ECONOMIC-POLICY AND THE RELATIVE PRICE OF SERVICES IN LDCS

Low relative prices of nontraded services are a feature of developing economies. Recent explanations focus on structural issues such as factor endowments and returns to scale. This paper argues that economic policy may also contribute to low LDC service prices. In a three-sector model with wage differentials, financial repression unambiguously depresses both per capita real income and the price of nontraded goods. In contrast to most current models, tariffs and production subsidies can also depress nontraded goods prices.