Topics to be Covered
This module focuses on two important topics in macroeconomics relevant to development: industrial policy and comparative advantage. The initial presentation covering industrial policy, entitled “Industrial Policy: Theory” examines the ways in which governments attempt to manage the development of specific sectors and industries in developing countries. This video addresses the potentially key role of government in solving the so-called “coordination failures” of private sector industries. Governments can deal with such coordination failures by creating and sustaining networks of supporting industries needed to bolster primary industries that cannot stand on their own. Also discussed in this presentation is how governments can help firms to overcome the so-called “first mover” problem, and how to achieve the proper balance between subsidies and tariffs, the two primary tools for conducting industrial policy. “Conditional convergence,” the following presentation, deals with the differences in how fast particular industries in the developing world close productivity gaps with the same industries in the developed world. The analyses covered in this presentation claim that manufacturing industries built around machinery tend to close this gap faster than agricultural and service industries that are not particularly mechanized. In the presentation “Local Monopoly Power,” the speaker reviews some evidence about the costs that local monopolies exact on consumers. When the monopolist is the source of a particular good or service in a particular area, consumers wind up paying substantially more for the product. The final two presentations in this module concern the topic of comparative advantage. The initial presentation, “Comparative Advantage,” introduces the topic by contrasting comparative advantage with the misleading concept of absolute advantage. Armed with concrete examples, the speaker explains comparative advantage in terms of the economic concept of opportunity costs. Opportunity costs are those losses incurred when one productive activity takes the place of other alternative activities that produce larger returns. When a country has a comparative advantage in one area, it means that it can undertake a particular productive activity, like making cars, with lower opportunity costs than other producing countries. By trading goods and services in which they specialize, countries with a comparative advantage in different areas can enhance their own welfare and that of their trading partners. The next presentation, entitled “Sources of Comparative Advantage,” sheds light on why certain countries have a comparative advantage in certain sectors and industries based on the structure of their economy. As the speaker explains, particular countries do a better job deploying capital, employing low-skill or high-skill workforces, enforcing business contracts, and producing goods that require large scale production. The final presentation provides a counterpoint to the theory of comparative advantage. Entitled “Secrets of Economic Growth,” this presentation offers a theory that contrasts the comparative advantage framework. The speaker makes the case that countries actually benefit when their economies contain firms that produce a great variety of different products, and suffer when there is not sufficient diversity in the country’s product mix. The reason for this diversity dividend is that the know-how involved in producing one product can spill over into a neighboring industry, encouraging the formation of another sector and enriching the society. Thus, wealthier countries tend to have a diversity of interconnected industries and poorer countries actually specialize more.
Learning Outcomes
After this module students will be able to explain some central concepts in economic development, including comparative advantage and industrial policy. They also will be able to offer a critique of the concept of comparative advantage based on the work of Ricardo Hausman on economic complexity and growth.
