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Paddy von Ossenderrcht's avatar

Wonder the impact if nations/economies introduced protectionism & Indl. Policy along with dual pricing policy too during a transition period- reviewed periodically/sectorally?

Not free market forces could be the critique though!

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Philalethes's avatar

Interesting analysis. Allow me to qualify it in the light of less than full wage equalisation between the tradeable and non-tradeable sectors (which is the mechanism of propagation of shocks between the two sectors): would not the ‘multiplier’ of a change in the prices in the tradeable sector on the prices of the non-tradeable sector be lower, the more rigid the labour market is (ie, existence of a wedge between the wages of the two sectors) and the more informal the non-tradeable sector (ie, large positive wedge between tradeable and non-tradeable sector)?

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Danny Quah's avatar

Good point. You're right, the more rigid the labour market, the lower would be the multiplier effect. But in the limit we're then talking about two different economies, each completely disengaged from the other, but both co-existing in a single nation. There would be complete sandboxing. When that happens, we would need to shift perspective from that of a single national (but two-sector) economy to that of two separate nations.

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Philalethes's avatar

Would not this be the case of countries such as India, where a technologically advanced tradeables sector (informatics, pharmaceuticals) coexists with a large informal sector (subsistence agriculture and personal services)?

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Danny Quah's avatar

Yes, it would indeed. And such countries had previously provided the original application for the so-called Balassa-Samuelson effect. This hypothesised effect was intended to help explain why poor countries are cheap. I just turned around the idea to suggest that the industrial policy approach to protectionism is both making economies look like the India that you describe, and not actually succeeding in protecting those targeted industries after all.

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