# **1. INTRODUCTION**

The global crisis that started in the U.S. financial sector in the fall of 2008 is the most serious one both in terms of magnitude and scope since the Great Depression. No country has been immune to the economic slowdown. World GDP contracted 2.2 percent in 2009, the first time after World War II (WWII), and world trade volumes fell by a staggering 14.4 percent, the largest in 80 years (World Bank 2010). Prior to the crisis, World Bank research estimated the number of people living below the poverty line worldwide at about 1.4 billion in 2005 (living on less than $1.25 a day). It is now expected that the cumulative impact of the crisis will deprive some 64 million people the opportunity of getting out of poverty by 2010, most of them in countries that have already been riddled with poverty (Chen and Ravallion 2009). The experience of previous crises makes it seem likely that the impacts may even be more long-lasting than the crisis itself.<sup>2</sup> However, several decades from now when economic historians look back on the story of the past hundred years, it is very likely that they will be more intrigued by the mystery of diverging performances by various countries, especially during the second half of the twentieth century. On the one hand, they will be amazed by the rapid growth path followed by a small number of countries such as Brazil, Chile, China, Indonesia, India, Korea, Malaysia, Mauritius, Singapore, Thailand and Vietnam, where the industrialization process quickly transformed their subsistence, agrarian economies and lifted several hundred million people out of poverty in the space of one generation. On the other hand, they will be puzzled by the apparent inability of many other countries, where more than one-sixth of humanity (the “bottom billion,” as Collier (2007) put it) remained trapped in poverty. They will also notice that with the exception of a few successful economies,<sup>3</sup> there was little economic convergence between rich and poor countries before the 2008-09 global crisis in spite of the many efforts made by developing countries and despite the assistance of many multilateral development agencies **.** The World Bank’s mandate is poverty reduction. Its dream is a world free of poverty. Long-term sustainable and inclusive growth is the driving force for poverty reduction. It is therefore crucial for economists at World Bank to understand the mechanics and determinants of economic growth. Development economics has provided us with some remarkable insights. But as a sub-discipline of economics, it has so far been unable to provide a convincing intellectual agenda for generating and distributing wealth in poor countries. The global crisis is an opportunity not only to identify new areas of research on how to help the developed and developing countries cope with the challenges of the crisis and prevent similar crises in the future, but also on how to achieve sustainable, inclusive growth to developing countries.

This paper focuses on the long-term development challenges. It discusses the evolution of development thinking since the end of WWII and suggests a framework to enable developing countries to achieve sustainable growth, eliminate poverty, and narrow the income gap with the developed countries. The proposed framework, called a neoclassical approach to structures and change in the process of economic development, or new structural economics, builds on some of the

> 2 Empirical research on previous crises suggests that very young children seriously affected by poor nutrition may never catch up to their peers who were born in more fortunate times.  In Indonesia, school enrollment fell after 1997 among the poorest; in rural areas the number of children 7-12 years old not enrolled in school doubled to 12 percent in a few years. The crisis also affected health outcomes; infant mortality increased by over 3 percentage points during the crisis. 3 See for example, those 13 economies studied in the Growth Report (World Bank 2008).

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