International convergence and local divergence

This paper presents an East–West endogenous-growth model that reproduces recent stylized facts applicable to the trade liberalization process of many developing countries: convergence with the rest of the world, higher internal divergence, increasing spatial concentration of economic activity and higher growth rates. We claim that the ongoing reduction of manufacturing trade costs may generate a net inflow of global demand towards the industrialized cores of developing countries. This will induce a reallocation of labor from traditional to modern sectors. In turn, such a sectoral shift may enlarge the catch-up (imitation) potential of developing countries and raise global growth rates, due to Grossman and Helpman’s complementarity between imitative and innovative activities. Although advanced economies may become relatively worse off, the effect on growth rates may allow them to gain in absolute terms.