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1 Introduction

During the second half of the past century, many, at the time, develop-
ing countries that have traditionally been inward looking, opened their
economies and began to trade with the rest of the world. Initially these
economies specialized in low-skill goods and most of them still do so. But
some countries (e.g. countries in the East Asian region) have managed to
transform their economies by shifting resources to high-skill sectors and thus
reversing their patterns of trade. Their exports are now dominated by goods
whose production requires the use of high-skill labor. These economies that
have successfully achieved this transformation had to devote resources to
education in order to equip workers with the new skills that were necessary
for employment in the new sectors. This is reflected by the steadily increas-
ing flow of young persons to higher education. The same type of policies
are adapted by many governments that aim to achieve similar trade pattern
reversals. Good examples are India and China where there is plenty of evi-
dence that their governments actively pursue to help produces to ‘move up
the value chain’.12

Intuitively, these policies cannot be globally optimal. As long as there
is a demand for low-skill intensive goods there always be some countries
with a comparative advantage in their production. For developing countries
with limited government budgets that constrain their choices, understanding
where their comparative advantage lies is important. The following two
figures show the export patterns and education attainment levels of four
countries that have followed four distinct development paths over the last
three decades.

Figure 1 depicts the percentage of high-tech exports in total manufac-
turing exports over the period 1980-2000 for Argentina, Korea, Poland and
United States.3 Not surprisingly, we find that over the whole period the
exports of United States are dominated by high-tech products. In contrast,

1This is clear from the World Economic Forum’s reports on the China Business Summit
2003 and on the India Economic Summit 2004 and from daily business magazines and
newspapers in these two countries.

2 ‘Moving up the chain’ has a dual meaning. In some cases it is taken to mean ascending
a quality ladder where the products are still the same however their quality is increasing.
In our context it implies a move along the production possibilities frontier such that high-
skill intensive goods substitute for low-skill intensive goods.

3The data on exports were obtained from the World Trade and Production Database.
For the separation of sectors into high-tech and low-tech ones we used the OECD classi-
fication of sectors according to their level of skills employed. We have experimented with
different threshold levels but with no consequence for our comparisons.



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