Working Paper: NBER ID: w2709
Authors: Kevin M. Murphy; Andrei Shleifer; Robert Vishny
Abstract: When world trade is not free and costless, a less developed country can profitably industrialize only if its domestic markets are large enough. In such a country, for increasing returns technologies to break even, sales must be high enough to cover the set-up costs, This paper studies some determinants of the size of the domestic market, and focuses on two conditions conducive to industrialization. First, agriculture or exports must provide the source of autonomous demand for manufactures. Such expansion of autonomous demand usually results from increases in farm productivity or from opening of new export markets. Second, income generated in agriculture or exports must be broadly enough distributed that it materializes as demand for mass-produced domestic goods, and not just for luxuries. We resort to these two determinants of the size of domestic markets to interpret several historical development episodes.
Keywords: Industrialization; Income Distribution; Market Size; Agricultural Productivity
JEL Codes: O14; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increases in agricultural productivity (Q11) | Higher incomes (J39) |
| Higher incomes (J39) | Demand for domestic manufactures (L69) |
| Income distribution mediates the relationship between higher incomes and demand for domestic manufactures (F61) | Industrialization (O14) |
| Concentrated income (D31) | Demand for luxury goods overshadows demand for mass-produced items (D12) |
| Broadly distributed income (D30) | Demand for local goods and support for industrialization (O25) |
| Middle class's purchasing power (D19) | Sustaining mass production (L23) |
| Sufficiently large middle class (P19) | Industrialization (O14) |
| Agricultural productivity + Equitable income distribution (Q11) | Successful industrialization (O14) |