BEIJING – Until the Industrial Revolution, the world was quite flat in terms of per capita income. But then fortunes rapidly diverged, with a few Western industrialized countries quickly achieving political and economic dominance worldwide. In recent years – even before the financial crisis erupted in 2008 – it was clear that the global economic landscape had shifted again. Until 2000, the G-7 accounted for about two-thirds of global GDP. Today, China and a few large developing countries have become the world’s growth leaders.
Yet, despite talk of a rising Asia, only a handful of East Asian economies have moved from low- to high-income status during the past several decades. Moreover, between 1950 and 2008, only 28 economies in the world – and only 12 non-Western economies – were able to narrow their per capita income gap with the United States by ten percentage points or more. Meanwhile, more than 150 countries have been trapped in low- or middle-income status. Narrowing the gap with industrialized high-income countries continues to be the world’s main development challenge.
In the post-colonial period following World War II, the prevailing development paradigm was a form of structuralism: the aim was to change poor countries’ industrial structure to resemble that of high-income countries. Structuralists typically advised governments to adopt import-substitution strategies, using public-sector intervention to overcome “market failures.” Call this “Development Economics 1.0.” Countries that adhered to it experienced initial investment-led success, followed by repeated crises and stagnation.