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My colleagues who serve as regional chief economists at the Bank -- Shanta Devarajan, Kalpana Kochhar, Indermit joined me at a roundtable discussion during the recent World Bank-IMF Spring Meetings in Washington and a lively debate ensued about whether a new wave of thinking in development economic is needed. A joint rejoinder to my ideas by Shanta, Kalpana and Indermit was posted on his space last week, and now I have a full counterpoint on Let’s Talk Development: http://blogs.worldbank.org/developmenttalk/the-development-debate-a-rejoinder Let me summarize some of my views here: First, I think the World Bank should reopen the search for the causes of structural change. Another big takeaway message is that pragmatism is paramount. Many past and existing policy prescriptions for poor countries overlook that they will not be implemented in the context of a ‘first best’ world. In fact, all World Bank country clients are in the ‘second best’, ‘third best’, or even ‘nth best’ world. While we should understand what an ideal, first-best world looks like, our recommendations to be helpful should pragmatic and sensitive to context. I do not share with my colleagues what seems like blind faith in the reforms proposed as part of the Washington Consensus of the 1990s, which Shanta claims failed largely because national level policymakers did not buy-in to them and because corruption and vested interests blocked any hope of enduring reform. Unlike Shanta, I do not believe that the recent acceleration of economic growth in Africa from about 3 percent a year to almost 6 percent a year is due to the implementation of Washington Consensus policies “that they emerged from a domestic consensus.” The simple, back-of-the-envelope cross-country regression shown below reveals that the most important parameter explaining the growth performance in Sub Saharan African countries is the resource intensity of the country. The World Bank Group’s Doing Business ranking, which started to be available in 2006 and has evolved considerably since then as a means of ranking the quality of countries’ investment climates, does not consistently appear to predict which countries will record strong growth. In fact, their rankings of African countries seem to reveal just the opposite (their positive coefficients may suggest that a worse business environment at times goes hand in hand with stronger country growth performance): http://blogs.worldbank.org/africacan/files/africacan/equation.gif I also hold the countervailing view that a country with a poor business environment does not have to wait until all the distortions/interventions are removed before it takes off. However, the caveat is that it should pursue targeted industries that are consistent with comparative advantage and the government should proactively help overcome the inherent coordination and externality issues in their growth. Many distortions certainly result from political capture, financial repression, or to the imperative of revenue generation. Political leaders always have some discretionary powers and are not necessarily hostages of elite capture. The key to success is to use those discretionary powers in areas where they can achieve quick wins. My colleagues also underestimate the scope and importance of proactive government support to create the conditions for successful industry. I do not share Indermit’s view that a noticeable shift in development policy in the 1980s and 1990s (with governments reducing their control of industry, embracing trade, and increasing their attention to education and health and social security) led to “a surge in development—especially in Asia and Europe.” The issue of reform is not only the direction of reform, but also the scope, pace and sequencing of reforms because the countries are not operating in a first-best environment but Nth-best world. While I agree with Indermit that government interventions in pursuit of comparative advantage defying (CAD) strategies are misguided, I also believe that the generic Washington Consensus-type of policy prescription to simply move away from facilitating structural transformation (a prescription based on past failures of CAD strategies) amounts to throwing the baby away with the bath water. I appreciate Indermit’s acknowledgement that I believe in new industrial policy because I have seen up-close the workings of a very capable government. But it has not made me forget my training of economic history at the University of Chicago, which I cherish. It has made me understand that in the catching up stage from an agrarian to an industrialized and most technologically-advanced economy in the world, the US government played proactive role in the structural transformation of the American economy. Long after the catch up, the US government continues to play a proactive role in facilitating technology and industrial innovation through patent, support for some basic research, procurement schemes to specific firms, and mandates. Except for patents, the other policy measures used by the US government actually correspond to picking winners. I hope this debate can continue, as I think it’s central to the mission of poverty reduction.