Defector to China turns development lending on its head – with a little Ethiopian and Rwandan inspiration

Meles travelled to China and today Dongguan-based Huajian Shoes has built a factory near Addis Ababa that employs about 3,500 workers.

WITHIN a week of becoming World Bank chief economist in 2008, Justin Lin Yifu rebelled against the “Washington Consensus” view that interventionist industrial policies don’t work. He packed his bags for Ethiopia and Rwanda to urge their governments to promote manufacturing.

“The global development community all wanted to help economies like these,” Lin, 62, said in an interview in Beijing, where he is now director of the China Center for Economic Research at Peking University. “But they did not deliver results. People did not have the right ideas.”

He believes the quickest way to ignite growth is government support for industries with a comparative advantage, a departure from development banks’ traditional reliance on free-market principles.

It isn’t the first time Lin’s been a maverick: In 1979, the Taiwan military officer defected to communist China by swimming a 3-kilometer (1.9 miles) tidal strait from Kinmen Island to a Chinese island nearby because he wanted to help shape that country’s economic transformation.

Lin was the first person from an emerging market to become chief economist at the World Bank, a post he held until 2012.

Justin Lin Yifu: Changed terms of development financing debate and took them to a new level. (Photo/AFP)

His advocacy for infrastructure investment and success at helping jump-start expansion through manufacturing in nations such as Ethiopia is catching on, with China starting new development banks and his former employer lending money last year for industrial parks in the African nation.

Debate shift

Lin’s work at the World Bank “was a real marker that there was a role for government to promote structural transformation, promote innovation, industrial policies,” said Joseph Stiglitz, the Nobel Laureate who had the same job as Lin from 1997 until 2000. “The terms of the debate have changed. He took it to a new level.”

He outlined his approach in a 2012 paper, “New Structural Economics: A Framework for Rethinking Development and Policy.‘‘ It says governments in emerging markets can encourage the rise of light manufacturing by using their limited resources to create industrial areas with business-friendly environments, as China did with its special economic zones in the 1980s.

While at the World Bank, Lin also advocated a global infrastructure-building campaign for emerging markets to help them cope with the worldwide financial crisis. That idea is now being promoted by China with three new lending institutions backed by the nation: a $50 billion development bank with fellow BRICS nations, a $40 billion fund to deepen economic ties along the historic Silk Road trade route, and the $100 billion Asian Infrastructure Investment Bank.

Infrastructure plans

Lin, who advises the Chinese government, says he’s ‘‘delighted’’ to see the founding of the new lenders. China’s leaders were familiar with his pro-infrastructure proposal, and Lin says they’re taking ‘‘a step in this direction.’’

‘‘He’s very influential among the top leaders’’ and advises both President Xi Jinping and Premier Li Keqiang, says Huang Yiping, who works with Lin at Peking University and has known him since 1987. ‘‘His views are favourably received by some of these top leaders.’’

The counter to Lin’s thesis is that governments are poor allocators of capital, a task that should be left to markets.

‘‘Providing infrastructural and institutional support in picking winners is surely more or less indistinguishable from creating them,’’ wrote Ben Fine and Elisa Van Waeyenberge at the School of Oriental and African Studies in London in a 2013 paper called ‘‘A Paradigm Shift that Never Will Be?: Justin Lin’s New Structural Economics.”

China rising

The AIIB’s formation demonstrated China’s rising weight in the global economy. After the U.S. failed to prevent allies from joining, 57 nations from Australia to Vietnam were accepted as founding members. Underscoring the potential for a more hands-on approach, Finance Minister Lou Jiwei said last month China isn’t planning to copy existing institutions.

The AIIB will be “mainly led by developing countries, and we must consider their appeals,” Lou said in a panel discussion with Takehiko Nakao, head of the Japan-and U.S.-led Asian Development Bank. Japan has so far declined to join the AIIB, citing concerns over governance.

Lin witnessed first-hand the impact of rapid development. Born in 1952 into a poor family of six children in northeast Taiwan’s Yilan county, Lin grew up as the economy surged. With manufacturing exports fuelling growth, the island became known as one of the East Asian tigers.

Lin began studying at Taiwan National University before transferring to the military academy and then joining the army. As a 26-year-old officer stationed on the island of Kinmen, close to mainland China, he defected to the People’s Republic in 1979, leaving his pregnant wife and three-year-old son.

Difficult swim

“It was extremely difficult to swim across a narrow channel between two islands due to strong currents,” said Lin. “I studied carefully the movement of currents before I swam.”

Upon reaching mainland China, he was arrested and interrogated before convincing authorities that he left Taiwan “for the simple purpose of contributing myself as a Chinese to China’s renaissance,” Lin said.

Deng Xiaoping was then consolidating power after the upheaval of Mao Zedong’s death. On Jan. 1, 1979, the U.S. had formally recognised China, and Deng spent the year promoting China’s export potential internationally while pushing pro- market policies at home.

Lin was released after three months and admitted into the graduate programme in Marxist economics at Peking University, supporting himself with a student stipend. He earned a master’s degree in 1982.

University scholarship

Nobel Laureate Theodore Schultz recommended him for a scholarship at the University of Chicago after Lin served as his interpreter on a trip to China.

His family wasn’t punished as a result of his defection because “I was reported missing,” Lin said. He was reunited with them in the U.S., where he spent four years completing his Ph.D. and a year of research at Yale University. In Taiwan, an arrest warrant for treason was later issued.

He returned to a booming China in 1987 as the first person with a doctorate in social sciences from the U.S. after the Cultural Revolution, Lin said.

Back in Beijing he joined one of the nation’s most prestigious government think tanks and in 1994 became a founding director of the China Center for Economic Research. It was from here that then-World Bank President Robert Zoellick recruited Lin as chief economist in 2008.

Prosperity quest

Lin viewed the role as an opportunity to “shape the global conversation on growth and poverty-reduction strategies,” he wrote in his 2012 book, “The Quest for Prosperity: How Developing Economies Can Take Off.”

Almost immediately after starting his new job, he travelled to Ethiopia and Rwanda because he saw a chance for African nations to attract manufacturers from China, where he estimated rising costs would shift 80 million jobs overseas.

In 2009, he called for a rethinking of global development policy, and the following year commissioned a World Bank study entitled “Light Manufacturing in Africa.”

He went to Ethiopia again in 2011 and urged then-prime minister Meles Zenawi to travel personally to China and promote his country to manufacturers there. Colleagues at the World Bank didn’t think the trip would attract investment, Lin said, adding they reeled off impediments including high customs duties on imports that had deterred foreign companies.

Meles did visit Guangdong province in southern China in 2011. The trip led to Dongguan-based Huajian Shoes building a factory near Ethiopia’s capital Addis Ababa that employs about 3,500 workers.

Cheap labour

Capitalising on factory wages that are about 10% of those in China, Huajian has used the plant to supply brands including Guess, Marc Fisher and Hennes & Mauritz, Europe’s second-biggest clothing retailer. Workers chant slogans in broken Chinese as they march on the spot in morning workouts and supervisors monitor quotas on whiteboards, giving cash rewards to winning teams and criticism to those that fall short.

Lin’s success in promoting Ethiopia helped prompt the World Bank to step up support last year, when it extended a $250 million loan for the development of industrial parks for light- manufacturing industries.

Such a loan “was unthinkable 10 years ago,” said Celestin Monga, who worked with Lin at the World Bank and now is a managing director at the United Nations Industrial Development Organisation (UNIDO) in Vienna, Austria.

Lin resumed his post at Peking University after returning to China in 2012 and now devotes about 40% of his time trying to catalyse manufacturing in Ethiopia, Senegal and Rwanda. One recent success is a memorandum of understanding C&H Garments signed with officials in Kigali, Rwanda’s capital, to make clothes there.

“Lin has been the intellectual force and leader behind the recent shift in the development debate,” said Cairo-based Hippolyte Fofack, chief economist at the African Export-Import Bank. “As a result of his contribution, the development landscape may be entering a new era.”

—With assistance from Michael Heath in Sydney.

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