Development Strategy, Viability, and Economic Distortions in Developing Countries

26 Pages Posted: 20 Apr 2016

See all articles by Justin Y. Lin

Justin Y. Lin

Peking University - China Center for Economic Research

Feiyue Li

Peking University

Date Written: April 1, 2009

Abstract

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.

Keywords: Economic Theory & Research, Debt Markets, Emerging Markets, Public Sector Corruption & Anticorruption Measures, Currencies and Exchange Rates

Suggested Citation

Lin, Justin Yifu and Li, Feiyue, Development Strategy, Viability, and Economic Distortions in Developing Countries (April 1, 2009). World Bank Policy Research Working Paper No. 4906, Available at SSRN: https://ssrn.com/abstract=1401212

Justin Yifu Lin (Contact Author)

Peking University - China Center for Economic Research ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

Feiyue Li

Peking University

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
142
Abstract Views
1,174
rank
249,930
PlumX Metrics