Increasing returns, imperfect competition and developing countries in international trade: some issues

Abstract

The incorporation of details of industrial organization into the trade theory has been the subject of a fast growing recent literature which is surveyed in this paper. "New" trade theory, which assumes imperfect competition, economies of scale and product differentiation provides new insights for the understanding of both positive and normative aspects of trade. Whereas the new literature provides scope for the active use of policy to raise welfare in developed countries, little or nothing has been said about the developing countries. In this paper I attempt to identify the most important implications of the "new" trade theory for developing countries. Although some types of trade described by the new literature justify policy intervention, it has been argued that trade intervention in the developing countries usually has welfare-worsening effects.