Research Project
Structural Change in an Open Economy – The Transmission Channels between Trade, Growth, and Poverty
For centuries, economists emphasised the benefits of free trade for economic growth due to specialisation, returns to scale, and knowledge spill-overs. These economic theories are modelled after an industrialised economy perspective, assuming inter alia perfectly functioning factor markets, full employment of the production factors, constant returns to scale, and perfect competition. The empirical results of these approaches have been inconclusive for low-income-countries and are highly dependent on the selected trade indicators, the choice of countries, and the methodological approaches.
Low-income countries are characterised by a segmented labour market. The modern sector produces with capital and technology, pays high wages, and is socially protected. While the informal sector has none of these characteristics. It is assumed that the poor work at subsistence wages in the informal sector. Here, economic growth leads to structural change in the economy without wage harmonisation between the sectors. Instead, the modern sector is increasing its production due to employment creation, while the informal sector shrinks.
The aim of this thesis is to adjust a segmented labour market growth model for the case of an open economy. This will allow to model the effect of trade on the process of structural change in low-income countries. Different transmission channels between trade, growth in the modern sector, and poverty will be presented. Using these theoretically modelled transmission channels, the effects of changes in trade on changes in the growth of the modern sector and on changes in poverty will be analysed. The theoretically determined transmission channels and expectations will be verified based on empirical estimations.
Supervisor: Prof. Dr. Wilhelm Löwenstein
