This thesis sets forth an expansion on a model of uneven development, developed by Paul Krugman, in his article "Trade, Capital Accumulation and Uneven Development" from 1981. Krugman (1981) explains the phenomenon of uneven development in a model, in which the world consists of two regions trading with each other. There are two sectors in Krugman's model: an industrial sector and an agricultural sector. The agricultural sector is characterised by constant returns to scale. In the industrial sector, on the other hand, there are external economies, and so increasing returns to scale in the sector as a whole.
Due to the external economies in the industrial sector, the region that starts of with the most capital will have the highest productivity. The initial lead in industrial development will cumulate over time, and this region will take the leadership in world trade. In this way, trade with the more developed region will prevent industrialisation in the less-developed region.
The thesis proposes two changes on this and works out the effects of these changes. First, the state is assumed to subsidise education. This results in two different labour productivities. The workers with education are assumed to be more productive in the industrial sector than the workers without education. This will change the wage development in the model. The wages of the educated workers willincrease when the agricultural sector is emptied of this type of labour. As wages increase, the profit rate will decrease, and so will the rate of investments. This will slow down the development, and may even lead to stagnation if the world price of manufacturing goods is low.
Second, the thesis will explore the possible effects of coordinating wage bargaining. As long as wage bargaining is decentralised, each worker will try to get the highest wage possible. Higher wage demands slow down the economic development. This thesis will show that if the workers moderate their wage demands for a period, in some cases they will be better off in the long run. The effect one worker would have on the economy by moderating his wage demands would be minimal, and so it will not outweigh the private gains of a higher wage. Thus, it will not pay for a single worker to moderate his wage demands. If wage demands are coordinated, however, the workers will be able to internalise some of the effects of the wage setting. In some cases, this will lead to temporary wage moderation, so that the capitalists can invest in capital and promote economic development.