New era for Chinese economists
A high-profile economist argues that China will become the global center of economic studies by 2050 and home to a host of leading thinkers
Justin Yifu Lin is one of the few Chinese economists who have a global vision to explain China's economic situation. Unlike some who are pessimistic about the Chinese economy, Lin insists that despite its many problems, China's economic achievement is “a miracle in human economic history.”
From 1978 to 2016, China's annual GDP growth averaged 9.6 percent, and the nation is now the world's second-largest economy. According to data from the World Bank, China accounted for 14.9 percent of the world economy in 2016, up from 2.3 percent in 1978. No nation in human history, Lin said, has experienced such a period of high and sustained growth.
Western economic theories fail to explain the phenomenon. In Lin's opinion, China's economic miracle was made by blazing a path suitable for Chinese conditions. Based on this assumption, he published The China Miracle: Development Strategy and Economic Reform in 1994, and There is no Textbook Paradigm for Interpreting the Chinese Economy in 2005.
In 2009, Lin proposed the concept of New Structural Economics (NSE), which uses a neoclassical economic approach to study the determinants of economic structure, including technology, industry, infrastructure and institutions, and its evolution in the process of economic development.
NSE created a systematic account of China's economic development and reform over the past 30 years and came up with a theoretical system different from Western economic thought. It is regarded as the most complete theoretical achievement of the Chinese School of Thought in economics.
Newschina: What motivated you to propose NSE in 2009?
Justin Yifu Lin: The concept was put forward in 2009, but it first emerged in 1988 when I returned to China from the US. Back then, I was accustomed to observing and studying China's economy and society within a Western theoretical framework. I tended to verify Western mainstream economic assumptions with empirical data in China just as most scholars did.
My conception was changed by two events that year. China was then suffering from its most serious inflation since 1949 and Western economic theory suggested raising interest rates. China's solution, however, was to slash many investment projects through administrative means.
I came to realize that China had many capital-intensive State-owned enterprises that defied comparative advantages and continued to operate because of government grants and low interest rates. If the interest rate went up, many of them collapsed. Alternatively, the government had to increase subsidies, which would drive up inflation. Under such conditions, it was more reasonable for the government to tackle inflation through using administrative means to cut investment instead of raising the interest rate.
Each theory has its preconditions. Western economic theories were proposed in the Western social and economic context, but for developing countries undergoing economic transitions, they are difficult to apply to real problems.
NC: And the second event?
YFL: It was also in 1988 that I was invited to an international conference in India, talking with senior officials from the Indian national development planning commission. I was quite curious as to why a market economy like India would have such an organization, whose role was exactly the same as that of China's – allocation of steel, chemical fertilizers and food.
I came to learn that after World War II, many developing countries were eager to catch up with developed economies like Britain and the US, trying to build modern heavy industry out of a poor agrarian economy. Developing countries lacked funds and to ensure the development of heavy industry, government planning and allocation played a crucial role. It was no wonder India had such a government agency.
Developed countries are relatively rich in capital but are short of labor resources and developing countries are the other way round. If developing countries want to develop heavy industry that does not match their comparative advantages, government interference and subsidies are the only way. The production rate, however, will be very low and the gap with developed countries will become wider.
Developing countries should make full use of their comparative advantages based on their natural strengths, and choose carefully which industries to develop. In the process, developing countries could also tap into the “advantage of backwardness” to borrow new technology and industries at a relatively cheaper price and lower risk. It will work to accelerate economic growth and transition, and shrink the gap with developed economies.
NC: A growing number of scholars are talking about NSE. Is the theory widely accepted?
YFL: I think so. But I've found that it is more readily accepted in other developing countries than in China. Developed countries have also begun paying attention to NSE. For example, Cambridge University invited me to illustrate the NSE for one of its famed Marshall Lectures. In economic circles, this is the most prestigious lecture, and only one economist each year since 1946 has been invited to speak. I was the 61st speaker to take the podium and also one of only two scholars from developing countries.
In 2011, I was invited to Yale University for the annual Kuznets Lecture. My speech was titled “New Structural Economics: A Framework for Rethinking Development.” I was also the second speaker from a developing country. From 2008 to this day, I have published six monographs on NSE, gaining recommendations from 11 Nobel laureates in economics. I think this is recognition of the theory.
NC: The Polish government has recently made NSE the theoretical foundation of its development strategy. What is behind that?
YFL: After 1989, Poland underwent an economic transition and began to draw close to Western countries. Until 2016, Poland had maintained relatively sound economic growth among countries in Eastern Europe, even though it was not very stable. The country has crossed the threshold of high-income countries, but its income per capita has been hovering at US$13,000, and there is a big gap between it and developed nations like the US.
The Party of Law and Justice won the 2015 parliamentary election with an outright majority in Poland. After that, Mateusz Jakub Morawiecki, deputy prime minister and also minister of development and finance, made NSE the strategic basis for its national development, abandoning neoliberalism.
Poland was heavily influenced by the Washington Consensus but the theory overlooked the specific circumstances of Eastern and Central European countries. After the economic crisis in 2009, Poland turned to NSE because it advocated a positive role for government in the market economy.
Recent statistics show Poland has seen unprecedented economic growth. By the end of May 2017, Poland's unemployment rate was 7.4 percent, the lowest since 1989. A recent poll showed that 42 percent of
Poles think the country is performing well economically, the best result in Polish history.
NC: What are the responses from developing countries?
YFL: Since I became vice president of the World Bank in 2008, I have been working to accelerate the economic growth of African nations, trying to bring the successful experience of China to them. Ethiopia was one of the least developed countries in Africa with poor transport and a depressed business environment. Nobody could imagine that the country would become a manufacturing base.
In 2011, Meles Zenawi, then prime minister of Ethiopia, accepted my suggestion and constructed industrial parks to produce shoes and garments by attracting investment. By conforming to its comparative advantages, Ethiopia has within three years become one of the major countries in Africa to export light industry products – just as China had in the 1980s and 1990s.
NSE'S success in Ethiopia gained attention from other developing economies and since then a growing number of countries invited me to visit, speak and give advice.
NC: Why is NSE more accepted abroad than in China?
YFL: Since the early 1980s when China began its economic reforms, all socialist countries were shifting from planned economies to market economies. Other developing countries were also transforming their economic models under the guidance of their governments.
All these countries underwent an economic transition based on the economic principles of neoliberalism. Nevertheless, they suffered from economic collapse or slowdown, seeing GDP growth even slower than before. As a result, these countries began to view neoliberalism critically. Developed nations also made policies according to neoliberalism, widening the income gap and creating the 2008 economic crisis. Under these circumstances, they have also begun to rethink the role of neoliberalism.
From the very beginning, China abandoned neoliberalism and blazed a new trail in line with its situation, making great achievements. In the reformation process, however, problems abounded such as corruption and a growing income gap.
In the 1980s and 1990s, China's neoliberalism advocates denied a gradual, dual-track approach to economic reform, attributing China's corruption and income disparity to the lack of neoliberal policy making. They were reluctant to accept NSE. What they overlooked was that these social problems also prevailed in countries undergoing economic transitions under the guidance of neoliberalism. These problems are even more acute in these countries than in China, but the stability and sustained economic growth of China are rarely seen in these countries.
NC: NSE is referred to as the most complete theoretical achievement of the Chinese School of Thought. Do you agree?
YFL: It is too much praise, but I will continue to work toward this goal.
NC: Some other scholars are also working to construct a Chinese School of Thought. How do you see this ideological trend?
YFL: During a speech on the first anniversary of the founding of Peking University's Institute of Humanities and Social Sciences in September 2017, I said that scholars and students of Peking University should lead China's academic circles to wake up the country's cultural and intellectual consciousness and practice independent theoretical innovation, rather than simply borrow from the West.
This does not mean that China does not need to learn from mainstream Western theories, but one thing needs to be pointed out: Western mainstream theories stem from experience in developed countries and they are not always suitable for other countries.
Chinese scholars must accumulate Chinese experience and practice before coming up with more independent and innovative theories and ideas. As Chinese President Xi Jinping has said, “China is undergoing the most extensive and sophisticated social reform in its history, this is an era that needs theory and gives rise to theory, this is an era that needs thought and gives rise to thoughts. We have to live up to this era.”
NC: You have predicted that in the 21st century, China will become the center of world economic studies and China will be home to a host of world-leading economists. Can you explain this?
YFL: It was proposed more than 20 years ago, and nowadays the likelihood is even greater. From the 18th century up until World War II, the world's center of economics was Britain, where most famed economists were British or from other countries but living in Britain. After World War II, however, the center moved to the US and many world-leading economists were either American or those living in the country.
The importance of a theory hinges on the importance of the phenomenon it explains. An important economic phenomenon is one that occurs in an important country. After the Industrial Revolution, Britain became the biggest economy in the world, but after World War I, the US became the leading economy.
China is expected to become the biggest economy worldwide in 2025, and account for 25 percent of global GDP by 2050. By then, the economic phenomena in China will become important and the theory that could explain these phenomena will also become important. In this process, China will become home to a great number of world-leading economists, and it will be the same situation for other social sciences.