What the Lin-Zhang debate tells us about Chinese economic power

The debates about the role of the state in economic development between two Chinese economists at Peking University should be followed closely

Ahmad-Risky-UmarIn November 2016, The Economist published an interesting article about the debate between two leading economists at Peking University, Justin Yifu Lin and Weiying Zhang.  The two high-profile economists represent two ideological leanings and offer conflicting perspectives on the future of China’s economic development and its role in shaping the global economic order.

Justin Yifu Lin is a keen proponent of a strong industrial policy and a former Chief Economist and Senior Vice President of the World Bank.  Professor Lin promotes what he calls ‘New Structural Economics’ – a kind of ‘marriage’ between structuralism and neoclassical economics – and is a keen believer in strong government involvement in developing the economy through various means including tax policy and infrastructure spending.

On the other hand, Weiying Zhang proposes Hayek-inspired ideas that strong entrepreneurial involvement with minimum state intervention should be central to development policy.  A former Dean of Guanghua School Management with radical libertarian economic ideas, Professor Zhang has criticised Chinese industrial policy for wasting too much money on incentives and argues for a ‘freer’ economy and less state involvement.

Yifu Lin suggests that a strong economy is determined by strong industrial policy and major investment in infrastructure in a particular state.  He uses the case of ‘Asian Tigers’ to illuminate his argument that governments should take a central role in developing their industries.  Furthermore, he makes the case for greater industrialisation in less-developed countries and that states should develop their infrastructure and industries through government facilitation.

Weiying Zhang disagrees.  Instead of supporting a strong government role in economic development, he calls for ‘abolishing any form of government-supported industry policy’, since it is arguably not the task of government.  With reference to Chinese state-supported industrial policy Zhang’s proposed solution is to give a greater role to Chinese private business interests to run the economy and go global.

Peking University held two debates between the two economists in 2016 and many Chinese prominent economists have followed them closely.  With Yifu Lin’s previous role as a World Bank Chief Economist, and Zhang’s track record as a prominent critic of government’s economic policy, the debate has heated up discussions in China’s academic community about China’s development policies – debates and questions which are difficult for policymakers within the Chinese Communist Party to engage with.

But the most interesting point about the debate is not which policy options are the best, but what the debate tells us about Chinese ‘real’ economic power.

As Richard Woodward reminded us in his recent SPERI blog whilst Chinese power might be a ‘rising power’ in world politics they are not yet ready to challenge US leadership in world politics.   Despite some decline in US power, China is still not in possession of both ‘soft’ and ‘hard’ power, which is arguably important for a state to become a ‘great power’.

However, even though China is not yet ready to challenge Anglo-American hegemony in leading the global economic order the country has become more prominent in Asian and African states.  China has expanded its outreach to finance development in such regions traditionally perceived as being part of ‘Third World’ by the Anglo-liberal policy community.  With less foreign aid by the US and Western international development agencies, Chinese infrastructure-led diplomacy has taken centre stage. Slowly but surely, China has replaced the US and Japan in financing economic development in many South East Asian states through infrastructure deals.  In Indonesia, China has started to finance 9 infrastructure projects since 2015, which has coincided with Indonesia’s moves to invest more in infrastructure development and increase tax collection.  In the Indochinese region (Cambodia, Laos, Myanmar, and Vietnam), China has also taken the lead in financing infrastructure projects; this has coincided with ASEAN’s strategy to enhance connectivity and economic growth in the region.

In this way China’s financing of infrastructure represents Yifu Lin’s position on strong state involvement in pushing economic development.  However, we also have another scenario of where and how Chinese economic power should be directed: the ‘entrepreneurial’ scenario held by Weiying Zhang.  Although his view is not currently popular in the Chinese policy community, we should not deny the strength of Chinese businesses in many parts of the world.  With China’s overseas connections, the ‘entrepreneurial’ strategy could see China take greater control over commodity markets, particularly when industries in the US or Europe are failing.

Parallels can be drawn between the Lin-Zhang debate and the debates between Hayek and Keynes in the 1940s.  That debate resulted in the establishment of two different world economic orders: the ‘post-war consensus’ that put a Keynesian strategy at the centre of the global post-war recovery agenda and financial consensus known as the ‘Bretton Woods’ settlement; and the Hayek-inspired turn to neoliberalism that was brought in as an alternative to the failure of Keynesian policies in the 1970s.

The Lin-Zhang debate might not follow the same course, but it will pose some similarities if China’s government decides to continue to take a stronger role in world politics.  Lin’s New Structural Economics might be championed by the Chinese government to further lead its industrial expansion at home and abroad in the coming years.  However, if this approach falters Zhang’s entrepreneurial approach with its vision of a reduced role for the state might attract more support.

This debate resonates with President Xi Jinping’s recent speech at the World Economic Forum in which he called for a defense of globalisation.  In Davos, Xi argued that globalisation is a ‘natural’ process caused by social productivity and, more importantly is not of ‘Western origin’.  The defence of globalisation was made after ‘Brexit’ and the election of Donald Trump as US President, two events which reflect moves towards more economic nationalist policies.

Regardless of the level of state involvement in the economy, Chinese economic strength is on the rise.  As Nicola Leveringhaus has so aptly warned, today, the UK (and broader ‘Western countries’ as well) needs China far more than China needs the UK in economic terms.  Even with slow growth, China’s economic size is likely to surpass that of the US or Europe in coming years.

The key question over the coming years will be whether China is willing to take on a greater leadership role in world politics, which could transform them as a ‘great power’, or instead put aside this role and just go with their own interests and leave the world in disorder.  The first scenario might lead to a rising tension with the US in the coming years, while the second scenario might continue the discontent in current political economy, particularly if there is no progressive alternative in Europe or America.

China’s rise in the world economy should not be left unaddressed by ‘progressive’ academics in the West and the debates being held in Peking University should be followed closely.  The arguments being made in those debates could be significant in shaping economic policy and development not just in China but around the world.