Increasing Returns, Industrialization, and Indeterminacy of Equilibrium

TLDR

History alone does not determine the economy’s eventual state, and self‑fulfilling expectations can enable escape from preindustrial underdevelopment. The study investigates whether real‑time adjustment dynamics can select a long‑run outcome in an industrialization model with multiple stationary states due to increasing returns, and examines the influence of government policy and agricultural productivity. The authors use global bifurcation analysis to identify conditions for underdevelopment traps versus takeoff paths, and evaluate how government policy and agricultural productivity affect industrialization.

Abstract

This paper asks whether adjustment processes over real time help to select the long-run outcome in a model of industrialization, where multiple stationary states exist because of increasing returns in the manufacturing sector. History alone cannot in general determine where the economy will end up. Self-fulfilling expectations often make the escape from the state of preindustrialization (the takeoff) possible. The global bifurcation technique is used to determine when an underdevelopment trap exists and when a takeoff path exists. The role of government policy and agricultural productivity in industrialization are then considered.