 Mr. Finest, ladies and gentlemen, it's a great honor for me to deliver the 15th Wider's Lectures and the topics from Flying Geese to Leading Dragons. And we know that when Wider was established 25 years ago, one of his mandate is to study economic structural changes and to help the country in a poor world to reduce the properties and to improve the living standards. But I'd like to say in the past decades, the economic population regret the importance of structural changes in their research. And today I hope to use this opportunity to rewrite the interest in the study of structural changes. And I try to propose a new economic theoretical framework to understand the economic structure, its determination, and how it involves. And hopefully this kind of understanding can also help us to improve our policy to promote the poverty reduction in the world. And my lecture will cover a few subjects. The first one is that why we need to rethink the current status of economic development. And then I'd like to say economic development in effect is a process of structural changes. And it will follow a pattern called the Flying Geese. And then I propose the new structural economics as a way to understand that kind of development process. Follow that. I will bring in that we are in a mini-multipolar gross world. And in this new world, it's not going to be just a Flying Geese. It's going to be leading dragons in order to avoid great opportunity for many countries to have structural changes. And then I propose a new approach to tap into that new world. Okay. The thinking of economic development is a common thing in the last two years. And the main reason is because of the economic crisis that we are encountering now. But why economic crisis stimulates so many rethinking? It is because the function of economic theory is to explain the observed economic phenomena. And not only to explain the phenomena, it also helps us to formulate economic policy in order to improve the world or to improve the living center and so on. Whenever the economic theory cannot explain the economic phenomena or economic policy choice based on the economic theory cannot achieve its target, then we need to rethink the theory. And currently certainly the global financial crisis and so on cannot be explained by the existing economic theory. And so we have a lot of rethinking. Use this thing directly to say that development economics has been on the process of rethinking since it was formulated in the 1940s. At the beginning, the development economics was dominated by the group of economists called structuralists. At that time, their understanding of why some countries are so poor, their proposal was because of the market failures in the developing country and they cannot develop the same industry that is in the high-income country. So they proposed to use some kind of infrastructure strategy through the government intervention in order to improve their economic performance. However, the country followed that approach, failed miserably. And so by the time of the 1980s, the understanding of global population changed to the so-called Washington consensus. In that consensus, the understanding for economic performance in the developing country was that the government failures were more serious than the market failure. So the best way for promoting economic growth is to liberalize the economy, to liberalize the state enterprises and other markets to function. And the country followed this approach. Their result was mixed at the most. And during this period of time, certainly there were some countries, economies, are doing extremely well. From the 1950s to the 1970s-80s, there was a group of economies in East Asia, their growth rate achieved 8 or 9% continuously for 21 more years. And for those economies, they adopt export promotion instead of import substitution. And it was different from the policy's prescription of the development economies at that time. And in the 1980s and over, during that Washington consensus period, China, Vietnam, and also Malaysia's, their economic performance were also extremely remarkable. And again, they did not totally liberalize their economy. They adopt some kind of dual-check approach. On the one hand, continue to provide some support to their own sectors and liberalize their entry to new sectors. And they achieve, again, 8 or 9 or even higher percentage of growth rate continuously for 20 or 30 years. And in this group of economies, they have some kind of common characteristics. That is, they all rely on market as the basic foundation, but they have a proactive government in the development process. And their combination of the orientation and strategies was neither the oldest structuralist approach or the Washington consensus type of approach. Because their approach and performance were different from the theoretical explanation, so we need to rethink our current understanding of economic development. And I'd like to say the World Bank has been on the process of rethinking of economic development since the 1990s. And one evidence is the publication of East Asia Middle Coast. And in that publication, the finding was for a country to have a successful economic development, the best way is to have export orientation and to have a market-friendly government. And in 2004, the World Bank published another publication called Lessons of the 1990s. And that was after 10 years of economic transition in Eastern European countries. And to understand the success and failures. And the conclusion is that countries are different. And so the policy should not have one-side-foot-all policies. And in 2008, the World Bank published another publication called the Growth Commission Report. It was a commission led by Nobel Prize winner Michael Spence, and to study 13 successful economies in the world since the Second World War. Those 13 economies, they achieved 7% and higher growth rate, continuously for 25 years. And among these 13 economies, they have common features. First, they are all open economies. Secondly, they achieve maker stability. Third, they have high growth rate and high investment rate. And of course, they are all without own market mechanism, and they also have committed a credible and a capital government. And as I say, economic theory, its function is to explain economic phenomena. And if we want to rethink economic development, then we need to understand what other phenomena we wanted to explain. Well, the economic development certainly is related to how to promote, fast, sustain and increase growth in our country. And I'd like to say that you know this is a recent phenomenon, because before the 18th century, all the countries in the world are poor. And even now, the rich countries in Europe and so on, their per capita income and the per capita income in countries like Africa actually were similar, at most 50% difference. And also before the 17th century, 18th century, the rate of economic growth was about 0.05% per year. That means that it took about 1,400 years to double per capita income. But for Western European countries, after the 18th century, the rate of economic growth accelerated to about 1% per year. And that means that it took about 70 years to double the per capita income. And entering into the 19th century, 20th century, the rate of per capita income growth accelerated again to about 2% per year. That means it took about 30 by years to double per capita income. And a number of countries were able to join this group of fast growth. But most other countries in the world did not follow the same path. So as a result, the income gap between the high income countries, industrialized high income countries and low income countries widened. And this kind of acceleration in economic growth certainly is a result of industrialization and bring in continuous technological innovation. But I like to focus, I like to emphasize that it's not only technological innovation. It is also a process of structural changes. We know that both the US and high income countries today, their production structures are computers, robot, airplane, and they also have financial sectors as well as a high education research institution. Both are their economic structure now. But in the 19th century, the production structure in the US was textile industries, shoe making industry, and that was similar to many low income developing countries today. And 300 years ago, in the 17th century, the production structure in the US was agriculture and it was similar to in a very low income country today in Africa and in other parts of the world. And this is the process of economic development, structural changes. And this kind of structural changes in our country were indeed global things were followed something like trying to get the pattern. Let me get the bottom. Japan in the 1950s, its main industries was garment, and then we sit to steal, then TV, then video, then hard definition TV. And in our country, it's a step by step move up the industrial ladies in a pattern the Japanese scholar Akama should call it as flying geese. But not only in our country, when Japan moved from the government to steal, then the government industry in the 1960s moved to the Asian Tigers, like Korea, Taiwan, Hong Kong, Singapore. And then in the 70s, when Japan shipped to the production of TVs, they still shipped to Korea. And Korea's government energy started to ship to the Asian country like Indonesia. And a step by step, something looked like the flying geese that I showed on the right-hand panel, the big goose. But the more advanced countries move up the industrial ladies, then are the second tier country farther than third tier country farther. This is a structural changes we observed in our country and also in the developed and developing country, in the modern growth period. In Hong Kong, we have these kind of structural changes. I try to propose framework to understand them. The framework I'd like to propose is the new structural economics. And if I call it a new structural economics, this is because I wanted to apply the neoclassical economic approach to understand the determinants of economic structure and its evolution. In economic convention, you apply the neoclassical approach to study agriculture. You should call it agricultural economics. And you apply this approach to study finance than you should call financial economics. And also, from this convention, I should call this approach as structural economics. However, as I mentioned, in the 1940s, 1950s, at the beginning of the development economics, it was dominated by a school called structuralist and structuralism. And to distinguish my approach from their approach, I call this new structural economics. And in effect, it's also a convention in economics. We know that in the 1960s, when Tokoro North proposed to use the neoclassical approach to study institution, and it called that new institution economics. And the reason was in the turn of the 20th century in the US, there was a group of economists called institutionalists. And they proposed to use a machine approach to study institution and they called themselves institutional school. And to distinguish the application of neoclassical approach to study institution, Tokoro was called this approach new institution economics. And as far as the convention, I call this new structural economics. Okay. And this framework, the starting point is that the industrial structure in our country is indulgent to its environment structure. And for economists, the so-called environment is the capital, local, natural resources. And certainly for any country, in any given time, the availability of capital or local or venture resources is relative abundance will be different. And that difference called the endowment structure. And here I'd like to say endowment is a very unique economic problem because the total environment for any country at any given time is the total budget of this country. Total capital, total natural resources, total labor force. And this endowment also had a structure because it had relative abundance. And this relative abundance will determine the relative prices of capital or natural resources of labor force. And for economists, we know budget and relative prices are two most important parameters. And endowment as well as its structure determine the total budget of the country as well as relative prices of capital or natural resources of labor force. And this relative abundance of the endowment will determine the competitive advantage of the economy at any given time. For a developing country, in general, they are relatively abundant in natural resources while in labor force. And they will have competitive advantages in the labor intensive industry or resources intensive industry. And for the high income country, the relative abundance factor is capital. And so they will have the competitive advantage in the capital intensive industries. And we know that competitive advantages will determine the competitiveness of the nation. So that's the reason why the high income country today, you know, their competitive industries in general is in the technological intensive industry, capital intensive industries. And from this analysis, we know for a country to have the optimal industrial structure that it means, but its structure will not give the most competitive. It's determined by your competitive advantage. And the competitive advantages is determined by your endowment structure. Suddenly, economic development means that we hope the low income country, one day will reach the same income level as the high income country. And if you wanted to have the same income level as the high income country, then you need to have the same industrial structure as the high income country. But you need to have a very capital intensive industry and so on. But since that the optimal industrial structure is essential to your endowment structure. So before you upgrade your industries, you need to upgrade your endowments. Once your endowment upgrade, your industry will upgrade. But as I should say, it's not only upgrading of the industrial structure. Because when you move your industry from resources base, the lower intensive industry to more capital intensive industry, you also need to improve the infrastructure including hard infrastructure and soft infrastructure. For example, in agrarian economies, like many societies in Africa, most people live on agriculture and they are working on a small-holder agriculture. In that kind of small-holder agriculture, economic surplus was very small. And as a farmer, each year, only a small amount of its produce, although produce they can exchange on the market. And in general, they share those products in the local market and exchange with people who they know. In this kind of economic structure, the elaborate transportation will not be needed. Because you will change with people who you know, so you don't need to write a contract and there's no need for an institution for contract enforcement, either. But if you move up the industrial structure to the manufacturing sector, the manufacturing firm will have a larger scale. Their production is not for their own consumption. They need to sell the goods in the national market or international market. And to make this kind of production possible, then you need to improve the transportation. And also, because you are going to exchange with people who you don't know, you need to write a contract. And you also need to have a contract enforcement institution, bigger institution. So we can see that the economic structure changes also means the infrastructure both in the high infrastructure and the sub-infrastructure changes. And here I'd like to argue, follow a country's competitive advantages. To develop their economic structure is the best way to promote fast and sustainable economic growth. This is because if you follow your competitive advantages, then the economy will be most competitive, will produce the most. And at some time, that means that you have the most to share. And also the investment in industries which are consistently with your competitive advantages will be most competitive, can generate the highest possible return. You have the most to save. And you have the highest return to your savings. Certainly, you will save the most. And the capital endowment will increase the farthest away. And the capital endowment increase, industry will increase, will upgrade, and income can be increased. And in this process, you started from resources-intensive industry or global-intensive industries. And gradually, according to your endowment structure upgrading, you will upgrade your industries. And that is something like we just described, follow the flying-geese pattern. And also, when a country move up to a higher-latest industries, then other countries at a lower stages, they will have the competitive advantages to develop those kinds of level-intensive or resources-intensive industries. So that is the reason for the flying-geese pattern in these dynamic economic structural changes. And from this understanding, if you follow in a country's competitive advantages to develop the economy in the best way, but competitive advantages is a term only can be understood by economists. For the private sector, their concern is profit-making and how to translate the ideas of following a country's competitive advantages to develop the economy into an action of the private firm. For that, we need to have a market institution because if we wanted the private sector to follow the country's competitive advantages to choose its technology and industries, we need to have a very deep price that can reflect the relative abundance of your endowment structure. If your endowment is abundant in labor force and scales in capital, then the wage rate should be relatively low and the capital should be relatively expensive. If you have both kinds of price signals, then firm for their own profitability, they will enter the labor-intensive industry to use the capital to replace labor and enter into the labor-intensive industry. And a vice versa. If capital is relatively abundant and a labor is relative skills, then you need to have a price signal that is which should be relative high and the capital should be relative inexpensive. And under the kind of price signals firm for the profitability, it will choose the capital to replace the expensive level and then there will be the capital-intensive industries. And most kind of price signal can only be produced by competitive market. If the market is so important, then probably should have a government there. And this is because economic development is a process of continuous upgrading your industries. And in this upgrading you need to improve the infrastructure also, like transportation, telecommunication with the legal system. And in the visual firm you are not able to internalize all those changes. So you need to have a government to coordinate different private sector to make the investment infrastructure with the legal system to improve the legal services to coordinate those kind of changes or to provide those kind of changes by the government itself. That's one thing. And secondly, the economic development is industrial upgrading and diversification. And that kind of upgrading and diversification itself is innovation. And so for the first mover in our first mover the possibility of failure is high. And if the first mover failed the first mover need to bear all the cost and send the information to others, we are not ready. The first mover can also be successful. And if the first mover is successful and send information to others this new industry is our competitive advantages. And then you are going to hear many people follow and the competition comes. And the first mover will not be able to earn more profit than the other firm. With this kind of asymmetry between the cost of failure and again of success then people will not have the incentive for the first mover. It's better to wait other people to demonstrate a success than you follow. However, if there are more first movers you cannot have a dynamic economic growth in our country. So you need to have a government there to find a way to compensate for the first movers. And in the high-end country we know the government can give the first mover a pattern. However, in a developing country for the low-income country when they upgrade the industry to the new one it's new to them but it's mature in the world so you cannot give them the pattern. So the government need to find some way to compensate the first mover in order to encourage more firm to upgrade the industry or to diversify the industry. By that you need to have a government to play this kind of facilitation role. And this new structural economics framework can provide understanding of the standard facts that was identified by the Gross Commission report or by the East Asian mineral report. According to the new structural economics the best way to develop the economies is to follow the countries competitive advantages. And to follow the country competitive advantages you need to provide the right price signal and you also need to have a facilitating state to overcome the issue of externality and coordination. And this is exactly the standard facts number four and number five of the Gross Commission report. And if you follow your competitive advantages you will be an open economy. You produce whatever you are good at and export and you import whatever you are not good at and import. And this is the condition number one of the Gross Commission report. And secondly if you follow your competitive advantages you will be the most competitive. So the economy is less likely to have a home grown crisis. In our cases that we are encountering now the country will also be in a much better position to carry out counter-secret fiscal monetary measure. So you will have a much better worker or maker stability. And again that is the condition number two of the Gross Commission report. And if you follow your competitive advantages as I just argued the country will produce the most and also have more to say. But at the same time the investment can generate the highest return. So you are going to save more and make the largest possible investment. And this is the condition number three of the Gross Commission report. So we can now we can understand this new structure economics in effect to provide consistent theoretical framework to tie all the status facts together. And this is certainly also consistent with the East Asia Miracles findings. To have a market friendly government and to have a whole oriented economic development policy. Okay. And in the past as I mentioned the economic development no matter which other country or cross country follow some kind of flying geese pattern. And now we are entering the world. This new world is a modern power gross world and we are going to instead of flying geese we are going to have leading dragons. You know that since the industrial revolution up to the 2000 the world was dominated by a small number of industrialized countries those G7 countries. Even up to 2000 GDP of the 7 industrialized countries you know was as high as about 66% 2.3 of the global GDP. And even mentioned by purchasing popularity those 7 countries their contribution to global GDP was still as high as about 50%. But entering into 2000 we started to have noticeable changes. For example in the 1980s the top flight contributors to the global gross except for China or another 7 countries US, Japan, Germany and the United Kingdom. And at that time the US its contribution to the global GDP was about 26%. And China's contribution was only about 1.7 of the US contribution. In the 1990s again the top flight contributors except for China other 4 were the members of the G7 country. And the US in that day its contribution to the global GDP was about 36%. And China's contribution was only 1.25 of the US contribution. By entering into 2000 to 2009 the top flight contributors except for the US or others are the emerging countries including China India, Korea and Brazil. And China became the number one contributors and it reached about 26%. And the US contribution was only about 21%. So China has about 4% higher than the US contribution to the global gross. And for a developing country which have much more income to become the new poles of global gross and the country must have a large population. Like Brazil its population was about 192 millions in 2009. And China was 1.3 billion. India 1.1 billion and Indonesia 227 million. And this 4 countries combined their population size was 2.9 billion. So to be a new gross poles in addition to you need to grow big dynamically. But you also need to have to be a large population in order to be a new gross poles. And this has a large implication. Because if you a large population and you grow big dynamically to have this kind of changes and your number of workers in the industrial sectors