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Gradual Spread of Market-Led Industrialization

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  • Jeffrey D. Sachs
  • Xiaokai Yang

Abstract

The paper introduces asymmetric production conditions between firms and asymmetric transaction conditions between countries into the Murphy-Shleifer-Vishny model of industrialization. It explores a general equilibrium mechanism that generates circular causation loop that each firm's profitability and its decision of involvement in a network of industrial linkages and trade flows is determined by the size of the network, while the network size is in turn determined by all firms' decisions of participation. It shows that the very function of the market is networking relevant self-interested decision makers and utilize the network effects of industrialization, though this function is not perfect. Hence, market led industrialization will gradually spread until the whole world economy is integrated in a single network of trade and industrial linkages as transaction conditions are improved. Also, this general equilibrium mechanism predicts empirical observation that temperate zone is involved in this industrialization process more early than the tropic zone because of its better climate and public health conditions. This paper devises a new approach to specifying zero profit condition for a marginal modern firm, while keeping original feedback loop between positive profit and the extent of the market of the MSV model. Hence, this new method and the trade off between economies of scale and transaction costs can be used to endogenize the number of modern sectors and increases applicability of this type of models which is featured with compatibility between economies of scale and competitive market.

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Bibliographic Info

Paper provided by Center for International Development at Harvard University in its series CID Working Papers with number 11.

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Date of creation: Apr 1999
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Handle: RePEc:wop:cidhav:11

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Web page: http://www.cid.harvard.edu/cidwp/
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Keywords: globalization; industrialization; market-led development;

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References

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  1. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1988. "Industrialization and the Big Push," NBER Working Papers 2708, National Bureau of Economic Research, Inc.
  2. Easton, Stephen T & Walker, Michael A, 1997. "Income, Growth, and Economic Freedom," American Economic Review, American Economic Association, vol. 87(2), pages 328-32, May.
  3. George J. Stigler, 1951. "The Division of Labor is Limited by the Extent of the Market," Journal of Political Economy, University of Chicago Press, vol. 59, pages 185.
  4. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
  5. Rosen, Sherwin, 1983. "Specialization and Human Capital," Journal of Labor Economics, University of Chicago Press, vol. 1(1), pages 43-49, January.
  6. Sachs, Jeffrey D & Warner, Andrew M, 1997. "Fundamental," American Economic Review, American Economic Association, vol. 87(2), pages 184-88, May.
  7. Bengt Holmstrom & John Roberts, 1998. "The Boundaries of the Firm Revisited," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 73-94, Fall.
  8. Yang, X. & Liu, P.W., 1999. "Division of Labor Transaction Cost, Emergence of the Firm and Firm Size," Papers 10, Chicago - Graduate School of Business.
  9. John Luke Gallup & Jeffrey D. Sachs & Andrew D. Mellinger, 1998. "Geography and Economic Development," NBER Working Papers 6849, National Bureau of Economic Research, Inc.
  10. Kelly, Morgan, 1997. "The Dynamics of Smithian Growth," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 939-64, August.
  11. Timothy Frye & Andrei Shleifer, 1996. "The Invisible Hand and the Grabbing Hand," NBER Working Papers 5856, National Bureau of Economic Research, Inc.
  12. Cheung, Steven N S, 1983. "The Contractual Nature of the Firm," Journal of Law and Economics, University of Chicago Press, vol. 26(1), pages 1-21, April.
  13. John J. Wallis & Douglass North, 1986. "Measuring the Transaction Sector in the American Economy, 1870-1970," NBER Chapters, in: Long-Term Factors in American Economic Growth, pages 95-162 National Bureau of Economic Research, Inc.
  14. North, Douglass C, 1987. "Institutions, Transaction Costs and Economic Growth," Economic Inquiry, Western Economic Association International, vol. 25(3), pages 419-28, July.
  15. John Luke Gallup & Jeffrey D. Sachs & Andrew D. Mellinger, 1998. "Geography and Economic Development," Harvard Institute of Economic Research Working Papers 1856, Harvard - Institute of Economic Research.
  16. Henry J. Bruton, 1998. "A Reconsideration of Import Substitution," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 903-936, June.
  17. Shi Heling & Yang Xiaokai, 1995. "A New Theory of Industrialization," Journal of Comparative Economics, Elsevier, vol. 20(2), pages 171-189, April.
  18. Young, Allyn A., 1928. "Increasing Returns and Economic Progress," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, vol. 38, pages 527-542.
  19. North, Douglass C. & Weingast, Barry R., 1989. "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," The Journal of Economic History, Cambridge University Press, vol. 49(04), pages 803-832, December.
  20. Balassa, Bela, 1989. "Outward orientation," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 2, chapter 31, pages 1645-1689 Elsevier.
  21. Bruton, H.J., 1998. "A Reconsideration of Import Substitution," Center for Development Economics 156, Department of Economics, Williams College.
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Cited by:
  1. Vladimir Gligorov & Mary Kaldor & Loukas Tsoukalis, 1999. "Balkan Reconstruction and European Integration," wiiw Balkan Observatory Working Papers 001, The Vienna Institute for International Economic Studies, wiiw.

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