Development Dialoguing With the Big Guns

The rich and famous continue to march through my fair city. Friday evening, I attended an on-campus panel featuring Justin Lin, the World Bank’s newly installed Chief Economist. Dr. Lin is the first native of a developing country (China) to occupy this post. He has pledged to make African development the priority of his tenure, and Ghana, “the gateway to Africa,” was his first stop on the continent since being appointed Chief Economist. Dr. Lin was joined on the panel by, among others, J.H. Mensah, the Chairperson of Ghana’s National Development Planning Commission.

Dr. Lin’s address was titled, “Inclusive Growth and the Role of Knowledge: Lessons from China and East Asia.” Dr. Lin began by reviewing the four elements of competitive advantage identified by Harvard professor Michael Porter. They are (1) abundant, low cost factors of production (i.e. comparative advantage), (2) a large domestic market, (3) an industrial cluster (He didn’t define this. I’m assuming it means locating the various facilities needed for a good’s production close to each other, but that could be wrong), and (4) competitive markets.

A nation’s development depends on its willingness to pursue its competitive advantage. And so the historical argument: In the wake of World War II, East Asian nations pursued labor and resource intensive industries which played to their competitive advantages. The rest of the developing world did not. South Korea may be producing robots and cloning puppies today, but it only moved into those high-technology industries after it built up a comparative advantage in those fields. Similarly, the whimsical example of Chinese production women’s underwear for sale in Europe was held up as paradigmatic. China identified a labor-intensive industry, imported the machinery, acquired expertise, and then began to produce and export both panties and the panty making machines. Dr. Lin’s example, not mine.

According to Dr. Lin, Latin America, Africa, and South Asian adopted competitive advantage defying (CAD) policies by attempting to engage in capital intensive industries like auto manufacturing. They could not compete with more developed nations. Their problems were compounded by interventionist national governments whose economic policies such as subsidies and price setting, led to crony capitalism, rent seeking, and low efficiency. Dr. Lin advocated for the emergence of “facilitating states,” or those governments which collect and disseminate information, provide education and infrastructure, and institute reasonable bankruptcy laws so that entrepreneurs are not unduly punished if their ventures fail. He ended by asserting that if Ghana followed its comparative advantage, perhaps in cocoa or shea butter, then it could join the ranks of medium-income countries within a generation.

Dr. Lin has his PhD in Economics from the University of Chicago. He is one of the most influential minds in development economics. My economic credentials include the successful completion of Introduction to Economics at Furman. Nevertheless, how can we identify youth unless it goes arm and arm with brashness? So I’ll say it: I was underwhelmed by the Chief Economist’s argument. Telling a developing nation to grow by following its competitive advantage is roughly equivalent to telling an unemployed person to get a job by going to work. I’m not the only one who noticed that not-so-subtle nuance. One of the other speakers and an audience member made reference to it.

I was vaguely aware that the evidence for complicating Dr. Lin’s presentation was readily available, so, for the benefit of myself and my reader(s), I did some research. When considering the theme of Dr. Lin’s speech, lessons for the developing world from the rise of China and East Asia, I think it’s also important to consider (1) the IMF’s and World Bank’s prior activities in Ghana, and (2) the actual policies that China and East Asia followed.

Point number one is that starting in 1983 when it received its first IMF structural adjustment loan, Ghana was considered a darling of the Bretton Woods institutions. From 1983-2000, it received 26 such loans. Over that period Ghana did register moderate growth (1.2%), but the country bordered on economic collapse due to high inflation (averaging 32% over that same period) [William Easterly, White Man’s Burden, 67]. I’m not asserting causation between the structural adjustment program and Ghana’s economic woes. Maybe the case could be made that Ghana did not properly curtail government spending or corruption over that same period. I’ll do more digging, but I’m pretty sure I’ll be hard pressed to find anyone who considered structural adjustment a success anywhere in the developing world.

Two of the speakers referred to the fact that at independence in 1957, Ghana and Korea had the same GDP per capita. South Korea’s GDP per capita is now 10 times higher than Ghana’s. Dr. Lin pointed to Ghana’s failure to follow its competitive advantage to account for the economic divergence between the two nations. He might also have acknowledged the formidable health challenges facing Ghana’s work force. The World Health Organization estimates that it would cost about US$40 per person per year to meet the essential health needs of a Ghanaian worker [Michael Weinstein, “The Economic Paradox of Ghana’s Poverty,” Financial Times 10 Nov. 2003]. Structural adjustment programs required developing nations to cut their social welfare spending.

Finally, China’s rise was not driven by marching in lock-step with neoliberal economic prescriptions. In Easterly’s words, “[China’s economy] combines lack of property rights with free markets, Communist Party dictatorship with feedback on local public services, and municipal state enterprises with private ones. ” [Easterly 354] Korean growth is also partly attributable to state owned enterprises. The story is more complicated than the discovery and pursuit of competitive advantage.

And you thought I was just going to be talking about what I had for lunch. This is just the first round on this set of fascinating and important issues. Especially since I’m taking Theories of Development this semester, I’ll be thinking and writing a lot on this over the next few months.