Journal Issue: World Bank Research Observer, Volume 26, Issue 2

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Comments on “New Structural Economics” by Justin Yifu Lin
(World Bank, 2011-08-01) Rodrik, Dani
"Justin Lin wants to make structuralist economics respectable again, and I applaud him for that. He wants to marry structuralism with neoclassical economic reasoning, and I applaud this idea too. So he has two cheers from me. I withhold my third cheer so I can quibble with some of what he writes. The central insight of structuralism is that developing countries are qualitatively different from developed ones. They are not just radially shrunk versions of rich countries. In order to understand the challenges of under-development, you have to understand how the structure of employment and production—in particular the large gaps between the social marginal products of labor in traditional versus modern activities—is determined and how the obstacles that block structural transformation can be overcome. The central insight of neoclassical economics is that people respond to incentives. We need to understand the incentives of, say, teachers to show up for work and impart valuable skills to their students or of entrepreneurs to invest in new economic activities if we are going to have useful things to say to governments about what they ought to do. (And of course, let's not forget that government officials must have the incentive to do the economically “correct” things too.) If we put these two sets of ideas together, we can have a useful development economics, one that does not dismiss the tools of contemporary economic analysis and yet is sensitive to the specific circumstances of developing economies. This is the kind of development …"
Explaining Enterprise Performance in Developing Countries with Business Climate Survey Data
(World Bank, 2011-08-01) Dethier, Jean-Jacques ; Hirn, Maximilian ; Straub, Stéphane
The authors survey the recent literature which examines the impact of the business climate on productivity and growth in developing countries using enterprise surveys. Comparable enterprise surveys today cover more than 100,000 firms in 123 countries. The literature that has analyzed this data provides evidence that a good business climate favors growth by encouraging investment and higher productivity. Various infrastructure, finance, security, competition, and regulation variables have been shown to have a significant impact on enterprise performance. The authors state their motivation for their review by explaining why a disaggregated, firm-level analysis of the relationship between enterprise performance and business climate—as opposed to a more macroaggregate analysis—is important to gaining insights into these issues. They review the main findings of the empirical microliterature based on enterprise surveys and consider the robustness of the results. To conclude they put forward some ideas to advance research on business climate and growth, and they suggest possible improvements in survey design.
Rethinking Development Economics
(World Bank, 2011-08-01) Stiglitz, Joseph E.
"Twelve years ago, when I was chief economist of the World Bank, I suggested that the major challenge to development economics was learning the lessons of the previous several decades: a small group of countries, mostly in Asia, but a few in other regions, had had phenomenal success, beyond anything that had been anticipated by economists; while many other countries had experienced slow growth, or even worse, stagnation and decline—inconsistent with the standard models in economics which predicted convergence. The successful countries had followed policies that were markedly different from those of the Washington Consensus, though they shared some elements in common; those policies had not brought high growth, stability, or poverty reduction. Shortly after I left the World Bank, the crisis in Argentina—which had been held up as the poster child of the country that had followed Washington Consensus policies—reinforced the doubts about that strategy. The global financial crisis, too, has cast doubt over the neoclassical paradigm in advanced industrial countries, and rightly so. Much of development economics had been viewed as asking how developing countries could successfully transition toward the kinds of market-oriented policy frameworks that came to be called “American style capitalism.” The debate was not about the goal, but the path to that goal, with some advocating “shock therapy,” while others focused on pacing and sequencing—a more gradualist tack. The global financial crisis has now raised questions about that model even for developed countries. In this short essay, I want to argue that the long-term experiences in growth and stability of both developed and less developed countries, as well as the deeper theoretical understanding of the strengths and limitations of market economies, provide support for a “new structural” approach to development—an approach similar in some ways to that advocated by Justin Lin in his paper, …"
New Structural Economics : A Framework for Rethinking Development
(World Bank, 2011-08-01) Lin, Justin Yifu
As strategies for achieving sustainable growth in developing countries are re-examined in light of the financial crisis, it is critical to take into account structural change and its corollary, industrial upgrading. Economic literature has devoted a great deal of attention to the analysis of technological innovation, but not enough to these equally important issues. The new structural economics outlined in this paper suggests a framework to complement previous approaches in the search for sustainable growth strategies. It takes the following into consideration. First, an economy's structure of factor endowments evolves from one level of development to another. Therefore, the optimal industrial structure of a given economy will be different at different levels of development. Each industrial structure requires corresponding infrastructure (both “hard” and “soft”) to facilitate its operations and transactions. Second, each level of economic development is a point along the continuum from a low-income agrarian economy to a high-income industrialized economy, not a dichotomy of two economic development levels (“poor” versus “rich” or “developing” versus “industrialized”). Industrial upgrading and infrastructure improvement targets in developing countries should not necessarily draw from those that exist in high-income countries. Third, at each given level of development, the market is the basic mechanism for effective resource allocation. However, economic development as a dynamic process requires industrial upgrading and corresponding improvements in “hard” and “soft” infrastructure at each level. Such upgrading entails large externalities to firms' transaction costs and returns to capital investment. Thus, in addition to an effective market mechanism, the government should play an active role in facilitating industrial upgrading and infrastructure improvements."
The Effects of Business Environments on Development : Surveying New Firm-level Evidence
(World Bank, 2011-08-01) Xu, Lixin Colin
In the past decade, the World Bank has promoted improving business environments as a key strategy for development, which has led to a significant effort in collecting surveys of the investment climate at the firm level across countries. The author examines the lessons that have emerged from the papers using these new data. The key finding is that the effects of business environments are heterogeneous and depend crucially on industry, initial conditions, and complementary institutions. Some elements of the business environment, such as labor flexibility, low entry and exit barriers, and a reasonable protection from the “grabbing hands” of the government, seem to matter a great deal for most economies. Other elements, such as infrastructure and contracting institutions (that is, courts and access to finance), hinge on their initial status and the size of the market.
Gender and the Business Environment for New Firm Creation
(World Bank, 2011-08-01) Klapper, Leora F. ; Parker, Simon C.
The authors summarize the extant literature on the relationship between gender and entrepreneurship. They note significant quantitative gender differences in business entry, with male-owned firms heavily prevailing over firms owned by women in many parts of the world. They find that enterprises owned by men on the one hand and women on the other are generally concentrated in different sectors, women entrepreneurs being better represented in labor intensive sectors such as trade and services rather than capital intensive manufacturing industries. They also observe certain gender differentials in business survival and growth patterns. Yet an analysis of a large body of literature does not suggest that, in general, the so called “gender gap” in entrepreneurship can be explained by explicit discrimination in laws or regulations. Rather, differences in quantitative and qualitative indicators of business entry and performance can in part be explained by a number of business environment factors that disproportionately affect a woman's decision to operate a business in the formal sector. For example the concentration of women in low capital intensive industries—which require less funding and at the same time have a lower potential for growth and development—might also be driven by barriers against women regarding access to finance. Furthermore, women may have relatively less physical and “reputational” collateral than men, which limits their access to finance. Overall the literature suggests that improvements in the business environment can help promote high-growth female entrepreneurship.
Comments on “New Structural Economics” by Justin Yifu Lin
(World Bank, 2011-08-01) Krueger, Anne
Ever since development economics became a field, there has been a search for “the” key to development. Physical capital accumulation, human capital, industrial development, institutional quality, social capital, and a variety of other factors have been the focus at one time or another. As each became the focal point, there was a parallel explicit or implied role of government. If I understand Justin Lin correctly, he is saying that the “new structural economics” (NSE) accepts that earlier thought ignored comparative advantage, which should be market determined, but that growth requires improvements in ‘hard’ (tangible) and ‘soft’ (intangible) infrastructure at each stage. Such upgrading and improvements require coordination and inhere with large externalities to firms' transaction costs and returns to capital investment. Thus, in addition to an effective market mechanism, the government should play an active role in facilitating structural change.