Lin Yifu's latest interview: How to understand the current challenges facing China's economy

Source: NetEase Finance Think Tank

Lin Yifu is Honorary Dean of the National School of Development, Peking University

Lin Yifu advocated "new structural economics" as the theoretical basis for studying economic development, transformation and operation. What are the causes of our current challenges and how should we respond to them? With this question in mind, we will explore the new drivers of economic development with Mr. Lin Yifu from the height of economic theory.

60S key points speed reading:

1. I think when China's per capita GDP reaches half of that of the United States, the United States will probably be convinced.

2. First look at what developing countries have in themselves, according to what they can do well, and with the joint efforts of the effective market and promising government, they will do well and become bigger and stronger.

3. In fact, any progress is to seize the opportunity when there is a problem. Whether it is the understanding of the current difficulties or the understanding of opportunities, we need theory to give us a map-like thing to understand the problem and understand the opportunity, to help us make the right judgment and then make the right response.

Here's a rundown:

There is no developing country that does not have problems, and there is no developed country that does not have problems. There may be more problems in developed countries than we do. Because "prescribing the right medicine" can "cure the disease", it is necessary to have a theory in order to analyze what is the main cause of the current difficulties. We must also see the problems and see where the opportunities are.

In fact, any move forward is about seizing opportunities when there are problems. Whether it is the understanding of the current difficulties or the understanding of opportunities, we need theory to give us a "map" to understand the problem and the opportunity to help us make correct judgments and reactions.

Economics is a theory that prevails for a while, but remember that it is only for a moment. During this time, people liked a certain theory in particular, but after a while, this theory was replaced by a new theory. In fact, theory is a tool to help us understand and transform the world, to let us see where the problems of the current world are, to explain the truth behind them clearly, and to guide our practice.

But the world is changing, and any theory is actually carving a boat to seek a sword, and the sword falls from the boat into the water, and the boat comes to find the sword, and it cannot be said that it is not right, nor can it be said that it must be right. The boat does not go and the water does not flow, and it is right for the boat to ask for a sword at that moment. But it is very likely that the boat will not go and the water will not flow, or it may be that the water will not move but the boat will go, in which case it is not right to carve the boat and ask for a sword. Therefore, these mainstream theories in foreign countries are caused by a popular theory that everyone is Xi learning for a while, but after a while, there are new theories. This is true in developed countries.

When it came to development economics, it was not about solving the problems of developed countries, but actually about helping developing countries to develop their economies. Development economics is the reason why after World War II, many developing countries got rid of their colonial and semi-colonial status and began to pursue the industrialization and modernization of their own countries. In order to help developing countries achieve industrialization and modernization, and catch up with the goals of developed countries, a sub-discipline separated from mainstream economics is now called development economics.

From the mid-to-late 40s of World War II to the present, mainstream development economics theory actually experienced the first wave of development economics known as structuralism, when the goal was to catch up with developed countries. Economists at that time said that in order to catch up with the developed countries, you must have the same level of productivity as the developed countries, with the income level and even the degree of social and economic development of the developed countries.

At that time, the level of productivity in the developed countries was very high, because they developed a large modern industry that was very capital-intensive and technologically advanced. At that time, I saw that the low income level of developing countries was due to the low level of productivity, because their industries were mainly traditional agriculture or some mineral resource industries, so I thought that developing countries should have the modern capital and technology-intensive industries of developed countries.

However, those industries that are very capital-intensive cannot develop in the markets of developing countries, and they are considered to have market failures. Therefore, structuralism at that time suggested that developing countries, since there is a market failure, it should be up to the government to overcome the market failure, directly mobilize resources, allocate resources, and develop a modern manufacturing industry that is as advanced as developed countries, which is very capital-intensive and large-scale.

I think their intentions are also very good. But as a result of that, even if developing countries can build modern manufacturing industries, in fact, these manufacturing industries are called white elephants in foreign countries, which look big, but they are very indynamic and uncompetitive. As a result, the economy has stagnated, and various crises have emerged, and the gap with developed countries has widened.

In the 80s, when China was reforming and opening up, developing countries all over the world were reforming and opening up, and the prevailing theory at that time was neoliberalism. According to this theory, developing countries have been working hard for a long time since World War II under the leadership of the government, but the gap between them and developed countries has become wider. They believe that developing countries do not have the same perfect and advanced market system as the developed countries, and that the government intervenes too much in the economy, which leads to the misallocation of resources, rent-seeking, and corruption.

At that time, there was indeed a widespread misallocation of resources in developing countries, because government-sponsored industries were inefficient and corruption was widespread. Therefore, neoliberalism at that time believed that in order for the economy of developing countries to develop well, they should have a perfect market system like that of developed countries, based on private property rights, resources should be allocated by the market, and prices should be used to guide the allocation of resources, so prices should not be set by the government, but should be set by marketization, and at the same time they should be optimized.

This also sounds very convincing, as if the problems of developing countries can also be explained very clearly. However, the problem is that according to the neoliberal policy of privatization, marketization, and liberalization at that time, whether it was the original socialist countries or these developing countries like Latin America and Africa, the economy has generally collapsed, stagnated, and in crisis, and the economic growth rate is slower than in the structuralist 50s and 70s, and the frequency of crises is still higher, and the gap with the developed countries has further widened.

Of course, during this period, there were also some developing countries, and their economies developed relatively well overall, narrowing the gap with developed countries, and even catching up with developed countries, and most of these economies were in East Asia. Why did these developing economies succeed? It is a general rule that they basically did not follow the prevailing theories of the time. The four Asian tigers basically started from the traditional, backward, labor-intensive, and small-scale processing and manufacturing industries, which was considered wrong at the time. The developed countries are developing such advanced industries, how can they catch up with the developed countries by developing the traditional small-scale processing industry now? But in fact, it is they who are catching up now.

In the eighties and nineties, developing countries, including China, were also undergoing economic transformation, from a government-led economy to a market economy. At that time, it was believed that shock therapy should be used – that the basic system that the market should have should be put in place at once. If the government and the market exist at the same time, it will be less efficient than the planned economy, and it is a wrong way to transform. But the few countries that have been in the process of transition that have been stable and rapid in the process of transition, including China, Vietnam, and Cambodia, are basically countries that have adopted those that are considered to be the worst in the transition mode.

In fact, none of the countries that have implemented shock therapy in accordance with liberalism have succeeded. And the failure is seen immediately, because the economy collapses immediately, and then it stagnates, and the crisis continues. Therefore, these mainstream theories can be very convincing when talking about problems. But the problem is that it doesn't really see the cause of the problem clearly. So after doing so, not only did not cure the disease, but made the problem worse.

So we have learned from these successes and failures, which is why I have reflected on it over the years, put forward new structural economics, and put forward a new theory of economic development transformation and economic operation.

New structural economics is not a platter of absorbing the essence, it does not mean that it stresses the importance of the government and the market, and it combines the government and the market. The essence of our economic development is that the end result is an increase in the level of income. The premise of the continuous improvement of the income level is the continuous improvement of the level of productivity, but the continuous improvement of the level of productivity is actually a process of continuous technological innovation and industrial upgrading, that is, your production structure must be continuously improved. In the process, your infrastructure, as well as the structure of the various institutional arrangements, must also be continuously improved. Therefore, the essence of economic development is to raise the productive forces and the income level, which is actually a process of constant structural change, from a structure of a low level of productive forces to a structure of a high level of productive forces.

New structural economics uses the methods of modern economics to study countries with different levels of development, for example, why their industrial structures are different, why their institutional arrangements and structures are different, what is the rationale behind them, what are the effects of those different places, and what are the conditions for changing them. Therefore, in fact, we use the methods of modern economics to study the determinants of various outcomes in the process of modernization of a country, as well as the determinants and effects of its changes. Why is it called New Structural Economics? Because there was originally a structuralism, in order to distinguish it from structuralism, it is called neostructural economics, which is also the way modern economics is named.

Of course, the theory put forward in this way can explain the success of the Asian Tigers, and it can also explain why we have been able to achieve stability and rapid development in the transformation. This is all about understanding the determinants behind these phenomena, and then generalizing them to propose a new theoretical system.

Although most people now accept the old theory. However, in countries or regions that make policies according to this theory, we can see that it has achieved obvious theoretical results. Ethiopia, for example, is one of the countries with the lowest income levels right now, and it mainly develops agriculture. How can we develop manufacturing in such a backward country? They followed the recommendations of the new structural economics, and basically received immediate results.

As another example, I have been concerned about the economic development of Hotan since 2015. At that time, Hotan's per capita GDP was not even one-fifth of the national average, and it was the lowest income level among the country's 332 prefecture-level cities at that time. First of all, the per capita arable land is only 0.8 mu, which is the same as that of the eastern coastal areas.

It was an oasis economy, there was land only when there was water, it was far away from the domestic and international markets, it basically did not have a manufacturing industry, and there were probably no more than 1,000 people working in the manufacturing industry among the 2.6 million people, basically all in agriculture. The lack of land means that the income level of agricultural development must be very low. But when I went to Hotan in 2015, several aspects changed. There are two main backgrounds: First, after more than 30 years of development in the eastern coastal area after reform and opening up, the comparative advantage of labor-intensive processing industries has weakened, and the industries need to be transferred out, which can be transferred to Vietnam, Cambodia, and of course, to places where our domestic income level and wage level are relatively low. Second, due to the development of the western region and the construction of the "Belt and Road", the transportation infrastructure has been continuously improved. Now its products have the conditions to enter the domestic and international markets. In this situation, as long as the idea is right, it will soon be able to develop its manufacturing industry.

Since 2015, I have been going to Hotan every year to communicate with the local government and develop according to this idea. You can also see that in the Hotan area, more than 100,000 manufacturing jobs were created immediately, and the local people told the local government that many of them had not seen cash or received wages before 2015 because they were farmers. Now that you go to Hotan, the market is much more prosperous. There are more than 100,000 workers, and he has to eat, wear, and use, so a worker in a manufacturing industry can usually drive at least three other jobs. Therefore, I think that with the right theory and the opportunity of the policy, every place can develop very quickly.

At present, everyone is very concerned about the decline in China's economic growth rate. We usually have a Xi in China, if we have a problem, we usually think that it is caused by our own reasons, unlike foreign countries, especially like the United States, they always think that other countries have problems. As a developing and transitional country, China certainly has many problems, and we must face them bravely. However, in the context of the current economic situation, we need to distinguish whether the current problems are caused by our long-standing internal problems or external problems. I think it's more due to external factors.

It is true that our economic growth rate in the first three quarters was more than 5 points, which was lower than the 6 points we expected to hope. However, the US economic growth this year is only 1.1 percent according to the forecasts of the World Bank and the International Monetary Fund. Before the 2008 crisis, the average economic growth in the United States was more than 3 percent, and after the 2008 crisis, its economic growth was generally between 2.5 percent and 3 percent. Now that it's down to 1.1 percent, isn't that a bigger drop than ours? The same is true in Europe and Japan.

Although we would like China's economy to grow at a faster pace, it is still relatively good compared to other countries. The reason why our economic growth rate is relatively slow compared with the past is due to the slow economic growth of foreign countries. Some people believe that due to geopolitical influences, many products were exported directly from China to the United States, and now they may have moved to Vietnam and Cambodia for production, but this is not the main reason. The main thing is that the slow economic growth of the United States has led to the sluggish growth of consumer demand. Consumer goods in the United States, which used to be mainly exported from China, are now weakening consumer demand, and direct exports from China to the United States are decreasing.

Even if some of the manufacturing industry is transferred to Vietnam and Cambodia, if they want to complete the processing and production of their products, they must import parts with high intermediate added value from China. Therefore, on the one hand, China's direct exports to the United States have decreased, but on the other hand, China's exports to Vietnam and Cambodia have increased. Now, due to the slowdown in the U.S. economy, exports from Vietnam and Cambodia to the U.S. have also decreased, resulting in a corresponding decrease in China's exports to the two countries. Not only in the United States, but also in Europe, China's export growth rate is much lower than the long-term average.

In this situation, the capacity utilization rate of China's exporters will be low, and investment will be reduced, and the impact may be more than a year. According to the forecasts of the World Bank and the International Monetary Fund, the economic growth of the United States next year will be even lower than this year, according to their forecasts that the United States will only be 0.8% next year. The same is true in Europe. In this situation, the export-related industries, which are still dominated by the economy, will become more and more severe, especially in the traditional export industries. As a result, everyone's family income is less than expected, and everyone will be relatively cautious in consumption.

At the root of this, I believe that the main factor is the change in the international cycle. We have to admit that there is a lot to be improved, but we must first understand what is the main cause of the current problem, and then we can take the necessary measures to deal with this factor.

If this is caused by changes in the international cycle, it is necessary to take some counter-cyclical measures, and we should give full play to the government's active fiscal policy and monetary policy, and the government's projects supported by these active fiscal policies should start investment, restore investment growth in the market, and stabilize everyone's confidence.

First of all, we need to understand how the great changes unseen in a century have come about, and I think the most fundamental thing is the change in the economic pattern. The United States was the dominant player in the world's economic and political landscape throughout the 20th century, and with China's rapid rise, the United States tried to adopt various policies to suppress China's development. From the Obama era to the proposed return to the Asia-Pacific region, strengthen the US military alliance in the Pacific, and attempt to encircle China by military force. to the trade war and technology war in the Trump era, to Biden's inheritance of all the previous policies, and plans to form a so-called democratic alliance to decouple from China.

China and the United States are now the second largest in terms of purchasing power parity, and the United States is the second largest in terms of market exchange rates. In any case, this friction between the two world's largest economies has created a lot of uncertainty in the world, and this situation is indeed unseen in a century. Because for the past 100 years of the 20th century, the United States has been the largest and strongest economy in the world, and it is the dominant force in the world. Now this situation has changed, and there is a great change unseen in a century.

How to solve this problem? I think development is the foundation and the key to solving all problems. Since the main reason for this change unseen in a century is the change in the economic pattern, to what extent will China, as the largest economy, and the United States, the second largest economy, enter a state of stability and peace, and the United States will willingly accept the fact that China is a larger economy than China? My personal view is that China needs to continue to develop.

I think when China's per capita GDP reaches half that of the United States, the United States will probably be convinced. Because China's population is four times that of the United States, and if its per capita GDP reaches half that of the United States, China's economy will be twice the size of the United States, and China will be able to mobilize twice as much material power as the United States.

Second, if our per capita GDP is half that of the United States, such as Beijing, Tianjin, Shanghai, and the five eastern coastal provinces, their per capita GDP will probably reach the same level as that of the United States. Its population is now a little over 400 million, the United States is now 330 million, and it's still increasing, and it will be close to 400 million, so the population size is about the same, the income level is about the same, and the economy is about the same size.

But more importantly, GDP per capita represents the average level of labor productivity and the average level of industrial technology. So by that time we will have an economy of the same size as the United States, and an economy of the same level of industrial technology as the United States. At that time, the United States will probably have no technical means to get stuck in our necks.

Third, the United States was of course still a high-income country at that time, and it also had many world-leading technology companies, but advanced technology is not a pie falling from the sky, it requires a lot of R&D investment to achieve technological breakthroughs and maintain its leading position in the world. After they invest a lot of R&D to make technological breakthroughs, how much profit determines how big the market is. At that time, China would be the largest market in the world, twice the size of the United States. With the Chinese market, these companies can be highly profitable. Without the Chinese market, it could go from being highly profitable to being low or even not profitable.

Profitability doesn't just affect the present. Because if enterprises want to continue to maintain technological leadership, they must have a large amount of R&D investment. Only highly profitable companies can maintain a high level of R&D investment, and if there is no Chinese market, technology may stagnate and be eliminated.

So whether or not you have the Chinese market will affect the very existence of those companies that are the foundation of the real U.S. economy and that allow the U.S. economy to lead in the market. Under such circumstances, the United States must also maintain good relations with China for the sake of its own economic stability and development. Therefore, I think that if we want to navigate the great changes unseen in a century, the most important thing is to maintain and take advantage of our current development advantages. 85% of our current industries are still in the traditional manufacturing industry, and those traditional manufacturing industries still have the advantage of latecomers. We have 15% of the new economy, and we are on the same starting line as the developed countries. Nowadays, whether it is artificial intelligence, big data and new energy, the new economy is not only new, usually its products and technologies have a particularly short research and development cycle, and its main investment is human capital.

With 1.4 billion people, China has an advantage in human capital-intensive industrial R&D. And we have the largest market in the world in terms of purchasing power parity. If these new technologies and new industries need hardware, our traditional industries have the best industrial base, and new technologies that need hardware can quickly turn ideas into products, which is our advantage. If we make good use of this advantage, I believe that China can still maintain relatively rapid growth and be able to navigate this great change unseen in a century.

Each country thinks in its own self-interest. Under this great change unseen in a century, the first and most important thing for China is to do its own work well. Taking advantage of China's advantages to achieve economic stability and high-quality development can meet the hopes of the domestic people for a better life, and in the process of maintaining stability and high-quality development, we must maintain economic openness, then our development will bring opportunities for many other countries. Whether it is China or other countries, if they want to develop their economies well, they must make full use of both domestic and international markets and resources.

In the midst of such great changes unseen in a century, the United States is trying to decouple from China, and once it is decoupled, it will create a situation in which China will not be able to make use of foreign markets, resources, and technology, and will have to do it in a closed manner, which will lead to a decrease in efficiency. Under such circumstances, we still need to make a targeted breakthrough in the technology that the United States may be stuck in China's neck and use a new national system to break through it.

If only the United States exclusively possesses a technology, we really want to use the advanced national system to tackle key problems and make breakthroughs. But if this technology is not only available in the United States, but also in other countries, then the best way for us is to maintain our stability, keep our development, and open our markets. In such a situation, other countries must maintain their own stability, their own development, and their own employment, and they must also maintain good relations with China in order to be able to take advantage of China's market.

For example, Australia, as a major member of the so-called Five Eyes Alliance, whether it is mineral resources, agricultural products, or fresh products such as Australia, if it opens the Chinese market, it will not only make considerable profits, but also increase employment. So they also recognized the current situation, and the Australian Prime Minister personally came to China to work as a salesman. Under such a situation, we will have a relatively good international environment, which will be conducive to our stability and development, and at the same time, it will be conducive to international stability and development, and this is the best way to defuse the US attempt to isolate China.

High-quality development is also built on the basis of development, and there will be no high quality without development. First of all, we need to realize Chinese-style modernization, which has rich connotations: it is a modernization under the leadership of the Communist Party of China, with a huge population, common prosperity for all people, harmony between material civilization and spiritual civilization, harmonious coexistence between man and nature, and the path of peaceful development. We talk about high-quality development in accordance with the new development concept, which has five connotations: innovation, coordination, green, openness and sharing. These goals cover a wide range of areas, but I think it comes down to developing according to our comparative advantage.

If we develop according to our comparative advantages, the goal of Chinese-style modernization and the five dimensions of high-quality development can be achieved at the same time. First of all, high-quality development requires innovation, if it is in line with our comparative advantages, the innovative technology, the industry in which it is located has great competitiveness in the domestic and international markets. In this situation, the government's tax revenue will increase, and enterprises will have the ability to survive on their own, so there will be no need for protection subsidies, and the government will have more resources to make up for shortcomings, so as to develop in a coordinated manner.

If an enterprise is in line with its comparative advantage, it will have the ability and willingness to adopt green technologies for development. Moreover, if a local industry is in line with its comparative advantage, the government will have greater willingness and ability to implement these environmental protection policies. At the same time, it will inevitably be an open development in accordance with its comparative advantages. Because we have a comparative advantage, we can export it if we develop it well. If we do not have a comparative advantage, we will import less development, and that will be open development. And in line with the development of comparative advantages, it can create the fastest development, the greatest competitiveness, and the most employment. It can allow the vast number of groups that rely on wage income as a source of income to share the fruits of development in the process of development.

To achieve high-quality development, the premise is to innovate according to comparative advantages. In the same way, with the same Chinese style of modernization, the population is huge, and the country is so big, how can all localities be able to develop? Of course, each locality develops according to its comparative advantages. In this way, the maximum number of jobs can be created, and everyone can share the fruits of economic development, and that is shared development.

At the same time, according to the development of comparative advantages, everyone's income level can be raised. We know that there is an old saying, "Cangli knows etiquette when he is honest, and he knows honor and disgrace when he has enough food and clothing", and material civilization and spiritual civilization can develop in tandem. In the same way, green development will lead to the harmonious development of man and nature. And according to our comparative advantage, we are an open development, and our development is not only beneficial to ourselves, but also to other countries, and this will be a peaceful and shared prosperity development.

So there are a lot of sides to these questions. If all these dimensions are realized, I think the starting point is to select industries according to comparative advantages, and carry out technological innovation in industries where you have comparative advantages. In this way, all aspects of Chinese-style modernization and all dimensions of the new development concept can be realized at the same time, and we can build socialism with Chinese characteristics in a high-quality way.

Economic development is a process of constant structural change, and entrepreneurs must be willing to take risks to choose new industries and new technologies for innovation. We know that if the first entrepreneur takes more risks, there must be incentives to compensate. At the same time, the industries and technologies chosen by the pioneers are in line with the comparative advantages, but the production costs are low. In the market competition, it is the competition of total costs, and the total costs include transaction costs, which determine whether the infrastructure is not in place, and whether the various institutional environments and institutional arrangements are appropriate. Infrastructure and various institutional arrangements cannot be solved by entrepreneurs themselves, so it must be solved by the government.

Therefore, it should be developed according to comparative advantages, and it has two institutional prerequisites, one is an effective market, relying on market competition to provide correct price signals and guide entrepreneurs to make choices. At the same time, it is also necessary to have a promising government to help entrepreneurs, encourage entrepreneurs to be pioneers, provide incentives and compensation, and at the same time solve problems that entrepreneurs cannot solve. Therefore, it should complement each other, and the two hands of the effective market and the promising government should work together.

In the process of economic development, there are places where the market fails, and the effectiveness of the market is premised on the government's action, and the government's action is based on the market's effectiveness. The purpose of the government is to help entrepreneurs overcome market failures, and if there is a market failure, and the government does not help entrepreneurs overcome it, it will become a government that does not act.

If the government's actions outweigh the efforts to make the market effective, it may create new distortions and turn into disorderly actions. So the boundary here is to see where the market failure is, and the government helps entrepreneurs to overcome the market failure and make the market effective. But there is a boundary to what the government does, and its boundary is where the market is effective. Where the market fails, help it recover to market efficiency. If it is less than this, it will become inaction, and more than this may become inaction.

In terms of theoretical analysis, such an analysis should be understood by anyone who has been trained in modern economics. But our current mainstream economics mainly solves the problems of developed countries, and their market failures may not be the same as ours. For example, in the past, people thought that they should not do anything other than support education and basic scientific research, because in general, the infrastructure in developed countries is relatively perfect, and in this case, there is no need to support the development of infrastructure for the development of new industries.

However, in developing countries, infrastructure bottlenecks are everywhere, which will inevitably limit the development of enterprises. Just because developed countries do not emphasize that governments should solve infrastructure bottlenecks, developing countries should not do things to help enterprises in developing countries solve infrastructure bottlenecks. In the past, we often used what developed countries do, or what developed countries advocate in theory, as a frame of reference for our policies. From the perspective of new structural economics, because the premise of development is different and the economic foundation is different, what developed countries do may be different from what we should do.

From the perspective of new structural economics and the current mainstream economics, what is the biggest difference between the development and economic operation or economic transformation of developing countries? At present, mainstream economics basically looks at what developed countries lack by what developed countries have, and suggests that developing countries should have what developed countries have, or to see what developed countries are doing better and what developing countries are not doing well, so it is recommended that developing countries follow what developed countries do. Or what things are important in developed countries, and it thinks they are important in developing countries as well.

What is the biggest difference between the new structural economics and it? The frame of reference has changed, and it is important to first look at what developing countries themselves have, and to do well according to what they have, and with the joint efforts of the efficient market and promising government, to make what they can do well and to make themselves bigger and stronger. This is the main difference between new structural economics and mainstream economics.

This kind of analysis can also be understood in other countries, which is conducive to summarizing our experience into a set of language that everyone can understand, so as to improve our voice and soft power. (Based on the shorthand of the interview, without personal confirmation.) ）