Can the North–South trade regime explain intra- and inter-country productivity differences?

Abstract

The literature identifies North–South disparities in Total Factor Productivity (TFP), which, in turn, justify the bulk of international income differences. By building a dynamic, general equilibrium model of North–South technological-knowledge diffusion with scale-invariant growth, we extend the literature in several directions: (i) growth is driven by Schumpeterian R&D and by high and low-skilled human-capital accumulation; (ii) three trade regimes are considered; (iii) sectoral and aggregate TFP measures are computed; (iv) the extent to which the North–South trade regime explains intra-country TFP and inter-country TFP differences is evaluated. In particular, the results suggest that intra-country TFP differences increase and inter-country TFP differences fall when countries are more interdependent.

Keywords:

• technological-knowledge diffusion
• North–South trade
• R&D
• human-capital accumulation
• TFP differences

JEL Classification:

• F12
• F16
• F43
• J24
• J31
• O31
• O33
• O34
• O4

Acknowledgement

CEMPRE – Centro de Estudos Macroeconómicos e Previsāo – is supported by the Fundaçāo para a Ciênciae a Tecnologia, Portugal.

Notes

1. We use ‘without trade effects’ instead of ‘autarky’, as the latter term usually means no relationship of any kind between countries and that would not allow for imitation. In our work, imitation is possible even without trade.

2. As will soon be made clear, under trade of intermediate goods, the South is no longer limited by its own ability to produce such goods; it can import state-of-the-art Northern intermediate goods that have not yet been imitated and export state-of-the-art intermediate goods that it has imitated by under-pricing the Northern innovators.

3. As we will see below, profit maximising by monopolist producers implies that p(j) is independent of j.

4. With trade of intermediate goods, only top qualities are used in final goods production. Plugging the demand for the top quality of j into the respective production functions, the supply of n relies on Northern indexes, Q_l,n and Q_H,N .

5. That is, [nbar]_L ([nbar]_H ) is an endogenous competitive equilibrium threshold final good that indicates the switch from the Southern (Northern) Low (High)-technology to the Northern (Southern) Low (High)-technology, at each t.

6. The ordering index has been built in this way only for analytical convenience: it eases the calculation of [nbar] since only one country produces goods around [nbar].

7. As stated below, this assumption is crucial under trade of intermediate goods, since competitiveness of the imitators rests on the assumption that the South has a marginal cost advantage.

8. The pattern of these shares as functions of the probabilities of successful R&D has been carried out so that the share produced in N increases with innovations and falls with imitations (e.g. Dinopoulos and Segerstrom 2006).

9. It will be made clear below that the product between terms (9a, b)–(ii) and (9a, b)–(iii) is required for a stable growth rate over time, as in standard models (Barro and Sala-i-Martin, 2004); and that the term (9a, b)–(iv) is also needed for a stable growth rate over time, but due to human-capital accumulation.

10. Our model is thus particularly in line with, for example, (i) Cohen and Levinthal (1990), who show that a model of conditional catching up fits empirical data better than a model where the wider the initial technological-knowledge gap, the higher the catching up, and (ii) Baumol (1986) and Quah (1997), who explain club convergence members.

11. Note that we can write (where av is an average of all domestic industries of its type):

12. As in the previous case, this term enables us to rule out scale effects and, due to the human-capital accumulation, it is needed for a stable growth rate over time.

13. That is, lending takes the form of ownership of the profitable firms, which are the ones that produce intermediate goods. The value of these firms, in turn, corresponds to the value of patents in use, as explained below.

14. It is useful to keep in mind the distinction between (i) Southern technological knowledge (Q_L,S and Q_H,S ) and (ii) available Southern technological knowledge through trade of intermediate goods (Q_L,N and Q_H,N ).

15. Resources devoted to R&D immediately increase in the North as well, but only for the third reason, (iii). Northern resources are reallocated at the expense of current consumption, while in the South C increases with the level effect.

16. That is, V(k,j,t) is the market value of the patent or the value of the monopolist firm, owned by consumers.

17. Internally and internationally (due to the technological-knowledge diffusion).

18. To solve numerically the system of differential equations in each trade regime (available upon request), we use parameter calibration and sensitivity analysis based on empirical literature and theoretical conditions and the fourth-order Runge-Kutta classical method.

19. The reduction of the gaps reflects different changes in I_N and I_S . In addition to the advantage-of-backwardness effect on I_S , different changes in I_N and I_S arise from inter-country differences in the allocation of resources to R&D. R&D resources increase more in the South due to stronger incentives. Incentives remain stronger in the catching-up South as long as the effect of the fall in the cost of imitation relative to innovation prevails; that is, during transition.

20. Results for other measures of productivity (Y, Y_w and ) suggest that they are once again greater in the North, but that the inter-country differences are now smaller.

21. For example, an advance in A_N helps the steady state world growth rate, although it expands the inter-country TFP gap, whereas an improvement in A_S helps the steady state world growth rate and drops the inter-country TFP gap.

22. Moreover, the computation of Y, Y_w and also suggest that the aggregate productivity is greater in the North.