Industrial Policy and the Timing of Trade Liberalization

Till F. Hollstein () and Kristian Estevez
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Till F. Hollstein: Universitat de Barcelona

No 2017/361, UB School of Economics Working Papers from University of Barcelona School of Economics

Abstract: In a closed (open) economy with a learning-by-doing externality in the manufacturing sector, Matsuyama (1992) found a positive (negative) link between the level of agricultural productivity and economic growth. We extend that framework by introducing a labor subsidy to induce industrialization. We make three contributions to the existing literature. First, we show that a comparative advantage in manufacturing is not a necessary condition for a small open economy to industrialize. Relative sectoral TFP growth determines whether the fraction of labor in manufacturing increases over time. Second, the timing of trade liberalization determines structural development and the use of a labor subsidy can allow a small open economy to industrialize early. Third, we analyze the labor subsidy when there is trade among two open economies. We find that there exists a unique subsidy which enables both economies to industrialize. Therefore, a country with a comparative advantage in producing the manufactured good could benefit from their trading partner using labor subsidies compared to not trading with them at all.

Keywords: Labor Subsidy; Production Externality; Industrialization; International Trade. (search for similar items in EconPapers)
JEL-codes: F43 O13 O14 O41 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2017
New Economics Papers: this item is included in nep-gro and nep-int
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