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on December 24, 2012
An Economics Masterpiece You Should Be Reading Now
By Clive Crook Dec 18, 2012 5:52 PM ET

The most valuable new book I've read this year is Justin Yifu Lin's "The Quest for Prosperity." George Akerlof, a Nobel laureate in economics and a man not given to reckless overstatement, calls it "a masterpiece." I'd say that's right.
Lin is an interesting man. In 1979, as an officer in Taiwan's army on the fast track to the elite, he defected to the People's Republic of China by swimming the channel between a Taiwanese island and Xiamen on the mainland. He continued his studies in economics, became a leading scholar, and was an observer and participant in China's economic miracle. From 2008 until earlier this year, he was the World Bank's chief economist. Today he's back in China, at Peking University.

Lin's book is intellectually ambitious. He sets out to survey the modern history of economic development and distill a practical formula for growing out of poverty. It's a serious undertaking: Lin isn't trying to be another pop economics sensation. But "The Quest for Prosperity" is lightly written and accessible. It weaves in pertinent stories and observations, drawing especially from his travels with the World Bank. He leavens the economics skillfully.
Two Schools
Essentially, he proposes a middle way between two contending schools: structuralism, which emphasizes barriers to development that government intervention is needed to overcome, and the neoclassical approach, which stresses market forces and frowns on industrial planning. He calls his hybrid "new structuralism," suggesting a closer affinity with the first. (That branding is a bit misleading, but I can see that the alternative -- new neoclassicism -- doesn't roll off the tongue.)
Under the banner of the old structuralism, governments in developing countries made huge mistakes in the 1960s and 1970s. The prevailing approach was import-substitution: Develop capital-intensive industries behind tariff barriers to supply domestic consumers. It worked in the sense that many places industrialized quickly, sometimes on a massive scale. For decades the Soviet Union was perceived both as a great success and as a development model. In India, Africa and Latin America, economic planning led the way.
In every case, this approach ran into the ground. One problem was technological backwardness. Isolation from global markets slowed the accumulation of industrial knowledge, so growth in productivity stalled. Another was fiscal stress. Supporting industrial champions required enormous subsidies, and governments lacked the revenue. Support had to be given in other ways -- through overvalued exchange rates (to lower the cost of inputs), price controls, financial repression (forced saving) and administrative direction. These distortions obliterated market signals not just for the favored industries but also across the rest of the economy.
Import-substitution came to be seen as a stunning failure. Especially after the Latin American debt crisis of the early 1980s, the neoclassical consensus and its "structural adjustment" formula took over. Keep government intervention to a minimum, squeeze public spending, free the exchange rate, liberalize finance and foreign trade, and give market forces full rein.
This didn't work either -- at least, not as well as its most enthusiastic advocates had predicted. Growth in many countries stayed slow. Financial crises kept happening. In Africa, countries such as Ghana, once a leader of the import- substitution school, moved abruptly to a market-friendly development strategy. They grew, but still too slowly. Ghana, Lin says, "has not achieved the type of structural transformation that the radical free-market revolution was supposed to bring."
China's Success
Structural transformation, of course, is exactly what China has achieved. Elsewhere Lin has acknowledged that China needs further policy reforms and that all is not well. Yet the country's success of the past several decades is indisputable -- and this is no Soviet-style industrialization mirage. Russian factories sold their output to captive markets. Nobody with a choice ever bought a Soviet-made car or television. China's outward-looking producers are world-class. I'm typing this on a best-of-breed Apple Inc. laptop, manufactured in China.
As I argued in my last column, China is a capitalist country. But how did it get that way?
Lin's answer draws on both development paradigms. He sees a vital role for government in overcoming barriers to development. But interventions, he argues, must respect compelling market realities. Of these, the most important is international comparative advantage. Poor countries have lots of cheap labor. For them, capital-intensive heavy industry isn't the way to go.
For today's developing countries, Lin says, the global economy is the indispensable setting, and looking outward is the sine qua non of rapid development. On the input side, that's because of the opportunity it affords for technologically driven catch-up growth. On the output side, it's because the world is a market for exports. On this view, "export pessimism," the idea that poor countries couldn't prosper through international trade, was one of the biggest mistakes of the import- substitution school. Globalization is the poor's best friend.
Even so, Lin says, rapid growth won't happen spontaneously, merely by letting the market work its magic.
Governments have to identify industries that are trading internationally and doing well elsewhere -- not those based in the most advanced economies (too big a leap) but in countries with incomes roughly double their own. If those industries are getting started at home, help them upgrade their technology. If they aren't, draw in foreign investors. If infrastructure is poor and doing business is difficult, create special economic zones where those problems can be fixed. Recognize that pioneer companies are taking on larger risks and compensate them with temporary tax incentives, co-financing of investments or preferential access to foreign exchange. And don't expect to shut down nonviable producers all at once; that has to be done gradually.
So yes, this is "industrial policy" and "picking winners" --ideas disdained by your typical pro-market type. And I'd say the record justifies a good deal of such skepticism. The book's main weakness is that it understates the political difficulty of delivering support of the kind it advocates: intelligent, measured, time-limited and disciplined in crucial ways by market imperatives.
This isn't just an issue in democracies, by the way. As China itself proves, interests gather around patterns of explicit and implicit subsidy, however well-judged at the outset, and the flexibility demanded by Lin's new structuralism gets ever harder to maintain.
Still, it's hard to quarrel with the results to date, in China most of all, but also in Taiwan, South Korea, Singapore and other rapidly industrializing economies that adopted similar strategies. If you're interested in development, you have to read Lin's book.
(Clive Crook is a Bloomberg View columnist. The opinions expressed are his own.)
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on May 20, 2013
In his book Lin makes an unabashed and convincing case for industrial policy under the title of "New Structural Policy". It is an extremely readable (if sometimes repetitive) book that summarizes neatly the past and current development debate. I found the chapter on the "Middle Income Trap" particularly interesting. There are some minor points where I would take issue with Lin, for example when he counts Belarus among the successful transitions in the 1990s (p. 190) or when he praises Indonesia's revival of the pulp and paper industry (p. 172) without a sentence on the prize to the environment. My main point, however, is the neglect of the political economy of change. If it were just an issue of reading the right academic books and papers to develop successfully, there would not have been only 13 successful growth stories over the last 50 years included in the Growth Commission's report (the jury on Vietnam and India is still out!). It seems a bit naive to assume that all heads of state, prime ministers, central bank governors and government officials are just looking for the right policy template to pursue the economics of dignity for their country and its population. Motivations are more complex and the political process is more difficult and prone to unwanted outcomes than that. Alas, not all politicians see good policies as the way to stay in power or have good names in history (p. 250)...
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on September 4, 2012
In this tour the force, Justin Yifu Lin distills all the lessons he has learned from his first-hand experience of the Taiwanese and Chinese Miracle, providing for the first time a "can do" interpretation of Asian's experiences. No doubt this book will generate a much needed controversy on the role of the State in development.
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HALL OF FAMEon March 7, 2013
Justin Yifu Lin combines his own insights with the World Bank's 'The Growth Report' study of 13 high-growth (7% or greater growth for at least 25 years after WWII) to credibly and convincingly upend traditional wisdom's 'Washington Consensus.'

He begins by pointing out that central bank provision of liquidity is not always effective because current excess capacity in housing, construction, and manufacturing limits both the desire to borrow and banks willingness to do so. Moreover, developed nation growth is not expected to be fast enough to make big inroads into high unemployment and spare capacity. Cheap money instead is encouraging financial speculation, unsustainable given the low profitability in the real economies of many developed nations.

Despite a number of nations transforming their subsistence farming economies post WWII, others have not - Argentina, the Philippines, Russia, and South Africa. Meanwhile, the collapse of socialist economies in the latter half of the 1980s seemed to demonstrate the complete victory of free-market economics over state interventions and central planning. Many concluded that government involvement in the economy is a mistake. Thus, we moved towards also getting the state out of welfare provision and income redistribution, strengthening macroeconomic discipline, and creating a more enabling business environment, a and total openness to world trade and investment. Yet, most recent successful developing countries expanded their new bases and moved into more sophisticated industrial products pursuing an export-promotion strategy instead of the generally prescribed import substitution strategy. And they each had a proactive government helping the private sector enter new industries, instead of relying on market competition alone, as advocated by the Washington Consensus.

Frequently modernization efforts selected projects too capital-intensive (financial and human) for an economy with scarce capital and inconsistent with that nation's comparative advantage of low-cost labor. These efforts required protection and subsidies, yet were not viable in the market; this was greatly acerbated when foreign borrowing was required (eg. Mao's China - repaying Russian loans with grain worsened grain shortages) and local demand insufficient to utilize the scale economies involved. Mao's China, Nasser's Egypt, Nehru's India, Sukarno's Indonesia, and Nkrumah's Ghana all made these errors. Most critics, however, saw the solution as privatization, stronger property rights, inadequate managerial and worker incentives, and greater competition - missing the real problem, lack of firm viability.

Stalin's U.S.S.R. appeared to be the exception because it was the world's most resource-rich nation and could afford to subsidize uncompetitive industries.

Motivating the import-substitution strategy is a nationalistic desire to reduce dependence on other and create the ability to built military power.

Justin Lin's conclusion - successful economic development requires step-by-step sustained efforts focused on a nation's comparative advantages and strengths, not leapfrog strategies. Singapore's organizing political principle for 4 decades has been the pursuit of growth, thirty years for China. Further, there is virtually no example of any successful catch-up in which the government did not play an active role - even in the U.S., the U.K., Germany, and Japan.

'The Growth Report' (2008) from the World Bank concluded that successful nations: 1)Made the most of globalization - exploiting global demand while importing ideas, technology, and know-how. They also acted consistent with a nation's comparative advantage. 2)They maintained stable macroeconomic environments - moderate inflation was OK, but never allowing it to get out of control. 3)High savings and investment rates - driven by attractive rates of return (and achievable only via pursuing competitive advantage). In China's instance, this was abetted by personal responsibility for retirement and health-care costs. 4)Adherence to the market system to allocate resources, allowing the economy to evolve to support its new direction. 5)A committed and capable supportive government.

'Bad ideas' identified in the report include subsidizing energy, reducing deficits by cutting infrastructure investment, providing open-ended protection to domestic firms, imposing price controls, resisting urbanization, measuring education progress via infrastructure, ignoring environmental issues, and allowing the exchange rate to significantly appreciate.

Justin Lin asserts that identifying industries with good potential for growth and competitiveness is a requirement for successfully launching industrial policy because this determines the appropriate hard and soft infrastructure improvements needed and facilitates encouraging market entry and clustering via government incentives. (Clustering makes transportation and exchange of ideas more efficient, as well as facilitating equipment maintenance capabilities and training new workers.) Ireland's 1950 development efforts (tax incentives and subsidies to encourage any investment that targeted exports) floundered until decades later when it focused on electronics, pharmaceuticals, software, and chemicals.

The author also notes that many of the 13 did not have Western-style democratic rule at the time. He compares Yeltsin and Deng - the former combined political and economic liberalization, generating frequent showdowns. Deng saw a major lack of consistency in U.S. policies, per political pressures. He replaced Mao's 'class struggle' with economic modernization as the focus, and moved slowly and carefully (often experimenting to limit potential problems), while Russia's transition was immediate and created economic collapse, large unemployment and associated macroeconomic and political instability.

Identifying potential industries involves reviewing goods close to those already exported, and what similarly endowed nations are doing. Remove binding constraints - but don't become distracted by trying to do everything at once, prioritize. Attract global investors, scale up existing successes - eg. India's software industry, Ecuador and Ethiopia's cut flowers, provide first mover incentives.

The biggest risk of all, per Justin Lin, is being too cautious.
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on June 11, 2014
Dear editor, kindly publish and distribute following important China dream discussion topics:
Harmony Renaissance: Revival of harmony philosophy ancient or modern for multipolar national cultural identity and world peace and harmony. For more details please refer to World Harmony Organization and Francis C W Fung publications. UPDATED 20 CHINA
China Dream: Revival of Chinese nation for national dignity and multipolar world peace and harmony. For more details on China dream please refer to summary of President Xi's statements.
1) China dream, harmony renaissance essential for China and global peace and China revival.
2) China dream and harmony renaissance together means Chinese soft power.
3) China must continue harmony renaissance for survival against U S criticism
4) China must be proactive on harmony renaissance not to be contained by U.S. liberal democracy
5) China dream, resolve south China sea dispute by harmony diplomacy
6) ancient Chinese thought, modern Chinese softpower through harmony renaissance
7) Harmony renaissance is the spirit of China dream, dream with in a dream
8) Harmony renaissance vs liberal democracy thought in 21st century.
9) Rally around harmony renaissance to rebuild a Chinese civilization state
10) Can China survive without harmony renaissance under U.S. democracy assault?
11) Survival of the fittest demands China dream to include harmony renaissance.
12) Without harmony renaissance China dream is empty
13) "China is unlikely to become a superpower because it lacked an independent ideology with global clout" according to Margret Thatcher.
14) China will remain a "small country" without harmony renaissance despite economic growth.
15) China dream means 21st century multipolar world, peace and world harmony.
16) Harmony renaissance is the missing ancient Chinese ideology with global clout Margret Thatcher is referring to.
17) Harmony renaissance is the revival of Chinese cultural value ,ancient and modern.
18) The Chinese dream with harmony renaissance can enrich world civilization.
19) Harmony renaissance adds spiritual life and perspective to China dream.
20) Harmony Renaissance will be a preferred balance to U.S. relentless and powerful push of liberal democracy ideology on other countries in a multipolar world.
21) China dreams mean democratic world order and multipolar world peace and harmony.
22) Sun Yet Sen and Nationalist party empowered the elite, Mao Zedong empowered women and the masses, Deng Xiaoping’s reform and open up empowered the economy and rule and order, the final movement in the symphony of Chinese modernization is to empower China’s soul and spirit with China dream and harmony renaissance.
Best of Harmony
Francis C W Fung, Ph.D.
Director General
World Harmony Organization
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on May 29, 2015
Very insightful. Grounded in economic theory and research, but highly accessible to a lay reader. This is one of the few books or article I've read (as an economics student) that offers insights about macroeconomic development that can actually be useful to guide policy-making, while also having a firm basis in economics to support the policy prescriptions (rather than just the the author's personal perspective).
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on December 30, 2013
This book is unbearable to read, mostly because it's terribly written: full of self-serving anecdotes that are off topic, full of pretentious quotes that are also almost always irrelevant, and full of a maddening misuse of the word "dynamic".

Apart from it being poorly written, the arguments are too simple and unconvincing. The book is basically one long argument for structural adjustment. This is a very old idea and one that has been shown over and over to not work. Lin fails to provide convincing evidence for why his version of structural adjustment (one that focuses on "latent comparitive advantage") will be any different from the myriad of other strategies that have been tried and failed.

In summary, this book has nothing new or interesting in it.
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on November 30, 2013
It's an excellent book for people who have not read the recent literature of development economics. But, in my case, I did it, so for me it was just a good book. In here you will see a excellent sum up of the mainstream
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on January 6, 2014
Building human and physical capital takes time but is the only way that a country/economy can prosper in this competitive world.
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on July 23, 2013
It's nice to have a Chinese view on the record so coherently, but it's a dull read. Feels like a lecture in text only. Also, for those already fairly knowledgeable about US-Asia policy, it's a pretty typical Chinese perspective. Like I said, it's good to have it on record.
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