New Structural Economics

Summary

New Structural Economics uses markets as the mechanism for resource allocation but government plays a role in coordinating investments and compensating first movers.

Assumptions

  • Economic structure = f(factor endowment structure)
  • Endowments are given but changeable = factor endowments (resources, labour, capital) and infrastructure (soft and hard). 
  • Economic development is a point along the continuum from a low-income agrarian economy to a high income post-industrialized economy (not a dichotomy of poor vs rich).
  • Market is needed for capital allocation according to comparative advantage (so relative factor prices = relative factor abundance).
  • Backwardness advantage = developing countries can borrow and adapt existing technologies rather than having to invent them themselves.
  • Increased risks to firms with industrial upgrading as they face product and technology risk in addition to managerial risk

Model/Theory

  • Sustained development = f(changes in factor endowments, technological progress).
  • Optimal industrial structure = Comparative Advantage Following (CAF)

CAF maximise economy's competitiveness, economic surplus and therefore the fastest possible capital accumulation and upgrading of endowment structure. 

However need government to 

  1. Coordinate investments in improvements in infrastructure.
  2. Compensate information externalities of first movers about where comparative advantage is.

Applications

Growth Identification & Facilitation Framework (GIFF) is a guide to help policymakers facilitate structural change.

  1. Government can identify the list of tradeable goods and services that have been produced for about 20 years in dynamically growing countries with similar endowment structures about roughly 2x their GDP/capita.
  2. Among the industries in that list, give priority to private firms that have already entered and try to identify 1. the obstacles to improving the quality of their products 2. barriers that limit the entry of other private firms. E.g. Hausmann's Growth Diagnostic Framework or Duflo's RCE.
  3. For completely new industries encourage firms from example countries to move and take advantage of lower labour costs.
  4. Should also encourage other successful firms.
  5. Improve infrastructure and business environment with industrial parks or export processing zones, rather than whole economy.
  6. Provide limited compensation to domestic pioneer firms or foreign investors e.g. corporate income tax holiday, direct credits or priority access to foreign reserves.

 

Predictions

Every developing country can grow at 8% for several decades.

Evidence

  • Other schools of economic development have failed because 2/3 of low income countries in 1960 failed to reach middle income in 2009 and those in middle income have stayed the same or regressed.
  • Bulk of empirical work (McMillan & Rodrik 2011) shows difference between Asia and Latin America and Africa is due to the contribution of structural change to overall labour productivity.

Evaluation

  • Anne Krueger asks how would government sectors be chosen without leading to the same corruption/protection problems of previous structural efforts? Also asks whether need tech changes and industrial upgrading from the beginning.
  • Dani Rodrik agrees that developing and developed countries are structurally different and agrees that market incentives are good but says that Lin argues for a CAD form of CAF development.
  • Stiglitz agrees with new structural approach but argues there are more market failures and that comparative advantage is often endogenous. Stiglitz argues that key is knowledge and human capital and transition to a learning society.
  • Ha Joon-Chang argues that first there isn't perfect factor mobility so there are losers from trade liberalization, second capital is discrete and industry-specific, third you can only learn-by-doing with different levels of technology, fourth there are many successful examples of countries like Korea and Japan significantly deviating from its CAF and succeeding.