Rethinking Development Economics

Twelve years ago, when I was chief economist of the World Bank, I suggested that the major challenge to development economics was learning the lessons of the previous several decades: a small group of countries, mostly in Asia, but a few in other regions, had had phenomenal success, beyond anything that had been anticipated by economists; while many other countries had experienced slow growth, or even worse, stagnation and decline—inconsistent with the standard models in economics which predicted convergence. The successful countries had followed policies that were markedly different from those of the Washington Consensus, though they shared some elements in common; those policies had not brought high growth, stability, or poverty reduction. Shortly after I left the World Bank, the crisis in Argentina—which had been held up as the poster child of the country that had followed Washington Consensus policies—reinforced the doubts about that strategy. The global financial crisis, too, has cast doubt over the neoclassical paradigm in advanced industrial countries, and rightly so. Much of development economics had been viewed as asking how developing countries could successfully transition toward the kinds of market-oriented policy frameworks that came to be called “American style capitalism.” The debate was not about the goal, but the path to that goal, with some advocating “shock therapy,” while others focused on pacing and sequencing—a more gradualist tack. The global financial crisis has now raised questions about that model even for developed countries. In this short essay, I want to argue that the long-term experiences in growth and stability of both developed and less developed countries, as well as the deeper theoretical understanding of the strengths and limitations of market economies, provide support for a “new structural” approach to development—an approach