As countries cope with the current economic crisis, major theories are being revisited in order to improve recovery efforts in both developed and developing countries. A 2011 paper, “New Structural Economics: A Framework for Rethinking Developmet,” published in The World Bank Research Observer by chief economist Justin Yifu Lin, critiques traditional economic development theories and suggests a new framework for future policy.

The author argues that much of the current economic development literature has been overly focused on technological innovation and not focused enough on industrial development and governmental interventions needed to encourage this type of development. The paper reviews the major movements in development economics in the past — the old emphasis on infrastructure and the emphasis on liberalization that then replaced it — and presents a case for a new understanding of development policy, with an emphasis on making targeted investments in infrastructure.

The underpinnings and key facets of this “new structural economics” include:

• Developing countries should be considered unique entities, with enough flexibility to implement custom policies; this would allow them to “exploit opportunities that were not available in the past and specialize in industries that are likely to vary from one economy to another.”
• Fiscal policy should direct financial resources towards long-term development goals. For example, “In resource-abundant countries … an appropriate share of revenues from commodities [should] be used to invest in human capital, infrastructure, social capital, and compensation for first movers in new non-resource sectors so as to facilitate the structural transformation.”
• Governments should actively encourage international capital and investments because “it spreads investment risk more broadly; and it promotes intertemporal trade—the trading of goods today for goods in the future.”
• Monetary policy’s primary goal should “be price stability, and … the use of short-term interest rates by independent central banks to maintain the general level of prices (or to control money supply growth), and not to stimulate economic activity and trigger inflation.”
• Economic growth and infrastructure development (including industrialization) must occur simultaneously: “economic development as a dynamic process entails structural changes, involving industrial upgrading,” and a policy must be evaluated on its effectiveness in both areas.
• Investment in human development is important because consistent “growth in per capita incomes of many countries during the nineteenth and twentieth centuries was mainly due to the expansion of scientific and technical knowledge that raised the productivity of labor and other inputs in production.”

The author concludes that this framework “stresses the need to understand better the  implications of structural differences at various levels of a country’s development.”

Tags: economy, technology, poverty, development