Trade, Education and Growth: The Small-Country Case

Abstract

This paper develops optimal educational and trade policies for a small open economy capable of growth. A theoretical structure previously used for the analysis of education and growth in closed economies (Manning [1975, 1976, 1978, 1979a, 1979b, 1981b]) is extended to do this. The analysis is aggregative. It differs from that of a similar problem by Aarrestad [1978] by allowing for heterogeneity of the labor force. Recently, Henry [1979], and Henry and Manning [1980], developed the model of this paper to permit the endogenous determination of international commodity prices, but only in the context of balanced growth. All of these papers belong to a small literature on aggregative aspects of education and growth, other examples of which include Aarrestad [1975], Hu [1976], Razin [1972a, 1972b], Tu [1969, 1970], and Uzawa [1965]. Oniki and Uzawa [1965] is the classic extension of the Heckscher-Ohlin theory of international trade to permit growth. In models of their type, production possibilities are given instantaneously and are altered over time by factor accumulation. Educational policy affects the production possibility set in two ways. An increase in educational activity reduces the factors available to produce traded goods, and so shrinks the production possibility set immediately: In the longer term the level of skill is altered, so changing the production possibility set. Both the size and shape of the production possibility set are determined statically and dynamically by educational policy. McMillan [1978] has recently presented a model of public intermediate goods, trade and growth with the same property. A problem like this is considered in Manning [1981a], for a general model of capital accumulation and growth. The structure of this paper is as follows. The model and optimality conditions are first presented. Growth is then analyzed, and it is found that specialization is the most likely pattern of production. A deeper investigation of the economics of the model explains this conclusion. Some concluding remarks are then made. Details of the lengthy mathematical proofs of two Propositions are relegated to a Mathematical Appendix.