18 Thanks to the country’s good economic performance, the government’s fiscal position is likely to be strong and there will be no justification for the kind of erratic budget policies (expenditure cuts, public investment delays, payment arrears, salary freezes, etc.) that are often caused by large fiscal deficits. Likewise, a government that implements a development strategy consistent with the country’s comparative advantage will not have to recourse to an overvalued exchange rate as a means for subsidizing nonviable firms that are created in the framework of comparative advantage-defying, import-substitution policies.

# **5. CONCLUSION**

The quest for economic growth has preoccupied economists and policymakers since at least the 18<sup>th</sup> century. Much progress has been achieved over the past 50 years, most notably on theoretical and empirical grounds. On the theoretical front, the analysis of endogenous technical innovation and increasing returns to scale has provided economists with a rich general framework for capturing the broad picture and the mechanics of economic growth. On the empirical side, the availability of standardized data sets such as the Penn World Tables has stimulated interest in cross-country work that highlights systematic differences between highgrowth and low-growth countries with regard to initial conditions, policy and institutional variables.

Yet, despite progress, policymakers around the world—especially in developing countries, still face difficulty in identifying actionable specific policy levers that can help ignite and sustain the type of dynamic growth rates that are necessary to reduce poverty. In recent years, growth researchers have responded to their concerns by trying to address various new challenges: the lack of convergence among countries; the identification of robust determinants of economic performance; the design of the supporting institutions for innovation and technological change, which are widely acknowledged to be the foundations for structural change and prosperity; and the identification of binding constraints to growth, the evaluation of successful development programs through randomized control trials, with the goal of scaling them up whenever possible.

By adopting a radically different approach to growth analysis, the Growth Report has made an important contribution to knowledge. It has identified five stylized facts (openness, macroeconomic stability, high rates of saving and investment, market mechanism, committed, credible and capable government) that can guide policymaking in developing countries. But in doing so, the Report has not disentangled causes and consequences.

The new structural economics framework proposed in Lin (2010) helps explain the endogeneity and exogeneity issues surrounding these five stylized facts. A central proposition that runs through this paper is that, developing countries that implement economic policies in contradiction with their comparative advantage tend to perform poorly and suffer macroeconomic instability. They do not exploit the benefits of globalization to the fullest. Typical features of such strategies are large budget deficits due to government support of nonviable firms, inflationary policies caused by excessive consumption, financial repression, and over-valued exchange rates in the context of low productivity. By contrast, countries that adopt comparative advantage-following strategies are typically in the position to achieve dynamic growth. They rely on the market as the key mechanism for allocating resources at any given