autarky to trade, and with an initial skill distribution that was optimal
under autarky, to change its education policy so that its patterns of trade
are reversed? The above analysis suggests that not only is it sometimes
optimal to increase educational spending in order to move up the chain, i.e.,
change from an economy that exports low-skill goods to one that exports
high-skill goods, but sometimes it is optimal to move down the chain and
switch from exporting high tech goods to exporting low tech goods.
Moving up the chain might require outside help so our results have also
some interesting policy implications for the provision of aid. Any economy
with a binding budget constraint can benefit from aid in the form of loans
or grants to increase educational spending. However, the size of the benefits
can differ significantly. For those countries in which it is optimal to move up
the chain, relaxing the budget constraint would allow them to switch their
patterns of trade and in that case the welfare gains would be very high. In
fact, they will be sufficient to cover the cost of financing the loan.
In future work we would like to endogenize the government budget and
determine the optimal government policy in the context of a dynamic model.
References
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john Institute, Kalamazoo
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