Coordination failures and government policy: A model with applications to East Asia and Eastern Europe

Poor countries must specialize in standardized, labor-intensive commodities. Middle-income countries may have a richer menu of options if their labor force is reasonably well educated and skilled. The multiplicity of equilibria is due to a coordination problem inherent in activities that require specialized inputs. If no intermediate inputs are presently 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 equilibrium. An investment subsidy or a minimum-wage policy can enhance welfare by moving the economy to a superior equilibrium.