Justin Lin, a former Chief Economist at the World Bank, is the author of several works on what he calls ‘new structural economics’. His latest book, Beating The Odds, is co-written with Célestin Monga, the current Chief Economist at the African Development Bank. It is ambitiously subtitled Jump-Starting Developing Countries.
The book contains some useful ideas on development policy, although for those more wedded to a political economy of development, rather than neoclassical economics, and all the self-styled ‘new’ branches of neoclassical theory, it is necessarily limited, compared to a more interdisciplinary story of development theory and policy.
I shall start with what is good in the book, and move on to what is missing, from the perspective of what I find to be a richer framework of political economy.
First of all, the authors argue that economic development should be seen as a process of structural transformation, involving resource shifts from low to higher productivity sectors over time. Secondly, that industrialization is a necessary part of this. Thirdly, they emphasize the importance of agriculture in development.
Fourthly, the book makes a case for state intervention and an industrial policy in order to accelerate development. These are needed to overcome market failures in poor countries such as externalities and coordination problems. Fifthly, that apparently poor initial conditions, such as culture, politics, institutions and so on, need not be a constraint on development. These can be improved as development proceeds.
Sixth, countries should take advantage of the opportunities provided by globalization by developing industries which can integrate into global value chains. Seventh, the analysis is apparently contextual, in that development policy should also attempt to take advantage of the particular country’s ‘latent’ comparative advantage, which is largely determined by initial resource endowments of land, labour and capital. Lastly, developing countries should encourage the formation of Special Economic Zones (SEZs) and Export Processing Zones (EPZs), and adopt policies which turn them into industrial clusters. These could be started with Foreign Direct Investment (FDI), or domestic firms if they have the capacity.
Much of this seems to be practical, and as the authors argue, an apparent step-forward from the market fundamentalism of the so-called Washington Consensus. The analysis in the book does draw on some historical experiences of development, although this is mostly in the form of historical data, which is very different from a historical analysis.
Nevertheless, the book remains hamstrung by its attachment to neoclassical economics, with the market as central to the analysis. From the perspective of political economy, it fails to provide deeper context-specific case-studies of development successes and failures. As is par for the course, little historical, political or social context is provided. Constraints on development are seen largely as forms of market failure. This may be true as far as it goes, but what are surely the interrelated political, social and economic processes of development are neglected.
A more satisfactory account of the political economy of development is interdisciplinary: the economic is important but evolving social and political factors should also be part of the story. Development is certainly a process of transformation, but it would be more helpful if the authors provided some deeper historical examples of the successful emergence of capitalism, which involves among other processes the creation of new social classes and shifting power relations in society. The socioeconomic transformation that it entails can be conflictual, and may require a state with the ability to create political stability even as property rights shift.
Lin’s argument that developing countries should encourage industries with latent comparative advantage is tautological, since successful industries will appear to have been those in which comparative advantage was given at some stage. The factor endowments that determine comparative advantage are treated as given, rather than historically specific and path-dependent, even created by state intervention.
While there are plenty of examples of industrial policy failure in the history of development, there have been some spectacular successes. South Korea is often cited as one of the latter. The government surely went against latent comparative advantage by setting up a state-owned iron and steel company in the 1960s. Officials understood that the steel industry has many forward and backward ‘linkages’ to related industries, which could be encouraged to emerge as development proceeded. Competitive steel production for the world market took some time to attain, but South Korea’s industrial policy was a significant factor in the country’s industrial upgrading. Comparative advantage was often created rather than latent.
Lin is also known for arguing for the relevance of the ‘flying geese’ paradigm of development. According to proponents, developing (low wage) countries should specialize in production for the world market in industries which richer nations used to produce when their wages were lower. The argument is that productivity and wages should rise together as development proceeds and the ‘leading goose’ will abandon industrial production in which it no longer has a comparative advantage due to its higher wages. This creates the opportunity for poorer ‘follower’ nations to specialize in said lower wage industries for exporting.
Follower nations will apparently remain in that position, according to the theory. This gives no scope for catching up, which is surely an important strategic aim for late developers. Industrial policy should, if possible, be more ambitious, dependent on governance capabilities. This may be risky, but its successful application requires a deeper analysis which draws on successes and failures from history. The flying geese paradigm is thus somewhat flawed.
Another weakness of the book is the absence of the concept of organizational capabilities and their key role in industrial catching up by developing countries. At early stages of development, emerging firms and their employees need to learn how to use already existing technologies, rather than innovating and creating new technologies, as happens in the leading industrial nations.
Newly emerging and growing firms and their employees in the poorest nations therefore need to be compelled to learn how to use current technologies. If countries are to catch up as rapidly as possible, there is scope for government support to these infant industries, conditional on performance. Firms that fail to grow up and become sufficiently competitive to export onto the world market, must have their support withdrawn after some period of time and states need to provide credible threats to do so.
This kind of industrial policy does require particular governance capabilities on the part of the state. However, even states in successful late developers in which this was achieved, such as Taiwan and South Korea, apparently had limited capabilities prior to their phase of rapid growth. In the same way as firms can engage in learning by doing, states can do the same, as long as they experiment and learn quickly from mistakes.
In sum, Lin and Monga’s book is a helpful summary of NSE, representing one direction that recent neoclassical thinking has taken, and incorporating some examples of market failure that a cautious state can try to overcome. I would hesitate to call it innovative, as it draws on ideas from ‘old’ development economics, and fails to acknowledge or explore a political economy of capitalism and development.
NSE is thus not so much new as a selective repackaging of particular ideas drawn from development thinkers of the past. Notions of power, conflict, class and systemic and global factors as enabling or constraining growth and development are absent. Admittedly, political economists may be asking different questions to neoclassical economists. For me these questions lead to a deeper understanding of development processes, providing more contextually specific and relevant policy suggestions. But Lin and Monga’s book is helpful as far as it goes.