Does international trade lead to uneven development or convergent growth?

Abstract

This study presents a model of North–South trade and development and investigates the growth rates of two countries under a trade pattern that the North specializes in investment goods while the South specializes in consumption goods. Many studies on North–South trade conclude that both countries' growth rates are equalized in the long run. Conversely, we show that if the ‘comparative advantage’ is explicitly considered, both countries' growth rates are not equalized in some cases and, hence, the South cannot catch up with the North even in the long run. Unlike many previous studies, we close the model by fixing each country's income distribution and making the price and quantity variables interdependent. Our results show that the growth rates of both countries are equalized in the long run if their trade patterns are fixed, irrespective of their comparative advantages, whereas their growth rates are not equalized in some cases if their trade patterns are determined by the comparative advantage principle.

KEYWORDS:

• International trade
• uneven development
• constant income distribution
• comparative advantage

JEL CLASSIFICATIONS:

• F10
• F43
• O33
• O41

Acknowledgments

Earlier versions of this paper were presented at seminars held at Chuo University in 2018 and at the 77th Annual Meeting of the Japan Society of International Economics held at Kwansei Gakuin University in 2018. The author would like to thank Shigehiro Naruse, the discussant at the annual meeting, and the participants for their suggestions and comments. I would also like to thank an editor of this journal and an anonymous reviewer for their constructive comments and useful suggestions. The usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Using a North–South model of Schumpeterian endogenous growth, Hübler (2015) reveals that international spillovers of technology and knowledge is imporatnt for North–South convergence. Liu (2009) conducts an empirical analysis as to whether trade causes income convergence, and concludes that trade induces income convergence. On the contrary, Kim (2011) empirically shows that greater trade openness has strongly beneficial effects on growth and real income for developed countries but significantly negative effects for the developing countries. Jain and Mohapatra (2023) empirically examine the dynamic linkages between trade, economic growth, poverty, and inequality in 18 emerging countries during the period from 1991 to 2020. They conclude that trade promotes growth. Hence, empirical facts are mixed.

2 For studies that consider North–South trade and economic growth, see also Blecker (1996), Conway and Darity (1991), W. A. Darity (1990), Dutt (1988, 1996), A. Sarkar (1989), and P. Sarkar (1997). W. Darity and Davis (2005) conducted a survey of studies on uneven North–South development.

3 Mainwaring (1974) presents a two-country, two-good model and compares the equilibrium under autarky with that under free trade. To close the model, he assumes that the profit rate is constant under both autarky and free trade. In his model, the economic growth rate is determined by multiplying the profit rate by the savings rate. Accordingly, unless the saving rate changes after trade, the economic growth rate does not change.

4 Foley and Michl (1999) and Foley, Michl, and Tavani (2019) present a one-sector classical growth model with a fixed constant wage/profit share.

5 For ease of analysis, we use the constant saving rate of capitalists. Krugman (1981) also uses this assumption in his analysis of the relationship between international trade and uneven development.

6 International trade has a possibility to affect the choice of technologies. Gong and Zhou (2023) investigate how international trade affects a firm's technology choice.

7 In this case, we must introduce the profit maximization of firms and, thus, the analysis becomes more complicated when considering the structure of the model. Our model is closed by giving the economy-wide income distribution and is different from the usual linear production model in which the price system and the quantity system are independent in that both systems are interrelated.

8 The specification of the equation under autarky is based on Uni (1996).

9 For the detailed derivation, see Appendix 1, available on request.

10 For the detail, see Appendix 2, available upon request.

11 In Appendix 5, available upon request, we also investigate an alternative trade pattern: a developed country specializes in the consumption goods sector, while a developing country specializes in the investment goods sector.

12 The values of ${\omega }_T^A$, $r_T^B$, and $g_T^B$ when $p_T=p^A$ or $p_T=p^B$ are obtained by the method in equations (57(57) $\frac{h_1^A}{h_2^B}\frac{(1+{\theta }^A)}{(1+{\theta }^B)}\frac{s^B}{(1+{\theta }^A-s^A)}\kappa =p^B⟹{\kappa }_3=\frac{h_2^B}{h_1^A}\frac{1+{\theta }^B}{1+{\theta }^A}\frac{1+{\theta }^A-s^A}{s^B}{p}^B.$(57) ) and (58(58) $\frac{h_1^A}{h_2^B}\frac{(1+{\theta }^A)}{(1+{\theta }^B)}\frac{s^B}{(1+{\theta }^A-s^A)}\kappa =p^A⟹{\kappa }_4=\frac{h_2^B}{h_1^A}\frac{1+{\theta }^B}{1+{\theta }^A}\frac{1+{\theta }^A-s^A}{s^B}{p}^A.$(58) ).

13 Figures 15–22 and Tables 5–8 are results for an alternative trade pattern. For details, see the Figures and Tables in the Appendices, which are available on request.

14 According to the Heckscher–Ohlin–Samuelson (HOS) model, country A will specialize in the more capital-intensive consumption goods sector, while country B will specialize in the more capital intensive consumption goods sector. However, our trade pattern is opposite to that of the HOS model because we introduce differences in technologies between countries.

Additional information

Funding

This work was supported by Japan Society for the Promotion of Science [22K01476].