Uneven development and the liberalisation of trade and capital flows: The case of Mexico

A dual economy model is used to analyse the preconditions for successful industrialisation under different trading and investment regimes. Assuming increasing returns to scale in industry and decreasing returns in agriculture, it is shown that protectionism may aid economic development at some points in a country's development process but retard it at others, that the desirable degree of openness depends on the stage of development already attained, and that improvements in agricultural productivity may reduce the overall rate of growth under a free-trade regime. Applying the model to Mexico, it is argued that liberalisation is likely to bring long-run industrialisation in the Mexican case but that this strategy implies substantial costs to a large segment of the population in the short and medium term.