What are the country's traditional development strategies of comparative advantage? What kind of dilemmas have they encountered? Detailed points

Western Development Old Northeast Revitalization Professor Justin Yifu Lin started to construct his economic development theory by comparing the different development paths taken by developing countries and their development performance. The comparison shows that the countries that have long practiced the strategy of "catching up" or "import substitution" after the Second World War have invariably failed to achieve their initial development goals, while some of those countries (or regions) that did not choose to adopt the strategy of "catching up" or "import substitution" or adopted a lesser strategy have achieved rapid economic growth. The Four Little Dragons of East Asia - South Korea, Singapore and China's Hong Kong and Taiwan - are typical representatives of these countries (or regions).

There are a variety of explanations in the theoretical community for this result. Prof. Justin Yifu Lin, after studying the various explanations, believes that none of the previous explanations can truly explain the reasons for the failure of the "catching up" strategy or "import substitution" strategy and the success of the Four Little Dragons of East Asia. He argues that the real reason is that the former pursued a strategy of "catching up" or "import substitution" that was incompatible with their own resource endowment structure and thus violated their own comparative advantage, while the latter pursued a strategy of economic development that was compatible with their own comparative advantage at every stage of their economic development.

Simply put, the strategy of "catching up" or "import substitution" is to use national power to promote the development of relatively capital-intensive industries and the adoption of relatively capital-intensive technologies in order to realize the upgrading of the industrial structure and the wealth and strength of the country at an early date. However, the factor endowment of less developed countries is characterized by relative abundance of labour and relative scarcity of capital. The concept of self-generating capacity tells us that in such an economy, vigorously promoting the development of relatively capital-intensive industries and using relatively capital-intensive production technologies ahead of their time in the production process will inevitably result in a large number of enterprises without self-generating capacity. In order to ensure the realization of national strategic objectives, countries pursuing a "catching-up" or "import-substitution" strategy must protect and support these strategic enterprises that are not self-supporting in every way. If "catching up" or "import substitution" is not strong enough, the State can also use tax reductions or subsidies to protect these industries. If "catching up" or "import substitution" is strong, the State will have to use the distortion of the price mechanism to support strategic industries. In this way, the implementation of the "catching up" strategy or import substitution strategy has led to a series of negative consequences:

First of all, due to the implementation of the "catching up" strategy or "import substitution" strategy and the emergence of a large number of enterprises in the economy that have lost the ability of self-reliance, the country's ability to accumulate capital has been weakened. This has slowed down the rate of capital accumulation in the country. However, the upgrading of the country's economic structure is ultimately determined by the upgrading of its factor endowment structure. Thus, as the rate of capital accumulation slows down, the rate of upgrading of the economic structure of the "catching up" countries and thus the rate of economic growth slows down.

Secondly, due to the lack of self-generating capacity, those strategic enterprises that are the concrete implementers of the "catching up" strategy are often in a loss-making situation. Prof. Justin Yifu Lin said that such enterprises are burdened with "strategic" policies. On the other hand, due to the distortion of the price mechanism and the increase of information asymmetry in the economy, the state is unable to judge whether the losses of enterprises are caused by "strategic" policy burdens or by the lack of efforts of enterprise managers. This gives business managers an excuse to demand constant support from the State. As a result, the economy will be rife with rent-seeking behavior. The proliferation of rent-seeking behavior will lead to a further decline in business performance.

In contrast to those countries that pursued a strategy of "catching up" or "import substitution," the Four Little Dragons of East Asia succeeded because they consciously pursued a strategy of economic development that was consistent with the structure of their factor endowments at every stage of their economic development. Since firms made industrial and technological choices that were consistent with their factor endowment structure, they were self-generating. Further, because most enterprises have self-generating capacity, the economy's capital accumulation capacity is relatively strong, and thus can quickly promote the upgrading of the factor endowment structure and thus the industrial structure, accelerating the pace of economic development.

Based on the above research, Prof. Justin Yifu Lin put forward the "Comparative Advantage Development Strategy" as the core of his economic development theory system. Simply put, the so-called comparative advantage development strategy is to choose the industrial structure and production technology that conforms to the structure of one's own factor endowment at each stage of economic development. Prof. Justin Yifu Lin analyzed in detail the advantages of a country's "comparative advantage development strategy":

Firstly, since an economy's industrial and technological structure is endogenously determined by its factor endowment structure, in order to "truly" catch up with the developed countries, the underdeveloped countries must firstly upgrade their factor endowment structure, i.e., to end the situation of relative scarcity of capital at an early date through rapid accumulation of capital. The above analysis has already told us that the "comparative advantage development strategy" is the only economic development strategy that can guarantee the country's rapid accumulation of capital.

Secondly, if an economy pursues a "strategy of comparative advantage," it does not need to import the most advanced production technologies available in the world at the time - because these are also the most capital-intensive technologies, which are not suitable for the resource endowment structure of the less developed countries. For technological upgrading, the less developed countries only need to introduce technologies that are slightly more advanced than their own existing technologies but are not at the forefront in the developed countries. This enables the less developed countries to acquire new technologies relatively easily and at low cost. In contrast, economies pursuing a strategy of "catching up" may need to introduce more advanced technologies. This makes the introduction of technology more difficult and more costly. In many cases, less developed countries pursuing a "catching-up" strategy may even need to reinvent technologies that have already been invented in developed countries. Because R&D is often very capital-intensive activities, relatively scarce capital countries can hardly afford its cost.

Thirdly, it has already been pointed out that the implementation of the "catching up" strategy will inevitably create a large number of enterprises without self-reliance in the economy, which becomes a source of macroeconomic instability in the country. Due to the lack of self-reliance of enterprises, they not only can not become a source of national tax revenue but also need strong support from the state treasury, which may result in financial emptiness; in the case of financial emptiness, banks have to bear the burden of supporting strategic enterprises, which may result in the loss of bank loans and the accumulation of non-performing loans; lastly, it is even more difficult for enterprises lacking self-reliance to gain an advantage in the international competition. . In addition, in order to establish and maintain these enterprises, the country needs to constantly spend scarce foreign exchange resources to import expensive machinery, equipment and advanced technology. This is likely to cause the country to run a current account deficit. Together, the fiscal deficit, the accumulation of non-performing bank loans, and the current account deficit pose the greatest threat to the country's macroeconomic stability. On the contrary, those countries that implement the development strategy of comparative advantage are likely to effectively avoid the emergence of the above macroeconomic imbalances.

Lastly, the strategy of "catching up" is likely to increase the inequality of income distribution, while the strategy of comparative advantage will help to maintain the equality of income distribution. The strategy of "catching up" aims to concentrate resources on the development of capital-intensive industries, while the employment opportunities created in capital-intensive industries with the same amount of capital are much smaller than those in labor-intensive industries. Thus, the implementation of a "catching-up" strategy has the potential to exacerbate a country's employment problem. If unemployment is high in a country, the distribution of income in that country cannot be equal. On the contrary, under the comparative advantage development strategy, the labor-intensive industries of the less developed countries are able to receive sufficient financial support, thus creating sufficient employment opportunities and alleviating the country's unemployment problem. This will certainly help to maintain equality in income distribution.