No matter how bad existing conditions in a low-income country are, there are always some areas they can do relatively well. It is much better to identify these areas and scale them up, than to spend time listing all the missing conditions for doing something that they are not good at. Such conditions are often in the image of an idealized advanced economy.
no matter how bad its current economic situation is, any poor country has sectors that are consistent with its comparative advantage (that is, what they can do well) based on their existing endowments. The government can help private firms scale up those sectors and become competitive in domestic and international markets. In the process of structural change the country can also exploit the benefits of backwardness to achieve sustained dynamic growth.
These cases demonstrate that fast, sustained growth is possible. According to Spence and his Commission colleagues, these economies share five traits. First, they are open. Second, they maintained macroeconomic stability. Third, they mustered high rates of saving and investment. Fourth, they let markets allocate resources. Fifth, they had committed, credible, and capable governments. In fact, the last two are the preconditions for a country to follow its comparative advantages and the first three are the results of doing so.
The ideal industrial structure emerges when all industries are consistent with an economy’s comparative advantages and are competitive in domestic and international markets. Macro stability, high savings and fast capital accumulation ensue, the endowment structure and comparative advantages shift, and eventually it is necessary to upgrade the economy’s industrial structure to a more capital-intensive level. This evolution requires changes in hard (physical) and soft (institutional) infrastructure to reduce transaction costs.
At its heart, development economics should be about supporting low-income country governments to set up effective policy frameworks and design interventions that allow the private sector to develop competitive industries and tap into the latecomer advantages. That is the open secret of dynamic and inclusive growth.
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