Monthly Archives: December 2013

GLOBAL INCOME DIVERGENCE, TRADE AND INDUSTRIALIZATION: Concluding Remarks continueOur model also has some interesting and intriguing political economy implications. The most obvious would, at first glance, appear to support notions of ‘inequalizing trade’. In our model, the big divergence between rich and poor countries is a necessary implication of Europe’s Industrial Revolution and the expansion of international trade triggered both. Industry Towards

Indeed, the creation of a global core-periphery situation is a necessary condition for the growth take-off. Moreover, our paper describes a purely economic mechanism (i.e. other than cultural or political) that explains why the Industrial Revolution did not spread to what we now call the Third World. The traumatic experience of massive de-industrialization in India during the 19th century is consistent with our model and it also suggests one reason why this country, along with most other Third World countries, kept an attitude of distrust towards international trade.

Our model, howeve...

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From 1750 to 1850, the world experienced dramatic economic changes. Global commerce expanded rapidly and the now-rich nations (the ‘north’) experienced massive structural shifts from agriculture to industry. The Industrial Revolution is also the starting point of the process of global divergence. Moreover, the nature of economic growth was irreversibly altered in this era. Before the Industrial Revolution, a Malthusian logic seemed to ensure stagnant per-capita-income levels worldwide. After the Industrial Revolution, per capita incomes, especially in the north, came to be governed by a Schumpeterian logic in which a self-sustaining cycle of investment, innovation and higher output permitted ever-rising incomes. Public Service

This paper presents a parsimonious model consistent with these facts and which attempts to capture some of the ideas of classic authors such as Braudel, Kuznets and Rostow. In our model, economic geography, trade, global income divergence and stages of growth are jointly endogenous. As is common in economic geography models, the equilibrium location of industry is marked by a punctuated equilibrium. That is, the gradual and exogenous reduction of trade costs results in a three-stage location equilibrium. In the first stage, where trade costs are high, industry is evenly scattered among similar nations. The world economic growth rate stagnates, since dispersed industrial production hinders exploitation of localized knowledge spillovers. In the secon...

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GLOBAL INCOME DIVERGENCE, TRADE AND INDUSTRIALIZATION: Growth StagesThe modified model has three growth stages as does the Section 2 model, however there are two important differences. In the modified model, the catastrophe is much larger in the sense that once the symmetric equilibrium becomes unstable, the only stable equilibrium is the core-periphery outcome. The second difference is that even though there are no local technological spillovers (since we assumed A=T), we still get a growth take-off because of the pecuniary externalities. Computer usage

To see this, consider the stage-one growth rate of K. Solving for g, using the fact that 0K= 1 /2 and B=l, gsym=[a2LA/(a-a)]-p. Since Д is rising in ф at 0K= 1 /2, we see that g rises as trade costs fall, even in stage-one where 0K is invariant. This brings out the new elements in this modified model; it contrasts with the Section 2 model, where g w’as not directly affected by ф. Intuitively, the point is that given, the marginal cost of new К (i.e. F) falls, as transaction costs decrease. This leads to an incipient rise in each nation’s q, and thereby draws more resources into the I-sectors. Faster К growth (and therefore real income growth) is the result.

The m...

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Stability of the symmetric steady state is investigated as in Section 3. Holding L, constant, the proportional change in q with respect to 0K can be written as:


Again, there is one stabilizing force (the local competition effect shown in the first term in large parantheses) and two destabilizing forces (the last two terms). The first of the destabilizing terms corresponds to the demand link that stems from the expenditure shifting impact of production shifting. The last term reflects the cost-link stemming from the way in which production shifting (i.e. d0K>O) lowers F and raises F* via the variety linked cost effect. That is, an increase in the share of firms producing in the north lowers the northern 1-sector’s marginal cost by lowering the cost of intermediate inputs. This in turn increases the northern accumulation rate, and raises 0K. Notice that as ф approaches unity, the stabilizing force approaches zero faster than the destabilizing forces, so for some ф sufficiently close to unity, the symmetric equilibrium is unstable. Notice al...

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GLOBAL INCOME DIVERGENCE, TRADE AND INDUSTRIALIZATION:  Modifications to the Basic ModelIncluding traded intermediates in the I-sector requires only one significant modification. Instead of, the modified I-sector production and cost functions assume that new capital is produced directly from consumption goods (as in the Solow model) according to:

where Qc is the amount of the composite good Q from consumed and F is the marginal cost of capital. A generic condition for steady, endogenous long-run growth is that Tobin’s q must be independent of the level of capital stocks. The dual of this is that F must fall at the same rate as V falls. Given Dixit-Stiglitz pricing, V falls at the rate that К grows, so F must fall at the same rate. The implied regularity condition is that a/(l-a)-£=-l.


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As with the north’s take-off, the miracle in the south w-ould appear to be driven by two virtuous circles. When the south invests, its capital stock and therefore permanent income begins to rise, triggering demand-linked circular causality. Rising local expenditures boosts southern profits and this in turn gives a newf incentive to innovate/invest. Moreover, as K* rises, the southern I-sector begins to benefit from localized learning externalities, and this triggers cost-linked circular causality. The net effect is a drastic structural change as the south industrializes. During the transitional phase north and south real incomes converge. Exhaust Emissions

The miracle in the south, however, differs from the initial northern take-off in three ways. First, the southern industrialization does not shut dow’n northern innovation. It merely forces a shift of some northern resources from the M-sector to the T-sector (here we think of the T-sector as including services as well as agriculture). Second, the source of the south’s take-off is quite different. The miracle occur...

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GLOBAL INCOME DIVERGENCE, TRADE AND INDUSTRIALIZATION: Globalization and Industrialisation of the South continueIn the context of our model, a decrease in the cost of communications and more generally an increase in the speed of international diffusion of ideas is translated into an increase in A, which measures the internationalization of knowledge spillovers in the I-sector. To focus sharply on this trend in the relative cost of trading goods and ideas, we make the simplifying assumption that all recent integration consist of rising A. That is, we start from the stage-three situation of full agglomeration in the north and suppose that trade free-ness ф has risen to some natural upper bound, but in a fourth stage X rises towards unity, i.e. perfect international transmission of learning externalities. Stock Market

Starting from a situation with full industrial agglomeration in the north (0K=1), the increase in X initially has no impact on southern industry or on the global growth rate given by. However, southern I-sector labour productivity rises with A,, so at some threshold level of A (call this Amu for ‘miracle’), the steady-state q* exceeds unity. Beyond this,...

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Finally, we study the expansion of trade during the three phases. The global trade volume from is graphed in Figure 7 (using the same parameters as in the previous figure writh a=0.3). Again there are three distinct phases. In the initial phase, the level of trade is fairly low and all trade is intraindustry trade. Furthermore, lowering trade costs promotes trade in a smooth, gradual fashion. Once ф>фса‘, agglomeration occurs rapidly in the north, so the nature of trade shifts. The north becomes a net exporter of industrial goods and a net importer of traditional goods. Once all industry is in the north, the value of trade is maximized since the south must satisfy all its demand for industrial goods via imports.

While the radical income disparity between poor and rich countries is still a dominant feature of the global economy, the decades since WWII have also seen some spectacular examples of rapid convergence – what Lucas calls ‘miracles’. Here we show that our...

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GLOBAL INCOME DIVERGENCE, TRADE AND INDUSTRIALIZATION: Welfare continueNote first that when transaction costs are sufficiently high (ф is below the threshold level), a decrease in transaction costs has the usual static effects in both the south and the north. It raises welfare because it lowers the real price of traded manufactured goods. At the point of the take-off, north and south welfare diverge. The north benefits from agglomeration and a higher growth rate. The south benefits only from higher growth; agglomeration actually harms the south. This explains why post-take-off welfare is always lower in the south. Sales personnel

The positive growth effect of the take-off explains why the comparison of welfare before and after the take-off is ambiguous. If the share of manufacturing goods is low enough, the increase in the growth rate of the manufacturing sector does not have a large welfare impact. In this case, the south loses due to agglomeration and its welfare never reaches the level it had before the take-off. In the intermediate a case, the south first loses but eventually attains a welfare level that exceeds its pre-take-off level.

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As pointed out above, our model is an example of uneven development in the sense that the agglomeration of industry in the north produces immediate divergence with the south. However, because agglomeration generates a take-off which materializes itself into an acceleration of the world rate of innovation, the take-off also produces benefits for the south. The tension between the negative effect of agglomeration and the positive effect of the increase in the rate of innovation is what makes the welfare effect of the take-off ambiguous for the south. Northern and southern steady-state welfare (i.e., the present value of the utility flow’s) as functions of ф are, respectively: Retailing in rural


where g and 0K depend upon ф as described above, and c0 captures terms that do not depend upon ф. Notice that while a rise in g is welfare enhancing in both regions, raising 0K raises northern welfare, but lowers that of the south. As discussed above, the impact of raising the steady-state 0K is twofold: it shifts wealth from south to north and it low’ers the northern price index relative to the southern price index, as long as ф< 1.

Figure 6 plots...

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