Lin Yifu: Addressing "Involution" Requires a Combination of Effective Markets and a Capable Government

How should the government seize the right timing to phase out subsidies during economic transformation?

By Sun Lichao, China Economic Journal, Boao, Hainan

Former Chief Economist of the World Bank and Director of Peking University’s New Structural Economics Institute, Lin Yifu, stated at the Boao Asia Forum 2026 Annual Meeting on March 24 that “involution” is an inevitable phenomenon in economic development, just like people growing up and old clothes no longer fitting, requiring new ones.

Lin Yifu explained that economic development relies on continuous technological innovation and industrial upgrading. During this process, new industries with comparative advantages will constantly emerge. When a new industry appears, it naturally attracts a lot of investment. As investment flows in, competition arises, leading to what is called “involution.”

“The issue of ‘involution’ is not unique to China; it exists in any country. For example, in the 1990s, the internet industry emerged, and many countries including the U.S. invested heavily, which led to ‘involution,’” Lin Yifu said.

Regarding how to address the problem of “involution,” Lin Yifu analyzed that on one hand, an effective market is needed; on the other hand, a proactive government is essential. A proactive government should first provide certain subsidies to pioneers to encourage enterprises to enter the market, while also helping pioneers overcome bottlenecks in soft and hard infrastructure. When new comparative advantages emerge, the government should then withdraw, no longer subsidizing enterprises, allowing them to face market competition. In this process, well-managed companies will survive, while poorly managed ones will exit, leading the economy into a more stable state and raising productivity levels to a new level.

The 2026 Government Work Report proposed an economic growth target of 4.5%–5%, with efforts to achieve better results in practice.

In Lin Yifu’s view, this target considers the actual potential for economic development and the current international and domestic economic situation. As long as there are no major unpredictable events in the international environment, and with favorable domestic conditions, achieving a growth rate of 4.5% to 5% is feasible, and it could even surpass 5%.

“From the perspective of growth potential, before 2035, China still has the potential for an annual 8% growth,” Lin Yifu further explained. China has gained comparative advantages in future industries such as artificial intelligence, controllable nuclear fusion, and quantum computing; it has about 6 million scientific and technological talents, which are the most important drivers of technological innovation; based on purchasing power parity, China is the world’s largest economy and market, with the most application scenarios and the most complete industrial categories; China is also good at leveraging the combination of an effective market and a proactive government to promote technological innovation.

Lin Yifu analyzed that China is transforming and upgrading traditional industries through artificial intelligence, digitalization, and green development, even in industries like new energy vehicles that can leapfrog. Considering all these factors, China’s 8% growth potential is not overly optimistic. “Turning this potential into reality depends on both domestic and international conditions. Since the 2008 financial crisis, the global economy has not fully recovered, especially with the persistent poor economic conditions in developed countries, coupled with de-globalization and geopolitical conflicts, which require structural adjustments internally. These factors will limit the realization of China’s economic growth potential. Therefore, in recent years, China’s economic growth rate has remained between 5% and 6%, but its full potential has not been fully tapped.”

He emphasized that maintaining the current growth rate, China can still contribute about 30% to global growth each year. China’s rapid development benefits not only itself but also the entire world.

(Editor: Zhu Huishan; Review: Zhu Ziyun; Proofreading: Zhai Jun)