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34 chapter chapter number
1 as trade and financial repression (discussed in chapter 7). For example,
2 recommendations for trade liberalization arise from static comparative
3 advantage theory and its neoclassical extensions (by Heckscher, Ohlin,
4 and Samuelson).
5
42
21
6 p(4|1) = p + ( p × p ) + ( p × p ).
31
41
43
7
8 In the Heckscher-Ohlin model, comparative advantage is given a “natu-
9 ral” basis due to the differences between countries in terms of endowments
10 of various factors of production. Specialization via free trade would be
11 based on products that use more of the readily available input. In this
12 model, even without capital or labor mobility.
13
14 1. List_Num_1top. Trade would lead inexorably to the equality of income
15 between countries (Samuelson’s factor-price equalization theorem).
16 2. List_Num_2mid. In other words, if a labor-endowed country switches from
17 producing capital-intensive goods to producing more labor-intensive goods, the
18 price of labor will rise.
19 3. List_Num_3bot. If that country trades with a relatively capital-abundant coun-
20 try that specializes in producing more capital-intensive goods, then returns to
21 capital will rise.
22
23 If both the labor-abundant country and the capital-abundant country
24 are open to trade, the price of both labor and capital will fall, and the
25 countries will trade to the point at which wages and the price of capital
26 are equalized in both relative and absolute terms.
27
28 • Thus, according to the Heckscher-Ohlin model, in a world with only labor and
29 capital as inputs, trade liberalization should lead to one world price for labor
30 and one world price for capital.
31 • This conclusion was a powerful affirmation of the claim that free trade would
32 enhance development and welfare.
33 • It served to underscore the World Bank’s policy advice to developing countries,
34 which aimed to push them toward their comparative advantages through trade
35 liberalization.
36
37 I now turn to the common neoclassical economic microfoundations of
38 these theories in order to illustrate their problematic nature relative to
39 the conditions and transformative needs of developing countries.

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