* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download NBER WORKING PAPER SERIES WHY ARE THERE RICH AND POOR COUNTRIES?: SYMMETRY-BREAKING
Survey
Document related concepts
Transition economy wikipedia , lookup
Economic planning wikipedia , lookup
Steady-state economy wikipedia , lookup
Production for use wikipedia , lookup
Economics of fascism wikipedia , lookup
Balance of trade wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Rostow's stages of growth wikipedia , lookup
Economy of Italy under fascism wikipedia , lookup
Post–World War II economic expansion wikipedia , lookup
Circular economy wikipedia , lookup
Transcript
NBER WORKING PAPER SERIES WHY ARE THERE RICH AND POOR COUNTRIES?: SYMMETRY-BREAKING IN THE WORLD ECONOMY Kiminori Matsuyama NBER Working Paper 5697 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 August 1996 The first draft of this paper was prepared for the TCER-NBER-CEPR Trilateral Conference, “Economics of Agglomeration,” Tokyo, Japan, January 11 and 12, 1996. This paper is part of NBER’s research program in International Trade and Investment. Any opinions expressed are those of the author and not those of the National Bureau of Economic Research. O 1996 by Kiminori Matsuyama. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including O notice, is given to the source. NBER Working Paper 5697 August 1996 WHY ARE THERE RICH AND POOR COUNTRIES?: SYMMETRY-BREAKING IN THE WORLD ECONOMY ABSTRACT To explain coordination cross-country differences in economic performance, the economics of failures typically portrays each country in a closed economy model with multiple equilibria and then argues that the poor countries are in an equilibrium inferior to those achieved by the rich. This approach cannot tell us anything about the degree of inequality in the world economy. A more satisfactory approach would be to build a world economy model and show why it has to be separated into the rich and the poor regions, i.e., to demonstrate the co-existence of the rich and poor as an inevitable aspect of the world trading system, In the present model, the symmetry-breaking of the world economy into the rich and the poor occurs because international trade causes agglomeration of different economic activities in different regions of the world. International trade thus creates a kind of “pecking order” among nations, and as in a game of “musical chairs,” some countries must be excluded from being rich. Kiminori Matsuyama Department of Economics Northwestern University 2003 Sheridan Road Evanston, IL 60208 and NBER [email protected] .nwu.edu 1. Introduction. One major the diversity challenge for the theory of economic performances There Rich and Poor Countries?” across by developing that the Rich countries somehow managed in a Pareto-inferior Murphy, closed Shleifer, and Vishny economies with aggregate of a good equilibrium difficult to see within bad state, coordination in Indeed, all the economy could while the models go back offers no compelling cross-country in order imitate to One (1996) . role they they is no more developed are and forth between in the development countries, and people and are trapped along have While the static, good than and we the insightful, state, in co- it is taken bad paper to observe in the state. literally, Their need in the Poor countries since the said, “according all competitive have to be trapped and continue problem, this line is demonstrated the two equilibria. (As one commentator equilibrium, of imperfectly difficult reason why we have observed eliminate work why some countries themselves and arguing the hence the huge to their theory, to do is simply are just too dumb to do it.”) can partially For example, multiple state differences. the Rich to be able good influential spillovers, find attempts equilibria, and a bad equilibrium. others failures coordination In the context their framework “why Are a Pareto-superior a necessary The most (1989) . existence the to achieve is to explain In short, of coordination a model of multiple fail to achieve equilibrium. development the countries. The economics to answer this question while the Poor countries of economic in a series steady states: In these models, in determining deal with of papers, Matsuyama I studied by making dynamic models (1991, 1992) ; see also the initial the eventual criticism this condition state toward 1 dynamic. of development Ciccone of the economy which the model with and Matsuyama plays an important the economy will gravitate (without entirely Offsfl, i.e., ruling some out the possibility comtries may occasionally join the club of the Rich countries) . why the cross-country to magnify over observations explicitly differences time, of and, at IIeconomic model a mechanism and hence come short of “economic escape These dynamic miracles, ” or “take- from the poverty models thus help to explain could be self-perpetuating the same time, they are and sometimes consistent miracles. “ Nevertheless, of generating the initial cross-country of offering an answer trap and these to the question, with studies tend a few do not differences, “Why Are There Rich and Poor Countries?” In all these independent, isolated possibility studies in a close paper the are in different a model of international trading with of the world living trade. and According in Instead equilibria, where The models income the lessons of portraying and arguing studies many to this model, appear camot as a that have the different done, this identical differences stable the co-existence from each country (inherently) It is an inevitable is not just the possibility. the economy. It is shown that cross-country the merely an “Why Are There Rich and as the previous economy, economy, suggest in the world although here. multiple equilibria, closed equilibria this question, perspective, trade with one another. standard countries model a and Poor countries. to answer global modelled of inequality are also incorporated economy offers countries a is multiple of Rich the degree from country Hence, is an attempt Countries?” countries entity. about This paper previous each of the co-existence tell us anything Poor studies, outcome in of of Rich and Poor aspect of the world system. The model concreteness . developed below adopts many specific Nevertheless, the logic behind 2 assumptions the result for the sake of is fairly general and can be understood to be Furthermore, consumed. production countries, each country cross-country such a agglomeration advantage countries, which of labor. The stable breaking” in those From countries to different longer become of caused international to take charge of producing agglomeration among economies. nations. an economies, individual into some division of “symmetryAnd trade. while advantage in country, the of comparative comparative in the previous to reach some advantage other countries, goods with of labor requires tradeable trade countries 3 perspective, goods, thus small can be Rich: some Poor They fail equilibrium thus offers different a kind and seem just however, with differing creates of studies. The problems equilibrium. division problems a Pareto-superior The global different all presence Poor. International Not the as a result to acquire comparative failures. The international in trade an equilibrium, of a system of the international by across and there is no acquiring appears in a Pareto-inferior view. remains difference coordination of coordination difference the these of international stable start in trade, of each good concentrates agglomeration acquire be countries the production large perspective a necessary find themselves order” no may look just like those captured to achieve different under autarky if they are lucky enough economies, the can economy, with happen agglomeration a matter world associated which goods, any imate the possibility that need economies of international Without allocation allocation As agglomeration these goods by the same amount, cross-country Rich some In the absence leads to an emergence the become are Now introduce economies. in different countries produces The equilibrium symmetric that there are a list of goods in each country. difference. in these goods. in goods there of each of these goods. goods must all be produced but Imagine intuitively. a countries degrees of countries of “pecking must be excluded from being the time, countries Rich. model does might This feature Although viewed neoclassical that world, the a theory adequately of deal economists, the as Baran such (1950) , who believe between the separation two approaches of the world recommendations The geography an element thus to by Krugman makes belt held this and into the by which of by first two in and is that this the hinterland. cannot or “radical” notably Prebisch paper through explains economy. formal work of In this The policy manner.1 on economic in transport identical a “symmetry- validity recent a reduction the otherwise the of the huge differences in a more the of approach most the Poor address assuming regions view of the world to The and then examining This and adopted spirit agricultural the is a cause economists shows problem can also trade. “structuralist” (1957), the Rich to separate the effects this paper endowment, many trade it possible in all) and becoming North-South regions. of the radical paper (1991), on across two Myrdal by the radical a symmetry-breaking manufacturing the approach economy offered closest The (but not failures, problem, or in the factor (1957), regions. framework differences concerns At the same economy. the North-South between some to talk about literature that international breaking, ” capturing present the fundamental with it possible chairs. “ that coordination by the development to trade possibility the makes say in labor productivity consequences causes motivated some the in the world contribution exist out in overcoming miracle” trade there rule of the model mainly as just like in a game of “musical not succeed such an “economic be Rich, regions costs into the literature, the ‘Matsuyama (1995) discusses more broadly how the notions of “symmetrybreaking, ” and “pattern formations, ” borrowed from recent development in nonlinear sciences, can be useful in thinking about a variety of economic issues, which camot be addressed appropriately within the neoclassical paradigm. 4 factor mobility contrary, plays the factor mobility in the context paper, and article 721) . an important of its this paper discussing blocks to establish section look the at the implications 2. The world Each country economy There 2 are tradeable, Manufacturing, preferences the share denoting while and over E = in In which goods, 3 is nontradeable. The i in consumer’s the aggregate income (1995, pp.720- of the world economy. so that I refrain of this section from is rather of the model. autarky. section of 5, In In section 4, I I some discuss can expenditure, by Y, the budget small countries. is the only primary 1, 2, and 3. representative which identical Good factor 1 and Good (Think of them as Agriculture, consumer be represented P:’ P:’ P:’ U , where U is utility, of Good survey Economy. of labor, are three consumption goods, recent and its extension. features under of a continuum with L units three in my in this 6 concludes. of the World Services.) the The purpose equilibrium. consists Good standard, the key is more relevant Matsuyama structure allocation Section Structure is endowed of production. function, economy of the model. The Physical fairly and highlight the equilibrium world processes; To the of the model sketched as its elaboration issues in detail. notations, 3, I discuss are which version been I lay out the physical of the model specification has and cumulative can be viewed In the next section, The building A simpler trade. implications, on complementarities Hence, the agglomeration. plays no role in this paper, of international a few role in generating Pi the price has by Cobb-Douglas an expenditure of good i, and Di satisfying PI + P2 + B3 = 1- constraint is then written BY as Y The assumption algebra simple, i.e., there prices . This somewhere in the world. means that preferences This not only helps to keep the that both Good I and Good 2 (as well as Good 3) are positive the (1) P:’ P:’ P:’ u of the Cobb-Douglas but also implies are “essential, “ = two demand tradeable feature plays for these goods goods must an important at any finite always role be produced in the following analysis. The returns three consumption to scale technologies. labor and a variety by a symmetric All CES production of intermediate cri being the share goods are of produced the inputs of differentiated composite consumption goods function, The [J‘[p(z) o and Stiglitz. unit elasticity Without more the price of substitution that a different degree; p(z) Sector much sector i spends between relies ai loss of generality, intensively than Sector Sector and they are are aggregated Labor and the technology production in with each (2) intermediates available z, and u > 1 the direct pair of constant ll-”dz+ 1 of intermediates. on the intermediate fraction with as of variety every of cost where W is the wage rate, N the range of differentiated in the marketplace, which with a Cobb-Douglas can thus be expressed W1-=J inputs, as in Dixit intermediates. cl = are nontradeable, intermediate inputs are combined sector competitively, their input revenue 2 is assumed sector on the partial It is assumed to a different intermediates. to use intermediate inputs 1; al If Goods 1 and 2 are interpreted (3) <a2. as Agriculture 6 and Manufacturing, this intensity assumption implies more heavily ensuing that the production upon the local support analysis depends that the tradeable local support goods Each variety labor to produce of its sectors inputs differ depends to say, nothing What in the degree power, is critical to which in the here is they rely on the monopolistically the the competitive given by economy, but so that with other Hence, (2), is simplified + F units market firm power does not rule for By choice of units, the unit of Each firm, aware As is well-known, pricing firm, p(z) [1-I/u] = aW. . p . W. its each firms. simple competitive uses ax(z) the fixed cost. optimally, following set a = 1 - 1/0, so as to have p(z) in each sector, price interaction to fi.Km, which by a single to the aggregate leads by the monopolistically where F represents sets any strategic specification are supplied is supplied relative into account Needless on such an interpretation. x(z) units, monopoly negligible industries. sector industries. The intermediate firms . cost of the manufacturing is Lake this each one can cost of production to (4) Hence, but in all the consumption the intensity than Sector Since production assumption goods sector, implies the production cost declines that the cost declines faster with N, in Sector 2 1. all the inputs functions, x(z) = x, and earns are priced all the input producing the same revenue a firm by S = px = Wx, equally and firms enter operate and the profit, its wage bill B and its profit B = W(ax+F) = [1 l-~ S+WF, symmetrically in the at the same scale, By denoting the revenue 11 are expressed of as (5) and (6) n=s-B=~-wF. respectively. Finally, there is no barrier to entry or to exit in the intermediate sector, which make all the input producing 3. The Autarkv Although consisting of equilibrium benchmark consumed produce the ultimate goal of the analysis a continuum of of small each for the subsequent costs: that the goods, is, from representative 100ai% of its revenue sector economies, in let autarky, preferences, Hence, us the world economy, first which look offers a at the useful all the consumption in the absence which means Ci = > WN1-” goods must be of trade, each economy that their prices must must be equal (4), PI Since is to examine analysis. amount. all the consumption open economy of the Cobb-Douglas by a positive to their in equilibrium. Equilibrium. allocation Because firms earn zero profit inputs = consumer spends on intermediate ~iY on inputs, (7) . the Good i, total and Sector revenue i spends of the inputs is (8) where @ represents the share of the = al~l +c2P2 intermediates 8 + a3P3 sector (9) , in the aggregate income in (Here, superscript autarky. interpreted extent as the degree A stands of to which an increase to the monopolistically Likewise, the aggregate i spends inputs This parameter demand in the aggregate competitive Sector for Autarky.) externality, income generates can also be measuring additional the revenue sector. 100(l-ai)% of its revenue on labor, wage income satisfies, WL where 3 ~(l-al)~~ [ 1 = NB+ use has been made of ]Y (5) and =~[(l-:)s+wF]+[ (9) . Combining + [1 Y= z (lo) l-oA]Y. (8) and (10) yields (11) [L-NF] and —=s aw The downward-sloping revenue firms, of an N. revenue; demand range the see eq. Figure implies inputs, 1 thus intersection, intermediate This merely model, inputs the profit a small 11 = O, or S/aW (and the nutier = F. each given size per declines an excess process Hence, from lead (12), them) that hence, profit, would with of its of the aggregate hence firm, how the on the number firm and of firms producing 9 (12) , showing the degree firms, N implies entry-exit eq. S, depends of of more the market and any plausible where firm, is to say that, reduces that 1 depicts producing O*, the presence suggests a loss, in Figure input present (6) . externality, of curve intermediate In (12) is of a wide the profit. and a large N to the unique the variety of (13) in this autarky equilibrium equilibrium. values (Here, superscript of endogenous = (Pi)’ and, by inserting derived (14) and The World Economy = look at the equilibrium trade from (7) and the autarky (11), (14 , (15 = wAg+ [1 (15) into (l), the utility level in autarky can be of the international Then, world = (16) 6’L ~ L — [1OF Equilibria. allocations exogenously.2 equilibrium P;p’ P;pa P;p’ WAL Tradinq Let us now introduce of W’L represents as U* 4. Then, variables.) YA A also in economy, trade. In the first subsection, of each small open country, the second where stisection, the terms the relative price of taking I will trade are I will the terms look at the determined endogenously. 4-A. The Small For each ODen small pl/p2, is exogenously economy produces similar open given From Rodrzguez-clare models economy in the world market. Good 1 or Good 2 now depends in the two sectors, 2see Economy. of a small Unlike and 10 1 and Good in autarky, 2, q = whether on the ratio of the production (4), it can be expressed (1993, 1996) open economy. of Good Rodrik the cost as (1996) for the analysis of ~2 which increases that an with economy with (Agriculture), which and an economy with input intensive determined N, due a to the intensity small N has uses the locally a large Good 2 a assumption, comparative available (Manufacturing) by the equality, The . advantage intermediates N has a comparative advantage threshold This (3) . is to say in Good 1 less intensively, in the level intermediate of N, N(q), is q = C1/C2: a-1 N(q) If N < N(q), then the economy Good 1 and Good 3. takes the form, = the output of sector consumption 1 by Ql, the income goods, identify Y = PIQI + fi3Y , or PIQI = The total . only two of the three produces By denoting q“-” revenue of the inputs Ns = (17) (1-133)Y. sector thus can be written a1P1Q1+a3~3Y = as (18) 61Y, where el represents the (Superscript specializes WL Solving 1 degree indicates in Good = NB+ (18) and of 1.) the = a1(~1+P2) aggregate that, of Likewise, (l-al) PIQ1+ (2o) simultaneously demand the two the wage (1-a3)P3Y externality tradeable income when goods, can be written N the < N(q) . economy as ‘N[(l-+)s+ wFl+(l-e’)y” ’20) yields 11 (19) +a3P3, Y= — [10:6’ T (21) [L-NF] and (22) A similar analysis can show that, Y= if N > N(q), * [1 T we have (23) [L-NF] and (24) where ez s (Superscript specializes 2 in Good In Figure the number eq. indicates relative defined implies in (9), curve depicts and there two tradeable goods, of the that two revenue the (19 , and how the revenue Equation the economy three (25 # must of a firm depends (22) applies is a jump at N = N(q) . (12), is also depicted locations (3), which the in the open economy. (24) if N > N(q), case, of (25) +a3p3r 2.) 2, the solid of firms the autarky that, az(~l+pz) if N c N(q), The revenue in the figure, by the dotted curves aggregate satisfy reflect demand the intensity externality the following function curve. on and in The assumption parameters, inequalities: (26) Unlike no longer in the autarky declines case, monotonically the revenue with of a firm, the number 12 and hence of firms. This its profit, is because an entry of firms, shift in comparative intermediate it pushes the economy which advantage, over increases the threshold level, the aggregate causes demand for a the inputs. Figure trade, when 2 is also drawn under the additional condition that the terms of q = pl/pz, satisfies or equivalently, 61 L (27) [– OF (As will be equilibrium, seen once later, the terms As the figure equal to zero; knife-edge cost case, where the firms slightly greater of trade there two make above three in equilibria, N = N2. Of these of firms is such tradeable is slightly losses the and there threshold, use of the intermediate exit process, below the world sectors in which that, entry this equilibrium if N is slightly and hence is an the inducement economy inputs, that N = N(q) the economy’s coincides with level, to exit. specializes perturbation in any plausible smaller an incentive than the to enter, 13 the is is a relative terms of N(q) , the economy inputs, and If the economy in Good 2, which and the firms make profits, would not be observed. stable economy the profit equilibria, the threshold Thus , with a slight N . N1 and N = N2, are both excess hold in Good 1, which makes less use of the local intermediate firms to enter. sense must is endogenized.) are the number in the If the economy specializes more shows, condition N = Nl, N = N(q), of production trade. this which and any plausible is makes induce entry- The other two equilibria, entry-exit equilibrium process value, and if N is slightly in the there larger is an than the equilibrium value, (27) , there condition The present country there is a loss and hence an incentive are two stable model drastically out equilibria thus predicts change worth pointing that price of the two tradeable under autarky from this change goods. can be expressed autarky is not Under the of this economy.3 that the equilibrium the to exit. to the caused open allocations economy by a change To see this, note of each case. It is in the relative that the relative price is as (28) from (7) and economy (13). case, Hence, the (27), can be rewritten 61 a2-m, Note that the lower bound Therefore, even without In what equilibrium values (Stiscripts, note that wage i must be equal price superscript produces open (29) “ the upper bound i = 1, hand, 2, is used depending continue to indicate From (7), this than in each country goods. to distinguish on whether i when N = Ni, so that to its price. is greater change of the tradeable variables, Good in the 02 ~ [1F trade can cause the drastic of endogenous the economy < is less than one, while on the other equilibria to (P1/P2)’ the relative follows, N2 . of Good < international affecting for multiple P1/P2 — a-l [1F one. condition N . Nl or N . the goods.) First, the production condition the pins down cost the rate, 30ne can also show that, if N(q) s Nl, then N = N2 is the Uniwe stable equilibrium and if N(q) z N2, then N = N1 is the unique stable equilibrium. 14 8iL& wi’Pi — [1OF WiL = PiL— (30) , Hence, Yi = fliL& [1OF (31) and (P3)~ = By inserting consumer these expressions w~N~& into = Pi g [ (32) ‘~:~’ l– (1) , the utility of the representative is, (33) for N = Nl and (34) for N = N2, where use has been made of terms of depends increase change on the affects equilibrium. The World the economy of the If N = Nl, the the welfare, exports Good (28). open that a change economy, economy while Note exports it reduces but its Good in the direction 1, hence the welfare an if N = 2. Economv. we are now ready at the world economy possible welfare in q . P1/P2 improves N2 , that is, when 4-B. the (16) and equilibrium to endogenize as a whole. allocations the terms of trade, As shown in the previous for each 15 country: q = P1/P2, and to look section, there are two N = Nl or N = N2. Let f be the fraction For these of the economies, countries, the relative c1 C2 (Recall that countries along then those as shown q+ been axis, first these conditions Cobb-Douglas the world ~ in eq. to (27) .) those in the second can be depicted preferences, By arranging the equilibrium, and by the step function, the relative For the economies (1-133)Yf Pi = of Goods demand for Good 1 with N . Ni, the output = (1-p,)g+ [1 good is zero. 1 and 2 are elL*(l.f) (Ql)w = (1-133)L= r [1 and (Q2)W = respectively. is =9’. (17)), while the output of the other tradeable output goods by (Qi)i (see eq. the two tradeable it is equal defined and Good 2 are D1/D2 = (~1/62)/(P1/p2) . i is given equilibrium. 3. From the assumed of Good EL equilibrium, the horizontal in Figure . [1 aF q- have in the first, in the second cost of producing (~z)~ at the first and find themselves a2-al 2 . (-) For the countries which Hence, the terms (1-~3)Lm of trade 16 02Lsf , [1 must satisfy Therefore, PI ~= which is depicted 131D2 —— in Figure At the intersection is smaller economies, than hence the relative in Good 1. . M,&] ~, D, its 3 as an upward-sloping of the two curves, relative production these economies production .(,, . , l-f elL& OF [–1 the relative cost specialize curve. for price the f* in Good 2, while fraction (f*, q’), thus depicts 1, q*, of q* is greater cost in the rest of the world economy, The intersection, of Good which the than specializes an equilibrium of the world economy.4 It is easy to see that the equilibrium tiy point on the upward with the sloping equilibrium equilibria, with of the world curve @(f) between conditions. the associated Hence, range this = f- < model of equilibrium f< f+ is not unique. f- c f c f+ is also consistent > [el/e210-l ~ I. + [ellezlo-1 economy admits a coritinuum of values > 161/e21”-l , > + [ellealc-1 . I and which is exactly Figure 2 the portrays condition the (27) , imposed situation faced by when each drawing economy Figure in a 2. world Hence, economy equilibrium. 4A similar geometrical (1996) in his model representation of a world economy of the equilibrium with 17 a continuum is used in yanagawa of countries. 5. Discussions Despite conditions is rich 5-A. . a plethora in its implications, Cross-Country this model, countries implication (at least First, (27), Thus , those advantage a theory of endogenous about economies w co-exist cross-country which of the aggregate an endogenous also section. purpose across economy) of building the countries, must some be in the first variations end demand up in the world show true when in their economy. two Therefore, it specializing 18 and in at Good 2 thereby in Good 1. economy looking standard of living. From that externality, of the world across the countries; comparisons. than those specializing separation is the main differences of the world (34) , one can easily standard-of-living, This indeed let us look at the differences (33), and in this that the model (at least f- fraction) must be in the second equilibrium. of economies to talk any innate 1 - f+ fraction The model thus offers sense allocations will be discussed of the model, without and others types which on possible Comparisons. is that, equilibrium different indexed by f ~ [f-, f+] , the equilibrium impose such strong restrictions One major makes of equilibrium, Hence, into “Rich” and the factor take achieve the greater the higher the model predicts “Poor” countries. price and income .5 From differences incomes across (27) and the two parts One of the classical Cheaper in Samuelson the postulated difference present across Good Poor (1964), (1988) , have differences across problems Kravis and this the countries, 3, interpreted Many issue, the the countries but they Rich and 5-B. The Welfare The others are cheaper mere E2-m, —a-l From ~ Balassa (1984), all started from regions. of price (27) and and Panagariya some exogenously Although economy levels (1964) , no equilibrium and the income difference innate in the level of the price of (32), al-a, (P3)1 sector is “Why Are Services including the world e’ (P3)2 5 the Service —0-1 [1F is the most labor intensive, then the in the Poor countries. Effects fact economics Bhagwati Poor wages and by at the cross-country [1F Services (1983), is assumed, as Services. e’ for the relative studies, the correlation by looking Thus , if al > a>, i.e., is given of development Lipsey across can explain (31) , the range of the world Countries?” addressed model (30), or that of Trade. international does not necessarily answer this, we must compare imply trade made that trade made the utility some countries them poorer levels before poorer than before. and after the trade. than To From 5Although the factor mobility plays no role in creating the cross-country differences in this model, introducing a mobile factor might be an interesting extension of the model. For example, suppose that there are two factors, immobile labor L, and mobile capital K, which jointly forms a “generalized factor, ” Z = F(K,L). If the restriction of capital mobility is imposed, then the present model can be directly applied by reinterpreted by replacing L by Z. Then, if we allow capital to mover then capital flows from the Poor to the Rich, which offers an answer to the question posed by Lucas (1990) . And the resulting capital outflow magnifies the wage difference across the two regions. 19 (29), (33), and (34), and Thus , the Rich countries countries, the lower unambiguously bound are the Poor offsetting benefits of parameter may have gains the to the autarky: 5-c. from of Recall Poor be clear Regardless whether that countries, Poor 2 captures in the bad is because Poor captured by than one, have the lost change condition in their there favor, in some its for the relative at the same level with the autarky, countries in their of a Poor country trapped the that (33) . it is certainly Figure This Stratecfies: An Individual the it is possible (but not a sufficient) to the good one and to become the government despite externality, price remains of Development equilibrium trade.G is that the terms of trade move The Effects trade, from specialization, if the relative c 1, as should international what benefitted demand For the Poor the upper bound may be greater from 6A to .91. One necessary Poor to gain from trade ul/u* However, also from aggregate from trade. on U1/UA is less than one, hence they may have lost from trade. so that have benefitted have interest Rich. Country gained to switch The natural can do to facilitate the situation equilibrium, faced suffer Perspective . or lost from question from the bad to ask is such a transition. by each from the country. The coordination ‘For example, if al = 0.2, CYz= 0.8, IY3= 0.1, 61 = 0.6, Dz = 0.2, and p3 = 02 . 0.66, and 6A = 0.3, and the upper bound is 0.2, then 81 = 0.18, (1.04544)0”06/(0-1) . 20 failures. Among a list of prescriptions coordination to direct the least failure, a coordinated in reaching context policy equilibrium (Indeed, and equilibrium. Matsui announcement For threshold Hence, with a more to intervention the bad equilibrium. economy of East policy to move interventionist the lower N(q) entry of Asian miracles measure, the better on Good level the can to that N(q) when of such between the be applied In the here. such this may work. base, of an Nl and Sector 1 or which makes extreme, K Nl, which (Rodrik a bad game cotiine 2, taxing along industrial in the the gap between firms. autarky equilibrium argued, in this model, can explained sufficient succeeding in an abstract is then N = N2. a temporary a gap want to narrow tariff the threshold the logic also policy import on argument the to such an extent generates toward same may The only equilibrium As a more direct autarky government a coordinated can reduce The thereby I have through guideline the effectiveness things, (1995) discuss imposing create that the secret level. the 2 could Sector other (1992), that firms, of a government their expectations, model, of the is for the government input producing In Matsuyama among and Matsuyama example, subsidizing it easier depends, the coordination.) the to coordinate in the economics approach The announcement “ of the Murphy-Shleifer-Vishny announcement N(q) . interventionist plaming. sector a better offered entry of the intermediate some sorts of “indicative may help the private commonly the eliminate (1996) argues line.) If NA > N(q), then which the government helps the removes the trade barriera. 5-D. The Effects of Development In 5-C, I have discussed take in order to facilitate Strategies: a few policy successful A Global options development, 21 Perspective. the government might from the perspective want to of an individual These country. work for some countries. it is useful succeed, an “economic Although for thinking the argument, that helped Rich As a result, remain Poor. countries. viewpoint Hence, move Furthermore, terms of trade, development, discussed The bigger Poor. N(q), industry of early hand, successful from effects can of such succeeded they remove As more countries manage all the to join the curve in Figure their the terms of trade developments viewpoint, are of not deteriorates some their chance effectiveness implies while countries, Pareto-improving from the of the government a the an increase may no economy removes the trade in some countries, 22 level of As to direct a to eliminate lead to NA K N(q) , so generate barriers. and more generally the Poor agricultural that Nl and N(q) grows. is required longer in their smaller. announcement in q could autarky may help the threshold development intervention on the in q, provided as the gap between temporary industrialization industrializers, from an increase of a successful that a bigger miracle” As an improvement in q, by raising firms harder Furthermore, to the blessing. benefit an increase the private when for the economy. makes gap also base, successful countries that, once some countries along the upward-sloping Poor may be a mixed the among return Rich. f increases However, the bad equilibrium. the spillover to the good equilibrium, the Poor countries above, coordination about which the terms of trade effect of such an “economic who remain they remain the possible I will assume On the other of the world countries is silent rich, but may q goes up and the terms of trade move in favor of the countries, Pareto-improving that about them become club of the Rich countries, which make all the countries the model from the bad equilibrium interventions 3. cannot miracle. ” To simplify in moving policies producers a sufficient In summary, a the presence by causing a favorable terms of trade change, extreme the case, industrializing, Rich (without Hence, radical poor impoverishing the present at the expense severed among believe that that that choose it would Models explaining also separate Those the view of The model only finished countries to become world system could ill-fated applies enough by common equally Some of them only market if they union agreements to any subgroup of So, of and isolates remain many the South their own economic themselves. to keeps develop into the Rich and the Poor unlucky held in the North. and formed among the trading countries some economy world countries.) the world North, In if a group from the rest of countries Poor may through hence be to drop out of the union.’ Remarks. with multiple the diversity. the variations variations Rich the Southern to trade for them to follow. for the remaining forms their own trade union and choose Concluding the industrializers in the sixties.) symmetry-breaking. explain captures the earlier Poor countries disappointed 6. of model it harder of the currently (This was the idea behind countries the world, a fraction the link with the established them. e~ally who in the past in Latin American the f+ it is no longer possible economists, even argued after and yet makes equilibria In a model of per capita in other variables, are with the unique most natural equilibrium, income across regions framework any attempt for to forces us to introduce such as saving rates and education, as is commonly 71n the present model, whether the Poorer countries in the union want to drop out of the Lion depends solely on the terms of trade prevailing inside and outside of the union. One can modify the model, such as adding monopolistic competitive tradeable goods, so that there exist some benefits of trading in a larger world. Then, when countries became Poorer in the union, they have an incentive to drop out of the union, because, if they had to be poorer, they would rather be poorer in a larger trading community. 23 done in growth themselves are variations growth key accounting left accounting variables countries other across equilibria, the economics they serve drawback is that they often and behaviors, coordination criticism. isolated hence failures In these entity. coordination of models little Hence, each multiple country equilibria the co-existence of Rich and Poor countries; about of inequality the degree a model of the country of the world world trading differences, think of trade economy, system, in the world explained derived and thereby and development the correlations of little offered as a model without development is modelled merely 24 with multiple assuming inherent previous is subject work on to such a independently, as the possibility an of do not tell us anything This paper, economy. On the on the equilibrium suggest the models poor as the critic might The content. by developing as an inevitable predictions and the inequalities why inequality. equilibria, different about of the key variables. the inequality some introducing of so many possibilities predictive by variables the importance of endogenous with multiple in the area of economic studies, us economies as a theory seem to allow have tells failures, across these explained way of summarizing of the simultaneity the diversity and hence One major of be in is not to deny But , it regions. because can explain differences, argue, the variations to This as a useful exercises, the need set of variables. remain poor, hand, or unexplained, in another Yet exercises. concerning implications among the aspect cross- for the way we nations. References : Balassa, Bela, “The Purchasing Power Parity Doctrine: A Reappraisal, ” Journal of Political Economy, December 1964, 72, 584-596. Baran, Paul A. The Political Economy of Growth, Monthly Review Press, 1957. Bhagwati, Jagdish, “Why Are Services Cheaper in the Poor Countries?” Economic Journal June 1984, 94, 279-286. Ciccone, Antonio, and Kiminori Matsuyama, “Start-up costs and Pecuniary Externalities as Barriers to Economic Development, ” Journal of Development Economics 49 (April 1996) : 3-32. Kravis, Irving, and Robert Lipsey, Towards an Explanation of National Price Levels, Princeton Studies in International Finance, No. 52, November 1983. Krugman, Paul R. Geoqraphy and trade, Catiridge: The MIT Press, 1991. Lucas, Robert E. Jr., “Why Doesn’t Capital Flow from Rich to Poor Countries?” American Economic Review 80 (May 1990) : 92-96. Matsui, Akihiko, and Kiminori Matsuyama, “An Approach to Equilibrium Selection, ” with Akihiko Matsui, Journal of Economic Theory 65 (April 1995) : 415-434. Matsuyama, Kiminori. “Increasing Returns, Industrialization, and Indeterminacy of Equilibrium, ” Quarterly Journal of Economics, May 1991, W(2), 617-50. Matsuyama, Kiminori. “The Market Size, Entrepreneurship, and the Big Push,” and International Economies, Decefier 1992, Q(4) , Journal of the JaDaneSe 347-64. Matsuyama, Kiminori. “Complementarities and Cumulative Processes in the Models of Monopolistic Competition, “ Journal of Economic Literature, June 1995, 33, 701-729. Matsuyama, Kiminori. “Comments on Paul Krugman’s ‘Complexity and Emergent Structure in the International Economy’ “ in Alan V. Deardorff, James A. Levinsohn, and Robert M. Stern, eds., New Directions in Trade Theory, Ann Arbor: University of Michigan Press, 1995. Murphyr Kevin; Andrei Shleifer, and Robert Vishny, “Industrialization and the Big Push,” Journal of Political Economy, October 1989, 97(5) , 1003-26. Myrdal, Gunnar. Economic theory and under-developed reqions, London: Duckworth, 1957. E~lanation of Some Styled Facts Of Economic Panagariya, A. 11A Theoretical Growth, “ Quarterlv Journal of Economics August 1988, 103(3) ,509-526. Prebisch, Raul . Economic Development of Latin America and Its Principal Problems, The Economic Commission for Latin America, United Nations, 1950. Rodriguez-Clare, Andres. The Division of Labor, Aqqlomeration Economies, and Economic Development, Ph.D. dissertation, Stanford University, 1993. Rodriguez-Clare, Andres. “The Division of Labor, and Economic Development, “ Economics 49 (April 1996) : 3-32. Journal of DeVelODIIIent Rodrik, Dani. “Coordination Failures and Government Policy in Intermediate Economies: A Model with Applications to East Asia and Eastern Europe, “ Journal of International Economics, 40 (February 1996) : 1-22. Samuelson, Paul, “Theoretical Notes on Trade Problems, “ Review of Economics and Statistics May 1964, 46, 145-154. Yanagawa, Noriyuki, “Economic Development in a World with Many Countries, “ Journal of Development Economics 49 (May 1996) : 271-288. 25 s Ow F I I I I I I o N A N Fig. 1 s w \ \ \ \ F I I I \ I I N \ I I o \ I I I 1 N(q) Fig. 2 I N2 N c c2 P1 1 ,— P I 1 I 1 ! I 1 1 1 I 1 * 1 ------- ------- ------- ------- 1 -, 1 I q 1 1 1 1 1 1 q“ 1 1 1 1 1 1 1 1 1 1 o f= 1 1 1 1 1 I 1 1 ~* + f Fig. 3 2