External Economies and Clusters

1.1 External economies occupied a very prominent position in what Hirschman (1983) called the "rise" of development economics and Krugman (1992) has more recently defined as "high development theory". Not only did the concept figure extensively in the literature, but it also contributed to defining policies and programmes relating to developing regions and countries, thanks mainly to a number of theories that strongly influenced the approaches taken by governments and international organizations at that time. Scitovsky (1954) defined the concept of external economies "one of the most elusive in economic literature" and many economists expended a great deal of energy in seeking a satisfactory definition for it. Some of the distinctions and classifications that they proposed are relevant to our discussion, and we will return to them later in this note. As a first, approximate definition, we can say that external economies, like external diseconomies, are the result of the interdependence between the decisions and actions of various agents, and that the external economies from which firms can benefit are the positive effects that accrue to one firm or set of firms as a result of the decisions or activities of others. As is well known, it is because of the existence of external economies and diseconomies that private and social costs and returns can diverge. Using this definition as a starting point, we can observe that external economies are considered not only explicitly as a basis for the theory of "balanced growth" -- that is, as one of the justifications of the so-called Big Push policies (Rosenstein Rodan, 1943; Nurske, 1958) -- but also implicitly by critics of this theory 5 such as Hirschman (1958) in his discussions of the effects of "linkages". The concept became fashionable again in the second half of the 1980s with the flourishing of new neoclassical models (Romer, 1986, 1987; Lucas, 1988; Becker, Murphy and Tamura, 1990). In these models, external economies and the increasing returns that they determine are at the root of endogenous growth processes. This note seeks answers to several questions: Why did externalities lose their central place in the literature on growth and development for a number of years What new factors led to the revival of this concept In what particular context, distinct from that of the 1940s-1960s, can externalities contribute to our understanding of development and development policies In our view, answers to these questions should be sought not just in the complexities and weaknesses of the theoretic models on which treatises on external economies and growth were based in the past. It is also important to consider the changes that have occurred in development strategies and industrialization policies over the years. Two main factors determined the context in which the concept of external economies lost relevance. The first was the failure in many countries of large-scale industrialization policies, which "Big P Continua »