Trade-induced Industrialization and Economic Growth

Based on a modified Heckscher-Ohlin model of Deardorff and Park (2010 Deardorff, A. and Park, J.-H. 2010. A story of trade-induced industrialization. International Economic Journal, 24: 283–296. Taylor & Francis Online] , Google Scholar]), this paper develops a dynamic model of trade-induced industrialization and economic growth. It shows that a developing country may grow out of its autarky steady state with no industrialization into a new steady state with full industrialization by opening to trade with a large industrialized country, exporting the labor-intensive intermediate input in exchange for the capital-intensive intermediate input for the modern good. Even when the developing country is on its path toward complete industrialization under autarky, free trade may induce it to grow faster with its return to capital being raised and sustained at a level that is higher than its autarky level during its industrialization process. Once it completes its industrialization process by having all of its resources in the modern sector, then diminishing returns to capital come back to accompany further capital accumulation, slowing down the growth of the economy. This trade-induced industrialization and economic growth, having an expansion of international trade both in its absolute value and in its ratio to the size of the developing country, correspond well with the dynamic profiles of East Asian Miracle countries’ economic growth based on their export-oriented industrialization strategy.