New New StructuralNew Economics “This splendid collection of essays, by one of the world’s outstanding experts on economic development, puts to work a newly emerging view, which he has helped to shape, of why in recent decades some countries have prospered while others have languished. Lin’s focus is on countries that were all economically Structural underdeveloped six decades ago, but his analysis offers strong hints about future prospects of the rich world as well. His style is dispassionate and unadorned by drama, which makes the essays all the more moving and illuminating.” — Sir Partha Dasgupta Frank Ramsey Professor Emeritus of Economics, University of Cambridge Economics “New Structural Economics is a truly important and ambitious book. Justin Lin, A Framework for Rethinking with some help from other distinguished scholars, has succeeded in laying out the complex structural microeconomic dynamics of economic growth, diversification Development and Policy and development, and in capturing the crucial complementary roles of government as investor, regulator, coordinator of activity and expectations, and guide. All of this is set in a global economy that is itself in the midst of massive structural change. This book will become an essential reference for scholars and for policy makers not only in developing countries, but also, increasingly, in developed countries.” — Michael Spence 2001 Nobel Prize in Economics William R. Berkley Professor in Economics and Business, New York University Leonard N. Stern School of Business “The World Bank has long been committed to the goal of achieving a world without poverty. In this brilliant volume, its Chief Economist, Justin Yifu Lin, lays out an economic agenda for how to make this dream a reality. He argues that the successes of China can be achieved elsewhere around the world, and explains clearly and forcefully the structural transformations that will be required and the role that government can and must play in that transformation. The book will be a landmark in rethinking development. It provides an alternative to the Lin Yifu Justin now discredited Washington Consensus policies that guided the Bretton Woods Institutions for years. Justin Lin’s ideas have already stirred discussion and debate. This book will ensure that they will continue to be central in the reexamination of developmental policy.” — Joseph Stiglitz 2001 Nobel Prize in Economics University Professor, Columbia University Justin Yifu Lin ISBN 978-0-8213-8955-3 90000 9780821 389553 SKU 18955 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 findings, interpretations, and conclusions expressed in this volume do not necessarily reflect 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 Office 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.