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Marshallian externality, industrial upgrading, and industrial policies

Author

Listed:
  • Ju, Jiandong
  • Lin, Justin Yifu
  • Wang, Yong

Abstract

A growth model with multiple industries is developed to study how industries evolve as capital accumulates endogenously when each industry exhibits Marshallian externality (increasing returns to scale) and to explain why industrial policies sometimes succeed but sometimes fail. The authors show that, in the long run, the laissez-faire market equilibrium is Pareto optimal when the time discount rate is sufficiently small or sufficiently large. When the time discount rate is moderate, there exist multiple dynamic market equilibria with diverse patterns of industrial development. To achieve Pareto efficiency, it would require the government to identify the industry target consistent with the comparative advantage and to coordinate in a timely manner, possibly for multiple times. However, industrial policies may make people worse off than in the market equilibrium if the government picks an industry that deviates from the comparative advantage of the economy.

Suggested Citation

  • Ju, Jiandong & Lin, Justin Yifu & Wang, Yong, 2011. "Marshallian externality, industrial upgrading, and industrial policies," Policy Research Working Paper Series 5796, The World Bank.
  • Handle: RePEc:wbk:wbrwps:5796
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    References listed on IDEAS

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    5. Howard Pack & Kamal Saggi, 2006. "Is There a Case for Industrial Policy? A Critical Survey," World Bank Research Observer, World Bank Group, vol. 21(2), pages 267-297.
    6. Harrison, Ann E. & Rodriguez-Clare, Andres, 2009. "Trade, Foreign Investment, and Industrial Policy," MPRA Paper 15561, University Library of Munich, Germany.
    7. Ju, Jiandong & Lin, Justin Yifu & Wang, Yong, 2015. "Endowment structures, industrial dynamics, and economic growth," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 244-263.
    8. Andrew Mold, 2003. "Kicking away the ladder: development strategy in historical perspective by HA-JOON CHANG. (London: Anthem Press, 2002, pp. 187)," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(5), pages 668-670.
    9. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1989. "Industrialization and the Big Push," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1003-1026, October.
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    12. Panagariya, Arvind, 1986. "Increasing returns, dynamic stability, and international trade," Journal of International Economics, Elsevier, vol. 20(1-2), pages 43-63, February.
    13. Krugman, Paul, 1987. "The narrow moving band, the Dutch disease, and the competitive consequences of Mrs. Thatcher : Notes on trade in the presence of dynamic scale economies," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 41-55, October.
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    Cited by:

    1. Xi Li & Xuewen Liu & Yong Wang, 2015. "A Model of China's State Capitalism," HKUST IEMS Working Paper Series 2015-12, HKUST Institute for Emerging Market Studies, revised Feb 2015.

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    Keywords

    Water and Industry; Economic Theory&Research; Industrial Management; Industrial Economics; Common Property Resource Development;

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