North-South Technological Diffusion and Dynamic Gains from Trade

Abstract

This paper studies the transitional dynamics in a quality ladder model of endogenous growth in which North-South trade leads to technological diffusion through reverse engineering of intermediate goods. The concept of learning-to-learn is incorporated into both imitative and innovative processes, which in turn drive domestic technological progress. International trade with imitation leads to feedback effects between Southern imitators and Northern innovators who compete for the world market. Consequently, both regions face transition paths dependent on their relative technologies. We solve the model numerically to illustrate the transition paths and welfare effects of Southern trade liberalization. While particular welfare results depend on parameter choices, we demonstrate that focusing solely on steady-state results can lead to incorrect welfare interpretations.