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Balanced and Unbalanced Growth

  • James E. Rauch

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.

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File URL: http://www.nber.org/papers/w4659.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4659.

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Date of creation: Feb 1994
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Publication status: published as Journal of Development Economics, Vol. 53 (June 1997): 41-66. Journal of Development Economics, Vol. 54 (December 1997): 493-518(reprinted with corrected page proofs).
Handle: RePEc:nbr:nberwo:4659
Note: ITI
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  1. Sergio T. Rebelo, 1990. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  2. Grossman, G.M. & Helpman, E., 1990. "Hysteresis In The Trade Pattern," Papers 157, Princeton, Woodrow Wilson School - Public and International Affairs.
  3. Pack, Howard & Westphal, Larry E., 1986. "Industrial strategy and technological change : Theory versus reality," Journal of Development Economics, Elsevier, vol. 22(1), pages 87-128, June.
  4. Stewart, Frances & Ghani, Ejaz, 1991. "How significant are externalities for development?," World Development, Elsevier, vol. 19(6), pages 569-594, June.
  5. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1989. "Income Distribution, Market Size, and Industrialization," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 537-64, August.
  6. James E. Rauch, 1994. "Balanced and Unbalanced Growth," NBER Working Papers 4659, National Bureau of Economic Research, Inc.
  7. Morande, Felipe G., 1992. "The dynamics of real asset prices, the real exchange rate, trade reforms and foreign capital inflows : Chile, 1976-1989," Journal of Development Economics, Elsevier, vol. 39(1), pages 111-139, July.
  8. McMillan, John & Naughton, Barry, 1992. "How to Reform a Planned Economy: Lessons from China," Oxford Review of Economic Policy, Oxford University Press, vol. 8(1), pages 130-43, Spring.
  9. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  10. Matsuyama, Kiminori, 1992. "Agricultural productivity, comparative advantage, and economic growth," Journal of Economic Theory, Elsevier, vol. 58(2), pages 317-334, December.
  11. Sebastian Edwards, 1991. "Trade Orientation, Distortions and Growth in Developing Countries," NBER Working Papers 3716, National Bureau of Economic Research, Inc.
  12. Resnick, Stephen A., 1970. "The Decline of Rural Industry Under Export Expansion: A Comparison among Burma, Philippines, and Thailand, 1870–1938," The Journal of Economic History, Cambridge University Press, vol. 30(01), pages 51-73, March.
  13. Child, Frank C & Kaneda, Hiromitsu, 1975. " Links to the Green Revolution: A Study of Small-Scale, Agriculturally Related Industry in the Pakistan Punjab," Economic Development and Cultural Change, University of Chicago Press, vol. 23(2), pages 249-75, January.
  14. Paul M. Romer, 1987. "Crazy Explanations for the Productivity Slowdown," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 163-210 National Bureau of Economic Research, Inc.
  15. Riedel, James, 1976. "A Balanced-Growth Version of the Linkage Hypothesis: A Comment," The Quarterly Journal of Economics, MIT Press, vol. 90(2), pages 319-22, May.
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