Loss of technological leadership of rentier economies: a two-country endogenous growth model

Abstract

History shows that rich countries may lose their productivity advantage by changing to a rentier economy with large investments abroad. In our two-country two-sector model with firm-specific knowledge and perfect international capital markets, the initially most productive country is being overtaken by the initially backward country. The two countries share the same structural parameters but have different initial knowledge stocks. The larger the initial productivity gap is, the larger is the leader’s productivity loss, which implies path-dependency. The existence of a non-tradables sector drives the result. The leading economy gradually accumulates net foreign assets. Interest receipts are spent on imports and non-tradables. Labor is shifted from tradables production and research to non-tradables.