World bank policy research working paper no. 5197

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.

World bank policy research working paper no. 5197

Justin Yifu Lin Abstract 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.

Notation and Abbreviations

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 stage of development to another. Therefore, the optimal industrial structure of a given economy will be different at different stages of development.

Each industrial structure requires corresponding infrastructure both"hard"and"soft" to facilitate its operations and transactions.

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Second, each stage 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 stages "poor"versus"rich"or"developing"versus"industrialized".

Industrial upgrading and infrastructure improvement targets in developing countries should not necessarily draw from those that existin high-income countries.

Third, at each given stage 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 stage.

World bank policy research working paper no. 5197

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.Policy Research Working Paper , World Bank, Washington, DC.

and Lin, Justin Yifu. “ New Structural Economics: A Framework for Rethinking Development.” World Bank Research .

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Every year, the World Bank's World Development Report takes on a topic of central importance to global development.

The Report, Learning to Realize Education's Promise, is . The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues.

An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished.

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World bank policy research working paper no. 5197

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