Oleg Itskhoki, Benjamin Moll, 05 September 2018

From a neoclassical perspective, export promotion and comparative advantage policies are unambiguously detrimental. This column extends the standard growth model with financial frictions to explore how such policies affect a country’s development trajectory. Results show that the presence of financial frictions opens the door for welfare-improving government interventions in product and factor markets. Optimal development policy interventions feature a pro-business tilt early on, but change towards a more redistributive pro-labour stance as the economy accumulates financial wealth.

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