Trade Liberalization and Economic Development in a Knowledge-based Economy

his paper addresses the implications for the economic growth and welfare of developing countries of trade liberalization and globalization, and discusses development strategies. The traditional trade theory implies that trade liberalization always increases the welfare of developing countries engaging in trade. The main features of analytical framework in this paper are as follows: first, to be consistent with the properties of Knowledge-based economy featuring current world economy, the production technology is subject to increasing returns to scale and the evolution of the production technology is determined by the amount of technological knowledge accumulated in the process of production activity. Second, same costs are required to adjust a newer and more sophisticated technology to production process. Third, the market structure of economy is imperfectly competitive. Fourth, newer goods are more human capital intensive than older goods. This paper argues that first, trade liberalization may have a negative effect on the welfare of developing countries by reducing their economic growth, and to nurture a better environment for the adoption of newer and more sophisticated technologies and the change in the industrial structure toward more sophisticated sectors is critical for higher economic growth. And for this, this paper suggests policies oriented for higher investment in education and the enhancement of entrepreneurship, and emphasizes the simultaneous implementation of policies for both activities.