Economic models of developing countries in the global ecnomy
Three theoretical models on economic policies of developing countries are developed. The first model explains the economic rationale for the observed policy combination of a developing country (inviting foreign direct investment (FDI) through education investment (EDI)) and the interest of a multinational corporation (MNC) about the local labor quality when it contemplates FDI. Information on local labor is the source of a more efficient contract for the MNC with local labor, and the local government can benefit both agents through EDI, FDI and information sharing. However, the policy tends to benefit the government and the MNC at the expense of local labor welfare. A new concept term take-off point, the point at which the government starts making EDI, is introduced. The behavior of take-off point is the main focus of the model. The second model investigates the welfare effects for a developed country which mandates child labor prohibition by their developing country trading partner. The model addresses this issue using human capital accumulation theory and general equilibrium trade theory. It is shown that the distinction between the short run and the long run effects of child labor policy is very important, both in magnitude and direction of influence. The incorporation of increasing returns to scale technology in the trade model can lead to a situation in which child labor prohibition converts the importer-exporter positions. The framework introduced here is generally applicable to analyses of policy change which entails human capital accumulation processes. Finally, an endogenous growth model is developed to show the possible link between economic growth and production stability resulted from economic integration. Welfare implications are even stronger; economic integration is always welfare improving if it reduces production volatilities, regardless if the growth rate increases or not. While, the market equilibrium rate of growth is lower than the optimal growth rate, but the government can achieve the latter through a combined policy of subsidy and production stabilization. Production stabilization also reduces the level of subsidy, even if subsidies alone can achieve the optimal growth rate.
School:The Ohio State University
School Location:USA - Ohio
Source Type:Master's Thesis
Keywords:education investment foreign direct information transaction labor quality child standards importer exporter conversion human capital accumulation endogenous growth economic integration production stability income uncertainty
Date of Publication:01/01/2003