Transition Studies Review

, Volume 11, Issue 3, pp 114–124 | Cite as

Why Transition Countries May Specialize in Low-Quality Production

  • Uwe Dulleck
  • Neil Foster
Quantitative Analyses Research
  • 32 Downloads

Abstract.

Politicians and economists of transition countries fear a low-quality trap for their economies. We present a model of international trade with two countries and two qualities of goods model where high-quality production exhibits economies of scale and low-quality production does not. Depending on transaction costs, the low-quality good will be produced either in the low-wage economy (i.e., the transition country) only or it will not be traded at all. Regarding the high-quality good, we discuss three potential reasons why transition countries may be trapped in the production of low quality when economies of scale in production prevail: (a) international trade policy (i.e., GATT / WTO); (b) external economies due to quality uncertainty; (c) external economies due to demand effects (big push). All reasons favor incumbents over entrants and thus lead to a low-quality trap for transition economies due to the existence of incumbents located in industrialized countries.

Keywords

international trade product quality home market effects 

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Copyright information

© Springer-Verlag/Wien 2004

Authors and Affiliations

  • Uwe Dulleck
    • 1
  • Neil Foster
    • 1
  1. 1.Department of EconomicsUniversity of ViennaViennaAustria

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