Comments on “New Structural Economics” by Justin Yifu Lin

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 (p. 206).He seems also to believe that growth depends almost entirely on industry growth and believes that constant “upgrading” or moving up the value added chain is the central challenge. He says that “the laissez-faire approach … missed the importance of the process of continuous, fundamental technological changes and industrial upgrading, which distinguishes modern economic growth from premodern economic growth” (p. 196).It is questionable whether such changes and upgrading must take place early in the development process. In many countries, unskilled labor has moved to unskilled-labor-intensive industries, with expansion of those industries' outputs for a period during which more and more workers acquired acquaintance with modern factory techniques, and exports of the unskilled-labor-intensive goods increased. Only later in the development process did upgrading become a major part of industrial growth once there had been significant absorption of rural labor, and much of it happened in existing firms in response to rising real wages, lower capital costs, and learning …