If economic development is essentially about an economy’s transition from agricultural to industrial production, then the attainment of a comparative advantage in industrial products is widely regarded to be the hallmark of successful development. Against this backdrop, governments aiming to promote development often seek to do so partly through the promotion of industrial exports. In light of this, a literature has developed in economics recently to understand whether and under what circumstances policy to promote exports has been successful.
This recent literature focuses on two different types of market imperfection that could motivate government intervention to promote exports. The first involves hysteresis in exporting. This is driven by firm heterogeneity in productivity and a sunk cost to foreign market entry, whereby the return to becoming an exporter today includes the option value of continuing to exporting in future without incurring start-up costs. The second type of market imperfection involves a cost of self-discovery both of new products and of new markets based on learning about the specific products in which a country has a comparative advantage. In both cases an across-the-board policy to promote exports is found to address the market imperfection: export subsidy and a real exchange rate depreciation respectively. The main policy conclusion is that an appropriate government policy can help to circumvent the externalities that firms face and hence promote industrial development. But to be successful these policies must allow the market, as opposed to the government, to determine which firms and products prevail. While these policy conclusions are promising for economic development in and of themselves, they risk imposing mercantilist or begger-thy-neighbour externalities of their own on other countries. Indeed, such are the risks associated with export subsidies that there is an initiative at the WTO to phase them out altogether. Therefore, future research could usefully evaluate whether and how policies can address domestic market imperfections associated with underdevelopment without imposing adverse effects on other nations.
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