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Trading arrangements and industrial development

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  • Puga, Diego
  • Venables, Anthony J.

Abstract

How do different trading arrangements influence the industrialization process of developing countries? Can preferential trading arrangements (PTAs) be superior to multilateral liberalization, or at least an alternative when multilateral liberalization proceeds slowly? If so, what form should the PTAs take? Are developing countries better advised to seek PTAs with industrial countries or among themselves? Traditional analysis of these issues has been based on the idea of trade creation and trade diversion. The problem with this analysis is that it starts from assuming a pattern of comparative advantage of newly industrialized countries. The experience of these countries suggests the need for an analysis in which the pattern of comparative advantage is not set in stone but is potentially flexible, and in which less developed countries can develop and converge in both income and economic structure to industrial economies. The authors outline an alternative approach for analyzing the role of trade in promoting industrial development. There are few fundamental differences between countries that generate immutable patterns of comparative advantage. Instead the pattern of trade and development in the world economy is determined mainly by history. Cumulative causation has created concentrations of industrial activity in particular locations (industrial countries) and left other areas more dependent on primary activities. Economic development can be thought of as the spread of these concentrations from country to country. Different trading arrangements may have a major impact on this development process. By changing the attractiveness of countries as a base for manufacturing production they can potentially trigger or postpone industrial development. This approach explains why firms are reluctant to move to economies that have lower wages and labor costs, and shows how trade liberalization can change the incentives to become established in developing countries. It provides a mechanism through which import liberalization can have a powerful effect in promoting industrialization. And it suggests that import liberalization may create or amplify differences between liberalizing countries with the possible political tensions this may create. While these features are consistent with the world economy, they fall short of providing convincing empirical support for the approach. Using the approach, the authors derive number of conclusions about the effects of trade liberalization. First, that unilaterally liberalizing imports of manufactures can promote development of the local manufacturing industry. The mechanism is forward linkages from imported intermediates, but this may be interpreted as part of a wider package of linkages coming from these imports. Second, the gains from liberalization through PTA membership are likely to exceed those obtained from unilateral action. South-South PTAs will be sensitive to the market size of member states, and North-South PTAs seem to offer better prospects for participating Southern economies, if not for North and excluded countries. Third, the effects of particular schemes (such as the division of benefits between Southern economies) will depend on the characteristics of the countries and cross-country differences in these characteristics.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1787.

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Date of creation: 30 Jun 1997
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Handle: RePEc:wbk:wbrwps:1787

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Keywords: Economic Theory&Research; Environmental Economics&Policies; Water and Industry; Labor Policies; Banks&Banking Reform; Economic Theory&Research; Environmental Economics&Policies; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Trade and Regional Integration; Water and Industry;

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  1. Antonio Spilimbergo & Gordon H. Hanson, 1999. "Illegal Immigration, Border Enforcement, and Relative Wages: Evidence from Apprehensions at the U.S.-Mexico Border," American Economic Review, American Economic Association, American Economic Association, vol. 89(5), pages 1337-1357, December.
  2. Puga, Diego & Venables, Anthony J., 1996. "The Spread of Industry: Spatial Agglomeration in Economic Development," Journal of the Japanese and International Economies, Elsevier, vol. 10(4), pages 440-464, December.
  3. Krugman, Paul & Venables, Anthony J., 1995. "Globalization and the Inequality of Nations," Working Paper Series, Research Institute of Industrial Economics 430, Research Institute of Industrial Economics.
  4. Diego Puga & Anthony J. Venables, 1995. "Preferential Trading Arrangements and Industrial Location," CEP Discussion Papers dp0267, Centre for Economic Performance, LSE.
  5. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, American Economic Association, vol. 70(5), pages 950-59, December.
  6. de Melo, Jaime & Panagariya, Arvind & Rodrik, Dani, 1992. "The New Regionalism: A Country Perspective," CEPR Discussion Papers, C.E.P.R. Discussion Papers 715, C.E.P.R. Discussion Papers.
  7. Baldwin, Richard E. & Venables, Anthony J., 1995. "Regional economic integration," Handbook of International Economics, Elsevier, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 31, pages 1597-1644 Elsevier.
  8. Gordon H. Hanson, 1994. "Regional Adjustment to Trade Liberalization," NBER Working Papers 4713, National Bureau of Economic Research, Inc.
  9. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, American Economic Association, vol. 67(3), pages 297-308, June.
  10. Richard Baldwin, 1993. "A Domino Theory of Regionalism," NBER Working Papers 4465, National Bureau of Economic Research, Inc.
  11. Venables, Anthony J., 1996. "Trade policy, cumulative causation, and industrial development," Journal of Development Economics, Elsevier, Elsevier, vol. 49(1), pages 179-197, April.
  12. Hanson, Gordon H, 1997. "Increasing Returns, Trade and the Regional Structure of Wages," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 107(440), pages 113-33, January.
  13. repec:fth:iniesr:430 is not listed on IDEAS
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