Comparative Advantage Defying Development Strategy and Cross Country Poverty Incidence

Abstract

This paper argues that poverty in a country is endogenously determined by the countryi¯s long-term economic development strategy. It empirically examines the effects of adopting a Comparative Advantage-Defying (CAD) development strategy - which attempts to encourage economic actors to deviate from the economyi¯s existing comparative advantages in their entry into an industry or choice of technology - on its level of poverty. This paper also examines how this effect of CAD differs with the level of an economyi¯s financial development, which is the most important channel for the effects of CAD on poverty to manifest themselves. Data for the period of 1963 to 1999 (cross-section average over this time period) and 1980 to 2000 (panel with 5 years interval) for 113 countries are used in the analysis. We find that the more aggressively a country adopts CAD development strategy, the higher the level of poverty incidence. But a high level of financial development reduces the poverty-increasing impact of adopting CAD. The policy recommendation by this paper is to adopt Comparative Advantage-Following (CAF) development strategy, which facilitates the actorsi¯ entry into an industry according to the economyi¯s existing comparative advantages, by all the countries in order to reduce poverty incidence.