DOES THIRD-WORLD GROWTH HURT 1ST WORLD PROSPERITY

As the fears of Japan's economic prowess fade, economic writers and co rporate executives foresee a new threat: Third World economic growth. In this article, Stanford economist Paul Krugman argues that such fear s about the impact of Third World competition are questionable in theo ry and flatly rejected by the data. Krugman illustrates his argument b y examining the patterns of wages and productivity in a series of mode l economies. In the first model, one all-purpose good is produced usin g one input: labor. In the second, three types of goods are produced i n a world with two regions of different productive capacities. The thi rd model is a world in which production requires both labor and capita l, and in the fourth model, labor is both skilled and unskilled. After examining the consequences of isolated productivity improvements in t hese increasingly realistic models, Krugman concludes that an increase in Third World labor productivity means an increase in world output. And an increase in world output shows up in higher wages for Third Wor ld workers, not in decreased living standards for the First World. Yet Krugman still fears the worst. If the West responds to the widespread fears about Third World economic success by erecting import barriers to protect Western living standards, the effects could be disastrous-d ashing any hope of a decent living standard for hundreds of millions o f people throughout the developing world.