The quest for prosperity
- By Heiko Khoo
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E-mail China.org.cn, August 12, 2013
At a recent book launch at the London School of Economics, Professor Justin Yifu Lin spoke about his new book, The Quest for Prosperity. Lin is honorary dean at the National School of Development at Peking University and he was the senior vice president and chief economist of the World Bank from 2008-2012. He focused on the world economic crisis and its causes and on development economics and the causes of China's success.
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Justin Yifu Lin's new book, The Quest for Prosperity [File photo] |
His theory is called New Structural Economics and it aims to produce long-term high growth rates enabling countries to advance from poverty to prosperity. He criticizes the strategy used by many countries in the 20th century which focused on heavy industry first and structured their economies around protecting and nurturing these sectors. He shows that this was a costly policy focus which led to distorted economic structures. Lin says that developing counties should concentrate on the effective exploitation of local competitive advantages; for example, a country with a large labour force should exploit its competitive advantage in cheap labour. This will raise revenue which can be used to upgrade infrastructure, provided that government foresight in assisting the private sector is matched to new market conditions and gradually moves the economy up the value chain. Rapid progress is possible due to the ability to effectively exploit the "advantages of backwardness" by importing new technologies purchased with revenue derived from cheap labour.
In 2008 the World Bank's Growth Commission Report identified the exploitation of competitive advantage in the global economy as a primary factor in the development of 13 diverse countries: Brazil, Botswana, China, Hong Kong (China), Indonesia, Japan, The Republic of Korea, Malaysia, Malta, Oman, Singapore, Taiwan (China), and Thailand. These countries all grew at an annual rate of at least 7 percent for 25 years. The state supported private sector export industries by upgrading infrastructure in ways compatible with the level of economic development. The star performers were Botswana and China, which both grew at over 7 per cent for 45 years, from 1960-2005. But Botswana has a population of only 2 million so it cannot possibly be compared to China.
Lin claims that global heavy industry development strategies, which dominated development theory after 1945, originated from the theory of the Soviet economist Yevgeny Preobrazhensky (1886-1937). Preobrazhensky argued that the public sector in a socialist economy should exploit the private sector to extract the resources needed to defend the socialist state and advance its economy, so that it could catch up with, and overtake, the most developed capitalist countries. Lin blames Stalin's forced collectivisation and Mao's Great Leap Forward in what he calls Preobrazhensky's 'super-industrialization' theory and he extends this criticism to any country that pursued a 'heavy industry first' development model.
In fact, Preobrazensky's theory, called 'Primitive Socialist Accumulation,' was not averse to exploiting comparative advantages, allowing private and foreign investment, joint ventures and increasing participation in the global market. However, Preobrazhensky objective was to increase the strength of socialist public property by combining the power of public sector enterprises and banks. This is much closer to what is happening in China than any comparison with Botswana.
China is actually the biggest growth puzzle of our era. Why has it grown at over 7 percent in 53 years from 1960 to 2013? Perhaps the conclusions derived from The Growth Report would be more valuable if China's differences with the other 12 countries on the list were central to its focus. Instead, the fundamental difference, public ownership of the commanding heights of the economy, was sidelined. All of the countries studied are capitalist, except for China. Under capitalism the driving force of investment is private profit. This is not what drives development in China.
Surely an analytical model for the growth pattern of China would be more useful if it provided detailed comparisons with the former USSR and Eastern Europe? Such comparative analysis as exists tends to focus on the speed and sequencing of market reforms and assumes that China's model is free market capitalism in all but name, or will be soon. In the former USSR and Eastern Europe in the 1990s, it was argued that rapid transformation to a free market and a parliamentary system of government would effectively deal with entrenched opposition, minimize social unrest, organize the 'creative destruction' of inefficient state industries and neutralise and defeat the bureaucratic interests associated with these sectors. Lin and others countered that the slower transformation in China enabled market relations to become dominant while protecting key industries which permit supportive infrastructure development, and that this helped to limit social unrest.
It can certainly be said that an economy dominated by public ownership which also exploits its comparative advantages can accumulate resources and channel investments to more rapidly upgrade its economic and societal infrastructure. But it does this by 'exploiting' the private sector internally and externally, through the credit system and the unified power of the public sector and the state, to direct investment. In capitalist market economies conditions are specifically designed to facilitate private sector operations; in China the private sector is controlled and channelled by state intervention to help meet state objectives. If the private sector were to become dominant then the public sector would be plundered and the direction of investment will be determined by profit, which would lead to economic crisis and restructuring on capitalist lines.
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