Globalization, Divergence and Stagnation

Proposition 1 For any σ ∈ (0,1), there exists a level θ such that if θ < θ income
differences in free trade, as measured by ω, are larger than income differences in
autarky.

This is the Hrst result of the paper, that trade can lead to divergence in income
and productivity levels. Proposition 1 is based on the interplay between specializa-
tion and weak IPRs in developing countries: Hrst, trade and specialization imply
that the North and South beneHt directly from different sets of innovations. Sec-
ond, weak IPRs make innovations directed to the South less proHtable. As θ → 0,
R&D is directed towards Northern sectors only and the income gap grows up to
its maximum (f_N(0)∕φ_s (0)), irrespective of any other country characteristics. In
autarky, instead, even with θ = 0, the South beneHts from the innovation activities
performed in all the sectors for the Northern market.

If North-South trade (with a low θ) shifts technology systematically in favor
of the North, is it always beneHcial for advanced countries? The striking answer
is negative, as divergence opens the door to stagnation. To see this, calculate the
equilibrium growth rate in free trade (see the Appendix for the derivation):

Note that the growth rate of the world economy is increasing in θ: a higher θ ex-
pands the range z of goods produced in the North and decreases ω, all effects that
contribute to raising the growth rate in (23). The intuition is simple and is the com-
mon argument in favor of IPRs protection: better enforcement of IPRs strengthens
the incentives to innovate and therefore fosters growth. But the surprising impli-
cation of (23) is that the growth rate of the world economy approaches zero if θ
is low enough. Endogenous growth is here possible because both the North and
the South are growing. If innovations were not directed to Southern sectors, the
Northern economy would be trapped into decreasing returns, not only because its
sectors would experience falling output prices and proHt margins, but also because
more and more sectors would move to the South, where production is increasingly
cheaper. In fact, long-run growth can stop even if θ > 0. To see this, note that
along the balanced growth path innovation has to be equally proHtable in all the
sectors; if θ is low enough, proHtability of R&D in the South becomes so low that
returns from investment fall short of the discount factor ρ and growth is destined

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