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Why gradualism?

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Author Info

  • Halvor Mehlum

Abstract

A Ramsey model for a two-sector economy, comprising a labour intensive non-traded sector and a capital intensive traded sector, is used to analyse the transition following trade liberalization. Liberalization takes the form of removing a tariff wedge that benefited the non-traded sector. This increases overall productivity of capital in the short run, and demand for labour declines. In the presence of a binding minimum real wage this leads to transitional unemployment. In this case, gradualism - in the form of gradually removing the tariff wedge - can be justified. Through gradualism the protection for the labour intensive non-traded sector is prolonged, leading to reduced unemployment in the transition phase.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/09638199800000015
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The Journal of International Trade & Economic Development.

Volume (Year): 7 (1998)
Issue (Month): 3 ()
Pages: 279-297

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Handle: RePEc:taf:jitecd:v:7:y:1998:i:3:p:279-297

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Related research

Keywords: Development economics; economic reform; gradualism; two-sector economy; transition; unemployment;

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Cited by:
  1. Robert Tatum, 2005. "Sustaining imperfectly credible trade liberalization: Do the rate of tariff reduction and the degree of labour mobility matter?," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 14(4), pages 407-435.
  2. Richard Chisik, 2010. "Gradualism in Free Trade Agreements: A Theoretical Justification," Working Papers 018, Ryerson University, Department of Economics.
  3. Mehlum, Halvor, 2001. "Speed of adjustment and self-fulfilling failure of economic reform," Journal of International Economics, Elsevier, vol. 53(1), pages 149-167, February.

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