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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