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Marshallian externality, industrial upgrading, and industrial policies

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  • Ju, Jiandong
  • Lin, Justin Yifu
  • Wang, Yong

Abstract

A growth model with multiple industries is developed to study how industries evolve as capital accumulates endogenously when each industry exhibits Marshallian externality (increasing returns to scale) and to explain why industrial policies sometimes succeed but sometimes fail. The authors show that, in the long run, the laissez-faire market equilibrium is Pareto optimal when the time discount rate is sufficiently small or sufficiently large. When the time discount rate is moderate, there exist multiple dynamic market equilibria with diverse patterns of industrial development. To achieve Pareto efficiency, it would require the government to identify the industry target consistent with the comparative advantage and to coordinate in a timely manner, possibly for multiple times. However, industrial policies may make people worse off than in the market equilibrium if the government picks an industry that deviates from the comparative advantage of the economy.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5796.

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Date of creation: 01 Sep 2011
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Handle: RePEc:wbk:wbrwps:5796

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Related research

Keywords: Water and Industry; Economic Theory&Research; Industrial Management; Industrial Economics; Common Property Resource Development;

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  1. Panagariya, Arvind, 1986. "Increasing returns, dynamic stability, and international trade," Journal of International Economics, Elsevier, vol. 20(1-2), pages 43-63, February.
  2. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1989. "Industrialization and the Big Push," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1003-26, October.
  3. Lin,Justin Yifu, 2009. "Economic Development and Transition," Cambridge Books, Cambridge University Press, number 9780521735513, October.
  4. Ju, Jiandong & Lin, Justin Yifu & Wang, Yong, 2009. "Endowment structures, industrial dynamics, and economic growth," Policy Research Working Paper Series 5055, The World Bank.
  5. Harrison, Ann E. & Rodriguez-Clare, Andres, 2009. "Trade, Foreign Investment, and Industrial Policy," MPRA Paper 15561, University Library of Munich, Germany.
  6. Aditya Bhattacharjea, 2003. "Book Review: Kicking away the Ladder: Development Strategy in Historical Perspective," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 38(1), pages 126-129, January.
  7. Andrew Mold, 2003. "Kicking away the ladder: development strategy in historical perspective by HA-JOON CHANG. (London: Anthem Press, 2002, pp. 187)," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(5), pages 668-670.
  8. Mussa, Michael, 1978. "Dynamic Adjustment in the Heckscher-Ohlin-Samuelson Model," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 775-91, October.
  9. Rodriguez-Clare, Andres, 2007. "Clusters and comparative advantage: Implications for industrial policy," Journal of Development Economics, Elsevier, vol. 82(1), pages 43-57, January.
  10. Hiroshi Ohashi, 2004. "Learning by Doing, Export Subsidies, and Industry Growth: Japanese Steel in the 1950s and 1960s," CIRJE F-Series CIRJE-F-280, CIRJE, Faculty of Economics, University of Tokyo.
  11. Krugman, Paul, 1987. "The narrow moving band, the Dutch disease, and the competitive consequences of Mrs. Thatcher : Notes on trade in the presence of dynamic scale economies," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 41-55, October.
  12. Vandana Chandra, 2006. "Technology, Adaptation, and Exports : How Some Developing Countries Got It Right," World Bank Publications, The World Bank, number 7118, October.
  13. Matsuyama, Kiminori, 1991. "Increasing Returns, Industrialization, and Indeterminacy of Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 617-50, May.
  14. Howard Pack & Kamal Saggi, 2006. "Is There a Case for Industrial Policy? A Critical Survey," World Bank Research Observer, World Bank Group, vol. 21(2), pages 267-297.
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