Globalization, dual economy, and economic development

This paper applies inframarginal analysis, which is a combination of margin al and total cost-benefit analysis, to a model with both constant returns a nd increasing returns in production. It demonstrates that as transaction co nditions are improved, the general equilibrium discontinuously jumps from a utarky to partial division of labor with a dual structure, then to the comp lete division of labor where the dual structure disappears. Two types of du al structure may occur in the transitional stage of economic development an d globalization. One of them involves the division of labor in the develope d economy and autarky in the less developed economy, generating increasing disparity of per capita real income between the two types of economies. The other involves a domestic dual structure in the less developed economy, wh ere the population is divided between a commercialized sector that trades w ith a foreign country and a self-sufficient sector that is not involved in trade. All gains from trade go to the developed economy. This paper shows t hat deterioration of a country's terms of trade and an increase of gains th at this country receives from trade may concur, provided productivity progr ess from an expanded network of division of labor outpaces the deterioratio n of terms of trade. In the model with both endogenous and exogenous compar ative advantages, a country may export a good with exogenous comparative di sadvantage if endogenous comparative advantage dominates this exogenous com parative disadvantage. Implications of the findings for China's WTO members hip and China's trade policy are explored. (C) 2000 Elsevier Science Inc. A ll rights reserved.