Innovation, Capital Accumulation and Economic Transition

Abstract: This paper explores some links between trade, human capital investment and innovation-based growth in the context of Eastern European economies in transition. Specifically, we calibrate a two region model with trade in differentiated high-tech products and a homogeneous traditional commodity. Human capital, or the quality of the skilled labour force, as well as physical capital are accumulated. Human capital remains finite in the long-run but depends endegenously on education and is an important determinant of the innovation rate. Transition is modelled as one of the two regions starting out with initial conditions that are grossly displaced from a reference path of balanced growth. The paper then evaluates and compares the effects of a number of policy instruments, such as trade liberalization and subsidies for schooling and industrial research, for the process of transition as well as long-run growth and welfare.;