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When comparative advantage is not enough: business costs in small remote economies

Published online by Cambridge University Press:  22 December 2004

L. ALAN WINTERS  and
PEDRO M. G. MARTINS
L. ALAN WINTERS
Affiliation:
Development Research Group, World Bank
PEDRO M. G. MARTINS
Affiliation:
Department of Economics, University of Sussex, Brighton
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Abstract

This paper uses a newly collected dataset on business costs to investigate empirically whether small and remote economies are inherently uncompetitive. Although in theory these economies can overcome their small size by specialising and trading, this may not be enough to generate acceptable incomes because they face a combination of diseconomies of small scale and high transaction costs. We conclude that there are almost certainly some very small economies for which this is true. These economies are likely to become less attractive for commercial activities as globalization proceeds and their current trade preferences are eroded. The policy solution is not protection, however, but proactive policies from the international community.

Type
Keynote article
Information
World Trade Review , Volume 3 , Issue 3 , November 2004 , pp. 347 - 383
Copyright
2004 L. Alan Winters and Pedro M. G. Martins

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Footnotes

This paper summarises a study supported by the Commonwealth Secretariat to whom we are most grateful – Winters and Martins (2004). It was written while Winters was Professor of Economics at the University of Sussex. We thank Anna Yartseva who did most of the electronic data preparation, Mohammad Razzaque and Elroy Turner who co-ordinated the initial data collection, and Richard Blackhurst, Roman Grynberg, Ricardo Faini and Catherine Mann for comments on an earlier draft. Thanks are also due to Reto Speck and Natasha Ward who provided excellent logistical support. Naturally the views expressed are the authors' alone and may not be shared by their past or present employers or the sponsors.