Our 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, however, departs sharply from the ‘inequalizing trade’ paradigm on several key points. First, we showed that the present value of the south’s welfare could have been increased the Industrial-Revolution-cz/w-income-divergence. That is, the south could be even poorer than it is today, had the Industrial Revolution not occurred. Second, once a north-south structure has been generated, further trade liberalization narrows the real income gap. Third, our model posits that income divergence was caused by lower trade costs, not by plunder or imperialism. Fourth, in our model, trade liberalization and more generally the reduction in transaction costs first generates massive divergence of real incomes but then is conducive to a process of relative convergence. Finally, we show that to the extent the recent decades of international integration have lowered the cost of trading ideas more than it has lowered the cost of trading goods, integration can be the key to southern industrialization.
Finally, our model may also be taken as providing a long-term perspective on the convergence literature (see Barro and Sala-i-Martin inter alia). That literature essentially takes the 19th century global income disparity as given and seeks to measure whether this gap has narrowed in the postwar period. Our model attempts to analyse the long term origin of the divergence between North and South by linking it explicitely to the growth take-off of the Industrial Revolution.