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5.1 The development model should determine the optimal trade policy: Economic Report on Africa 2007

Guest post by: United Nations Economic Commission for Africa

Article Overview: The two-stage diversification process from economic history has been registered both in open and closed economies. The difference between the two is that the turning point after reasonable and sustainable development has been achieved occurs at a much earlier point for open economies compared to the case for closed economies.

5.1 The development model should determine the optimal trade policy: Economic Report on Africa 2007

The two-stage diversification process from economic history has been registered both
in open and closed economies. The difference between the two is that the turning
point after reasonable and sustainable development has been achieved occurs at a
much earlier point for open economies compared to the case for closed economies.
In fact, countries that went through a minimum level of specialization relatively
early tended to be substantially more open to trade, on average by 15 percentage
points (Imbs and Wacziarg 2003). They showed that the turning point occurred at
a per capita income level of $5,405 for an average openness of 78 per cent for open
economies while it occurs much later in the development process at a per capita
income of $9,161 for an average openness of 47.4 per cent for closed economies.
Thus, depending on which development model a country pursues, it can remain less
open and still diversify with the turning point occurring much later in the development
path. Alternatively, a country could consider a much earlier diversification
turning point more optimal and as such be comfortable with an aggressive tradeopenness
policy.

Hence, these results simply add weight to the arguments made by proponents of
gradualism in trade liberalization, especially for developing countries. Proponents of
a gradual approach to trade liberalization point out that there are inherent constraints
in countries that limit their ability to build a competitive advantage to export new
products in a short period of time. As such, they argue for policy space that would
allow them to pursue policies conducive to diversification through industrialization.
This argument is even more relevant for those economies that are commoditiesdependent
in their export base. These results reinforce to some extent the argument
that calling for policy space is a good approach. Calls for such space from multilaterally
imposed policies are not misplaced when viewed in the context of strategic trade
policy.

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Article Tags: competitive advantage, developing countries, development model, development path, diversification, economic history, export base, gradualism, imbs, industrialization, open economies, openness, per capita income, percentage points, policy space, proponents, short period, specialization, trade liberalization, turning point



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