Why Justin Lin’s Door-Opening Argument Matters for Development Economics

Abstract

Let there be no doubt: the fact that Lin advances a nuanced argument for strategic government intervention – as part of his larger ‘new structural economics’ – is an important new advance in thinking about economic development. The World Bank, of which he is the firstever non-G7 chief economist, is now not particularly important as a source of capital for developing countries (except during global crises); but it remains very important as a source of knowledge, including knowledge of development strategy. Its research department is by far the biggest center of such thinking in the world, and other aid agencies and many NGOs tend to begin their thinking by asking what the World Bank says on the subject and, often, stopping there. As is well known, the World Bank has long championed the set of prescriptions known as the Washington Consensus – not only at the level of words but also at the level of actions (for example, in the codification of the ‘ideal’ set of development policies and institutions in its Country Policy and Institutional Assessment (CPIA) formula). Central to its thinking was the proposition, first, that economic growth is a function of the size and competitiveness of markets (as distinct from Leontief’s emphasis on economic growth as a function of the structure of production, for example) and, second, that government ‘intervention’ tends to be more costly than ‘market failure’, so government ‘intervention’ has to be carefully justified case by case. Lin’s papers are pushing at the edges of this consensus, reflecting his awareness of the inconsistencies between these propositions and the actual roles of several East Asian governments in helping to stimulate high-speed growth, as well as of governments in Brazil and in the west (including the US government in IT and defense industries). The fact that Lin is ‘disturbing the deep slumber of a decided opinion’, in J. S. Mill’s words, is what is really important (Mill, 1998 [1859], ch. 2). By doing so he helps to open doors for others to push more vigorously on the frontiers than he can, given his official position in a still US-dominated organization. Everything else is secondary. Here are a few directions in which some vigorous pushing is needed, whether by the World Bank or others. First, on the supply side, is the distinction between ‘existing comparative advantage’ and ‘future’ or ‘latent’ or ‘dynamic’ comparative advantage. Most of the time Lin wishes to limit ‘interventions’ to helping firms exploit the opportunities offered in the existing comparative advantage – with the qualification that ‘economic development is a dynamic process that requires industrial upgrading’ (p. 000), a dynamic process that may change the existing comparative advantage and in which the government may have an important coordinating role. I wonder how to operationalize the distinction between existing and latent comparative advantage. Lin suggests that government and firms in country X should scrutinize the kinds of products and services produced in comparably endowed countries with per capita incomes roughly double X’s, and look for promising items or processes within this set. Indeed, Japanese, Korean and Taiwanese planners did do a lot of this ‘looking ahead down the river’ kind of exercise. But they often took target countries much more than twice as rich as they were at the time. And today, more than when the capitalist East Asians went through their fast-growth decades, there is more ‘vertical’ differentiation in the production of any one product, creating niches in the production of final products which, as final products, appear to be far beyond the ‘latent’ comparative advantage of country X (see my Governing the Market (Wade, 2004)). *J. Y. Lin (2010) ‘Six Steps for Strategic Government Intervention’, Global Policy, Vol. 1, No. 3, pp. 330–331. DOI: 10.1111/ j.1758-5899.2010.00046.x Global Policy Volume 2 . Issue 1 . January 2011