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Trading Arrangements and Industrial Development

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  • Puga, Diego
  • Venables, Anthony J

Abstract

This article outlines a new approach for analyzing the role of trade in promoting industrial development. It offers an explanation as to why firms are reluctant to move to countries with lower labor costs and shows how trade liberalization can change the incentives for firms to locate in developing countries. It models economic development as the spread of concentrations of firms 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. The analysis shows that unilaterally liberalizing imports of manufactures can promote industrialization but that membership in a preferential trading arrangement is likely to create larger gains. South-South preferential trading arrangements will be sensitive to the market size of member states, while North-South arrangements seem to offer better prospects for participating southern countries, if not for excluded countries. Copyright 1998 by Oxford University Press.

Suggested Citation

  • Puga, Diego & Venables, Anthony J, 1998. "Trading Arrangements and Industrial Development," The World Bank Economic Review, World Bank, vol. 12(2), pages 221-249, May.
    • Handle: RePEc:oup:wbecrv:v:12:y:1998:i:2:p:221-49
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    JEL classification:

    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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