COORDINATION FAILURES AND GOVERNMENT POLICY - A MODEL WITH APPLICATIONS TO EAST-ASIA AND EASTERN-EUROPE

Poor countries must specialize in standardized, labor-intensive commod ities. Middle-income countries may have a richer menu of options if th eir labor force is reasonably well educated and skilled. The multiplic ity of equilibria is due to a coordination problem inherent in activit ies that require specialized inputs. If no intermediate inputs are pre sently produced, there may be little incentive for any single firm to do so on its own. The economy may get stuck in a low-wage, low-tech eq uilibrium. An investment subsidy or a minimum-wage policy can enhance welfare by moving the economy to a superior equilibrium.