The Budgetary And Resource Allocation Process

The political and economic changes of the past decade have sharply altered the role and scope of military involvement in the Chinese system, with the armed forces no longer enjoying pride of place in centrally allocated budgetary, technical, and manpower resources. The PLA's diminished stature is reflected in its reduced leadership role: only two military leaders (Yang Shangkun and Qin Jiwei) serve on the Politburo elected at the CCP's Thirteenth National Congress, and military membership in the Central Committee has continued its slippage, evident since the Ninth Party Congress.^[34]

There have also been sharp reductions in the defense budget. In the immediate aftermath of the Sino-Vietnamese War of early 1979, defense expenditure increased by 5.5 billion yuan, much of it replacement costs for the heavy losses of equipment and weaponry sustained during the war. This action proved the last major "out of cycle" surge in the military budget. The predominant thrust has been to reduce military manpower and defer major procurement decisions, in the hope of decreasing the military's operating budget in both absolute and relative terms. The announced increases of 15 percent in the 1990 military budget (much of it supposedly allocated for equipment purchases related to internal security needs) therefore represents a marked departure from this trend.^[35]

As was noted earlier, however, the introduction of a retirement system has sharply increased near-term personnel and pension costs, effectively denying the PLA the surplus funds it hoped to generate by reducing the size of the armed forces. Moreover, a 1988 Central Intelligence Agency study estimated that total PLA manpower at the time of Deng's return to top military leadership may have been nearly double the prevailing estimates. Although much of this surplus manpower may not have been uniformed personnel, these individuals remained on the army payroll. According to this estimate, China "has reduced its armed forces by about 3 million men since 1977 ... [and] China's military operating budget ... has declined by about one-fifth over the last eight years." As the Chinese budget as a whole has grown, defense expenditures have shrunk from approximately one-third of total state expenditure in 1978 to about one-

fifth in 1987. The share of gross national income in the same period declined from 12 percent to 5 percent.^[36]

These trends have convinced numerous observers that the military has lost much of its previous "clout," generally embodied in the view that national defense is "the last of the four modernizations." This judgment is more assertion than fact. Of the other "three modernizations," two (industry and science-and-technology) are linked integrally to the enhancement of military power, with the PLA still able to exert substantial influence in both domains. In addition, Chinese strategies unequivocally view the modernization of military power as essential for China's credibility as a world power in the next century. In his address commemorating the sixtieth anniversary of the founding of the PLA, Yang Shangkun drew attention to the need to guarantee China's "status as a world power" (shijie jiangguo diwei ) by the middle of the twenty-first century.^[37] Huan Xiang, the late international-affairs strategist, insisted that China could not rest content with the position of "being a second-rate power or merely a regional power," arguing that the nation must aspire to a status (if not a strength) equivalent to that of the United States and the Soviet Union.^[38] Thus, the curtailing of the acquisition of major weapons systems is intended to shift attention toward enhanced technological and industrial capabilities as a whole rather than weaponry per se, with the armed forces very well endowed in scientific and industrial resources, especially in high-technology areas.

The movement away from a central allocative system has also opened a wide array of commercial opportunities for portions of the military system, with some parts of the military doing very well in recent years. In particular, the automony permitted to various military organizations to buy and sell goods and services has transformed the PLA's position and role. Although it is no longer business as usual for the armed forces, it is very much a time of business, with more entrepreneurial segments of the military establishment testing the marketplace for financial gain, thereby recouping many of the losses sustained in central budgetary allocations. The generation of such export earnings (Chinese weapons sales abroad

for 1988 were estimated at $3.1 billion in a U.S. congressional study) constitutes a new and potent source of power within the PLA.^[39]

Although many levels of the military system initially appeared sluggish or resistant in responding to these new "rules of the game," the armed forces ultimately proved more adaptive. The defense establishment has been disabused of its somewhat complacent attitude toward its status and power relative to other functional sectors, and it is far more intent on developing strategies for enhancing institutional interests. But these commercial opportunities have disproportionately benefited those within the defense sector with the requisite connections to effect these transactions. It remains to be seen whether and when the military as an institution (as distinct from powerful individuals within the defense establishment) will realize gains appropriate to the scale of these activities.

The PLA remains an extremely powerful bureaucratic actor, a power reinforced by its coercive functions, by its responsibility for defense of the realm, and by its still potent access to technology and resources. But the military's capacity to retain or augment its financial and manpower assets was greatly challenged by various reform measures undertaken in the mid and late 1980s. At a time of budgetary stringency, the PLA confronted a growing gap between China's military-technological capabilities and those of its external rivals and potential adversaries. As Yang Shangkun observed at a Military Commission meeting in late 1986, "The principal contradiction in our army building is the contradiction between the objective requirements of modern warfare and the low level of modernization of our army."^[40]

Paradoxes and contradictions nevertheless persist in the defense research-and-development sector. The Commission on Science, Technology, and Industry for National Defense nominally presides over a vast, interlocking network of institutions devoted to the specification, appraisal, and application of advanced technologies for national defense. These functions comprise the four major tasks of research, development, testing, and evaluation. In theory, COSTIND oversees this sprawling, unwieldy apparatus, coordinating requests from the services for particular technologies, evaluating budgetary requirements of project proposals, and forwarding recommendations to the Military Commission for approval. COSTIND also oversees China's missile launch sites and satellite tracking facilities, thereby providing it control over important resources for which it has no bureaucratic competitor.

Considered as a whole, China's defense technology apparatus combines the logic of centralization and coordination with the reality of fragmentation, duplication, intrabureaucratic competition, and the frequent absence of effective oversight.^[41] Thus COSTIND lacks the manpower resources required to undertake a more comprehensive bureaucratic role; its immediate professional staff numbers only seven hundred. But its small size is symptomatic of two larger problems: the absence of a viable concept of defense-resource management through which the commission can direct the R & D process, and the diffusion of effective control over budgetary and technical resources within the defense industrial system.

In a certain sense, COSTIND is a victim of the success of the Chinese nuclear weapons program. This program stands as vivid testimony to the capabilities of Chinese scientists and engineers, and the Chinese are legitimately proud of its accomplishments.^[42] But the history of this program has also had an inhibiting effect, since the circumstances that contributed to its success cannot be replicated in the defense-modernization process as a whole. The principal ingredients included a virtually unlimited budget, consistent support from the highest levels of the political system, a relatively large pool of scientists and engineers trained abroad in the requisite areas, substantial infrastructural and technological assistance from abroad in initiating the program, a limited number of required end products, and urgent, compelling pressure to produce rapid results.

In 1982 COSTIND was formed by merging its predecessor (the Commission on Science and Technology for National Defense) with the National Defense Industries Office, which oversaw defense industrial production within the numbered machine building industries.^[43] By combining the research and production functions in one organization, a single body was expected to wield power that a more limited organization could not. COSTIND's mandate and authority were provided through its principal sponsors in the military leadership, Marshal Nie Rongzhen and Senior General Zhang Aiping, both of whom had been intimately involved in the nuclear weapons program. The power of the nuclear weapons and space bureaucracy was entrenched within the commission, but it was subsequently extended through senior person-

nel appointments to the reconstituted industrial ministries that at least nominally "own" the plants that produce China's weapons.

These arrangements have guaranteed a pivotal role for COSTIND in the planning process and reflect a continuing effort (first put forward by Zhang Aiping in 1983) to maintain oversight and direction of major R & D decisions. Recalling the nuclear program, Zhang argued:

In 1956 the CPC Central Committee decided that developing guided missiles and atomic energy were the two key projects in our national defense modernization. ... Facts have proved that this was a completely correct decision. ... Our work in developing guided missiles and atomic bombs started relatively late but the speed of development was relatively quick. One important reason for this is that we centralized our organization, vigorously carried out coordination and cooperation, gave priority to key tasks, and concentrated our resources of labor, materials, and funds.^[44]

The difficulty in applying this concept more widely in defense R & D reflects the highly disparate technological and engineering demands imposed by the full array of military needs (especially products or components that require serial production), the absence of a guaranteed internal customer for the items produced, and the lack of requisite experience in incorporating more advanced technologies within an outmoded defense industrial structure. As a result, the Chinese still produce military equipment that improves only marginally on Soviet designs provided to China three decades ago. Although there are prototypes and limited production runs of some systems that incorporate more advanced technologies, China's indigenous capability for R & D innovation and diffusion remains quite limited.

Under the "old" R & D system, where the industrial ministries were virtually guaranteed an annual allocation of materials and funds and where few if any pressures existed for technological innovation, the inertial tendencies were substantial. Factories steadily produced large quantities of military equipment (there are over five thousand aircraft in the air force inventory alone), but with very little attention given to its relevance to potential combat needs. Under the "new" R & D system, the customers (i.e., the services) either no longer want the product or cannot always guarantee the funds needed for manufacture and procurement.

Thus, those officers responsible for miltary procurement (housed principally in the Armaments Department of the General Staff) believe that their power and status within the system have been greatly undermined, and they are actively seeking to reassert their power and prerogatives. Their efforts are aided by the existence of an informal "middle-age

boy" network, many with familial or personal ties to senior Chinese leaders, who are able to secure large quantities of surplus weaponry lying unused in army warehouses. These arrangements tend to cut across institutional lines of authority, suggesting that informal, personal relationships remain the glue to numerous commercial transactions within the military system. By marketing this equipment (some of it upgraded with Western Technology) at bargain rates, Chinese suppliers earn substantial foreign exchange. Thus, financial power has passed to those who control the disbursement of surplus equipment and weaponry and show an aptitude for marketing these items.

The proliferation of trading companies that market Chinese military items attest to these changing conditions, with some companies also serving as purchasing agents for foreign military components or systems desired by end users.^[45] There appear to be three principal types of actors: (1) companies associated with central R & D planners (i.e., COSTIND); (2) those linked to the industrial ministries (most prominently, North China Industries, or NORINCO); and (3) those associated with either the General Staff Department or the General Logistics Department (most prominently, Polytechnologies, which serves as the marketing arm of the General Staff's Armaments Department). COSTIND appeared to take the lead in negotiations at a government-to-government level (for example, the now-aborted Sino-American avionics agreement for the J-8 II aircraft); the ministries deal principally with collaborative arrangements with foreign firms, especially related to coproduction or technology transfer; and the services (as represented by the general departments) deal predominantly in Chinese sales to foreign governments and firms.

Of the three actors, the General Staff Armaments Department has garnered the largest amounts of hard-currency earnings. Partly because of its success but probably more because of the particular leaders involved in these transactions, it appears to have the most latitude in conducting such exchanges. The observable patterns, however, do not follow predictable institutional lines, but instead derive from the close family connections of these military entrepreneurs. The most frequently cited cases concern He Ping, a lead official in Polytechnologies and the son-in-law of Deng Xiaoping, and He Pengfei, director of the General Staff's Armaments Department and the son of He Long. Both organizations work under a cloak of secrecy, frequently working through umbrella import-export organizations such as the China International Trade and Investment Corporation (CITIC). The success of these officials demonstrates the capacity of different parts of the bureaucracy to "end run" the indus-

trial ministries by defense marketing activities, enabling the services to retain export earnings that would otherwise be unavailable to them. The precise portion of earnings retained by the services or the General Staff, and the uses to which these earnings are put, are subject to widely divergent estimates. But a profit-oriented military establishment reflects the sharply altered rules of the game. An entrepreneurial system does not necessarily produce a more technologically innovative defense force, but it does underscore the shifting locus of power within the armed forces.

A clear task for future research is to attempt to examine the effects of the weapons-sale process on the military system as a whole. The key questions include these: Where does financial control reside within the military system? Who allocates which resources, and are the purposes and consequences predominantly personal or institutional? Are these shifts in military behavior likely to manifest themselves over time in the form of increased demands for more sophisticated weapons systems being produced in Chinese factories? How has the incentive structure changed for both consumer and producer, and are there means by which profit motivations and military needs can be reconciled?

Another illustrative case concerns the canceled J-8 II avionics transaction with the United States. The total package, undertaken through the Foreign Military Sales (FMS) program, was to have totaled $550 million. One close observer of this process likened the scale of the project to the B-1 program in the United States. Although this probably overstated the costs for China, it was a major undertaking and by far the largest collaborative agreement with the United States in the defense sector. Yet the agreement was not well received by all portions of the military R & D apparatus, especially within the aviation industry, since the project did not entail the transfer of production know-how for the complex electronics packages that represented the heart of the transaction. From a service perspective, however, the prospect of the acquisition of more advanced avionics—even for a limited number of a prototype aircraft—was judged worth the risks and uncertainties. The project's cancellation in May 1990 reflected the escalating costs that the Chinese deemed unacceptable; some in China also appeared to believe that the United States was simply unprepared to implement the full scope of the agreement.^[46]

Despite the cancellation of the project, this effort at foreign collaboration reflects the diminished power of China's indigenous military industrial system. Confronted by specific commercial and technological opportunities, the top levels of decision making slighted the interests of the ministries. As a result, numerous enterprises that previously concentrated

on defense production now devote principal attention to civilian manufacture. Many defense enterprises, however, remain uncomfortable with the civilian market and have sought ways to sustain their military production capabilities. In one of his major commentaries on national defense modernization while overseer of the R & D process, Zhang Aiping spoke of the need to establish "a state mobilization working system for wartime." Zhang concluded:

While carrying out national economic construction, we should consider the way to make peacetime construction conform with the material needs during future warfare. Peacetime construction ... should make necessary preparations for meeting the demands of war. Otherwise, once war breaks out, there will not be enough time to build factories and institutes for manufacturing various kinds of weapons and facilities or to build roads and bridges. ... We should do our best to integrate peacetime and wartime demand.^[47]

Such comments leave unsettled the readiness of all portions of the military system to shift conclusively away from its long-standing practices and habits.

Despite these uncertainties, those responsible for long-term planning viewed the more constrained budgetary and investment climate as an opportunity rather than a problem. In an environment much less supportive of open-ended, frequently duplicative military allocations, the separate components of the military R & D process acquired incentives to collaborate rather than compete. This is the logic of more centrally coordinated and administered planning arrangements. In the deliberations over the Seventh Five-Year Plan, defense procurement fared very poorly. Since that time, senior defense planners have sought to introduce for the first time mechanisms geared toward long-range military planning. This effort is in contrast to the annual and five-year planning cycles and explicitly seeks to coordinate research and development activities to the year 2000 and beyond.

According to interviews with those involved in this process, the PLA is endeavoring for the first time to create a mechanism across all relevant bureaucracies to guide defense-technology planning from concept to final implementation. This effort entails a coordinated effort in all areas of potential military need (both technology related and service oriented), with subsequent reports purportedly serving as guidance for decision making and resource allocation. This effort is coordinated by COSTIND, with extensive participation by all relevant military bureaucracies. Even conceding the incentives for constituent organizations to inflate their importance

portance and needs, the very fact of such an exercise may prove more important than its actual results.

To the extent that this planning effort clarifies choices among alternatives and erodes a tradition of separatism widespread within the military, it seems likely to prove a valuable exercise. Regardless of any specific policy outcomes, it will help prepare the defense R & D system much more fully and effectively for the next five-year plan. Indeed, some military spokesmen openly hint at expectations of receiving an increased "return" on the deferral of major procurement decisions during the 1980s and see the next decade as a more promising period. The PLA's vital support for Deng and his political allies in the crisis of 1989 assumes obvious importance in this regard, with the announced defense budget increases for 1990 representing a "down payment" for services rendered by the military.