In this paper, we argue that the poor growth performance and many institutional distortions in the LDCs after the World War II can be explained by heir adoption of an inappropriate development strategy.. Motivated by nation building, most LDCs, including the socialist countries, adopted a comparative-advantage defying (CAD) strategy to accelerate the growth of capital-intensive, advanced sectors in their countries. Many firms in those prioritised sectors were nonviable in open, competitive markets because of the violation of their economies' comparative advantages. For implementing CAD strategy, the governments in the LDCs adopted a series of distortions in input and output markets to subsidize/ protect the nonviable firms, resulting in rent seeking, soft-budget constraint, macroeconomic instability, and income disparities. Economic stagnation or even sudden collapse becomes unavoidable, prompting the LDCs, voluntarily or involuntarily, to start a market-orientated reform. Without addressing first the firm's' viability issue, the implementation of market-orientated reforms might result in widespread bankruptcies, unemployment, and social/ political instability. For fear of the above dreadful consequences, many governments found other disguised ways to the above dreadful consequences, many governments found other disguised ways to protect/ subsidize those nonviable firms after implementing the reform. In either case, not only the transition to a well-functioning market economy could not be achieved but also the economic performance became poorer than that before the reform.
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Length: 37 pages Date of creation: Feb 2004 Date of revision: Handle: RePEc:eab:develo:447
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Dani Rodrick, 2003.
"Growth Strategies,"
Economics working papers
2003-17, Department of Economics, Johannes Kepler University Linz, Austria.
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