incomes of many countries during the nineteenth and twentieth centuries was partly due to the expansion of scientific and technical knowledge that raised the productivity of labor and other inputs in production. Economic theory has demonstrated that growth is the result of synergies between new knowledge and human capital, which is why large increases in education and training have accompanied major advances in technological knowledge in all countries that have achieved significant economic growth. Education, training, and health, which are the most important investments in human capital, are considered to be the most important driving force for economic development (Becker 1975; Jones and Romer 2009).

New structural economics considers human capital to be one component of a country’s endowment. For economic agents, risks and uncertainty arise during the process of industrial upgrading and technological innovation that accompanies economic development. As various firms move up the industrial ladder to new, higher capital-intensity industries and get closer to the global industrial frontier, they face higher levels of risks. Human capital increases workers’ ability to cope with risk and uncertainty (Schultz 1961) but its formation requires a long time. A person who loses the opportunity to receive education at young age may not be able to compensate for that loss at a later age. In a dynamic growing economy, it is important to plan ahead and make human capital investment before the economy requires the set of skills associated with new industries and technologies. However, improvements in human capital should be commeasurable with the accumulation of physical capital and the upgrading of industry in the economy. Otherwise, human capital will either become a binding constraint for economic development if it is under supplied because of insufficient investment, or the country will have many frustrated highly-educated workers who cannot find adequate jobs if investment in training, knowledge and learning is not consistent with the speed of industrial upgrading in the economy.

A well-designed policy on human capital development should be an integral part of any country’s overall development strategy. The new structural economics goes beyond the neoclassical generic prescription for education and suggests that development strategies include measures to invest in human capital that facilitate the upgrading of industries and to prepare the economy to make full use of its resources.

# **5. IMPLICATIONS FOR WORLD BANK RESEARCH**

The new structural economics approach highlights the importance of endowments and differences in industrial structures at various stages of development, and the implications of distortions stemming from past, misguided, interventions by policymakers whose belief in old structural economics led them to over-estimate governments’ ability to correct market failures. It also points out the fact that policies advocated under the Washington Consensus often failed to take into consideration the structural differences between developed and developing countries, and ignored the sources of various types of distortions in developing countries.

The main criterion for assessing applied research in development economics is its relevance to the most pressing policy issues at hand. Many of the countries that have achieved some degree of convergence with industrialized countries in the past 50 years have often not followed the orthodox prescriptions advocated in the most influential policy circles. Development economists must learn from the experiences of these countries that have not followed conventional wisdom, yet have done better at reducing poverty than others. Moreover, the recent global economic crisis has challenged 28