Journal of International Economics · 1996 · 395 citations · 23 references
Social SciencesEconomicsPublic PolicyEconomic PolicyMicroeconomicsPublic EconomicsComparative AdvantageEconomic InterdependenceEconomies Of ScopeGeneral EquilibriumGovernment FailureWalrasian EquilibriumEconomic EquilibriumEquilibriumGeneral Equilibrium EfficiencyIntermediate InputsInternational Economic CooperationLabor Force AnalysisProduction Economies
In low‑income economies, coordination failures in producing intermediate inputs can trap the economy in a low‑wage, low‑tech equilibrium, forcing specialization in standardized, labor‑intensive commodities. The study examines how investment subsidies or minimum‑wage policies can shift the economy toward a higher‑welfare equilibrium. The authors model the effects of investment subsidies or minimum‑wage policies on the economy’s equilibrium outcomes. The analysis shows that middle‑income countries with a reasonably educated and skilled labor force can access a broader range of economic options.
Poor countries must specialize in standardized, labor-intensive commodities. Middle-income countries may have a richer menu of options if their labor force is reasonably well educated and skilled. The multiplicity of equilibria is due to a coordination problem inherent in activities that require specialized inputs. If no intermediate inputs are presently produced, there may be little incentive for any single firm to do so on its own. The economy may get stuck in a low-wage, low-tech equilibrium. An investment subsidy or a minimum-wage policy can enhance welfare by moving the economy to a superior equilibrium.
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