Why Transition Countries May Specialize in Low-Quality Production

Uwe Dulleck and Neil Foster-McGregor

Transition Studies Review, 2004, vol. 11, issue 3, 114-124

Abstract: Politicians and economists of transition countries fear a low-quality trap for their economies. We present a model of international trade with two countries and two qualities of goods model where high-quality production exhibits economies of scale and low-quality production does not. Depending on transaction costs, the low-quality good will be produced either in the low-wage economy (i.e., the transition country) only or it will not be traded at all. Regarding the high-quality good, we discuss three potential reasons why transition countries may be trapped in the production of low quality when economies of scale in production prevail: (a) international trade policy (i.e., GATT / WTO); (b) external economies due to quality uncertainty; (c) external economies due to demand effects (big push). All reasons favor incumbents over entrants and thus lead to a low-quality trap for transition economies due to the existence of incumbents located in industrialized countries. Copyright Springer-Verlag/Wien 2004

Keywords: international trade; product quality; home market effects (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1007/s11300-004-0001-4

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