1 2 -0 8 -7 12*0 30*9

GNP

110 100 9 -3 1 1 -4 11*9 14 -2 16-3 16 -8 15*9 17*2

NNF

6*7 5*5 4*5 6*5 6*8 90 110 11 *4 10*3 11*5

(5) NNCF

GNP

NNP

10-8 8 -2 5*3 9*9 1 2 -4 14*7 14*6 14*8 15*3 1 7 -2

6 -4 3 -5 20 4 -9 7 -3 9*5 9 -3 9*3 9*7 11*5

% O f G D F C F EX. M°

% Of G D F C F E x . M

(6) P rivate

(7) Public

(8) c

47*8 45*5 49*0 4 4 -7 4 6 -5 56*1 49*9 43*8 47*1 64*5

24*0 34*0 3 8 -4 40*7 41*3 32* 1 36*0 42*1 41*4 25* 1

83*7 83*0 68*3 67*8 6 5 -5 62*1 67*5 70 5 63*0 42*6

a D oes n o t a d d up to 100 because th e percentages have been calculated fro m the u n ad ju sted totals. A b b rev iatio n s: m : M ilitary g d f c f G ross D om estic Fixed C apital F orm ation

u n it: %

(9) DE

16*3 17*0 31*7 32*2 34*5 37*9 32*2 29*5 370 57*4

T a b l e IV

R A T E S O F G R O W T H O F N A T I O N A L P R O D U C T IN C O N S T A N T P R IC E S , A N D T H E R A T IO T O I T O F C A P IT A L F O R M A T I O N P R O P O R T IO N S , E X C L U D I N G M IL I T A R Y IN V E S T M E N T : J A P A N , 1887-1957 G ro ss R atios R atio to Col. (1) o f: Periods

% R ate o f G row th G

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

1887 1892 1897 1902 1907 1912 1917 1922 1927 1932 1951

to to to to to to to to to to to

1897 1902 1907 1912 1917 1922 1927 1932 1937 1941 1957

L o n g e r P e r io d s 12. L in e s 1-3 13. L in e s 4 - 6 14. L in e s 7 -1 0

(1) 4*92 4-4 1 2*67 3*49 4*07 3-7 1 519 5 -9 6 5*10 4 -1 8 8 -1 8

400 3 -7 6 511

GDCF

GNCF

P rop. (2)

Prop. (3)

2*2 2 -5 3 -5 3*3 2*9 3 -8 3 -2 2*8 31 41 3 -5

2 -2 1 -9 20 2 -8 30 3 -9 2 -8 2 -5 3 -0 4 -1 3 -6

2 -7 3*3 3 -3

20 3 -2 3*1

N e t R atios R atio to C ol. (4) of: % R ate o f G ro w th

NDCF

NNCF

P rop. (5)

P rop. (6)

4*88 4*37 2 -6 2 3*44 403 3*68 5*16 5 -9 2 506 413 7 -5 4

1 -4 1-3 1 -7 1 -9 1*7 2 -4 21 1 -9 2 -0 2 -8 31

1*3 0 -8 0 -8 1 -4 1*8 2*6 1*8 1*6 1 -9 2*8 3*2

3*96 3*72 5 -0 7

1-5 20 2 -2

1*0 1*9 20

NNP

(4)

CAPITAL FORMATION IN PRE-WAR JAPAN

called the ‘take-off’ in Japan, and according to his model there should have occurred a doubling o f the investment ratio.1 The Japanese case does not verify these expectations.2 2. A comparison of columns (4) and (7) of Table II illustrates another important feature of Japanese capital formation. Here we can see that the relative weight of the public sector was very large Over the whole period the government accounted for close to half of total investment. 3. The unusual share of public investment is closely linked to the next distinctive feature of capital formation: the role or weight of military investment. Tables I and II include military durables as part of public investment. This is a somewhat controversial procedure which need not be debated here. Military durables do not necessarily increase the productive capacity of an economy and many economists would advocate treating these expenditures as consumption. On the other hand, in order to understand the developmental capabilities of a country it is useful to compute a national savings or abstention rate, and this would argue for the inclusion of military investment. The details are of little significance in the present context; obviously it is most sensible to make the calculations both ways. By comparing Table III with Tables I and II, we can derive a clear idea of the importance and consequences of military investment. The capital formation ratios excluding the military—columns (2) to (5) of Table III—are considerably reduced, although the investment periods discussed previously remain valid. That is to say, the weight of military expenditures is heavy, but the trends are (relatively) unaffected. We should note also that the exclusion of the military significantly reduces the share of public capital formation—columns (6) and (7) of Table III. The average share of the government falls from about one-half to one-third, but that is still a very considerable amount. 4. A well-known characteristic of Japanese industrialization is that it was financed largely by domestic savings. This is, of course, re­ flected in the capital formation figures of Table I, and in a number o f different ways.3 Generally, the domestic investment proportions are larger than the national proportions, indicating that—in common with most other developing countries—capital imports were taking 1 W. W. Rostow, The Stages o f Economic Growth (Cambridge: Cambridge University Press, 1960), Ch. IV. 2 According to the evidence gathered by Kuznets, op. cit., very few countries verify Rostow’s expectations. In Japan there was rapid economic growth between the Meiji Restoration and World War I. It is not reflected in the overall invest­ ment ratio because this measurement is based on an aggregate which includes too much. If, instead, we examine the proportion of investment in producers’ durables, the data indicate a continuous and sharp increase from 1892 to 1921. See Rosovsky, op. cit., Ch. I. 3 These figures do not include invisible transactions, and may therefore somewhat understate foreign contributions.

211

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

place. But the differences between these two sets of proportions are small, showing that capital imports were very moderate. Further details are supplied by column (3) which shows the proportion of investment financed by foreign funds. There are only two periods of relatively large foreign participation. At the end of the nineteenth and beginning of the twentieth century some rather large loans were secured to finance the Yawata Iron and Steel Works, and to improve railway and telegraphic communications. Again, between 1923 and 1930, the Japanese government contracted sizeable loans in London and New York in order to finance reconstruction of damage caused by the Great Earthquake of 1923.1 5. Returning once more to Table II, we can make a few observations about the structure of capital formation. The entire period can be summarized as follows: very heavy construction expenditures throughout, but a relative decline in this type of investment as industrialization proceeds.2 This is to be expected because many of the early developmental imperatives—largely social overhead capital— are in the field of construction. However, there is something unusual about the path of private residential construction. The weight of this component declines extremely rapidly, and maintains low levels throughout the twentieth century.3 6. Table IV, computed by Simon Kuznets, also links the long-run national income and capital formation estimates, this time in order to determine the capital-output ratios.4 He finds, for the whole period, a general increase in the incremental capital-output ratios:5 the gross domestic ratios rose from 2-6 or 2-7 to 3-3, and the net ratios rose from 1 -5 to 2-2. In spite of the increase, the level o f the incremental capital-output ratios has been steadily rather low—low compared with the prevailing level in many other countries/* All this raises a number of intriguing issues. The low levels of the capital-output ratios mean that in Japan large gains in output were achieved with comparatively small inputs o f additional capital. By itself this would be deserving o f close analysis; after all, it implies 1 I am not suggesting that this is any way to gauge the impact of the foreign sector on Japanese development in general or on capital formation in particular. Economic growth involves much more than the ability to finance investment, and in Japan foreign ‘know-how’ and imported technology played a most crucial role. 2 The heavy commitment to construction is even more obvious when it is realized that government investment in durable equipment went primarily to the military. See columns (8) and (9) of Table III. 3 Japanese houses, being of light wooden construction, are in real terms very cheap. A relatively small investment in residential construction provided a lot of shelter, and permitted heavier investment in other areas. 4 Columns 2, 3, 5 and 6. 5 The incremental capital-output ratio shows the amount of increase in income that is achieved with a given amount of investment. 6 Kuznets, op. cit.

212

CAPITAL FORMATION IN PRE-W AR JAPAN

extremely efficient use of a scarce resource. It is all the more intriguing because we know that construction figured very heavily in investment expenditures, and that the relative importance of con­ struction declined in favour of producers’ durable equipment. The accepted view has been that construction expenditures—especially of the social overhead type—are characterized by particularly high capital-output ratios, and this only adds to the puzzle. F or a priori reasons one might have expected falling capital-output ratios. S T AT I S T I C AL PROBLEMS

Having come this far, it seems appropriate to say just a few words about the statistical problems of deriving estimates of Japanese capital formation. They are formidable, and the discussion of certain fine analytical points must never be allowed to obscure the crudity of the underlying data. A t the same time, it should be stressed that Japan is not in any sense peculiar in this regard. The data for most of Europe are no better, and in many instances much worse; compared to the rest of Asia, Japanese sources are the best. The core of the problem lies in the requirements of quantitative economic history and its attempt to apply the concepts of economic analysis. These concepts were unknown when industrialization began in most countries, and a great deal of information, now considered extremely valuable, slipped through the fingers of early administrators. The shortages of data affecting the estimates can be clarified by referring to Table II where the various components o f investment are listed. This Table shows two totals: the ‘gross total unadjusted’ of column (8) and the ‘adjusted total’ of column (11). The necessity of an adjustment stems from the lack of usable macro-economic long­ term estimates for investment in agriculture and inventories. We know, both from Japanese and general economic history, that the missing components are important, especially in the early phases of economic development. Omitting them entirely creates the danger of analysing pseudo-trends, and at the moment a highly indirect and risky adjustment is the only solution. Clearly the next major research effort should be aimed at plugging these gaping holes.1 i The adjustment for agriculture, in Table II, is based on the 1955 National Wealth Survey. This source shows that in agriculture, at that time, there prevailed an incremental gross capital-net income ratio of 1 -0. For a variety of historical reasons, I assumed that the gross incremental ratio increased from 0- 5 in 1887-96 to 1 -0 in 1927-36, where it remains. Using the Ohkawa national income series, I next determined the net output of agriculture for the overlapping decade aver­ ages. Then, applying the gross capital-net output ratio, I derived average agricul­ tural investment for the decades. The adjustment for inventories is similar, and also begins with the 1955 National Wealth Survey, which shows that inventories were about 0 •4 of additions to g n p . I assume that this represents the incremental i n v e n t o r y - G N P ratio, and also that i t remains unchanged for the entire period of analysis. Next, changes

213

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

The list of weaknesses must be extended. For example, the official Factory Statistics (Kojo tokeihyo)—in effect a census o f manufactures— start only in 1909, and this makes the estimation o f private invest­ m ent in durable equipment especially difficult before that date. Likewise, the estimates of private construction rest on less than adequate data. In general, the time series display overall weakness before 1890, the year in which most government statistical services became regularized. It would not be difficult to mention other, equally im portant, problems. A t the moment, especially in Japan, a great deal of quantitative historical work is under way, and we may expect that m ost of the capital formation estimates are subject to revision. Revisions are norm al in literary as well as quantitative economic history, although when numbers are involved em endation seems to arouse a greater degree o f scholarly alarm. W hat can be said by way o f a general evaluation o f these figures? On the whole, they appear to yield reasonable results, both in terms of our knowledge o f general Japanese economic history and the quantitative and non-quantitative history o f other countries. The purpose of this type of research is to produce the p ath o f trends, and not the movements o f short-term fluctuations. T hat is why the results are put in terms of overlapping decade averages and broad aggre­ gates. In my opinion it would not be wise—at least for the m om ent— to go much beyond this.1

P R O B L E M S OF I N T E R P R E T A T I O N

Some o f the most interesting questions about Japanese capital form ation lie in the com parative sphere. W hat is o r is not peculiar in the historical pattern o f investment? And, by implication, the same question can then be applied to the broader process o f economic development. A com parative orientation m ust make reference to the ‘average experience’ of other developed or developing countries or in g n p are calculated for the overlapping decades, and an application of the incremental inventory g n p ratio yields average inventory investment for the decades. For a more detailed presentation, see Rosovsky, op. cit., Ch. I. A rigorous and direct estimation of some of the missing components has been started. The Rockefeller Project of Hitotsubashi University's Institute of Econ­ omic Research is presently engagedin an intensivestudyofagriculturalinvestment. But at this time (November 1961) the results are not yet available. 1 Very recently a preliminary version of a long-term national savings series has become available for Japan. See KOichi Emi, ‘An Approach to the Measurement of National Saving in Japan, 1878-1940’, Hitotsubashi University, Institute of Economic Research, Rockefeller Project Working Paper, No. D 10 (1961). This series, based on entirely different sources and completely independent calculations, measures the financial side of investment and, therefore, should closely correspond to capital formation. In fact, the results are broadly similar, and this should raise the level of confidence in the present estimates.

214

CAPITAL FORMATION IN PRE-WAR JAPAN

to some sort of economic-historical model. With the data which Simon Kuznets has collected it is now possible to identify Japanese peculiarities against the background of average experience. Some of the points have already been covered in ‘A Summary of Findings’: the share of government was extremely high, military investment was unusually heavy, the share of residential construction was very low, and the overall level of the incremental capital-output ratio was also uncommonly low. The reasons for some of these peculiarities are pretty obvious and have been elaborated elsewhere, i Before moving on to another type of problem I would, however, like to speculate a bit about the level of the capital- output ratios. Kuznets concluded th a t: \ . . the levels of the capital-output ratios for Japan were distinctly lower than in other countries despite the high proportion of construction in the capital formation for Japan, because the sectoral distribution and the capital-output ratios within sectors must have made for the possibility of large gains in output with relatively small inputs of additional capital.’2 Since capital is nearly always scarce in the early stages of a growing economy, large gains in output with relative small inputs of capital must fulfil the ambitions of many development planners. Why was Japan so fortunate? Perhaps no one is yet prepared to answer this question with certainty, but I would like to suggest a line of reasoning which is particularly relevant before World War I. In trying to understand the nature of Japan’s good fortune, her experience with agriculture is most illuminating. It is by now a familiar story.J Shortly after the Meiji Restoration Japanese agriculture began to flourish. Output and labour productivity increased with astonishing rapidity at least until World War I, and a growing urban population with rising per capita incomes was fed largely out of home pro­ duction. At the same time, large-scale exports of silk and tea brought in valuable foreign exchange, and surplus capital—via the Land Tax —was transferred out of agriculture into social overheads. Specialists in comparative economic development will find all this extremely reasonable. Nevertheless, the events in agriculture bear a distinctly Japanese stamp. Japan had no enclosures, collectives, or communes. The size and type of production unit remained nearly the same as it had been during the later Tokugawa Era. The gains in output and productivity were due to a number of factors: greater use of fertil­ izers, better seed selection, improved methods of irrigation, education, 1 Sec Rosovsky, op. cit., Chs. I-VI. There are also certain distinctive charac­ teristics in the financing of Japanese capital formation. See, for example, Kazushi Ohkawaand Henry Rosovsky, ‘The Role of Agriculture in Modem Japanese Economic Development’, Economic Development and Cultural Change, IX, 1 (October 1960). 2 Kuznets, op. cit., p. 16. 3 See Ohkawa and Rosovsky, op. cit.

215

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

and others. These improvements required almost no fixed capital, while yielding large increases in output. In other words, we have here an indigenous Asian system of cultivation capable of significant selfimprovement with only minor changes in capital intensity. I would be inclined to argue that the experience of agriculture applies also to some other sectors in the Japanese economy. We may call these the indigenous or traditional (as opposed to the modern) sectors. These are the sectors of the economy in which the pre­ modem techniques of production—using little capital—were subject to only very minor changes. And the point is that some of these sectors were capable of great output expansion by making minor improvements in techniques, and mainly by adding labour which was cheap and plentiful. One can think of many examples especially before the Showa Era: the food industry catering to traditional consumption preferences, road building, riparian works, etc. Con­ currently, scarce capital resources could be diverted to modem industry—cotton textiles, iron and steel, railroads, etc.—where the capital-output ratio was much higher.1 This pattern of industrialization—relying both on labour-intensive indigenous and capital-intensive modem techniques—is not without penalties. It does, however, explain the low levels of the capitaloutput ratios. The penalties, in turn, can serve as a partial explana­ tion for the rising trend of these ratios. A mixed style of industrializa­ tion leads to economic dualism, and one of the two sectors is normally characterized by low wages and productivity. This is obvious in Japan, especially after World War I. The possibilities for expanding indigenous techniques were limited and after about half a century met rapidly diminishing returns. Now agriculture no longer expanded satisfactorily, modern roads were required, and new methods were needed nearly everywhere. When possible, the Japanese economy turned more and more toward capital-intensive western ways and the capital-output ratio rose. Once an economy is moulded in a dual frame—and fully realizing that this may have had its advantages —structural difficulties typically occur in maintaining sustained growth. The domestic market is weakened by lower productivity and incomes among large segments of the population, and this may have been one of the causes of the intensified Japanese export drive and aggression in the 1930’s. Today, the elimination of economic dualism remains a major problem for Japan. Let me turn now to quite another problem in interpreting the measures of capital formation. As stated earlier, there are four rather distinct periods or phases in the historical analysis of pre-war 1 For a more detailed presentation of these arguments, see Henry Rosovsky and Kazushi Ohkawa, ‘The Indigenous Sector in the Modern Japanese Econ­ omy’, Economic Development and Cultural Change, IX, 3 (April 1961).

216

CAPITAL FORMATION IN PRE-WAR JAPAN

investment. The question is: how do these phases fit into the general pattern of economic development? It is convenient to start answering this question by looking at the rate of growth of output—an excellent indicator of overall economic growth. Most recently this has been done by Professor Kazushi Ohkawa.1 He split the rate of growth of the non-agricultural sectors into its two component parts— the growth rate of the labour force and the growth rate of output per labour force (a rough measure of labour productivity)—and finds that Japanese economic development in the pre-war period falls into two phases. From the beginnings of industrialization until approximately 1903-07, phase I, non-agricultural output grew at an average annual rate of 5 -4 per cent, while the labour force increased at a rate of 3 •5 per cent. Therefore, during this phase, two-thirds of the high growth can be attributed to additions in the labour force. Productivity increases accounted for only one-third of the growth, and Ohkawa calls this phase ‘labour growth dominant’. By contrast in phase II, from 1903-07 to World War II, when output grew at 5-9 per cent, 3-8 per cent or two-thirds can be attributed to the growth rate of productivity, while the remaining third was obtained by increases in the labour force. Phase II is labelled ‘productivity growth dominant’. Ohkawa’s conclusions point to a major turning point slightly before World War I. This is fully confirmed by the capital formation figures, although only after a short time-lag. Another commonly accepted indicator of general economic development is the distribution of the gainfully occupied population between primary (agriculture), secondary (manufacturing), and tertiary (services) industries. Examining these series for Japan strengthens the notion that a major structural change occurred in the economy around World War I—in this instance between 1913 and 1917. The change can best be seen in terms of the percentages of workers engaged in each sector.2 During the entire period (1878— 1942) the proportion of workers in primary industry declined at a more or less smooth rate. The percentage of workers in secondary industry shows initial rapid increases at a steady rate through 1913-17. At that point the rate of increase declines until 1928-32. This is followed by another period of even more rapid increases, no doubt connected with the development of the war economy. The growth of the proportion of workers in tertiary occupations reflects the effects of the secondary growth pattern. Both secondary and tertiary labour force grow rapidly and at more or less equal rates 1 ‘The Pattern of Japanese Long-Term Economic Growth’, unpublished paper prepared for the Center for Japanese Studies, University of California (Berkeley), 1960. 2 All the calculations are based on series presented in Kazushi Ohkawa and Others, The Growth Rate o f the Japanese Economy Since 1878 (Tokyo: Kinokuniya Bookstore Ltd., 1957), Ch. II.

217

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

through 1913-17. Then, while secondary declines, tertiary rises. Conversely, after 1928-32, when secondary once again rises, tertiary declines—and all the time the rate of decline of the proportion of labour in primary industry remains relatively unaffected. These are most interesting facts when looked at against the back­ ground of capital formation. First of all, it is apparent that the same historical turning-points are involved: the change at the time of World War I, and in 1928-32, giving us four similar phases. Secondly, there are sharp differences. While capital formation spurted at the time of World War I, the rate of growth of workers in secondary industry begins to decline; but, while a similar capital formation spurt took place in the 1930’s, the rate of growth of workers in secondary industry increased. The overall pattern suggests the following tentative conclusions. Workers left the land at a fairly rapid rate reflecting the high rates of natural increase in the rural areas. They entered both secondary and tertiary industries. Probably the workers preferred employment in the secondary sector. Although the levels of per capita income were nearly the same in secondary and tertiary, I would assume that the income distribution within tertiary is more uneven. Tertiary pro­ duction includes the highly-paid professions, but it also includes numerous low productivity indigenous services. This bi-modality within tertiary production explains, I believe, the periodic inverse relationship between secondary and tertiary. The latter acted as a cushion, absorbing country workers in jobs which often must have been at the level of disguised unemployment when, for some reason, labour requirements in manufacturing declined. It cannot now be said why intensified capital formation was associated with both rapid and slower increases in the labour force of secondary industries. Changes in the structure of industry, the impact of military industries, and other reasons may have been in­ volved. This is one area where further reseaich is needed. It would be equally revealing to compare capita! formation with other ways of looking at economic growth, for example, with the balance of pay­ ments and terms of trade schemes suggested in this volume by Professor Shinohara, or with the general stages of development in agriculture. In short, we must tie the process of capital formation to the other macro-economic tools of analysis, if possible within a theoretical framework. These are the future targets, and when they are reached we should understand more clearly the secret of Japan’s spectacular development.

218

CA PIT A L FORMATION IN PR E -W A R JAPA N

BIBLIOGRAPHY 1. Emi, Koichi, ‘An Approach to the Measurement of National Saving in Japan, 1878-1940’, Hitotsubashi University, Institute of Economic Research Working Papers, 1961. 2 .------ , ‘Nihon no shihon keisei no suikei’ (Materials on Japanese Capital Formation), Hitotsubashi University, Institute of Economic Research Working Papers, 1960. 3. ------, ‘Nihon no shihon keisei to shite no jutaku toshi’, (Investment in residential Housing as a Part of Japanese Capital Formation), Keizai Kenkyu, IX, 3 (July 1958). 4. Japan, Keizai Kikakucho (Economic Planning Agency). Kokumirt shotoku hakusho (White Paper on National Income), 1961. 5. Japan, Keizai Shingicho (Economic Planning Board). Nihon keizai to kokumin shotoku (The Japanese Economy and National Income), 1954 6. Kuznets, Simon, ‘Quantitative Aspects of the Economic Growth of Nations, Part VI’, Economic Development and Cultural Change, Part II, IX, 4 (July 1961). 7. Ohkawa, Kazushi, ‘The Pattern of Japanese Long-Term Economic Growth’, paper prepared for the Center for Japanese Studies, University of California (Berkeley), 1960. 8. Ohkawa Kazushi and Others, The Growth Rate o f the Japanese Economy Since 1878, Tokyo: Kinokuniya Bookstore Ltd, 1957. 9. Ohkawa Kazushi and Henry Rosovsky, ‘The Role of Agriculture in Modern Japanese Economic Development’, Economic Development and Cultural Change, IX, I (October 1960). 10. Rosovsky, Henry, Capital Formation in Japan, 1868-1940, New York: The Free Press of Glencoe, 1961. 11. Rosovsky, Henry, in association with H. Nishio and K. Odaka, Quantitative Japanese Economic History: An Annotated Bibliography and a Survey o f CIS Holdings, Berkeley: Center for Japanese Studies of the Institute of International Studies, and the Institute o f Business and Economic Research, 1961. 12. Rosovsky, Henry and Kazushi Ohkawa, ‘The Indigenous Sector in the Modern Japanese Economy’, Economic Development and Cultural Change, IX, 3 (April 1961). 13. Tang, Anthony M., ‘Education and Research in Japanese Agricultural Development’, Paper presented to the Econometric Society, August 1960. 14. Yamada, Yuzo, Nihon kokumin shotoku suikdi shirye (A Comprehen­ sive Survey of National Income Data in Japan), Enlarged and Revised Edition, Tokyo: Toyo Keizai Shimposha, 1957.

219

9 E C O N O M IC D E V E L O P M E N T A N D F O R E IG N T R A D E IN P R E -W A R JA PA N * MIYOHEI SHI NOHARA

Professor of Economics, Institute of Economic Research, Hitolsubashi University I. I NT R ODUC T I O N

This paper will attempt to explain the role of the rapidly expanding foreign trade in the striking economic development of Japan since the Meiji era (1867), and at the same time to analyse its various aspects, e.g. the causes of high export growth rate, changes in the commodity composition of trade, the effect of changes in the terms of trade, etc. Especially important in the understanding of the above, is the fact that the Japanese export growth rate was among the highest in the world not only in the post-war period but also in the pre-war period. This raises an interesting problem: to what extent (relative to other factors) the expansion of foreign trade has been responsible for Japan’s economic development and whether dom­ estic demand or foreign demand has played the major role.2 However, as will be discussed below, it is our opinion that the expansion of the export industry has had the leading part. This is one of the chief conclusions obtained from the analysis in this paper, and to that extent the growth potential of her exports must be regarded as important in the understanding of Japan’s economic development. II .

I NT E RNAT I ONAL COMPARI SONS OF EXPORT G R O WT H RATES

Before going into factual analysis, it may be appropriate to explain one of our hypotheses. For a number of countries which show remarkably large rates of growth in industrial production or national output, rates of growth in exports are comparatively high. O f course, the question remains which was the cause and which the effect. However, it will be useful first to confirm the above correlation not only for the pre-war period but also for the post-war period. 1 I am indebted to Dr Harry Oshima for his assistance and comment in the preparation of this paper. 2 W. W. Lockwood seems to emphasize the role of the increase in domestic demand. See his Economic Development o f Japan, Growth and Structural Change, 1868-1938, Oxford University Press, 1955, p. 369. 220

ECONOMIC DEVELOPMENT IN PRE-WAR JAPAN

Fig. 1 depicts the relation between the growth rates in exports of manufactured articles and industrial production among various countries for the period 1911-13 to 1926-29. This covers only about fifteen pre-war years, but in the prior period an increasingly larger part of production by smaller factories drops out from the pro­ duction statistics. Also the index of production for a longer period may lose its economic meaning in so far as structural changes during the time are very great. Therefore we have adopted a shorter period as in Fig. 1. Moreover, the period from 1930 on includes the G reat Depression, and if we were to take the 1930’s as the years for com­ parison, it would be difficult to compute growth rates unbiased by

sO 04 £ I ro I

* o

Jai ian----

7 6 5

u

L_

Z production -v exports, and then capital goods (the sequence is again similar) with some overlapping in these processes in consumer goods and capital goods. Since 1898-1902, the Japanese economy has advanced tremendously and as Professor Akamatsu suggests, the economy gradually moved into a stage in which the share of capital goods production became much larger. Table V reveals that in the movement of investment goods the proportion of machinery imports reached a peak (11-3 per cent) in 1893-97, and then levelled off around 7 per cent, but that the imports of ores and metals rose to 16-4 per cent in 1913-17 from the early low figure of 2 •3 per cent in 1868-72, and then declined (except in the war period 1933-37). Here again, we can see that the imports of finished machinery were gradually replaced by their domestic production, so the proportion of the raw material imports for the manufacture of machinery increased in the later period. Actually, in the Showa period (from 1926 on), the proportion of metal and i K. Akamatsu, ‘Synthetic Dialectics of Industrial Development in Japan’, Journal o f Nagoya Higher Commercial School, July 1937 (in Japanese). See also his article, *A Theory of Unbalanced Growth in the World Economy’, Weltwirtschaftliches Archiv, Band 86, Heft 2, 1961. 233

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

machine industries increased enormously, not only in the natural course of economic growth but also due to the development of the war economy. It is well known that after the war, the share of heavy industry increased in total output as well as in exports, but we shall not discuss the post-wai period in detail here. T able V

T H E SH A R E O F IN V ESTM EN T G O O D S IN TO TA L IM PO R T S, 1868-1937. Imports of machinery

Imports of ores and metals Thousand yen

%

Imports of fabricated metal products

%

495 (2-2) 8186-72 522 (2-3) 45 1873-77 1,354 (5 1) 1,231 (4-6) 268 1878-82 1,219 (3-7) 1,962 ( 6 0 ) 448 1,180 1883-87 2,066 (6-3) 1,729 (5-3) 1888-92 5,755 (8-3) 3,344 (4 8) 2,791 1893-97 5,824 16,428 (11-3) 8,232 (5-7) 1898-1902 8,119 19,145 (7-3) 19,093 (7-3) 1903-07 11,264 30,355 (7-3) 38,049 ( 9 1 ) 1908-12 37,382 (7-7) 48,655 (1 0 0 ) 15,352 11,344 1913-17 35,715 (4-9) 120,074 (16-4) 40,832 1918-22 133,570 (6 9) 287,306 (14-8) 1923-27 163,739 (7 1) 201,990 (8-7) 32,701 130,734 (7-6) 1928-32 171,884 (10 0) 15,666 1933-37 9,897 160,894 (6 1) 440,192 (16 7) Source: The Ministry of Finance, Dainihon Gaikokuboekinempyo Statistics of Foreign Trade in Japan).

VI .

% (0-20) (1 0 1 ) (1-37) (3-60) (4 02) (4 01) (3-09) (2-69) (3 16) d -5 5 ) (2 • 11) (1-41) (0 91) (0-37) (Annual

F ACT ORS T HAT RAI SED E X P O R T S , UP TO A R O U N D 1900

In exploring the background of the rapid export expansion, it may be adequate to divide the whole period before World W ar II into two periods with about 1900 as the dividing line. This division is sup­ ported by the fact that while we see no deterioration in the terms of trade before the 1900’s, there were two severe declines in the terms of trade after that, and by the fact that the 1900’s was the turning point, when Japanese economy changed its pattern of foreign trade from the exporting of indigenous products to the pattern of a processingnation. We may summarize the factors which accelerated exports for the 1868-1900 period as follows: 1. The liberalization of foreign trade with lowered tariffs under the unequal treaty immediately after the Meiji Restoration, meant a 234

ECONOMIC DEVELOPMENT IN PRE-WAR JAPAN

sifting-out process of the healthiest industries, and thus tea and raw silk became the selected commodities which had a relatively strong competitive power in foreign trade. Matsukata’s deflationary policies also provided the Japanese economy with a sound starting point from which her exports could grow rapidly. 2. There were several propitious factors in the early export picture. One is that Japan had carried over a great deal of gold and silver from the feudalistic period and could divert this to cover the con­ tinued deficits in the balance of payments. Another is that in 1876 the exports of raw silk more than doubled due to the spread of silk­ worm diseases throughout Europe. The average of raw silk exports for 1873-75 was ¥5,978 thousand, but it jumped in 1876-79 to an average of ¥10,238 thousand. This was a sudden jump in an export item which had been relatively stagnant during 1868—75 although it constituted a large share in the total exports of that time. 3. The third was the injection into the economy of the reparations acquired as a consequence of the Sino-Japanese War (1894^95). The large amount of reparations not only made possible the construction of railroads and communications and the establishment of the steel industry, but also the raising of the balance-of-payments ceiling, thus contributing to the advance of industrialization, which in turn stimulated the establishment of the processing trade and the ex­ pansion of exports. 4. It is natural that raw silk played a leading role in export growth up to the 1900’s, for its proportion in total exports had been the highest. In its initial stage, raw silk exports benefited from the silkworm diseases in Europe, but the problem was how to continue increasing it even after that. It is difficult to make an analysis of the qualitative T able VI

COM PARISON O F W AGES A N D COSTS O F PRO D U CTIO N IN SERICU LTU RE IN JAPAN, ITALY AND FRA N CE IN 1913(U nit: yen) Daily wages in sericulture: Male Female Cost o f production o f cocoon per kwans Sale prices o f cocoon per kwans

Japan

France

Italy

0-50 0-28

114 0-56

0-95 0-43

4-20* 4-50

5-17 4-98

4-65 4-98

Source: Japan: Noshomu Tokeihyo (Statistics of Agriculture and Commerce); France and Italy: The Ministry of Agriculture and Commerce, Silk Reeling Industry in Italy and France (in Japanese), (August 1916). Note: * refers to 1916. In 1913, it was far less than Y4-20, for the selling price of cocoon per kan was Y5 -36 in 1916. 1 kan = 3 -759 kg.

235

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

improvement in Japanese raw silk. However, Fig. 5 which indicates the comparative developments in sericultural productivity in Japan, Italy, and France may suffice to give a general impression of the rapidity of the quantitative increase in productivity in Japanese sericulture as compared with her competitors. In addition to this, we should take into account the rapidity of quality improvement, un­ paralleled in any other country. Scientific management of sericulture, introduction of silk reeling machines, quality improvement in cocoons and raw silk, and the standardization of cocoons, together with cheap labour, increasingly strengthened the competitive position of Japanese raw silk exports. The cheapness of wages and cost of production in Japan compared with Italy and France, is indicated in Table VI.

F ig. 5. Comparison of productivity in the sericulture of Japan, Italy and France, 1886-1940. Source: Nihonseni Kyogikai (Japan Textile Conference Association. Nihonseni Sangyoshi (History of Japan’s Textile Industry) (Tokyo 1958), Vol. 1, p. 73. Note: (1) Five year averages of cocoon per 10 grams of silkworm eggs. (2) Original data: Japan: The Ministry of Agriculture and Forestry, Sanshigyo Yoran (General Survey of Silk Reeling Industry), 1939 and 1953: Italy and France: The Ministry of Agriculture and Commerce, Sericulture in Italy and France (in Japanese), (August 1916). (3) 1 Kan = 3-759 kg. 236

ECONOMIC DEVELOPMENT IN PRE-WAR JAPAN

5. A probable factor pushing up the rate of export growth may be the secular decline in the price of silver compared with gold, which fol­ lowed the continued drop in Japanese exchange rates—Japan had adopted the silver standard then—on those countries which were on the gold standard, such as the u k or us a . This effect appears similar to that of exchange devaluation which may stimulate exports if there is a lag in the adjustment of domestic prices. Fig. 6 indicates clearly how secular decline of silver prices relative to gold is reflected almost perfectly in the exchange rates (on New York) for 1874-97, during which time Japan was on the silver standard. However, in such a process, it may be expected that a lag in the adjustment in the domestic prices would decidedly stimulate exports to the countries on the gold standard. no 100 v 5

..

.

Parity of silver to gold

90

) 2

80

C

YV

Exchange race (on N ew York)

1 » X

“

50

V40 35 1874 '75

1880

1885

1890

1895

S897

6. Decline of price of silver relative to gold and the exchange rate, 1874-97. Source: Asahi News Paper Co. Ltd., Nihonkeizai Tokei Sokwan (General Summary of Japanese Statistics), 1930.

F ig .

VII.

DETERI ORATI ON OF THE TERMS OF TRADE AND E XPORT EXPANSI ON AFTER THE 1900’s

The development of foreign trade after the 1900’s involves many events. One was the outbreak of the Russo-Japanese War, which imposed an immense drain on the Japanese economy and made the deficit in the balance of payments relatively chronic and persistent. Thus, to make up this deficit, large amounts of foreign loans were contracted at the end of the Meiji period but this balance of pay­ ments difficulty, together with the tendency towards overproduction in the cotton textile industry due to the completion of the industrial revolution around the 1900’s resulted in a severe deterioration in 237

THE ECONOMIC DEVELOPMENT OF CHINA AND JAPAN

1

— — U.K.'s terms o f tra