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Comparative Advantage and Industrial Policy in Developing Countries

Satisfactory Essays
1.) Comparative advantage speaks about win-win situation for countries in trade but there are many criticisms regarding comparative advantage theory such as consideration of trade costs, import substitution industrialization and also criticism from a economist Ha- Joon Chang speaking about Technology making Developed countries rich and Developing countries as it were form past. Our Question is based on criticism made by Ha- Joon Chang i.e. developed countries maintain relatively advanced technology and industry compared to developing countries which lead to countries with good technology to export and become richer and countries with low technology lead them to become more poor by importing. In a paper "Should Industrial Policy in Developing Countries Conform to Comparative Advantage or Defy it? A Debate Between Justin Lin and Ha-Joon Chang" Ha-Joon Chang had quoted an example about Japan not allowing for any FDI in Automobiles for four years and also applied many tariffs on imports to get highly advantage in automobile industry. This example shows Japan has great technology towards technology and had utilized itself to build up its industry becoming rich it that sector. Trade through comparative advantage should be made with competitive advantage for producing better products in an innovative way. This will lead to an Win-Win situation for companies to trade in terms of export and import products. Firms in developing countries produce goods based on technology which was leveraged by developed country having greater global market share. This also leads developing countries using that technology but do not try to innovate the technology. Developing countries who identified and brought new technologies are now making more income for example India leveraged heavy machinery and Information technology, China got leveraged with electrical, office, telecommunication products and data-processing products. This is defined as product classification in paper "How Rich Countries Became Rich and Why Poor Countries Remain Poor: It’s the Economic Structure" by Jesus Felipe, Utsav Kumar and Arnelyn Abdon. This three authors had given an scenario regarding comparative advantage with respect to technology used for designing and making better products can have greater advantage over international market which in general held by developed countries leading them to be more rich and countries having this products leading them to poor. Also developing countries labor more unskilled then developed countries this takes them time to understand technology. which makes them to use that technology but not understand and innovate new technology. 2). Yes, Government intervention in trade can shape or distort comparative advantage.
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