A heated debate between two of China’s most prominent economists at the Peking University campus has attracted much media and public attention in the country.
About 1 million Chinese viewers watched an online broadcast of the three-hour exchange of views between Zhang Weiying and Justin Lin Yifu on Wednesday as they debated whether China should embrace or ditch state-led industry policies – a question that encompasses the future trajectory of China’s growth and development model.
While the debate was not directly for policymaking purposes, the academic argument between economists Zhang and Lin, who both studied in the West and now teach at Peking University, was highly topical at a time when the Chinese state is seen as expanding its presence in the economy, from the coal industry to the housing market.
Lin, a former chief economist for the World Bank who holds a doctorate in economics from the University of Chicago, argued that a developing country needs government-led industrial policies to “catch up” with advanced economies. Zhang, an Oxford graduate who is an avid believer in the free market and entrepreneurship, said state-led industrial policies only lead to inefficiency and distortions.
“Industry policy is the new look of Soviet-style planning economy,” Zhang said. He argued for the complete abolition of government intervention in all private goods sectors, saying it brings nothing but overcapacity and corruption.
Zhang said the government has both bias and vested interests, and it’s not the state’s role to pick winners and losers in industrial development. China’s failed industry policy in automaking, solar energy and new energy vehicles proved that, he said.
The Chinese government embraced a Keynesian stimulus package in 2008 to cope with impacts from the global financial crisis, and achieved an immediate rebound in growth but created a hangover of huge unpaid debts and unneeded facilities.
Zhang said China’s backing of state-designated industries hurt the national economy as a whole, and different treatment of different industries, in terms of market entry, tax, subsidies, credit and financing, land use and export licenses, created room for “rent-seeking”, or corruption.
Lin argued that the market has inherent failures and the government has to play a role in fostering national development, although he said there are state industry policy failures.
The Taiwan-born economist, who swam across the Taiwan Strait in 1979 to become a government adviser for Beijing, said China’s economic boom in recent decades proved the value of state intervention.
The government must create industry policy to guide the market, but the trick was to create appropriate policy, Lin said.
Some entrepreneurs, however, still favour government support in the early development stage, especially when external funding such as venture capital is limited.
“Government policy guidance and funding support are necessary for newly rising industries,” said Kou Bing’en, vice-president of Golden Concord Holdings, a large solar firm based in east China, in an interview after the debate was broadcast. “But competition should be encouraged for long-term sustainable development. Government should focus more on technical advances and industry upgrades when the market grows.”