The authors thank two anonymous referees for valuable and constructive suggestions.
Intersectoral Spillovers, Relative Prices and Development Traps
Article first published online: 16 APR 2012
© 2012 Blackwell Publishing Ltd
Review of Development Economics
Volume 16, Issue 2, pages 243–261, May 2012
How to Cite
Chen, B.-L. and Lee, S.-F. (2012), Intersectoral Spillovers, Relative Prices and Development Traps. Review of Development Economics, 16: 243–261. doi: 10.1111/j.1467-9361.2012.00659.x
- Issue published online: 16 APR 2012
- Article first published online: 16 APR 2012
Why is the economic growth rate so low in poor countries? This paper offers an explanation by using a simple two-sector AK growth model with intersectoral linkages and high relative prices of intermediate goods. Intersectoral linkages lead to two balanced growth paths (BGPs). The high-growth BGP is a source. The low-growth BGP is a sink because it has a small final goods sector, small intersectoral spillovers from the final goods sector to the intermediate goods sector, and small marginal products in the intermediate goods sector, yielding high relative prices of intermediate goods. The low-growth BGP is an attractor and thus development trap. To produce a big push effect, this paper analyzes the first-best policy and finds that a subsidy to own consumption and a provision of public goods to the final goods sector can internalize the external effect and render the low-growth BGP infeasible. As a result, there is only the high-growth BGP.