Prescription from New-Structural Economics

Jan 22-2020   

From new-structural economics perspective, the ways of innovation must be compatible with the comparative advantages of industries and technologies in different development stages, argues Prof. Justin Lin Yifu in an opinion piece. He’s the Honorary Dean of the NSD and the Dean of the New-Structural Economics Institute at Peking University.

Rarely have developing countries secured economic success since the end of the World War Two. In fact, only 13 of them have grown at an annual rate of 7% and above for 25 or more consecutive years.

The World Bank commissioned a research on these high-flying developing countries, which came to identify five common features: an open economy; macro stability; high savings rate and investment rate; a market economy or in transition to market economy; and a proactive and effective government.

The head of the World Bank research team admitted that the five features are merely ‘medicinal materials’, and not prescription, for success. However, Prof. Lin believes that they do imply a prescription: every country, region or economic entity must select technologies and develop industries based on the comparative advantages decided by the structure of its productive factors and endowment in that particular development stage.

In the stage of abundant labor and limited capital, focus should be put on labor-intensive industries; conversely, when capital becomes copious and labor scarce, capital-intensive industries should be favored and machines should be deployed to make up for labor shortfall. An economy thus built on comparative advantages will have lower costs, higher competitiveness, less spontaneous crisis, and better stability. Consequently, more profit and savings can be achieved, setting off a virtuous cycle.

A competitive market is needed to ensure that prices of production factors reflect their scarcity. In the meantime, governments should play an active role in shaping low transactional costs, which is critical for the overall competitiveness of products. In conjunction with capital accumulation and the change of comparative advantages, governments should incentivize pioneering enterprises to use new technologies and embrace innovation, in recognition of the relatively higher risks and costs involved.

Most developing countries failed economically largely because of an overzealous effort to develop industries in contravention of comparative advantages. Going all out with large-scale steel and car industries in the stage of capital-strapped agricultural economy is a typical example.