INNOVATION AND INEQUALITY IN A SMALL WORLD

Ines Lindner,Holger Strulik

doi:10.1111/iere.12437

Abstract

AbstractWe present a multicountry theory of economic growth and R&D‐driven technological progress in which countries are connected by a network of knowledge exchange. Technological progress in any country depends on the state of technology in the countries it exchanges knowledge with. The diffusion of knowledge throughout the world explains a period of increasing world inequality, followed by decreasing relative inequality. Knowledge diffusion through a small world network produces an extraordinary diversity of country growth performances, including the overtaking of individual countries and the replacement of the technologically leading country in the course of world development.

Highlights

In pre-modern times, before the take-off to long-run growth of the countries that led the industrial revolution, national income differences were minuscule from today’s perspective. Bairoch (1993, Ch. 9) reviews the literature and comes to the conclusion that, even in the mid-18th century, income of the future developed countries exceeded income of the future least developed countries by only factor 1.1 to 1.3
In an earlier working paper (Lindner and Strulik, 2015) we considered economic growth based on human capital externalities and knowledge diffusion through networks and found that a small world network generates a similar complexity of growth performances
We argue that the Small World network is already sufficiently complex to generate growth trajectories consistent with the historical development of world inequality and economic growth

Summary

Introduction

In pre-modern times, before the take-off to long-run growth of the countries that led the industrial revolution, national income differences were minuscule from today’s perspective. Bairoch (1993, Ch. 9) reviews the literature and comes to the conclusion that, even in the mid-18th century, income of the future developed countries exceeded income of the future least developed countries by only factor 1.1 to 1.3. In contrast, the economic growth of the leaders, followers and trailers of the industrial revolution is endogenously explained and understood by the increasing diffusion of knowledge throughout the world. This allows us to explain a richer set of phenomena. The network through which knowledge diffuses is best conceptualized as face-to-face interaction of people This notion is supported by a series of recent studies documenting the importance of short-term (Andersen and Dalgaard, 2011; Hovhannisyan and Keller, 2015) and long-term (Ortega and Peri, 2014) cross-border flows of people for TFP growth and economic growth.

The Model

Long Run Dynamics in Connected Networks

Adjustment Dynamics

Knowledge Diffusion and Income Evolution in A Small World

Conclusion