New Structural Economics – A new framework for development

Justin Lin World Bank’s chief economist has written a new paper arguing for fresh thinking on development issues. The paper is here and was presented at a WB conference titled- Industrial Policy and The Role of the State in Promoting Growth. The paper was pointed by PSD Blog and Urbanomics also had some comments on the paper.

He begins with a useful history of development economics. He points to two main thoughts – Old Structural Economics (OSE) and Neoclassical Economics (NE) . OSE became mainstream post World War II and argued for a bigtime government role as everything was Keynesian at that time. NE came post stagflation and 1970 inflation episodes and was taken over by rational expectation revolution.

He then looks at his new approach and says we need a mixture of the two. There are 3 main ideas of this approach:

  • First, the economy’s structure of factor endowments (defined as the relative composition of natural resources, labor, human capital and physical capital) is given at each stage of development and differs from one stage to another. Therefore, the optimal industrial structure of the economy will be different at different stages of development. Different industrial structures imply, in addition to differences in capital intensity of industries, differences in optimal firm size, scale of production, market range, transaction complexity, and also different nature of risks. As a result each industrial structure requires corresponding soft and hard infrastructures6 to facilitate its operations and transactions.
  • Second, each stage of economic development is a point in a wide spectrum from a low-income, subsistence agrarian economy to a high-income industrialized economy, not a dichotomy of two economic development stages (“poor” versus “rich” or “developing countries” versus “industrialized countries”). Due to the endogeneity of industrial structure at each stage of development, the targets of industrial upgrading and infrastructure improvement in a developing country should not necessarily refer to the industries and infrastructures that are in place in high income countries. 
  • Third, at each given stage of development, the market is the best mechanism for effective resource allocation. However, economic development as the dynamic process of moving from one stage to the next requires industrial upgrading and corresponding improvements in hard and soft infrastructures. The industrial upgrading is an innovation. The pioneer firms in the upgrading process generate non-rivalry, public knowledge to other firms in the economy (Jones and Romer 2009; Rodrik 2004; Harrison and Rodriguez-Clare 2009). The improvements of infrastructures have large externalities to firms’ transaction costs and returns to capital investment. Thus, the government should play an active, facilitating role in the industrial upgrading and in the improvements of infrastructures.

Interesting. WB Chief economist asking for a more clearer role of Government in development. But then again the role is more of a facilitator. He also has a useful distinction between the three theories in the middle of the paper.

He adds that it is not another development framework:

The new structural approach to economics is not an attempt to substitute another grand development theorizing to various policy frameworks (often ideologically-based) that have dominated development thinking in past decades, yet showing little connection to the empirical realities of individual countries. Rather, it is an approach based on a set of principles that have guided the success of a wide sample of developing countries. It suggests a path towards country-based research that is rigorous, innovative and relevant to policy.

This framework raises several questions for researchers in the academia and in international and national development agencies. It stresses the need to better understand the role of government in industrial upgrading and the development of soft and hard infrastructures in the process of economic development: How can a successful development strategy be designed and implemented? What advice should be given to developing countries trying to move from an environment characterized by distortions due to inappropriate government interventions to a first-best world? How to ensure that such transitions work well? New structural economics posits that because of the different structure of economies at different stages of development, the targets of reform for poor countries should not necessarily refer to the policies and institutions that prevail in high-income countries.

And asks WB to chip in with its vast research resources and agenda for development:

As one of the largest and most productive development economics research groups in the world, the World Bank Research department is a major producer of analytic tools directly applicable to operational issues, and in high demand by governments, development partners and civil society. Current World Bank research has developed a heavily sectoral approach because it responds to concrete questions and specific gaps in the understanding of the development process at the sectoral level, where many of the most pressing development problems are faced. This is also due to the fact that the World Bank today has a largely sectoral orientation in both lending and policy advice. The work is often country-specific, although efforts are also made to undertake similar research in comparator countries to enrich our understanding of what other factors affect the results and thus policy recommendations. The gaps in knowledge that are addressed emerge in large part from interactions with operations, donors and client countries.

 Read on….

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2 Responses to “New Structural Economics – A new framework for development”

  1. New Structural Economics – A new framework for development … | DevBlogr Says:

    […] See the original post: New Structural Economics – A new framework for development … […]

  2. The growth report and new structural economics « Mostly Economics Says:

    […] New Structural Economics (NSE) is an idea being promoted by WB chief economist Justin Lin. He argues for a bigger role for government but not as a doer but a facilitator. […]

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