Why gradualism?

Halvor Mehlum

The Journal of International Trade & Economic Development, 1998, vol. 7, issue 3, 279-297

Abstract: A Ramsey model for a two-sector economy, comprising a labour intensive non-traded sector and a capital intensive traded sector, is used to analyse the transition following trade liberalization. Liberalization takes the form of removing a tariff wedge that benefited the non-traded sector. This increases overall productivity of capital in the short run, and demand for labour declines. In the presence of a binding minimum real wage this leads to transitional unemployment. In this case, gradualism - in the form of gradually removing the tariff wedge - can be justified. Through gradualism the protection for the labour intensive non-traded sector is prolonged, leading to reduced unemployment in the transition phase.

Keywords: Development economics; economic reform; gradualism; two-sector economy; transition; unemployment (search for similar items in EconPapers)
Date: 1998
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DOI: 10.1080/09638199800000015

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