Justin Lin’s

“New Structural Economics”

Lyla Latif

Seminar on Global Governance and Development

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Table of contents

Different perspectives on globalization through economics Old perspectives New perspective

Highlighting the similarities and differences between these 2 perspectives

Contemporary application of the new perspective

Concluding remarks

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Introduction

Take home message from Justin Lin is that we need to re examine the strategies for achieving sustainable growth

He offers a new perspective for economic growth based on structural change and industrial upgrading

Before we discuss this new perspective, it is important to understand the contributions made by the old perspectives of development economics and the challenges these perspectives encountered

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The old perspectives

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The laissez faire approach

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The structuralist approach

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7Early trade and development theories

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Rational expectations approach (also known as the free market approach or the Washington consensus)

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Decision tree (also referred to as growth diagnostics)

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The challenges encountered

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The new perspective

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Factor endowments

Low income agrarian countries

Scarcity in capital

Abundance in labor and resources

Production activities tend to be Labor intensive Resource intensive

(subsistence agriculture, animal husbandry, fishery and mining production)

Firm sizes are small

Markets often informal and limited to local markets

Hard and soft infrastructure is simple and rudimentary

High income industrialized countries

Abundance of capital because they are industrialized

Capital intensive industries with economies of scale in production

Reliance on new technology and products for achieving technological innovations and industrial upgrading

R&D activities to generate no rival public knowledge and R&D subsidized

Large banks and sophisticated equity markets which can mobilize a large amount of capital and are capable of diversifying risks

Hard and soft infrastructure is built along national and global markets for business transactions that are long distance, large in quantity and value and no longer informal but based on contracts

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Level of development

For a country to move from low income to high income level, it must: Upgrade its factor

endowments Its stock of capital must grow

rapidly than its labor force

This would then mean; Increase in its scale of

production since its moving closer to global industrial frontiers

Need bigger markets and changes in infrastructure to meet its levels of risk (develop and expansion of financial institutions to share risk)

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Market and government

Role of government: Design policies to facilitate

industrial upgrading Enable distortion free

situation (import substitution and subsidization followed by administrative measures)

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15Similarities & differences between the old & new perspectives

Similarities

Structural differences among developing and developed countries exist

State plays a crucial role in moving the economy from lower stage to higher stage of development

Differences

Old perspective

New perspective

Policies that go against an economy’s CA

Advises developing countries to develop capital intensive industries through direct administrative measures and price distortions

Central role of the market in resource allocation

Advises states to play a facilitating role to assist firms in the process of industrial upgrading by addressing externalities and coordination issues

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16Addressing economic development

Old perspectives

Failure to develop: Incorrect price signals Dividing countries along

dichotomies and as a result missing the fact that economic development is a continuous process that gives each country following its CA the opportunity to improve and adjust its economic structures at each development stage

Resource dependent Victims of external political

and economic factors State intervention

New perspective

Countries will develop: Determined by endowments Build industries and upgrade

infrastructure consistent with their CA

State to only Provide information about

new industries Coordinate related

investments across different firms in the same industry

Nurture new industries through incubation

Encourage FDI

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Application of the new perspective

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Explanations

Fiscal policy

Endowments and CA = sound fiscal policy Strong growth Good trade performance No need for subsidization

(viable firms) End result= fewer home

grown economic crises External shocks:

government in good position to implement counter cyclical fiscal stimulus and invest in infrastructure and social projects

Foreign capital

FDI inclined towards endowments and CA

Brings not only capital but; Technology Management Access to market needed

for industrial upgrading

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Explanation continued

Trade policy

Trading based on CA, concentrate on exports

Trade liberalization for industries not consistent with CA and subject to imports Industrial upgrading Infrastructure

improvement Technology

Human development

Industrial upgrading + technological innovation = need for training workers to cope with change and attain the requisite skills

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Conclusion

Is Lin’s New Structural Economics a useful perspective or not?