NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Trade, Technology, and the Great Divergence

Kevin Hjortshøj O'Rourke, Ahmed Rahman, Alan M. Taylor

NBER Working Paper No. 25741
Issued in April 2019, Revised in April 2020
NBER Program(s):Development of the American Economy, Economic Fluctuations and Growth, International Finance and Macroeconomics, International Trade and Investment

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.

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Document Object Identifier (DOI): 10.3386/w25741

 
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