I was the first person from the developing world to be appointed chief economist of the World Bank, a position traditionally held by renowned economists from the West. My tenure started in June 2008, right before the eruption of the worst global financial and economic crisis since the Great Depression. The position at the World Bank required me to explore the causes and a way out of the crisis. In this book I present a perspective that may be new to people accustomed mainly to Western points of view.

Let me explain why I wrote this book.

Let me explain why I wrote this book.

As an intellectual from the developing world, I used to believe, like the monk in the classic Chinese epic novel Journey to the West, that the West had a holy sutra, which I needed only learn and apply to help my native country modernize and prosper. I felt fortunate to have the opportunity, just as China was beginning to transition from a centralized economy to a market economy, to study modern economics with the masters – including several Nobel laureates – at the University of Chicago, a global center of modern economic research.

Soon thereafter, PhD in hand, I was ready to apply my knowledge to real-world problems at home. Instead, I was confronted by events that contested the very applicability of modern economics in my country. In 1988, after a decade of reforms, China experienced its first episode of double-digit inflation. The orthodox inflation-fighting response would be to raise interest rates to cool down overheating investment and discourage consumption. Instead, the government adopted a retrenchment program and administratively cut back many investment projects, leaving them wastefully uncompleted. Evaluated against macroeconomic theory, the government’s behavior was irrational.