China was the largest and one of most advanced economies in the world before the eighteenth century, yet declined precipitately thereafter and degenerated into one of the world's poorest economies by the late nineteenth century. Despite generations' efforts for national rejuvenation, China did not reverse its fate until it introduced market-oriented reforms in 1979. Since then it has been the most dynamic economy in the world and is likely to regain its position as the world's largest economy before 2030. Based on economic analysis and personal reflection on policy debates, Justin Yifu Lin provides insightful answers to why China was so advanced in premodern times, what caused it to become so poor for almost two centuries, how it grew into a market economy, where its potential is for continuing dynamic growth and what further reforms are needed to complete the transition to a well-functioning, advanced market economy.
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"No one knows the Chinese economy better than Justin Lin, and there's no one better placed to describe its essential workings. A unique perspective on the Chinese miracle from a unique perch." - Barry Eichengreen, George C. Pardee and Helen N. Pardee Professor of Economics and Political Science, University of California, Berkeley
"Justin Lin's Demystifying the Chinese Economy is a tour de force. The book succeeds at many levels. It presents a broad historical perspective over two millennia of the rise, fall, and the dramatic resurgence of Chinese economic power. It presents an analytically informative study of the sources of Chinese economic growth and the prospects of growth for the future. Lin formalizes the successful pragmatic Chinese approach to economic development using his insightful notion of 'Comparative Advantage Following (CAF)' strategies. The book challenges many tenets of conventional neoclassical theory and shows how naive application of many of its principles had catastrophic consequences for many transition economies." - James J Heckman, Henry Schultz Distinguished Service Professor of Economics, 2000 Nobel Prize in Economics, University of Chicago
"This book considers fundamental questions about the great transformation of China from a poor underdeveloped country to a global leader in modern economic growth. These are among the most important questions of our time, and Justin Lin has the best credentials to help us understand them. In this book, he offers a new and important perspective on the conditions for modern economic development in China and the world." - Roger Myerson, Glen A. Lloyd Distinguished Service Professor of Economics, 2007 Nobel Prize in Economics, University of Chicago
"This clear and insightful study of the origins of China's failures and, finally, its extraordinary success will be must-reading for anyone who wants to understand Chinese development. An important book and much overdue." - Edmund S. Phelps, McVickar Professor of Political Economy, 2006 Nobel Prize in Economics, Columbia University
"This is the best book on China's economy that I've read..." -James Pressley, Bloomberg
"...[one of] five recent titles from the Letter from China bookshelf that are surprising or entertaining or useful...when the history of China's economic boom is written, Lin's will be one of the clearest cases in defense of the Chinese way." -Evan Osnos, New Yorker.com
"Justin Lin's Demystifying the Chinese Economy is a tour de force. The book succeeds at many levels. It presents a broad historical perspective over two millennia of the rise, fall, and the dramatic resurgence of Chinese economic power. It presents an analytically informative study of the sources of Chinese economic growth and the prospects of growth for the future. Lin formalizes the successful pragmatic Chinese approach to economic development using his insightful notion of 'Comparative Advantage Following (CAF)' strategies. The book challenges many tenets of conventional neoclassical theory and shows how naive application of many of its principles had catastrophic consequences for many transition economies." - James J Heckman, Henry Schultz Distinguished Service Professor of Economics, 2000 Nobel Prize in Economics, University of Chicago
"This book considers fundamental questions about the great transformation of China from a poor underdeveloped country to a global leader in modern economic growth. These are among the most important questions of our time, and Justin Lin has the best credentials to help us understand them. In this book, he offers a new and important perspective on the conditions for modern economic development in China and the world." - Roger Myerson, Glen A. Lloyd Distinguished Service Professor of Economics, 2007 Nobel Prize in Economics, University of Chicago
"This clear and insightful study of the origins of China's failures and, finally, its extraordinary success will be must-reading for anyone who wants to understand Chinese development. An important book and much overdue." - Edmund S. Phelps, McVickar Professor of Political Economy, 2006 Nobel Prize in Economics, Columbia University
"This is the best book on China's economy that I've read..." -James Pressley, Bloomberg
"...[one of] five recent titles from the Letter from China bookshelf that are surprising or entertaining or useful...when the history of China's economic boom is written, Lin's will be one of the clearest cases in defense of the Chinese way." -Evan Osnos, New Yorker.com
Book Description
Justin Yifu Lin provides an insightful account of why China was so advanced in pre-modern times, what caused it to become so poor, how it grew into a market economy, where its potential is for growth and what reforms are needed to complete the transition to a well-functioning market economy.
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6 of 9 people found the following review helpful
Format:Paperback
What this book offers is a very brisk and plaintive summary of development economics, as "understood" by the World Bank (for which Lin was a chief economist). As such, the book does not assume knowledge or interest in the history of China; exposition of this is kept to an absolute minimum.
For example, he mentions that "...between 1000 and 1700 the West was basically a poor and backward agrarian economy while China was a rich and advanced industrial economy. Note that switching the subjects in that sentence depicts the picture today." Lin's knowledge of the comparative histories of "the West" and China is surely far more sophisticated than this, but he appears to prefer very broad-brush, snappy summaries. There's a place for this, but this is not that place.
For example, what would Lin regard as evidence of China's wealth? China is, after all, a huge country with a very large population; it's possible to have huge numbers of people with a few living in great opulence. Judging 1930s China by a contemporary aerial view of Shanghai's Bund would also convey an impression of amazing affluence in a country where there was mass starvation. One waits in vain for more detail, but Lin offers only snapshots. I'm guessing this is because a more comprehensive look would involve things like the challenges of comparing different economic epochs (even the data-rich USA, there are no GDP statistics prior to 1937). Lin wants to invite readers to think of the distant past in the same terms with which they might consider the present, but historical comparisons have inherent ambiguities that he never hints at.
Climate events very seldom get a mention in Lin's long views of history, and weather events are acknowledged only once (as in the famine of 1958-1962).
Lin actually goes on for an amazing length about the mysterious decline in total factor productivity (TFP) that accompanied the Great Leap Forward and concomitant famine. This was practically a full-blown civil war in China (except that the belligerent were blended together shoulder to shoulder), and the primary weapon was food--following a cruel tradition in regional warfare. Agricultural failure was a _symptom_ for the resilient peasantry of China, who could cope with practically everything but actual totalitarian democide. I realize this is a sensitive subject for Lin, who lives in China--where Mao Zedong is still revered--so perhaps readers should take his bizarre obtuseness as a gentle nudge to the shoulder ("Now what could POSSIBLY have gone wrong with that plan? What? What? It should have worked PERFECTLY!").
If the book is understood as sarcasm, it works a little better. For example, on p.108, analyzing the extraordinary success of the Asian tigers, Lin looks at and rejects several hypotheses (I'll get to this method of his later). One of them is that US foreign aid played a role in picking winners. Note that the prime example of this is the Cold War flourishing of the Taiwanese economy--and Lin in fact defected from Taiwan to Mainland China in 1979. So he would naturally be inclined to accept this as an explanation of Taiwan's spectacularly superior economic performance. But he rejects the hypothesis because the Philippines received US assistance (p.208), and it was not one of the tigers.
This is either bombastically silly or very sly irony. But if it's irony, then it's a book written for people who already know the subject and can get the joke. Most readers will probably not know about the highly destructive role of the Bell-Tidings Acts on the RP economy prior to 1965.
A large number of readers will not be interested in the developmental history of China (seriously--Lin himself seems to find the topic boring and writes as though he's never seen a farm*). So I'm guessing readers of my review might be tapping their feet impatiently and wondering, "All right, all right, but what about the current financial crisis in China? Is the system going to blow up?"
I got the impression reading this that Lin had no sense of the urgency of China's financial crisis; he certainly did not begin to address the structure or actuality of China's financial institutions. For example, not once does he mention the CBRC or CSRC. This would be like writing about the 2008 Global Financial Crisis in the USA without once mentioning the FDIC, SEC, OCC, or OTS.
So regardless of whether one shares Lin's world view or not, one is bound to be disappointed by a narrative that leaves out so much.
A WORD ON LIN'S ANALYTICAL METHOD
Lin really likes a type of fallacy called "denying the antecedent." It works like this: if A (a proposition) is true, then B. A is not true, therefore not B. So, for example, if economies take off as a result of following industrial policies, then industrial policies will always lead to economies taking off. So if (say) Ghana or Brazil adopt an industrial policy, and those countries do not take off, then industrial policy cannot be credited for the economic take off of South Korea, Singapore, or Taiwan. First, as a proposition in logic, it's flawed; second, even if it were not flawed--for example, if Lin reworked it into a modus tollens syllogism--economics still doesn't work like that.
In development economics, post colonial relations, financial concentration, corruption (agency problem), and of course, civil war--all have a decisive role in whether or not an economic policy can be applied at all, let alone successfully. Lin barely mentions these, and certainly does not take them into consideration.
________________________
I recommend as alternatives:
(1) Ha-Joon Chang, Bad Samaritans (2007)
(2) Ha-Joon Chang, Kicking Away the Ladder (2002)
Shorter essays by Ha-Joon Chang are usually excellent and many are available online.
Regarding China specifically, a definite must-read is
(3) Victor C. Shih, Factions and Finance in China: Elite Conflict and Inflation (2009)
And regarding economic history, I recommend the classic
(4) Fernand Braudel, Civilization and Capitalism, 15th-18th Century, Vol. I: The Structure of Everyday Life (1992 English translation).
________________________
* Hence, the title of the review. Lin does recognize that farm productivity and the surplus is critical to development, but he thinks like a student of industry--not someone familiar with farm economies like China's pre-1988.
For example, he mentions that "...between 1000 and 1700 the West was basically a poor and backward agrarian economy while China was a rich and advanced industrial economy. Note that switching the subjects in that sentence depicts the picture today." Lin's knowledge of the comparative histories of "the West" and China is surely far more sophisticated than this, but he appears to prefer very broad-brush, snappy summaries. There's a place for this, but this is not that place.
For example, what would Lin regard as evidence of China's wealth? China is, after all, a huge country with a very large population; it's possible to have huge numbers of people with a few living in great opulence. Judging 1930s China by a contemporary aerial view of Shanghai's Bund would also convey an impression of amazing affluence in a country where there was mass starvation. One waits in vain for more detail, but Lin offers only snapshots. I'm guessing this is because a more comprehensive look would involve things like the challenges of comparing different economic epochs (even the data-rich USA, there are no GDP statistics prior to 1937). Lin wants to invite readers to think of the distant past in the same terms with which they might consider the present, but historical comparisons have inherent ambiguities that he never hints at.
Climate events very seldom get a mention in Lin's long views of history, and weather events are acknowledged only once (as in the famine of 1958-1962).
Lin actually goes on for an amazing length about the mysterious decline in total factor productivity (TFP) that accompanied the Great Leap Forward and concomitant famine. This was practically a full-blown civil war in China (except that the belligerent were blended together shoulder to shoulder), and the primary weapon was food--following a cruel tradition in regional warfare. Agricultural failure was a _symptom_ for the resilient peasantry of China, who could cope with practically everything but actual totalitarian democide. I realize this is a sensitive subject for Lin, who lives in China--where Mao Zedong is still revered--so perhaps readers should take his bizarre obtuseness as a gentle nudge to the shoulder ("Now what could POSSIBLY have gone wrong with that plan? What? What? It should have worked PERFECTLY!").
If the book is understood as sarcasm, it works a little better. For example, on p.108, analyzing the extraordinary success of the Asian tigers, Lin looks at and rejects several hypotheses (I'll get to this method of his later). One of them is that US foreign aid played a role in picking winners. Note that the prime example of this is the Cold War flourishing of the Taiwanese economy--and Lin in fact defected from Taiwan to Mainland China in 1979. So he would naturally be inclined to accept this as an explanation of Taiwan's spectacularly superior economic performance. But he rejects the hypothesis because the Philippines received US assistance (p.208), and it was not one of the tigers.
This is either bombastically silly or very sly irony. But if it's irony, then it's a book written for people who already know the subject and can get the joke. Most readers will probably not know about the highly destructive role of the Bell-Tidings Acts on the RP economy prior to 1965.
A large number of readers will not be interested in the developmental history of China (seriously--Lin himself seems to find the topic boring and writes as though he's never seen a farm*). So I'm guessing readers of my review might be tapping their feet impatiently and wondering, "All right, all right, but what about the current financial crisis in China? Is the system going to blow up?"
I got the impression reading this that Lin had no sense of the urgency of China's financial crisis; he certainly did not begin to address the structure or actuality of China's financial institutions. For example, not once does he mention the CBRC or CSRC. This would be like writing about the 2008 Global Financial Crisis in the USA without once mentioning the FDIC, SEC, OCC, or OTS.
So regardless of whether one shares Lin's world view or not, one is bound to be disappointed by a narrative that leaves out so much.
A WORD ON LIN'S ANALYTICAL METHOD
Lin really likes a type of fallacy called "denying the antecedent." It works like this: if A (a proposition) is true, then B. A is not true, therefore not B. So, for example, if economies take off as a result of following industrial policies, then industrial policies will always lead to economies taking off. So if (say) Ghana or Brazil adopt an industrial policy, and those countries do not take off, then industrial policy cannot be credited for the economic take off of South Korea, Singapore, or Taiwan. First, as a proposition in logic, it's flawed; second, even if it were not flawed--for example, if Lin reworked it into a modus tollens syllogism--economics still doesn't work like that.
In development economics, post colonial relations, financial concentration, corruption (agency problem), and of course, civil war--all have a decisive role in whether or not an economic policy can be applied at all, let alone successfully. Lin barely mentions these, and certainly does not take them into consideration.
________________________
I recommend as alternatives:
(1) Ha-Joon Chang, Bad Samaritans (2007)
(2) Ha-Joon Chang, Kicking Away the Ladder (2002)
Shorter essays by Ha-Joon Chang are usually excellent and many are available online.
Regarding China specifically, a definite must-read is
(3) Victor C. Shih, Factions and Finance in China: Elite Conflict and Inflation (2009)
And regarding economic history, I recommend the classic
(4) Fernand Braudel, Civilization and Capitalism, 15th-18th Century, Vol. I: The Structure of Everyday Life (1992 English translation).
________________________
* Hence, the title of the review. Lin does recognize that farm productivity and the surplus is critical to development, but he thinks like a student of industry--not someone familiar with farm economies like China's pre-1988.
0 of 2 people found the following review helpful
Format:Paperback
Author Justin Yifu Lin is the founder of the China Center for Economic Research and former professor of economics at Peking University. He has a PdD in economics from the University of Chicago, and until recently was the chief economist at the World Bank.
China was the world's largest and most advanced economies before the 18th century (accounting for an estimated 1/3 of global GDP in 1820), then degenerated into one of the world's poorest by the late 19th century (about 5% prior to 1979 reforms). It did not reverse its fate until introducing market-oriented reforms in 1979; since then it has been the world's most dynamic economy and is forecast to regain its #1 position before 2020.
The book is based on Justin Lin's lecture notes for Peking University classes. He contends that in premodern times, technological inventions were came mostly from farmers and craftsmen, the rate of innovation was slow, and most lived on subsistence agriculture. China's advantage at the time derived from having a large number of farmers and craftsmen, a relatively advanced market system, Confucian philosophy, and a civil service examination system with improved resource allocation and facilitated unity.
When scientific experiment became the basis of invention, technological development in western countries accelerated, as did their economic development. China's civil service examination system, based on Confucian classics, repressed incentives to learn mathematics and how to conduct controlled experiments. China soon was no longer a leader.
Outside economists criticized Asia's export-oriented development strategy right from its 1950s beginnings. China received the same criticisms when it initiated forms in 1979. Deng Xiaoping, the architect of China's initial reform efforts proposed in early 1980 that China accept a target of quadrupling China's GDP by the end of the 20th century. Author Justin Lin admits doubting the viability of that goal; in fact, it was exceeded. Undeterred by Western criticisms, Chinese leaders focused on taking advantage of its comparative advantage - plenty low-cost labor.
Adam Smith's theories were based on interpreting and resolving the problems of developed countries; because the conditions and problems in developed countries constantly evolve, theories changed as well (for some). Regardless, theories tailored for developed nations are not necessarily applicable to developing ones.
The author rejects 'shock therapy' because policymakers too often simply do not know what is going to work. The book contains many examples of experiments that failed because the incentives involved were not understood by policymakers; these failures also justify Deng's emphasis on using limited experiments to guide the way and avoid major setbacks that would have played into the hands of those opposing change.
China decided to also focus on catching-up in technology, allowing it to utilize existing or used machinery and improve per capita income much faster than in Europe and the U.S. It was able to import what the world knew and export what the world wanted.
Previously, Mao had pursued a wrong strategy for his time. Lack of industrialization, especially large heavy industries that supported military strength, were seen as the root cause of China's then backwardness. Previously, leaders in France, Germany, the U.S. and other Western nations pursued the same strategy, motivated by the contrast between Britain's rising industrial power and the backwardness of their own industry. China, however, attempted to do so prior to attaining basic industrial competencies.
Nonetheless, China's government gave firms in those sectors a monopoly, and subsidized them with lower-priced inputs, often creating shortages. This allowed China to establish modern industries, test nuclear bombs in the 1960s, and launch satellites in the 1970s. But its labor-intensive sectors were repressed - and that was where it held a comparative advantage. Thus, efficiency was low and growth prior to 1979 was driven mainly by increased inputs. GDP did increase an average of 6.1% from 1952-78, but the populace did not fare so well. And without protection, those new industry firms would not have been viable.
China then embarked on a dual-track system, introducing reforms in some areas while maintaining the status-quo in others - aimed at controlling the shock delivered at one time. Farmers were one of the first beneficiaries - they were allowed to own their land again (collective farms were broken up) and could set prices for selling their production that exceeded quota obligations sold to the state at fixed prices. Meanwhile, entry of private enterprises, joint ventures, and foreign investment in labor-intensive sectors were liberalized. Poland, Slovenia, and Vietnam adopted similar strategies. The costs, so far, have been rising income inequality and negative environmental impact.
The state's proactive role included guidance as to where to focus efforts, encouraging foreign investment and technology transfer, protecting nascent industries, providing capital for infrastructure and new industries.
China was the world's largest and most advanced economies before the 18th century (accounting for an estimated 1/3 of global GDP in 1820), then degenerated into one of the world's poorest by the late 19th century (about 5% prior to 1979 reforms). It did not reverse its fate until introducing market-oriented reforms in 1979; since then it has been the world's most dynamic economy and is forecast to regain its #1 position before 2020.
The book is based on Justin Lin's lecture notes for Peking University classes. He contends that in premodern times, technological inventions were came mostly from farmers and craftsmen, the rate of innovation was slow, and most lived on subsistence agriculture. China's advantage at the time derived from having a large number of farmers and craftsmen, a relatively advanced market system, Confucian philosophy, and a civil service examination system with improved resource allocation and facilitated unity.
When scientific experiment became the basis of invention, technological development in western countries accelerated, as did their economic development. China's civil service examination system, based on Confucian classics, repressed incentives to learn mathematics and how to conduct controlled experiments. China soon was no longer a leader.
Outside economists criticized Asia's export-oriented development strategy right from its 1950s beginnings. China received the same criticisms when it initiated forms in 1979. Deng Xiaoping, the architect of China's initial reform efforts proposed in early 1980 that China accept a target of quadrupling China's GDP by the end of the 20th century. Author Justin Lin admits doubting the viability of that goal; in fact, it was exceeded. Undeterred by Western criticisms, Chinese leaders focused on taking advantage of its comparative advantage - plenty low-cost labor.
Adam Smith's theories were based on interpreting and resolving the problems of developed countries; because the conditions and problems in developed countries constantly evolve, theories changed as well (for some). Regardless, theories tailored for developed nations are not necessarily applicable to developing ones.
The author rejects 'shock therapy' because policymakers too often simply do not know what is going to work. The book contains many examples of experiments that failed because the incentives involved were not understood by policymakers; these failures also justify Deng's emphasis on using limited experiments to guide the way and avoid major setbacks that would have played into the hands of those opposing change.
China decided to also focus on catching-up in technology, allowing it to utilize existing or used machinery and improve per capita income much faster than in Europe and the U.S. It was able to import what the world knew and export what the world wanted.
Previously, Mao had pursued a wrong strategy for his time. Lack of industrialization, especially large heavy industries that supported military strength, were seen as the root cause of China's then backwardness. Previously, leaders in France, Germany, the U.S. and other Western nations pursued the same strategy, motivated by the contrast between Britain's rising industrial power and the backwardness of their own industry. China, however, attempted to do so prior to attaining basic industrial competencies.
Nonetheless, China's government gave firms in those sectors a monopoly, and subsidized them with lower-priced inputs, often creating shortages. This allowed China to establish modern industries, test nuclear bombs in the 1960s, and launch satellites in the 1970s. But its labor-intensive sectors were repressed - and that was where it held a comparative advantage. Thus, efficiency was low and growth prior to 1979 was driven mainly by increased inputs. GDP did increase an average of 6.1% from 1952-78, but the populace did not fare so well. And without protection, those new industry firms would not have been viable.
China then embarked on a dual-track system, introducing reforms in some areas while maintaining the status-quo in others - aimed at controlling the shock delivered at one time. Farmers were one of the first beneficiaries - they were allowed to own their land again (collective farms were broken up) and could set prices for selling their production that exceeded quota obligations sold to the state at fixed prices. Meanwhile, entry of private enterprises, joint ventures, and foreign investment in labor-intensive sectors were liberalized. Poland, Slovenia, and Vietnam adopted similar strategies. The costs, so far, have been rising income inequality and negative environmental impact.
The state's proactive role included guidance as to where to focus efforts, encouraging foreign investment and technology transfer, protecting nascent industries, providing capital for infrastructure and new industries.
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