Lin Yifu has emerged at the center of the latest wave of controversy over Keynesianism. He is probably the most debated contemporary Chinese economist. His reputation comes not only because of his opinions, but also because he was the first Chinese senior vice president of the World Bank.

His first public appearance since retiring from the World Bank in June has caused hot debate in academia because he says the Chinese economy still has the potential to grow by 8 percent annually over the next 20 years.



The reason this opinion is controversial is two-fold. On one hand, most economists think China has crossed a threshold, or in the words of economist Wu Jinglian, a tipping point, after maintaining an average annual growth rate of more than 9 percent for three decades. There is a growing consensus that the previous development model can no longer be sustained.

The central government has realized the imperative of restructuring the economy, but the challenge is huge and many doubt that it can be smoothly overcome. Against this background, Lin's forecast apparently makes him the boldest and most optimistic economist.

On the other hand, he advocates fiscal stimulus to infrastructure construction over monetary policies. Trumpeting what he calls "beyond Keynesianism," he said the government should focus on investment projects, especially infrastructure building, as part of a proactive stimulus package. The manifestation of this idea is vividly demonstrated by China's stimulus-driven investment binge after the 2008 financial crisis.

But there are two inherent defects with government-led investment stimulus.

First, compared with the market mechanism, the government is far less effective at resource allocation and is more prone to corruption. Companies and individuals are better than bureaucracies at making investment decisions because they respond more quickly to price signals and are much more strongly motivated to make sure a project's benefits outweigh costs. This has been proven time and again by the failure of planned economies.

Putting the government in charge of large projects also creates room for rent-seeking behavior and facilitates corruption. One needs to go no further than reviewing the case of former railway minister Liu Zhijun to know how government officials can exploit public spending for their own benefit.



Second, the 4 trillion yuan cure in 2008 came with severe side effects ranging from surging inflation and housing prices to a rapid increase of local government debt levels. Beijing was forced to change course abruptly, raising banks' reserve-requirement ratios 12 times, reining in bank loans so aggressively that private lending businesses thrived and then fell apart. Restrictions on housing purchases were introduced to crack down on speculative property hoarding.

As investments weakened, the nation's year-on-year growth rate is on track for the seventh straight quarterly decline in the July to September period.



Frankly, the 2008 stimulus may have been necessary for China to steer away from the severest impact of a global crisis. The real blame lies with the ripple effect it gave rise to, which caused local governments to spend much more than expected, inflating the ultimate figure to perhaps around 20 trillion yuan. On this account, local governments are the genuine trouble maker.