COMPARATIVE ADVANTAGE DEFYING DEVELOPMENT STRATEGY AND CROSS COUNTRY POVERTY INCIDENCE
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This paper argues that poverty in a country is endogenously determined by the country’s long-term economic development strategy. It empirically examines the effects of adopting a Comparative Advantage-Defying (CAD) development strategy - which attempts to encourage economic actors to deviate from the economy’s existing comparative advantages in their entry into an industry or choice of technology - on its level of poverty. This paper also examines how this effect of CAD differs with the level of an economy’s financial development, which is the most important channel for the effects of CAD on poverty to manifest themselves. Data for the period of 1963 to 1999 (cross-section average over this time period) and 1980 to 2000 (panel with 5 years interval) for 113 countries are used in the analysis. We find that the more aggressively a country adopts CAD development strategy, the higher the level of poverty incidence. But a high level of financial development reduces the poverty-increasing impact of adopting CAD. The policy recommendation by this paper is to adopt Comparative Advantage-Following (CAF) development strategy, which facilitates the actors’ entry into an industry according to the economy’s existing comparative advantages, by all the countries in order to reduce poverty incidence.
Abstract
This paper argues that poverty in a country is endogenously determined by the country’s long-term economic development strategy. It empirically examines the effects of adopting a Comparative Advantage-Defying (CAD) development strategy - which attempts to encourage economic actors to deviate from the economy’s existing comparative advantages in their entry into an industry or choice of technology - on its level of poverty. This paper also examines how this effect of CAD differs with the level of an economy’s financial development, which is the most important channel for the effects of CAD on poverty to manifest themselves. Data for the period of 1963 to 1999 (cross-section average over this time period) and 1980 to 2000 (panel with 5 years interval) for 113 countries are used in the analysis. We find that the more aggressively a country adopts CAD development strategy, the higher the level of poverty incidence. But a high level of financial development reduces the poverty-increasing impact of adopting CAD. The policy recommendation by this paper is to adopt Comparative Advantage-Following (CAF) development strategy, which facilitates the actors’ entry into an industry according to the economy’s existing comparative advantages, by all the countries in order to reduce poverty incidence.
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