This article outlines a new approach for analyzing the role of trade in promoting industrial development. It offers an explanation as to why firms are reluctant to move to countries with lower labor costs and shows how trade liberalization can change the incentives for firms to locate in developing countries. It models economic development as the spread of concentrations of firms from country to country. Different trading arrangements may have a major impact on this development process. By changing the attractiveness of countries as a base for manufacturing production, they can potentially trigger - or postpone - industrial development. The analysis shows that unilaterally liberalizing imports of manufactures can promote industrialization but that membership in a preferential trading arrangement is likely to create larger gains. South-South preferential trading arrangements will be sensitive to the market size of member states, while North-South arrangements seem to offer better prospects for participating southern countries, if not for excluded countries.

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Diego Puga and Anthony J. Venables

1 May 1998

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World Bank Economic Review 12(2), pp.221–249, 1998

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DOI: 10.1093/wber/12.2.221

https://academic.oup.com/wber/article/12/2/221/1646866

This Journal article is published under the centre's Urban programme.

This publication comes under the following theme: What determines urban growth and urban decline and what should be the role of policy?