Trading Population for Productivity

Abstract

This research argues that the rapid expansion of international trade in the second phase of the industrial revolution has played a significant role in the timing of demographic transitions across countries and has thereby been a major determinant of the distribution of world population and a prime cause of the Great Divergence in income per capita across countries in the last two centuries. The theory suggests that international trade affected the evolution of economies asymmetrically. The gains from trade were channeled towards population growth in non-industrial nations while in the industrial nations they were directed towards investment in education and growth in output per capita. International trade enhanced the specialization of industrial economies in the production of skilled intensive goods. The rise in the demand for skilled labor induced an investment in the quality of the population, expediting the demographic transition, stimulating technological progress and further enhancing the comparative advantage of these industrial economies in the production of skilled intensive goods. In non-industrial economies, in contrast, the specialization in the production of unskilled intensive goods that was brought about by international trade reduced the demand for skilled labor and provided limited incentives to invest in population quality. The gains from trade were utilized primarily for an increase in the size of the population. The demographic transition was therefore delayed, increasing further the abundance of unskilled labor in these economies and enhancing their comparative disadvantage in the production of skilled intensive goods. The focus on the interaction between population growth and comparative advantage generates an important new insight regarding the distribution of the gains from trade. The theory suggests that even if trade equalizes output growth of the trading countries, (due to the terms of trade effect), income per capita of developed and less developed economies will diverge since in less developed economies growth of total output will be generated primarily by population growth, whereas in developed economies it will be generated by an increase in output per capita.