After World War II, developing countries have a strong desire to achieve rapid development and catch up with developed countries, which is very noble. However, the leaders of these countries failed to realize that the high proportion of capital-intensive industries (including human capital and material capital) in developed countries and the fact that developing countries are dominated by resource-based and labor-intensive industries are endogenous to the national factor endowment structure, and the difference in industrial structure is not the fundamental reason for the backwardness of developing countries. Therefore, these countries often pursue the development of capital and technology-intensive industries under the condition of low factor endowment structure. In this way, enterprises have no viability in the competitive market and can only rely on government protection subsidies for development.

Under the catch-up strategy (CAD) which is contrary to the comparative advantage, although developing countries can establish a relatively complete industrial system relatively quickly, it will have the following negative effects: First, economies that pursue the catch-up strategy will often become inward-oriented economies: on the one hand, industries that give priority to development have no comparative advantage and should be imported, but they develop on their own, so their imports will decline; On the other hand, domestic resources are limited. If these limited resources are used to develop industries that give priority to development, those industries that have comparative advantages and can export will get less resources, and their exports will decline. On the contrary, if we develop according to comparative advantage, the imports of industries without comparative advantage will increase, while industries with comparative advantage will get more resources, thus increasing exports. Therefore, the country's extroversion will be higher than when the catch-up strategy is implemented. There is a view that countries with higher extroversion have better development performance, but this view only sees superficial phenomena, and the essential reason for this phenomenon is that countries with higher extroversion often develop according to comparative advantages. Therefore, the best extroversion also depends on a country's factor endowment, not the higher the better.

Second, it may be difficult for countries pursuing the catch-up strategy to make good use of their late-comer advantages. (1) When pursuing the catch-up strategy, it is necessary to introduce the most advanced technologies, which may be mastered by developed countries, so developing countries may not be able to obtain them, and even if they can obtain them, they will pay a high price, so their technology introduction is facing difficulties. Even though developing countries can acquire technology and establish advanced industries through R&D, the established industries violate their comparative advantages and are inefficient, making it almost impossible to create surplus. At the same time, the technology of developed countries is still improving. If developing countries want to maintain the catch-up strategy, they must continue to invest capital and realize technological progress through research and development or introduction of machinery and equipment, which is difficult to achieve in the case of small economic surplus. Therefore, countries that pursue catch-up usually become rigid after establishing an advanced enterprise. (2) On the contrary, if a country develops according to its comparative advantage, it will first enter more mature labor-intensive industries. Most of the technologies in these industries have passed the patent protection period, and even if they are still in the protection period, they are relatively primary technologies and are relatively easy to introduce. After the introduction of technology, because the related industries are in line with the comparative advantages, the products can occupy a large share in the domestic and foreign markets, create a large amount of surplus, and realize the rapid accumulation of funds and industrial upgrading. At the same time, the material capital in the economy is accumulated because of the surplus, the human capital is also improved because of experience and "learning by doing", and the preparation of material capital and human capital is improved, so the industry can be upgraded. However, in the next stage of development, mature and easy-to-introduce technologies should still be introduced. In this way, developing countries can make better use of their late-comer advantages, make their own technological changes much faster than those of developed countries that rely entirely on their own inventions, and then obtain higher economic growth rates.

It should be pointed out that countries that implement the catch-up strategy may experience a period of rapid economic development at the beginning, but this is mostly investment-driven economic growth. After that, because the established priority industries do not conform to the comparative advantage, they can't create surplus, while the industries with comparative advantage can't create surplus because they can't get funds, and there are very few funds available for investment, which leads to the slowdown or even stagnation of economic growth. At this time, if funds can be borrowed from abroad, the investment-led economic growth may be maintained for some time. However, if the invested industry still does not meet the comparative advantage and cannot create surplus after the establishment, the economic growth rate will eventually slow down and even a financial crisis will occur. If we develop according to comparative advantages, we can realize rapid technological upgrading and surplus accumulation, constantly improve the industrial level and realize dynamic economic growth.

Third, whether a country develops according to its comparative advantage will also have different effects on income distribution. (1) If the comparative advantage is violated in the development, most people who can invest in capital-intensive industries are rich or have special relations with the government and can get loans from banks. The industries they invest in are not viable and need government protection and subsidies, and subsidies come from poor people who cannot invest in these industries. In this way, the poor subsidize the rich, which will naturally widen the income gap. At the same time, due to the shortage of jobs created by the catch-up strategy, a large number of laborers cannot be employed in the formal sector, and unemployment will occur, and polarization of income distribution is inevitable. A popular "interest group theory" holds that those who invest in priority industries and get protection and subsidies are rich and powerful people, and this protection and subsidy is precisely the institutional distortion formed by the interests of interest groups. I object to this view. Of course, the policy distortion in developing countries seems to be protecting and subsidizing interest groups, but the widespread existence of a large number of state-owned enterprises in countries pursuing catch-up is not conducive to interest groups, and the "interest group theory" cannot give a logical and consistent explanation for this. Therefore, the more consistent reason behind the policy distortion is the catch-up strategy. (2) On the contrary, if a country develops according to its comparative advantage, its income distribution may gradually improve. In this case, industries with comparative advantages can create a large number of jobs, rural labor can enter modern industrial sectors in large numbers and share the fruits of industrial growth, and the economy can easily achieve full employment. At the same time, because the established industries are in line with comparative advantages, the products are competitive in domestic and foreign markets, which can realize rapid profit accumulation and capital accumulation and continuously improve the factor endowment. In this process, the richness of capital relative to labor gradually increases, the return on capital gradually decreases, and wages continue to rise. Because the income of the rich mainly comes from capital gains, while the income of the poor mainly comes from labor income, the income distribution will naturally improve gradually. This is also the main reason why the East Asian economy can achieve "fair growth" in its development.

As mentioned above, after World War II, according to the catch-up strategy at that time, people generally thought that the market was out of order and needed a lot of government intervention to protect and subsidize the development of advanced industries. After twenty or thirty years of practice, this policy has generally failed. At that time, the economic development of most socialist countries was more difficult. In the late 1970s and early 1980s, the academic circles, international development institutions and most developing China countries produced the "theory of capitalist victory", arguing that the failure of socialist countries proved the success of the capitalist market economic system. Under the influence of this social trend of thought, international development institutions, including the World Bank and the International Monetary Fund, and governments of developing countries generally began to advocate economic reform and transformation. At that time, it was generally believed that developing countries should implement a market system. This goal is right, but some judgments on the problem may be wrong. "Washington Knowledge" has ten policy suggestions, the basic goal of which is to quit the government and establish a perfect market system, so that the market can allocate resources and competition can determine incentives. The "shock therapy" promoted in the reform of eastern Europe in the Soviet Union is the knowledge version of Washington. Washington believes that the three important contents of shock therapy must be carried out simultaneously in a transitional country, and only in this way can the rapid economic development of the transitional country be brought about. These three contents are: (1) price liberalization, which determines the price by market supply and demand, thus effectively guiding the allocation of social resources; (2) Rapid privatization, only when the property rights are private, the business owners can actively respond to the price signal; (3) The government maintains fiscal balance and macro-stability, avoids hyperinflation, and allows price signals to play a role.

Theoretically, shock therapy is very rigorous, which is consistent with the basic institutional arrangements that an effective market system should have in mainstream economics. At the beginning of the reform in the early 1990s, economists who were engaged in shock therapy promised that if the economy was transformed in this way, it might decline at first, but it would definitely achieve high-speed growth and "J curve" after six months or at most one year. But in fact, countries that implement shock therapy are actually facing an "L curve". In some countries, the economy has declined by more than 50%, and it has been stagnant for a long time until the end of the 1990s. In fact, not only socialist countries, but also most developing countries are facing the crisis under the old system, and they all borrow from the International Monetary Fund on the condition that they implement reforms in the way proposed by Washington. However, in more than 20 years, the economic development performance of these countries that carried out reforms according to Washington's knowledge was worse than before.

From the theoretical model, the logic of shock therapy is interlocking, and the most important reason for its failure is that economists who advocate shock therapy ignore a factor-the distortion existing in the original planned economy or developing countries is not random. Most of these distortions are "fruit", and its "cause" lies in the fact that the industries that give priority to development do not have comparative advantages. Therefore, in an open and competitive market, without protection and subsidies, enterprises in these industries cannot survive and lack viability. Therefore, the government must give them protection and subsidies. Exploring the institutional distortion of developing countries from the perspective of development strategy can better explain the failure of transformation than from the perspective of interest groups. According to the interest group theory, distortion is only the distribution of interests and the transfer of wealth among interest groups, so protected and subsidized enterprises should be able to survive in the competitive market, and shock therapy should be successful. From the development strategy, these enterprises can't survive in the highly competitive market, which is the crux of the failure of shock therapy.

It can be seen that a theory itself may be reasonable, but if it can't explain the reasons behind things, it can't stand the inference. Shock therapy ignores the endogenous nature of system distortion, so it fails to realize that the three contents of shock therapy cannot be realized at the same time. For example, there is no problem if only price liberalization or privatization is carried out alone; However, if the two are carried out at the same time, there will only be two results if the enterprise has no viability: or the whole society collapses, resulting in a large number of unemployment; Or the government provides subsidies for enterprises that are not viable. This is because enterprises that do not have viability often employ a large number of laborers, and the government subsidizes them not because they are state-owned, but because they do not have viability. After shock therapy, the original technology and industry have not changed. For the following two reasons, the government tries to avoid bankruptcy and gives them protection and subsidies: (1) These industries are very advanced and very important for the modernization of the country; (2) These enterprises employ a large number of laborers. Once they go bankrupt, they will inevitably lead to a large number of unemployment, which will lead to social instability. Therefore, the failure of Washington's consciousness lies not in the failure of the goal, but in its analysis of the problem only seeing the appearance, but not realizing the deep-seated reasons of the problem.

It is worth pointing out that in the case of privatization, the government needs to provide more protection and subsidies than in the case of nationalization. When an enterprise without viability is owned by the state, the factory director and manager will ask the government for protection and subsidies, but they cannot have subsidies; After the privatization of these enterprises, the factory directors and managers can take the surplus subsidies as their own. Therefore, in the case of privatization, business owners have higher enthusiasm and more reasons to ask the government for protection and subsidies. However, because the government funds are not owned by them, their enthusiasm for providing protection and subsidies for enterprises has not changed. In this way, protection and subsidies have increased, not decreased. In the early 1990s, most people didn't believe this, but a large number of empirical studies, including those of the World Bank and Eastern European countries, showed that large privatized enterprises received more protection subsidies than those without privatization. At the same time, the government's income has decreased after the reform, because in the case of nationalization, the surplus of state-owned enterprises belongs to the state and needs to be turned over, while in the case of privatization, the government can only collect taxes from enterprises to obtain income, and it is not easy to collect taxes. In this way, the government can only provide protection and subsidies to enterprises by printing a large number of banknotes, which leads to high inflation. For example, in 1993 and 1994, the inflation in Russia once exceeded 10000%, that is, the price rose more than 100 times in one year, which was the result of misunderstanding at that time. In contrast, Poland, the best performing country in Eastern Europe, has not fully implemented shock therapy, and state-owned enterprises have basically remained state-owned and prices have not been liberalized. Another country with a good performance is Slovenia, which has kept state-owned enterprises for a long time and started privatization only one or two years before joining the European Union.

The transformation of China and Viet Nam is relatively successful, which benefits from their gradual, dual-track transformation mode of "crossing the river by feeling the stones", rather than shock therapy. To sum up, this transformation model has the following characteristics: (1) It does not want to overthrow the socialist system, and there is no so-called capitalist victory theory. (2) In the early stage of transformation, micro-subjects are inefficient and lack enthusiasm, so we should improve their enthusiasm, let well-done enterprises get higher income, let well-done workers get higher income, and the city should practice profit retention; In rural areas, we should also break egalitarianism and implement the household contract responsibility system, so that farmers who do well can have higher incomes. (3) To reflect the difference between doing good deeds and doing bad deeds, we must give micro-subjects some autonomy to improve their enthusiasm, make their production close to the frontier of production possibilities and create new material. At the same time, the market track is allowed to appear outside the planned track, that is, the dual-track system is implemented: on the one hand, some market prices are allowed to exist while maintaining the planned price; On the other hand, collective enterprises, private enterprises and joint ventures are allowed to enter the previously restrained light industry sector (the investment comes from the surplus of state-owned enterprises and farmers, who will naturally pursue profits when investing surplus, so they will naturally invest in the light industry sector with product shortage and technology in line with comparative advantages). However, state-owned enterprises and farmers can only sell their products in the market after the government has completed the quota of unified purchase and marketing. In this case, the enthusiasm of micro-subjects is improved, and the resources controlled by micro-subjects can be invested in departments with comparative advantages, so the efficiency of resource allocation is gradually improved, and the proportion of planning tracks is gradually reduced. When most of a department's products are allocated by the market, the government can let go of the price and let it be completely allocated by the market.

The results of the gradual reform are reflected in the following two aspects: (1) enterprises without viability continue to be protected in the process of transformation and will not fail; (2) After the enthusiasm of micro-subjects is improved, more and more resources flow to sectors that are in line with comparative advantages, and the economy realizes dynamic development. This is why the transformation of China and Viet Nam is relatively successful. In addition to China and Viet Nam, some non-socialist countries, such as Chile and Mauritius, also carried out effective reforms after the 1970s. They used to have a planned department, and they also implemented a dual-track system during the transition, which greatly restricted the import of competitive departments. However, by setting up export processing zones to encourage exports, they achieved good results (Chile is the best performing country in Latin America and Mauritius is the best performing country in Africa). According to the governor of Chile's central bank, the success of Chile's transformation depends on trying (that is, "crossing the river by feeling the stones" as China said) to promote reform where there is an opportunity.

In six articles, I proved the whole theoretical framework with a rigorous mathematical model: the industrial structure is endogenously determined by the factor endowment structure; If the development goal in the institutional arrangement is contrary to the industrial structure, a series of distortions will inevitably occur at the same time; Under distorted circumstances, economic growth is slow, convergence cannot be achieved, and income distribution is unequal; Policy burden is the reason behind soft budget constraints. If the policy burden is not eliminated, the government needs to give more subsidies to enterprises that have no viability under privatization. Dual-track transformation is a relatively more effective way of transformation.

Let's discuss this theory from the perspective of empirical verification. I use TCI (Technology Choice Index) to measure the catch-up degree of a country. The basic feature of the mode of production that violates comparative advantage is that the ratio of actual capital and labor input in manufacturing industry is much higher than that in other departments. Based on this, we can construct two indicators to measure the mode of production according to the availability of data: (1) The first indicator is the ratio of the per capita capital intensity of the manufacturing sector to the national per capita capital intensity. The higher the catch-up degree of a country, the greater the per capita capital intensity of manufacturing industry, and the greater the value of this TCI index. (2) The second indicator is the ratio of the per capita output of the manufacturing sector to the national per capita output. The higher the catch-up, the fewer workers in the manufacturing industry and the higher the price, so the per capita output of the manufacturing industry is higher than that of the whole economy, and the greater the value of this TCI index.

The degree of government intervention in a country is reflected in the following aspects: (1) First, the situation of the black market. According to the data from 1960s to 1990s, the higher the catch-up, the higher the difference between the black market price and the official price. (2) Secondly, economic freedom. The higher the catch-up, the more procedures and the longer the time for the government to approve micro-subjects to enter an industry. The higher the degree of government intervention in the economy, the less free the economy is. (3) The higher the catch-up, the worse the economic development performance, which is the result of econometric analysis by using the panel data of more than 60 countries 1962 ~ 1999 and the above two TCI indicators. The results show that when two TCI indicators are used to explain the economic growth rate, the coefficient of TCI indicators is significantly negative, indicating that the higher the catch-up, the slower the economic growth rate.

Next, we will discuss the impact of the transformation model. If we develop according to comparative advantages, we can expect the rapid development of labor-intensive sectors, while if we implement shock therapy, we will subsidize enterprises without viability with a lot of resources, which will lead to the slow development of labor-intensive industries. The difference between these two catch-up indicators is used to measure the closeness between the reform model and the dual-track reform. The results show that the closer to the dual-track reform, the faster the economic development after the transformation, which is basically in line with theoretical expectations.

It should be pointed out that everyone will be influenced by social thoughts. The leaders of East Asian economies did not pursue the catch-up strategy in the 1950s and 1960s, while the leaders of China and Viet Nam chose the gradual reform method in the 1980s and 1990s, so they were very lucky.

In 1950s and 1960s, leaders of all countries had the same goal-leading the country to modernization under their own leadership, and developing advanced industries was the only way to realize national modernization, and leaders of newly industrialized economies in East Asia were no exception at that time. However, the catch-up strategy is inefficient and needs a lot of mobilizable resources to support it. The length and degree of its sustainability depend on the richness of natural resources and the population per capita. The richer the per capita natural resources and the larger the population, the longer and easier it will be to mobilize resources. However, the shortage of per capita resources and the relatively small population size of East Asian economy are unfavorable conditions for its implementation of the catch-up strategy. For example, in 1950s, Taiwan Province Province tried to implement the strategy of giving priority to the development of heavy industry, but the government deficit caused by subsidies and the ensuing hyperinflation appeared the following year, which was difficult to maintain. Since then, although the government advocates the strategy of giving priority to the development of heavy industry, because the government does not provide protection subsidies, enterprises can only enter sectors that are in line with comparative advantages and have viability, and thus develop the economy step by step according to comparative advantages. A similar situation happened in South Korea. When park chung-hee was in power in 1960s, in order to maintain economic stability, he once developed labor-intensive industries. Later, 1973 issued a policy of giving priority to the development of heavy machinery manufacturing and heavy chemical industry, but then it triggered vicious inflation (the inflation rate exceeded 20%) in 1973 and 1974. Although the government has not given up this policy on the surface, it has provided enterprises with. This policy was basically abandoned after the assassination of park chung-hee in 1979, and Korean consortia could only return to labor-intensive industries without government subsidies. This is especially true in Singapore and Hong Kong, because their respective economies have only a few million people and it is impossible to develop heavy industry. It can be seen that the development of emerging economies in East Asia according to their comparative advantages is largely due to resource constraints.

The influence of resource constraints is also reflected in China's long-term cultural thought. For a long time in the history of China, the per capita resources were very limited. Of course, China in pre-modern society is more developed than the west, but in fact everyone is close to the edge of hunger. Therefore, China culture has long emphasized pragmatism and seeking truth from facts. From the Confucian doctrine of the mean to Mao Zedong's seeking truth from facts, Deng Xiaoping's emancipating the mind, and now "keeping pace with the times", all reflect the cultural tradition of not pursuing simple and perfect ideology, not being influenced by dogmatism, and adjusting policies according to reality. However, China and Viet Nam began to transform from the late 1970s, and the reason why they adopted the dual-track gradual transformation model was also limited by political factors. The transformation of China and Viet Nam was mainly driven by the first generation of leaders. In the eastern authoritarian society, the authority of leaders comes from the benefits they can bring to the people and the correctness of their policies. Because the first generation of leaders are also the promoters of the planned economy, they can't and can't completely deny the planned economy, so they can only cross the river by feeling the stones and tinker with them.

Now, it has become common sense to develop according to comparative advantages. However, can China's reform experience be used for reference by other transition countries and developing countries? It should be noted that the Soviet Union and Eastern Europe also carried out gradual reforms in the 1980s, but none of them succeeded. The success of gradual reform is also related to the implementation mode and method. The reform in Eastern Europe of the Soviet Union is fundamentally different from that in China and Viet Nam in the following aspects: First, during the reform in Eastern Europe of the Soviet Union, enterprises were not given pricing power, and prices were still completely controlled by the state. In China, planned prices are set by the state, while unplanned prices are set by enterprises according to the market, which is very different. Micro-subjects will respond to marginal prices. Enterprises in the Soviet Union and Eastern Europe are faced with low marginal prices, so their enthusiasm for dealing with marginal prices is very low, while enterprises in China and Viet Nam are very enthusiastic about dealing with marginal prices. Second, in the Soviet Union and Eastern Europe, there are many obstacles to the entry of the previously suppressed light industry sector, and it is difficult to improve the efficiency of resource allocation. China, on the other hand, encourages township enterprises, private economy and foreign-funded economy to enter the light industry sector, thus improving the enthusiasm of micro-subjects and the efficiency of resource allocation. Third, the Soviet Union and Eastern Europe have the right to set wages for enterprises. In this case, factory directors and managers naturally tend to set high wage rates, which leads to wage inflation. In China and Viet Nam, although the profit retention system is implemented, the total wages of enterprises are limited, so there is no inflation caused by wages. Fourth, in the Soviet Union and Eastern Europe, rising wages triggered an increase in market demand, which aggravated the shortage. Russia, Poland and Hungary all rely on borrowing a large amount of foreign debts and importing a large amount to meet consumer demand, and the national debt has increased substantially, which is unsustainable. In contrast, in China and Viet Nam, wages did not increase much, while resource allocation improved, production efficiency increased, market richness greatly increased, exports continued to increase, foreign trade surplus increased, and national macro-stability became better and better.

It can be seen that the reform is also gradual, and the effectiveness of the reform depends on the specific operation mode. The reforms in China, Viet Nam and East Asia have the following lessons for other countries in transition: First, the government should take measures to implement the system of more work and more pay, and improve the enthusiasm of micro-subjects. Second, because a large number of enterprises without viability need protection and subsidies, subsidies cannot be reduced before conditions change, but previously suppressed departments should be liberalized, so we should implement a dual-track system in resource allocation and then a dual-track system in price. Third, after the efficiency of micro-subjects is improved, if the proportion of government funding in the original dual-track system is getting lower and lower, then the time is ripe for the transition from the dual-track system to the single-track system market. In this process, the government's legal system and other aspects need to be continuously improved. In this way, we can "skip" a "gap" from planned economy to market economy in several steps.

Summarizing all the contents of the lecture, we can draw the following conclusions: First, in the modern economy (the economy after the industrial revolution), technological upgrading is the most important driving force for the long-term economic growth of any country and society. If there is no continuous change in technology, the economy will inevitably stagnate.

Second, ideology, cognition and social thoughts are the most important reasons to determine whether a country, especially developing countries, can make use of its late-comer advantage to achieve rapid economic development. If a country has enough knowledge of the real reason behind backwardness (factor endowment structure) and formulates policies accordingly, it can make full use of the advantages of backwardness.

Third, for developing countries, the government is the most important institutional arrangement. The citizenship of every country is given, and you can't choose it. The government has coercive power. The correctness of its policies determines whether the country's institutional arrangements are efficient.

Fourthly, a country's factor endowment is the most important restrictive factor in its industrial and technological choice. At any given time, the given factor endowment determines the total budget of the society at that time. The factor endowment structure determines the relative price of a country's capital and labor force, thus determining the most efficient choice of industry and technology in an open and competitive market.

Fifth, for the development of a country, developing according to comparative advantage is the most important economic principle. Only in this way can we form a competitive advantage, and backward countries can make full use of their comparative advantages.

Sixth, the viability of enterprises has not been seriously studied in the existing economics, but it is the most important concept to understand the institutional distortion of a developing country. Most institutional distortions are formed to protect enterprises that are not viable because of wrong strategies.

Finally, in the process of transformation, we should seek truth from facts, emancipate our minds and keep pace with the times. For a developing country and a country in transition, if we can choose the transition path according to the actual situation, it is possible to achieve rapid economic growth even under a very weak institutional framework.

I am an optimist, and I don't think poverty in developing countries is fate. As Lewis said, all countries have opportunities. If they have the courage to seize their own opportunities, have good leaders and governments, and introduce appropriate policies at the right time, then this country can basically achieve economic take-off like East Asia in the 1950s, China and Viet Nam in the 1980s. Of course, government leaders need courage and correct understanding to make development decisions. The success of East Asian economy and China-Vietnam has both luck and inevitability, but as Engels said, freedom lies in dominating ourselves and the external nature according to the understanding of the inevitability of nature, that is, to recognize the cause and effect behind the things we have to make decisions.

I hope Marshall's lecture will give us a deeper understanding of development and transformation and complete the leap from the realm of necessity to the realm of freedom!