The eternal quest

The oldest questions are the most important. Adam Smith started it with his . Over time, the developed world has come to take prosperity for granted (it might be changing), and the question has focused on why some countries have remained poor. As Bill Easterly’s book labelled it, it was . There is now a new contribution by Justin Yifu Lin, until recently the World Bank’s first non-western chief economist, . It will be a must-read for anyone interested in development economics, and for anyone rethinking the role of industrial policy in developed economies too.

I’ve always thought ‘growth miracle’ was exactly the right term for the handful of experiences of catch-up in the post-WW2 era: rare and dramatic. Each example has also had its own special characteristics; generalisation into standard policy prescriptions is difficult, and the most widely applied prescription – the so-called Washington Consensus – is discredited. So it would seem either brave or foolhardy to offer an alternative. But I think this book offers a very credible general prescription which inherently recognises that every country will need to adapt this to its own circumstances. Not surprisingly, in this post-crisis economic moonscape, Lin ditches everything about the Washington Consensus but its sensible macroeconomic stability measures. Not surprisingly, for a Chinese economist, he assumes an important role for the government, albeit a role a large and growing number of conventional neoclassical economists will find sensible.

In a nutshell, the argument is that countries must play to their comparative advantage. A resource-rich African country with ample labour but little capital (human or physical) is foolish to opt for an import-substitution policy aiming at the capital-intensive top of the value chain – as so many newly independent countries tried in the 1960s and 70s. On the other hand, they absolutely should aim to substitute simpler manufactures for imports. Import substitution of this realistic kind – a link or two along the value chain – is a “necessary step”. Often the investment and expertise will come from inward FDI.

The government should identify the kinds of activity that play to comparative advantage and strategic potential, and provide the infrastructure that will be needed. This is not ‘picking winners’ but it is making choices, as different sectors will require different infrastructure priorities. Lin calls it a ‘new structural economics’:

“It sees the state as a facilitator that helps a developing country convert its backward structure to a more modern structure in an open market economy.”

Post-crisis, it sounds more like common sense than a grand new theory, but then economists are on quite a journey these days. Lin distinguishes it, though, from an older structural economics associated with ‘big push’ development theory, in endogenising the direction in which the state should be pushing.The ideal industrial structure will change as the economy develops but will always be guided by the resources and skills available at each stage. At each stage, the market is the best allocation mechanism, but the state needs to enable development by investing in infrastructure that reduces firms’ transactions costs and enables them to compete viably in international markets. This includes ‘soft’ infrastructure. For example, freight and insurance costs in many African countries are 250% of the global average, and road transportation takes two or three times longer than in comparator Asian countries.

The book also distinguishes this framework from the approach of pre-crisis mainstream structural adjustment economics, which made the mistake, he argues, of advocating the removal of economic distortions without understanding that the distortions were second-best workarounds of strategically mistaken state support for firms that are not viable given the resources and skills available.

It is a bit dismissive of the other recent hot new trend in development economics, the use of randomised control trials, as described in Banerjee and Duflo’s . Lin says these are of limited use as the results do not generalise. But then, his top-down framework does not generalise either; in fact he specifically says country-specific context makes a difference for policy. It would have been nice to see him engage more with the RCT approach.

Clearly, the framework can apply to any country at any stage of development along the spectrum, and the book has a useful checklist for policymakers. Its level of generality is high, but a prescription for growth that does not say ‘all you have to do is X’ is very welcome. After a century of misfired silver bullets, some endogenous policy prescriptions are very welcome. Lin sums up his approach for me with an apt Chinese proverb: “One cannot pull up the seedlings to make them grow.”

[amazon_image id=”0691155895″ link=”true” target=”_blank” size=”medium” ]The Quest for Prosperity: How Developing Economies Can Take Off[/amazon_image]


2 thoughts on “The eternal quest

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