Wednesday, 4 April 2012

Rethinking development around new structural economics: What do the World Bank president candidates think?

By Carlos Fortin

Considering the world is trying to find its way out of a deep financial crisis, the question of who will become the next World Bank president is a matter of importance, particularly for development and developing countries.

As of now there are three candidates (Jim Yong Kim from the US, Ngozi Okonjo-Iweala from Nigeria and Jose Antonio Ocampo from Colombia) and the discussion on their relative merits has almost exclusively centered on their nationality.

I believe we should move away from that emphasis and concentrate rather on their ideas on the current development challenges and their approaches to meeting them.  A recent draft of a paper by Justin Yifu Lin, Senior Vice President and Chief Economist of the Bank, entitled New Structural Economics. A Framework for Rethinking Development might provide the occasion to do just that.

A framework for rethinking development
For Latin American development economists  the term “structuralism” conjures up the name of Raúl Prebisch and the work of the United Nations Economic Commission for Latin America, which in the 1950s and 1960s put forward an alternative view of inflation to that of Milton Friedman and the Chicago monetarists. Structuralism is not an approach one would associate with the World Bank, whose endorsement of the so-called Washington Consensus would surely place it closer to the neoliberal-monetarist end of the spectrum.

Is Lin’s paper an about-face for the Bank?  Is the World Bank recognising, in the aftermath of the financial crises, that an entirely different approach from that of neoliberalism is called for?

Well, not quite.  Lin explains the similarities and differences between the ‘new’ and ‘old’ structural economics thus:
In terms of similarities, both approaches take the structural differences between developed and developing countries seriously and acknowledge the active role of government in the process of economic development; facilitating the movement of the economy from a lower stage of development to a higher stage of development. While old structural economics recommends developing country governments go against its economy’s comparative advantages and overcome market failures to develop advanced capital-intensive industries through direct administrative measures and price distortions; the new structural economics suggests that the market should serve as the fundamental resource allocation mechanism and the government should only play the role of a “facilitating” state to assist firms to upgrade to industries that are consistent with the economy’s comparative advantages.
According to  Lin, while neoclassical economics “generally assumes a minimalist state whose role is limited to protection of property rights, maintaining law and order and compensating for externality”, the new structural  economics “offers a clear rationale for having a proactive, facilitating state in the process of economic development”.

In Lin’s paper, therefore, the new structural economics seems to involve some non-negligible departures from the tenets of orthodox analysis. In one crucial respect, however, it does not.  As he himself puts it, while for the Latin American structuralists market failures are:
exogenously determined by incorrect price signals distorted by monopoly, or by labor’s perverse response to price signals, and/or the immobility of factors … by contrast, the new structural economics posits that the failure to develop advanced capital intensive industries in developing countries is endogenously determined by their endowments.
Governments can only “use industrial policy to facilitate the upgrading to industries that are consistent with the country’s comparative advantages.”

For all that, the paper represents  a significant move in the direction of finding a common ground among reasonable defenders and opponents of liberalisation and globalisation (the published version of the paper will include comments by  Anne Krueger, Dani Rodrik and Joseph E. Stiglitz).

Let’s ask what the candidates think
What the ultimate fate of the new approach within the Bank will be is unclear. Lin is retiring in June, and so is Robert Zoellick, the current President, who seemingly supported decidedly the production of the paper. So the ideas of those stepping in will surely guide the World Bank along a new path - shouldn’t we ask them?


Anonymous said...

Hi Thanks for the post. What do you think of "comparative advantage" in this whole "new" idea of Lin's. Other economists like Ha-Joon Chang have argued that countries do/did defy their comparative advantage in their developmental phase.


Carlos Fortin said...

I agree with Chang that countries need to "defy" their comparative advantage in order to move up the technology ladder,although it must be done carefully. An enlightening exchange on the issue between Lin and Chang can be found at
Carlos Fortin

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