G.F. 326
CONFIDENTIAL #
PAPARARAMAYAYARINARAYAN
2
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The
turn, were to a large extent under state control. outcome was determined outside the market system and was set in accordance with the preferences of the state economic planners. At that time the Chinese planners in principle adopted a cost-plus formula for the pricing of both raw materials and finished goods, i.e. the price of a product was equal to its average cost of production plus a certain profit margin. The size of the profit margin was determined by the planners and was intended, in principle, to reflect the priorities and value the state assigned to the development of the industries in question. In the 1950s, in an attempt to encourage rapid industrialization, exceedingly low prices were set for energy and industrial raw materials so as to reduce the production costs of the industrial sector. The prices of agricultural products were also kept at a low level so that the cost of living of the urban workforce could be kept low. Some of these policies are still reflected in the price structure.
3.
In China, a multi-tier system was involved in administering the pricing policy. The right to set the price or administer a pricing policy for a particular product was given to the authorities entrusted with distributing the goods in question. The delegation of such power to distribute the goods was in turn made in accordance with a centrally determined system of categorization of goods. Under this system, both materials (producer goods and industrial raw materials) and commodities (finished products) were divided into three categories. Category I, which consisted of all key materials and commodities, was under the control of the State Planning Commission. Materials and commodities of Category II were within the ambit of various central ministries while Category III, which was a residual category, came under the domain of local authorities,
CONFIDENTIAL #3
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