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Justin Yifu Lin on "profound changes unseen in a century"
China's leading economist and former World Bank Chief Economist says when China's economy is twice as large as America's, bilateral ties may enter a new, more friendly paradigm.
Profound changes unseen in a century, or 百年未有之大变局, is the Chinese government’s programmatic assessment of a changing world order. What does this term, adopted by the central leadership and repeatedly invoked by Chinese officials and scholars everywhere, mean? Justin Yifu Lin recently offered his explanation in a speech at a book reading event on August 26, 2023, hosted by the State Organs Work Committee, with the audience being mid-level cadres in the central-level Communist Party of China and Chinese Government organs.
Justin Yifu LIN is Dean of Institute of New Structural Economics, Dean of Institute of South-South Cooperation and Development and Professor and Honorary Dean of National School of Development at Peking University. He was the Senior Vice President and Chief Economist of the World Bank, 2008-2012. Prior to this, Mr. Lin served for 15 years as Founding Director and Professor of the China Centre for Economic Research (CCER) at Peking University. He is Councillor of the State Council and a member of the Standing Committee, Chinese People’s Political Consultation Conference.
Below is the first part of Lin’s speech, dedicated to “Profound changes unseen in a century.” Other parts of his speech, including on the 中国式现代化 Chinese path to modernization, will be shared later. The speech was published in the 新经济学家 New Economist WeChat blog.
I am honored to have the opportunity to share my thoughts on the Report to the 20th National Congress of the Communist Party of China at this book reading event hosted by the State Organs Work Committee. I believe this is a topic that everyone is studying and cares about. In the report, it was emphasized that the world is currently experiencing profound changes unseen in a century that is accelerating, and external pressures could escalate at any time. Therefore, we must enhance our awareness of potential risks and be prepared to withstand significant tests, even in the face of severe challenges.
The report also highlights that the comprehensive promotion of the great rejuvenation of the Chinese nation with the Chinese path to modernization is the central task for the entire Party starting from now. I believe this is also the central task for all of you working in the central and state organs. The report further stresses that high-quality development is the primary task in building China into a modern socialist country in all respects. I believe this is also the primary task for all of you in your work.
In this morning's report, I would like to discuss why we are witnessing a profound transformation, unseen in a century, from the perspective of the theoretical framework of new structural economics. This framework, which I have championed over the years, is guided by Marxism and uses modern economic methods to summarize China's developmental experience. Why is this transformation happening now and why is it accelerating? How can we manage and steer this change? Additionally, I will address what constitutes Chinese modernization. How can we fulfill the central tasks of Chinese modernization, and what does high-quality development really mean? How can we achieve such high-quality development? Finally, I wish to analyze the prospects for China's future development and discuss how we can accomplish the tasks set out in the report of the 20th National Congress.
The concept of "profound changes unseen in a century" was introduced by the General Secretary of the Chinese Communist Party (CCP) Central Committee and President of China Xi Jinping during the Central Foreign Affairs Work Conference in June 2018. Different scholars may have various interpretations of this concept.
I am an economist, and I understand that the economy forms the bedrock of our society. With this in mind, I'd like to begin by examining shifts in the economic landscape to explain the profound changes we're observing today. Reflecting on the past century, it's important to consider the multitude of transformations that have unfolded over this one-hundred-year period.
A century ago, in the early 20th century, around 1900, a significant event took place when the Eight-Nation Alliance launched an attack on Beijing. The Eight-Nation Alliance consisted of the following eight countries: Britain, the United States, France, Germany, Italy, Russia, Japan, and the Austro-Hungarian Empire.
At that time, the eight countries were the great powers of the world. Why were they considered great powers? On one hand, they had strong military capabilities; on the other, they were the most developed nations globally. According to purchasing power parity, the combined economies of these eight countries accounted for 50.4% of the world's total economic output. In other words, the economic scale of these eight nations made up half of the world's economy. It was this significant economic size and advanced development that supported their defense and military industries, allowing them to become the great powers of the world.
Given their status as world powers, when conflicts arose with other nations, they often resorted to using military force to address them. Consequently, these powers formed an alliance and initiated a coordinated assault on Beijing.
In the year 2000, there was another Group of Eight (G8), consisting of the United States, Britain, Germany, France, Italy, Russia, and Japan. Only one country changed compared to the Eight-Nation Alliance; Canada replaced the Austro-Hungarian Empire. The reason for this change was the dissolution of the Austro-Hungarian Empire after World War I, leading to the emergence of Austria, Hungary, and other Eastern European countries.
So, due to the collapse of the state and the reduction of their economies, they fell from the ranks of the world's great powers, and Canada stepped in to take their place. Why did these eight countries form the G8? It was because the combined economic output of these eight countries, calculated based on purchasing power parity, accounted for 47% of the world’s total, which is still close to 50%, although it represented a decline of 3.4 percentage points from 50.4%. Since the economy is the foundation, we can observe that throughout the entire 20th century, whether the world was at peace or in chaos was largely determined by the relations among these eight countries.
We know how World War I broke out: within the coalition of the Eight-Nation Alliance, Germany, and the Austro-Hungarian Empire formed the Central Powers, while the other countries made up the Allied Powers. Due to conflicts over political and economic interests, a global war ensued. Similarly, how did World War II begin? Within the G8, Germany, Italy, and Japan came together to form the Axis Powers. The other countries, including the United States, the United Kingdom, France, and others, were part of the Allies. Again, due to clashes over economic, political, and geographical interests, World War II erupted.
So, over the course of the entire 20th century, major wars in the world were primarily driven by conflicts among these eight countries. If any other issues arose globally, the procedure was for the leaders of these eight nations to convene and decide how to address them, and in practice, other countries largely followed the resolutions of the G8.
By the time we reached 2018, why did the General Secretary mention the profound changes unseen in a century? From an economic perspective, it was quite clear that in 2018, the collective economic output of the G8 had decreased from 47% in 2000 to 34.7%, just slightly over a third. What did this decline in economic status lead to? As I mentioned earlier, throughout the entire 20th century, the world's stability or turmoil was largely dependent on the relations among these eight countries. Whenever conflicts or disputes arise in the world, the leaders of these eight nations would convene to decide on the response.
However, with their waning economic influence, the decision-making authority of these eight nations in global affairs has lessened. The most evident indicator of this shift was the onset of the Global Financial Crisis (GFC) in 2008. In the past, the G8 leaders typically spearheaded the formulation of solutions during various global economic and financial crises. Yet, in the face of the 2008 crisis, the G8, being led by the United States, found their hands were tied. Consequently, in late 2008, President George W. Bush convened a G20 summit in Washington to deliberate on the strategies to combat the GFC.
In fact, since the end of 2008, the primary institution for global governance has transitioned from the G8 to the G20 summit. But what accounted for the relative stability of the global economic and political landscape throughout the 20th century? It was largely influenced by the eight countries of the G8. Considering their economic output, in 1900, these nations constituted 50.4% of the global economy. By the year 2000, their share remained substantial at 47%, which is still remarkably close to half of the world's economic output.
So why, in just over a decade into the 21st century, did their economic scale drop from 47% to 34.7% in 2018? In the previous 100 years, it had only declined by 3.4 percentage points, but in the last 18 years, it had dropped by 12.3 percentage points.
Upon closer examination, it was China's rapid economic development that led to this change in the world's economic landscape. In 2000, China's share of the global economy was 6.9%. By the time the General Secretary mentioned the profound changes unseen in a century, in 2018, China's share had risen to 16.8%. If you compare the increase from 6.9% to 16.8%, it's a rise of 9.9 percentage points. Of the 12.3 percentage points decrease in the G8's economic share, 80% of it was due to China's economic growth.
As China's economic proportion in the world has increased, so too has our standard of living and our international influence. I once served as the Chief Economist and Senior Vice President at the World Bank, a role that is considered one of the highest positions for economists globally. I was the ninth person to hold this position, and my eight predecessors were essentially master-class economists, often serving as professors at prestigious universities in the United States and Europe. These economists not only had significant academic stature but also held high political offices, including central bank governorships, chairmanships of the US President's Economic Advisory Council, and even US Treasury Secretaries.
So why was I the first economist from China and a developing country to hold this prestigious position? It was primarily due to China's rapid economic development, which had increased our global influence. The World Bank's main mission is to assist developing countries in reducing poverty, and China's rapid development had a significant impact, contributing to over 70% of global poverty reduction.
In this context, I had the opportunity to become the Chief Economist of the World Bank, a position considered the highest for economists worldwide. This reflects China's growing influence in the world. During this process, the country that felt the greatest sense of loss was, understandably, the United States. Around 1875, the United States, when measured by purchasing power parity, exceeded the economic size of the United Kingdom, becoming the world's largest economy.
With the growth of the US economy, its global influence likewise increased. As previously mentioned, World War I was triggered by the alliance of Germany and the Austro-Hungarian Empire, which formed the Central Powers, opposing the Allied Powers, which included several other countries. The main battlegrounds of World War I were in Europe. The Central Powers, led by Germany and Austria-Hungary, advanced across many parts of the European continent and occupied areas within countries like France.
In such a situation, the United States initially remained neutral. It only entered the war when it saw that the Central Powers, led by Germany and Austria-Hungary, had effectively conquered the European mainland, leaving only the British Isles. The United States entered the war to prevent the possible conquest of the British Isles.
After the United States joined the war, leveraging its status as the world's largest economy, it was able to sustain a steady flow of resources. Given that wars greatly deplete resources, Germany and the Austro-Hungarian Empire, with their smaller economic scales, faced significant challenges. The loss of a single artillery piece, a tank, or a naval ship meant that their capacity to replenish these assets was markedly slower.
The United States, with its large economic scale, could replace losses more efficiently. Thus, on the battlefield, the United States could continuously supply weapons and equipment, relying on its steel industry to eventually defeat Germany. The same pattern occurred in World War II. Germany, Italy, and Japan, as part of the Axis Powers, initially swept through Europe. However, once the United States entered the war, the tide turned. Following the pivotal landing in Normandy, American forces drove the German retreat all the way back to Berlin. This culminated in Hitler's suicide and Germany's subsequent surrender.
The situation was essentially the same on the Far Eastern front. At the beginning of hostilities in the Far East, Japan, as part of the Axis Powers, arrogantly planned to conquer China within three months. However, they underestimated China's resistance capabilities, and their audacious goal was not achieved.
But we cannot deny that Japan occupied a significant portion of China's territory, and at the same time, Japan not only took over significant Chinese territory but also expanded into the South Pacific. In order to control the Pacific, Japan sent its navy to launch a surprise attack on Pearl Harbor. During the attack on Pearl Harbor, half of the military power of the US naval fleet in the Pacific was destroyed, resulting in a tremendous loss.
For some time, Japan controlled the entire Pearl Harbor. So why did Japan eventually get defeated? While it's true that the United States lost a significant portion of its warships at Pearl Harbor, the United States had a large economy with strong production capabilities. Their ability to replace ships and equipment was rapid.
They continuously supplied ships, airplanes, and artillery, while Japan, with its smaller economy, had more difficulties in replenishing its warships. Generally, the turning point of the Pacific War is said to be the Battle of Midway. If we look at the naval battle itself, Japan and the US were evenly matched because both sides lost a similar number of aircraft carriers, making it hard to determine a victor.
But why is it said that the Battle of Midway was a turning point in the Pacific War? From a battlefield perspective, Japan's ability to replenish its forces was slower compared to the United States. The US continuously committed naval vessels, aircraft, and artillery to the conflict. As a result, Japan was gradually pushed back from the Pacific until the United States dropped two atomic bombs, leading to Japan's surrender.
So, from these historical events, we can see that the United States was the largest and most powerful economy from the mid-1870s onwards and throughout the entire 20th century. It was also the dominant global power.
However, in 2014, when measured using purchasing power parity, China's economy surpassed that of the United States, becoming the world's largest economy. This was a situation that the United States had not encountered in over a century. As I mentioned earlier, as China's economy expanded, its influence in the world grew, while the influence of the United States relatively declined. In this context, the United States still maintained advantages in military power, technology, finance, and ideological influence.
Everyone can see that China's influence is growing, and the United States wants to use its current advantages in various aspects - military, technology, finance, and ideological influence - to contain China's development. We know that by purchasing power parity, China is the world's largest economy, while the United States is the second largest. By market exchange rates, the United States is the largest economy, and China is the second largest. The competition between these two giants is often discussed in the media and on the international stage. When two elephants fight, the grass underfoot gets trampled, causing many adverse effects on global stability and other countries.
The United States' intention to contain China's development can be said to have started when China's economy surpassed that of the United States. This was marked by Obama's proposal of the "Pivot to the Asia-Pacific." What does "Pivot to the Asia-Pacific" mean? Essentially, after World War II, the United States had military forces stationed around the world. The pivot he referred to entailed relocating strategic assets such as the Sixth Fleet from the Mediterranean, along with aircraft carriers and aircraft, to the Pacific to bolster the Japanese naval fleet there. The goal was to use military force to restrain China.
After President Donald Trump came to power, he initiated trade and science and technology wars against China for specious reasons, including placing Huawei and other Chinese high-tech companies on the US trade-restriction Entity List, aiming to decouple the United States from these Chinese enterprises. When Biden assumed office, he not only continued to support Obama's "Pivot to the Asia-Pacific" but also pursued Trump's trade and technology controls, arguably with increased intensity.
President Biden proposed creating a coalition of democracies united by their shared ideology, which, once again, aims at countering China's sustained stability and growth. As China's economy grows at a faster rate than that of the United States and its global economic influence increases, the U.S. faces a relative decline in power. To preserve its global leadership, the United States is prepared to use a range of strategies to limit China's development.
The containment of China's growth is now a shared stance between the Republicans and Democrats, becoming what is essentially considered "political correctness" in the American context. For example, some scholars in the United States, despite being objective and rational, risk facing backlash from some media and online communities for expressing their views publicly.
Jeffrey Sachs, formerly of Harvard and currently at Columbia University, is recognized for his impartiality and objectivity. Yet, when he posted his candid opinions on social media, he was met with such severe online harassment and criticism that he closed his account. In the current climate in the United States, openly expressing unbiased views has become a rarity. This reluctance, as previously discussed, underscores the deep-seated rivalry between the two global powerhouses, which has the potential to create significant global instability.
Because China's development is our right and we want to continue growing, the sense of loss in the United States will become stronger, leading to an increasing array of tactics to hinder China's growth. We must be mentally prepared for such external pressures, as they will likely accompany us in the coming years. This situation is detrimental not only to China but also to any other country. The question of when this can be alleviated, or when a new stable global order can emerge, is something we need to consider and study.
There's a Chinese saying, "Those who caused the problem should solve it." The emergence of this global transformation is a result of changes in the world's economic structure, with China's rapid development being a primary driver. Transitioning the world into a new paradigm also requires China's continued rapid growth. Regarding when this should happen, I believe it should begin once China's per capita GDP reaches half of the United States'. For instance, at present, China's per capita GDP, when measured by purchasing power parity, is less than 30% of the United States'. If calculated at market exchange rates, it's even lower, at around one-sixth to one-seventh of the United States'. When China's per capita GDP, measured by purchasing power parity, reaches half that of the United States, I believe the United States will be more accepting of China as the world's largest and most influential economy.
Why is that? China has a population of 1.4 billion, while the US currently has 330 million. China's population is over four times that of the US Moreover, our population is aging, and our population growth won't be rapid. The same is true for the United States. This fundamental structure is not likely to change in the next 20 to 30 years. If China's per capita GDP reaches half of the US, and China has a population four times that of the US, China's total economic size will be double that of the United States. With China having a bigger influence, this is a reality the US cannot change. The resources and forces China can mobilize will be twice as much as what the US can.
Regional disparities in China result in varying levels of development across the country. The most developed areas comprise three major cities—Beijing, Tianjin, and Shanghai—as well as five eastern provinces: Shandong, Jiangsu, Zhejiang, Fujian, and Guangdong. These regions are notably more advanced compared to others within China.
When China's per capita GDP reaches half of the US, I believe that the per capita GDP of these three cities and five provinces can match that of the United States. These areas currently have a population of just over 400 million, while the US population is 330 million and gradually increasing.
In summary, these two economies have similar per capita GDP levels, with China having a slightly larger population. The overall size of these two economies is roughly comparable. However, what's more crucial isn't just the relative size of the economies but the per capita GDP levels. What does per capita GDP signify? It represents the average labor productivity, which in turn reflects the average level of industries and technology. So, in our more developed regions, their technological and industrial levels are on par with the United States. Why is it that the United States can exert pressure on us? It's because the United States possesses stronger technological capabilities and a higher level of advanced industries. Therefore, in this situation, they can use technology to exert pressure on China. If China's economy is twice the size of the United States', its material resources and military capacity are also twice as large, and its support for military forces is twice as strong, the United States has no more technological or military superiority over China.
The third point is pivotal. By that juncture, the United States would not only forfeit any advantage but would also see its development and job stability become increasingly reliant on China. Consider the high-tech US firms within the Fortune 500 that are instrumental to America's economic progress. Their expansion hinges on the innovation and market presence of these leading corporations. Their inclusion in the Fortune 500 stems from their technological edge. Yet, such technological prowess is not serendipitous; it demands substantial investment in research and development. And once developed, the profitability of these technologies is tied to the breadth of market share they can secure.
By that time, China is projected to be the world's largest market, a status it currently holds in terms of purchasing power parity. It is anticipated that the Chinese market will be double the size of the United States'. The high-tech companies central to US development stand to become highly profitable if they can tap into the Chinese market. Conversely, should they be barred from it, their profitability could suffer a considerable setback.
Also, it's not just about profitability. High-tech companies need substantial research and development investments to maintain their technological edge. The level of research and development depends on how high the profit margins are.
If profits are higher, the research and development capabilities are stronger, and they can maintain their technological leadership. If their profit margins are lower, so are their research and development capabilities, and they could be replaced by others as leaders in the global economy.
Without access to the Chinese market, these enterprises would likely face the risk of dropping out of the Fortune 500 list. So, for the leading companies in the United States, having access to the Chinese market is a matter of life and death. Additionally, ordinary people wouldn't do well without trade with China. Trade is a mutually beneficial and win-win situation, and in general, smaller economies tend to benefit more from trade than larger ones.
If the US economy is half the size of China's by then, it means that the benefits the United States receives from trading with China will be greater than what China gets. Therefore, whether for the advanced companies driving US development or for everyday production and consumption activities, the United States wouldn't do well without China. I believe that the United States doesn't have the power to change this dynamic, and it needs China. At that point, I think US-China relations will transition from the current state of friction to one of necessity, and their relationship may enter a new, more friendly paradigm.
As the two largest and most powerful economies in the world, and significantly larger than the third and fourth largest economies, such as Japan, whose economy is currently only about one-third the size of ours, this gap will grow even wider in the future. In this situation, if China and the United States can coexist peacefully, they can provide a secure environment for global stability. The world may then enter a new era of peace and stability.
Therefore, the "profound changes unseen in a century" we refer to are driven by China's swift progress, ushering the world into a new era of stability. Likewise, navigating these unprecedented shifts necessitates our own advancement. To tackle the challenges posed by this rapid transformation, a steady course of development within China is essential. This is the first point I want to emphasize.
Other parts of Lin’s August 26 speech, including on the 中国式现代化 Chinese path to modernization, will be shared later.