The absence of financial markets means that firms accumulate capital through retained earnings.
Labour markets are imperfect giving rise to a wage gap.
The model shows that the real exchange plays the crucial role of determining real wages. Through real wages it sets the pace for the development of the new sectors as workers are attracted out of the state sector. The link between growth and real appreciation differs from the usual Balassa-Samuelson effect. The paper also explores the role of labour market distortions and foreign financing. Please take the time and register at our new service.