1 Introduction
The past decades have witnessed a dramatic increase in the level of market integra-
tion across the globe. During the period 1960-1998, the average share of import plus
export in GDP rose from 0.54 to 0.76 and the volume of world merchandize trade
grew steadily at 10.7% per year.1 A distinctive feature of this wave of globalization
is the increasingly important role played by less developed countries (LDCs). Al-
though trade between the US and non-OECD countries is still relatively small, it
almost tripled during the period 1980-95 (Wood, 1998) and the same years have seen
unprecedented episodes of market liberalization in LDCs (Sachs and Warner, 1995).
In this scenario of increasing integration between more and less advanced economies,
the cross-country income distribution is also changing. Many commentators claim
that we live in an era of growing inequality. Quah (1993) documents that countries
are diverging from the world mean.2 Similarly, Pritchett (1997) argues that “di-
vergence in relative productivity levels is the dominant feature of modern economic
history” .3 Despite evidence of convergence among rich nations and falling poverty
in world population,4 a crude measure of cross-country inequality, the variance of
log real per capita GDP, displays a disturbing upward trend, rising steadily from
0.7 in 1960 to more than 1.3 in 1998.5 Observations like these stress the centrality
of understanding the effects of trade on the world income distribution and raise the
concern of a possible causal link from globalization to divergence. This concerns
have recently been the subject of heated debates. Although it is well known that
trade affects the world income distribution, only few models focus on how and why
gains from trade may be systematically biased in favor of rich nations.6
1The trade share in GDP is from the Penn World Table, Mark 6.0; averages refer to a constant
sample of 115 countries. World merchandize trade is from WTO data.
2Interestingly, Beaudry, Collard and David (2002) show that this phenomenon seems to be more
pronounced among open countries.
3Pritchett (1997), using data from Maddison (1995), shows that, over the past century, advanced
economies consistently grew faster than the less developed ones. Perhaps surprisingly, the average
growth differential reaches a peak in the last two decades, characterized not olny by the globalization
boom, but also by low productivity growth in advanced countries.
4See Sala-i-Martin (2002) on falling poverty in world population, a phenomenon mainly due to
the good performance of two very populous countries, India and China. For the purpose of the
paper, that is to relate different policies to economic prosperity, the country seems the relevant
unit of analysis. See Acemoglu and Ventura (2003) on the relative stability of the world income
distribution.
5Data form the Penn World Table 6.0 on a sample of 115 countries.
6The most common argument is based on the need to protect infant industry in LDCs. See
Young (1991) and Acemoglu, Aghion and Zilibotti (2002) for recent applications.