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Trading arrangements and industrial development

Author

Listed:
  • Puga, Diego
  • Venables, Anthony J.

Abstract

How do different trading arrangements influence the industrialization process of developing countries? Can preferential trading arrangements (PTAs) be superior to multilateral liberalization, or at least an alternative when multilateral liberalization proceeds slowly? If so, what form should the PTAs take? Are developing countries better advised to seek PTAs with industrial countries or among themselves? Traditional analysis of these issues has been based on the idea of trade creation and trade diversion. The problem with this analysis is that it starts from assuming a pattern of comparative advantage of newly industrialized countries. The experience of these countries suggests the need for an analysis in which the pattern of comparative advantage is not set in stone but is potentially flexible, and in which less developed countries can develop and converge in both income and economic structure to industrial economies. The authors outline an alternative approach for analyzing the role of trade in promoting industrial development. There are few fundamental differences between countries that generate immutable patterns of comparative advantage. Instead the pattern of trade and development in the world economy is determined mainly by history. Cumulative causation has created concentrations of industrial activity in particular locations (industrial countries) and left other areas more dependent on primary activities. Economic development can be thought of as the spread of these concentrations 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. This approach explains why firms are reluctant to move to economies that have lower wages and labor costs, and shows how trade liberalization can change the incentives to become established in developing countries. It provides a mechanism through which import liberalization can have a powerful effect in promoting industrialization. And it suggests that import liberalization may create or amplify differences between liberalizing countries with the possible political tensions this may create. While these features are consistent with the world economy, they fall short of providing convincing empirical support for the approach. Using the approach, the authors derive number of conclusions about the effects of trade liberalization. First, that unilaterally liberalizing imports of manufactures can promote development of the local manufacturing industry. The mechanism is forward linkages from imported intermediates, but this may be interpreted as part of a wider package of linkages coming from these imports. Second, the gains from liberalization through PTA membership are likely to exceed those obtained from unilateral action. South-South PTAs will be sensitive to the market size of member states, and North-South PTAs seem to offer better prospects for participating Southern economies, if not for North and excluded countries. Third, the effects of particular schemes (such as the division of benefits between Southern economies) will depend on the characteristics of the countries and cross-country differences in these characteristics.

Suggested Citation

  • Puga, Diego & Venables, Anthony J., 1997. "Trading arrangements and industrial development," Policy Research Working Paper Series 1787, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1787
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    References listed on IDEAS

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    Cited by:

    1. Hoekman, Bernard & Saggi, Kamal, 1999. "Multilateral disciplines for investment-related policies," Policy Research Working Paper Series 2138, The World Bank.
    2. Sanguinetti, Pablo & Traistaru, Iulia & Volpe Martincus, Christian, 2004. "Economic integration and location of manufacturing activities: Evidence from MERCOSUR," ZEI Working Papers B 11-2004, University of Bonn, ZEI - Center for European Integration Studies.
    3. Blaise Gnimassoun, 2018. "Regional Integration: Do intra-African trade and migration improve income in Africa?," EconomiX Working Papers 2018-9, University of Paris Nanterre, EconomiX.
    4. Volpe Martincus, Christian & Siedschlag, Iulia, 2010. "The Impact of South-South Preferential Trade Agreements on Industrial Development: An Empirical Test," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 25, pages 69-104.
    5. Henri Ngoa Tabi & Henri Atangana Ondoa, 2011. "Industrialization of the Manufacturing Sector and Trade Opening in Cameroon," Research in World Economy, Research in World Economy, Sciedu Press, vol. 2(1), pages 58-68, April.
    6. Cristobal, Adolfo, 2007. "Trade and migration: a U-shaped transition in Eastern Europe," MPRA Paper 3446, University Library of Munich, Germany.
    7. Hugues JENNEQUIN & Isabelle RABAUD, 2006. "Location of services industries in MENA countries, in EU and NMS: a comparative analysis?," LEO Working Papers / DR LEO 1161, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    8. World Bank, 2012. "From Political to Economic Awakening in the Arab World : The Path of Economic Integration - Deauville Partnership Report on Trade and Foreign Direct Investment, Volume 1. Overview Report," World Bank Other Operational Studies 11886, The World Bank.
    9. Joseph F. Francois & Douglas Nelson, 2002. "A Geometry Of Specialisation," Economic Journal, Royal Economic Society, vol. 112(481), pages 649-678, July.
    10. Volpe Martincus, Christian & Siedschlag, Iulia, 2010. "The Impact of South-South Preferential Trade Agreements on Industrial Development: An Empirical Test," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 25, pages 69-104.
    11. Corinne Bagoulla, 2006. "Localisation industrielle et spécialisation. Les rôles des infrastructures, des coûts de production et de la taille de marché dans un cadre Nord Sud," Revue économique, Presses de Sciences-Po, vol. 57(4), pages 705-726.
    12. Fugazza, Marco & Robert-Nicoud, Frédéric, 2006. "Can South-South trade Liberalisation Stimulate North-South Trade ?," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 21, pages 234-253.
    13. Xinyi Li, 2009. "Free trade agreements and vertical-specialisation in East Asia," Asia Europe Journal, Springer, vol. 7(1), pages 145-160, February.
    14. Jörg MAYER, 2004. "Industrialization In Developing Countries: Some Evidence From A New Economic Geography Perspective," UNCTAD Discussion Papers 174, United Nations Conference on Trade and Development.
    15. Blomström, Magnus & Kokko, Ari, 1997. "Regional Integration and Foreign Direct Investment," CEPR Discussion Papers 1659, C.E.P.R. Discussion Papers.
    16. Madani, Dorsati H., 2001. "South-South regional integration and industrial growth : the case of the Andean Pact," Policy Research Working Paper Series 2614, The World Bank.
    17. Ottaviano, Gianmarco I. P. & Puga, Diego, 1997. "Agglomeration in a global economy: a survey," LSE Research Online Documents on Economics 20324, London School of Economics and Political Science, LSE Library.
    18. Jaime MELO DE, 2005. "Regionalism and Developing Countries: A Primer," Working Papers 200510, CERDI.
    19. Kurt A. Hafner, 2011. "Trade Liberalization and Technology Diffusion," Review of International Economics, Wiley Blackwell, vol. 19(5), pages 963-978, November.
    20. repec:got:cegedp:31 is not listed on IDEAS
    21. Umber, Marc P. & Grote, Michael H. & Frey, Rainer, 2014. "Same as it ever was? Europe's national borders and the market for corporate control," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 109-127.
    22. Madani, Dorsati H., 2001. "Regional integration and industrial growth among developing countries - the case of three ASEAN members," Policy Research Working Paper Series 2697, The World Bank.
    23. Blaise Gnimassoun, 2018. "Regional Integration: Do intra-African trade and migration improve income in Africa?," Working Papers of BETA 2018-09, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

    More about this item

    Keywords

    Economic Theory&Research; Environmental Economics&Policies; Water and Industry; Labor Policies; Banks&Banking Reform; Economic Theory&Research; Environmental Economics&Policies; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Trade and Regional Integration; Water and Industry;

    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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