Trade, Technology, and the Great Divergence
Why did per capita income divergence occur so dramatically during the 19th century, rather than at the outset of the Industrial Revolution? How were some countries able to reverse this trend during the globalization of the late 20th century? To answer these questions, this paper develops a trade-and-growth model that captures the key features of the Industrial Revolution and Great Divergence between a core industrializing region and a peripheral and potentially lagging region. The model includes both endogenous biased technological change and intercontinental trade. An Industrial Revolution begins as a sequence of more unskilled-labor-intensive innovations in both regions. We show that the subsequent co-evolution of trade and directed technologies can create a delayed but inevitable divergence in demographics and living standards—the peripheral region increasingly specializes in production that worsens its terms of trade and spurs even greater fertility increases and educational declines. Allowing for eventual technological diffusion between regions can mitigate and even reverse divergence, spurring a reversal of fortune for peripheral regions.
We thank numerous people for helpful comments including Robert Allen, Quamrul Ashraf, Stephen Broadberry, Gregory Clark, Diego Comin, Lewis Davis, Robert Feenstra, Raphael Franck, Oded Galor, Timothy Hatton, Phillip Hoffman, Marc Klemp, Per Krusell, Christopher Meissner, Stelios Michalopoulos, Steven Nafziger, Karl Gunnar Persson, Jean-Laurent Rosenthal, Dean Scrimgeour, Paul Sharp, Hans-Joachim Voth, David Weil, Jacob Weisdorf, and Jeffrey Williamson; seminar participants at Brown University, College of William and Mary, University of Connecticut, and Yale University; and conference participants at Frontier Research in Economic and Social History workshop, Saint Pierre d’Entremont, France; Frontier Research in Economic and Social History workshop, Universidad Carlos III de Madrid, Spain; Royal Economic Society Meetings, Royal Holloway College London, England; Eighth BETA Workshop in Historical Economics, Strasbourg, France; Conference on Trade, Poverty and Growth in History, Madrid, Spain; Macroeconomic Research at Liberal Arts Colleges Workshop, Lafayette College; CEPR Macroeconomics and Growth Programme, London Business School; Economic Divergence and Convergence in History, NYU Abu Dhabi; Decline and Rise: Asia since the Industrial Revolution, All-UC Group, CalTech. All errors are ours. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Alan M. Taylor
Alan M. Taylor has served as an author, consultant, or speaker for various research organizations, policy making institutions, and financial sector firms. He currently serves as a Senior Advisor at PIMCO.