October 14, 2012 11:19 pm

Pragmatic search for path to prosperity

A former chief economist of the World Bank has come up with an original and intelligent new model of economic development

The Quest for Prosperity: How Developing Economies Can Take Off, by Justin Yifu Lin, Princeton University Press, RRP £20/$28

 

Justin Lin, the Chinese economist who was, until recently, chief economist of the World Bank, has written a book that is as remarkable as it is ambitious: its aim is to show the route to economic development. This is ambitious, because it has been the holy grail of economics since its inception. It is remarkable, because he largely succeeds. One does not have to accept everything Lin argues to recognise that he has made an invaluable contribution.

The salient attribute of Lin’s way of thinking is practicality. As an admirer of China’s late leader, Deng Xiaoping, he, too, does not care if a cat is black or white, so long as it catches mice. He recognises the decisive contribution of market forces. But he also argues for the role of government in prodding those forces in the right direction. Only thus, he argues, can countries make the long journey from poverty to prosperity.

More precisely, the book promotes a “new structural economics”. This is to be distinguished from the old structural economics, which influenced economists in the 1950s and 1960s, and the neoclassical economics of the faculty at the University of Chicago, where Lin studied in the 1980s.

As in the old structural economics, the version advanced by Lin recognises the importance of obstacles to economic progress that individual entrepreneurs cannot overcome on their own. But in opposition to that school Lin, influenced by his training and east Asian experience, points to the importance of exploiting a country’s comparative advantage. In his rejection of what he labels the “comparative advantage-defying” strategy, Lin is in line with neoclassical economics. But he also emphasises the role of active government in guiding the economy and overcoming obstacles to the process of continual economic upgrading. This, then, is heterodox thinking.

Yet how is this approach to be turned into practical policy? The answer is to be found in what Lin calls his “growth identification and facilitation framework”.

This has six steps. First, choose a country to follow that has a roughly similar set of resources, but about double the real income per head. Then identify tradeable industries that have grown for two decades. Second, if businesses are already active in these activities, identify constraints to further upgrading and new entry. Then act to remove them. Third, where no such businesses are yet active, look for foreign direct investment in these activities. Fourth, look for industries where domestic businesses are already successful and support scaling up: improvements in infrastructure or support for research and development are possibilities. Fifth, where infrastructure and business environments are poor, concentrate activities in special economic zones or industrial parks. Sixth, provide time-limited incentives to pioneering companies.

The underlying idea that development goes in leaps, but small ones, makes sense. One must be ambitious, but not too ambitious. That is a good summary of what countries such as Singapore and South Korea have done.

Lin applies his framework to some obvious challenges: the experience of reform in former socialist economies; and the plight of countries stuck in what has come to be called the “middle-income trap”. He has interesting things to say. But his assumption that Boris Yeltsin had the same political and economic choices as Deng is, to me, unpersuasive.

Indeed, it not clear that this is a universally applicable theory of economic growth. Lin ignores the problem of composition, for example: it may be difficult for every poor country to follow a similar path, at the same time – how many garments does the world want? Another objection is that he underplays the problems facing countries with a comparative advantage in resource-based activities, including agriculture. Yet another difficulty is that certain countries face particularly difficult constraints: landlocked countries surrounded by poor neighbours with inadequate infrastructure are an obvious example. Again, Lin assumes away the question of resource constraints as development spreads across the planet.

Yet these are niggles. Beyond doubt, this is an important contribution. Perhaps because he is an insider, Lin has done a better job of explaining why the east Asian approach to development worked than anybody else. Of course, his approach assumes competent supportive government. But without that, development is not going to work anyway. Moreover, the book is also excellently written. A book on a subject of the highest importance, which is intelligent, original, practical and thought-provoking, deserves indeed to be read. Readers, do so.

The reviewer is chief economics commentator of the Financial Times

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