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[00:00:00.00]Well welcome to this 2007 lecture series of Alfred Marshall. I'm sure he would have agreed, and we would all agree that economic development is one of the most important contributors to human welfare and of course one of the extraordinary features of our time has been the remarkable growth of the Chinese economy.
[00:00:31.16]It is thus a great honour to have a very distinguished Chinese economist to give the 2007 Marshall lectures, Professor Justin Yifu Lin is professor of economics at Peking University.
[00:00:48.08]He's director of the China centre for Economic Research after an unusual and distinguished military career, he went to study political economy at Peking University.
[00:01:00.09]He then moved on to do a doctorate in Economics at the Faculty of Economics in Chicago, a faculty not noted for it's expertise in market socialism.
[00:01:13.25]He's got a very distinguished record of publication in top journals and a substantial number of books.
[00:01:22.27]Professor Lin is a senior adviser to the Chinese government and to a number of Chinese cities and a number of Chinese provinces, as well as the World Bank.
[00:01:32.06]One of his books has the title 'China Miracle' and we couldn't have a more authoritative person to talk to us about it. Professor Lin's title today is "Development and Transition, Idea, Strategy and Viability" and it's a great privilege to introduce Professor Lin to you.
[00:01:59.22]Thank you very much for the introduction and I'd like to say it is a great honour not only so, it's a surprise for me to be invited to give the Marshall lecture here today because more than 20 years ago I was a student at the University of Chicago and at that time Bob Lucas was invited to give the 1985 Marshall Lectures and I had the opportunity to observe him making the preparation for these lectures.
[00:02:36.27]At that time I did not expect myself to follow in his shoes to give this lecture
[00:02:43.10] I got my Phd from the University in Chicago and I returned to China in 1987, so that was 20 years ago and the main reason I returned to China was because I wanted to make a contribution to the economic growth and the economic transition in China.
[00:03:06.04]So in the past twenty years I had the opportunity to observe economic development and economic transition in person and also to do research on these two areas.
[00:03:22.29]So today i'd like to use this opportunity to share with you my understanding of economic development and transition.
[00:03:33.10]There are two lectures and so the first lecture will mainly focus on economic development and the lecture tomorrow will focus on economic transitions.
[00:03:47.00]And I think that we all know it's a fact before the modern time all nations were in relatively backward stages and in most of the countries their production was mainly agriculture and the income difference between the rich countries of that time and the poor countries at that time was not so large.
[00:04:12.24]You know it was estimated to be about 30 to 40% in per capita terms at most, but also at that time when countries like China and India that they were considered as a developing country, were considered to be more wealthier than many countries in Western Europe
[00:04:37.06] and after the Industrial Revolution in the 18th century things happened very quickly, because we can see that the income gap started to emerge and today the rich country's per capita income was about 30 or 40 times higher than the per capita income in the poor countries and so catching up with the developed country is some kind of dream for people in the developing world.
[00:05:08.06]and after the Second World War a lot of nations in the developing areas became politically and economically independent so under their revolutionary leaders they started to adopt certain kinds of policy to pursue the modernisation and economic development.
[00:05:30.09]Certainly a few countries did suceed for example Japan in 1980s the per capita income exceeded that of Britain
[00:05:41.27]and the new industrialised economies like Taiwan, Korea, Hong Kong and Singapore, they caught up very quickly and especially like Singapore and Hong Kong their per capita income exceeeds that of Britain in the 1980s; but most other countries failed, including China as you can see the gap becomes larger and larger.
[00:06:06.23]So in the 1980s the developing countries in the Socialist group and non-Socialist group started to have some kind of reform and transitions and China and Vietnam were extremely successful
[00:06:22.15]After they started the transition in the early 1980s they maintained rapid economic growth for example, in the past almost 30 years the GDP gross rate in China was about 9.8% per year, continuously for thirty years and we now maintain about 8 GDP gross rate in the past thirty years also
[00:06:46.27]And in the early 90s the Eastern European countries in the former Soviet Union started to have their transition
[00:06:56.02]At that time most people had a lot of expectation, thinking that they could have similar rapid economic growth as in China and Vietnam.
[00:07:05.14]However as you can see they encountered economic collapse and stagnation.
[00:07:11.06]And recently the European bank held surveys of 29 countries including 29,000 households and about 70% of the responses think that their living was worse than 15 years ago before the transition started.
[00:07:33.16]And so the question I'd like to ask in these lectures is why did Japan and East Asian NIEs succeed in their economic development to ctach up with the developed countries and most other countries failed?
[00:07:52.02]And the second question I'd like to ask was why did China and Vietnam have this economic growth but most other countries in their reform and transition process do so poorly?
[00:08:07.11]And certainly this is a question that has been asked in economics; like why are some countires so rich and other countries so poor?
[00:08:18.02]And it actually is a question asked by Adam Smith about 200 years ago, and then so like Bob Lucas has said in his Marshall lectures, he said that the consequence for human welfare, involved in questions like this are simply staggering
[00:08:36.26]And there was one I think economist who started to think each like this, it's hard to think anything else and I think I have a similar position like Bob Lucas.
[00:08:49.23]And so if we want to understand how come the country has different performance in development introduction certainly we need to understand what determined the economic development the success and failure
[00:09:05.23]And economists at first certainly proposed that natural resources are very important
[00:09:12.17]if you are rich in natural resources you can be in a (?) development something like that and that is one reason why China has a one child policy because we think we are a resource poor country and that if our population is so large then we cannot be rich.
[00:09:26.16]However nowadays people think that natural resources are not important because in the rich countries, in the developed country, the natural resources contribute at most about 5% of their national GDPs.
[00:09:41.25]And so economists think that more important things are like physical capitals, human capitals and technologies, however to say that physical capitals, human capitals and technology are the cause of economic development is just like saying rich people have a lot of money.
[00:10:04.29]Certainly they have a lot of money but that's a consequence of their richness, it's not a cause of their richness.
[00:10:12.24]And so that's just approximate the causes we need to look into something more fundamental and according to the literature you know there are certain competing hypothesis and one is luck.
[00:10:28.17]In one to have some sort of multiple equilibriums and maybe some countries have luck to be in a good equilibrium and other country maybe they have bad luck so they are trapped in the bad equilibrium, so that's one explanation.
[00:10:46.15]And the other explanation is geography, if you are in a landlocked country then your transportation costs will be higher and you may lag behind
[00:10:57.20]If you are in tropical areas then you know, it's easy to have some kind of disease and life expectancy is short and under that kind of situation people may not invest in education to accumulate human capital so they are poor, that's another explanation.
[00:11:14.10]And the thrid explanation is institutional because the institution determines the incentive or investment of work in a country.
[00:11:25.00]So if you have good institutions then people work harder, accumulate human capital, physical capital and acquire technology so they become rich.
[00:11:33.19]And vice versa, if you have bad institutions then people do not have the incentive to work and so they are poor, that's one explanation.
[00:11:41.22]And the fourth explanation is culture. You know in some countries, if they have some kind of long culture, long civilisation so they have good social capacities to organise things, and some economists think that is the reason why some countries do better than other countries.
[00:12:00.14]And also some cultures encourage trust so it's easier to have some kind of business transaction and so on.
[00:12:07.27]So that's another cause maybe, for some countries doing better than the other countries
[00:12:12.04]And the fifth hypothesis is openess. If you look at all the developed countries they are more open, and if a country is inward looking they are generally poor.
[00:12:25.04]So some economists think that trade, globalisation is the key for the success of a nation.
[00:12:32.07]Well nowadays most economists think that institution is the most important determinant because if you have some kind of multiple equilbrium situation then it's hard to imagine that people in the nation will not try to do a little bit of changes in order to jump from the bad equilbrium to the good equilibrium.
[00:12:55.19]And also geography may have some impact but we can also find some kind of exception. like Switzerland is a land-locked country but it's one of the richest countries in the world, and also Singapore is in the tropics, however Singapore is also one of the richest countries.
[00:13:12.29]So geography is not a destiny. And the culture well we can find soem countries that have identical culture, but some are very rich, some are very poor, and one good example is South Korea and North Korea.
[00:13:28.08]And openess, certainly we observe the rich countries are more open than the poor countries, however openess may be a consequence instead of a cause of their development
[00:13:41.22]And so now people think institution is the key, but institution is (?) some countries have good institutions and other countries have bad institutions, we need to explain that.
[00:13:58.22]And there are some hypothesis. In some of the literature on this hypothesis many focus on the conflict between the vestid interest group.
[00:14:10.13]In one hypothesis, the first one is proposed by Olsen, he said that if a society, if a nation has a very long term of stability then under this kind of society it's very easy to form some kind of institutional coalition and then the institution will work towards how to distribute the wealth instead of how to produce more wealth.
[00:14:37.01]And that is the reason according to him why some countries decline, why some countries become poor.
[00:14:43.22]And the second hypothesis that is also very influential is based on the Grossman and Harperman(?) study of trade policies.
[00:14:53.14]They think that the trade policy is determined by the lobby or some kind of interest group to buy the protection or buy the benefit from the national government.
[00:15:06.23]And the politician will decide what kind of policy that you will introduce depending on the lobbying of this special interest group and he also extends that to say, 'Oh this bad institution can be explained in this kind of interaction or equilibrium between the vestid interest group and the politician'
[00:15:30.11]In the third hypothesis which in recent years became very influential is based on the Acemoglu, Johnson and Robinson study of the experiences in the new world, in America
[00:15:46.26]And according to him, according to their studies the quality of institution is based on some kind of historical experiences.
[00:15:55.22]They argue that when they started to colonise the Americas, the New World. If a process had a high death rate then those kind of colonial elites, they could not stay there and under that kind situation they are going to introduce some kind of attractive institution and to protect the elite's power and position.
[00:16:23.00]And due to the past dependence and so on, then in those areas they are going to have bad institutions
[00:16:28.24]And in the North of America, like US and Canada well because their death rate at that time was lower and a settler could you know live there, and so they brought the European institution to there.
[00:16:44.03]And those kind of institutions continue to now, so they have good institutions and they use those kinds of historical roots as an explanation why the North of America become developed, become rich and Latin America become poor
[00:17:00.03]Based on the same observation in Latin America and North America another hypothesis was proposed by Engerman and (Sackler?) according to Engerman and (Sackler?) it was not because of death rates it was because in the Latin America, Central and South America the production - due to their environment, like soil type, weather was good for coffee and sugar cane and those kind of plantations have a large economy of scale and can induce slave labour.
[00:17:37.22]And because of that they have some kind of powerful elite and the slave, and the human capital and political power were different and if the powerful elite will introduce some kind of institution to protect their power and so you know they are socially diversified and classified and those kind of bad institutions continue to this day.
[00:18:02.11]And in North America according to them, the weather was not good for plantation, the weather,the soil was good for small farming and because of the small farm the society was more equal, power was more equally distributed.
[00:18:18.05]And so they gradually formed some kind of more cooperative institution andthey used that to explain why North America performed better than South America.
[00:18:26.12]So you know according to these studies, if we want to understand the institution you need to look from the vestid interest groups point of view.
[00:18:37.08]However my question is that we see that Asian NIE's started to take off, Chile in the 1970s also started to have dramatic changes in their performance.
[00:18:52.06]China and Vietnam in the 1980's also started to have dramatic changes in their economic development performance.
[00:18:59.04]However we did not observe important or significant changes in the factor affecting the vestid interest groups contributions in those economies.
[00:19:09.28]So from this I think maybe the vestid interest group may be able to explain some phenomena, but may not be the key to determine good institutions or bad institutions, the policy or bad policy that changes the fate of a nation or an economy and from that I think Keynes may have a better observation than most of the other economists
[00:19:35.04]According to Keynes ideas it's the most important, in the concluding chapter, concluding sentence of his general theory it says 'but sooner or later it is ideas not vestid interest which are dangerous for good or for evil' and I share the same conclusion.
[00:19:55.28]Why are ideas so important? according to Ted Schwartz, he is the person who brought me to Chicago he said that the social institution and so on in our society in shaped by the dominant social thought at any time,in any nation.
[00:20:18.29]And social thought consists or different political, social and economic ideas. So ideas are the core of the social thought and social thought shapes the institutions and institutions effect the economic performance in a nation.
[00:20:39.12]And so that is(?) of my explanation of why ideas, social thought are so important.
[00:20:49.11]For this we need to look into the government, because the government is the most important institution in a country and why is it the most important institution? Because the membership in a nation is universal and people have no choice, and secondly the government has some kind of compulsory power on institutions. So under this kind of situation the other institutions whether it's good or bad actually is determined by the government, and I think that is the reason why Arthur (Louis?) you know had one observation.
[00:21:27.03]He said that 'No country has made economic progress without positive stimulus from the intelligent government, ut on the other hand there are so many examples of the mischief done to economic life by governments and that its easy to fill ones pages with warnings against goverment participation in economic life'.
[00:21:50.15]So intelligent government or bad government is important to determine the economic performance of a nation.
[00:21:59.24]But governement is a black box. Government is run by politicians, by political leaders, so if we want to understand how the government perfoms, we need to understand what is the motivation? what is the choice of the political leaders?
[00:22:17.15]And for the political leaders what is their motivation? I think that their motivations, just like Alfred Marshall said 'Economic models are not exclusively selfish and may be some arise from noble motives', and I think that this is a very good description of the motivation of political leaders in a nation.
[00:22:43.26]For the political leaders I think that they certainly worry about the internal security but they also want to be viewed as a hero in history and for that the best way for them to secure their tenure and also historical position is to bring prosperity to the nation.
[00:23:08.28]So they have those kinds of desire to do good for the nation, and to do good for the nation is not so easy, because we economists today still do not know what exactly will make a good policy that will make a country grow and so on.
[00:23:27.11]So under that kind of situation the political leader they have some kind of (grounded?) rationalities so they couldn't undertsand how to make things right and also in this kind of situation the dominant social thought tells people what is good, will make one country become strong, become developed.
[00:23:46.10]So under that kind of situation certainly it's easy for the political leader to follow the dominant social thought because they don't know how to do that(?)
[00:23:57.00]And secondly if you follow the dominant social thought it will be easier to motivate people to support your policies.
[00:24:05.16]And I think that is the reason why, you know, dominant social thought will have some kind of impact on the policy choice and institutional choice in a country.
[00:24:17.10]So built on this my hyopthesis to explain why some countries are successful in their attempt for economic development and some other countries fail in those kind of attempt, my study points that if the institution is right a developing country can exploit the advantage of backwardness and catch up the developed country very quickly, because for a long term economic development, continuous technological changes is the key and for a developing country they can beneift from the gap with the developed country by importing, by borrowing technologies, and if they have those kinds of institution to do that certainly they can perform better.
[00:25:05.07]However we shouldn't allow these countries to do that because they have bad institutions they cannot benefit from that advantage of backwardness and why do they have those kind of bad institutions those kinds of distortions and so on, because their institution was shaped by inadequate ideas about - to give the development of an advanced capital intensive industries is a priority.
[00:25:32.05]When their countries were in a poor status, capital is very scarce in the economy and due to those kind of bad ideas they need to introduce all kinds of distortions
[00:25:43.19]And then my explanation of why some countries are successful in transition but most other countries they fail to have a good performance in transition, it's also because of ideas wrong.
[00:25:58.06]Because in a transition you can observe all those countries had a lot of non viable firms they were created by the government in the past and certainly we see a lot of distortions in these countries but those kind of distortions were some kind of second best arrangement to protect those kind of non viable firms.
[00:26:22.23]But in the transition process, like the Washington Concensus and so on, they did not understand those kind of distortions are enlargements to protect those kind of non viable firms and they try to get rid of those kind of distortions immediately then certainly you are going to cause a lot of economic chaos and so on so that's also due to the wrong ideas.
[00:26:45.13]And let me explain now step by step, well because the great divergence occured in the west and in the east or in the north and the south only after the industrial revolution and industrialisation, so because of that industrialisation especially the development of big heavy industry was viewed as a key or a foundation for economic prosperity and political independence in a country
[00:27:21.11]and also the historical experiences of Germany in the late 19th centruy and the Soviet Union before the Second World War to provide certain kinds of evidence for this kind of you know, observations.
[00:27:37.22]So if you look into you know modern history in all the developing countries you will find their national leaders are all you know have some kind of fascination about the big heavy industries, for example Dr Sun Yefang he was considered as the national father of modern China and in his book about the development of China he said 'The development of key (?) industries is the priority in China's modernisation and industrialisation' and he wrote that book in 1919.
[00:28:13.25]and Mao Zedong, the Chairman Mao he has similar conclusion he said 'Without industry there can be no solid national defence, no well being for the people, no prosperity and strength for the nation'
[00:28:27.08]and Chairman Mao was quoted by (?) in 1953 he said' If the industry is not developed a country may become other countries vassal even after the country has a obtained independence'
[00:28:43.09]and so they see that heavy industry, big industry is the foundation for people's well being for the national defence, for the political independence
[00:28:55.18]and a similar position was also shared in India, like Nehru in one of his talks he said ' Big industry must be encouraged and developed as rapidly as possible and it should be heavy in the best industries in which is the foundation of a nations economic strength and on which other industries can gradually be built up'.
[00:29:17.16]On another occasion Nehru also sadi 'No country can be politically and economically independent unless it is highly industrialised and has developed it's (power?) resources to the utmost'
[00:29:31.26]So that's some kind of common aspiration for the modernisation for the nation building, you know, after the Second World War.
[00:29:40.13]And not only aspiration but how to fufil those kind of aspirations through your policy, you need to have other ideas to build up and academically we know according to Marx in his Das Kapital, he has a two sector economy he showed that the production of needs should grow faster than the production of consumer goods. That means that heavy industry shoudl you know grow faster than light industry and agriculture
[00:30:11.12]And not only so, according to the publish of a single thesis, if a developing country that focuses on the production and export of commodities like agricultural product or mineral product and so on will be exploited by the developed country that focuses on production and export of manufactured goods.
[00:30:29.24]So again you need to develop heavy industry in order to be, to avoid yourself being exploited by the developed countries. That was the understanding in the academic circle at that time.
[00:30:42.22]And not only that you need to develop the heavy industries you need to have governement support for the heavy industries, and the first one to argue that is you know, List he said that if a country wanted to develop a heavy industry on it's own the government need to protect certain kind of, to adopt certain kind of protection like trade restriction and so on and in order to you know to help those industries to grow.
[00:31:09.06]And the development economics in the 1950's also supported those kinds of ideas because they think that there is some kind of market failures, there's some kind of (?) in the market and so heavy industry without government support cannot be developed.
[00:31:25.17]And the government need to, you know overcome those kind of market failures in order to create an enabling environment for the development fo heavy industry.
[00:31:34.15]That is the understanding in development economics in the 1950s.
[00:31:39.02]And based on that the World Bank, IMF and other international agencies also promoted the governments intervention for industrialisation in the 1950s and 1960s.
[00:31:52.14]But the political leaders aspiration for developing an advanced heavy industry is normal and that should be the end result for a developing country to become developed but their understanding of the diagnosis of the market failure is wrong.
[00:32:09.29]Because why in a developing country they don't have those kind of big advanced capital intensive industry? It is because those kinds of industries are against their competitive advantages.
[00:32:23.07]Firms in those kinds of industries are not viable in that market situation, so in fact it was not because of market failure it was because the market is very efficient so those kinds of big heavy industry could not develop.
[00:32:37.08]Let me explain.
[00:32:41.04]Supposedly we have a very simple economy, only have two factor production, capital and labour and under this kind of situation what kind of industrial structure should this economy have?
[00:32:54.18]In effect determined by their economic structures, supposedly we have three industries, I J and K and you can, you know that this is iso-value curve. K industry is most capital intensive. I industry is most labour intensive industries and whether a country, which industry a country should go?
[00:33:17.15]Well certainly it depends on the iso-cost curve? and the slope of the iso-cost curve reflected the relative abundance of capital and labour.
[00:33:29.19]So if a country which is rich in labour their iso-costs curve will be something like this and under this kind of situation this country should have I industry and J industry and produce I1 goods and J1 goods.
[00:33:43.21]And if the other country they are more abundant in capital their iso-costs curve will be like, you know this steeper one and they should go into J industry and the K industry, producing J2 Goods and K1 goods.
[00:33:58.26]However we know that the more steeper one means that the country is, has more capital per person. They are richer, they are developed.
[00:34:09.27]And the developing country they see that the developed country produces the capital intensive K1 good, they also want to produce that kind of K1 good.
[00:34:19.17]But if they go to those kind of industries their costs of production will be higher, firms in that industry will not do well, because they go against their competitive advantages
[00:34:29.15]But if the government adopts a certain kind of strategy I call competeitive advantage defying strategies to encourage firms to go into K industries to produce K1 goods and under the kind of situation in an open competitive economy this firm wil not be well unless they receive certain kind of support they cannot be well.
[00:34:52.07]So I say in the developed country they didn't have those kind of big modern capital intensive industries it was not the result of market failure it was a result that the market worked quite well.
[00:35:05.24]But at that time the government thought it was market failure. They wanted to encourage firms into, to go into those kind of capital intensive industries and the firm is not vaiable. So a firm following those kind of government policy is some kind of burden on them, and unless the government give their support otherwise they will not go.
[00:35:27.23]And how can the goverment give the support? Well certainly there are choices.
[00:35:31.16]One is to give direct subsidies, economically we can say it's not efficient in the way of subsidising some kind of firm however direct subsidy will be visible, only when the number of firms involved is very small.
[00:35:49.20]But when a developing country, when they wanted to develop this kind of capital intensive heavy industries there are too many firms to protect so direct subsidy will be you know, invisible
[00:36:01.11]So the government now give them some kind of tax preference and also create some kind of trade barrier to give them some panopoly and so they can charge a higher price for their good and so on.
[00:36:13.20]But in the developing country those kinds of support very often are not enough, the goverment need to do further things, artificially supress interest rates and (?) financial depression and also artifically overvalue domestic currrencies in order to enable some, or impose some equipment capital and so on at a cheaper cost.
[00:36:37.16]Those are distortions for the purpose of supporting the non-viable firm, but we know that interest rate, foreign exchange rate, raw material price and so on, they are prices.
[00:36:49.11]Once you have that kind of price distortion you're going to cause some kind of shortages in those kind of factory productions and the government need to have some kind of national plan and use administrative measures according to the national plan to allocate those kind of capital changes, raw materials and so on.
[00:37:07.29]So they have to plan their economy I think that's the reason why the socialist country in many developing countries have the state planning you know commission or something like that.
[00:37:19.16]And this kind of price distortion certainly is going to cause some kind of ransacking or some kind of directly unproductive profit seeking and also cause some kind of (?) countries and the economy will be very inefficient.
[00:37:36.26]and what is the other alternative?
[00:37:39.15]The alternative, the other alternative I call the 'Competitive Advantage Following Strategy'.
[00:37:45.08]And these kind of strategies will encourage firms to choose their industries according to the competitive advantage of their economy, determined by their (endowment??) structures and under these kind of strategies the firm will be viable.
[00:38:03.23]And so the government does not have to give them support or protection, but firms only care about the cost and the price they do not care about competitive advantage as determined by their endowment structure.
[00:38:19.02]So to enable a firm to choose their industries according to their competitive advantages they need to have some kind of relative prices which reflect the relative abundance of their endowment structures, and only a competitive market can do that.
[00:38:36.09]So if a country want to follow their competitive advantages they need to have market institutions.
[00:38:45.05]But for a developing country, in addition to the market institution the government can play a more active role than just keeping the price right. Becuase if a country followed it's competitive advantage in their development they will be so competitive and so their performance is going to be very good and they will accumulate their capital very quickly so their endowment structure will upgrade very quickly and once their endowment structure is upgraded well their industry need to upgrade.
[00:39:20.16]And this kind of industrial upgrading involves certain externailties, both in terms of information, because you need to know which industry to go into, what kind of techonology you need to adopt, and we know that information has the characteristic of public good.
[00:39:37.28]If everyone collected information and processed the information, they would keep those kind of information to themselves; and under that kind of situation all the firm need to do the same things. There is some kind of redundance in the information collecting and process so it would be better for the government to collect the information, process information and release this kind of information in some kind of industrial policies.
[00:40:03.22]Not only information, when you have the industrial upgrading you need to coordinate many kinds of activities you need to change the ducation, you need to change your financial structure, you need to change your legal system and so on and a firm cannot internalise all those kinds of changes.
[00:40:22.19]so you need to have a government to coordinate those kind of changes and also in the upgrading there is certainly some kind of risk involved.
[00:40:33.18]There is no guarantee that upgrading will be successful, but if the first firm to upgrade finds it unsuccessful you provide some kind of information to the other firm not to go there, so the firm needs to incur those kinds of costs to create some useful information for others, so that's externality
[00:40:52.26]And even the if the firm is successful you also provide some information for other firms, to tell other firms that this is the right direction and many firms will follow they are giong to have some competition and so on and under that kind of situation you know the successful firm can reap some kind of monopoly rate.
[00:41:10.06]So you have some kind of symmetry between the success and failure in terms of costs again and to this the government can subsidise the first firm who do the industrial upgrade, so that means that the government can be a help in the way that we call the development of state.
[00:41:28.11]That means the government can have industrial policies to provide information for industrial upgarding to coordinate all those social, economic, legal changes necessary and to provide certain subsidies to the firms in order to overcome the information externality and so on.
[00:41:49.19]Well then I need to explain what's the difference between the industrial policy that follow the competitive advantage of the economy and the industrial policy that is against the competitive advantage of the nation.
[00:42:06.21]And I can use one example, that is the automobile industries in Japan in India and China and in Korea to show what is the difference.
[00:42:18.25]We know that Japan had automobile industry policies in the mid 1960s and Japan was very successful in their development of the automobile industries.
[00:42:31.22]And you know, automobile industries in the 1960's, 70's even up to now was viewed as a modern industry; was viewed as an important industry for developing country to have to be modernised.
[00:42:46.26]And because of the success for Japanese automobile industry many developing countries followed that, but we see that some other developing countries have similiar automobile industry, like China and India started to have the automobile industry policies in the 1950s but China's and India's was very unsuccessful.
[00:43:08.11]Their automobile industry received a very long period of government protection and they remained an infant industry for a very long time.
[00:43:16.21]In Korea they started to have automobile industries and policies in mid 1970s and the case of Korea was in the middle.
[00:43:26.17]They had three automobile industries, two collapsed after the East Asian Financial Crisis and one now has become very competitive, that is Hyundai. And why has the same policy such a dramatic difference in their performance?
[00:43:41.18]Well I think it's because in some countries the automobile industry policy is consistent with their competitive advantages in other countries it's against their comptetive advantages.
[00:43:52.25]For example in mid 1965, 1960s the per capita income in Japan was about 40% of the per capita income of the US.
[00:44:04.19]So Japan was not a poor, developing country. In mid 1960s they already were developed in the steel industry, shipbuilding industries and they were very successful in the 1950s and the 1960s by doing that.
[00:44:18.24]So by the time of the 1960s to upgrade into the automobile industries I think is industrial upgrading according to their competitive advantages.
[00:44:29.06]In fact I can prove that, because in the mid 1960s, MITI, the Ministry of International Trade and Industry in Japan at the beginning only wanted to have two automobile firms in Japan one is Nissan the other one is Toyota. But in fact more than ten firms entered the automobile industry in Japan including Honda, Mitsubishi, Matsuda and so on.
[00:45:02.27]And those ten firms (?) without the governments support but they were successful internationally.
[00:45:10.18]They were very competitive domestically and internationally, if the upgrading was successful, was competitive without any government support then that means those kinds of upgrading were consistent with their competitive advantages.
[00:45:25.18]So just to show in mid 1960s the Japanese automobile industry in effect was industrial policy along the line of Competitive Advantage Following Strategies.
[00:45:38.14]And why India and China were so unsuccessful. The automobile industry in India and China you know required government support for more than thirty years and still remained an infant.
[00:45:50.21]But the reason is that in 1955, it's not 1965 it should be 1955, the per capita income in China and India was only about 5% of the per capita income of the US.
[00:46:05.23]And so to go into the automobile industry at that time was too early. It's against their competitive advantages.
[00:46:14.00]So those kinds of firm are not viable, so they require a long term protection from the governement and even with the government protections their product cannot be competitive internationally.
[00:46:26.19]And why Korea, you know their performance was in the middle, you know three firms, two collapsed, one was very successful.
[00:46:35.07]The reason why, the reason was that in the 1970s the per capita income in Korea was about 20% of the US per capita income, 30% of the Japanese per capita income.
[00:46:50.04]So when Korea went into the automobile industries there was not, you know, Korea was not as ready as Japan in the mid 1960s but the situation was much better than India and China in the 1950s.
[00:47:12.08]So similar policies have different performance and the different performance could be explained by whether this policy is consistent with their competitive advantage or against their competitive advantages.
[00:47:28.11]And unfortunately, you know, in the 1950s most national leaders with the good intentions to make their nation become a modern industrial nation and they jumped into the capital intensive heavy industries as shown here like India and China in the 1950s
[00:47:50.16]But those kind of industries, although they were successful in the developed country to make them strong, make them modern, but they are not viable. They go against their competitive advantages, so they became a failure and to make that failure they had to restore all kind of institutions and that's the reason why they had such a poor performance in the process of their development
[00:48:16.04]That is basically the first message I'd like to give today.
