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Economics moves eastward

By Justin Yifu Lin: 0 Comment(s)Print E-mail China.org.cn, December 7, 2012

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Costly ride [By Zhai Haijun/China.org.cn]

Suppose that China will become the largest economy in the world by 2030. When this occurs, what happens economically in the country will become increasingly significant. Chinese economists or economists living and working in China will then be in a better position to understand the essence of all phenomena happening in China. Their economics theories will then contribute more to society. It is inevitable, then, that the research center of economics will move eastward to China.

According to modern economic theory, structural economics studies economic structures and their changes. To be differentiated from the old structuralism, this approach was called new structural economics. Both the old structural economics and neo-liberalism approaches consider structure and system as exogenous with the former using the industrial structures of developed countries as examples to be followed by developing countries, while the later uses the systems of developed countries as examples to be copied by developing countries.

The new structural economics believes that structure is endogenous. It focuses on what developing countries have and what they can do better while formulating economic policies. In the 1950s, Japan and the Four Asian Dragons decided to develop labor-intensive industries based on their own realities instead of following the suit of developed countries to first develop large industries, and they succeeded.

While emphasizing the primary role of market, the new structural economics also pays attention to what the government can do. An analysis of the nature of modern economic growth will find that the market and government must co-exist.

According to the theories of endogenous market structure and factor endowments, capital accumulation must be faster than the growth of population. Surplus accumulation yields capital, but itself comes from economic growth observing the principle of comparative advantage, and the market is the basis and prerequisite for this development approach.

Why, then, does modern economic growth still need the government? The reason lies in the nature of the modern economic growth – which requires constant upgrading of industrial and technological structures. Structural upgrades require pioneers who are often stimulated through awarding of patents in developed countries, while external compensation in developing countries offsets some of the risks they face. Meanwhile, the government should also be the provider and coordinator of various infrastructures and improved institutional systems so as to create an appropriate environment for these pioneers.

I suggest we go back to study on the nature and causes of national wealth, but not back to the "Wealth of Nations", because I believe that Adam Smith did not have a clear understanding of the industrial revolution process when he wrote his famous work. Smith advocated optimal allocation of resources under the condition of given technologies and industries, emphasizing market competition while neglecting the role of government. He did not foresee the constant innovation of technologies and upgrading of industries – the biggest change that has happened since his time. It's important to optimize resource allocation in given technological and industrial conditions, but knowing how to continuously improve technology and industry is more important.

It's crucial to balance the relationship between government and the market. Structuralism overemphasizes the role of the government, resulting in misallocation of resources, corruption and businesses' lack of capabilities to survive. Neo-liberalism and "Washington Consensus" just represent the opposite side. Overemphasis on market competition while minimizing government regulation to lower cost and provide external compensation makes industrial and technological upgrades difficult to realize. Chile, which began its reform process according to the "Washington Consensus" in the 1970s, illustrates this problem.

During Britain's drive to catch up with the Netherlands in the 15th and 16th centuries, the British government provided the textile industry with lots of policy support. The governments of Germany, France and the US played a similar role in these countries' efforts to break the established hegemony of Britain. In today's developed world, government regulation is achieved through patent protection, input in selected areas of basic research, government procurement and administrative rules. Developing countries should give better play to their governments in these areas in order to encourage effective industrial and technological upgrades.

The center of economic research will move to China. The speed of this process will depend on our efforts to push it. Chinese issues and problems actually present a goldmine for economic researchers.

The author was the former Chief Economist and Senior Vice President of the World Bank. He is an honorary dean of the National School of Development at Peking University.

(The article was first published in Chinese and translated by Chen Qiuping.)

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

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