Luciano Boggio
Long-run effects of low-wage countries’ growing competitiveness and exports of manufactures

Abstract:The long run effects of increasing productivity in manufactures taking place in low wage countries and the ensuing increase in exports to high wage ones are studied firstly by means of the traditional Ricardian approach; then by models developed from this approach, by removing the assumption of fixed fully employed labour supply of a model. Previous work on this problem by both neoclassical and Ricardian approaches, done by means of two country two or three good models, brought to light the possibility of a worsening of terms of trade and/or a loss in income by the high wage country. Our two country multicommodity Ricardo Mill (RM) model extends this result to the n good case but stresses the possibility of an offsetting income benefit, accruing to the high wage country, if the low wage country's productivity increases go beyond what is strictly necessary to bring to zero the production of a good previously produced by the high wage country. Ricardian models, however, imply that a low wage country, when new opportunities of profitable employment arise in international markets part of the labour force employed in its preexisting productions is shifted in these new directions, must reduce those productions, because of a fixed labour supply. Since this process looks scarcely plausible in our context, we explore two alternative setups, where for the low wage country the assumption of full employment of a fixed labour supply is discarded: first, a model, in which the modern (capitalist) sector can hire at a fixed wage, based on the subsistence level, any amount of labour force (infinite elasticity of labour supply model); and secondly a model, built upon the previous ones, in which the elasticity of labour supply is positive and finite. On the basis of this more realistic and general model we conclude that, if the elasticity of labour supply is sufficiently large, high wage countries, far from losing, will gain.

JEL: O24, F1.
Keywords: globalization, international specialization, catching-up, productivity growth, less developed countries.



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