External Economies in Trade and Development: Contrasting Arguments for Industry Promotion Under Alternative Analytical Frameworks

Abstract

This paper contrasts the treatment of external economies in the neoclassical framework with that in Hirschman’s linkage model. It traces the doctrinal historical roots of both to the two types of division of labor in Smith’s Wealth of Nations, with the neoclassical one based on production (of final products) and exchange, while Hirschman’s model is related to the woolen coat example. Especially through the theory of domestic divergences, the former is predisposed to defend free trade. Uneven development from free trade can arise in the latter. To catch up, lagging countries might employ both non-trade and trade interventions to overcome technological strangeness and activate linkages. Some connections with the Cambridge welfare economics literature are made, including a brief consideration of the issue of rent-seeking. The discussion underscores the importance of critically appraising the role of concepts like external economies, or market failures in general, against the analytical frameworks in which they are situated.

Keywords

• externalities
• trade and development
• industry promotion
• domestic divergences
• linkage model
• Hirschman (Albert O.)