Development Strategy, Viability, and Economic Distortions in Developing Countries
This paper presents a three-sector static model to explore the rationale for a series of institutional distortions in developing countries. The authors argue that, after World War II, motivated by a belief in the development of state-of-the-art ind...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20090416152119 http://hdl.handle.net/10986/4099 |
| Summary: | This paper presents a three-sector
static model to explore the rationale for a series of
institutional distortions in developing countries. The
authors argue that, after World War II, motivated by a
belief in the development of state-of-the-art industries as
a means for nation building, the majority of developing
country governments attempted to accelerate the growth of
advanced capital-intensive industries. However, since
developing countries are relatively rich in labor or natural
resource endowments but not in capital endowment, advanced
capital-intensive industries were not adapted to the
endowment structures of these developing countries at the
time. Enterprises in those industries were non-viable in
open, competitive markets and could not survive without
government subsidization or protection. The model shows
that, in order to mobilize resources into the
capital-intensive, advanced sectors, it is necessary for
governments to use distortionary policies such as taxes and
subsidies, distortions of factor prices, directive
allocation of resources, and nationalization of enterprises.
Such distortions enable developing countries to set up
advanced, capital-intensive industries in the early stage of
their development. However, they also tend to suppress
incentives, misallocate resources, and make the economy inefficient. |
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