Lin Yifu reiterates that China has the potential to grow at a rate of about 8% by 2035 (full text)

Source: Green Notes

Lin Yifu: Clarify the logic of growth, make good use of the advantages of latecomers, and maintain open innovation

On December 5, 2023, a high-level dialogue was held on December 5, 2023, co-sponsored by Wall Street Insight and CITIC Publishing Group, and supported by the National School of Development of Peking University. Edmund Phelps, winner of the 2006 Nobel Prize in Economics and author of The Logic of Growth, and Lin Yifu, Honorary Dean of the National School of Development of Peking University and Dean of the Institute of New Structural Economics of Peking University, held a dialogue on growth and innovative development. He Zhiyi, professor of Guanghua School of Management of Peking University and chief expert of the Global Industry Research Institute of Tsinghua University, presided over the meeting. This article is based on Professor Lin Yifu's speech.

The following is the full text of the speech:

Thank you very much, Professor He Zhiyi, and I am very happy to have the opportunity to speak on the occasion of the release of the Chinese version of Professor Phelps' new book "The Logic of Growth".

In the next 30 years, China still has the potential and necessity for rapid growth

The publication of this book comes at a timely time and will help to achieve the rejuvenation of the Chinese nation on the occasion of the centenary of the founding of the People's Republic of China in 2049. The Chinese government has set a goal to become a developed country by then. The Chinese government didn't specify what the income level would be in developed countries, but based on my research, I guess that by then, China's per capita GDP should be 50 percent of that of the United States.

I say this because in 2019 there were 70 high-income countries in the world, and 28 of them had a per capita GDP of 50% of that of the United States, about $35,000. These 28 countries include all the major industrialized countries, such as the United Kingdom, Germany, France, Italy, Switzerland, Australia, Canada, as well as Japan, South Korea, Singapore and Israel, which are all developed countries in our common image. In 2019, China's per capita GDP reached 22.6% of the United States, so the book "The Logic of Growth" is very important to us, because, if in 2049, China's per capita GDP wants to increase from 22.6% to 50% in the United States, we need high growth, especially from 2019 to 2049, for a period of 30 years, if we want to increase from 22.6% to 50% of the United States' per capita GDP, China must have a growth rate 2.7 percentage points higher than that of the United States.

Over the past half-century, U.S. GDP per capita has grown at an average rate of about 1.8 percent per year, so China must grow at an annual rate of 4.5 percent for the 30 years from 2019 to 2049.

Making good use of the late-mover advantage is conducive to narrowing the technological gap and promoting innovation and development

Is it possible for China to achieve this goal? We need to understand that economic growth means the need for constant innovation to increase productivity and increase people's incomes, as we can see from Professor Phelps's "The Logic of Growth", innovation is the driving force of growth in any country.

When it comes to innovation, China seems to have some advantages, one of which is the so-called late-mover advantage. We know that high-income and developed countries are among the top in the world in terms of income, which means that their technology is at the forefront of the world, and if they want to innovate, they must have local innovation or alternative means, and they must invent new technologies themselves. But at present, the per capita GDP of Chinese is only about 25% of that of the United States, and there is a productivity gap between us and developed countries, so we can make up for these technological gaps by learning from the technology of developed countries as a way of technological innovation.

For developed countries, GDP per capita growth can reach about 2% per year through homegrown innovation or invention, as I mentioned in the United States over the past half-century. But if developing countries take advantage of the potential of their late-mover advantage, they can grow faster, as in China, which grew at an average annual rate of 9% from 1978 to 2022, and its per capita GDP grew at an average annual rate of 8.1%, four times that of developed countries.

China still has the potential to be a latecomer

But the question is, how much potential is there for the latecomer advantage that China has been exploiting for the past 44 years, and to that end, we can look at how some successful countries have taken advantage of the latecomer advantage, which is similar to the level of development that China had in 2019. Germany, for example, had a per capita GDP of about 22 to 23 percent of the United States in 1946 and an 8.6 percent increase from 1946 to 1962. Similarly, Japan's per capita GDP grew by about 20 to 23 percent of the United States in 1956 and 8.6 percent from 1956 to 1972. South Korea, whose per capita GDP accounted for about 22 to 23 percent of the United States in 1985 and grew at an annual rate of 8.1 percent from 1985 to 2001. From these experiences, it is an advantage that China's per capita GDP is likely to grow by about 8% from 2019 to 2035.

China has three advantages in the Fourth Industrial Revolution

Another advantage is the fourth industrial revolution, especially in the digital economy, artificial intelligence, new energy, solar energy, etc. For the Fourth Industrial Revolution, China is on the same starting line as other countries, but China has three advantages in the Fourth Industrial Revolution.

China is the number one economy in purchasing power parity terms, and the second largest economy in dollar terms, which means:

In the Fourth Industrial Revolution, China has the most complete manufacturing industry in the world if hardware is needed, therefore

I think these three strengths will make China quite competitive in the Fourth Industrial Revolution and even become a global leader in areas such as electric vehicles and solar energy.

From the perspective of the two advantages of late-mover advantage and the fourth industrial revolution, China should have the potential to grow at a rate of about 8% in terms of technological scale by 2035, although China also needs to pay attention to other issues, such as climate change. But I think China should be able to grow at a rate of about 5 to 6 percent a year by 2035.

Using a similar analysis, I believe that China should have a growth potential of 6% from 2036 to 2050, and it should be able to achieve real growth of 3% to 4% per year. If China can recognize this, it will be able to maintain a growth rate of 4.5% until 2050. This means that China will become a developed country, and the goal of the great rejuvenation of the Chinese nation can be achieved. However, we cannot take these analyses for granted, because the late-mover advantage has always existed and has always been available, but before 1978, China's economic growth was slow and income levels were very low.

Making good use of the late-mover advantage is inseparable from an effective market and a promising government

Second, the late-mover advantage applies to every developing country. But we know that in the decades after World War II, most developing countries were trapped in the poverty or middle-income trap, and only a few countries were able to achieve dynamic growth, moving from low-income to middle-income, and only a few countries were able to move from low-income to high-income, so we need to understand the importance of innovation and the late-mover advantages and opportunities of new technologies unleashed by the Fourth Industrial Revolution. But we also need to understand how to prepare the necessary preparations to seize these opportunities from the new structural economics that I have advocated in recent years.

I believe that in the process of innovation, we first need to follow the principle of comparative advantage, we need to innovate in areas where the country has a competitive advantage, and transform the competitive advantage from potential to reality.

Secondly, we need the support of two institutions.

The first is an efficient market. Because competitive advantage is a concept that economists can certainly understand, but we need entrepreneurs to innovate. Entrepreneurs are concerned about profits, so we need to have price signals to guide entrepreneurs in their technology choices, and that guidance is about which industry they will enter, and what type of technology they will adopt. We also need relative prices to reflect relatively abundant factor endowments: such as labor, capital, and natural resources. It is also necessary for relative prices to re-reflect the relative scale of the scarcity of factor endowments, so as to guide entrepreneurs to make correct industrial and technological choices.

The second is a promising government. Because economic development is a process of technological innovation and structural transformation, in this process, there are many market failures in infrastructure, systems, etc., we need government support to overcome bottlenecks, overcome market failures to improve market efficiency, how can the government play this role of promotion, how can the price sector really release this entrepreneurial spirit?

It seems to me that Professor Phelps' book can provide us with a lot of inspiration and useful lessons. I strongly recommend that all of us Chinese read this book carefully, I think we will be able to achieve our desire to become a developed country by 2050, thank you very much!