A mechanism of endogenous growth suitable for investigation of sectoral or regional interaction is developed. The effects on steady state growth of consumption and production linkages between sectors are assessed, and it is shown how the high value placed on production linkages by economic historians might be reconciled with the high value placed on openness (often implying lack of linkages) by observers of contemporary less developed countries. It is also shown how sectors or regions interact out of steady state through both product and labor markets, and in particular how if the former interaction dominates one sector can be an "engine of growth" pulling along the other, while if the latter interaction dominates one sector or region booms while the other declines. By building on these results it is shown why liberalization of foreign trade should lead to a transition from a lower to a higher steady state growth rate and why, during the course of this transition, growth might initially be even slower than before liberalization. On this basis a reinterpretation of the post-1973 economic performance of Chile is offered. An application to economic integration of previously separate regions or countries shows that the largest growth effects are to be had if one region is allowed to decline and provide a source of cheap labor for the other region. This study would make an important contribution to our understanding of sectoral or regional interaction in response to economic integration during the growth process.
