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Justin Yifu Lin: Domestic and international circulation is the best way to maintain China's comparative advantages

How will China’s metamorphosis unfold? We sit down with Justin Yifu Lin, Honorary Dean, National School of Development, Peking University; Councilor of the State Council and member of the Standing Committee, Chinese People’s Political Consultation Conference, to understand why domestic and international "dual circulation" will be the best way to maintain the country’s comparative advantages.

Justin Yifu Lin, Honorary Dean, National School of Development, Peking University; Councilor of the State Council and member of the Standing Committee, Chinese People’s Political Consultation Conference

In the past, one of China’s comparative advantages – perhaps the most significant driver of its rapid economic growth – has been the low cost of labor. But the consensus is that this pillar has already gone away; incomes are rising in China and have been for years. What will the country’s comparative advantages be over the next decade? What sectors of the economy will benefit from China’s new comparative advantages?

Justin Yifu Lin: A county’s comparative advantages will evolve with its economic development. When starting the transition from a planning economy to a market economy in 1978, China was one of the poorest countries in the world. Its capital was relatively scarce, labor was relative abundance, and the wage rate was low at that time. The comparative advantages in the early years of China’s transition were indeed labor-intensive industries. 

With rapid economic growth, capital, both physical and human, was accumulated quickly and turned from relatively scarce to relatively abundant while labor turned oppositely. Along with the change in the factor endowment structure, China’s comparative advantages have evolved to more capital-intensive industries, including for examples, equipment, telecom devices, transportation vehicles, ship building and new economy such as artificial intelligence (AI), big data, internet platform, etc.

The Dual Circulation Strategy does not mean China will turn from an open-economy to a self-sufficiency economy. China will continue to be a champion for globalization.

The Dual Circulation Strategy is a key component of China’s new economic model, aimed at promoting self-sufficiency and securing China’s place in the global supply chain. What does that mean for the future of domestic consumption and exports? How exposed is China’s economy to a reversal of the globalization we have seen in recent decades?

Justin Yifu Lin: The idea of Dual Circulation Strategy is to have the domestic circulation as the main body of the Chinese economy and to let China’s domestic and international circulations promote each other. Theoretically and empirically, the weight of domestic circulation in an economy is determined by both the size of the economy and the share of service sector in the economy, both in turn are a function of the per capita income in the economy. 

In fact, China’s external circulation had dropped from the peak of 35.4% of GDP in 2006 to 17.4% of GDP in 2019, correspondingly, the domestic circulation has raised from 64.5% to 82.6% in this period. The way to further expand China’s domestic circulation is to raise per capita income. Except for a few technologies, which may be embargoed due to geopolitical reasons and China will be forced to rely on self-sufficiency, the best way for China to raise per capita income is to follow China’s comparative advantages in an open market with domestic and international circulations promoting each other. 

Therefore, the Dual Circulation Strategy does not mean China will turn from an open-economy to a self-sufficiency economy. China will continue to be a champion for globalization. With the rising of per capita income in China, both quantity and share of domestic consumption in GDP will increase but the quantity of export will increase while the share of export in GDP will decline.

The AIC is celebrating its 25th anniversary this year. You’ve studied many different economies over that time. What do you think Asia’s economy will look like in 25 years’ time? Is there anything that could prevent China from becoming the world’s biggest economy?

Justin Yifu Lin: Asia’s economy has been the most dynamically growing economy in the world since the 1950s. I expect Asia’s economy, including China, will continue to be the driver of growth in the world in the coming decades. Except for a doomsday war that wipes out humanity, China will continue to grow dynamically and become the world’s biggest economy around 2030.