DP2642 Stages of Diversification

Author(s): Jean Imbs, Romain Wacziarg
Publication Date: December 2000
Keyword(s): Comparative Advantage, International Macroeconomics, International Trade, Specialization
JEL(s): F15, F43, O40
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2642

This Paper studies the evolution of sectoral labour concentration in relation to the level of per capita income. We show that various measures of sectoral concentration follow a U-shaped pattern across a wide variety of data sources: countries first diversify, in the sense that labour is spread more equally across sectors, but there exists, relatively late in the development process, a point at which they start to specialize again. We introduce a model with endogenous costs of trading internationally that provides an explanation for this new empirical fact. The model highlights a trade-off between the benefits of diversification in the context of high trading costs, and the benefits of specialization in a Ricardian sense.