For many decades, numerous legislators, heads of State and administrative officials from around the world, including many in developing countries, have been graduates of eminent US and British universities, notably the Harvard Kennedy School, Oxford University and Cambridge University. Several economists who studied at the University of Chicago held high-ranking positions in South American economies, particularly Chile, in the 1970s. Many policies implemented by these so-called “Chicago Boys” still shape Chile’s economy today.
Now Peking University has announced its answer to these institutions. Its Institute of South-South Cooperation and Development (ISSCAD), officially established at an April 29 opening ceremony, will welcome its inaugural class this September. This first group of students, made up of 30 officials and social leaders from developing economies, will be earning master’s and doctorate degrees in national development. They hope to apply their ISSCAD-given knowledge to their own countries’ economies to improve conditions at home. Chinese President Xi Jinping first spoke about the ISSCAD at a high-level roundtable on South-South cooperation at UN headquarters last September.
Justin Yifu Lin, co-founder of Peking University’s National School of Development and former World Bank chief economist and senior vice president, will be the ISSCAD’s first dean. In an exclusive interview with NewsChina on the day of the institute’s official launch, Lin, who himself received his PhD in economics from the University of Chicago in 1986, explained how the ISSCAD would make a difference to developing economies through a new school of economics that he is promoting, along with other economic thought leaders, called new structural economics.
New structural economics differs from the mainstream schools of development economic thought that dominated the latter half of the 20th century. In Lin’s view, these schools harbored unique errors. For example, when some developing economies tried to mirror the industrial structure of developed economies in the 1950s and ’60s through intense government intervention, they floundered.
As a result of these failures, the mainstream school of economics at the time was replaced in the 1980s and ’90s by what is known as the Washington Consensus, a set of 10 policies advocated by Washington-based institutions that pushed transitional economies to privatize, deregulate and free up their markets.
The result has since been regarded as, at best, controversial.
Lin illustrated how a few economies, China included, actually succeeded by adopting what was deemed as “wrong” by mainstream development theories at the time. His school of thought highlights the importance of piecing together a growth strategy based on a developing economy’s current assets instead of copying the strategies of others. He hopes the ISSCAD will help equip developing economies to use their comparative advantages in order to build a better future.
NewsChina: What will make the ISSCAD different from institutions like the Harvard Kennedy School, Cambridge or Oxford in terms of training leaders of developing economies?
Justin Yifu Lin: It is true that more Harvard Kennedy alumni have gone on to become national or intellectual leaders than those of any other institution in the world.
By this standard, it is the world’s most successful educational institution, and is widely regarded as such. However, the purpose of these leaders’ education is fulfilled only when they lead their countries down a path of growth. I personally think Harvard Kennedy fails in this regard.
Of the more than 200 economies in the world, only two of them, South Korea and China’s Taiwan, have moved from low-income status to high-income status since the end of World War II. The Chinese mainland will likely become the third one by 2020.
Only 13 of these 200 or so have upgraded themselves from the middle-income group to the high-income one. Eight of them are either oil-producing countries or European countries that only had a small gap to close in order to catch up to their developed neighbors.
The remaining five are Japan and the ‘Four Asian Tigers’ [South Korea, Hong Kong, Singapore and Taiwan, all of which experienced high economic growth in the latter half of the 20th century]. The majority of other political leaders and elites did not achieve their goals of prosperity for themselves and their people through what they learned at Harvard Kennedy.
The same is true of Oxford and Cambridge graduates, who were ministers, prime ministers and presidents of many developing countries. How can a medical school be regarded as successful if doctors trained there cannot cure their patients?
By the same token, the ISSCAD cannot be seen as a success if it just trains a lot of leaders of developing countries who do not bring prosperity and a better life to their own countries and people.
NC: You are advocating a new school of economics called new structural economics.
Can you give an example to illustrate how it is different from previous mainstream development ideas?
JYL: In the 1950s and ’60s, developed economies focused on capital-intensive [heavy] industries because they had sufficient capital but insufficient labor. By contrast, developing economies were endowed with abundant labor but a lack of capital.
However, [inspired by mainstream economic thought at the time, which advocated mimicking the industrial structure of developed economies through strong state intervention] they tried to follow in the footsteps of developed economies to build up capital-intensive industries, where they had no comparative advantage. The governments of these developing economies then had to subsidize these enterprises and distort the market in order for them to survive.
In the 1980s, developing economies on this path were struggling and inefficient.
The solution that mainstream development economics provided was that the governments of these countries should step out of the market completely, as the doctrine of the neoliberalist Washington Consensus dictated.
State-owned enterprises [SOEs] in these economies would collapse if they were to be weaned off subsidies. As they employed 40- 50 percent of some countries’ total work force and were all located in cities, the problems of mass unemployment, social unrest, political turmoil and stunted national development would arise. Besides, some of the affected industries [such as aircraft manufacturing] were part of the defense system, so their collapse could even put national security at risk.
Therefore, governments in those countries continued to subsidize those industries after their privatization, but in a more subtle way, and on a larger scale. The inefficiency of these industries became more pronounced than ever. Many researchers have proven that the eight oligarchies in Russia got even more handouts after the transition from communism in the 1990s than before. The same thing happened over the same period in Eastern European countries.
Other countries [like China] adopted a gradual, dual-track way in their shift from a planned economy to a market economy. It was regarded as the worst method to choose at the time [when ”shock therapy,” a sudden sweep of privatization and deregulation, was the norm]. However, it succeeded. Why? Because large, capital-intensive enterprises were kept under State ownership, which helped avoid mass unemployment and national security risks. In the meantime, industries with comparative advantages and the potential to create new jobs were opened to the private sector. While decent infrastructure and administrative efficiency cannot be instated around the country overnight, they were seen first in special industrial parks, zones and export- processing districts.
All of this shows that copying the models of developed economies has not worked in developing economies, while the few successful developing economies assessed their assets through self-evaluation and focused on figuring out how they could do well with what they had at hand.
NC: What is your expectation for new structural economics within the ISSCAD?
JYL: The purpose of South-South cooperation is to help developing countries achieve their dreams of prosperity by improving the use of their own capital, technology and experience.
Ideas inform solutions. By drawing on lessons learned from both the good and bad experiences of China and other developing countries, new structural economics is designed to come up with a competitive theoretical framework in comparison to theories proposed and practiced by developed economies.
It can inform developing countries to address their own challenges and opportunities in their policymaking, and improve cooperation between them. I hope our ISSCAD students will utilize the new structural economics-based training modules that they study to promote employment, exports and industrial upgrading in their own countries.
NC: China’s own comparative advantage in labor-intensive industries has been weakening in recent years. Given this, China is also in the process of industrial upgrading.
What does this mean for other developing countries?
JYL: It means enormous opportunities.
The post-World War II success of a few developing economies has proven the feasibility of 20-30 years of rapid growth, as long as an economy can take advantage of the window of opportunity brought about by a change in the international supply chain. After World War II, labor-intensive industries in the US, including electronic products and textile manufacturing, lost comparative advantages.
The Japanese government encouraged domestic enterprises to take advantage of cheap domestic labor to develop these labor-intensive industries that the US was giving up, which largely provided the foundation for Japan’s economic take-off.
Then, in the 1960s, Japan’s wages also rose significantly. South Korea, Taiwan, Hong Kong and Singapore grabbed this same opportunity and grew to become the Four Asian Tigers.
When their own raised wages swallowed up the tigers’ comparative advantage in the 1980s, the Chinese mainland was starting its period of Reform and Opening-up. While major SOEs in heavy industries continued to survive on subsidies, private enterprises that were built in townships or jointly funded by foreign investors mushroomed to produce labor-intensive products which used to be manufactured by the Four Asian Tigers.
Now China’s per capita GDP has grown from being less than one-third of the average of African countries in 1979 to US$7,950 [which places it as a “higher middle-income” country by World Bank standards]. Capital abounds. Wages have risen to the point where labor-intensive industries have lost their comparative advantages. If other developing countries can do what China, Japan and the Four Asian Tigers have done, they can also move from the low-income group to the middleincome or even high-income bracket.
There were 9.7 million manufacturing workers in Japan in the 1960s, when its economy started to take off. There were 2.3 million in South Korea, 1.5 million in Taiwan, 1 million in Hong Kong and half a million in Singapore in the 1980s, when their economic status rose. In China, 85 million workers are in labor-intensive industries. It is time for China’s labor-intensive enterprises to either stay in China and try to move up the value chain, or to relocate their facilities to less-developed economies, as Japan and the Four Asian Tigers did. In this way, the buildup of China’s wealth will expand from domestic GDP to GNP [Gross National Product], which includes both GDP and net earnings of overseas investments by Chinese residents.
For developing economies to receive this industrial transfer from China, they should start by turning surplus agrarian labor into urban workers who can be employed by foreign-funded enterprises. Local enterprises will join the supply chain throughout the transfer process. If these developing economies can seize this same opportunity, they will also enjoy the period of rapid growth that Japan, the Four Asian Tigers and China have all experienced.
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