On the mechanics of trade-induced structural transformation

Gains from trade come from a certain degree of specialization among trade partners. Specialization in the case of an agriculture-based developing country might be feared to imply a higher reliance than ever on low skill labor. Trade might thus be seen as a step away from the much awaited structural transformation of the economy, which can only come with increases in productivity. In this paper, we suggest that it needs not be the case. We show, within a dynamic general equilibrium model, that trade openness can in fact trigger the structural transformation of such an agrarian society. It can induce a higher reliance on human capital accumulation and produce the necessary productivity gains for an economy to pick up. Our model provides an illustration of the mechanics behind such structural transformation.