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Oxford Economic Papers Advance Access originally published online on February 19, 2007
Oxford Economic Papers 2007 59(4):682-701; doi:10.1093/oep/gpm002
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© Oxford University Press 2007 All rights reserved

Specialization on a technologically stagnant sector need not be bad for growth

Gabriel J. Felbermayr

Department of Economics, Eberhard Karls University Tübingen, Nauklerstraße 47, 72074 Tübingen, Germany; e-mail: gabriel.felbermayr{at}uni-tuebingen.de


  Abstract

This paper presents a two-sector, North-South model of endogenous growth, where the investment goods sector features learning by doing. There are no technological spillovers across countries that are integrated only via goods markets. In equilibrium, South specializes on the consumption sector. Despite strict concavity of the production function for consumption goods, the endogenous decline in the relative price of investment goods maintains the incentives for capital accumulation. Hence, specialization on the stagnant consumption sector does not entail a growth penalty. The model is consistent with a number of empirical observations: (i) the relative price of investment goods has been declining in many countries; (ii) poor countries are net importers of investment equipment; (iii) per capita income convergence has stopped in the sample of open economies.

Key Words: JEL classifications: F43 • O41


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