In the economic theory, three main approaches to comparative advantage can be found:
o the static approach common in textbooks of economics o approach oriented to dynamic growth and the process of industrialization (Bruno 1970),
o and the industry spesific sequential approach (Cline 1982).
Besides these the concept could be approached from quite a few other angles, for example from those of the dynamic advantages, adaptation advantages, cooperation advantages and of cumulative effects. (Kozma 1982). However, from the normative point of view the division into three approaches seems t o be the most useful one.
In the static approach, the factor proportions and comparative advantages over time are given. Countries, you could say, have their static, by comparative advantages predetermined places in the global division of labor.
The dynamic
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or quasi dynamic-
approach is based on a theory of different stages of development. The first stages are often seen asperiods of interdependent processes of economic growth within the economy, largely independent of the international environment and often aided by different measures of protection. These measures cause distortions in factor prices and changes in factor supplies, which in time support the development of economies of scale in the production of commodities. In a way, the comparative advantages are let to develop with the aid of general
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not targeted-
support measures. In the later stages of development the economy can turn t o more open international relations now based on the fully developed relative advantages.According t o the third approach, the domestic industrial development is regarded within the context of international economic environment, but in difference t o the second approach in a quite selective way. The
comparative advantages are actually created and shaped by measures of protection and support targeted on some industries chosen beforehand. In this approach, the role of active governmental industrial policy is very important.
When promoting growth and strengthening international competitivenes are major goals for industrial policy in a country with modest industrial
showing, the need for intervention seems to be quite considerable. In L D C ~ the industrialization strategies are strongly influenced by the position the country is already taking within the international economy. An
implication of this is, that the prevailing comparative advantages are important starting points for formulating policy measures, and that a renewal
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or even a recreation-
of advantages is a central target for policy consideration.3.2. hport s u b s t i t u t i o n o r export o r i e n t a t i o n ?
Depending on t h e s t r a t e g y adopted, comparative a d v a n t a g e c r i t e r i a can be r e g a r d e d a s a g u i d e l i n e f o r e x p o r t o r i e n t e d p o l i c y , o r a s a c o n s t r a i n t f o r import s u b s t i t u t i o n p o l i c y . These p o l i c y o r i e n t a t i o n s can a l s o b e s e e n a s d i f f e r e n t s t a g e s i n t h e p r o c e s s of i n d u s t r i a l i z a t i o n : f i r s t import
s u b s t i t u t i o n when a t t e m p t i n g t o r e d u c e dependence on i m p o r t s , and t h e n e x p o r t o r i e n t a t i o n when t r y i n g t o e a r n from e x p o r t s and become i n t e g r a t e d i n t o t h e world t r a d i n g system. Although, s u b s t i t u t i o n of i m p o r t s by
d o m e s t i c p r o d u c t i o n and e x p a n s i o n of e x p o r t s a r e o f t e n l i k e l y t o t a k e p l a c e s i m u l t a n e o u s l y .
Among t h e r e a s o n s f o r promoting d o m e s t i c p r o d u c t i o n i n f a v o r of i m p o r t s i n LDCs, was t h e d e c l i n e i n e a r n i n g s from e x p o r t s which i n t u r n l e d t o
d e c l i n e i n i m p o r t s of i n d u s t r i a l goods. T h i s h a s been t h e c a s e
p a r t i c u l a r l y in L a t i n America. T h e o r e t i c a l l y , t h e s e a c t i o n s w e r e b a s e d on
" e l a s t i c i t y pessimismw, a c c o r d i n g t o which b o t h e x p o r t and import demand a r e i n e l a s t i c i n t h e s h o r t r u n (Nurkse 1 9 5 9 ) .
T y p i c a l i n s t r u m e n t s u s e d f o r import s u b s t i t u t i o n a r e t a r i f f s , q u a n t i t a t i v e import r e s t r i c t i o n s and m u l t i p l e exchange r a t e s . A common p o l i c y r a t i o n a l e b e h i n d t h e s e measures i s t h e p r o t e c t i o n of i n d u s t r i e s i n t h e i r i n i t i a l p h a s e s t o make them i n t e r n a t i o n a l l y c o m p e t i t i v e i n t h e l o n g r u n . The f o s t e r i n g of - i n f a n t i n d u s t r i e s " may, however, c a u s e d i s t o r t i o n s i n t h e s t r u c t u r e of m a n u f a c t u r i n g i n d u s t r i e s (UNIDO 1 9 8 6 ) .
I n f a c t , a new e r a i n e x p o r t promoting p o l i c i e s began i n t h e 1960's.
S u c c e s s a c h i e v e d i n a number of t r a d e l i b e r a l i z a t i o n n e g o t i a t i o n s r a i s e d new optimism a l s o i n LDCs (Viner 1953, H a b e r l e r 1 9 5 9 ) . I n many c o u n t r i e s t h e s e i n t e r n a t i o n a l developments and l i m i t a t i o n s r e v e a l e d i n t h e
p r e v a i l i n g i m p o r t s u b s t i t u t i o n s t r a t e g i e s changed t h e f o c u s of i n d u s t r i a l i z a t i o n p o l i c i e s towards e x p o r t promotion.
By c o n t r a s t t o i m p o r t s u b s t i t u t i o n p o l i c i e s , e x p o r t o r i e n t a t i o n l e d t o a l i b e r a l i z a t i o n o f i m p o r t s . I n c e n t i v e s t o promote e x p o r t s o f t e n t a k e t h e form of
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d i r e c t o r u n d i r e c t-
s u b s i d i e s and c o r r e c t i o n s of exchange rates.I n t h e mid 70s. however, t h e new e x p e c t a t i o n s t u r n e d t o pessimism when e x p o r t demand, a s a consequence of d e p r e s s e d growth performance of t h e world economy, w e r e s e v e r e l y d e p r e s s e d . The d e c l i n e of growth h a s l e d t o i s s u e s o f "new p r o t e c t i o n i s m " b u t now mainly from t h e d e v e l o p e d c o u n t r i e s f s i d e .
I n f i g u r e 1 t h e e f f e c t s on demand, s u p p l y and p r i c e of a p r o d u c t c a u s e d by s u b s i d i e s a r e compared t o t h o s e c a u s e d by t a r i f f s (Gorden 1 9 7 4 ) . P P f i s t h e f o r e i g n s u p p l y c u r v e , DD' i s t h e d o m e s t i c demand c u r v e and GGf i s t h e s u p p l y c u r v e f o r d o m e s t i c , import-competing p r o d u c e r s . I n a b s e n c e of s t a t e i n t e r v e n t i o n , domestic p r o d u c t i o n of OA would t a k e p l a c e , w h i l e AB, e x c e s s of demand o v e r l o c a l p r o d u c t i o n i s b e i n g imported.
A s u b s i d y a t t h e r a t e of SPIPO w i l l r a i s e t h e p r i c e r e c e i v e d by
p r o d u c e r s , t h u s i n d u c i n g them t o r a i s e o u t p u t t o t h e l e v e l of OC. F o r t h e a d d i t i o n a l o u t p u t AC t h e s o c i e t y h a s t o pay t h e p r i c e AKLC, t h e a r e a under s o c i a l m a r g i n a l c o s t c u r v e . However, t h e c o s t of i m p o r t s r e p l a c e d by l o c a l p r o d u c t i o n i s g i v e n by ANLC, t h e a r e a under m a r g i n a l c o s t of i m p o r t s
c u r v e . D i f f e r e n c e between t h e two a r e a s , KNL, r e p r e s e n t s t h e g a i n t h e s o c i e t y i s e a r n i n g from t h e s u b s i d y .
The same production or protection effect can be brought about by imposing a tariff at the rate SP/PO. Now there is, however, unlike in the case of subsidy, also a consumption effect resulting from an increase in the consumer prices. At the higher price of OS, consumption falls by BB' resulting in a loss of consumers surplus by B'EQB. Accordingly, the consumers' welfare is reduced with FEQ, which is the cost additional to the use of subsidies, resulting from by-product distortions.
South Korea offers a good example of criticism against the static approach to comparative advantage. According to the theory, technology and
productivity are taken as exogenous and unchanging variables. In South Korea, however, the state
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rather than assuming given cost curves like PP' and GG' in the figure above, and attempting to minimize by-product distortions-
has attempted to reduce costs in order to gain international competitiveness. Under total prohibition of competitive imports theobjective of government policy is to shift the GG' curve downwards to the level to make local production internationally competitive.
The major weakness of the diagram, however, is the inability to portray the mechanisms of productivity increase. In South Korea the dynamic effects of instruments facilitating technical and productive change in local firms are more important than the distortion effects, which are central in the static analysis.
Figure 2.2.1.: Quantity of the importable.
Table 16. The share of IDCs of world exports on manufactures:
distribution by country groups and by broad product categories, 1963, 1971 and 1980, %.
Country group Year Product Category
*
M I N S C 0
Developing 1963 3.4 9.4 8.4 9.3 0.9 30.2 countries 1971 4.0 7.5 12.5 8.0 1.6 24.3 and areas 1980 7.0 9.9 17.9 9.1 4.5 24.6 4 major
Others
*
Product categories:M = Manufactures (SITC 5-8 less 68)
I = Industrially produced goods and intermediates N = Consumer non-duraples
S = Supplies and intermediates
C = Capital goods and consumer duraples 0 = Other manufactures and semimanufactures
In chapter 3 we have already discussed the main issues of industrial development in LDCs since the early 60s. The showing is largely due to a successful application of policies referred above. We found out, too, the somewhat ambigious features in this success. First, the success is
concentrated to a few most developed LDCs, the NICs. Second, when the manufacturing industries in LDCs are refarded as a unity (i.e.
industrially produced goods and intermediates) the picture is not so obviously positive. Some branches have had advantage of the policies, others have not. In particular the categories of 'other manufactures' and 'semimanufactures' seem to have been going down in the LDCs.
The ambigious result focuses on a central question in the industrializatio n strategies: in what order should the different industries be developed?
Given the scarcity of physical and human capital, policy makers have to allocate resources between various industries. The sequential character of industrial development is spesific for every country, which underlines the normative side of comparative advantage. The South Korean case can, once again, be referred to as an example
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there is little left from thepositive side of comparative advantage. In other words the sequence of industries in which the relative efficiency of a developing country is to be grown is of utmost importance to policy makers aiming to shape the patterns of comparative advantages.