Industrialization, the Extent of MArket, and the Mobility of Labor: A Geographic Perspective

A general equilibrium model with heterogeneous agents is presented to explain why the undeveloped economies are not industrialized until the late twentieth century. The model takes into account two factors related to the geographic structure of the economy. First, the poor infrastructure of an undeveloped economy leaves its domestic market spatially segregated because of the high transport costs. Second, depending on how readily the labor force in the rural areas can move into the industrial area, the cost of labor may be too expensive to run a factory profitably. The model bears several policy implications. The government's investment in infrastructure encourages the industrialization. The effect of the government's investment in the infrastructure on the geographic concentration of industries depends on the fixed cost of the manufacturing technology. A country can get around the problem of high transportation costs by targeting foreign markets and exploiting the cheaper ocean transportation costs. A reduction in the cost of migration, such as housing costs and the cost of risk-sharing, the labor force with low reservation wage can be attracted to the industrial area.