Economic models of developing countries in the global economy

In this dissertation I present three essays on the economy of developing countries. All of these are related to policy issues. The first essay introduces a model that explains the economic rationale for the observed policy combination of a developing country (inviting foreign direct investment (FDI) through education investment (EDI)) and the interest of a multinational corporation (MNC) about the local labor quality when it contemplates FDI. Information on local labor is the source of a more efficient contract for the MNC with local labor, and the local government can benefit both agents through EDI, FDI and information sharing. It is shown that the government of a country in an earlier stage of development will have a stronger incentive for EDI given FDI. While the MNC also benefits from EDI and information sharing, otherwise it will avoid FDI in that country. In that sense, EDI and FDI have a mutually beneficial and causal relationship. However, the policy tends to benefit the government and the MNC at the expense of local labor welfare.; The second essay introduces a model that can be used to investigate the welfare effects for a developed country which mandates child labor prohibition by their developing country trading partner. Although child labor prohibition in developing countries is often insisted by the government of developed countries and is a crucial issue in WTO and regional trade negotiations, no theoretical framework exists to explain this situation. I address this issue using human capital accumulation theory and general equilibrium trade theory. I show that the distinction between the short run and the long run effects of child labor policy is very important, both in magnitude and direction of influence. The incorporation of increasing returns to scale technology in the trade model can lead to a situation in which child labor prohibition converts the importer-exporter positions. I show the conditions for positive gains from this conversion. My framework is generally applicable to analyses of policy change which entail human capital accumulation processes.; The third essay introduces an alternative path for economic growth and welfare improvement through economic integration among less developed countries. Depending on the sector, lower production volatilities (higher production stability) resulting from economic integration can have opposite effects on the rate of economic growth: manufacturing is positive, but agriculture is negative. However, economic integration is always welfare improving if it reduces production volatilities of both sectors, regardless if growth rates increase or not. The market equilibrium rate of growth is lower than the optimal growth rate, but the government can achieve the latter through a combined policy of subsidy and production stabilization. Production stabilization also reduces the level of subsidy, even if subsidies alone can achieve the optimal growth rate. While existing growth models have shown the positive effect of production volatility on economic growth and welfare, this model shows possible negative effects of production volatility on economic growth and welfare.