Justin Yifu Lin’s “Interpretation of China’s Economy” Notes 8

Original link: https://ljf.com/2022/09/18/1152/

Appendix 1 Economic Growth and Institutional Change

1. Pre-modern economic growth and modern economic growth

(1) Characteristics of pre-modern economic growth

In the study of the relationship between technological progress and economic growth, the most famous scholar is Simon Kuznets, winner of the 1971 Nobel Prize in Economics. [Illustration] He has a very interesting finding in his research: in pre-modern society (society before the Industrial Revolution), economic growth is characterized by an increase in population and an expansion of economic scale, but per capita income remains basically unchanged. This kind of growth belongs to extensional growth.

Typical characteristics of economic growth in pre-modern society: population increases but per capita output does not increase; the expansion of national economic scale mainly depends on population increase; technological progress is very slow, and its contribution to economic growth is relatively small.

In 2003 I attended a seminar at Harvard to discuss a new book by Professor Maddison, The World Economy: A Millennial Perspective [illustrated]. According to his estimates in this book, the population of China in AD 1500 (the Ming Dynasty of China) was about 130 million. Calculated in international dollars based on the international currency unit in 1990, China’s per capita income in 1500 was 600 international dollars, while Europe was 450 international dollars at that time, and China’s per capita income was higher than Europe’s. By 1820 AD (China’s Qing Dynasty), China’s population reached 380 million, and the per capita income was also 600 international dollars. This shows that China’s economic growth in the pre-modern society was an extensional economic growth that relied on population increase.

(2) Characteristics of modern economic growth

At the beginning of the reform and opening up in 1978, China’s population was 960 million. In 2001, China’s population reached 1.28 billion, an increase of more than 300 million. In 1978, China’s per capita income in RMB was 379 yuan. By 2001, the nominal GDP per capita was 7,081 yuan without deducting the inflation factor. If the inflation factor was deducted, the per capita income was 2,255 yuan at the constant price in 1978. The actual value and output of individual production were relative to 1978. increased nearly 6 times. In the long period of more than 300 years from 1500 to 1820, China’s per capita income basically did not change at all; in just 20 years after the reform and opening up, per capita income increased by 6 times. This is the significant difference between the economic growth mode of modern society and pre-modern society.

Samuelson wrote about such a case of changes in working hours in his book Economics, a general textbook for undergraduates. At the end of the 19th century and the beginning of the 20th century, American industrial workers worked 6 days a week, 12 hours a day, a total of 60-70 hours a week; but now American workers only work 5 days a week, only work every day 7 hours, less than 40 hours a week. While the working hours are decreasing, the per capita output is increasing. The fundamental reason is the improvement of production efficiency. The improvement of production efficiency is the result of technological progress, so technological progress is the most important determinant of modern economic growth.

Since the Industrial Revolution, technological change has generally focused on a certain industry at a certain time. At the beginning of the Industrial Revolution, technological change was concentrated in the textile industry, and then moved to the steel industry and machinery manufacturing. After the end of the 19th century, technological changes were mainly concentrated in the chemical industry, after the invention of the aircraft, in the aviation and aerospace industries, and now in the electronics and IT industries.

In the United States in 1870, 50% of the labor force was farmers; by 1980, the agricultural labor force accounted for only 2% of the labor force; by 2000, the agricultural labor force accounted for less than 2% of the total labor force. For another example, during the Meiji Restoration era in Japan in 1870, the agricultural labor force accounted for 70% of the total labor force; in 1950, Japan still had 48% of the agricultural labor force; in 1990, it was only 6%. The same trend is seen in South Korea, China, and China’s Taiwan region.

Agriculture is the lifeblood of the national economy. For developing countries with weak foundations, problems in agriculture may bring a major blow to the economy. Therefore, as a developing country, while paying attention to the development of industry, it must also pay attention to the development of agriculture. , and technological advances in agriculture.

2. The Internal Mechanism of Institutional Change

Whether the potential for production growth can be tapped depends not only on technological changes, but also on whether there is a supporting system for protection. For example, introducing a new high-yielding variety into a very backward country, farmers may refuse to adopt the technology due to imperfect systems such as markets, insurance and finance.

(1) Why did primitive people hide behind trees?

According to research by Gary Becker, a Nobel laureate in economics at the University of Chicago [illustration], if the government wants to reduce the crime rate, there are several ways: One way is to increase the number of police, which will make criminals arrested The probability of being caught increases, thereby reducing the expected benefit of criminals; another way is not to increase the number of police, but to impose heavy penalties, which can also reduce crime. And the cost to the government of reducing crime by increasing penalties is lower.

The same market trading system has evolved from hiding behind a tree, to temple fairs and fairs, to a fixed market every day, but the reason behind the change is that the surplus that can be exchanged continues to increase.

(2) Definition of the system

Institution [illustration] is “institution” in English, and it has many different definitions, one of which is more applicable here: “Institution is a set of rules formulated by people to regulate people’s interactive behavior.” Institution It is formulated by people on the basis of consensus to regulate people’s behavior. It is like designing a frame to confine itself within a certain range, in order to achieve the purpose of regulating the behavior of oneself and others, so as to make the society work better.

(3) Classification of systems

Institutions can generally be divided into two different types: one is a formal institution and the other is an informal institution. The difference between a formal system and an informal system is that the formal system is usually formulated and announced by the government or authoritative institutions, such as laws and university systems. Informal systems are spontaneously created by members of society and are followed by everyone without the government’s approval. Common informal systems include township rules and folk customs, family responsibilities, and marriage morality, which are not formally stipulated in formal laws.

(4) Reasons for the emergence of the system

A system is a set of norms formulated by people to regulate their own behavior. Although this set of norms constrains the individual, it can also bring huge benefits to the individual.

First, the timing of production and consumption in a person’s life is inconsistent.

Second, not only from the perspective of the life cycle, the time of production and consumption of each person is inconsistent, but there are also certain risks in the process of production.

Third, economies of scale.

Fourth, people work together to form professional division of labor.

All in all, the benefits of economies of scale and professional division of labor determine that it is necessary for people to live together, which helps to overcome individual problems such as asymmetric production and consumption time, risks, etc. However, the coordination problems arising from group life are related to “free riders”. The phenomenon has yet to be resolved, which requires a system to restrict the occurrence of these behaviors.

(5) Institutional arrangements and ideology

The definition of ideology given in the dictionary is: a set of ideas reflecting the social needs and wishes of a person, group, class or culture. Another definition is that an ideology is a set of doctrines or beliefs about political, economic, social, and other institutional foundations. Since ideology is a foundation of political, economic, social and other institutions, it can of course also be regarded as a very important institutional arrangement.

Ideology can be interpreted as a kind of human capital. If you believe that democracy is an ideal system and accept this ideology, then the more religious you are to the ideology, the greater the inner satisfaction you will get after voting, and the greater the inner punishment for not voting. Ideology is not innate, it takes time to learn, understand and accept. Ideology is an investment. When ideology is accepted, it will remain relatively stable and have characteristics similar to capital.

(6) Optimal institutional arrangements

The optimal institutional arrangement depends on several factors: the density of demand, the benefits and costs of institutional arrangements, and transaction costs. Ideology and other institutional arrangements in the institutional structure will also affect the optimal institutional arrangement to some extent, such as the legal system, the government’s ability to enforce the law, and the completeness of the law.

3. Factors Affecting Institutional Change

(1) Changes in trading technology can lead to changes in institutional arrangements.

(2) Changes in ideology will also affect the choice of some institutions.

(3) The selection and adoption of institutions are also restricted by various conditions such as history, region, and culture.

Even the best systems are not one-size-fits-all. When judging the optimal system, we must consider the utility brought by the institutional arrangement and the cost required to maintain the institutional arrangement. The optimal institutional arrangement is the one with the lowest cost to achieve the same purpose within the optional range.

In many cases, the cost of foreign institutions is not necessarily lower than that of domestic institutions, so careful screening is required. The system of an advanced country is not necessarily the optimal system for a backward country.

(4) The process of economic development is also a process of constant institutional changes.

The main contribution of Nobel Laureate in Economics Douglas North lies in the study of institutional changes in long-term historical development. He believes that the most important institution of slave society is the possession of people; the most important institution of feudal society is the possession of land. Regarding the transition from the system of ownership by people to the system of land ownership, he put forward a verifiable hypothesis: the area of ​​land is basically fixed and will not increase in the short term, but the population will continue to increase. When the population is very sparse, the ultimate way to obtain wealth is to possess people. If you have people, you will have wealth, because the land is basically unlimited, and you can reclaim the land at any time as long as you have labor. In this situation, wealth mainly comes from the possession of labor, so the social form is slave society. As the population increased and less land was available for cultivation, the determinant of the amount of wealth shifted from ownership of people to ownership of land. Labor can be hired at any time as long as the land is owned. As a powerful group, the nobles choose to occupy land and release people from the perspective of maximizing their own interests. The fundamental reason for this institutional change is that the relative prices of various production factors and the main source of wealth, or the main resource constraints, have changed due to population growth.

(5) Economic growth is also an important cause of social system changes.

(6) Institutional changes sometimes come from changes in institutional aggregates.

4. Ways of Institutional Change

(1) Two ways of institutional change

Institutional change is divided into two ways [illustration]: The first way is spontaneous change (spontaneous changes). Spontaneous changes occur because of institutional imbalances, and through institutional changes, the efficiency of the entire society can be improved. The second way is forced institutional change. Coercive institutional change depends on the coercive power of the government, that is, the government can use political power to make institutional changes.

(2) Cases of Spontaneous Institutional Changes

(3) Government and Institutional Changes

For the study of government, traditional political scholars have mainly put forward two views: one is the theory of government subject; the other is the theory of interest groups. Although these two viewpoints have some contributions, they also have certain limitations, which are often not applicable when studying the governments of developing countries. In my opinion, one of the most suitable ways to study governments in developing countries is the theory of leader plus principal-agent.

To study the behavior of a government, we must first understand what the behavior of the government leaders is. But this is not quite the same as the so-called subjectivism, because the supreme leader needs many bureaucrats to carry out his orders, and the interests of the bureaucrats and the interests of the supreme leader may not be exactly the same. For example, the top leaders may want the history to be named, but bureaucrats generally do not have such “excessive expectations”, so how to evaluate history will not enter the bureaucratic objective function, or even if there is an objective function, it is not the main goal. . Since the objective functions of leaders and bureaucrats cannot be completely coincident, their decisions may be different.

Arthur Lewis (Lewis, 1955) said in “The Theory of Economic Growth”, “Any very successful country has a very sensible government behind it, but more can be written at length. , the stagnation or decay of the entire economy caused by the failure of those unwise governments to intervene in the economy.”

(4) Reasons for the failure of government intervention

(1) The individual utility of the ruler is inconsistent with the utility of the society

First of all, the leader of any country, even the leader of a poor African country, is probably living a very good life, so an increase in the wealth of a country does not lead to a much increase in the personal wealth of the leader. Second, leaders’ primary goal is to consolidate their political power. Leaders maintain social stability in order not to lose power, and promote economic development in order to maintain social stability. This is a good situation; but leaders can also lead to the failure of social development in order to consolidate and strengthen power, which is a bad situation. situation. Finally, a major goal that leaders may focus on is “reputation in history,” which may also be at odds with the goal of maximizing social welfare.

(2) Government leaders hope to carry out reforms that promote social progress, but cannot implement them due to the pressure of political survival

(3) Decisions made at the highest levels of government sometimes run counter to the interests of the bureaucracy.

(4) According to the public choice school’s interpretation of government behavior, government policies are entirely the result of competition among interest groups.

The spirit of democracy and the rule of law is different in different countries. According to North’s research, if viewed from a formal organizational level, such as the separation of powers, the constitution is the same in North and South America, and there is no difference. However, some countries in South America do not have the spirit of democracy and the rule of law, and their military does not necessarily obey the elected president, so a coup is likely to occur. And after the military leader came to power in a coup d’état, the common people did not oppose him, and he could slowly hold that seat until he became president. And if a general in the United States wants to coup, no one will follow him. Even if he can assassinate the president himself, he will never become president. Therefore, the spirit of democracy and legal system is different here.

(5) Summary: Combination of spontaneity and government-mandatory institutional changes

An effective government-mandated system change method is based on spontaneous system change, and the process of implementing such a system will be smoother.

It is only promoted by the government and social elites, usually only by means of executive orders, rather than legal means to establish the organizational level. Even after the organizational level is established, if there is no supporting values ​​and ideology, it will be It’s hard to function as it should, and it often ends in failure.

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