Working Paper: NBER ID: w25741
Authors: Kevin Hjortshøj O'Rourke; Ahmed Rahman; Alan M. Taylor
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: Trade; Technology; Divergence; Convergence; Economic Growth
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 living standards between core and peripheral regions (F12) | exacerbated by specialization of the peripheral region in unskilled-labor-intensive production (F66) |
| specialization of the peripheral region in unskilled-labor-intensive production (F66) | negatively impacted its terms of trade (F69) |
| negatively impacted its terms of trade (F69) | led to increased fertility rates (J13) |
| negatively impacted its terms of trade (F69) | led to decreased educational attainment (I24) |
| trade initially fosters divergence (F12) | can facilitate convergence over time through technological diffusion (O33) |
| technological diffusion (O33) | allows peripheral regions to adopt innovations from the core (O36) |
| allows peripheral regions to adopt innovations from the core (O36) | improves their productivity and living standards (O49) |
| nature of technological change (O33) | affects the long-term growth trajectories of regions (R11) |
| skill-biased technological advancements in the north (J24) | lead to demographic transitions characterized by lower fertility and higher education levels (J19) |
| historical trade patterns (N73) | impact contemporary growth (F69) |
| conditions of technological diffusion in the late 20th century (O33) | contributed to a reversal of fortunes for some previously lagging regions (R11) |