Justin Lin: China Can Keep Growing At 8% For The Next 20 Years
Nov 27-2013
On 7 October, 2013, Professor Justin Lin (Lin Yifu) was invited by CCTV’s ‘Dialogue’ programme to debate his view on the Chinese economy, in particular his bullish view which is in stark contrast to many China bears.
Recently, Professor Lin’s much cited phrase, “In the coming 20 years China still has the potential to keep growing at an average 8% GDP per annum”, has been in contention with the widely held view that China is entering a period of much slower economic growth.
Prof. Lin stated: “I am not an optimist, but rather an objective economist. I stated China has the potential to stay on 8% GDP growth, not that it is inevitable.”
He explained that to bring about this high level of growth, China must continue to open up and liberalise. During this growth period, China must play to its comparative advantage and the government must take the lead.
In the last 33 years, China’s average growth has been 9.8%, a number unseen in human history. However, there is still an enormous income gap with developed countries.
“Today the average income per capita in China is USD 6100, which is equivalent to Japan in the early 1950s, Singapore in the mid-1960s or South Korea in the mid-1970s.”
He said that economic growth’s fundamental catalyst is technological innovation and industrial upgrades. In developed countries, technological advances can only come from high-cost, high-risk innovation and invention. Developing nations, on the other hand, have a ‘late mover’ advantage. This is because they can follow in the footsteps of developed nations, taking into account previous experience, in their road to development. Professor Lin explained the Asian nations mentioned above once used this ‘late mover’ advantage to achieve close to 20 years of 8-9% real growth. In this way, China can also achieve its potential rate of 8%.
Whilst some say that the main reason for China’s economic slowdown since Q1 2011 is due to its institutional mechanism, Prof. Lin contends that the real culprits were external factors. Taking the example of Singapore, Prof. Lin showed that in 2010, its GDP growth was 14.8%; in 2011 it was 5.11%; in 2012 it was 1.3%. Its average income per capita is 20% higher than the US – Singapore’s institutional mechanism has very few problems, but its economic slowdown has nevertheless been larger than that of China.
He went on to explain that in order to achieve long-term economic growth, the only sustainable stimulus is investment – consumption may work in the short-term but is unsustainable. The premise of consumption growth is that income also grows; in order for income to grow, labour productivity must grow; for labour productivity to grow, technological innovation and industrial upgrades must occur; for innovation and upgrades, we need innovation. And what fosters innovation? Investment.
Eliminate protection and subsidies – give companies fair competition
As an economist, Professor Lin has discovered a number of cruel facts about developing economies.
“All successful economies post- World War 2 share a common trait – they all implemented policies that were, according to mainstream development economists at the time, quite simply incorrect.”
“The previous development economics school of thought held that a ‘two-tier’ system is highly inefficient. However, the facts show that China’s ‘two-tier’ system has brought success and results.” Prof. Lin explained this was because at the time, the two-tier system protected China’s under-developed industries, bringing economic and social stability.
Prof. Lin highlighted that with the passage of time the ‘two-tier’ system has also brought income inequality, ‘rent-seeking’ (economic theory – non value adding behaviour whereby an organisation, individual or company uses their own resources to obtain economic gain without reciprocating any benefits back to society) and corruption.
“Right now, we are in a position to change”.
China is already a mid-income economy with an upward bias meaning that many industries (such as the automotive and heavy equipment industries) in China now have a competitive advantage which they did not have in years past.
Apart from extremely capital intensive sectors such as defence and the military, industries are in a position to remove subsidies and protective barriers to entry. The market is ready to give companies a level playing ground with the relevant legal environment to keep these rules in place.
During his interview, Professor Lin also mentioned opportunities in Africa.
When business owners talk about transfer of industry, they think of locations such as Vietnam or Cambodia. China’s manufacturing industry employs 150 million - it is not feasible to move to these places, wages would immediately shoot up. According to Prof. Lin, we should all really be considering Africa instead. In the future, the one place that can handle the transfer of China’s labour-intensive industry is Africa. The continent has a population of one billion, the age of the population is very low, similar to China in the early 1980s, giving it the right fundamentals for this transfer.
