many new nations throughout the period of interest, restricts considerably
our sample size. Nevertheless, one of the implications of the collapse of
the Eastern alliance is a move down the chain of comparative advantage.
This is clear for Romania and Poland and probably for Bulgaria as indi-
cated by the narrow definition. Hungary, whose exporting sectors have been
predominantly low-skilled, is the only notable exception.
[Please insert Table Id about here]
Finally, in Table Ie we show the corresponding data for China and India
the two countries that aspire to move up the chain. Our model suggests
that given the educational achievements such aspirations may be difficult to
achieve.
[Please insert Table Ie about here]
We next develop a model of the optimal choice of education policy when
the budget is fixed.
3 The Model
Consider a two-sector small open economy inhabited by a continuum of
agents of unit measure. Sector X produces a high-tech product while sector
Y produces a primary commodity. In both sectors labor is the only input in
production, however, the productivity of each worker depends on his level of
education and his sector of employment. To keep things simple we assume
that there are three levels of education, namely low, medium, and high.
Workers with a low level of education (type Γ) can only find employment
in sector Y where they produce 1 unit while workers with a medium level
of education (type m) can produce v(> 2) units in either sector.13 The
high level of education (type h) is useful only to workers employed in the
high-tech sector where each produces V(> v) units.
The distribution of educational attainment in the economy is completely
determined and financed by the government. Agents are initially identical
but education separates them into three skill groups that correspond to
the three levels of education. We assume that the low level of education is
provided to all agents and that the fixed education budget of the government
is sufficiently high to cover its cost. The remaining budget is equal to b. We
13Setting the productivity the same in the two sectors keeps the number of parameters
low and, below, it will become clear that it is without any loss of generality.