Lower Corruption Warrants Less, but Higher Corruption Removes it: A Ricardian Note

One can also find a vanishing sector sort of argument even in case of specific factor model of trade. This phenomenon is known as ‘Dutch Disease’. In brief, ‘Dutch Disease’ refers to a situation, in general, where emergence of a new booming sector causes one of the existing traded sectors to shut down. The primary reason behind such incident is that the new sector draws factors of production from other sectors leading to a hike in the prices of those factors. Therefore, cost of production has a tendency to go up in all sectors. But, such increase in the cost of production is directly absorbed by the non-traded sector whereas traded sector cannot do that as the prices may be regarded as given to the system due to ‘small’-ness of the country. Hence higher cost compared to lower price makes the sector non-viable and leads to shutting down.

Country B is considered in order to ensure production and consumption of both X and Y even if one country ends up with complete specialization in any one line of production.

In context of Ricardian model with one factor and two goods to start with we must ensure the non-occurrence of corner solution whatsoever. This requires a very specific and subtle assumption: factor requirement ratio in X and Y should not be unequal to the commodity price ratio. This guarantees the possibility of production of both X and Y at equilibrium in the beginning.

Such assumption of extreme asymmetry in corruption related cost may sound a little unusual. A more sensible assumption could have been the presence of corruption in both X and Y but in unequal extent. The result of such a possibility is briefly explained in the concluding segment. I am thankful to the referee for asking me to shed some light on this issue.

Simple mathematical calculation analogous to Case-I would help the reader to delineate this case.

In fact, introduction of \(\alpha \) would immediately yield the results we discussed here.

However, if \(\alpha \) falls, labor gets higher wage in X, and hence attracts all L from Y. Thus, Y peters out in the end. This is also a kind of vanishing sector argument.