Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
10477407 | Journal of International Economics | 2005 | 15 Pages |
Abstract
We present a simple model where complementarities between wages and demand due to factor market distortions can make a transition economy worse off from trade. Prior to trade, a virtuous circle prevails: high wages in industry support a high demand for indivisible industrial goods, which in turn supports high wages. However, factor market distortions in the transition economy create a comparative disadvantage in industry. Opening up to trade results in the import of indivisibles and a fall in manufacturing wages, breaking this virtuous circle. Consequently, trade liberalization without structural reform can have serious adverse effects in a transition economy.
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Authors
Kala Krishna, Cemile Yavas,