Notes on New Structural Economics by Justin Yifu Lin

Having taken the class of Professor Wang, I found my intense interest in the topics of economic growth. In preparation of writing the research proposal for the applications, I read the paper by Justin Yifu Lin and would like to write about my own summary.
In the paper, Lin proposed a new theory in development economics. He started the paper by introducing the questions to be examined, then gave a literature review on the history of development economics. After that, he proposed his own theory of new structural economics and compared it with the existing literature.

Problem

The problems of interest are basically how to maximize the economic growth in developing countries. Specifically, what is the role of government in the market? How to guide the economy to a more efficient equilibrium in the process of industrialization and structural transformation? How to avoid too much distortion resulting from the government intervention?

Literature Review

Since the foundation of economics was laid by Adam Smith, the role of free market has become a consensus among economists. However, the oversimplified model given by the ancient theory did not pay attention to the technology progress and structural transformation in the economic development. Later when Rosenstein-Rodan defined the concept of 'development' as the virtuous circle of development depending essentially on the interaction between economies of scale at the level of individual firms and the size of the market, vast literature were born to understand the structural rigidity and coordination failure faced by developing countries. The role of government was emphasized in different aspects. Rosenstein-Rodan promoted the big push, which suggests that government should complement the information about externalities in order to solve under-investment in the pre-industrialization period. Nurkse saw the bottleneck in the domestic market and Hirschman promoted the government to invest in industries with highest potential. The theories were put into use by the Latin-American countries but the outcomes were not as good.
Accompanied by the disintegration of Soviet Union and the crisis in Latin-American countries, more and more economists realized that the theories on big government do not work so well and the theory about free market rose again.
Later the micro level studies emerged in this field. JPAL and RCT, for example, tried to find solutions from the individual level but the principles are hardly generated from the experiment and focus on the key of the problems. Other work include World Bank (2005a), which research the period of investment and enterprise performance, and Rosenzweig & Wolpin (1985) on household savings and productivity.
In the context of so little empirical evidence for the theories, the Asian miracles, whereas, provided some positive examples on how government can serve as a complementary role to push economic growth while give the free market the place to play a fundamental role. And this is where the theory of new structural economics starts.

Basic principles

The new theory proposed that when thinking about economic growth, it should be noted that economies in the different stage of development has different structural characteristics. In contrast to the classic view of two states of economy, the path is more of a spectrum. Generally, the industries move from labor-intense/ resource-led economy to capital-intense economies. The latter is more applicable to the endogenous growth theory that Schumpeter gave, which emphasized the accumulation of human capital, the role of R&D on technology progress and industrial upgrading.
As the theory points out, the government should play a role in the construction of infrastructure in order to reduce the friction and transaction cost for the industries with the highest comparative advantage, which are demonstrated in the context of competitive market. However, it is crucial for the government to recognize the best way to end the intervention so that the distortion would least affect the stability in one way and the most efficient industries pertain competitiveness without protection in another way.

Comparison with the old structural economics

Instead of promoting systematic, thorough intervention from the government, the new theory focuses more on the guiding role of the government. It admits the fundamental significance of market in guiding the resources but stresses the role of government in providing underrated information, complementing externalities, encouraging FDI and improving infrastructure.

Policy implications

The policy implication as in fiscal policy, management of public fund, monetary policy, financial market improvement, foreign direct investment, international trade and human well beings are discussed with comparison between the new and old theory.

Specific problems

Some of the questions to be think about and worth research stemmed from the theory proposed are brainstormed as follows.

• How can the government improve infrastructure (both hard and soft) in order to fit in the best growth strategy determined by the endowment structure of different economies?
• Distortion
• Wave Phenomena
• Industrial Policy

The theory provides a new insights accounting for the economic success of China and gave a new vision on the problems of structural transformation that China is facing today.