Justin Yifu Lin is one of China’s most prominent economists. From 2008 to 2012 he was the World Banks’ chief economist – the first from a developing nation – and helped prod the bank to use the kinds of industrial policies that China has employed successfully over the past 30 years.

Now, he’s back at his perch at Peking University’s China Center for Economic Research. In his new book, “Against the Consensus: Reflections on the Great Recession,” the 60-year-old, crew-cut economist has come up with a number of ideas for remaking the world economy, including launching a global infrastructure initiative and introducing a new international currency.

On a rainy Sunday afternoon in Beijing, Mr. Lin sat down to discuss his ideas with The Wall Street Journal’s Bob Davis. Below is an edited transcript.

In your book you say that China was improperly blamed for the global financial crisis. What’s your view?

Imbalances — trade surpluses in China; trade deficits in the U.S.– were a problem. But all the pressure was on China to appreciate its currency in order to reduce imbalances instead of trying to understand the true cause of the imbalances.

(When it comes the U.S., it enjoyed) the status of a reserve currency country so it could maintain large trade deficits for an extended period of time. Second, the U.S. started to have financial deregulation and high leverage. This created a huge amount of liquidity and encouraged all kinds of speculative activity and over-consumption domestically. It also encouraged huge capital outflow from the U.S. to non-reserve countries, (as financiers) took advantage of difference in interest rates.”

Since you’ve been back in China, you’ve become known as an opponent of capital account liberalization. What do you see as the downsides?

I am supportive of foreign direct investments in real economy but I am concerned about portfolio inflow. Large portfolio inflows are often followed by large outflows and crises. This is because a large inflow often results in bubbles in housing and equity market and a sharp currency appreciation, which hurts exports and real economy.

We also need to be cautious about allowing corporates and financial institutions to borrow abroad. In a downturn, countries may not be able to generate enough exports to repay their debt in time. That was the reason Korea was hit so heavily in the (1997-98) East Asian financial crisis.

What about allowing ordinary Chinese to invest overseas as a way to diversify their portfolios?

China is still a developing country. Capital should have a higher return in China than in high-income countries. We need to allow more opportunity for ordinary Chinese to have higher returns on their savings domestically.

The Chinese financial sector is overly concentrated in big banks. The interest rates on saving deposits are repressed. We can allow more financial decentralization, and that will generate higher returns for savings and investment.

We should focus on how to make high-return investment opportunities available to ordinary people in China domestically. Even in high-income countries ordinary people would not (usually) make investments abroad.

In your book, you propose a global infrastructure plan. Aren’t you saying the rest of the world should operate like China, which relies so much on infrastructure spending for growth?

I don’t mean the rest of the world should be like China. But any country can generate useful lessons for other countries.

Why is infrastructure spending so important when so many nations need to tackle fundamental reform?

If you don’t have structural reform, you may not be able to return to high growth rates. But structural reforms in general are economically contractionary and politically hard to implement when unemployment rate is high.

We can be more creative .Why not make real investment in sectors which in the short run can create demand, create jobs, boost growth and create the space for structural reform? That would also enhance growth in the future.

But you go further and argue that wealthy countries should invest in developing nations’ infrastructure.

In high income countries, the scope for improving infrastructure may be very narrow. Japan, for example, has an airport in every county already. But in developing countries, aside from China, there are a lot of opportunities. Go to Latin America countries, go to South Asian countries, go to Africa and you see bottlenecks almost everywhere. If you make investments in those kinds of bottlenecks, that will generate high return and generate demand for capital good exports from high-income countries.

It’s hard enough to get the U.S. Congress to back infrastructure spending at home. Isn’t it politically impractical to expect the U.S. to invest overseas as well?

We need people like (former President Ronald) Reagan, who can sell ideas. Otherwise, I don’t see the way out for the US. The U.S. can print money to pay social benefits and can accumulate debt. Or it can make investments (that lead to growth).

You also propose creating an new international currency, which you call “paper gold” or p-gold. National currencies would be pegged to this new currency in the same way that they used to be pegged to gold. Why?

By 2030, we will be moving to a world of multiple reserve currencies. The U.S. dollar, euros and Chinese yuan, are likely to be the major reserve currencies. All these three economies will be around the same size then.

Many people argue that a competitive reserve currency system will be stable because competition will discipline countries. If a country doesn’t act responsibly, money will flow out and it could lose its status as reserve currency country

I’m doubtful this will be stable. I don’t think all the major countries will be able to implement all the structural reforms necessary. As a result, there would be a lot of opportunities for speculators to point to one country, say it has structural problems and is dangerous, and bet that people will move money out of one country into another. It would be like musical chairs.

Instead, we need a supranational currency. Paper gold would be a supranational currency. Each country could use it as reserve to issue its own national currency. P-gold can avoid the inherent conflict of national interest and global interest when a national currency is used as a global reserve currency.

The amount of paper gold each year could be increased according to certain principles, to avoid the inherent deflationary tendency of using gold as a reserve. If you try to retain multiple reserve currencies, every country will be hurt.

– Bob Davis

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