So what does the World Bank's new chief economist think about development?

December 23, 2008 Off By admin

Following our recent conversation (see July 4 post), I’ve been digging into the views of Justin Lin, the World Bank’s first ever developing country chief economist. Check out his Marshall lecture on development, delivered in Cambridge in November 2007, shortly before he got his new job. It gives a fascinating insight into how Lin’s interpretation of economic take-offs in China and East Asia is likely to shape the evolution of the Bank’s thinking. The paper is pretty heavy going in parts, but you can always watch the video.

Lin blends orthodoxy and heterodoxy and sprinkles on some very Chinese characteristics. He argues that decision makers and economists in developing countries usually act according to what he calls ‘social thought’ – the common sense of the time – and that social thought in the period of import substitution (post World War Two to late 1970s) led them into the mistake of pursuing heavy industry (when they should have stuck to labour intensive light manufacturing) and then, when social thought veered towards market liberalization in the post-Keynesian period, into a mistaken pursuit of shock therapy, as prescribed at the time by his new employer.

The countries, mainly in his region, that have prospered have been those that defied ‘social thought’ – China and Viet Nam pursued gradual reforms, rather than shock therapy, and, he argues, South Korea and Taiwan got it right by first building up light manufacturing before jumping into the more capital intensive sectors like iron and steel, or automobiles (the holy grail of government planners everywhere).

He distinguishes between two different kinds of industrial policy – ‘comparative advantage defying’ and ‘comparative advantage facilitating’ (CAD and CAF), and argues that CAF works, whereas CAD is a developmental blind alley that pumps money into sectors that need permanent protection, and never become competitive – the kind of industrial policy pursued by many developing countries in Latin America and Africa in the post War period. CAF is a kind of industrial policy lite, where governments nudge things along, but stick close to their comparative advantage, rather than go for big leaps into new sectors.

In the case of China, Lin argues that ‘Instead of following the “macro institution-first” approach proposed by the Washington Consensus, the Chinese government employed a ‘micro-first’ approach to improve incentives for farmers and state-owned enterprise workers.’

The feel of the paper is very un-World Bank – sprinkled with quotes from Keynes, unabashed support for state intervention, praise for gradualism and ‘tinkering’, and criticisms of structural adjustment. It’s also very Chinese, concluding with a ‘Confucius meets Dani Rodrik’ moment:

‘China’s Confucianism —which has a strong impact in East Asia—is pragmatic in nature. The core of Confucianism is ‘zhongyong’, the golden mean, which advises people to maintain balance, avoid extremes and achieve harmony with the outside, changing world. ….Political wisdom derived from Chinese culture—shishiqiushi (finding truth from the facts), jiefangsixiang (freeing one’s mind from dogmatism) and yushijujin (adapting to the changing environment)—could be relevant to reform-minded governments in other developing and transitional countries’.

I actually find it quite hard to work out how radical all this is – Lin’s message could boil down to little more than a post Washington Consensus increased emphasis on institutions and gradualism within an overall liberalizing agenda. Cambridge economist Ha-Joon Chang for one thinks that Lin is being overly conservative, and argues that South Korea and other successful industrializers departed much further than Lin admits from their ‘natural’ comparative advantage when pursuing industrialization. New broom or old wine in new bottles? Watch this space.