Intersectoral Spillovers, Relative Prices and Development Traps

Authors


  • The authors thank two anonymous referees for valuable and constructive suggestions.

Chen: Institute of Economics, Academia Sinica, 128 Academia Rd., Section 2, Taipei 11529, Taiwan. Tel: +886-2-27822791, ext. 309; Fax: +886-2-27853946; Email: bchen@econ.sinica.edu.tw. Lee: Department of Industrial Economics, Tamkang University, 151 Ying-chuan Road, Tamsui, New Taipei City 25137, Taiwan. Tel: +886-2-26215656 ext. 2999; Fax: 886-2-26209731; E-mail: alphalee@mail.tku.edu.tw.

Abstract

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.

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