Towards_a_Microeconomics_of_Growth1 - Towards a...

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Towards a Microeconomics of Growth 1 Robin Burgess LSE and CEPR Anthony J. Venables LSE and CEPR JEL classification nos: O10, O12, O14. Keywords:. Growth, development, structural change, clustering. Addresses 1 Paper written for the Annual Bank Conference on Development Economics, Bangalore, India, 2003. We are grateful to Bronwen Burgess, Gur Offer, Diego Puga, Steve Redding, Marit Rehavi and Sidney Winter for comments on an earlier draft. R. Burgess Dept of Economics London School of Economics Houghton Street London WC2A 2AE, UK [email protected] A.J. Venables Dept of Economics London School of Economics Houghton Street London WC2A 2AE, UK [email protected]
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Abstract : The emergence of new economic activities is the driving force of economic development. The development of such activities is often ‘lumpy’, manifesting itself in rapid growth of particular regions or sectors. Recognition of these facts requires a reorientation of the analytical frameworks and empirical approaches that are used to investigate growth. In particular, we need to understand what drives growth at the microeconomic level. The paper starts by reviewing some of the evidence on the spatial and sectoral concentration of fast growing activities. It then outlines some simple theory which helps us to understand why particular locations experience rapid growth whilst others remain backward. We find it useful to divide the factors that determine a location’s growth performance into two groups, that we term ‘1 st advantage’ and ‘2 nd advantage’. ‘1 st advantage’ refers to the conditions that provide the environment in which new activities can be profitably developed. They include most of the factors that traditional theory has focussed on, such as access to inputs (labour and capital), access to markets, provision of basic infrastructure and the institutional environment. ‘2 nd advantage’ factors increase returns to scale and can lead to cumulative causation processes. They may be acquired by learning, through technological spillovers, and by the development of thick markets of suppliers and local skills. Furthermore, these increasing returns are often external to the firm and thus associated with market failure. It is increasing returns that underlie the ‘lumpiness’ of development. This analysis suggests that empirical investigation of the drivers of growth must shift down to a more microeconomic level. Such an analysis has become more feasible as data at the sub-national level has become more available. By viewing recent empirical evidence on drivers of growth through our analytical framework we are able to begin to sketch out a microeconomic agenda for growth. We emphasize that it is the manner in which 1 st and 2 nd advantages interact which shapes the pattern of development. Policy must therefore take into account the quite different natures of these advantages.
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