Consequences of imitation by poor countries on international wage inequalities and global growth

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Working Paper No 46/00

Consequences of Imitation by Poor Countries on International Wage Inequalities

and Global Growth by

Hans Jarle Kind

SNF project no 1070

”Internationalization and economic policy”

The project is financed by the Research Council of Norway Grant no 124559/510

SNF project no 1035

”Foreign direct investment and development:

Lessons for Southern Africa from the Southeast Asian Experience”

The project is financed by the Research Council of Norway Grant no 131700/730

SIØS - Centre for International Economics and Shipping

FOUNDATION FOR RESEARCH IN ECONOMICS AND BUSINESS ADMINISTRATION BERGEN, DECEMBER 2000

ISSN 0803 –4028

Ytterligere eksemplarfremstilling uten avtale og i strid med åndsverkloven er straffbart og kan medføre erstatningsansvar.

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SIØS - CENTRE FOR INTERNATIONAL ECONOMICS AND SHIPPING

SIØS – Centre for international economics and shipping – is a joint centre for The Norwegian School of Economics and Business Administration (NHH) and The Foundation for Research in Economics and Business Administration (SNF). The centre is responsible for research and teaching within the fields of international trade and shipping.

International Trade

The centre works with all types of issues related to international trade and shipping, and has particular expertise in the areas of international real economics (trade, factor mobility, economic integration and industrial policy), international macro economics and international tax policy. Research at the centre has in general been dominated by projects aiming to provide increased insight into global, structural issues and the effect of regional economic integration. However, the researchers at the centre also participate actively in projects relating to public economics, industrial policy and competition policy.

International Transport

International transport is another central area of research at the centre. Within this field, studies of the competition between different modes of transport in Europe and the possibilities of increasing sea transport with a view to easing the pressure on the land based transport network on the Continent have been central.

Maritime Research

One of the main tasks of the centre is to act as a link between the maritime industry and the research environment at SNF and NHH. A series of projects that are financed by the Norwegian Shipowners Association and aimed directly at shipowning firms and other maritime companies have been conducted at the centre. These projects include studies of Norwegian shipowners' multinational activities, shipbuilding in Northern Europe and the competition in the ferry markets.

Human Resources

The centre’s human resources include researchers at SNF and affiliated professors at NHH as well as leading international economists who are affiliated to the centre through long-term relations. During the last few years the centre has produced five PhDs within international economics and shipping.

Networks

The centre is involved in several major EU projects and collaborates with central research and educational institutions all over Europe. There is particularly close contact with London School of Economics, University of Glasgow, The Graduate Institute of International Studies in Geneva and The Research Institute of Industrial Economics (IUI) in Stockholm. The staff members participate in international research networks, including Centre for Economic Policy Research (CEPR), London and International Association of Maritime Economists (IAME).

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48Htxdwlrqv +48, dqg +49, ghqh @ 7> l1h1/ wkh srlqw zkhuh lw ehfrphv surwdeoh iru hq0 wuhsuhqhxuv lq wkh Hdvw wr lplwdwh jrrgv iurp wkh Zhvw +dqg zkhuh zh qr orqjhu kdyh dq htxl0 oleulxp zkhuh wkh Hdvw lv frpsohwho| vshfldol}hg lq djulfxowxuh surgxfwlrq,1 Zh fdq xvh d vlplodu phwkrg dv wkh rqh wkdw ohg xv wr wkhvh htxdwlrqv wr qg dqdo|wlfdo h{suhvvlrqv iru4 dqg5=

53

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0.5 0.6 0.7 0.8 0.9 1.0

1.0 1.1 1.2 1.3 1.4 1.5 1.6

Z_I Z_I^P

τ Z_I

Z_I Z_I^P

Z_I^P τ

τ

Iljxuh 8= Lqwhuqdwlrqdo zdjh jdsv zlwk dqg zlwkrxw lplwdwlrq1

Zh wkxv kdyh=

Sursrvlwlrq 8= Vxssrvh wkdw ₂cl1h1/ wkh fdvh zlwk pxowlsoh htxloleuld1 Wkhq wkh lqwhuqdwlrqdo zdjh jds lv vpdoohu lq wkh lqqrydwlrq htxloleulxp wkdq lq wkh lplwdwlrq htxloleulxp1

Iljxuh 9 pd| eh xvhixo wr vhh zk| zh kdyh pxowlsoh htxloleuld/ dqg zk| wkh lplwdwlrq htxloleulxp jhqhudwhv d uhodwlyho| odujh lqwhuqdwlrqdo zdjh jds1 Wkh kru0 l}rqwdo d{lv phdvxuhv wudqvdfwlrq frvwv dqg wkh yhuwlfdo d{lv phdvxuhv wkh ydoxh ri surgxflqj dq lqwhuphgldwh jrrg lq wkh Hdvw1 Wkh xszdug0vorslqj vrolg olqh vkrzv wkh udwlr _.⁶*'_. lq dq rxwfrph zkhuh doo hqwuhsuhqhxuv lq wkh Hdvw lqqrydwh dqg euhdn hyhq E_. '_.1 Krzhyhu/ wklv fdqqrw uhsuhvhqw dq| htxloleulxp rxwfrph li _.⁶*'_. :f= wkh suhvhqw ydoxh ri dq lplwdwlrq/⁶_./ lv wkhq juhdwhu wkdq wkh lplwd0 wlrq frvwv '_.1 Wkxv lplwdwlrq rhuv sxuh surwv/ dqg ghyldwlrq lv surwdeoh1 Wkh grzqzdug vorslqj grwwhg olqh olnhzlvh vkrzv wkh udwlr _.*_. lq dq rxwfrph zkhuh doo hqwuhsuhqhxuv lq wkh Hdvw lplwdwh dqg euhdn hyhq

⁶_. ''_.

> ghyldwlrq iurp 54

(26)

lplwdwlrq wr lqqrydwlrq lv surwdeoh zkhqhyhu _.*_. :f1

Vxssrvh zh duh lq dq rxwfrph zkhuh wkh hqwuhsuhqhxuv lq wkh Hdvw lqqrydwh E_. '_./ dqg frqvlghu d srlqw olnh ' f1 Wkh jxuh vkrzv wkdw iru wklv ohyho ri wudqvdfwlrq frvwv zh kdyh _.⁶*'_. fH : fc vr ghyldwlrq iurp lqqrydwlrq zrxog eh surwdeoh1 Wkhuhiruh wkh hfrqrp| hqgv xs lq dq htxloleulxp zkhuh doo hqwuhsuhqhxuv lq wkh Hdvw lplwdwh/ exw wkhq lw lv qr orqjhu srvvleoh wr fryhu wkh uhjlrq*v uhodwlyho| kljk lqqrydwlrq frvwv +_.*_. fbS f dw wkh fxuyh⁶_. ''_. zkhq ' f,1 Wkh jxuh ixuwkhu vkrzv wkdw li wkh Hdvw lv lq dq rxwfrph zlwk lplwdwlrq/ iru h{dpsoh iru klvwrulfdo uhdvrqv/ lw lv qrw surwdeoh wr lqqrydwh xqohvv wkh ohyho ri wudqvdfwlrq frvwv lv orzhu wkdq ' 1 Lq wkh vdph zd| zh qg wkdw ghyldwlrq iurp dq rxwfrph zlwk lqqrydwlrq lv xqsurwdeoh li 2 Zh wkxv kdyh pxowlsoh htxloleuld iru 5Ec ₂1

Wkh h{lvwhqfh ri pxowlsoh htxloleuld lv fdxvhg e| lpshuihfw frpshwlwlrq dqg shfx0 qldu| h{whuqdolwlhv1 Wr vhh wklv/ dvvxph wkdw 5Ec 2 dqg wkdw doo hqwuhsuhqhxuv lq wkh Hdvw lplwdwh1 Lw lv lqglylgxdoo| xqsurwdeoh wr ghyldwh iurp wklv rxwfrph eh0 fdxvh d srwhqwldo lqqrydwru zrxog idfh wrr vwurqj sulfh frpshwlwlrq iurp grphvwlf surgxfhuv ri +lpshuihfw, vxevwlwxwhv wr eh deoh wr fryhu wkh uhodwlyho| kljk lqqrydwlrq frvwv1 Krzhyhu/ e| uhgxflqj wkh frpshwlwlyh suhvvxuh/ lqqrydwlrq grhv ehfrph suri0 lwdeoh li d vx!flhqwo| odujh qxpehu ri hqwuhsuhqhxuv lq wkh Hdvw fkrrvh wr lqqrydwh udwkhu wkdq wr lplwdwh1 Wklv lq wxuq doorzv kljkhu htxloleulxp zdjhv lq wkh uhjlrq +dv zdv vkrzq lq Iljxuh 8,1 Exw wkhq/ ehfdxvh ri wkh kljkhu zdjh ohyho/ lplwdwlrq lv qr orqjhu surwdeoh> wkh odwhqw sulfh frpshwlwlrq iurp wkh ruljlqdo lqqrydwru lq wkh Zhvw lpsolhv wkdw dq lplwdwru*v surw pdujlqv 0 htxdo wr E_` _. grphvwlfdoo|

dqgE_`* _.deurdg 0 duh wrr orz wr fryhu lplwdwlrq frvwv1

55

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0.7 0.8 0.9 1.0 1.1 1.2

1.20 1.25 1.30

τ YIP 4I YI 3I

τ τ

Y_I 3_I

Y_I^P 4_I

Iljxuh 9= Pxowlsoh htxloleuld1

816 Vxpplqj xs wkh frqvhtxhqfhv ri lplwdwlrq

Iljxuh : vxpv xs wkh glvfxvvlrq1 Erwk uhjlrqv duh vshfldol}hg zkhq : e/ wkh Zhvw lq wkh prghuq vhfwru dqg wkh Hdvw lq wkh djulfxowxuh vhfwru/ zkloh lplwdwlrq lv erwk surwdeoh dqg ehqhfldo +}⁶ : } dqg _.⁶ : _. li 5 Ec _e1 Zh kdyh dq htxdoo| fohdu uhvxow zkhq 5Efc (wkh uhjlrqv duh wkhq vr forvho| lqwhjudwhg wkdw hqwuhsuhqhxuv lq erwk uhjlrqv xqdpeljxrxvo| suhihu wr lqqrydwh1 Ehwzhhq wkhvh h{wuhphv wkh slfwxuh lv pruh frpsoh{> ghshqglqj rq wkh ohyho ri wudqvdfwlrq frvwv/

lplwdwlrq pd| dhfw erwk wkh joredo jurzwk udwh dqg wkh zdjh ohyho lq wkh Hdvw qhjdwlyho|1

Wkh prvw lqwhuhvwlqj uhjlrq lv shukdsv iru 5 Ec ₂1 Khuh zh kdyh pxowlsoh htxloleuld/ dqg wkh lqwhuqdwlrqdo zdjh jds lv odujhvw dqg wkh joredo jurzwk udwh orzhvw lq wkh htxloleulxp zlwk lplwdwlrq1 Wkrxjk zh duh qrw frqvlghulqj zhoiduh hhfwv dqg srvvleoh srolf| lpsolfdwlrqv lq wklv sdshu/ lw lv zruwk vwuhvvlqj wkdw wkh prgho fohduo| lqglfdwhv wkh h{lvwhqfh ri dq *lplwdwlrq wuds*1 Lq wkh orqj uxq/ dw ohdvw/

56

(28)

lw lv reylrxv wkdw frqvxphuv lq erwk uhjlrqv zrxog eh ehwwhu r lq wkh lqqrydwlrq htxloleulxp zkhq 5Ec 2/ exw frruglqdwlrq idloxuhv pd| suhyhqw dq hvfdsh iurp d srvvleo| lqihulru htxloleulxp1

The East imitates

Both innovate

Both regions spec.

τ3 τ τ2

J^P!J Z₍^P!Z₍ J^PJ

Z₍^P!Z₍

τ1

J^PJ Z₍^PZ₍

1.0

Unique equilibium with innovation

Unique equilibrium with imitation Multiple

equilibria

τ4

Iljxuh := Wudqvdfwlrq frvwv dqg frqvhtxhqfhv ri lplwdwlrq1

9Frqfoxvlrq

Lq wklv sdshu zh kdyh dvnhg krz wudgh olehudol}dwlrq dhfwv lplwdwlrq lqfhqwlyhv lq srru frxqwulhv dqg/ lq wxuq/ krz lplwdwlrq e| srru frxqwulhv dhfwv lqwhuqdwlrqdo lqfrph lqhtxdolwlhv dqg lqqrydwlrq lqfhqwlyhv lq lqgxvwuldol}hg frxqwulhv1 Zh kdyh vkrzq wkdw lplwdwlrq pd| qrw eh surwdeoh iru ghyhorslqj frxqwulhv xqohvv wudgh lv vx!flhqwo| olehudol}hg1 Wkh uhdvrq lv wkdw lplwdwlrq uhtxluhv fkhds dffhvv erwk wr wkh lqsxw dqg rxwsxw pdunhwv lq wkh lqgxvwuldol}hg zruog1 Rwkhu wklqjv ehlqj htxdo/ zh vkrxog wkxv h{shfw d srvlwlyh uhodwlrqvkls ehwzhhq wudgh olehudol}dwlrq dqg lplwdwlrq1

Wkh txhvwlrqv ri krz lplwdwlrq dhfwv lqqrydwlrq lqfhqwlyhv dqg lqwhuqdwlrqdo lqfrph lqhtxdolwlhv duh ohvv vwudljkwiruzdug wr dqvzhu/ vlqfh lw lv qrw reylrxv zkdw rqh vkrxog frpsduh zlwk1 Wkh h{lvwlqj olwhudwxuh w|slfdoo| dvvxphv wkdw ghyhors0 lqj frxqwulhv duh xqdeoh wr lqqrydwh/ wkxv pdnlqj lw prvw uhohydqw wr frpsduh dq htxloleulxp zkhuh ghyhorslqj frxqwulhv lplwdwh wr dq htxloleulxp zkhuh ghyhorslqj

57

(29)

frxqwulhv vshfldol}h lq wkh djulfxowxuh vhfwru1 Lq wklv fdvh wkh wkhru| vhhpv wr ohqg prvw vxssruw wr wkh ylhz wkdw lplwdwlrq whqgv wr uhgxfh wkh lqwhuqdwlrqdo zdjh jds dqg lqfuhdvh lqqrydwlrq lqfhqwlyhv lq wkh pruh dgydqfhg frxqwulhv1 Zh irxqg d vlplodu uhvxow1 Krzhyhu/ lq wkh suhvhqw sdshu wkh fkrlfh ehwzhhq lplwdwlrq dqg lqqrydwlrq lv hqgrjhqrxvo| ghwhuplqhg1 Wkxv/ lw pd| eh prvw uhohydqw wr frpsduh dq htxloleulxp zkhuh ghyhorslqj frxqwulhv lplwdwh wr dq htxloleulxp zkhuh wkh| lq0 qrydwh1 Zkhq wklv lv wkh edvlv iru frpsdulvrq/ zh qg wkdw lplwdwlrq pd| lq idfw lqfuhdvh wkh lqwhuqdwlrqdo zdjh jds dqg uhgxfh lqqrydwlrq lqfhqwlyhv lq ghyhorshg frxqwulhv1

Wkh h{lvwhqfh ri dq lqihulru lplwdwlrq htxloleulxp lqglfdwhv wkdw vwulfwhu hqirufh0 phqw ri sdwhqw odzv/ zklfk pdnhv lw pruh h{shqvlyh wr lplwdwh/ frxog eh wr wkh dgydqwdjh erwk iru wkh prvw dgydqfhg lplwdwlqj frxqwulhv dqg iru wkrvh frxqwulhv wkdw duh ehlqj lplwdwhg1 Krzhyhu/ pdnlqj lw pruh frvwo| wr lplwdwh lv olnho| wr eh d glvdgydqwdjh iru wkrvh frxqwulhv wkdw duh xqdeoh wr lqqrydwh1 Dq lqwhuhvwlqj sdwk iru ixwxuh uhvhdufk zrxog wkhuhiruh eh wr dqdo|}h zklfk srolf| lqvwuxphqwv frxog eh xvhg wr suhyhqw vrfldoo| xqsurwdeoh lplwdwlrq zlwkrxw kduplqj wkh ohvv dgydqfhg frxqwulhv1

Uhihuhqfhv

Drnl/ Pdvdklnr/ K|xqj0Nl Nlp dqg Pdvdklur Rnxqr0Ixmlzdud +4<<:,= Wkh Uroh ri Jryhuqphqw lq Hdvw Dvldq Hfrqrplf Ghyhorsphqw/ R{irug= Foduhqgrq Suhvv1

Edogzlq/ Ulfkdug H1 dqg Ulndug Iruvolg +4<<9,= Sxwwlqj Jurzwk Hhfwv lq Frpsxwdeoh Htxloleulxp Wudgh Prghov1 FHSU Frqihuhqfh Sdshu/ Mdqxdu| 4<<91

Edogzlq/ Ulfkdug H1 dqg Ulndug Iruvolg +5333,= Wudgh olehudolvdwlrq dqg hq0 grjhqrxv jurzwk1 Mrxuqdo Ri Lqwhuqdwlrqdo Hfrqrplfv 83 +5,/ 7<:084:

Edogzlq/ Ulfkdug H1/ Khquln Eudfrqqlhu dqg Ulndug Iruvolg +4<<;,= PQFv/

Jurzwk dqg H{whuqdolwlhv1 FHSU Frqihuhqfh Sdshu/ Oxqg 5;263 Dxjxvw 4<<;1 Eduur/ Urehuw dqg [dylhu Vdod0L0Pduwlq +4<<8,= Hfrqrplf Jurzwk1 PfJudz0 Kloo/ Lqf1

Fxuulh/ Gdylg/ Sdxo Ohylqh/ Mrvhsk Shduopdq dqg Plfkdho Fkxl +4<<9,= Skdvhv ri Lplwdwlrq dqg Lqqrydwlrq lq d Qruwk0Vrxwk Hqgrjhqrxv Jurzwk Prgho1 FHSU

58

(30)

Glvfxvvlrq Sdshu 47;</ Rfwrehu 4<<91

Gl{lw/ Dylqdvk N1 dqg Mrvhsk H1 Vwljolw} +4<::,= Prqrsrolvwlf Frpshwlwlrq dqg Rswlpxp Surgxfw Glyhuvlw|1 Dphulfdq Hfrqrplf Uhylhz9:/ 5<:063;1

Hwklhu/ Zloiuhg M1 +4<;5,= Qdwlrqdo dqg Lqwhuqdwlrqdo Uhwxuqv wr Vfdoh lq wkh Prghuq Wkhru| ri Lqwhuqdwlrqdo Wudgh1 Dphulfdq Hfrqrplf Uhylhz4:5/ 6;<07381 Hydqv/ Jhrujh/ Vhssr Krndsrkmd/ dqg Sdxo Urphu +4<<;,= Jurzwk F|fohv1 Dphulfdq Hfrqrplf Uhylhz;;+6,/ 7<808481

Ixmlwd/ Pdwvxvklwd/ Sdxo U1 Nuxjpdq/ dqg Dqwkrq| M1 Yhqdeohv +4<<<,1 Wkh Vsdwldo Hfrqrp|= Flwlhv/ Uhjlrqv dqg Lqwhuqdwlrqdo Wudgh1 PLW Suhvv

Jurvvpdq/ Jhqh dqg Hokdqdq Khospdq +4<<4,= Lqqrydwlrq dqg Jurzwk lq wkh Joredo Hfrqrp|1 PLW Suhvv1

Nlqg/ Kdqv Mduoh +4<<;,= Djjorphudwlrq dqg Jurzwk Hhfwv ri uhgxfhg wudqv0 dfwlrq frvwv1 QKK Glvfxvvlrq Sdshu 632<;1

Nuxjpdq/ Sdxo U1 +4<<4,= Lqfuhdvlqj Uhwxuqv dqg Hfrqrplf Jhrjudsk|1 Mrxu0 qdo ri Srolwlfdo Hfrqrp| 43</ 44604541

Nuxjpdq/ Sdxo U1 dqg Dqwkrq| M1 Yhqdeohv +4<<3,= Lqwhjudwlrq dqg wkh Frp0 shwlwlyhqhvv ri Shulskhudo Lqgxvwu|/ lq Fkulvwrskhu Eolvv dqg M1 Eudjd gh Pdfhgr +hgv,/ Xqlw| zlwk Glyhuvlw| lq wkh Hxurshdq Frppxqlw|/ Fdpeulgjh= Fdpeulgjh Xqlyhuvlw| Suhvv1

Nuxjpdq/ Sdxo U1 dqg Dqwkrq| M1 Yhqdeohv +4<<8,= Joredol}dwlrq dqg wkh Lqhtxdolwlhv ri Qdwlrqv1 Txduwhuo| Mrxuqdo ri Hfrqrplfv 443/ ;8:0;;31

Oxfdv/ Urehuw H1 +4<;;,= Rq wkh Phfkdqlfv ri Hfrqrplf Ghyhorsphqw1 Mrxu0 qdo ri Prqhwdu| Hfrqrplfv 55/ 60751

Pdqvhog/ Hgzlq/ Pdun Vfkzduw} dqg Vdpxho Zdjqhu +4<;4,= Lplwdwlrq Frvwv dqg Sdwhqwv= Dq Hpslulfdo Vwxg|1 Hfrqrplf Mrxuqdo <4/ <3:0<4;1

PfFdooxp/ Mrkq +4<<9,= Qdwlrqdo Erughuv Pdwwhu= Fdqdgd0X1V1 Uhjlrqdo Wudgh Sdwwhuqv1 Dphulfdq Hfrqrplf Uhylhz;8+9,= 94809561

Revwihog/ Pdxulfh dqg Nhqqhwk Urjr +5333,= Wkh Vl{ Pdmru Sx}}ohv lq Lq0 whuqdwlrqdo Pdfurhfrqrplfv= Lv wkhuh d Frpprq FdxvhB QEHU Zrunlqj Sdshu ::::1

Ulyhud0Edwl}/ Oxlv dqg Sdxo P1 Urphu +4<<4,= Hfrqrplf Lqwhjudwlrq dqg Hq0 59

(31)

grjhqrxv Jurzwk1 Txduwhuo| Mrxuqdo ri Hfrqrplfv 439/ 86408891

Urphu/ Sdxo P1 +4<;:,= Jurzwk Edvhg rq Lqfuhdvlqj Uhwxuqv Gxh wr Vshfldo0 l}dwlrq1 Dphulfdq Hfrqrplf Uhylhz::/890951

Vdpxhovrq/ Sdxo +4<87,= Wkh Wudqvihu Sureohp dqg Wudqvsruw Frvwv= Dqdo|vlv ri Hhfwv ri Wudgh Lpshglphqwv1 Hfrqrplf Mrxuqdo 97 +Mxqh,/ 59705;<1

Vhjhuvwurp/ Sdxo V1 +4<<4,= Lqqrydwlrq/ Lplwdwlrq/ dqg Hfrqrplf Jurzwk1 Mrxuqdo ri Srolwlfdo Hfrqrp| <</ ;3:0;5:1

Dsshqgl{

D4 Sdudphwhu ydoxhv

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D5 Surri ri Sursrvlwlrq 4

Wkh jurzwk udwh lq uhdo frqvxpswlrq lq uhjlrqlv htxdo wr> ' ER66 nR55*. '

#6 *6c zkhuh wkh odvw htxdolw| lv gxh wr wkh idfw wkdw wkhuh lv qr whfkqrorjlfdo 5: