China's best-known economist is wearing rose-tinted specs

PUBLISHED : Thursday, 22 December, 2011, 12:00am
UPDATED : Thursday, 22 December, 2011, 12:00am
 

Some real heavyweights have served as chief economist at the World Bank. Over the last couple of decades, holders of the post have included Lawrence Summers, who went on to become treasury secretary of the United States, Joseph Stiglitz, subsequently awarded the Nobel Prize for economics, and Nicholas Stern, author of the 2006 Stern Review which finally persuaded many sceptical politicians that climate change was a real threat.

But even among such august company, the current holder of the job, Justin Lin Yifu, manages to stand out.

The first Chinese national to hold such a prominent position at a supra-national institution, Lin is widely regarded as one of the main architects of China's rapid growth.

While he backed opening up the economy to take advantage of China's cheap labour and transfers of foreign know-how, he also advocated protecting favoured state industries to cushion the impact of economic change. It's what he has described as 'a pragmatic, gradual, dual-track approach'.

Certainly it did Lin's reputation no harm, either inside China, where he wields considerable policy influence, or internationally, landing him the World Bank job and the accolade last year of a 6,000-word profile in the New Yorker magazine.

Today, with many economists getting increasingly gloomy about China's growth prospects, Lin remains resolutely bullish, forecasting that output will continue to expand at annual rates of 8 per cent or more for the next 20 years.

His argument is simple, 'some might say simplistic' according to Arthur Kroeber, head of Beijing-based research house Dragonomics and himself an indefatigable China bull.

Lin notes that China's income per head is currently around 20 per cent of the US level (adjusted to purchasing power parity). That's roughly the same as Japan in 1950 (and, incidentally, Hong Kong). Over the following 20 years, Japan's growth averaged slightly more than 9 per cent a year, lifting Japanese incomes to almost 60 per cent of the US level (please see the first chart).

Similarly, China's current ratio of around 20 per cent of US income is roughly the same as Taiwan's in 1975 and Korea's at the beginning of the 1980s.

And like Japan, both Taiwan and Korea notched up impressive growth over the 20-year periods that followed, each averaging around 8 per cent a year (see the second chart).

Lin's position is that China should be able to replicate much the same growth trajectory over the next 20 years as its Asian neighbours did from the same starting points.

You don't need to be an eminent international economist to spot the holes in his argument.

The most obvious problem is one of scale. Japan, Korea and Taiwan got rich largely by selling ever more sophisticated stuff to wealthy customers in the developed world, mainly in the United States.

That strategy worked in part because their populations were small compared to that of the US. China's population, however, is more than four times as great as that of the US. There simply aren't enough rich-world consumers for their demand to raise average incomes for the whole Chinese people at near-double-digit rates for another 20 years.

Lin is aware of this, which is why he says that Beijing must now push through major reforms in order to switch China's growth engine over to domestic demand.

But here his optimism begins to look stretched. To boost domestic consumer demand Beijing will need to abandon Lin's 'dual-track approach'. The authorities will have to break up the cosy arrangements by which favoured state corporations have benefited from access to cheap capital while enjoying protection from private-sector competition.

Capital will have to be re-priced at market rates to reflect the true risk of investment, and made more available to private businesses. And state monopolies will have to be scrapped to open up internal markets.

The trouble is that it is precisely those senior officials who would be charged with implementing the necessary reforms who have benefited most from the approach which protected the state sector - preserving it as the main base of power and source of patronage.

As a result, it is highly doubtful senior officials have the political will to force through reforms which might undermine their own positions. It may make economic sense, but it would look like political suicide to the ruling elite, which is why it looks as if the renowned Lin may have got it wrong this time.

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