Abstract
We present a multi-country theory of economic growth and R&Ddriven 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 after the take-off of the forerunners of the industrial revolution, 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 premodern 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 mid18th 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, 2014), 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
In contrast, the economic model is straightforward but the process of knowledge diffusion is nontrivial and the analysis focuses on transitional dynamics
Summary
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 mid18th 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 take-off and subsequent growth of the leaders, followers, and trailers of the industrial revolution is endogenously explained by R&D effort and the imperfect diffusion of knowledge throughout the world. 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 total factor productivity (TFP) growth and economic growth.
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