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Do Low-Income Countries Have a High-Wage Option?

  • Rodrik, Dani

Poor countries must specialize in standardized, labour-intensive commodities. Middle-income countries may have a richer menu of options available to them if their labour force is reasonably well-educated and skilled. This paper is motivated by the possibility that there may exist multiple specialization patterns for countries of the second type. What creates the multiplicity of equilibria is a coordination problem inherent in high-tech activities. It is assumed that high-tech production requires a range of differentiated intermediate inputs that are non-tradable. For the high-tech sector to become viable, a sufficiently large number of intermediates has to be produced domestically. But if none is currently being produced, there is little incentive for any single firm to do so on its own. The economy may get stuck in a low-wage, low-tech equilibrium -- even though the high-tech sector is viable. As long as the high-tech sector is more capital-intensive than the low-tech sector, a high-wage policy would stimulate the high-tech sector and be welfare-enhancing.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 862.

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Date of creation: Jan 1994
Date of revision:
Handle: RePEc:cpr:ceprdp:862
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  1. Hamilton, C.B. & Winters, L.A., 1992. "Opening Up International Trade in Eastern Europe," Papers 511, Stockholm - International Economic Studies.
  2. Matsuyama, Kiminori, 1991. "Increasing Returns, Industrialization, and Indeterminacy of Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 617-50, May.
  3. Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May.
  4. Markusen, James R, 1989. "Trade in Producer Services and in Other Specialized Intermediate Inputs," American Economic Review, American Economic Association, vol. 79(1), pages 85-95, March.
  5. Faini, Riccardo, 1984. "Increasing Returns, Non-Traded Inputs and Regional Development," Economic Journal, Royal Economic Society, vol. 94(374), pages 308-23, June.
  6. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1988. "Industrialization and the Big Push," NBER Working Papers 2708, National Bureau of Economic Research, Inc.
  7. Antonio Ciccone & Kiminori Matsuyama, 1993. "Start-Up Costs and Pecuniary Externalities as Barriers to Economic Development," NBER Working Papers 4363, National Bureau of Economic Research, Inc.
  8. Krugman, Paul, 1991. "History versus Expectations," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 651-67, May.
  9. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June.
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