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

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Poor countries must specialize in standardized. labor-intensive commodities. Middle income countries may have a richer menu of options available to them if their labor 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 nontradable. For the high-tech sector to become viable. a sufficiently large number of intermediaries 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 get the high-tech sector going and be welfare-enhancing.

Published: "Coordination Failures and Government Policy: A Model with Applications to East Asia and Eastern Europe," Journal of International Economics, 1996.

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