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Balanced and Unbalanced Growth

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  • James E. Rauch

Abstract

A mechanism of endogenous growth suitable for investigation of sectoral or regional interaction is developed. It is shown how the high value placed on production linkages by economic historians might be reconciled with the high value placed on openness (often implying lack of linkages) by observers of contemporary less developed countries. When the output of one sector is traded and the output of the other is nontraded, it is shown how the traded goods sector acts as the 'engine of growth' in the sense that its profitability of knowledge acquisition primarily determines the steady state aggregate growth rate. It is also shown how sectors or regions interact out of steady state through product, labor, and capital markets, and in particular how if the former interaction dominates the growth of one sector 'pulls along' the growth of the other while if the latter two interactions dominate one sector or region booms while the other declines. The paper builds on these results to show why liberalization of foreign trade should lead to a transition from a lower to a higher steady state growth rate and why, during the course of this transition, growth might initially be even slower than before liberalization. On this basis a reinterpretation of the post-1973 economic performance of Chile is offered. A final application to economic integration of previously separate regions or countries shows that the largest growth effects are to be had if one region is allowed to decline and provide a source of cheap labor for the other region.

Suggested Citation

  • James E. Rauch, 1994. "Balanced and Unbalanced Growth," NBER Working Papers 4659, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4659
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    Cited by:

    1. Hilde C. Bjørnland & Leif Anders Thorsrud & Ragnar Torvik, 2018. "Dutch disease dynamics reconsidered," Working Paper 2018/1, Norges Bank.
    2. Jensen, Martin Kaae, 2012. "Global stability and the “turnpike” in optimal unbounded growth models," Journal of Economic Theory, Elsevier, vol. 147(2), pages 802-832.
    3. Diao, Xinshen & Rattsø, Jørn & Stokke, Hildegunn Ekroll, 2002. "International spillovers, productivity growth and openness in Thailand," TMD discussion papers 89, International Food Policy Research Institute (IFPRI).
    4. Jørn Rattsø & Hildegunn Ekroll Stokke, 2003. "Learning and Foreign Technology Spillover in Thailand: Empirical Evidence on Productivity Dynamics," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 29, pages 47-66.
    5. Rauch, James E., 1997. "Balanced and unbalanced growth," Journal of Development Economics, Elsevier, vol. 53(1), pages 41-66, June.
    6. Klaus Schmidt-Hebbel, 2006. "Chile's Economic Growth," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 43(127), pages 5-48.
    7. Valerie A. Ramey & Matthew D. Shapiro, 1998. "Displaced Capital," NBER Working Papers 6775, National Bureau of Economic Research, Inc.
    8. Easterly, William, 2001. "The effect of International Monetary Fund and World Bank programs on poverty," Policy Research Working Paper Series 2517, The World Bank.
    9. Easterly, William, 2001. "The Effect of IMF and World Bank Programmes on Poverty," WIDER Working Paper Series 102, World Institute for Development Economic Research (UNU-WIDER).
    10. Diao, Xinshen & Rattso, Jorn & Stokke, Hildegunn Ekroll, 2005. "International spillovers, productivity growth and openness in Thailand: an intertemporal general equilibrium analysis," Journal of Development Economics, Elsevier, vol. 76(2), pages 429-450, April.
    11. Faini, Riccardo, 1996. "Increasing returns, migrations and convergence," Journal of Development Economics, Elsevier, vol. 49(1), pages 121-136, April.
    12. Torvik, Ragnar, 2001. "Learning by doing and the Dutch disease," European Economic Review, Elsevier, vol. 45(2), pages 285-306, February.
    13. Rauch, James E., 1997. "Erratum to "Balanced and unbalanced growth" [Journal of Development Economics 53(1997) 41-66]," Journal of Development Economics, Elsevier, vol. 54(2), pages 493-518, December.

    More about this item

    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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