Working Paper: NBER ID: w4714
Authors: Alberto F. Ades; Edward L. Glaeser
Abstract: We examine two sets of economies, (19th century U.S. states and 20th century less developed countries) where growth rates are positively correlated with initial levels of development to document how these dynamic increasing returns operate. We find that open economies do not display a positive connection between initial levels and later growth; instead, closed economies do display this positive correlation (i.e. divergence). This evidence suggests that increasing returns operate by expanding the extent of the market (as in the big push theories of Murphy, Shleifer and Vishny (1989)). For U.S. states, we also find that larger markets enhance growth by increasing the division of labor. Among LDCs, while more diversified production increases growth, diversification is negatively associated with openness for the poorest economies (as in the quality ladder theories of Boldrin and Scheinkman (1988), Young (1991) and Stokey (1991)). However, and despite the negative effect that openness has on the diversity of production and, thus, on growth, we find that openness still substantially increases growth for these poorer economies.
Keywords: Economic Growth; Increasing Returns; Market Extent
JEL Codes: O40; O11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| initial GDP (E20) | growth rates (O40) |
| closed economies (P19) | higher growth rates (O49) |
| initial GDP (E20) | market demand for national products (F49) |
| openness (O36) | growth rates (O40) |
| initial GDP (E20) | division of labor (L23) |
| openness (O36) | division of labor (L23) |
| division of labor (L23) | growth rates (O40) |
| openness (O36) | diversity of production (D20) |