Distinguished Speaker Seminar: Justin Yifu Lin - Development and Transition: Idea, Strategy, and Viability

Professor Justin Yifu Lin presented his ideas on approaches to development and transition on 5 December 2007. The seminar explored the reasons underlying both the dynamic economic growth of some countries and the lack of such success in many developing and transition countries. The seminar started with an overview of the industrial revolution and the subsequent division of the world into industrialized and non-industrialized countries and asked, "Why are some countries rich and others not?"

The proximate determinants of development generally consist of natural resources, physical capital, human capital, and technology. Most economists now agree that institutions are another key factor in economic development. Professor Lin argued that social thinking is the key to shaping the institutionalized order of society.

After World War 2, industrialization, especially the development of big, heavy industries, was viewed as a key to economic prosperity and political independence. Many developing countries pursued development strategies focusing on advanced heavy industries, an approach Professor Lin terms a comparative advantage defying (CAD) strategy. He contrasted the failure of this strategy-which induced rent-seeking, unproductive profit seeking, and soft budget constraint problems, and caused great failures in developing countries-with the comparative advantage following (CAF) strategy that enabled sustained economic growth in Japan, the Republic of Korea, the NIEs, and some other countries. In the CAF strategy, firms are encouraged to follow the economy's comparative advantage determined by the economy's endowments. Professor Lin noted that limited natural endowments made the CAF strategy an obvious choice for East Asian economies.

With the CAD strategy discredited, countries made new efforts to build up the necessary institutions for a well-functioning market economy. In many socialist and developing countries, shock therapy-massive privatization, comprehensive market liberalization, and strict fiscal discipline-was implemented. This therapy, however, ignored the existing distortions in the socialist and developing countries, so the privatization worsened soft budget constraints and the shock therapy led to rampant inflation in many former Soviet republics. A different transition approach-a dual-track approach-was pursued by the PRC, Viet Nam, and some other countries. They attempted to improve incentives by giving partial autonomy to farmers and state-owned enterprises (SOEs). This approach resulted in simultaneous stability and dynamic growth.

In concluding his remarks, Professor Lin recommended pragmatism as the best approach for policy in economic transition. A gradual, piecemeal approach to reform and transition, he said, could enable countries to achieve stability and dynamic growth and allow them to complete the transition to a market economy.

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