Working Paper: NBER ID: w27286
Authors: Pinelopi K. Goldberg; Tristan Reed
Abstract: What is the pathway to development in a world marked by rising economic nationalism and less international integration? This paper answers this question within a framework that emphasizes the role of demand-side constraints on national development, which is identified with sustained poverty reduction. In this framework, development is linked to the adoption of an increasing returns to scale technology by imperfectly competitive firms that need to pay the fixed setup cost of switching to that technology. Sustained poverty reduction is measured as a continuous decline in the share of the population living below $1.90/day purchasing power parity in 2011 US dollars over a five year period. This outcome is affected in a statistically significant and economically meaningful way by domestic market size, which is measured as function of the income distribution, and international market size, which is measured as a function of legally-binding provisions to international trade agreements, including the General Agreement on Tariffs and Trade, the World Trade Organization and 279 preferential trade agreements. Counterfactual estimates suggest that, in the absence of international integration, the average resident of a low or lower-middle income country does not live in a market large enough to experience sustained poverty reduction. Domestic redistribution targeted towards generating a larger middle class can partially compensate for the lack of an international market.
Keywords: Demand-side constraints; Market size; Trade; Inequality; Poverty reduction
JEL Codes: F10; F13; F15; L10; L16; O10; O14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic market size (F61) | Sustained poverty reduction (I32) |
| Share of the population in the global middle class (F62) | Domestic market size (F61) |
| International market size (F61) | Sustained poverty reduction (I32) |
| Domestic market size (F61) | Adoption of increasing returns to scale technologies (O33) |
| International integration (F15) | Market size sufficient for sustained poverty reduction (O15) |
| Market size of at least 325 million people (O51) | Sustained poverty reduction (I32) |