Last updated on August 1, 2011
In a new article published in the August issue of the World Bank Research Observer, Justin Lin, who is currently serving as chief economist of the World Bank, lays out a new agenda for development research, which he calls the “New Structural Economics.” Here is the paper’s (long) abstract:
“As strategies for achieving sustainable growth in developing countries are re-examined in light of the financial crisis, it is critical to take into account structural change and its corollary, industrial upgrading. Economic literature has devoted a great deal of attention to the analysis of technological innovation, but not enough to these equally important issues. The new structural economics outlined in this paper suggests a framework to complement previous approaches in the search for sustainable growth strategies. It takes the following into consideration.
First, an economy’s structure of factor endowments evolves from one level of development to another. Therefore, the optimal industrial structure of a given economy will be different at different levels of development. Each industrial structure requires corresponding infrastructure (both ‘hard’ and ‘soft’) to facilitate its operations and transactions.
Second, each level of economic development is a point along the continuum from a low-income agrarian economy to a high-income industrialized economy, not a dichotomy of two economic development levels (‘poor’ versus ‘rich’ or ‘developing’ versus ‘industrialized’). Industrial upgrading and infrastructure improvement targets in developing countries should not necessarily draw from those that exist in high-income countries.
Third, at each given level of development, the market is the basic mechanism for effective resource allocation. However, economic development as a dynamic process requires industrial upgrading and corresponding improvements in ‘hard’ and ‘soft’ infrastructure at each level. Such upgrading entails large externalities to firms’ transaction costs and returns to capital investment. Thus, in addition to an effective market mechanism, the government should play an active role in facilitating industrial upgrading and infrastructure improvements.”
I am not a macroeconomist, so I apologize in advance to the macro crowd for my misuse of the nomenclature, but Lin’s approach strikes me as an example of New Keynesian thinking. Of particular interest to me, given my interest in industrial policy, was the following excerpt:
“Economic development requires continuous introduction of new and better technology to an existing industry. Most people in low-income countries depend on agriculture for their livelihood. Improvements in agricultural technology are key to increasing farmers’ income and reducing poverty. However, economic development also requires continuous diversifying and upgrading from existing industries to new, more capital-intensive ones. Without such a structural change, the scope for sustained increase in per capita income will be limited. Therefore, the discussion in this paper will focus mostly on issues related to industrial upgrading and diversification.”
In a companion article titled “Rethinking Development Economics,” Joe Stiglitz adds:
“At the center of creating a learning society is the identifying of sectors that are more amenable to learning, with benefits not captured by firms themselves, so that there will be underinvestment in learning. Elsewhere Greenwald and I have argued that an implication of this is the encouragement of the industrial sector, which typically has large spillovers. This approach provides an interpretation of the success of Asia’s export-led growth. Had Korea allowed market forces on their own to prevail, it would not have embarked on its amazing development successes. Static efficiency entailed that Korea produced rice; indeed the country might today have been among the most efficient rice farmers—but it would still be a poor country. As Arrow pointed out (1962), one learns by doing (and one learns how to learn by learning [Stiglitz 1987]).”
I wonder if — and hope that — this will launch a new agenda for development research.