By Tang Xiangyang (湯向陽)
Issue 576, July 2, 2012
Business Review, page 53
Translated by Zhu Na
Original article: [Chinese]
The World Bank’s former chief economist, Justin Yifu Lin (林毅夫), last month returned to his teaching post at Peking University and has recently given several lectures there on the state of China’s economy. The Economic Observer has collected some salient questions and answers from these sessions. Those answers have been edited for length and clarity.
Does government intervention foster special interest groups?
Justin Yifu Lin: According to New Institutional Economics, special interest groups don’t necessarily obstruct a country’s development.
Weren’t there interests groups at the beginning of reform and opening up? Of course there were. Heavy industry was represented by eight different departments in the State Council
The success of a country’s development depends on its leader’s ability to use his status to push through policy changes: that doesn’t mean restricting all interest groups, but it does mean making a small space where new groups develop.
Take for example the development of industrial parks. Their infrastructure is usually well built and the regulations are becoming simpler – since they don’t harm the broader interest groups, they’re able to grow quickly.
A successful country isn’t one without interest groups, but one where the leader can take critical and strategic decisions.
China is still mostly using government funds to pay for new infrastructure, even though there is private capital available for this purpose, it seems the timing is wrong. What is your view?
Lin: Infrastructure is a business for the government. After the Latin American debt crisis in the 1980s, governments tended to seek private sector financing or withdraw from the infrastructure sector– this was seen as a way of improving efficiency and diversifying capital sources.
The outcome was that the only area of infrastructure to get private capital was telecommunications because this is the one field where private investors can get returns from paying customers.
Transport, ports and aviation require large investments and have long payback periods, and, in many cases, the revenue depends on external factors. For example, if you build a highway when the economy is strong, it’s highly profitable and the payback period is short, but if the economy is weak, there will be fewer vehicles on the road, cheaper tolls and lower profits.
This approach meant that Latin America lacked infrastructure investment for three decades. People have now recognized that the government needs to play a leading role in major infrastructure projects.
Despite the strength of China’s growth, the country’s current system distorts many factor costs and restricts the financial system, with financial institutions catering for large enterprises. What should be the next step for policy?
Lin: It’s true that there are many [market] distortions in China at the moment, but the effect is relatively small. For example, the financial system is controlled by the state, but real interest rates are mostly positive rather than negative. However, this doesn’t mean that the distortion should continue.
The biggest problem for China right now is income distribution, which is a consequence of price distortion. If China wants to continue its rapid development, the country needs to deepen reforms that rationalize income distribution.
Your comment that “China can maintain its high growth rate for another 20 or 30 years” has been received skeptically by many people. What’s your response?
Lin: I am not optimistic as a result of blind patriotism, but because I’m an economist and need analyze the situation rationality.
The essence of growth lies in continuous innovation and upgrades in industry and technology. As a developing country, China has “late-mover advantage” i.e. industries that have developed well internationally can be introduced in China, digested, imitated and used as a foundation for innovation. It’s entirely possible that China can sustain its rapid growth based on this model.
In 2008, China's per capita income was at 21 percent of the U.S. level; it was on a par with Japan in 1957, Taiwan in 1975 and South Korea in 1957. But per capita income in Japan reached 60 percent of U.S. level by 1971, Taiwanese incomes were at 54 percent of those in the U.S. by 1995, and in South Korea they were at 50 percent by 1977. All [these countries] achieved the annual growth of 7.6 percent or more over a period of two decades. Our economy can also have 20 years of rapid growth from its 2008 level, and so, by 2030, we can reach 50 percent or even more of per capita income in the U.S.
China’s economy has done exceptionally well over the last 30 years. Right now, what is standing in the way of China continuing to perform “exceptionally well”?
Lin: I’m confident that the Chinese economy still has a lot of potential. Currently, the biggest problem is social conflicts caused by uneven income distribution. In China, the tradition has been “it’s not the amount of social wealth that matters, but how it is distributed,” specifically; we’re a socialist country. If a large amount of wealth is concentrated in the hands of a few people, there will many tensions.
We’re implementing a two-tier system, in which areas such as finance and the environment have been inadequately assessed and problems remain, particularly in the area of factor prices.
The next step for the government is to improve the market system, eliminate the distortions of economic planning and support the vulnerable.
You have always stressed “comparative advantage”. What will be China’s comparative advantage in the next stage?
Lin: The infrastructure and financial system need to be reformed in parallel with industrial development. This kind of reform can offer a “systemic advantage” for China’s development. Economic growth needs low factor costs and transaction costs across all industries. Lower transaction costs can only come about through structural and legal changes led by the government.
People have criticized China for "state capitalism," but those critics are taking as a model the Washington system, where any economic role for the government amounts to state capitalism. In fact, industrial upgrades and transitions are government responsibilities in any country. The U.S. also needs the state to help foster the next new industry.
The government can help industry by supporting the patent system and basic research. It can also use procurement to boost renewable energy products.
China’s per capita income has reached $5,500, should the role of government change?
Lin: There are some sectors of the China’s economy from which the government ought to withdraw; there are others that need state intervention. China has many industries in the international supply chain, but there are others on the margins. In those latter sectors, the government should let the market to play a role, whereas the government can play a guiding role for industries in the international supply chain.
If developing countries grow at 8 percent every year for three decades, then how can developed countries respond? Global resources are limited. Is it inevitable that there will be a war between China and the U.S.?
Lin: This argument is unfounded. Developing countries have the potential, but not all of them can achieve the 8 percent annual growth for 20 or 30 years.
If that potential is fulfilled, it doesn’t mean that there’s no room for developed countries to grow. On the contrary, developing countries will need significant investment and may create more markets for the developed countries. The lack of a market is the biggest problem facing developed countries.
History has told us that when the number two [world power] rises to the top, war is inevitable. But one thing is usually overlooked in this discussion – in the past when the number two became the number one, the difference between the two was very small.
For example, when Germany caught up with Britain, Germany’s per capita income was 75 percent of Britain’s and it was also involved in Britain's main industries. So they were rivals.
But China's economic structure today is complementary to the U.S.’s; China's development will only create a bigger market for the U.S. There will be friction, but the two countries have a common interest.
Source of homepage picture: University of Hong Kong
