China’s top economists debate value of government’s intervention in economy

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

China’s two top economists continued their two-decade long debate on whether industrial policies can be applied as an economic driver for China on Wednesday. In nature, the debate is about how far the government should extend its “hand” into the economy.

While Justin Lin Yifu, a Taiwan-born economist who served for many years as an economic adviser to the Chinese leadership and worked as the World Bank chief economist, believes Chinese mainland should continue with the government direction on which industries should be encouraged and subsidized, to better leverage the country’s competitive advantages, Zhang Weiying, a liberal economist who teaches at Peking University, countered that industrial policies have led to nothing but distortion and overcapacity so China should let the market decide which industries would thrive.

Lin and Zhang’s debate over Chinese government’s intervention in economic development can be traced back to 1995 when the focus of the debate was how to promote the reform of state-owned enterprises. The debate between the two continued in the following in years in 2004 and 2014, both on the role of the government in the country’s economic growth. The dispute re-emerged in August this year as one of the hottest topics in the domestic academic circle as many of the country’s industry-specific policies have resulted in waste and fraud.

Wednesday's debate was the first face-to-face encounter between the two on the topic and marked the latest phase in an ongoing discussion between Lin and Zhang who, despite their opposing views, are colleagues and friends.

Given China is undergoing a special period of economic transformation, the debate between the nation’s most prominent economists comes at a critical time, and many Chinese media even called the debate a “debate of the century.”

What are they saying?

The first dispute between Lin and Zhang lies in their definitions of industrial policy. While Lin defines industrial policy as measures taken by central or local governments aimed at supporting specific industries considered crucial for the region’s economic growth, Zhang thinks Lin’s definition of industrial policy is so broad that it sounds like everything that government does to the economy belongs to industrial policy and criticizing industrial policy may be misunderstood as criticizing the government.

During the debate, Lin said he has neither seen any developing countries and regions that successfully caught up with developed countries and regions without applying industrial policies, nor seen any developed countries and regions maintain their leading roles without employing industrial policies.

He also said industrial policy is necessary to protect an entrepreneur who takes the first step in a field and is at risk of losing the monopoly profits once his or her project succeeds and gets followed by other competitors.

“Developed countries and regions use patent protection to encourage first movers so they're not afraid of new competitors, and that's the function of industrial policies,” Lin said.

On the other hand, Zhang insists that China should scrap industrial policies and let the market play a major role in developing the country’s economy.

Zhang said that industrial policies are like a gamble, and they try to channel social resources collectively into certain projects that are chosen by the government. The odds of success are small, but the cost of failure is enormous.

"I think the first one to sample crabs is being driven by an impulse to taste delicious food instead of government subsidies," Zhang noted.

In this regard, Lin underestimates the adventurous spirit of entrepreneurs, he said. He also cited the examples of James Watt and the steam engine, George Stephenson's intercity railway, as well as that of Jack Ma, one of China’s richest men who created Taobao, the nation’s largest and world’s leading online shopping platform, without government support.

Zhang said industrial policy can foster greed. For example, companies may collude with government officials to win special favors. And policymakers can make mistakes, given that even the most well-informed intellectual cannot always predict market trends.

In any country, Zhang said, "a free market and entrepreneurs can make the best of comparative advantages."

Lin, however, believes a combination of market forces and active government involvement is needed to foster industrial progress. Japan's steel, oil and auto industries contributed to double-digit growth in the gross domestic product in the 1960s thanks to government policies, he said.

But Zhang said Japan's auto industry could never have taken off if not for the fact that Honda Motor Co. founder Soichiro Honda opposed a 1961 industrial policy barring his company, which then made motorcycles, from building cars.

However, while Lin advocates industrial policy, he said it doesn’t mean he thinks the market is not important. Market is important and the development of the economy is a process which contains constant structural changes, Lin said, adding that what he disagrees are some insufficient advices on the market construction.

“The debate over industrial policy between me and Lin has something to do with our different interpretations of entrepreneurial spirit,” Zhang said on Wednesday.

The Lin-Zhang debate has been closely followed by China’s academic community with some economists taking sides.

Wu Jinglian, a government adviser quoted by Caixin, thinks the days of industrial policy have passed and favors a “policy of competition” that encourages fair play and blocks monopolies in boosting economic growth, while Zhou Yongliang, a guest researcher at the China Society of Economic Reform, said market forces and government controls, which Lin thinks should work together, cannot get along.

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