Caixin
Jul 11, 2014 01:39 PM

Top Chinese Economists Debate Role of Gov't in Economy

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Justin Yifu Lin (left), Zhang Weiying (right)


(Beijing) – In a debate reminiscent of the clashes between John Keynes and Friedrich Hayek that shaped major developed countries' economic policies for most of the last century, two prominent Chinese economists are battling it out over where to draw the line between government and the market in this country.

Justin Yifu Lin, former chief economist and senior vice president of the World Bank, has argued for government intervention in market activities along the lines of Keynesianism and also called for global policy coordination.

Mistakes are inevitable when you have a government trying to guide development of industry, but the costs of non-intervention far outweigh the benefits, he said.

"For a government to coordinate economic activities, failure is of course a likely result, but without government coordination it could be a worse failure," he said at a recent forum in Shanghai.

That means economists should help the government figure out a better course of action, he argues.

Zhang Weiying, a Hayek follower and free-market advocate, disagrees. He argued at the same forum that the government has, more often than not, obstructed entrepreneurship and efficient resource allocation rather than supported it.

There is no way a government can make its intervention better, he said, and it should refrain from getting involved altogether. The government's role should be limited to laying the infrastructure and regulatory groundwork for an open, equal and competitive market, he said.

Zhang is a professor at the university's National School of Development, a highly respected research and education facility developed on the basis of the China Center for Economic Research, which Zhang and Lin co-founded two decades ago. He headed Beijing University's Guanghua School of Management from 2006 to 2010.

Below is a summary of the two economists' main arguments over several issues based on the transcript of their debates at the forum.

Government support for scientific and technological research

Justin Yifu Lin: Entrepreneurs are willing to spend on product development but less on research because the investments are huge with greater risk and the results may not be exclusively owned by the researchers. The emergence of important industries in the United States had government support behind every one of them. The government has a limited amount of capital to support basic research, so when they choose which one to support and which not to, they are making a choice based on the research's likely impact. That's industrial policies at work.

Zhang Weiying: Creative thinking does not necessarily require government support. During the Industrial Revolution, a lot of new products emerged without government backing. The development of science was not driven by the government to a large extent. The best universities in the U.S. are privately funded. All economists have biases. That's why open and equal competition and arguments are needed for everyone to make their own judgment. It is vitally important that the government does not force any kind of ideas upon people under all circumstances.

Government's role in making use of comparative advantage

Lin: Seeking a country's comparative advantage requires the government because it needs more developed infrastructure, improved human capital, and better financial and legal arrangements. None of those can be achieved by individual business owners. Many of them need to work together and it is essential that the government provides coordination. All of the successful economies are the results of joint efforts by the government and the market.

Zhang: Discovering and making use of comparative advantages are what entrepreneurs are best at. No businessman would be stupid enough to grow rice in the northern part of China and no one would grow wheat in the south because it does not suit the local conditions. Entrepreneurs know their comparative advantages best, and in China it is the government that often does not.

Correct intervention or no intervention?

Lin: It is true that the majority of industrial policies in even developed countries are a failure. Bad intervention is worse than none. But achieving success absolutely requires government involvement. It is the responsibility of economists to research and find out how to implement intervention and strengthen coordination. It is a challenge and also an opportunity. Just because there were many mistakes does not mean the effort should stop.

Zhang: The idea that whenever the market goes wrong the government can fix it does require research to find how it can do the job better. But plenty of theories have argued that there is no way the job can be done any better. The market is not a tool for society to support when it is efficient and oppose when it's not. It is a guarantee for basic human rights to be realized. Only when certain basic rights are guaranteed, including property rights, can the market economy have a stable foundation.

Evaluation of economic policies

Lin: More than 95 percent of China's policies made over the past 35 years have been correct or the country would not have had such rapid growth rates and it would not have been the only major economy that was not severely crippled by the global financial crisis. There is certainly room for improvement. The government has indeed made many mistakes. If one reads papers, one could be under the impression that a revolution is looming because there are protests and unrest all over the country. But this is not the reality. The problems cannot be exaggerated. The China Model is not a static concept. It needs to continue evolving just like other countries, including the United States and Britain.

Zhang: China's policies before the 30th anniversary of reform and opening up were more promising than they have been for the past few years. Reform has not been successful because it is easy to backtrack on previous progress. The government has been negating the market since launching its 4 trillion yuan stimulus policy in 2009.

The late-mover advantage of a country, referring to the phenomenon that a less-developed country can close its gap with the developed countries quickly by copying their moves and technologies and avoiding the mistakes they made, can easily turn into a disadvantage because it will be tempting for the government to take credit for the development. It will make the need for structural and institutional reform seem less urgent. The so-called China Model and similar situations in many other developing countries are classic examples of the late-mover advantage turning into disadvantages.

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