Market Led Industrialization and Globalization

Jeffrey Sachs () and Xiaokai Yang
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Jeffrey Sachs: Harvard University, Postal: Center for International Development, Harvard University, 79 J.F. Kennedy Street, Cambridge, MA 02138, USA

Journal of Economic Integration, 2002, vol. 17, 223-242

Abstract:

The paper introduces asymmetric production conditions between firms and asymmetric transaction conditions between countries into the Murphy-Shleifer- Vishny model of industrialization. It explores a general equilibrium mechanism that generates circular causation loop that each firm’s profitability and its decision of involvement in a network of industrial linkages is determined by the size of the network, while the network size is in turn determined by all firms' decisions of participation. It shows that the very function of the market is to network relevant self-interested decision-makers and to utilize the network effects of industrialization, though this function is not perfect. Hence, market led industrialization will gradually spread until the whole world economy is integrated in a single network of trade and industrial linkages as trading efficiency is improved. This paper devises a new approach to specifying zero profit condition for a marginal modern firm, while keeping original feedback loop between positive profit and the extent of the market of the MSV model. Hence, this new method and the trade off between economies of scale and transaction costs can be used to endogenize the number of modern sectors, thereby increasing applicability of this type of models.

Keywords: income distribution; division of labor; dual structure; economic development; trade pattern; economies of scale; network effect of industrial linkage (search for similar items in EconPapers)
JEL-codes: D30 F10 O10 (search for similar items in EconPapers)
Date: 2002
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Chapter: MARKET LED INDUSTRIALIZATION AND GLOBALIZATION (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0192

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