Industrial Policy Reform in China: Structural and Regional Imbalances

China's postwar commitment to economic self-sufficiency required a rapid expansion of heavy and chemical industry (HCI). Such a strategy is especially risky for low-income countries since it conflicts strongly with their comparative advantage in labour-intensive activity. It makes heavy demands on scarce capital resources and yields low returns, implying sizeable costs in terms of consumption foregone. For China the risks are compounded by a relatively poor natural resource base and the weak allocative efficiency of the command economy system. HCI is also difficult to downgrade. The Dengist reforms seek to shift resources from investment to consumption and from HCI to light industry and agriculture. They pose dilemmas over whether to discard existing HCI plant, upgrade it, or build new plant - and where. Reform is hampered by the rigidity of Chinese institutions which prepetuated HCI dominance through an unintended investment surge 1984-88.