Trade, Foreign Investment, and Industrial Policy for Developing Countries 4055

EXPOFLORES, to convince the government and the national airline to set up the
required number of cargo flights for this activity. Thanks in part to this effort, the value
of flower exports boomed from less than half a million dollars in 1984 to more than
$400 million in 2006.19

2.3.1 A simple model

We now want to explore a model where policy can induce higher productivity in a
sector through some kind of industry-level collective action, and where prices are
determined in a collection of economics (not only in “the North”), so that there
may be rents. The goal is not to model the specifics of collective action, but rather
to examine the conditions under which this may increase a country’s income level.
There are N countries, indexed by j. Labor is the only factor of production and is avail-
able in total quantity Lj in country j. There are M industries indexed by m. There are
opportunities for collective action in each industry. Collective action increases produc-
tivity in industry m by the factor xm; otherwise, productivity is one in all industries in
all countries. We refer to xm as the level of complexity in industry m, since it seems reason-
able to expect that more complex industries will benefit more from collective action.
A country that has achieved high productivity in industry m thanks to collective action
will be said to have HP (for high productivity) in that industry. Let kjm be the indicator
function for whether country j has HP in industry m, and assume SL j ¼ 1 so that Lj is also
the share of worldwide labor living in country j. Then sm " Sj kjm L j is the share of
labor in countries with HP in industry m. Also, country j’s productivity in industry m
can be written as ^xjm " ð1 $ kjm Þ þ kjm xm . Preferences are Cobb-Douglas, with a share
vm devoted to industry m, and S vm ¼ 1. Thus, we can think of vm equivalently as the
“size” of industry m, or the extent of the world’s demand for its output.
The model described thus far is a Ricardian model with N countries and M industries,
where productivity can be either low or high in each industry. The equilibrium is easy to
describe: it consists of a set of wages, wj, prices, pm, and an allocation, Ljm, for j ¼ 1, . . .,
N and m ¼ 1, . . ., M such that for all j and m the following conditions hold: w j ' ^xjm pm
and if Ljm > 0 then wj ¼ ^xjm pm (zero profits), and pm Sj ^xjm L jm ¼ vm Sj w j L j (i.e., the value
of sales of m equals total expenditures on m) for all m.
It is useful to describe an equilibrium without rents. Choosing labor as the numer-
aire, this entails wj ¼ 1 for all j and pm ¼ 1 if sm ¼ 0 and pm ¼ 1/xm if sm > 0; it requires
that for each industry either no country has HP or there are enough countries (adjust-
ing for their size) with HP that the large supply drives the price to its marginal cost
with unitary wages.20 Note that in this case a country that does not achieve HP in
any industry would still enjoy the same wage as other countries. We can think of this
as a case in which factor price equalization (FPE) holds.