Introduction

Abstract

Specialization, we are told, is good because it promotes efficiency, which in turn makes everybody better off. Everywhere, that is, except in international trade where high degrees of specialization by countries in particular products seem to be associated with poverty, tyranny, corruption, or all three. Why do some countries specialize in the production of some goods to the degree that they become so intimately connected that we can speak of banana republics and petro-states? Nature clearly has something to do with it: Saudi Arabia has lots of oil and little arable land whereas Argentina has lots of grass land (and cows) and little oil. Although the gifts of nature are rarely as specific as in the South American pampas or the Ghawar oil field, countries specialize despite the dangers of doing so. Why this should be so is something of a mystery and the volume of advice to political leaders to diversify their country’s economies is only exceeded by the volume of academic studies attempting to explain why they fail to do so. Without claiming to resolve the mystery I can shed light on a largely ignored aspect of specialization. Simply put, factor endowments matter but human agency matters too and one of the most important drivers of specialization is human agency in the form of a search by economic policy makers to segment global markets to gain a premium price for products with a reputation for quality. States, in short, create brands to promote exports.