Stages of Diversification

Abstract

This Paper studies the evolution of sectoral labour concentration in relation to the level of per capita income. We show that various measures of sectoral concentration follow a U-shaped pattern across a wide variety of data sources: countries first diversify, in the sense that labour is spread more equally across sectors, but there exists, relatively late in the development process, a point at which they start to specialize again. We introduce a model with endogenous costs of trading internationally that provides an explanation for this new empirical fact. The model highlights a trade-off between the benefits of diversification in the context of high trading costs, and the benefits of specialization in a Ricardian sense.

Keywords: Comparative advantage, international macroeconomics, international trade, specialization

JEL Classification: F15, F43, O40