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Why Transition Countries May Specialize in Low-Quality Production

Author

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  • Uwe Dulleck
  • Neil Foster

Abstract

Politicians and economists of transition countries fear a low-quality trap for their economies. We present a model of international trade with two countries and two qualities of goods model where high-quality production exhibits economies of scale and low-quality production does not. Depending on transaction costs, the low-quality good will be produced either in the low-wage economy (i.e., the transition country) only or it will not be traded at all. Regarding the high-quality good, we discuss three potential reasons why transition countries may be trapped in the production of low quality when economies of scale in production prevail: (a) international trade policy (i.e., GATT / WTO); (b) external economies due to quality uncertainty; (c) external economies due to demand effects (big push). All reasons favor incumbents over entrants and thus lead to a low-quality trap for transition economies due to the existence of incumbents located in industrialized countries. Copyright Springer-Verlag/Wien 2004

Suggested Citation

  • Uwe Dulleck & Neil Foster, 2004. "Why Transition Countries May Specialize in Low-Quality Production," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 11(3), pages 114-124, December.
    • Handle: RePEc:spr:trstrv:v:11:y:2004:i:3:p:114-124
    DOI: 10.1007/s11300-004-0001-4
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    Cited by:

    1. Ciaian, Pavel & Kancs, d'Artis & Pokrivcak, Jan, 2011. "Comparative Advantages, Transaction Costs and Factor Content in Agricultural Trade: Empirical Evidence from the CEE - Vantaggi comparati, costi di transazione e contenuto dei fattori nel commercio agr," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 64(1), pages 67-101.

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