Economic development by the creation of new sectors

Abstract.

The basic theme underlying this paper is qualitative change taking place during economic development. These changes in the composition of the economic system should become one of the most important variables in models of economic growth and development. Our knowledge of the relationship between economic development and qualitative change, however, is still very limited. This paper attempts to shed light on some important aspects of the role played by qualitative change in economic development, by laying the foundations of a model in which changes in the composition of the economic system are endogenously generated by the evolution of the system itself and, in turn, affect its future development. The model has a strong Schumpeterian flavour in that the first entrepreneur entering a market enjoys a temporary monopoly. This temporary monopoly is eroded by the entry of imitators, that gradually increases the intensity of competition. The saturation is reinforced as the demand for what was a new product comes to be satisfied. In this way the adjustment gap initially created by the innovation is eliminated transforming a niche into a mature market, which becomes one of the routines of the economic system. As soon as a sector becomes saturated there is an increasing inducement for incumbent firms to exit and to create a new niche, where once more they will have a temporary monopoly. To put it in another, slightly different, form, we can say that economic development is a process in which new activities emerge, old ones disappear, the weight of all economic activities and their patterns of interaction change.