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Why ‘Securing Transformation’ matters in development economics

Justin Yifu Lin's picture

In his September 29 speech at Georgetown on ‘Democratizing Development Economics’, World Bank Group President Robert B. Zoellick insisted on the importance of ‘securing transformation’. The new structural economics approach to development, which I have proposed, aims exactly at that objective.

 Photo: © Simone D. McCourtie / World Bank
As I see it, ‘securing transformation’ highlights certain key features in the economic development process: the importance of endowments; different industrial structures atvarious stages of development and various distortions stemming from past, misguided interventions by policymakers whose belief in old structural economics led them to over-estimate governments’ ability to correct market failures.

The securing transformation approach points several shortcomings in the Washington Consensus. First, the Washington Consensus often failed to take the structural differences between the developed and developing countries into consideration. Second, it overlooked the need for the state to help overcome the externality and coordination issues that arise in the process of industrial upgrading and diversification.Third, it ignored the existence of various types of distortions in developing countries, and the fact that their economies are always in second-best [create link to paper by Davis and Whinson on Welfare Economics and the Theory of the Second Best situations—if not worse.

The main criterion for assessing applied research in development economics is its relevance to the most pressing policy issues at hand. Yet, in reality, many of the countries that have achieved some degree of convergence with industrialized countries in the past fifty years have not followed the often orthodox prescriptions advocated in the most influential policy circles. Development economists must learn from the experiences of these countries that have not followed conventional wisdom, yet have done better at reducing poverty than others. Moreover, the recent global economic crisis has challenged the economic profession to reexamine the validity of some of its existing knowledge, including on development thinking. With this in mind, the new structural economics approach also stresses the need to update the research agenda on key issues and questions related to development paradigms.

Over the past decade, the World Bank has initiated a number of research projects to draw lessons from successful economies’ experiences. These projects, which include the East Asian Miracle (World Bank, 1993), Growth in the 1990s (World Bank, 2005), and the Growth Report (World Bank, 2008), have produced many useful stylized facts for determining the success or failure of economic development. The proposed new structural economics is a continuation of that effort and attempts to develop a general framework for understanding the causality behind the observed stylized facts.

Photo: Edwin Huffman / World Bank

Specifically, the new structural economics proposes to (i) develop an analytical framework that takes into account both factors and infrastructure endowments; (ii) analyze the roles of the state and market at each development stage and the transition from one stage to another stage; and (iii) focus on the causes of economic distortions and the governments’ exit strategies from the distortions.

This framework stresses the need to better understand the implications of structural differences at various stages of a country’s development on appropriate institutions and policies and the roles of market and state in the process of economic development.  It also suggests a user-friendly framework for designing and implementing a successful industrialization strategy, that is doing it in a way that is consistent with comparative advantage, and therefore avoids the traps of the so-called “old” structural economics approach.

The proposed new structural economics is complementary to the existing sector-oriented research at the World Bank. There are obvious links between the new approach and ongoing work in the trade, macroeconomics and finance teams of the Bank’s Research Group. It is expected that links will emerge with the work of other teams (poverty, human development, rural development, and environment).

Such a new perspective is sure to generate exciting new areas for research. 

The current state of development economics and the severe impact of the global crisis on the economies of developing countries have generated strong demand for a new framework for development thinking. For its part, the World Bank must play a leading role in the global community in the search for new thinking based on continuous examination of developing countries’ experiences of successes and failures.

I am confident that the research agenda of new structural economics will enrich the World Bank’s research and enhance our understanding of the nature of economic development so as to assist low- and middle-income countries achieve dynamic, sustainable and inclusive growth, and eliminate poverty.
 

Comments

Developing countries are generally trapped by a combination of various factors such as the status of infrastructure endowments, market distortions and untimely state interventions. However, those economies which have let the private sector take the lead have shown an ability to respond rather rapidly to reversals in market situations. The situation of Bangladesh, which survived the post-MFA period despite various negative predictions and has been able to carry on at a steady growth rate during the world-wide recession may be cited as an example. It is important to understand that in an age of increasing competitiveness the ability to respond to a particular market situation has overcome the theory of comparative advantage.