Justin Yifu Lin and Yong Wang: Remodeling Structural Change

Economic development is a continuous process of economic growth accompanied by structural change, including technology, industry, hard infrastructure, and institution (or soft infrastructure) (Kuznets 1966).  The existing growth literature focuses mainly on the process of resource reallocation across the three sectors (agriculture, industry, and service) in the process of structural transformation (see, for example, Herrendorf et al. 2014).  Following Kuznets, throughout this chapter, structural change covers a much broader range of changes in economic structures including endowment structure, industrial structure, financial structure, and governance structure, etc. We believe that a deep understanding of the nature of economic development requires thorough analyses and explicit characterizations of the determinants, evolution, and various development implications of each of these structures, which is the research agenda of New Structural Economics (NSE) proposed by Justin Yifu Lin (Lin 2012a, 2013a). 

The primary goal of this chapter is to introduce the key ideas and hypotheses of NSE, and, more importantly, to demonstrate by concrete examples the way structural change can be formally modeled in NSE. We argue that structural changes should be remodeled to highlight the central roles of endowment structure and firm viability,  which deserve much more attention in the pertinent literature.

The rest of the chapter is organized as follows. In Section 3.2, we briefly review the current dominant framework for macro-development analysis, whichis almost structureless. In Section 3.3, we explain why structures are important for an understanding of economic development. In Section 3.4, we introduce a benchmark model of new structural economics. In Section 3.5, we discuss several theoretical extensions to the benchmark model. Section 3.6 concludes.

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