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Rzeczpospolita – interview with prof. Lin


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Rzeczpospolita – interview with prof. Lin


What will be the influence of Trump's policy on the world? Are we on the verge of a trade war? 

I hope not. Trump is trying to do something for the efficiency of the US economy, so we need to understand why it is weak. Indeed, Americans have to face a trade deficit, but its main reason is over consumption and too little saving. The US manages to keep such a large deficit for so long, because the dollar is the main reserve currency of the world. They can print money to cover the trade deficit. Exports fromChina to the US are mainly labor-intensive products, which Americans have not been producing for half a century.

How to reduce the risk of a trade war?

First of all, I hope that economic reason will win. And secondly, if the Americans introduce those unreasonable tariffs, the countries affected will have to answer: a blow for a blow. This is the only way for the US to understand that the policy they propose is not right.

Let's talk about China. The dependence of GDP growth in Europe on the economic situation in your country is growing. What could happen with China's hard landing?

The coming collapse of the Chinese economy is being foretold repeatedly for at least 20 or 30 years (laughs). Like in the past, I am convinced that China will maintain stability and a reasonable growth.

What does it mean to be reasonable? 

6 percent annually Or more.


For how long? 


Over the next decade. Of course, once China reaches the level of income of the US or Germany, the growth rate may slow down to 3-4 percent. For now, however, China is still on the track of catchng up. And as in every  catching up economy GDP growth will be higher than in high income countries.


China is aging, so sooner or later there will be a problem of lack of hands to work. 


The aging of societies is a predictable problem that we can prepare for. Human capitaland change in retirement age will help. Today, the retirement age is 50 years for women and 55 for men. We can raise it.


In Poland, the previous government wanted to raise it to 67 years and lost the election.

Perhaps a change from 65 to 67 years is difficult, but from 50 to 55 for women and 55 to 60 for men - not necessarily, because people at that age enjoy work. But more important is the quality of employees, which can compensate for the decrease in their number. That's why we improve education. In the early 2000s, 1 million people a year graduated from universities, now over 8 million. In addition, the efficiency of work is enhanced by advanced technologies. China can also improve infrastructure, especially urban, like metro, sewerage. We have many investment opportunities here (which will fuel the economy’s growth - ed.).

Poland is also catching up.


And you have just crossed the threshold to high-income countries. You have income in the lower zone in this group, which gives you room for further growth. Just like China, where the authorities are able to carry out investments, because public debt is below 60 % of the country's GDP, which situates it among the least indebted. Low debt gives the government space for fiscal stimulus of the economy. And in addition, we have high domestic savings in China.


In Poland, GDP is growing at a rate of over 5% annually. How long will it be possible to maintain it?


It seems that the growth is stable. You can develop at a rate of 4-5%, because you are still in the phase of catching up. The level of education is high. And if you are able to ensure a balance between the state and the market, then you have the opportunity to maintain relatively fast growth for a high-income country.


What do you think about the actions of Prime Minister Morawiecki?

The strategy of responsible development is a breakthrough, allowing the government to play a proper role in supporting the market, while the market is key here and entrepreneurship is the driving force behind growth.

Entrepreneurship, you mean the private sector?

Yes, private.


But in Poland, the authorities are strongly opting for the state-owned companies, which are controlled by politicians.


I do not think it's about the state's domination of everything. It has a different role to play. It helps to overcome market failures that are immanent in economic development. Here, during the transition to a market economy, prevailed the idea of the Washington consensus, according to which the market should care for itself. But this did not happen, as a result, despite the entrepreneurial spirit, growth was too small to stop the emigration of talented Poles to Ireland, Great Britain and Germany. The private sector can not work well if the state does not help with overcoming shortcoming of  infrastructure or employee’s education problems. After the implementation of the responsible development strategy, we see acceleration of GDP growth and job creation. And it is not because the state wants to dominate. It has an auxiliary role.


Facilitation, not domination is the key word?


The state should be a regulator and a facilitator for the development of the private sector. I am glad that this is practiced here.


But if it gives direction to the economy, there is a risk of an error. We experienced it in the 1970s: the investments did not pay off and the state went bankrupt. We are afraid of the repetition.


You have to take lessons from the past. The state can make mistakes, so you need to impose a framework that will reduce the risk. It should support the sectors in which Poland has a competitive advantage.


How to choose them?

Promising sectors in Poland can be divided into five categories. The first one is the Polish industry at the stage of catching up, whose products have a lower added value than those from Germany or the USA. The government can support these industries so that they improve technology and get to a higher level. The second category are companies that are world leaders. In order to maintain their position, they must introduce innovations, including new products. These must pass the phase of research and then development. The private sector is good at development, while research is risky.

... And they do not often refund the costs incurred...


Therefore, the state should help the sectors in which you are already world-class at the research stage.


What about mining, which is slowly dying? 

In industries that lose comparative  advantages, you need to identify those products or services in the industries  that are able to compete on a global level. This is, for example, the production of mining machinery and equipment. You can help manufacturers strengthen their leading position, for example through research and development. And as for the miners, you can help them find another job. For example, services are developing. The forth type is  is short innovation-cycle industries, based on human capital: due to the high level of education you may be able to create a new product that will be very competitive in the world. You only need to build a creative environment by supporting incubation and venture capital funds.

The last type is– strategic industries, which require long innovation cycles. Sometimes it's 10-20 years. Some are related to national defense, others to new industries of strategic importance. The private sector will not enter itby itself, unless it knows that it c can count on government support. This should be fiscal support, not distorting the market or creating a monopoly.


What about the next crisis? Herman Van Rompuy says it will surely come, but not where and when ... 


... so we must be prepared. Sooner or later, we will see a global financial crisis like in 2008. During a crisis, it is necessary for the state to maintain stability and recover quickly. It can support those who lose their jobs. On the other hand, the crisis may be an opportunity for the state to invest, for example in infrastructure bottlenecks. Investments create jobs and reduce spending on unemployment benefits. The state should prepare such projects in advance. If it starts to do so only after the crisis strikes that it will not bring results, because they will enter the phase of implementation when the crisis is about to end.

Justin Yifu Lin is a professor of economics at the Peking University, the creator of the theory of the new structural economy, which is the theoretical foundation of the Responsible Development Strategy of Prime Minister Mateusz Morawiecki. In 2008-2012 he was the chief economist of the World Bank and its vice president.

Original linkhttp://www.rp.pl/Wywiady/306069900-Justin-Yifu-Lin-Panstwo-powinno-pomagac.html