Prominent Chinese economist Lin Yifu (Justin Lin) from Peking University has encouraged people to pay more attention to both equity and efficiency during the first round of economic distribution. If this cannot be done, the expected goals of the second round of distribution will be impossible to achieve. He warned against the trappings of the situation in Latin America and proposed allowing the poor get richer quicker.
His opinions, aired at the 116th Chang'An Forum in Beijing, are in sharp contrast to those who consider equity and efficiency to be features of different stages. These people believe that during the first round of distribution, people should focus more on efficiency, and that during the second round of distribution, there is more equity.
Lin Yifu said that in the past, people have believed that in the course of economic development, people will naturally first have a low income. However, the experiences of other Asian economies such as Japan, Taiwan, South Korea and Singapore differ. Income distribution improved throughout rapid economic development, making development more sustainable.
Lin Yifu provided theoretical support for his view. About 200 years ago, there was a theory about comparative advantages. Although this theory was in relation to trade issues, Lin Yifu believes it is still relevant to China. The current competition advantage theory is in fact based on the old comparative advantage theory.
He said it is very important that a country uses its comparative advantages. China's comparative advantages are its vast labor force and market scale. Thus China should develop labor-intensive industries or play a labor-intensive role in capital intensive industries. This will create more employment opportunities. The difference between the poor and the rich is that the poor make their living from their labor and the rich earn their money with their capital. Only when the poor have jobs can they share in the fruits of economic growth.
"Only after we have a surplus can we accumulate capital," says Lin Yifu. Manufacturing and service industries have comparative advantages and can generate the maximum surplus. As labor doesn't grow as fast as capital, laborers' salary will increase, and capital returns will decrease. In the end, the income distribution gap between the rich and the poor will be narrowed.
Lin Yifu says the comparative advantage of developed countries is their large amount of capital. They lack for labor. So they use their advantage in capital instead of labor.
He also says that in Latin America, many people invest in the same industries as people in developed countries do, but these industries drive off a large amount of labor. At the same time, they don't have the comparative advantage of capital. Consequently, they cannot survive alone and have to rely on national subsidies. If the country does not have enough savings, it has to borrow money from developed countries and goes into deficit. When it cannot pay back the debt, there will be a financial crisis. This is the trouble in Latin America. Thus Lin opposes the idea of developing similar industries and the hope of 'exceeding the West' in a short time.
Lin Yifu proposes that China allow poor people's income to increase faster than those who are rich. For this to happen, the government must provide a good market price system which reflects the scarcity and abundance of various factors in the market. During the different development periods, entrepreneurs naturally select appropriate industry according to the market price signal. This will also encourage technical innovation in enterprises.
Lin Yifu thinks that the key is improving the nation's financial structure. Currently, four national banks own 75 percent of the market share. These large banks are unwilling to lend money to the labor-intensive industries. They only like to lend money to large enterprises, and due to the low cost of lending, they will invest the money in the capital-intensive industry. Thus, it is better to develop medium and small banks that can serve small and medium-sized enterprises.
By People's Daily Online