Abstract
Development economics is a new sub-discipline in modern economics. Its first generation, the Structuralism, focused on market failures and advised the government to adopt import-substitution strategy to develop modern industries. Its second generation, the Neoliberalism, focused on government failures and advised the government to implement Washington Consensus reform with a shock therapy to transit to a well-functioning market system. Developing countries, following the Structuralism and Neoliberalism, failed to achieve development and transition successfully. This chapter introduces the third generation of development economics, the New Structural Economics, which emphasizes the endogeneity of structure for countries at different levels of development and provides pragmatic guide to formulate industrial policy for accelerating economic development. This chapter calls for a structural revolution in modern economics.
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Notes
- 1.
“White elephants” refers to assets or firms which are very costly to maintain but generate output of low value, so that they fail to make a profit.
- 2.
The widening of income gap between developed and developing countries after the Second World War does not mean that there has been no improvement of income and living standards in developing countries. Rather, it means that the average annual per capita GDP growth rate in developing countries was less than the average annual per capita GDP growth rate of 2% per year in high-income countries over last 100 years (Maddison 1995).
- 3.
Old Structuralism, or early development economics, has been described in the previous section.
- 4.
One of the major differences between New Structural Economics (NSE) and Neoclassical Economics is the role of the state in industrial upgrading. NSE advocates the adoption by the state of a facilitating role to compensate for the first mover’s externality and to coordinate/provide necessary improvements in hard and soft infrastructure for the industries of new comparative advantages determined by the changing endowment structure. In contrast, Neoclassical Economics shies away from the state’s proactive role in facilitating structural transformation because of concerns about rent-seeking and state capacity. NSE develops a Growth Identification and Facilitation Framework (GIFF) to identify industries of latent comparative advantages and infrastructure bottlenecks and advises governments on how to turn latent comparative advantages into competitive advantages in a pragmatic way, which can be followed by a state with any capacity and does not generate distortions and rent-seeking (Lin 2017; Lin and Monga 2011). See also the discussion in Sect. 4.
- 5.
The state’s removal of bottlenecks in hard and soft infrastructure to reduce transaction costs for the new industries will not cause distortions and generate rents, so that rent-seeking can be avoided.
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Lin, J.Y. (2021). Economic Development, Transition, and New Structural Economics. In: Douarin, E., Havrylyshyn, O. (eds) The Palgrave Handbook of Comparative Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-50888-3_21
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