Creating comparative advantage

August 22, 2007

The theory of comparative advantage says that two countries can mutually benefit by trading that which they are good (or not so bad) at producing. This easily explains trade in natural resources: I’ll trade some coal for your tasty corn. But this doesn’t quite explain [to me, at least] how one acquires an advantage in non-natural things, like high tech [read more here]. There is no natural nerd mine that one country can exploit, while others lack it. Instead, nerds can be manufactured with a decent educational system. Similarly, governments can produce industries that have a comparative advantage over other producers by protecting them while they are in the development stage. However, there is no guarantee of success. These companies are still competing in a world market where advanced countries have a huge lead. The best bet is to commoditize older industries that aren’t too profitable in Western countries. For example, developing countries should target polluting industries like chemical plants because Western countries are slapping more restrictions on them. They are all aiming for IT because it requires much lower infrastructure costs. Whatever it is, once you build a base that pulls in money you can expand into other areas. You can’t leap into nuclear power plants, but you can start with textiles, furniture, call centers, IT, chemicals, steel, etc. There are other external serious problems that will still prevent poor countries from developing, but at least it won’t be their fault.


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