Working Paper: CEPR ID: DP13674
Authors: Alan M. Taylor; Kevin Hjortshøj O'Rourke; Ahmed Rahman
Abstract: Why did per capita income divergence occur so dramatically during the 19th century, rather than at the outset of the Industrial Revolution? How were some countries able to reverse this trend during the globalization of the late 20th century? To answer these questions, this paper develops a trade-and-growth model that captures the key features of the Industrial Revolution and Great Divergence between a core industrializing region and a peripheral and potentially lagging region. The model includes both endogenous biased technological change and intercontinental trade. An Industrial Revolution begins as a sequence of more unskilled-labor-intensive innovations in both regions. We show that the subsequent co-evolution of trade and directed technologies can create a delayed but inevitable divergence in demographics and living standards—the peripheral region increasingly specializes in production that worsens its terms of trade and spurs even greater fertility increases and educational declines. Allowing for eventual technological diffusion between regions can mitigate and even reverse divergence, spurring a reversal of fortune for peripheral regions.
Keywords: Industrial Revolution; Unified Growth Theory; Endogenous Growth; Demography; Fertility; Education; Skill Premium; North-South Model; West-East Model
JEL Codes: F11; F16; F43; F62; F63; J10; J24; N10; N30; O11; O19; O33; O4; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| initial divergence in per capita income during the 19th century (N11) | industrial revolution's unskilled-labor-intensive innovations (F66) |
| industrial revolution's unskilled-labor-intensive innovations (F66) | regions with abundant unskilled labor (F66) |
| north specialized in skill-intensive production (L69) | demographic transitions characterized by falling fertility and rising education rates (J11) |
| south's focus on unskilled labor (F66) | exacerbated economic challenges (F69) |
| peripheral region's increasingly unfavorable terms of trade (F14) | further population growth and deteriorating living standards (O15) |
| allowing for technological diffusion (O33) | reverse the trend of divergence (F62) |
| technological diffusion (O33) | peripheral regions adopt innovations from the north (O51) |
| peripheral regions adopting innovations from the north (O51) | potential convergence in income levels (F62) |