GLOBAL INCOME DIVERGENCE, TRADE AND INDUSTRIALIZATION: Concluding Remarks

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 second stage – the take-off – the economies are in transition. Trade costs have fallen to the point where the symmetric location equilibrium becomes unstable and a core-periphery equilibrium is emerging. During this transition, the global growth rises from the low first stage rate to the higher third stage rate, but we observe massive divergence in real incomes. In the final stage, both nations grow at a common rate that is higher than the stage-one rate. During this third stage, the real income gap narrows, but is not closed. Broadly, these findings are consistent with four key phenomena mentioned in the introduction, namely northern industrialization and growth take-off, rapid trade expansion and income divergence.

The main focus of this paper is on these four key phenomena, however, the model is sufficiently rich to produce eventual southern industrialization. The source of this industrialization is a lowering – in a fourth stage – of the relative costs of transporting ideas versus goods. This enhances the south’s ability to learn from the north’s experience in innovation, thereby weakening the forces that supported total agglomeration in stage-three. We showed that this emergence of southern industry slows global growth to point between stage-one (pre-industrial Revolution) and stage-three (core-periphery) levels. It also forces a relative de-industrialization in the north.