Review of The Quest for Prosperity: How Developing Economies Can Take Off by Justin Yifu Lin (Princeton University Press, 2012).
A former World Bank economist promises to revolutionize development economics, but his ideas need more work.
These days in development economics everyone is doing experiments – or, in the lingo, Randomised Controlled Trials (RCTs). One village, say, is given anti-malarial bed nets for free, and another is made to pay them: the results are carefully monitored to see which village actually uses the nets the most. It all seems appealingly scientific. A pity, then, that it is not possible to conduct an RCT on development economics itself.
Imagine how such an experiment would run. One group of countries is told to follow the latest prescriptions of development economists, while a control group is told to completely ignore them. Which group would do better?
Here are two observations from history. First, from the import substitution policies of the 1950s to the ‘shock therapy’ of the post-communist transition, places that heeded the development economists have floundered more often than flourished. Second, the few sustained episodes of economic lift-off have occurred in countries ignorant of, or sometimes hostile to, economists’ advice. The early growth of northwestern Europe may have been due to benign institutions, or technical innovation, or fortuitous coal deposits – but whatever its origins, it owed more to Matthew Boulton than Adam Smith. More recently, scholars like Dani Rodrik have pointed out that rapid Chinese growth was aided by a gradualist approach to economic reform, rather than the Big Bang favoured by many Western economists.
That suggests, a little unfairly, that all development economics is bunk. How can economists respond? One answer is to to retreat from the grand narratives of the growth gurus; indeed, this is what the RCT approach attempts to do with its focus on the micro-economics of ‘what works’. But Justin Yifu Lin, in his book The Quest for Prosperity: How Developing Countries Can Take Off (Princeton University Press, 2012), offers another. Rather than giving up on the big stuff, he suggests we can learn from past mistakes. The result is his own recipe for growth, which he dubs ‘new structural economics’. If that sounds grand, it isn’t: the core of his argument is rooted in pragmatic common sense.
The opening chapters of the book are an argument against two previous approaches. The first, which he calls the ‘old’ structuralist economics, was once popular in Latin America and the newly independent countries of Africa. It involved large investment in capital-intensive industry, often supported by trade barriers, overvalued exchange rates and price controls, to overcome pervasive market failures. The second, the ‘Washington Consensus’, was promoted by the World Bank, the IMF, and right-leaning governments in the 1980s and 1990s. It advocated privatization, deregulation and liberalization, policies that were often imposed on countries in the global South.
In many ways these approaches were mirror images of each other – the dogma of state planning replaced by the dogma of the market. Before acquiring a doctorate in Chicago, Lin had studied Marxist economics, and has an eye for the dialectic: he seeks a synthesis between those two extreme positions. The failure of old-style structuralism led many to argue against any form of active industrial policy; in mainstream circles, talk of ‘picking winners’ is seen as little better than astrology. That’s a mistake, says Lin. Governments can and should encourage particular industries – but they need to be much cannier than they were in the past.
The problem with mid-century industrial policy, Lin argues, was a lack of realism. From Ghana to Indonesia, governments tried to defy the law of comparative advantage, attempting to develop capital-intensive industries despite scarce endowments of capital and abundant supplies of labour. Without the right technical and institutional capacity, these grand schemes were destined to fail; in the words of a Chinese proverb, quoted by Lin, ‘one cannot pull up the seedlings to help them grow’.
Instead, argues Lin, developing countries should exploit their comparative advantage to climb the value chain in small, steady steps. Rather than mimicking the most advanced economies, which are fifty times as rich, they should copy countries which are only slightly better off – with twice the per capita income, say. By identifying and supporting the right target industries, countries can follow the path of their predecessors – much like a formation of flying geese.
Lin offers several examples. Bangladesh developed its garment industry in the 1970s with direct investment from Korean firms; Ecuador learnt from Colombia’s experience of flower-growing. The east Asian experience, understandably, is a major influence on Lin’s work (he was born in Taiwan, and has spent much of his working life in mainland China). But he finds examples of successful industrial policy in Western economies too, citing Ireland’s rapid growth from the 1980s as one example.
Of course, Ireland’s growth also owed a lot to a credit boom and a low-tax regime designed to attract the world’s major multinationals: Google and Apple have offices there. And perhaps this is telling. For all Lin’s heterodox talk, his detailed recommendations often amount to a familiar recipe of tax breaks, special economic zones, and other goodies to lure foreign investors. At one point he considers the problem of poor infrastructure, but skips over the role of public investment in favour of ‘the power and magic of industrial parks’: designated-zones for export production, to benefit from state-of-the-art infrastructure while the rest of the country, presumably, rusts.
Perhaps we shouldn’t be surprised: Lin is, after all, a former Chief Economist at the World Bank. And there are some interesting ideas in here, about the role of the state in providing technical support, in R&D, and in targeted interventions (the Ecuadorean government, for instance, arranged regular flights and cooling facilities to support its cut-flower producers). But the whole package of ‘new structural economics’ fails to live up to the fanfare with which it is introduced.
The book is also strangely blind to the big picture. As Martin Wolf points out in his review, it’s not clear what happens if everyone follows Lin’s advice at the same time: the whole of Africa can’t suddenly start making T-shirts. And unlike the original structural economists, Lin has little interest in power: either the power of local elites to hijack the development process, or the power of wealthy countries to write rules in their favour, from climate change to trade.
Has Lin found the elixir of growth? There are ideas brewing here, but little yet to revolutionise the field. Nonetheless it is a readable book, enlivened by well-chosen quotations, though it can be repetitive in places. For those who are new to development economics, Dani Rodrik offers some similar arguments, more cogently presented. But for those with some background in the subject, and wanting to explore mainstream alternatives to free-market orthodoxy, this book is worth reading – even if it does not live up to its promise.