North–South trade, technology diffusion, and uneven development

Abstract

ABSTRACT A recent consensus in the trade and endogenous growth literature establishes that North–South trade could only be detrimental to the South if there is no international technology diffusion. In this paper, I challenge this consensus. To do so, I develop a North–South two-sector trade model, with innovation and technology diffusion (or imitation). The crucial elements of the model are that diffusion is cheaper than innovation, but costly nonetheless, and that it occurs in the modern sector. By opening to trade, the South ends up specializing more in traditional sector production, losing the productivity gains associated with technology diffusion through modern sector production. The model thus confirms that technology diffusion is a force of convergence but shows that trade makes the South experience lower levels of technological progress and income relative to the North, so-called uneven development. After presenting the model, I broadly discuss the consistency of its policy implications in light of historical evidence and discuss the empirical plausibility of its crucial assumptions.