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Open questions | Justin Lin Yifu on China’s third plenum, overcapacity and avoiding Japan’s fate

  • The professor and former World Bank economist says China’s industrial policy essential to fuel innovation, avoid Japan-like depression

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Illustration: Victor Sanjinez Garcia
Ji Siqiin Beijing

Justin Lin Yifu is a professor of economics at Peking University and former chief economist at the World Bank. His theory of “new structural economics” – which advises governments of developing countries to take an active role in building and optimising their industrial base – is widely believed to have influenced Beijing’s economic policies over the past decade, and he has predicted China will “surpass the US, as measured by market exchange rate, around 2030” and surmount the middle-income trap “within two or three years”. He was a counsellor for China’s State Council from 2013 to 2023.

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In this latest interview in the Open Questions series, Lin elaborates on his projections, analyses the documents issued in the wake of the highly anticipated third plenum and expounds upon the relationship between governments and markets. For other interviews in the Open Questions series, click here.
One thing receiving attention in China is the future of market-oriented reform. Even though the market’s “decisive role” in resource allocation was mentioned in the full text of the decision document from the recently concluded third plenum, the expression was omitted from the initial summary, which triggered some concerns about a downgrade of the role of the market. How do you interpret this?

Having already been designated as playing a “decisive role” in resource allocation, it is difficult to find words that can emphasise the role of the market even more.

It is known that market failure is a common phenomenon in economic development. Therefore, the third plenum proposes to optimise the role of the government and ensure effective regulation to “remedy market failure”.

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Where does market failure occur? It may be different across industries and stages of development. Thus, if the government wants to play a better role, it must be flexible and take measures according to the situation.

So this is not a downgrade of the role of the market, but a further explanation and improvement of the role of government, of which the ultimate purpose is to let the market play a decisive role in resource allocation.

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