Thread. #Atmanirvar
Many economists are warning against a return to protectionism in India, and rightly so.
However, some are using the economic theory of Comparative Advantage to make this argument, and this is misleading.
1/4
Many economists are warning against a return to protectionism in India, and rightly so.
However, some are using the economic theory of Comparative Advantage to make this argument, and this is misleading.
1/4
CA is a powerful but static theory which shows that with given endowments, trade increases welfare for all countries.
But what if a country is not really happy with the welfare increase due to trade based on its current CA, and like Oliver Twist, wants more? 2/4
But what if a country is not really happy with the welfare increase due to trade based on its current CA, and like Oliver Twist, wants more? 2/4
This is where the dynamic effect of trade comes in. If developing countries really want to achieve maximum welfare, they need to shift from labour-intensive to skill-intensive production and exports.
This means CHANGING the Comparative Advantage of these economies. 3/4
This means CHANGING the Comparative Advantage of these economies. 3/4
So coming back to the discussions on protectionism in India, it is not useful to debate Protectionism vs. Comparative Advantage.
Rather, we need to discuss why protectionism will hamper a change in our Comparative Advantage towards a skill-intensive industrial economy. 4/4
Rather, we need to discuss why protectionism will hamper a change in our Comparative Advantage towards a skill-intensive industrial economy. 4/4
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