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Guest blog: World Bank chief economist replies on his industrial policy proposals

July 7, 2010
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Last week I wrote about Justin Lin’s intriguing suggestions for how developing countries can best pursue a low risk/high return form of Justin Linindustrial upgrading. Here Justin responds to some of the concerns and questions raised in that post:

“I am grateful to Duncan Green for his comments on my recent paper “Growth Identification and Facilitation”, which offer me the opportunity to clarify some of the ideas discussed there, and respond to the very pertinent questions he raised at the end of his post.

I certainly do not assume that “states possess a well informed, effective bureaucracy”. In fact development is a challenging process everywhere and all types of public policies and strategies—from education to health, from structuralist import substitution to Washington Consensus reforms— require some government capacity. However, the required capacity for the proposed Growth Identification and Facilitation framework is relatively minimal, compared to almost any other policy proposal: many of the specific instruments recommended in the paper are far easier to implement in low-capacity environments: setting up an export-processing zone for instance requires much less capacity than building infrastructure for the whole country as often advocated; implementing tax exemption  schemes for a few years to attract investments in industries with latent comparative advantage is easier than collecting large tax revenues or repressing the financial system to subsidize nonviable firms for endless years in industries that are inconsistent with a country’s comparative advantage.

Economic policy never takes place in a vacuum and there is wide consensus on the importance of having capable, credible, and committed governments to design and implement viable economic development strategies—something that is lacking, by definition, in many poor countries. The question is how to facilitate their emergence. While there is probably no ready recipe for generating effective bureaucracy, I would argue that the framework proposed in my paper would not lead to heavy-handed government interventions and large administratively-created rents. To the contrary, what I am proposing would help developing countries minimize the risks of poor governance and pervasive corruption. At the same time as the framework is easier to implement and likely to yield quick wins, the government’s commitment, credibility and capability may be enhanced as a result of following this approach.

Another important point raised by Duncan is whether ineffective leaders in developing countries actually know better which policies could lead to sustained growth but cynically choose not to implement them. The implicit assumption here is that the appropriate policies for generating and sustaining economic growth are known, but because of their bad instincts or the prevailing incentive systems, political leaders ignore them. It seems to me that things might not be that clear-cut. After all, economists have been looking for the recipe for growth for more than 200 years. The dominant theories for development policy in developing countries proposed by economic profession have been rooted in either structuralism (roughly from the 1940s to the 1970s) or in Washington Consensus-types of frameworks (from the 1980s onwards). The empirical evidence shows that both of them are inadequate.

My view is that most political leaders would like to gain legitimacy, stay in power and have a good name in history. They will be willing to do the right thing to achieve those personal ambitions if only they knew what that is and how to do it. Delivering sustained dynamic and inclusive growth during their tenures should be consistent with their personal goals.  Yet, the quest for growth has been elusive, to use Bill Easterly’s famous book title. The Growth Identification and Facilitation approach does not claim to offer a magic bullet, but it suggests a logical framework that could allow policymakers in developing countries to emulate successful strategies implemented throughout history. It is therefore compatible with prevailing political incentives.

Duncan’s last point is about the likelihood that old high-carbon growth pathways may not be an option for developing countries in the future due to the concern of climate change, rendering the industrial ladders implied in the Growth Identification and Facilitation inappropriate. One can realistically expect that as long as there will be demand for goods and services around the world, countries with the lowest production costs will be competitive in those industries. If one accepts that proposition, then two scenarios are likely to materialize: if low-carbon technology is not available at reasonable costs and the production of goods and services continuously relies on the existing technology, low-income countries could successfully move up the development ladder by using their low-wage advantage as suggested by the Growth Identification and Facilitation framework. If the new low-cost clean technology becomes available, low-income countries should adopt it and enjoy the “advantage of backwardness” in adopting new technology in their industrial upgrading process. However, the selection of their targets for industrial upgrading should still follow the methodology suggested in the Growth Identification and Facilitation Framework.”


  1. It is great to see the World Bank finally beginning to learn from the evidence on economic policy and the role of the state – known to most outside the Washington Consensus bubble for many years. This is a good sign.

    Will this learning be applied to climate change however? The starting point for sustainable development cannot be the vagaries of supply and demand. The starting point must be the need to reduce global temperatures by 80%.

    That requires applying the learning from the problems of the Washington Consensus. As in development – there is a leading role for the state in creating and popularising the new technologies, a leading role for the state in regulating and reducing the old dirty industries (supply side), and there is a role for everyone to reduce demand for limited resources (demand side).

    To do this, we must globally decrease the power of the major corporations, so that they do not over-influence countries in a dirty and destructive direction.

  2. The one source of concern for me is that there is an expectation that low-income countries have the funding to implement all these wonderful low-carbon emitting technologies – I question the validity of such a suggestion. Why is it that low-income countries that contribute little to global warming have to make all the changes and the real culprits, the developed countries of the world do nothing. Is it a question of the World Bank having a say over low-income countries that borrow funds provided by the developed countries, or is the World Bank scared that if they say something that they will not receive the funding from whoever?

    The responsibility for environmental cleanup should not rest with the implementation of policies by low-income countries’ governments where there is a lack of expertise, where one will have to import the “wise” men from the developed world and pay them for their input. If this is so important then the World Bank should provide these experts free of charge to those low-income countries to help them achieve these “good” policies. It will be a small enough amount to achieve a reduction in the less than 10% contribution of low-income countries’ effect on global warming.

    My concern is that everyone expects the low-income countries to come out of their corner to fight global warming but expect nothing of the developed world. The USA being absent in its signing of many protocols. World leaders can not agree on what to do or what aims to achieve during these environmental summits. The last holiday discussions is an example of such a pointless discussion. By canceling all these summits we will prevent several tons of carbon emissions and a lot of hot air being put into the atmosphere. They do not achieve anything so why waste all that money, time and scarce resources.

  3. Justin & Duncan: I’m sure you are both familiar with Theodore Moran’s book: “Harnessing FDI for Development: Policies for Developed and Developing Countries” … I suspect some of the techniques he presents would be compatible with your Growth Identification and Facilitation framework.

  4. Mr. Lin, you talk about leaving a good name. You will be forever remembered by history as the man who betrayed his country to work for one of humanity’s worst totalitarian governments ever. You and your wife will be remembered in the same vein as the Chinese Communist Party. Congratulations!

  5. Duncan,

    I hope you will respond to this — it is important to keep this conversation going and I don’t think this one is over. What did you think of Mr. Lin’s responses?

    Duncan: Sorry Kolleen, I have to surrender the right to the last word sometimes! But if you want to follow up this conversation, best to follow Jiesheng’s advice in the comments: ‘Interesting and I agree to some extent with both Justin’s and Ha-Joon Chang’s views. I suppose you have seen the DPR article-debate (Development Policy Review, 2009, 27(5))between the two economists?’

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