Question

 

(a) Why do some economists argue for dynamic comparative advantage? How does this concept relate to industrial policy? Use cases or examples to substantiate your discussion.

(b) Was the 1997 Asian Financial Crisis a result of government failure or market failure? Discuss.

(c) Why some people suggest that deglobalization will become major global trend after the coronavirus pandemic. Do you agree with this argument? Discuss.

Answer 1

a)A country may have comparative advantage in certain new resources.But these countries may not be able to exploit their resources.These countries comparative advantage is having other countries exploit their resources.Real developmeent requires integration of the natural resources into the economic structure but countries may not have comparative advantage in these activities .So the comparative advantage lies in having other countries exploit the new resources .From this point, these countries comparative advantage is having other countries exploit their resources.Thus what is important is dynamic comparative advantage in the long run.

It is necessary to understand the link between industrial policy and trade policy.If the role of industrial policy is to be understood , it is believed that it should be complementary to trade policy.The industrial policy should adjust and compensate for market failures which stop development.

b)Market failure means inefficient distribution of goods and services in the free market.Government failure means when the intervention of the government to fix a problem creates more problem.The Asian financial crisis of 1997 refers to the macroecnomic shocks which the Asian countries experienced which led to rapid devaluation of currency and capital outflows from the country.The crisis was government failure as both government and private firms built  high external debt ratios.Devaluations caused repayment of debt expensive and so firms as well as nations started defaulting on debt repayments.Intervention of IMF worsened matters..IMF suggested fiscal restraint ie higher taxes and lower spending which resulted in recession in the Asian countries.

c)The covid 19 pandemic is causing the world economy to move away from globalization in an attempt to reduce economic interdependence .This will not end globalization totally but it can be partially reversed . Due to the current economic and health crisis, policymakers are thinking of moving towards  deglobalization.These steps will slow down economic growth because it will put an end to different elements of globalization like cross border trade,investment, technology ,etc.Deglobalisation is needed because every country would like to protect its own domestic market, manufacturing potential,human resource in order to make domestic market grow.