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Title: Do Low-Income Countries Have a High-Wage Option?

Author(s): Dani Rodrik

Publication Date: January 1994

Keyword(s): Technology, Trade Strategy and Wage Policy

Programme Area(s): International Macroeconomics and International Trade and Regional Economics

Abstract: Poor countries must specialize in standardized, labour-intensive commodities. Middle-income countries may have a richer menu of options available to them if their labour 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 non-tradable. For the high-tech sector to become viable, a sufficiently large number of intermediates 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 stimulate the high-tech sector and be welfare-enhancing.

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Bibliographic Reference

Rodrik, D. 1994. 'Do Low-Income Countries Have a High-Wage Option?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=862