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Help or hindrance? Leading economists debate value of state intervention in China’s industrial policy

An escalating debate on industrial policy between two of the nation’s most prominent economists is causing a rethink of the country’s industrial development model and government intervention in market forces.

Justin Lin Yifu, a Taiwan-born economist who served for many years as an economic adviser to the Chinese leadership and worked as the World Bank chief economist, believes the mainland should continue with government direction on which industries should be encouraged and subsidised, to better leverage the country’s competitive advantages.

Opposing that view is Zhang Weiying, a liberal economist who teaches at Peking University, who countered that industrial policies led to nothing but distortion and overcapacity so China should let the market decide which industries would thrive.

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The debate over China’s fundamental approach to economic development can be traced back two decades, but the dispute has re-emerged in recent weeks as one of the hottest topics in the domestic academic circle as many of the country’s industry-specific policies have resulted in waste and fraud.

Zhang, a professor with the National School of Development at Peking University, gained attention in August in a forum by arguing that industrial policies, such as those launched by the government to shore up certain sectors with preferential measures, were the legacy of a planned economy.

He called for “abolishing any form of industry policy because government shouldn’t grant special treatment to any industry or any enterprise.”

He said local Chinese government officials tried to fix mistakes when they found such policies ineffective, often leading to more waste of capital or resources.

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In China’s solar panel industry, an industry named by Beijing as a promising field, the local government in Xinyu, Jiangxi province, tried many times to rescue LDK Solar Hi-Tech, but the company still filed for bankruptcy after taking billions of yuan in credit from banks.

Quoting numbers of failures that overwhelmingly trumped successful cases, Zhang said such policies “hinder innovation rather than encourage it”.

Lin, who advised the central government over the past decades, disagreed.

Lin, who is also a professor at Peking University, said both market forces and active governance were needed for developing countries such as China that were seeking economic growth. A strong government was needed to foster industrial development, he said, citing experiences in Japan, South Korea and Taiwan.

Guo Zhenhua, an associate professor at the Shanghai University of International Business and Economics, said he tended to agree with Zhang’s view more “as China is moving into a stage that focuses on industry upgrading and moving up the value chain”.

“The practices of industry-wide support are more effective in shoring up low-end sectors whose models are easy to copy,” he said.

Nie Huihua, vice-dean of the National Academy of Development and Strategy at Renmin University of China, said the real argument should be how to make industry policy effective.