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Demand-Side Constraints in Development: The Role of Market Size, Trade, and (In)Equality

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  • Pinelopi K. Goldberg
  • Tristan Reed

Abstract

What is the pathway to development in a world marked by rising economic nationalism and less international integration? This paper answers this question within a framework that emphasizes the role of demand-side constraints on national development, which is identified with sustained poverty reduction. In this framework, development is linked to the adoption of an increasing returns to scale technology by imperfectly competitive firms that need to pay the fixed setup cost of switching to that technology. Sustained poverty reduction is measured as a continuous decline in the share of the population living below $1.90/day purchasing power parity in 2011 US dollars over a five year period. This outcome is affected in a statistically significant and economically meaningful way by domestic market size, which is measured as function of the income distribution, and international market size, which is measured as a function of legally-binding provisions to international trade agreements, including the General Agreement on Tariffs and Trade, the World Trade Organization and 279 preferential trade agreements. Counterfactual estimates suggest that, in the absence of international integration, the average resident of a low or lower-middle income country does not live in a market large enough to experience sustained poverty reduction. Domestic redistribution targeted towards generating a larger middle class can partially compensate for the lack of an international market.

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  • Pinelopi K. Goldberg & Tristan Reed, 2020. "Demand-Side Constraints in Development: The Role of Market Size, Trade, and (In)Equality," NBER Working Papers 27286, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:27286
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    Cited by:

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    2. repec:hal:spmain:info:hdl:2441/6jahov5tde8vt9aplqrgg3trl4 is not listed on IDEAS
    3. Jonas Hjort & Vinayak Iyer & Golvine de Rochambeau, 2020. "Informational Barriers to Market Access: Experimental Evidence from Liberian Firms," SciencePo Working papers Main hal-03389180, HAL.
    4. Arvind Subramanian & Shoumitro Chatterjee, 2020. "India’s Export-Led Growth: Exemplar and Exception," Working Papers 42, Ashoka University, Department of Economics.
    5. repec:hal:wpspec:info:hdl:2441/6jahov5tde8vt9aplqrgg3trl4 is not listed on IDEAS

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    More about this item

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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