Revisiting New Structural Economics: Architecting Future-Fit Development Policies

Justin Yifu Lin's work on New Structural Economics (NSE) was a breath of fresh air for me when I first read it years ago and continues to be because it bridged the gap between classic structuralism and free-market orthodoxy by returning structural change and its corollary, industrial upgrading, to the forefront of development discourse. As an early-career dev economist, I remember being drawn to Lin's neoclassical approach to structures and change, which recognized that developing countries are qualitatively different from advanced ones but still respond to market incentives.

Fast-forward to 2025. The world of development policy looks very different. We are grappling with climate change imperatives, a digital revolution, the aftermath of a pandemic, and the rise of heterodox models like Doughnut Economics and Modern Monetary Theory (MMT). These global changes provide an opportunity to revisit NSE's core arguments – its emphasis on factor endowments, comparative advantage-following industrial policy, and the facilitating role of the state – to assess its enduring relevance and adaptability in today's development landscape.

At its core, NSE pivots on three key propositions:

Development as Stage-by-Stage Structural Change: Economies evolve their factor endowments—labor, capital, natural resources, and human capital—and optimal industrial structures change accordingly. This involves a gradual industrial upgrade that aligns hard infrastructure, such as roads and power, with soft infrastructure like institutions, talent, and skills, to support industries at each stage of development.
Comparative Advantage-Following (CAF) Industrial Policy: Countries thrive by entering industries and adopting technologies that are consistent with their factor endowments. This grow with what you have philosophy, even if seemingly slow, is, in reality, the fastest way to build capital and capabilities, often by borrowing off-the-shelf technologies from slightly more advanced countries.
The Facilitating Role of the State: While markets allocate resources, governments must actively facilitate industrial upgrading and infrastructure improvements. This is not about picking arbitrary winners but about identifying sectors with latent comparative advantages and helping the private sector exploit them, acting more as a facilitator than a commander-in-chief.

15 Years Later: Adapting to New Paradigm Shifts

As alluded to earlier, the global development landscape has undergone a dramatic shift, marked by climate change, digital transformation, post-neoliberal economic thinking, and the push for resilience and inclusion following the COVID-19 pandemic. So, how does the NSE framework hold up?

Green and Climate-Resilient Industrialization
- The Challenge: Lin's original framework did not prioritize climate concerns. Today, a comparative advantage based on, say, cheap coal or oil could be a dead end due to carbon constraints. Kate Raworth's Doughnut Economics, for example, emphasizes operating within planetary boundaries.
- NSE's Evolution: We must now interpret natural capital and environmental limits as part of a country's endowment. This leads to a comparative advantage-shaping approach, where states actively guide their economies toward green industries, renewable energy, and electric vehicles, even if these aren't traditional strengths, to align with future global markets. The state's facilitating role then expands to include green infrastructure addressing carbon externalities, in line with Mariana Mazzucato's mission-oriented approach of creating markets
- Resilience: Structural transformation must explicitly hedge against climate risks, diversifying away from climate-sensitive activities to build more resilient economies.
Digital Transformation and Intangible Infrastructure
- The Shift: The digital economy underscores the significance of intangible and soft infrastructure, including broadband networks, digital IDs, talent, and skills. Comparative advantage is less about static factors and more about learnable, buildable factors, such as human capital and innovation ecosystems.
- How NSE Applies: NSE can accommodate these changes by recognizing that endowments are not fixed and can be shaped by policies that enable digital leapfrogging. The facilitating state invests in skills, people, and digital infrastructure by treating connectivity like roads, creating niches in the digital value chain consistent with evolving capabilities. This means asking questions like what digital or knowledge-based activities can our country compete in, given our current human capital structure and institutions?
Integrating Heterodox Models Beyond Neoliberalism
- Doughnut Economics: While NSE is a growth strategy, there are other models like Doughnut Economics that critique growth-centric development by focusing on social foundations and ecological ceilings. NSE can be complementary by filtering industry choices through sustainability and inclusion criteria.
- Modern Monetary Theory (MMT): Again, while NSE is micro-structural, models like MMT offer a rationale for mobilizing public finance for the hard and soft infrastructure that NSE calls for. In a broad sense, MMT encourages focusing on real development goals and not being constrained by fiscal red lines as long as inflation is controlled, of course.
- Mission-Oriented Innovation (MOI): Both the NSE and MOI frameworks advocate a strong state role in structural transformation. While NSE is more horizontal and market-aligned, mission-oriented policy is vertical and goal-driven. A synthesis can emerge where missions accelerate comparative advantage, even if it means temporarily defying it for strategic reasons, as seen during COVID-19 with vaccine production.
Resilience, Localization, and Inclusive Development in a Post-COVID World
- Post-Pandemic Realities: COVID-19 exposed vulnerabilities of over-specialization and import dependencies. While strict NSE might promote efficiency through specialization, resilience demands domestic buffers and diversified production in strategic sectors, such as health, food, and energy, even if less efficient, as a form of insurance policy.
- NSE's Adaptation: The state can justify supporting local strategic industries by extending the notion of externality to include resilience. We see this being done today through global trade tariffs and sanctions by more powerful countries that can afford to do so. However, NSE can also encourage localization by fostering cluster-based approaches and strengthening regional and local supply chains.
- Inclusive Growth: While NSE was somewhat distribution-neutral, today's paradigm shifts demand inclusion. A facilitating state can choose labor-intensive industries, invest in targeted education for disadvantaged groups, or direct infrastructure to lagging regions to ensure growth benefits people broadly -- this choice is always available.

What I Think Going Forward

As I reflect on development policy today, NSE remains a profoundly relevant framework, but it needs an ecological upgrade, a digital wing, stronger resilience walls, and more inclusive rooms.

We must redefine success. Beyond GDP, success is a diversified, green, inclusive economy. We can use frameworks like NSE for growth fundamentals, but let Doughnut/SDGs set the targets for societal well-being within planetary boundaries.
It is not always bad. We must embrace a strategic facilitating state. Countries should be bold enough to pursue an industrial policy, guided by NSE's criteria of aligning with their context-specific development phases, while also being willing to push for strategic imperatives such as climate, health, and food security, with clear performance criteria.
There is a new and evolving fiscal space that must be leveraged. Don't let financial fears paralyze needed investments in hard and soft infrastructure. Invest in the comparative advantages of tomorrow, leveraging insights from Modern Monetary Theory (MMT) while maintaining fiscal discipline. The biggest challenge now is not financial opportunities but the execution capacity of countries seeking these funds.
Comparative advantage is a moving target. Ask, "Can we become good at that, given global trends, and what would it take?" This is where mission orientation meets NSE to mobilize endowments toward future green and digital opportunities.
We must embed resilience and inclusion from the outset. Design industrial strategies that assess risk and ensure broad-based benefits. Resilience is the new efficiency, and inclusive growth is essential for social cohesion and long-term stable development.
The objective should be to continuously adapt by observing peer countries and recalibrating strategies. If a mission-oriented approach falters, perhaps a more gradual NSE approach is needed, and vice versa.

Ultimately, NSE remains a valuable framework for policy professionals – not as a dogma but as a foundation. It provides a clear-eyed view of how economies develop and the constructive role governments can play. The state's facilitating hand should not be timid; it should be visionary and pragmatic in equal measure. The objective for policy professionals is to build on blueprints that frameworks like NSE provide while adding the necessary extensions and renovations needed to make it fit the dynamic and unique nature of their contexts.

Sources:

Lin, Justin Yifu. "New Structural Economics: A Framework for Rethinking Development." World Bank Policy Research Working Paper 5197, 2010.
Rodrik, Dani. "Comments on 'New Structural Economics'." World Bank Research Observer 26(2), 2011.
UNCTAD. Trade and Development Report 2021: Chapter on Climate Adaptation and Development, 2021.
World Economic Forum / World Bank. "Setting a Path to Green, Resilient, and Inclusive Development (GRID)," Jan 2022.
Raworth, Kate. Doughnut Economics: 7 Ways to Think Like a 21st-Century Economist. 2017.
Mazzucato, Mariana. Mission Economy: A Moonshot Guide to Changing Capitalism. 2021.
Murphy, Richard. "Can MMT be used by developing countries?" Tax Research UK Blog, Jan 11, 2021.
UNDP Digital Strategy. "Digital Transformation – Inclusive Tech" (undp.org, 2022).