The miracle growth of the Chinese economy has decreased from a compound annual growth rate of 10% to less than 7% in 2015, raising questions about China?s prospects of avoiding the ?middle income trap?. 
 
The two engines of growth -- exporting on a scale never before witnessed and massive infrastructure investments -- are approaching the limits of diminishing returns.  Assuming that current political arrangements prevail and that western socio-political economic models are not adopted, can China develop a new growth model with innovation at its center? 
 
This volume brings together leading Chinese and international scholars who examine the role of culture, institutions, national policy, firm and individual dimensions in shaping the operation of firms, industries and technologies. Their analyses of the daunting challenges of building an innovation-driven growth model for China range from quite optimistic to deeply pessimistic. The book will appeal to scholars, policy-makers and business persons.

China's Innovation Challenge: Overcoming the Middle-Income Trap

The miracle growth of the Chinese economy has decreased from a compound annual growth rate of 10% to less than 7% in 2015, raising questions about China?s prospects of avoiding the ?middle income trap?.

The two engines of growth -- exporting on a scale never before witnessed and massive infrastructure investments -- are approaching the limits of diminishing returns.  Assuming that current political arrangements prevail and that western socio-political economic models are not adopted, can China develop a new growth model with innovation at its center?

This volume brings together leading Chinese and international scholars who examine the role of culture, institutions, national policy, firm and individual dimensions in shaping the operation of firms, industries and technologies. Their analyses of the daunting challenges of building an innovation-driven growth model for China range from quite optimistic to deeply pessimistic. The book will appeal to scholars, policy-makers and business persons.

China's Innovation ChallengeOvercoming the Middle-Income Trap

Economic development is a process of structural transformation with continuous technological innovation and industrial upgrading, which increases labor productivity, and accompanied improvements in infrastructure and institution, which reduces transaction costs. The middle-income trap is a result of a middle-income country’s failure to have a faster labor productivity growth through technological innovation and industrial upgrading than high-income countries. Industrial policy is essential for the government of a middle-income country to prioritize the use of its limited resources to facilitate technological innovation and industrial upgrading by overcoming inherent externality and coordination issues in structural transformation. The industries in a middle-income country may be classified into five different types, depending on their distance to the global technology frontier: catching-up industries, leading-edge industries, comparative advantage-losing industries, short innovation cycle industri...

Industrial policies for avoiding the middle-income trap: a new structural economics perspective*

Ladies and gentlemen, it is a great honour for me to give this 12th H.W. Arndt Memorial Lecture. I am honoured for two reasons: one professional and one personal. As the vicechancellor just mentioned, Heinz Arndt was a pioneer in development economics, and his book, The Economic Lessons of the 1930s, published in 1943, was a seminal work in the field that influenced several generations of economists. On a personal note, when I was an adjunct professor at The Australian National University in the early 1990s, Heinz was a gentle, friendly, and encouraging presence in the department, even after his retirement. Today’s lecture on the new structural economics as the third wave of development thinking covers four main areas. First, with so many famous economists having already contributed to the field, why do we need to rethink development economics? Second, I propose a new theoretical framework for development economics—the new structural economics— that can guide developing countries in making better development policy choices and promoting economic growth. Third, towards that end, I introduce a new growth identification and facilitation framework for formulating industrial policy. And fourth, as a new theoretical framework, it sheds light on many controversial questions in economics. After you leave here, I invite you to formalise these questions and test them empirically in your own work.

New structural economics: the third wave of development thinking

The domestic institutions of China’s state-permeated market economy (SPME) have been conducive to the consolidation of an investment- and export-led growth model that has transformed China from a low- to middle-income country. Since the global financial crisis Chinese authorities have become increasingly disposed to internationalizing the renminbi (RMB) to address the external monetary vulnerabilities arising from their economy’s excessive dependency on the dollar. We adopt a comparative capitalism perspective to argue that China’s international monetary ambition is incompatible with the domestic financial institutions of its SPME and growth model. The success of RMB internationalization hinges on the implementation of far-reaching domestic institutional reforms that would overhaul the key domestic financial institutions of its SPME. On the basis of a comprehensive analysis of the complementarities between these institutions and their role in China’s SPME and growth model, it is argued that the political capacity and resolve of the Chinese government to adopt these reforms can be called into question.

Justin Yifu Lin

Papers

Against the Consensus: List of figures