Comparative Advantage and Development Policy

Abstract

In the great revival of interest in economic development in the U.S. that has marked the past decade, attention has centered on two main questions: the determining factor of the over-all rate of economic advance; and the optimal allocation of given resources to promote growth. Analysis of the growth rate has relied mainly on the Keynesian tools and has produced a multiplicity of aggregate growth models. In the field of resource allocation, controversy centers around the implications of the classical principle of comparative advantage, according to which growth is promoted by specialization. The present paper discusses the analysis of resource allocation in less developed economies from three points of view. One section tries to ascertain the extent to which the allocation principles derived from trade theory and from growth theory can be reconciled with each other without losing their operational significance. Another section compares various approaches to the measurement of optimal resource allocation in terms of their logical consistency and their applicability to different conditions. One section examines some of the practical procedures followed in setting investment policy in underdeveloped countries in the light of the earlier discussion. Some of the theoretical issues are re-examined to indicate their practical importance.