In a recent email exchange, I was reminded of a post by Rodrik on his blog where he points to a study by Imbs and Wacziarg that shows that economic specialization occurs as a country grows out of poverty.

Here is Rodrik:

What's the big deal, you might say. Well, it is a big deal if you have been brought up on the idea that the key to economic growth for poor countries lies in specialization according to comparative advantage. If that simple recipe were true, countries that are getting richer would be producing a narrower range of goods, not a broader range. It takes a lot of mental gymnastics to square this stylized fact with the standard comparative advantage arguments. A far simpler interpretation is that the key to growth is the acquisition of production capabilities in an increasing range of goods, in a way that is often in tension with what comparative advantage would dictate. Here is a paper that tries to make these ideas more precise.

Now this sent alarm bells in my head when I first read it. First, I don't remember being taught that the key to development is comparative advantage. Only that comparative advantage can explain how a country that is less productive at everything, can still focus on a subset of products and gain from trade. I have always thought of comparative advantage as a tool to improve economic wellfare, not as the key to development.

Also, the point Rodrik is making doesn't include the case of countries growing as they produce a broader set of goods simply because they have better access to capital and can improve labor productivity. Sure enough, this point is made more eloquently by a commenter in Rodrik's site:

UPDATE: Roberto Porzecanski's comment below provides an opportunity for clarification. Roberto says the Imbs-Wacziarg result is consistent with trade models, insofar as countries that are growing through capital-deepening may end up producing a broader menu of goods as a result.

Think of low-hanging fruit.

Now, Rodrik also goes on to agree with this point but disagree that it explains the questions that arise as to the causality of specialization and growth: "If countries that are growing are those that are making use of comparative advantage while those that aren't are not, then you should see the growing group of countries becoming more specialized".

By this point assumes that the dataset includes countries that have pursued trade policy according to comparative advantage. I have never seen any policymaker pour over an analysis of the value-added chain or the factors of production for the country's commodities and use the results to formulate policies. Heck, I haven't even seen policymakers argue for a zero-tariff system given global and local realities.

Trade policy, in reality, probably has no relation to comparative advantage. It is the combination of economic interests and political power, as well as fiscal necessities, that push a government (particularly one in a poor country) to enact export taxes, cascading tariff structures, subsidies, etc.

But I don't want to be overly dismissive of the point Rodrik is making. I think it is a valid question to be asking and to examine empirically.

Comparative advantage and growth

In a recent email exchange (h/t Marco Llinas and Jim LaFleur), I was reminded of a post by Rodrik on his blog where he points to a study by Imbs and Wacziarg (available in the American Economic Review 2003) that shows that economic specialization occurs as a country grows out of poverty.

Here is Rodrik:

What's the big deal, you might say. Well, it is a big deal if you have been brought up on the idea that the key to economic growth for poor countries lies in specialization according to comparative advantage. If that simple recipe were true, countries that are getting richer would be producing a narrower range of goods, not a broader range. It takes a lot of mental gymnastics to square this stylized fact with the standard comparative advantage arguments. A far simpler interpretation is that the key to growth is the acquisition of production capabilities in an increasing range of goods, in a way that is often in tension with what comparative advantage would dictate. Here is a paper that tries to make these ideas more precise.

Now this sent alarm bells in my head when I first read it. First, I don't remember being taught that the key to development is comparative advantage. Only that comparative advantage can explain how a country that is less productive at everything, can still focus on a subset of products and gain from trade. I have always thought of comparative advantage as a tool to improve economic wellfare, not as the key to development.

Also, the point Rodrik is making doesn't include the case of countries growing as they produce a broader set of goods simply because they have better access to capital and can improve labor productivity. Sure enough, this point is made more eloquently by a commenter in Rodrik's site:

UPDATE: Roberto Porzecanski's comment below provides an opportunity for clarification. Roberto says the Imbs-Wacziarg result is consistent with trade models, insofar as countries that are growing through capital-deepening may end up producing a broader menu of goods as a result.

Think of low-hanging fruit.

Now, Rodrik also goes on to agree with this point but disagree that it explains the questions that arise as to the causality of specialization and growth: "If countries that are growing are those that are making use of comparative advantage while those that aren't are not, then you should see the growing group of countries becoming more specialized".

By this point assumes that the dataset includes countries that have pursued trade policy according to comparative advantage. I have never seen any policymaker pour over an analysis of the value-added chain or the factors of production for the country's commodities and use the results to formulate policies. Heck, I haven't even seen policymakers argue for a zero-tariff system given global and local realities.

Trade policy, in reality, probably has no relation to comparative advantage. It is the combination of economic interests and political power, as well as fiscal necessities, that push a government (particularly one in a poor country) to enact export taxes, cascading tariff structures, subsidies, etc.

My point is that there is a false dichotomy in the argument that since countries are growing without specialiation, comparative advantage is not important to growth. There are a number of potential "engines" of growth, and in the presence of market dynamics (the absence of strong central control), the economic agents will not be coordinated around a specialized good. I think the growing specialization that we beyond the inflection point is fascinating, and actually serves to bolster the argument for comparative advantage. But Rodrik is right that it begs the question of how does the economy benefit from greater diversification before settling in a specialized role? Rodrik's paper offers a model for this, with entrepreneurs engaging in economic innovation and information being disseminated, eventually leading to specialization.