Learning Objectives
By the end of this section, you will be able to:
- Define the term path dependence.
- Explain how a path dependency analysis of trade is different from the comparative advantage approach.
- Define the phrase factor endowments.
- Define the concept of an export-led growth model.
- Analyze different “real world” examples that support the path dependency approach to understanding international trade.
Given the critiques outlined above, many progressive and radical (heterodox) economists believe that the orthodox economic free trade theory is chronically incapable of addressing important, real world, concerns. Because of its failure to explain real world conditions, the orthodox model is also incapable of suggesting policy approaches that may be helpful in correcting many of the problems that emerge when trade between countries expands and grows. For example, in the orthodox world of free trade, any, and all, trade protections are perceived as inefficient and costly. As a result, if the real world provides evidence of the effectiveness of trade restrictions, a story built on the benefits of free trade cannot and will not be functionally applicable. Using the free trade story in this regard would generate inaccurate analyses, failing to recognize that trade protections have had historic usefulness toward assisting an economy’s economic development. In this instance, the free trade story is of no practical/functional use. What is needed, instead, is a different theory of how trade works. A sound theory of regarding trade should be able to demonstrate how trade restrictions may stimulate more economic growth and/or improve a country’s economic development prospects.
Because theorists outside of the orthodoxy view the orthodox economic trade story as being impossibly limited in its real world applications, heterodox economists generally begin their trade story from a different perspective. For many heterodox economists, in the real world, specialization and trade are path dependent. Path dependence means that history matters. A given country’s productive situation is the byproduct of past circumstances, past decision making (with respect to domestic economic choices as well as the country’s place in the global economy). Further a country’s economic development, it’s future productive possibilities and future economic position in the global economy, depends on the choices it makes in the present.
To follow the logic of comparative advantage, a country identifies its comparative advantage, specializes and then trades. So if agricultural products are the only products that a country has a comparative advantage producing, then the country will specialize in the production of agricultural products only and then trade for the other non-agriculture products that are desired. In response to this scenario, heterodox economists ask, for how long does a country only produce agricultural products? After all, from an economic development standpoin