Trade Policy and the Third World Metropolis
Raul Livas Elizondo and
Paul Krugman ()
No 4238, NBER Working Papers from National Bureau of Economic Research, Inc
Many of the world's largest cities are now in developing countries. We develop a simple theoretical model, inspired by the case of Mexico, that explains the existence of such giant cities as a consequence of the strong forward and backward linkages that arise when manufacturing tries to serve a small domestic market. The model implies that these linkages are much weaker when the economy is open to international trade -- in other words, the giant Third World metropolis is an unintended by-product of import-substitution policies, and will tend to shrink as developing countries liberalize.
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Published as Journal of Development Economics, Vol. 49, no. 1 (April 1996): 137-150.
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