African Transformation without tears - JUSTIN LIN

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http://findarticles.com/p/articles/mi_qa5327/is_377/ai_n57899398/

Justin Lin, World Bank Chief Economist Justin Yifu Lin, from China, is the first person from the developing world to be appointed the World Bank's Chief Economist. This is perhaps the most powerful policy-making position in the institution. He is also its Senior Vice President, Development Economics. He guides the Bank's intellectual leadership and shapes the economic research agenda of the institution. Here he discusses with Anver Versi how Africa can transform itself from a poor region to a wealthy one over a relatively short space of time.
Lin is working on an ambitious research programme that examines the industrialisation of rapidly developing countries and throws new light on the causes of lagging growth in poor regions. Lin's appointment to this critical position reflects the swing of the economic pendulum to the East. His economic ideas are shaped by the realities of the developing world rather than the certainties of the developed countries. He holds no truck with the idea that poor countries have to remain poor - "poverty is not a destiny", he told me. He wants to reduce poverty faster - "in other words, accelerate wealth creation" and plans to shape World Bank policies to his end.
Justin Lin's appointment at this stage in Africa's development has come as heavensent. For years, Africans have argued, in vain, that the Bank's policy directives, derived from the Western economic models, were not suitable for developing nations. Lin has already rejected the 'one size fits all' philosophy and set in motion programmes that will hopefully accelerate wealth creation for the developing world, including Africa.

 

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My first question to him was why some countries were poor while others were rich. "All countries started out poor - labour working on the land or water for sustenance and using whatever resources they had to provide for their urgent needs. The accumulation of wealth began with recognition of comparative advantage. This lead to the accumulation of surpluses - grain, for example, or labour. These could be used to increase surplus and on and on."
The great civilizations of the Middle East and Egypt were built through food surpluses which were used as payment and finance, and the surplus labour could be put to work on the land, produce articles and form armies.
"Nothing much has changed," insists Lin. "To create wealth, you have to go through the same stages." With the experience of China to back his ideas, he explains the stages this way: "First look at your comparative advantages. What do you have that be put to good use? Land? Labour? Natural resources? A beautiful landscape? Mountains, rivers, waterfalls?
"Whatever you have can be turned into a comparative advantage. If you are labour abundant, turn to labour-intensive industries. Be competitive. Accumulate more resources, improve productivity by the use of better technology and enhance competitiveness. By using labour-intensive industries, you create more jobs, which means you have a bigger market and you can save more. You enhance your capacity, produce more, save more, produce more and step by step you move up."
"The rich countries are now capital abundant, while 80% of poor countries are labour abundant but capital scarce," he says. "This is why labour (wages) costs are greater in rich countries than in poor ones and capital costs more in poor countries."
The way out for poor countries is use their resources, including cheap labour, to be competitive and gradually move up the steps to capital sufficiency and then to capital abundance. But industrialisation is an essential part of this process. "Development is a continuous upgrading of technology - an endless process."
Lin argues that all societies, even the least developed, use technology of some sort or the other. "The difference is in upgrading and incorporating new knowledge to the technology," he says. Which is why some people have landed on the moon while others are still using wooden ploughs. Although he does not say it in so many words, Lin implies that the lack of progress in general, and economic progress in particular, can be laid at the door of ossified technology. Societies that have failed to improve their technology or to apply advances in technology have stagnated and been mired in poverty.
Traumatic change
"Change comes from doing something new, something different," he says. The question is how to decide on what to do and what sort of change one expects. He accepts that transition can be traumatic and that there could be pain in the short term.
"China embarked on a policy of 'transition without tears'," he told me. "China adopted a dual-track approach and was able to achieve both stability and dynamic transformation simultaneously. As a latecomer, it developed according to its comparative advantage, and tapped into the potential of the advantage of backwardness. This was no accident: it was based on the government's recognition that big-bang reforms could be self-defeating. It was necessary to let private enterprise prosper wherever feasible, but to continue to support important state-owned enterprises while reforming them gradually. What, I asked, is the 'advantage of backwardness'? "In advanced high-income countries, technological innovation and industrial upgrading require costly and risky investments in research and development, because their vanguard technologies and industries are located on the global frontier," he explains.
"Moreover, the institutional innovation required to accommodate the potential of new technology and industry often proceeds in a costly trial-and-error, path-dependent, evolutionary process. By contrast, a latecomer country aspiring to be at the global technological and industrial frontiers can borrow technology, industry, and institutions from the advanced countries at low risk and costs.
"So if a developing country knows how to tap the advantage of backwardness in technology, industry, and social and economic institutions, it can grow at an annual rate several times that of high-income countries for decades before closing its income gap."
This strategy, he says, has been behind China's phenomenal growth over the past 20 years. He is quick to remind me that in the 1980s, China's economy was not very much different from Africa's. "At the start of economic reforms in the 1980s, China was primarily an agrarian economy," he says. "Even in 1990, 73.6% of its population lived in rural areas, and primary products comprised 27.1% of GDP. These shares declined to 27.1% and 11.3% respectively in 2009.
"A similar change also occurred in the composition of China's exports. In 1990, primary products comprised an important share of merchandise exports. Now, almost all of China's exports are manufactures."
However, he cautions that behind this growth there has been a dramatic structural transformation, in particular, rapid urbanisation and industrialisation.
The state, Lin believes plays a central role in coordinating industrial policy and supporting the private sector, particularly the 'first movers' or pioneers. "Economic development is a process, it involves the private sector entering new industries, learning new skills, building new infrastructure, establishing new financial systems and enjoying access to capital. But individual companies cannot coordinate these changes - and this is where the state steps in."
The Chinese government provides large funds and support to its companies, which is one reason why they dominate in so many different sectors in Africa and elsewhere.
Domestically, Lin is emphatic that 'first movers' who step into unknown territory have to be given special incentives such as tax breaks, co-financing, easy access to finance and help in locating markets. "If first movers succeed, others will imitate them, but if they fail, they have to bear the cost of failure. They are unlikely to make more profits than others in any case, so there must be incentives to encourage them into uncharted paths. Without first movers, there is no dynamic growth."

 

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Suitable and unsuitable policies
I asked his opinion on the oft-cited African complaint that policy frameworks designed for them by multilateral institutions failed to take account of African realities and were therefore, more often than not, unworkable.
"The growth of East Asian economies in the WWII period is extraordinary and unexpected in human history - both for its pace and for the policy framework that guided the process. 'Their policy frameworks often did not follow the recommendations based on the mainstream economic theories."
These theories, he said, based on Adam Smith's The Wealth of Nations, are based mostly on the experience of industrialised nations. "One consequence of such modelling choices is that they pay little heed to structural factors. These structures and the differences they imply between countries should be the starting point for the enquiry of economic development.
"It is crucial to consider the fact that countries at different stages of development tend to have different economic structures due to differences in their endowments. An economy's factor endowments at any given time determine budget levels and relative factor prices - the two most important economic parameters at any given time."
The analysis of growth dynamics should, therefore, begin with an economy's endowments and its evolution over time. Following classical thinking, economists tend to consider a country's endowments as consisting only of its land (or natural resources), labour, and capital (both physical and human). These are simply factor endowments, which firms can use for production," he argues.
To summarise, Lin returns to his conviction that poor countries can change their destinies by adopting the comparative-advantage-following (CAF) strategy at each stage of their development.
"This will create more job and income opportunities for the poor and will be characterised by a pro-poor growth trajectory. The CAF strategy pursues a set of policies that facilitate the development of industries and the adoption of technology that follows the comparative advantage determined by the country's evolving endowment structure at each 'stage' of development," he argues.
"In most cases," he continues, "a developing country is relatively abundant in labour in comparison to capital. Thus, if the country follows its comparative advantage in economic development, it will develop labour-intensive industries and will create greater job opportunities which favour the poor, whose main source of income is labour earnings.
"Moreover, the economy will be competitive in domestic and international markets because its industries will follow the country's comparative advantage.
"Therefore, under a CAF strategy, the country will produce the largest possible economic surplus and will have the highest returns on investment so that capital will be accumulated faster, and in this fashion the country will change its endowment structure from relatively abundant in labour to relatively abundant in capital. The industries in the country will upgrade from relatively labour intensive to capital intensive and the wage rate will increase accordingly. Therefore the poor, who rely on wage earnings, will increase their income."
Anyone who doubts this theory has only to study China to see it working day in and day out.
World Bank's Justin Lin: "Poor countries can change their destinies."
"The state plays a central role in coordinating industrial policy and supporting the private sector, particularly the 'first movers' or pioneers" - Lin
73.6% of China's population in the 1980s lived in rural areas, and primary products comprised 27.1% of GDP. These shares declined to 27.1% and 11.3% respectively in 2009
"If a developing country taps the advantage of backwardness in technology, industry, and social and economic institutions, it can grow at an annual rate several times that of high-income countries" - Lin
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