Economic Development and Transition: Thought, Strategy, and Viability.

• Author: Dorn, James A.
• Position: Book review

Economic Development and Transition: Thought, Strategy, and Viability

Justin Yifu Lin

New York: Cambridge University Press, 2009, 170 pp.

Justin Yifu Lin is senior vice president and chief economist at the World Bank. He is the first Chinese economist to hold those positions. He earned his doctorate in economics at the University of Chicago in 1986 and returned to China the following year the first Ph.D. economist to return from abroad since the beginning of the reform movement in 1978. At Peking University, he founded the China Center for Economic Research in 1994, and has played an important role in educating a new generation of graduate students and advising top officials. His deep understanding of the institutional framework for a market economy reinforced his support for economic liberalization, which has increased the range of individual choice and allowed millions of Chinese to lift themselves out of poverty.

This is perhaps Lifts most important book. Although it touches on Chinas development process, it is much broader--providing a theoretical framework for understanding the fundamental determinants of development and the implications of alternative development and transition strategies. The book stems from the author's 2007 Marshall Lectures at Cambridge University. It is well written, tightly argued, and empirically grounded. Although the main body of the book consists of only 96 pages, each of the eight chapters (six of which are 12 pages or less) packs a powerful punch. The author also includes a mathematical appendix, which is where Alfred Marshall would have put the formal models---or he would have written them down and discarded them. They add little to the lucid reasoning in the main text.

The purpose of this book is to improve our understanding of how countries move from poverty to wealth--or, as Lin puts it, to help "developing and transitional countries jump from the kingdom of necessity to the kingdom of freedom" (p. 96).

The core of the book is found in chapter 4, which deals with "development strategy, viability, and performance," and chapter 6, which provides empirical support for the author's key hypotheses. Chapter 7 examines the lessons one can learn from East Asian economies, and chapter 8 provides a useful summary of the book's main findings.

In a nutshell, the author argues that the fundamental determinant of development is not natural resources or capital investment but the choice of institutions, which depends heavily on the government's development strategy and, thus, on the prevailing "social thought."

Following Word War II, the dominant development strategy relied on central planning of investment, state ownership, import substitution (that is, protectionism), capital and exchange controls, and other interventionist policies. Indeed, Nobel laureate Gunnar Myrdal, a pioneer in development economies, wrote in his classic book An International Economy: Problems and Prospects (1956): "The special advisers to underdeveloped countries who have taken the time and trouble to acquaint themselves with the problem... 'all recommend central planning as the first condition of progress."

Justin Lin labels this state-led, top-down, development model, which dominated the development literature in the 1950s and 1960s, "a comparative-advantage-defying (CAD) strategy." The drive to catch up to developed countries and the appeal of nation building led leaders in many underdeveloped countries to disregard the economy's "endowment structure"--that is, "the relative abundance of capital, labour, and natural resources'---and steer resources away from labor-intensive toward capital-intensive industries (such as iron and steel). Trade barriers were erected to protect infant manufacturing industries, while favored domestic firms were given cheap loans and other forms of government assistance. The goal was to build the "commanding heights" of the economy (heavy industries). Conventional wisdom held that the fastest way to achieve that goal was to employ Soviet-style planning and suppress the spontaneous order of the free market.

Without real markets based on well-defined private property rights and a rule of law, there can be no...