DP13674 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.