New Structural Economics: the Third Generation of Development Economics

Development economics is a new sub-discipline in modern economics. The first generation of development economics is structuralism, focusing on market failures in developing countries and advising their governments to adopt import-substitution strategies for developing modern advanced industries. The second generation of development economics is neoliberalism, focusing on government failures in developing countries and advising their governments to implement Washington Consensus reform with a shock therapy. Most developing countries followed the above two generations of development economics and failed to achieve industrialization and modernization.

A working paper by Justin Yifu Lin introduces a third generation of development economics, new structural economics, which advises governments in developing countries to play a facilitating role in the development of industries in a market economy according to the country’s comparative advantages. 

The author reviews the ideas and failures of previous generations of development economics, introduces the main ideas of new structural economics and discusses how to apply new structural economics to formulate industrial policy for accelerating development. New structural economics argues that the state has an essential role in facilitating industrial upgrading in the process of economic development because of the need to address externalities and solve coordination problems in the improvement of infrastructure and institutions. According to the author, new structural economics can help developing countries become prosperous, industrialized high-income countries.