Much of the motivation for the renaissance of growth theory in the mid-1980s was due to the finding that, contrary to the predictions of the traditional neoclassical growth model, most countries do not appear to be converging over time. In Discussion Paper No. 1359, Research Affiliate Dan Ben-David and Atiqur Rahman focus on the relationship between technology, trade and income convergence. They examine the route through which international trade plays a role in the reduction of income gaps between countries. The paper builds upon earlier work by Ben-David which explored the convergence issue in general, as well as the link between international trade and income convergence. Earlier data shows that, while most countries exhibit little evidence of unconditional income convergence, countries that trade heavily with one another tend to exhibit a much higher incidence of convergence.

Ben-David and Atiqur explore two alternative explanations for this trade-related convergence. In one, trade-related income convergence is due to a convergence in capital-labour ratios. Little support is found for this explanation. The alternative story is one of a convergence in technologies due to trade. This alternative is corroborated by a high incidence of convergence in total factor productivity among countries that trade heavily with one another – an outcome that is not common between these same countries when they are grouped randomly rather than on the basis of trade.

Technological Convergence and International Trade
Dan Ben-David and A K M Atiqur Rahman