A Comment on Professor Robert Wade’s Rebuttal

Abstract

I thank Professor Wade for his response to my comments. There is much agreement between us on the importance for development economists to rethink industrial policy, and to come up with a framework that adequately describes the distribution of roles between states and markets in well-functioning economies. His elegant conceptualization of the strategy used by East Asian economies to address market failures is an important component of today’s knowledge of the political economy of development. His discussion of the key issues associated with the risk of government failures deserves a few clarifications on my part. Wade observes that latecomers to the industrial process often targeted industries in countries that were much more than twice as rich as they themselves were at the time, and that there is more vertical differentiation in the production of any good, which creates niches far beyond the latent comparative advantage. Besides the fact that industrial policy has also sometimes failed in East Asian countries and there have been many cases of costly targeting mistakes, it may be useful to note that the emergence of production networks and vertical differentiation makes it possible indeed for a developing country to export some technology-intensive products. But a decomposition of the value chain tends to reveal that in successful ventures the value-added part of production in the developing country is still consistent with its comparative advantage. An illustration of this phenomenon is the fact that most information and communication technology (ICT) products sold in the US are imported from China. But what China actually does is mainly the assemblage of imported capital ⁄ technology-intensive components produced in Japan, Korea and Taiwan, China. It does not yet produce such sophisticated components, which are still beyond the reach of its comparative advantage. It is important to remember that an industry can be divided into different segments. Each segment involves a set of production activities with specific capital ⁄ technology intensities. For a developing country, the decision to enter any particular segment should be determined by the comparative advantage principle (see Wang et al., 2010). Wade also raises the wage–productivity gap issues and suggests that the World Bank should devote more attention to equity. I agree. Most economists view the increase in productivity as a necessary condition for growth, neglecting the question of whether growth is inclusive and sustainable. The World Bank has done substantial work in recent years on that very topic. Greater emphasis is now given to the quality of the growth process, notably whether it can deliver inclusive and sustainable development. The impacts of policies and economic changes on the poorest, once neglected, are now given high priority in research. Inequality – especially inequality of opportunity – is now seen as an important problem constraining growth and poverty reduction (see World Bank, 2010; see also World Bank, 2006). Public policy should indeed tackle the role that inequality plays in the gap between productivity growth and compensation, wages and incomes. A developing country engaged in the catching-up process can achieve growth with equity by following its comparative advantage. The adoption of a comparative advantagefollowing strategy can improve income distribution in the dynamic development process. When an economy’s development is in its early stage – with relatively abundant labor and scarce capital – enterprises will initially enter labor-intensive industries and adopt technologies that require large amounts of labor inputs. This creates as many employment opportunities as possible and enables a rapid migration of labor from low value-added traditional sectors to higher value-added modern manufacturing and service sectors. With the upgrading in the endowment structure, labor gradually becomes scarce while capital becomes abundant. As a result, the relative cost of labor increases while the relative cost of capital decreases. Because capital income is the major source of *Wade, R. (2011) ‘Why Justin Lin’s Door-Opening Argument Matters for the Discipline of Development Studies’, Global Policy, Vol. 2, No. 1, pp. 115–116. DOI: 10.1111/j.1758-5899.2010.00049.x Global Policy Volume 2 . Issue 2 . May 2011