The Quest for Prosperity: How Developing Economies Can Take Off
Howard Davies on an industrial strategy that could help the Third World catch up with the West
Vince Cable published a new industrial strategy a few weeks ago. Its presentation suffered from a problem that has bedevilled British governments for 40 years. The dismal record of administrations in the 1960s and 1970s, when flocks of lame ducks were splinted up and large sums were lost in trying to sustain national champions such as ICL and British Leyland, has made it obligatory for any business secretary to begin by saying that he is not engaged in "picking winners". No sir. Disobliging commentators are then inclined to ask: what is the point of the government having an industrial strategy at all if there is no selectivity or prioritisation involved? The economy is not an Alice in Wonderland-style caucus race, where everybody wins.
The business secretary tried to escape from this box by saying that he was picking sectors, not firms, to prioritise. That may work in rhetorical terms, but sectors are made up of firms, so in practice the government will be backing some horses over others.
Perhaps Cable would have been less coy about his intentions had he read Justin Yifu Lin's latest book. Lin thinks governments can now hope to succeed with activist industrial policies, as long as they go about it in the right way. "The legacy of the failure of industrial policies...has led many economists to conclude that it may be impossible for any government to successfully pick winners. But things have changed lately, and a rich body of research now exists, and several approaches have recently been suggested...to reopen the debate on the government's role in promoting growth."
Lin has just completed a four-year term as chief economist of the World Bank - the first person from a developing country to hold that position. His background is unusual. Born in Taiwan (or "Taiwan, China" as he always describes it), he defected from the Taiwanese army in 1979, swimming to the mainland, leaving his pregnant wife and child behind. (They were subsequently allowed to join him.) He learned Marxist economics at Peking University, and then a rather different brand of the discipline at the University of Chicago, before launching the China Center for Economic Research back at Peking. (Full disclosure: I collaborated with Lin in setting up the London School of Economics-PKU Summer School in Beijing. His course on the Chinese economy was a huge success with overseas students.)
The Quest for Prosperity is the fruit of his work on China and of his four years at the World Bank, when he toured the world dispensing advice in countries from Peru to the Philippines. His aims are ambitious: to present a comprehensive assessment of the successes and failures of growth strategies adopted by developing countries, and to offer a new approach, based on what he calls a "Growth Identification and Facilitation" framework (GIF). Armed with a GIF, any country should in his view be able to make the most of its factors of production and radically enhance its growth rate. That sounds as though it should be worth £19.95 of anybody's money. How far does he succeed?
He starts very well indeed. After a succinct introduction, chapter 2, rather intimidatingly titled "A Battle of Narratives and Changing Paradigms", gives us the story so far on the economic analysis of the dynamics of growth. It is a brilliant survey of economic thought on the subject, from Adam Smith through Solow-Swan to Michael Spence's Growth Commission. Thousands of authoritative-sounding economic history essays will be written on the back of it by students smart enough to read it before their professors do. The book's English is also clear and highly sophisticated.
But this is in the nature of ground-clearance work, leading to the presentation of Lin's own thesis, which in fact owes a lot to the Growth Commission's analysis of what are known as "successful catch-up" countries.
Lin is a strong believer in the power of the state to influence growth. Perhaps his Chinese background makes that predictable, although his examples of successful government interventions are not drawn exclusively from his home territory. He begins from the proposition that a clear-sighted analysis of a country's comparative advantage is the essential starting point for any successful strategy. He also demonstrates that the failure of many development initiatives, particularly those in Africa, can be traced to the adoption of what he describes as "comparative-advantage-defying" strategies, such as prioritising capital-intensive industries in countries where capital is short and labour is cheap and abundant.
Armed with that understanding, the state should not be shy about its own function: indeed, he says, the creation of successful strategies "requires that the state play a crucial role in creating conditions for private sector development in the context of well-functioning market systems". Lin provides the intellectual justification for Barack Obama's controversial "You didn't build that" remark in the 2012 presidential election campaign, when he tried to persuade an audience of entrepreneurs in Virginia that they did indeed benefit from public goods such as roads and education. (Only in the US could this observation be portrayed as a gaffe.)
So far, so persuasive. But with all such books, the meat is to be found in the practical recommendations. Lin is not shy of presenting a cookbook with recipes that any economic ministry could try to use. It is "a practical guide for sequencing structural transformation". There are six essential steps, it turns out, beginning with "choosing the right target" - in other words, setting realistic objectives - then passing through a phase of removing constraints on development (such as poor infrastructure or badly structured taxes) and on to "seducing and attracting global investors", "scaling up self-discoveries" and "providing limited incentives to the right industries". The last two are the new, politically correct phrases for picking domestic winners and backing them. I bet we see them appearing in the Department for Business, Industry and Skills' industrial strategy White Papers before too long.
It is a clear and commonsensical list, although it may be a touch harder to implement in practice than is suggested here. Understanding a country's true comparative advantages is not straightforward, nor is identifying sustainable success stories - one can already imagine the complaints from the "wrong" industries. And some of the references to successful GIF strategies give one pause for thought. Lin argues that his approach is also directly relevant to developed economies. I wonder. There is lavish praise for the Republic of Ireland, for example. The previous UK government's "new industrial policy" is cited as a model, yet it is hard to identify what precisely has resulted from it. Even more surprisingly, there are positive words about economic reform in Belarus. My Belarusian friends were nonplussed (well, OK, friend).
Nonetheless, as an accessible summary of how the World Bank (at least under Lin's management) thinks about development these days, The Quest for Prosperity is hard to beat. It will quickly find its way on to the course reading lists for development economics master's programmes. I trust Lin will find time to adapt it for the LSE-PKU Beijing Summer School as well.
The founding director of the China Center for Economic Research (CCER) at Peking University, Justin Yifu Lin was born in Yilan, Taiwan in 1952. In 1979, a year after completing an MBA at Taipei's National Chengchi University, he defected to mainland China.
"I wanted to participate in China's development," Lin would later tell the Financial Times of his decision. "It's just like moving from Hawaii to the US mainland."
Although his wife did not immediately follow him, he would later tell an interviewer that she "supported" him in his precipitate move. "As long as I am happy, she is happy," he said.
While studying for a master's degree in Marxist political economy at Peking University, he spent a single day as translator for Nobel laureate Theodore Schultz. Lin so impressed him that Schultz arranged a doctoral scholarship for him at the University of Chicago.
Joined in Chicago by his wife and children, Lin completed his PhD in 1986. After a year at Yale University in a postdoctoral post, he returned to Beijing in 1987.
In 2008, after 15 years at CCER, Lin was named chief economist and senior vice-president of the World Bank. He has also served as a deputy of China's People's Congress and as vice-chairman of the All-China Federation of Industry and Commerce.
His wife, Yunying Chen, is also an economist and a member of the People's Congress. Upon receiving an honorary degree at Fordham University in the US in 2008, Lin observed that what gives his life meaning is "the love I receive and the love I give...The love I get from my wife allowed me to love my work."
The Quest for Prosperity: How Developing Economies Can Take Off
By Justin Yifu Lin
Princeton University Press
Published 10 October 2012
Howard Davies is professor of practice at Sciences Po, Paris.