Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Economics Structural New Development andPolicy Rethinking for A Framework Justin Yifu Lin Yifu Justin New Structural Economics New Structural Economics A Framework for Rethinking Development and Policy Justin Yifu Lin © 2012 International Bank for Reconstruction and Development / International Development Association or The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org 1 2 3 4 15 14 13 12 This volume is a product of the staff of The World Bank with external contributions. The fi ndings, interpretations, and conclusions expressed in this volume do not necessarily refl ect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dis- semination of its knowledge, this work may be reproduced, in whole or in part, for noncom- mercial purposes as long as full attribution to the work is given. For permission to reproduce any part of this work for commercial purposes, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Offi ce of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. ISBN (paper): 978-0-8213-8955-3 ISBN (electronic): 978-0-8213-8957-7 DOI: 10.1596/978-0-8213-8955-3 Library of Congress Cataloging-in-Publication Data Lin, Justin Yifu, 1952- New structural economics : a framework for rethinking development / by Justin Yifu Lin. p. cm. Includes bibliographical references and index. ISBN 978-0-8213-8955-3 -- ISBN 978-0-8213-8957-7 (electronic) 1. Economic development. 2. Neoclassical school of economics. I. Title. HD75.L56 2012 338.9--dc23 2011050744 Cover design and photo illustration: Critical Stages Contents Acknowledgments ix Abbreviations xi Introduction 1 I New Structural Economics: A Framework for Rethinking Development 11 Comments 48 by Anne Krueger, Dani Rodrik, Joseph E. Stiglitz Rejoinder: Development Thinking 3.0: The Road Ahead 66 II The Growth Report and New Structural Economics 81 with Célestin Monga Debate: Should Industrial Policy in Developing Countries Conform to Comparative Advantage or Defy It? 113 with Ha-Joon Chang V VI | Contents III Growth Identifi cation and Facilitation: The Role of the State in the Dynamics of Structural Change 141 with Célestin Monga Comments and Rejoinder 181 with Dirk Willem te Velde, Suresh D. Tendulkar, Alice Amsden, K.Y. Amoako, Howard Pack, Wonhyuk Lim, and Célestin Monga IV Applying the Growth Identifi cation and Facilitation Framework: The Case of Nigeria 215 with Volker Treichel V Financial Structure and Economic Development 259 with Lixin Colin Xu VI Development Strategy, Institutions, and Economic Performance 285 VII Epilogue: The Path to a Golden Age of Industrialization in the Developing World 349 Index 357 Box IV.1: Applying the GIFF: Comparative Value Chain Analysis 228 Figures IV.1: Evolution of Total Factor Productivity 220 IV.2: Total Factor Productivity Relative to the United States 221 IV.3: Prioritization of Value Chains for Further Investigation 235 VI.1: Relative Price of Production Factors and Technique Choice 293 Contents | VII VI.2: Product Choice in an Industry 294 VI.3: Industry and Product Choices in an Economy 295 VI.4: The TCI and Black-Market Premium 323 VI.5: The TCI and the IEF 324 VI.6: The TCI and Expropriation Risk 325 VI.7: The TCI and Enterprise Autonomy 326 VI.8: The TCI and Openness 327 VI.9: Development Strategy and Income Distribution 334 Tables IV.1: Macroeconomic Aggregates, 2003–2009 219 IV.2: Real Non-Oil GDP Growth, 2003–2009 220 IV.3: Contribution to Non-Oil GDP 222 IV.4: Labor Force Status 223 IV.5: Types of Employment as a Percentage of the Sample Population 224 IV.6: Types of Wage Employment 224 IV.7: GDP Per Capita PPP in 2009 230 IV.8: Identifying Sectors for Growth: Key Exports of China, India, Vietnam, and Indonesia 232 IV.9: Nigeria’s Top Imports, 2010 234 IV.10: Criteria for Screening Potential Subsectors 238 IV.11: Average Wage, Including Benefi ts, by Industry 239 IV.A1: Growth-Inhibiting Cross-Cutting Constraints, Interventions and Expected Outcomes 246 VI.1: Level of Per Capita Income 300 VI.2: Variable Defi nitions and Data Source 329 VI.3: Development Strategy and Economic Growth—Model 1 330 VI.4: Development Strategy and Economic Growth—Model 2 331 VI.5: Development Strategy and Economic Volatility 333 VI.6: The Effect of Development Strategy on Inequality 336 VI.7: Development Strategy and the Performance of Economic Reform/Transition 338 VI.A1: TCI Based on Value Added in the Manufacturing Sector 341 Acknowledgments This volume presents the key fi ndings of my research program on New Structural Economics (NSE), which I conducted during my tenure as Chief Economist and Senior Vice President of the World Bank from 2008 to 2011. This contribution to development economics and policy would not have been possible without the overall guidance and support of Robert Zoellick, President of the World Bank Group. I am grateful to Bob for his encouragement and valuable advice over my tenure. I am also very thankful to K. Y. Amoako, Alice Amsden, Ha-Joon Chang, Anne Krueger, Wonhyuk Lim, Howard Pack, Dani Rodrik, Joseph Stiglitz, Suresh Tendulkar, and Dirk Willem te Velde for providing insight- ful and detailed comments on the NSE framework. Their contributions fueled a thought-provoking and enriching debate about the framework and are presented in this book. In addition, I would like to thank my many friends and colleagues who provided thoughtful inputs and suggestions on various aspects of the work presented here and throughout the research process. In par- ticular, I am grateful to Shaida Badiee, Gary Becker, Otaviano Canuto, Ha-Joon Chang, Robert Cull, Augusto de la Torre, Christian Delvoie, Asli Demirgüç-Kunt, Shantayanan Devarajan, Hinh Dinh, Doerte Doemeland, IX X | Acknowledgments Shahrokh Fardoust, Ariel Fiszbein, Robert Fogel, Alan Gelb, Indermit Gill, Ann Harrison, James Heckman, Vivian Hon, Jiandong Ju, Auguste Tano Kouame, Aart Kraay, John Litwack, Norman Loayza, Frank Lysy, Shiva Makki, William Maloney, Célestin Monga, Mustapha Nabli, Vikram Nehru, Ngozi Okonjo-Iweala, Howard Pack, Luiz Pereira da Silva, Nadia Piffaretti, Claudia Paz Sepulveda, Brian Pinto, Zia Qureshi, Martin Ravallion, David Rosenblatt, Sergio Schmukler, Luis Servén, Sunil Sinha, Hans Timmer, Volker Treichel, Harald Uhlig, Lixin Colin Xu, Yong Wang, and the many others whom I have had the pleasure and opportunity to collaborate with during the production of the manuscript. I would like to express special thanks to Doerte Doemeland, who worked closely with me in the fi nalization and editing of the manuscript. The research on NSE evolved from my previous work on economic development and transition at the China Center for Economic Research at Peking University. Several papers produced during that period are also included in this volume. I would like to take this opportunity to thank my former colleagues, Qiang Gong, Demin Huo, and Ho-Mou Wu, and for- mer students, Binkai Chen, Shudong Hu, Feiyue Li, Yongjun Li, Zhiyun Li, Mingxing Liu, Peilin Liu, Xifang Sun, Zhaoyang Xu, and Pengfei Zhang for their support and collaboration in the research. Last, the World Bank’s Offi ce of the Publisher provided excellent edi- torial, design, and printing services under the direction of Carlos Rossel. In this context, I would like to thank Santiago Pombo-Bejarano, Patricia Katayama, Aziz Gökdemir, Andrés Meneses, and Martha Gottron. Abbreviations CAD comparative-advantage-defying CAF comparative-advantage-following DC developed countries GDP gross domestic product GIFF Growth Identifi cation and Facilitation Framework GMM Generalized Method of Moments HRS Household Responsibility System IEF Index of Economic Freedom IMF International Monetary Fund LDC less developed countries NIE newly industrialized economies NSE New Structural Economics R&D research and development TCI Technology Choice Index TFP total factor productivity TVE township and village enterprises (China) UNU-WIDER United Nations University – World Institute for Development Economics Research XI Introduction The quest for sustainable growth has been the most intriguing topic in the world for economists and policy makers since Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations was published in 1776. Measured by today’s living standards, all countries in the world were poor at the beginning of the 18th century. Their economies were pre- dominately based on agriculture. Growth of gross domestic product (GDP) per capita had lingered at around 0.05 percent a year for millennia. Only after the onset of the Industrial Revolution did per capita income growth in the now advanced countries accelerate, jumping to around 1 percent a year in the 19th century and doubling to about 2 percent in the 20th cen- tury. This was an unimaginable change. While it took about 1,400 years for world income to double before the 18th century, the same process took only about 70 years in the 19th century and only 35 years in the 20th cen- tury for the now advanced countries (Maddison 1995).