Export-promoting production subsidies and the dynamic gains from experience

This paper examines export-promoting production subsidies in a dynamic product-cycle model with learning by doing and spillovers from experience. History dictates that the South is less experienced than the North and, thus, produces less advanced goods. Non-uniform Southern export promoting production subsidies applied to a small set of marginal industries that are on the verge of being internationally competitive, generate conventional static benefits for the South and costs for the North. Since such an industrial policy expands the South's range of production, it ultimately enhances Southern learning. The South's rate of production and technology transfer and the North's rate of innovation both increase, creating dynamic benefits for each country. While the South must gain overall, the North will also gain if the dynamic benefits outweigh the static costs.