DAGAO VILLAGE, China -- Here the part of China's ailing economy that still works boils down to a deceptively simple scene: A spare workshop about 20 miles southeast of Beijing where a handful of women stand under bare light bulbs sealing pieces of plastic together with flat irons to make plastic bags.
Another group of women in an adjacent shed then stencils each bag by hand with the standard English-language warning: "This is not a toy." After that, the bags -- Dagao Village turns out about a million of them a year -- are sold to a Beijing company that makes shirts for lucrative foreign markets.
Even compared to many of China's faltering state-run industries, Dagao's assembly of plastic bags is an inefficient, low-tech enterprise mainly dependent on lots of manpower and little skill.
But unlike most of China's state-run industries, it makes a good deal of money. And the profits from assembling the plastic bags -- and from Dagao's more than two dozen other light industries -- have brought a previously unimagined standard of living to this small village.
Since 1984, when these former farmers banded together to form the Dagao Agricultural, Industry and Commerce United Company, annual per capita income here has increased from about $42 to almost $300.
Last January, old Dagao Village -- brick hovels that had housed generations -- was leveled, and the last of the village's 1,300 peasants moved into rent-free, spacious apartments that boast central heating and plumbing and, in many cases, carpeting, refrigerators, freezers, washing machines, TVs and videotape players.
Dagao's transformation is a particularly successful example of an economic phenomenon that blossomed throughout much of China in the 1980s: The haphazard growth of more than 18 million rural township and village enterprises, small-scale industries ranging from privately run, household-sized concerns to collectively organized, mini-conglomerates such as Dagao's.
These enterprises -- flexible, market-oriented but uncontrolled competitors with China's unwieldy state-run industries for scarce capital, materials and energy -- represent much of the Chinese economy's promise as well as some of its quandaries.
Control of these enterprises' future, particularly in respect to the heavily subsidized, centrally planned sector, is just part of an intense economic debate and political struggle here over China's economic course.
China's leaders are having so much trouble resolving this debate that this fall they have repeatedly postponed the seventh plenum of the Communist Party's Central Committee, a key meeting to endorse new five- and 10-year national economic plans.
A hastily arranged national economic planning conference was held here last week in another apparently failed effort to cure the political paralysis.
The economic argument essentially pits hard-line conservatives favoring centralized economic control against relative economic liberals willing to allow more free play for market forces. The debate is not so much over whether to continue the economic reforms of the 1980s, but rather how far and how fast to proceed.
Paralleling that argument -- and lately taking precedence -- is a real dogfight between the central government and China's provinces over control of economic matters, particularly tax revenues.
The economic debate has cropped up in part because of the continuing tension within China's leadership over who will succeed Deng Xiaoping and in part because China's once- booming economy is at a crossroads.
China's economic dilemma in some ways stems from its reforms of the 1980s, which produced phenomenal industrial growth rates but ultimately led to chaotic investment, wasted energy, imbalanced production, and a return of this country's historic nemesis, runaway inflation.
This forced the central government to slam the brakes on the economy in late 1988, by drying up new loans, halting 18,000 construction projects and closing more than 100,000 state firms. As a result, inflation dramatically fell, but so did employment, industrial output and retail sales.
Chinese economic planners this year have been searching for ways to jump-start the stagnant economy without setting the stage for another bout of high inflation. That might not prove possible: Industrial output lately has been rising again, but so has inflation.
At stake in the economic debate is the paramount concern of China's nervous central leadership -- social stability -- for either high unemployment at one extreme or high inflation at the other could ultimately produce more disorders similar to that quelled only by military force last year.
In recent weeks, there have been some signs that conservative economic ideas might prevail if a plenum were held soon, particularly those of the longtime central-planning advocate, 85-year-old Chen Yun. But some Western analysts are not convinced the market-oriented reformers will be defeated.