Probably not, the New Structural Economics won’t make it as far as becoming a new consensus in development economics. But the debate triggered by the Chief Economist of the World Bank  Justin Yifu Lin is an interesting one.

The NSE is basically a milder version of economic structuralism, an approach from the ’60s and ’70s that entailed strong state interventions in the economy, import-substitution and protection of domestic industries. The “New Structural Economics” makes a step closer to the  “Washington Consensus”  as it believes that markets are the best mechanism for allocating resources. At the same time, however, it says that governments must play a central role in facilitating industrial upgrading and structural change -not in all sectors of the economy, but only in those where the country has a comparative advantage. In other words, governments must “follow” markets, not “lead” them wherever they hope to succeed.

Lin summarizes the principles of NSE in three points (the ungated older version of the paper is here):

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.

This topic hasn’t “trickled down” yet from academic circles to the blogosphere (or did I miss something?) but several thought-leaders have commented on the issue.

Dani Rodrik, for example, agrees with most arguments but criticizes the idea of following strictly the comparative advantage:

Lin doesn’t want governments to employ “conventional” import substitution strategies to build capital-intensive industries which “are not consistent with the country’s comparative advantage.” But isn’t building industries that defy comparative advantage what Japan and South Korea did, in their time? Isn’t it what China has been doing, and quite successfully, for some time now? According to my calculations, the export bundle of China is that of a country between three and six times richer. If China, with its huge surplus of agricultural labor, were to specialize in the type of products that its factor endowments recommend, would it now be exporting the advanced products that it is?

Anne Krueger criticizes Lin’s excessive focus on industrial expansion for development:

Lin’s NSE seems to equate growth with industrial expansion, ignoring the importance of increased productivity of the large fraction of the labor force (and of land) in rural areas. Failure to invest in agricultural research and development and in rural health and education has been a major weakness of many countries’ development strategies. While strides have been made in reducing discrimination against agriculture, the NSE as exposited by Lin would appear to support the industrial and urban bias that has itself constituted a very large distortion in some countries.

I would like to see some more commentaries on the topic. Hopefully now that the World Bank President has been chosen, there will be more space for some  good-old policy debate.

If you are interested in the book, you can find it here.

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