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Trade Policy and the Third World Metropolis

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Raul Livas Elizondo
Paul Krugman

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Abstract

Many of the world's largest cities are now in developing countries. We develop a simple theoretical model, inspired by the case of Mexico, that explains the existence of such giant cities as a consequence of the strong forward and backward linkages that arise when manufacturing tries to serve a small domestic market. The model implies that these linkages are much weaker when the economy is open to international trade -- in other words, the giant Third World metropolis is an unintended by-product of import-substitution policies, and will tend to shrink as developing countries liberalize.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4238.

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Date of creation: Dec 1992
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Publication status: published as Journal of Development Economics, Vol. 49, no. 1 (April 1996): 137-150.
Handle: RePEc:nbr:nberwo:4238

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  1. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
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  2. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June. [Downloadable!] (restricted)
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