Does trade cause detrimental specialization in developing economies? Evidence from countries south of the Suez Canal

When opening up to trade, countries specialize according to their comparative advantage. However, developing countries are often disadvantaged in production that requires contract enforcement or other institutions. Such specialization could be detrimental, as it might eliminate the demand for property rights in developing countries. I examine the development of product trade patterns in East-African countries that suffered longer trade routes during the war-induced closure of the Suez Canal (Feyrer, 2009), to identify a causal impact of trade costs on specialization patterns. Detrimental specialization does not occur: by contrast, contract-intense exports and production declined in the developing countries of this sample when they were isolated.