Development 3.0

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.

Development thinking then shifted to the neoliberal Washington Consensus: privatization, liberalization, and stabilization would introduce to developing countries the idealized market institutions that had been established in advanced countries. Call this “Development Economics 2.0.” The results of the Washington Consensus reforms were at best controversial, and some economists have even described the 1980’s and 1990’s as “lost decades” in many developing countries.