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 occurs due to the south’s ability to learn from the north’s experience in innovation rather than trade openness per se. This is consistent w ith the account of Rodrick on the success of the Asians dragons. Finally, the convergence of the south pushes the global steady-state growth rate to a level that is in-between the stage-one (pre-industrial Revolution) rate and the stage-three (rich-north-poor-south) rate. In particular, defining stage-four as the phase where 0K has returned to 1/2, the stage-four rate of innovation is:
By inspection this is higher than stage-I rate since A.'”” exceeds the X in. But it is lower than the stage-three rate in since A.mir’ <1 (assuming that natural barriers prevent X from reaching unity).