UC Irvine

The authors propose a new model of trade between developing and advanced economies to capture the effects of important asymmetries in the organizations of their industries. This model demonstates how the industrial structure of a develping economy can evolve to produce what the auhors call "implicit mercantilism." Free entry plus domesitc oligopoly in a developing country , when combined with competititve behavior in developed countries, generates several distinct stages of mercantilism hitherto unrecognized in the literature. Each stage has its own pattern of interaction with a competitive trading world. As the production costs and techniques of the mercantile society converge to world standards, its citizens first lose from this progress, only later to gain. Both effects are due to certain relationships between home prices and world prices, newly identified in this paper. The analysis is particularly relevant to the structure ofAsian economnies, and to policy debates about their reform.