LAUSR

Abstract Even though there has been massive research on the impact of trade liberalization on various aspects of economic performance, its impact on trade deficits have been virtually ignored. This is partly due to the underlying theoretical framework which is based on patently unrealistic assumptions and which rules out chronic trade deficits. Within such context, the paper argues that there is no theoretical or empirical justification for postulating an automatically balancing external trade in developing countries. Using a historical case study of Ethiopia, it also shows that chronic deficits are fundamentally structural in nature and therefore cannot be reversed without bringing about structural transformation of the economy from low-skill, low technology productive structure to high-skill, high technology intensive productive structure. It also concludes that such structural transformation cannot be realized under a liberal external trade regime which forces a country to specialize based on its ‘natural’ comparative advantage.