Evidence on Growth, Increasing Returns and the Extent of the Market

Abstract

We examine two sets of economies (19th century U.S. states and 20th century less developed countries) where growth rates axe 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.

Historical Perspectives on U.S. Economic Geography

“…Meyer (1983Meyer ( , 1988 emphasizes pecuniary externalities; for Meyer, the manufacturing belt is really an agglomeration of regional urban city systems. Ades and Glaeser (1999) find that initial development proxied by urbanization in 1850 was significantly correlated with later urban development. Thus, increasing returns led to divergent urban development.…”

Natural resources, rent seeking and welfare

“…However, looking at the manufacturing sector they find a significant relationship between growth and scale variables. The most influential recent study is probably Ades and Glaeser (1999). By examining two independent data sets, they find support for a positive effect on growth from aggregate demand and size of the market effects, as suggested by the Murphy et al (1989a,b) models.…”

Economic Integration and Fiscal Decentralization: Evidence from OECD Countries

“…15 See, e.g., Alesina et al (2000), and Wacziarg et al (2002) for some recent contributions on the relationship between economies of scale and market size. Ades and Glaeser (1999) provide empirical support for a positive relationship between economic growth and the size of the market. However, note that even in an integrated world, high transaction costs can of the market.…”