Lin Yifu: Utilizing Comparative Advantage to Achieve High Quality Development
What else can developing according to comparative advantages bring? How to encourage entrepreneurs to spontaneously choose comparative advantages?
Utilizing comparative advantages to achieve high-quality development
The new structural economics proposed by summarizing China's development experience may provide a reference for the complete, accurate, and comprehensive implementation of the new development concept
The report of the 20th National Congress of the Communist Party of China proposes that high-quality development is the primary task of building a socialist modernized country. To achieve high-quality development, it is necessary to comprehensively, completely, and accurately implement the new development concept. The new development concept includes five aspects: innovation, coordination, green, openness, and sharing. Each goal is very good and important. How can we fully, accurately, and comprehensively implement these five goals? If a single goal is easy to pursue, with five goals now, would it be possible to miss out on one goal and sacrifice others? How can we achieve these five goals of the new development concept? This is a question that I have been pondering and researching over the years.
From the perspective of the new structural economics that I advocate, in order to achieve high-quality development in a complete, accurate, and comprehensive manner, first of all, it is necessary to grasp the foothold of the new development concept in development. Only after development can we talk about whether it is of high quality, and innovation is the first driving force of development. However, in order to achieve the other four goals simultaneously, attention should be paid to innovation, which must follow the comparative advantages determined by the factor endowment structure of each region to carry out technological innovation and promote industrial upgrading. If that's possible, then all the other goals can be achieved. Because the so-called innovation based on comparative advantage means that if a place has relatively more labor and relatively less capital, then new technologies and industries must make as much use of relatively more and relatively cheaper labor as possible. On the other hand, if a place has relatively abundant capital and relatively less labor, new technologies must use more capital and less labor, and replace people with machines. In the same situation, newly entered industries also need to make more use of the rich local factors. If a place has good natural environmental resources, developing industries means leveraging the ecological advantages, which is a principle that innovation must follow.
What are the benefits of innovation in this way? If technological and industrial innovation is a comparative advantage in line with local factor endowments, then the products and services produced will have the lowest cost, maximum competitiveness in the market, and the economy will develop faster. When the economy develops rapidly, the government's fiscal revenue will increase. Moreover, if the industry and technology developed by the enterprise are in line with comparative advantages, the enterprise provides products and services at the lowest production cost, and has self-sufficiency in market competition, there is no need for government protection subsidies. In this situation, when the government has more money, there is no need to protect and subsidize enterprises. The government has more money to narrow regional disparities, urban-rural disparities, provide education and training, or fill gaps, which is called coordination.
Not only can coordination be achieved, but if we develop according to comparative advantages, achieve maximum competitiveness, achieve the fastest economic development, the highest financial growth, and continuously improve people's income levels, the demand for a better life will continue to increase. The government's policies need to meet the needs of the people. As people's demands for the environment, ecology, and green continue to increase, the government needs to promote environmental protection policies. Moreover, from the perspective of enterprises, if the industry they develop aligns with comparative advantages, they have competitiveness, and do not need government protection subsidies. As long as they operate well, they can make money. In this situation, enterprises will have greater enthusiasm to adopt a green approach to development. If comparative advantage is violated, production costs are higher than others, and without government protection and subsidies in market competition, one cannot survive, then what we call "mud bodhisattva crossing the river is difficult to protect oneself.". Enterprises usually don't care about the environment or green. When the government comes to inspect, the enterprise should make a gesture. After the government inspectors leave, they may be able to pollute or even pollute. But if the enterprise itself has competitiveness, it has the ability to pay to adopt the necessary means for green development. In this way, our development is certainly green. On the one hand, there is demand, on the other hand, there are regulations, and on the third hand, enterprises have the willingness.
What else can developing according to comparative advantages bring? Those with comparative advantages can produce more and meet the domestic market. Moreover, they have comparative advantages and their products are competitive internationally. They not only utilize the domestic market but also the international market. Of course, on the other hand, if there is no comparative advantage, our domestic production costs will be higher than buying from abroad, so of course we have to buy from abroad. So, based on comparative advantage development, it will inevitably make full use of both domestic and international markets and resources, and such development is certainly open development.
Developing according to comparative advantages can also achieve sharing and common prosperity. Why? According to our current development stage, the per capita GDP is around $12500, which is less than $13000. Developed countries, such as the United States, have already reached $70000, so for developed countries, their capital is relatively abundant, while our capital is relatively scarce. Another aspect is the relatively abundant labor force. So the industries we develop are relatively labor-intensive compared to developed countries, and the technology we use is relatively labor-intensive compared to developed countries. If the industries being developed and the technologies used are relatively labor-intensive, it will definitely create the most employment opportunities, allowing these groups who rely the most on labor for income to obtain employment and share the fruits of development.
This kind of development will make us competitive and the economy can develop the fastest. With rapid economic development, capital will accumulate quickly. Then, the structural changes in factor endowments gradually shifted from relatively abundant labor and relatively scarce capital in the early stages to relatively abundant capital and relatively scarce labor. In the process of changes in the factor endowment structure, a very important point is that when labor becomes relatively scarce, wages will increase very quickly, and the relative price of capital will decrease. That is to say, the labor assets of the group that relies on labor as a source of income are becoming increasingly valuable, while the assets of the group that relies on capital as the main source of income are becoming relatively less valuable. In this process, the growth rate is fast, the level of wealth continues to improve, and the income distribution gap is getting smaller, achieving common prosperity.
So in order to achieve high-quality development, in addition to some technologies that may be "stuck", if we want to buy them but don't sell them to us, we must certainly use a new national system to tackle the problem. In addition to this, the most important thing is that each region should carry out technological innovation and industrial upgrading according to comparative advantages. If we can do so, we can solve coordination problems, green development problems, openness problems, and sharing problems.
To achieve high-quality development based on comparative advantages, it is necessary to continuously deepen market reforms
How can the development that follows comparative advantage become a spontaneous choice for entrepreneurs? The key is to have two institutional arrangements: one must have an effective market, and the other must have a capable government.
Why is an efficient market very important? According to comparative advantage development, a place has a relatively large amount of labor, and the price of labor is relatively cheap, while capital is relatively expensive. When capital is relatively abundant and labor is relatively scarce, capital should be relatively cheap and labor should be relatively expensive. There must be a factor price signal that reflects the relative richness of factor endowment structures in various regions, and its relative prices must be adjusted with economic development. When capital is relatively scarce in this area and its prices are relatively high, it will guide entrepreneurs to enter industries that use less capital and more labor, and then produce in these industries using less capital and more labor technology. Conversely, this will also happen when capital becomes relatively abundant. Or a place with abundant natural resources will guide you to protect them and turn them into an ecologically beautiful place to attract tourists and meet the spiritual needs. There must be such relative prices to guide entrepreneurs in their industrial and technological choices.
But can such relative prices be calculated by computers? Artificial intelligence may not be able to calculate up to today, perhaps in the future, but not yet. The only possibility is to have a fully competitive market, relying on market competition to form such a price system, and allowing market competition to form such a price system, this market must be effective and sufficient. So the first one must be having an effective market.
But that alone is not enough, because both new technologies and industries belong to innovation. What are the characteristics of innovation? Innovation carries great risks and a high probability of failure. The first to fail bears all the costs of failure, letting followers know that the industry and technology are not suitable and avoiding the same failure. On the other hand, success is also possible. If successful, it will earn more money. Other entrepreneurs will follow suit and compete, and the first and second movers will gain the same profits in the competitive market.
Then you will find that there is an asymmetry between the cost of failure and the benefits of success for the pioneers. So, what is the best way for a good entrepreneur to do this? Wait until someone tries successfully before you follow, but if everyone waits, there will be no innovation. So, the government must provide an incentive for innovators, and patents in developed countries represent this meaning. In developing countries, we can introduce digestion, absorption, and innovation. While patents may not necessarily provide incentives for pioneers, they must also compensate innovators, which must be done by the government. And to enter new industries, it is not just about using one technology and one equipment, but also about having new skilled workers with higher human capital who can apply these technology and equipment. If entrepreneurs rely on their own training, and they succeed, others follow suit and use slightly higher salaries to attract your trained workers away, then the pioneers are unwilling to train workers. So in this situation, the government must provide education in this area according to the direction of industrial and technological development. Moreover, the risks of new industrial technologies are increasing, and the demand for capital is also increasing. It is necessary to have corresponding financial markets to provide the necessary capital to diversify risks. Of course, roads and ports need to be improved. So there must also be a capable government.
Therefore, if innovation is based on comparative advantages to achieve high-quality development, it is necessary to continuously deepen market reforms and enable the market to play a decisive role in resource allocation. But at the same time, there should also be a capable government to better integrate the market and the government. If all regions can do so, then they can fully, accurately, and comprehensively implement the goals of innovation, coordination, green, openness, and sharing mentioned in the new development concept, and build a modern socialist country with high-quality development.
