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Economic Development and Transition: Thought, Strategy, and Viability, by Justin Yifu Lin
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In Economic Development and Transition, renowned development economist Justin Yifu Lin argues that economic performance in developing countries depends largely on government strategy. If the government plays a facilitating role, enabling firms to exploit the economy's comparative advantages, its economy will develop successfully. However, governments in most developing countries attempt to promote industries that go against their comparative advantages by creating various kinds of distortion to protect nonviable firms in priority industries. Failing to recognize the original intention of many distortions, most governments in transition economies attempt to eliminate those distortions without addressing firms' viability problems, causing economic performance to deteriorate in their transition process. Governments in successful transition economies adopt a pragmatic dual-track approach that encourages firms to enter sectors that were suppressed previously and gives necessary support to firms in priority industries before their viability issue is addressed.
- Sales Rank: #1521566 in Books
- Published on: 2009-03-16
- Original language: English
- Number of items: 1
- Dimensions: 8.98" h x .43" w x 5.98" l, .65 pounds
- Binding: Paperback
- 182 pages
Review
"No economist has a deeper understanding of the policies that have given rise to the Chinese economic miracle than Justin Yifu Lin. He has not only influenced the thinking of government and business leaders in China, but also of economic analysts in the United States and Western Europe. This is essential reading for anyone who wants to understand the likely course of the global economy over the next generation." - Robert Fogel, Nobel Laureate, University of Chicago
"Justin Lin's Marshall lectures provide an unrivaled opportunity to both understand the spectacular rise of Asian economics over the past several decades and to cast a jaundiced eye on standard explanations of development by economists. Western training in economics combined with an insider's exposure to China's development has given him both a skeptical view of standard western development economics and an intimate insider's view of the details of the pragmatic approach that has characterized Asian and particularly Chinese spectacular development." - Douglass C. North, Nobel Laureate, Washington University in St. Louis
"This is an important book in many ways. Two strike me as central. Professor Lin is a scholar of great insight who has experienced and participated in the policy debate in China, the largest and fastest growing economy thus far. His intimate insight into policy formulation in a transitional economy informs his rigorous theoretical analysis and brings the development part of growth and development back to center stage. Second, the analysis of the consequences of aligning or misaligning the evolving endowments of an economy with its evolving growth strategy is insightful and surely right. It has its roots in trade theory and comparative advantage. But turning that into a body of dynamic analysis of growth strategy and policy is a major achievement." - Michael Spence, Nobel Laureate, Stanford University
"Development and transition pose extremely difficult challenges. In these masterly Lectures, Justin Lin, now the World Bank's Chief Economist, brings to these complex subjects a profound understanding of the problems they raise and also unusual insights from his first-hand experience with China's spectacular performance. The Lectures are a tour de force." - Jagdish Bhagwati, University Professor, Columbia University
"Justin Lin, who has been at the center of the policy debates in China since the 1980's, has provided a masterly account of the economic rationale of the Chinese path of transition from the plan to the market. His book is essential reading for understanding the Chinese economic miracle." - Deepak Lal, James Coleman Professor of International Development Studies, University of California, Los Angeles
"Justin Lin's study combines economic theory, institutional knowledge, quantitative data, and an appreciation for the importance of starting conditions in determining the success of different plan for economic development. His most unique contribution is the emphasis on how different starting points dictate very different optimal policies, which explains why shock therapy policies have been less than great successes in formerly communist countries like Russia, whereas China's more gradualist elimination of state enterprises has been working very well. Lin's point of view is controversial, but highly stimulating. I strongly recommend this book as an insightful study that interprets an impressive amount of actual evidence of attempts at economic development through the powerful lens of economic analysis." - Gary Becker, Nobel Laureate, University of Chicago
"This is a brilliant and revolutionary book explaining why some developing countries have succeeded and others failed. Lin argues that it is ideas, even more than interests, that matter. Those countries that failed attempted to modernize through a strategy of modernization focusing on heavy industry-that he characterizes as defying their comparative advantage. By contrast, governments in the successful countries (mostly in East Asia) facilitated the development of industries and the adoption of technology in a developing country following their comparative advantage determined by their endowment structure at every phase of development. Successful governments did intervene in their economy-the Washington consensus was wrong. But they did so in the right way. The World Bank is lucky to have as its Chief Economist someone willing and able to look at development with fresh eyes, free from the dogmas of the past." - Joseph Stiglitz, Nobel Laureate, Columbia University
"The exposition of this volume is clear and straightforward. References to the development literature are plentiful and helpful. And the ample footnotes are ignored only at the reader's peril. Overall, it makes a stimulating, thought-provoking, and instructive read." - Economic Development and Cultural Change
About the Author
Justin Yifu Lin is Senior Vice President and Chief Economist of the World Bank. He obtained his PhD in economics from the University of Chicago in 1986 and returned to China in 1987, the first PhD in social sciences to return from abroad after China started economic reform in 1979. He was the founding director of China Center for Economic Research at Peking University from 1994 to 2008 and is the author of sixteen books, including The China Miracle (1996) and State-Owned Enterprise Reform in China (2001).
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5 of 5 people found the following review helpful.
Likely Nobel Prize Winner -
By Loyd Eskildson
Justin Yifu Lin's "Economic Development and Transition" provides an excellent summary of the recent evolution of economic development thinking and the role of industrial policy. Dr. Justin earned a master's degree in Marxist political economy from Peking University and a PhD at the University of Chicago, founded the China Center for Economic Research, and is the World Bank's chief economist. He contends that the primary factor in nations moving from poverty to wealth is the appropriateness of government development strategy. Lessons come from the rapid growth path followed by a small number of countries such as Brazil, Chile, China, Indonesia, India, Korea, Malaysia, Singapore, Thailand, and Vietnam; other nations, especially the Soviet Union and its satellites, Africa, and the Middle East, provide counter-examples.
State-led, top-down development leaders in many 1950s-60s underdeveloped nations steered resources away from labor-intensive activities to capital intensive industries such as steel-making, protected by trade barriers and nurtured by cheap loans. In the Soviet Union, India, and China, the government controlled prices of credit, energy, raw materials, labor, etc. brought artificially lower costs of developing heavy industry; at the micro level, managers had no autonomy. The result was slower growth and greater income inequality than otherwise. Returning to comparative advantage then required eliminating distorted state-set prices, liberalizing trade, improving incentives, and allowing the non-state sector to grow.
China began its economic transformation effort with Mao's focus on heavy industry, creating the 'Great Leap Forward' fiasco and the starvation of millions. To be fair, however, China had been invaded by America, Britain, France, Japan, Germany, and Russia during the 20th century, and had not performed well technologically during the Korean War - thus, he saw heavy industry as essential for military strength. Import substitution was also pursued - intended to avoid exploitation by more developed countries. At the time, 84% of its labor force was employed in primary activities, mostly agriculture. After Mao's death came Deng Xiaoping's pragmatic experimentation that ended up instead focusing on China's comparative advantage - cheap labor. Deng's transformation resulted in a temporary 'dual-price' economy that allowed gradual 'reform without losers' instead of the "shock therapy" of the 'Washington Consensus' (immediate fiscal discipline, end of subsidies, tax reform, trade liberalization, privatization, deregulation) that most Western economists recommended at the time. (During the 1970s, the Washington Consensus had replaced earlier belief that developing countries should first focus on capital intensive industries.)
Justin Lin asserts that successful economic development is more complicated than shock therapy would imply. Non-viability of firms in transitional economies may instead arise from other factors such as disadvantageous scale economies, learning curve benefits, education levels, transportation ease, average income levels, etc. Shock therapy, applied to such situations simply creates large-scale avoidable unemployment and businesses bankruptcies (eg. the Soviet Union). This is also the likely reason why Russian farmers opposed privatization after Glasnost - their farming success was based on extensive mechanization that might be impossible with smaller private plots. Similarly, Japan has refused to subject its farmers to global competition - too much unemployment would result.
Justin's lesson in this is that when reforming economies, "government should not have a predetermined, grand blueprint;" successful identifying and eliminating binding constraints is key. Privatization of agriculture was key to China's initial success, but seen as likely disastrous by the Soviets. However, subjecting Chinese agriculture to international competition too soon would probably have created massive chaos and unemployment. China did not undergo its version of 'shock therapy' until private firms had grown sufficiently to offer credible employment opportunities, and a social safety-net (selling off at attractive terms the housing owned by state-owned enterprises [SOEs], establishing unemployment and retraining benefits).
'Private firms' in the preceding context includes TVEs (township/village enterprises) established by community residents, mostly begun after reforms had begun, and not run by the central government. Land and funding were often contributed by the local government. China's TVEs faced market competition from their inception in the early 1980s, buying inputs from the market channel of the dual-track system, selling products at market prices, and raising capital on their own or at market interest rates. There were no restrictions on the type of industries they could enter, their rapid growth during initial reform years provided important employment havens for those displaced by farming and other reforms, but they were not protected. While property rights were not clear, their performance was closely related to the interests of the local governments; they were also attractive candidates for privatization and investment - despite incompetent and corrupt courts.
Another example of the need for careful situational analysis before writing prescriptions - Africa has high transport costs (about 2.5X China), low-productivity agriculture, and a heavy disease burden - supposedly preventing it from embarking on high growth despite large amounts of foreign aid. Yet, the same could have been said of Vietnam, which was also suffering from economic sanctions by the U.S. and the lack of economic aid. Yet, it succeeded in moving forward, while Africa has stagnated.
Modern methods of production are economically possible only if the internal and external markets are large enough. If not, countries will be trapped in lower-levels of development. On the other hand, as firms move closer to the global technology frontier, it becomes increasingly difficult for them to acquire mature technology from others, increasing investors' risk. Growing larger also increases risk of market maturity.
Justin's new development economics concludes that the role of the state in upgrading an economy should be limited to the provision of information about new industries, compensation of pioneer firms for obtaining new information (R&D, and purchasing expertise, technology, and equipment from foreign firms), incubating new industries (tax benefits, protection through tariffs and China-specific technology standards, preferential treatment in government purchasing) and encouraging foreign direct investment (FDI). Justin does not refer to one of the Chinese government's major contributions - forcing FDI providers to also provide technology transfer as a condition for being granted permission to operate.
[Aside: Protection through technology standards is used as leverage to reduce royalty payments, per some experts. Product inspections and certifications serve to delay foreign firms.]
China has emphasized FDI, and Justin also prefers it, for several reasons. 1)It usually is targeted toward industries consistent with a country's comparative advantage. 2)FDI backers are less panic prone than holders of bank loans, and less speculative prone than those pursuing portfolio investment. 3)FDI does not generate the same acute problems of financial crises as do debt. 4)FDI also brings technology, management, access to markets, and social networking to recipient nations.
By way of comparison, Japan, Hong Kong, and Taiwan began their economic transformation in the 1950s-60s with a greater emphasis on labor-intensive production, far less SOEs, and then moving to progressively higher value-added manufacturing. Thus, they avoided most of the pains of China's transition.
China's success is also attributable to its exploitation of the advantage of backwardness - importing what the world knows allows leapfrogging early stages and greater certainty of capital investment success. Justin Lin, however, suggests not trying to jump too far from one's current abilities. (This does not preclude eg. China's also leapfrogging extended efforts refining internal-combustion technology to focus instead on electric vehicles, an entirely different technology in which it holds the lead - Bill Russo, "Fortune," 10/19/2010.)
Western ownership models are not necessarily superior, per Justin Lin. Large numbers of small stockholders, for example, are unable to influence management, while large stockholders are generally more interested in short-term gains and financial manipulation (eg. stock buybacks, leveraged buyouts, program trading). Executive directors from within the company, of course, do not effectively supervise themselves, while non-executive directors are usually well-paid and often nominated by executive directors - undermining the effectiveness of their supervisory role. Poison-pill anti-takeover devices raise more problems. Financial debt discipline depends on rigorous arrangements and procedures for bankruptcy, and normally has very limited impact on management. Thus, information asymmetry between inside and outside directors, incentive incompatibility (stock options for insiders, limited or no shares for outsiders), and limited liability (eg. golden parachutes for insiders) remain problems - only sufficient and fair competition can cure these problems. New Zealand reformed its SOEs beginning in 1986 by placing them in a competitive market environment rather than changing to private ownership.
Profit cannot serve as a sufficient information indicator of managerial performance (eg. impacted by imposed social responsibilities for hiring, use of particular local resources; accounting and short-term policy differences), operation on a different level of scale and learning-curve economies vs. competitors.
After initial successes following a nation's comparative advantages, its physical, economic, and human endowments will grow. However, to move further up the economic ladder, infrastructure (hard - power, communications, transportation and port facilities; soft - financial and legal institutions, protection of new industries to allow achievement of scale economies, education, productive values) will likely need to be further upgraded. The state can coordinate those gradual upgrades, including coaxing firms into more sophisticated industries, encouraging savings (eg. raising interest rates, providing deposit insurance, exhortation; household savings equate to about 20% of China's GDP, businesses and government the rest), compensating pioneer firms for their innovations, and 'encouraging' multinational producers to find participants at the desired next level.
The one weakness of Justin Lin's thinking is that too often dictators leading reforming economies are not benevolent, largely operating instead in their own self-interest (eg. Africa, the Middle East); alternatively, they sometimes are possibly well-intentioned but poorly informed (eg. Mao).
Bottom-Line: "It is fair to say that nobody really believes in the 'Washington Consensus' anymore. The question now . . . is what will replace it." (Dani Rodrik, Harvard - written before this book) Professor Rodrik is both too optimistic and too pessimistic. Old Washington Consensus doctrine still dominates America (despite McKinsey consultants now advising others on how to do it right) and is decimating our economy. Fortunately, the clarity, depth of knowledge, and obvious logic and documentation of best practices underlying Justin Lin's "Economic Development and Transition" provides the foundation for replacing it. The 'really good news' is that as the World Bank's chief economist, Justin Lin is pushing a more pragmatic, trial-and-error approach to development, akin to China's. Given his risk-taking nature (he defected to China from Taiwan by swimming across the strait), there's reason to hope for more successes.
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