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NBER WORKING PAPER SERIES
WHY ARE THERE RICH AND POOR
COUNTRIES?: SYMMETRY-BREAKING
IN THE WORLD ECONOMY
Kiminori Matsuyama
NBER Working Paper 5697
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
August 1996
The first draft of this paper was prepared for the TCER-NBER-CEPR
Trilateral Conference,
“Economics of Agglomeration,” Tokyo, Japan, January 11 and 12, 1996. This paper is part of
NBER’s research program in International Trade and Investment. Any opinions expressed are those
of the author and not those of the National Bureau of Economic Research.
O 1996 by Kiminori Matsuyama. All rights reserved. Short sections of text, not to exceed two
paragraphs, may be quoted without explicit permission provided that full credit, including O notice,
is given to the source.
NBER Working Paper 5697
August 1996
WHY ARE THERE RICH AND POOR
COUNTRIES?: SYMMETRY-BREAKING
IN THE WORLD ECONOMY
ABSTRACT
To explain
coordination
cross-country
differences
in economic
performance,
the economics
of
failures typically portrays each country in a closed economy model with multiple
equilibria and then argues that the poor countries are in an equilibrium inferior to those achieved by
the rich. This approach cannot tell us anything about the degree of inequality in the world economy.
A more satisfactory approach would be to build a world economy model and show why it has to be
separated into the rich and the poor regions, i.e., to demonstrate the co-existence of the rich and poor
as an inevitable aspect of the world trading system, In the present model, the symmetry-breaking
of the world economy
into the rich and the poor occurs because international
trade causes
agglomeration of different economic activities in different regions of the world. International trade
thus creates a kind of “pecking order” among nations, and as in a game of “musical chairs,” some
countries must be excluded from being rich.
Kiminori Matsuyama
Department of Economics
Northwestern University
2003 Sheridan Road
Evanston, IL 60208
and NBER
[email protected] .nwu.edu
1.
Introduction.
One major
the diversity
challenge
for the theory
of economic
performances
There Rich and Poor Countries?”
across
by developing
that the Rich countries
somehow managed
in a Pareto-inferior
Murphy,
closed
Shleifer,
and Vishny
economies
with
aggregate
of a good equilibrium
difficult
to see within
bad
state,
coordination
in
Indeed,
all
the
economy
could
while
the
models
go back
offers no compelling
cross-country
in order
imitate
to
One
(1996) .
role
they
they
is no
more
developed
are
and forth
between
in
the
development
countries,
and people
and are trapped
along
have
While
the
static,
good
than
and
we
the
insightful,
state,
in
co-
it is
taken
bad
paper
to observe
in
the
state.
literally,
Their
need
in the Poor countries
since
the
said, “according
all
competitive
have to be trapped
and continue
problem,
this line is
demonstrated
the two equilibria.
(As one commentator
equilibrium,
of imperfectly
difficult
reason why we have observed
eliminate
work
why some countries
themselves
and arguing
the
hence
the huge
to their theory,
to
do
is
simply
are just too dumb
to do it.”)
can partially
For example,
multiple
state
differences.
the Rich
to be able
good
influential
spillovers,
find
attempts
equilibria,
and a bad equilibrium.
others
failures
coordination
In the context
their framework
“why Are
a Pareto-superior
a necessary
The most
(1989) .
existence
the
to achieve
is to explain
In short,
of coordination
a model of multiple
fail to achieve
equilibrium.
development
the countries.
The economics
to answer this question
while the Poor countries
of economic
in a series
steady
states:
In these models,
in determining
deal
with
of papers,
Matsuyama
I studied
by making
dynamic
models
(1991, 1992) ; see also
the initial
the eventual
criticism
this
condition
state
toward
1
dynamic.
of development
Ciccone
of the economy
which
the model
with
and Matsuyama
plays an important
the economy
will
gravitate
(without
entirely
Offsfl, i.e.,
ruling
some
out the possibility
comtries
may
occasionally
join the club of the Rich countries) .
why the cross-country
to magnify
over
observations
explicitly
differences
time,
of
and,
at
IIeconomic
model a mechanism
and hence
come
short
of
“economic
escape
These dynamic
miracles, ” or “take-
from
the poverty
models
thus help to explain
could be self-perpetuating
the
same
time,
they
are
and sometimes
consistent
miracles. “
Nevertheless,
of generating
the initial cross-country
of offering
an answer
trap and
these
to the question,
with
studies
tend
a few
do
not
differences,
“Why Are There Rich
and Poor Countries?”
In
all
these
independent,
isolated
possibility
studies
in a close
paper
the
are in different
a model
of
international
trading
with
of the
world
living
trade.
and
According
in
Instead
equilibria,
where
The models
income
the
lessons
of portraying
and arguing
studies
many
to this model,
appear
camot
as
a
that
have
the
different
done,
this
identical
differences
stable
the co-existence
from
each country
(inherently)
It is an inevitable
is not just the possibility.
the
economy.
It is shown that cross-country
the
merely
an
“Why Are There Rich and
as the previous
economy,
economy,
suggest
in the world
although
here.
multiple
equilibria,
closed
equilibria
this question,
perspective,
trade with one another.
standard
countries
model
a
and Poor countries.
to answer
global
modelled
of inequality
are also incorporated
economy
offers
countries
a
is
multiple
of Rich
the degree
from
country
Hence,
is an attempt
Countries?”
countries
entity.
about
This paper
previous
each
of the co-existence
tell us anything
Poor
studies,
outcome
in
of
of Rich and Poor
aspect
of the world
system.
The model
concreteness
.
developed
below adopts many specific
Nevertheless,
the logic behind
2
assumptions
the result
for the sake of
is fairly
general
and
can be understood
to be
Furthermore,
consumed.
production
countries,
each country
cross-country
such
a
agglomeration
advantage
countries,
which
of labor.
The stable
breaking”
in
those
From
countries
to
different
longer
become
of
caused
international
to take charge of producing
agglomeration
among
economies.
nations.
an
economies,
individual
into some
division
of “symmetryAnd
trade.
while
advantage
in
country,
the
of
comparative
comparative
in the previous
to reach
some
advantage
other
countries,
goods
with
of labor requires
tradeable
trade
countries
3
perspective,
goods,
thus
small
can be Rich:
some
Poor
They fail
equilibrium
thus
offers
different
a kind
and
seem just
however,
with differing
creates
of
studies.
The problems
equilibrium.
division
problems
a Pareto-superior
The global
different
all
presence
Poor.
International
Not
the
as a result
to acquire
comparative
failures.
The international
in
trade
an equilibrium,
of a system of the international
by
across
and there is no
acquiring
appears
in a Pareto-inferior
view.
remains
difference
coordination
of coordination
difference
the
these
of international
stable
start
in
trade,
of each good concentrates
agglomeration
acquire
be
countries
the production
large
perspective
a necessary
find themselves
order”
no
may look just like those captured
to achieve
different
under autarky
if they are lucky enough
economies,
the
can
economy,
with
happen
agglomeration
a matter
world
associated
which
goods,
any imate
the possibility
that need
economies
of international
Without
allocation
allocation
As
agglomeration
these goods by the same amount,
cross-country
Rich
some
In the absence
leads to an emergence
the
become
are
Now introduce
economies.
in different
countries
produces
The equilibrium
symmetric
that there are a list of goods
in each country.
difference.
in these goods.
in goods
there
of each of these goods.
goods must all be produced
but
Imagine
intuitively.
a
countries
degrees
of
countries
of
“pecking
must
be
excluded
from being
the
time,
countries
Rich.
model
does
might
This
feature
Although
viewed
neoclassical
that
world,
the
a
theory
adequately
of
deal
economists,
the
as
Baran
such
(1950) , who believe
between
the
separation
two
approaches
of the world
recommendations
The
geography
an element
thus
to
by Krugman
makes
belt
held
this
and
into
the
by
which
of
by first
two
in
and
is
that
this
the
hinterland.
cannot
or
“radical”
notably
Prebisch
paper
through
explains
economy.
formal
work
of
In this
The
policy
manner.1
on
economic
in transport
identical
a
“symmetry-
validity
recent
a reduction
the otherwise
the
of the huge differences
in a more
the
of
approach
most
the Poor
address
assuming
regions
view of the world
to
The
and then examining
This
and
adopted
spirit
agricultural
the
is a cause
economists
shows
problem
can also
trade.
“structuralist”
(1957),
the Rich
to separate
the effects
this paper
endowment,
many
trade
it possible
in
all)
and becoming
North-South
regions.
of the radical
paper
(1991),
on
across
two
Myrdal
by the radical
a symmetry-breaking
manufacturing
the
approach
economy
offered
closest
The
(but not
failures,
problem,
or in the factor
(1957),
regions.
framework
differences
concerns
At the same
economy.
the North-South
between
some
to talk about
literature
that international
breaking, ” capturing
present
the
fundamental
with
it possible
chairs. “
that
coordination
by the development
to
trade
possibility
the
makes
say in labor productivity
consequences
causes
motivated
some
the
in the world
contribution
exist
out
in overcoming
miracle”
trade
there
rule
of the model
mainly
as
just like in a game of “musical
not
succeed
such an “economic
be
Rich,
regions
costs
into the
literature,
the
‘Matsuyama
(1995) discusses
more broadly how the notions
of “symmetrybreaking, ” and
“pattern
formations, ” borrowed
from recent
development
in
nonlinear sciences, can be useful in thinking about a variety of economic issues,
which camot
be addressed appropriately
within the neoclassical
paradigm.
4
factor mobility
contrary,
plays
the factor mobility
in the context
paper,
and
article
721) .
an important
of
its
this paper
discussing
blocks
to establish
section
look
the
at
the
implications
2.
The world
Each country
economy
There
2 are tradeable,
Manufacturing,
preferences
the share
denoting
while
and
over
E
=
in
In
which
goods,
3 is nontradeable.
The
i in consumer’s
the aggregate
income
(1995, pp.720-
of the world economy.
so that
I refrain
of this section
from
is rather
of the model.
autarky.
section
of
5,
In
In section
4, I
I
some
discuss
can
expenditure,
by Y, the budget
small
countries.
is the only primary
1, 2, and 3.
representative
which
identical
Good
factor
1 and Good
(Think of them as Agriculture,
consumer
be represented
P:’ P:’ P:’ U , where U is utility,
of Good
survey
Economy.
of labor,
are three consumption
goods,
recent
and its extension.
features
under
of a continuum
with L units
three
in my
in this
6 concludes.
of the World
Services.)
the
The purpose
equilibrium.
consists
Good
standard,
the key
is more relevant
Matsuyama
structure
allocation
Section
Structure
is endowed
of production.
function,
economy
of the model.
The Physical
fairly
and highlight
the equilibrium
world
processes;
To the
of the model
sketched
as its elaboration
issues in detail.
notations,
3, I discuss
are
which
version
been
I lay out the physical
of the model
specification
has
and cumulative
can be viewed
In the next section,
The building
A simpler
trade.
implications,
on complementarities
Hence,
the agglomeration.
plays no role in this paper,
of international
a few
role in generating
Pi the price
has
by
Cobb-Douglas
an expenditure
of good
i, and Di
satisfying
PI + P2 + B3 = 1-
constraint
is then written
BY
as
Y
The assumption
algebra
simple,
i.e., there
prices .
This
somewhere
in the world.
means
that
preferences
This
not only helps
to keep the
that both Good I and Good 2 (as well as Good 3)
are positive
the
(1)
P:’ P:’ P:’ u
of the Cobb-Douglas
but also implies
are “essential, “
=
two
demand
tradeable
feature
plays
for these goods
goods
must
an important
at any finite
always
role
be
produced
in the following
analysis.
The
returns
three
consumption
to scale
technologies.
labor and a variety
by a symmetric
All
CES production
of intermediate
cri being
the
share
goods
are
of
produced
the inputs
of differentiated
composite
consumption
goods
function,
The
[J‘[p(z)
o
and Stiglitz.
unit
elasticity
Without
more
the price
of substitution
that a different
degree;
p(z)
Sector
much
sector
i
spends
between
relies
ai
loss of generality,
intensively
than Sector
Sector
and
they are
are aggregated
Labor
and the
technology
production
in
with
each
(2)
intermediates
available
z, and u > 1 the direct
pair
of
constant
ll-”dz+
1
of intermediates.
on the intermediate
fraction
with
as
of variety
every
of
cost
where W is the wage rate, N the range of differentiated
in the marketplace,
which
with a Cobb-Douglas
can thus be expressed
W1-=J
inputs,
as in Dixit
intermediates.
cl =
are nontradeable,
intermediate
inputs are combined
sector
competitively,
their
input
revenue
2 is assumed
sector
on
the
partial
It is assumed
to a different
intermediates.
to use intermediate
inputs
1;
al
If Goods 1 and 2 are interpreted
(3)
<a2.
as Agriculture
6
and Manufacturing,
this intensity
assumption
implies
more heavily
ensuing
that the production
upon the local support
analysis
depends
that the tradeable
local
support
goods
Each variety
labor to produce
of
its
sectors
inputs
differ
depends
to say, nothing
What
in the degree
power,
is critical
to which
in the
here
is
they rely on the
monopolistically
the
the
competitive
given
by
economy,
but
so that
with other
Hence,
(2), is simplified
+ F units
market
firm
power
does
not
rule
for
By choice of units,
the unit
of
Each firm, aware
As is well-known,
pricing
firm, p(z) [1-I/u] = aW.
. p . W.
its
each
firms.
simple
competitive
uses ax(z)
the fixed cost.
optimally,
following
set a = 1 - 1/0, so as to have p(z)
in each sector,
price
interaction
to
fi.Km, which
by a single
to the aggregate
leads
by the monopolistically
where F represents
sets
any strategic
specification
are supplied
is supplied
relative
into account
Needless
on such an interpretation.
x(z) units,
monopoly
negligible
industries.
sector
industries.
The intermediate
firms .
cost of the manufacturing
is
Lake
this
each
one can
cost of production
to
(4)
Hence,
but
in all the consumption
the intensity
than Sector
Since
production
assumption
goods
sector,
implies
the production
cost declines
that the cost declines
faster
with N,
in Sector
2
1.
all
the
inputs
functions,
x(z) = x, and earns
are
priced
all the input producing
the same revenue
a firm by S = px = Wx,
equally
and
firms
enter
operate
and the profit,
its wage bill B and its profit
B
=
W(ax+F)
=
[1
l-~
S+WF,
symmetrically
in the
at the same scale,
By denoting
the revenue
11 are expressed
of
as
(5)
and
(6)
n=s-B=~-wF.
respectively.
Finally,
there is no barrier
to entry or to exit in the intermediate
sector, which make all the input producing
3.
The Autarkv
Although
consisting
of
equilibrium
benchmark
consumed
produce
the ultimate
goal of the analysis
a continuum
of
of
small
each
for the subsequent
costs:
that
the
goods,
is, from
representative
100ai% of its revenue
sector
economies,
in
let
autarky,
preferences,
Hence,
us
the world economy,
first
which
look
offers
a
at
the
useful
all the consumption
in the absence
which
means
Ci =
>
WN1-”
goods must be
of trade, each economy
that their
prices
must
must be equal
(4),
PI
Since
is to examine
analysis.
amount.
all the consumption
open
economy
of the Cobb-Douglas
by a positive
to their
in equilibrium.
Equilibrium.
allocation
Because
firms earn zero profit
inputs
=
consumer
spends
on intermediate
~iY on
inputs,
(7)
.
the
Good
i,
total
and
Sector
revenue
i spends
of the inputs
is
(8)
where
@
represents
the
share
of
the
=
al~l +c2P2
intermediates
8
+
a3P3
sector
(9)
,
in
the
aggregate
income
in
(Here, superscript
autarky.
interpreted
extent
as
the
degree
A stands
of
to which an increase
to the monopolistically
Likewise,
the
aggregate
i spends
inputs
This parameter
demand
in the aggregate
competitive
Sector
for Autarky.)
externality,
income generates
can also be
measuring
additional
the
revenue
sector.
100(l-ai)%
of its revenue
on labor,
wage
income
satisfies,
WL
where
3
~(l-al)~~
[ 1
= NB+
use has been
made
of
]Y
(5) and
=~[(l-:)s+wF]+[
(9) .
Combining
+
[1
Y=
z
(lo)
l-oA]Y.
(8) and
(10) yields
(11)
[L-NF]
and
—=s
aw
The downward-sloping
revenue
firms,
of an
N.
revenue;
demand
range
the
see eq.
Figure
implies
inputs,
1 thus
intersection,
intermediate
This
merely
model,
inputs
the profit
a small
11 =
O,
or
S/aW
(and the nutier
= F.
each
given
size
per
declines
an excess
process
Hence,
from
lead
(12),
them)
that
hence,
profit,
would
with
of
its
of the aggregate
hence
firm,
how the
on the number
firm
and
of firms producing
9
(12) , showing
the degree
firms,
N implies
entry-exit
eq.
S, depends
of
of more
the market
and any plausible
where
firm,
is to say that,
reduces
that
1 depicts
producing
O*, the presence
suggests
a loss,
in Figure
input
present
(6) .
externality,
of
curve
intermediate
In
(12)
is
of a wide
the profit.
and a large
N
to the unique
the
variety
of
(13)
in this autarky
equilibrium
equilibrium.
values
(Here, superscript
of endogenous
=
(Pi)’
and, by inserting
derived
(14) and
The World
Economy
=
look at the equilibrium
trade
from
(7) and
the autarky
(11),
(14
,
(15
= wAg+
[1
(15) into
(l), the utility
level
in autarky
can be
of
the
international
Then,
world
=
(16)
6’L ~
L —
[1OF
Equilibria.
allocations
exogenously.2
equilibrium
P;p’ P;pa P;p’ WAL
Tradinq
Let us now introduce
of
W’L
represents
as
U*
4.
Then,
variables.)
YA
A also
in
economy,
trade.
In the first subsection,
of each small open country,
the
second
where
stisection,
the
terms
the relative
price
of
taking
I will
trade
are
I will
the terms
look
at
the
determined
endogenously.
4-A.
The Small
For each
ODen
small
pl/p2, is exogenously
economy produces
similar
open
given
From
Rodrzguez-clare
models
economy
in the world market.
Good 1 or Good 2 now depends
in the two sectors,
2see
Economy.
of a small
Unlike
and
10
1 and Good
in autarky,
2, q =
whether
on the ratio of the production
(4), it can be expressed
(1993, 1996)
open economy.
of Good
Rodrik
the
cost
as
(1996)
for
the
analysis
of
~2
which
increases
that
an
with
economy
with
(Agriculture),
which
and an economy
with
input
intensive
determined
N, due
a
to the intensity
small
N
has
uses the locally
a large
Good
2
a
assumption,
comparative
available
(Manufacturing)
by the equality,
The
.
advantage
intermediates
N has a comparative
advantage
threshold
This
(3) .
is to say
in
Good
1
less intensively,
in the
level
intermediate
of N,
N(q),
is
q = C1/C2:
a-1
N(q)
If N < N(q),
then the economy
Good 1 and Good 3.
takes
the form,
=
the output
of sector
consumption
1 by Ql, the income
goods,
identify
Y = PIQI + fi3Y , or
PIQI =
The total
.
only two of the three
produces
By denoting
q“-”
revenue
of the inputs
Ns
=
(17)
(1-133)Y.
sector
thus can be written
a1P1Q1+a3~3Y
=
as
(18)
61Y,
where
el
represents
the
(Superscript
specializes
WL
Solving
1
degree
indicates
in Good
= NB+
(18) and
of
1.)
the
=
a1(~1+P2)
aggregate
that,
of
Likewise,
(l-al) PIQ1+
(2o) simultaneously
demand
the
two
the wage
(1-a3)P3Y
externality
tradeable
income
when
goods,
can be written
N
the
<
N(q) .
economy
as
‘N[(l-+)s+
wFl+(l-e’)y”
’20)
yields
11
(19)
+a3P3,
Y=
—
[10:6’
T
(21)
[L-NF]
and
(22)
A similar
analysis
can show
that,
Y=
if N > N(q),
*
[1
T
we have
(23)
[L-NF]
and
(24)
where
ez s
(Superscript
specializes
2
in Good
In Figure
the number
eq.
indicates
relative
defined
implies
in
(9),
curve depicts
and there
two
tradeable
goods,
of the
that
two revenue
the
(19 , and
how the revenue
Equation
the
economy
three
(25 # must
of a firm depends
(22) applies
is a jump at N = N(q) .
(12), is also depicted
locations
(3), which
the
in the open economy.
(24) if N > N(q),
case,
of
(25)
+a3p3r
2.)
2, the solid
of firms
the autarky
that,
az(~l+pz)
if N c N(q),
The revenue
in the figure, by the dotted
curves
aggregate
satisfy
reflect
demand
the
intensity
externality
the following
function
curve.
on
and
in
The
assumption
parameters,
inequalities:
(26)
Unlike
no longer
in the autarky
declines
case,
monotonically
the revenue
with
of a firm,
the number
12
and hence
of firms.
This
its profit,
is because
an
entry
of firms,
shift
in comparative
intermediate
it pushes
the economy
which
advantage,
over
increases
the threshold
level,
the aggregate
causes
demand
for
a
the
inputs.
Figure
trade,
when
2 is also
drawn
under
the additional
condition
that
the terms
of
q = pl/pz, satisfies
or equivalently,
61 L
(27)
[– OF
(As
will
be
equilibrium,
seen
once
later,
the terms
As the figure
equal
to zero;
knife-edge
cost
case,
where
the firms
slightly
greater
of trade
there
two
make
above
three
in
equilibria,
N = N2.
Of these
of firms
is such
tradeable
is slightly
losses
the
and
there
threshold,
use of the intermediate
exit process,
below
the
world
sectors
in which
that,
entry
this equilibrium
if N is slightly
and hence
is an
the
inducement
economy
inputs,
that
N = N(q)
the economy’s
coincides
with
level,
to exit.
specializes
perturbation
in any plausible
smaller
an incentive
than
the
to enter,
13
the
is
is a
relative
terms
of
N(q) , the economy
inputs, and
If the economy
in Good
2, which
and the firms make profits,
would not be observed.
stable
economy
the profit
equilibria,
the threshold
Thus , with a slight
N . N1 and N = N2, are both
excess
hold
in Good 1, which makes less use of the local intermediate
firms to enter.
sense
must
is endogenized.)
are
the number
in the
If the economy
specializes
more
shows,
condition
N = Nl, N = N(q),
of production
trade.
this
which
and any plausible
is
makes
induce
entry-
The other two equilibria,
entry-exit
equilibrium
process
value,
and if N is slightly
in the
there
larger
is an
than
the equilibrium
value,
(27) , there
condition
The present
country
there is a loss and hence an incentive
are two stable
model
drastically
out
equilibria
thus predicts
change
worth
pointing
that
price
of the two tradeable
under
autarky
from
this
change
goods.
can be expressed
autarky
is not
Under the
of this economy.3
that the equilibrium
the
to exit.
to the
caused
open
allocations
economy
by a change
To see this, note
of each
case.
It is
in the relative
that the relative
price
is
as
(28)
from
(7) and
economy
(13).
case,
Hence,
the
(27), can be rewritten
61
a2-m,
Note that the lower bound
Therefore,
even without
In
what
equilibrium
values
(Stiscripts,
note
that
wage
i must
be equal
price
superscript
produces
open
(29)
“
the upper bound
i
=
1,
hand,
2,
is
used
depending
continue
to indicate
From
(7), this
than
in each country
goods.
to
distinguish
on whether
i when N = Ni, so that
to its price.
is greater
change
of the tradeable
variables,
Good
in the
02 ~
[1F
trade can cause the drastic
of endogenous
the economy
<
is less than one, while
on the other
equilibria
to
(P1/P2)’
the relative
follows,
N2 .
of Good
<
international
affecting
for multiple
P1/P2
—
a-l
[1F
one.
condition
N . Nl or N .
the goods.)
First,
the production
condition
the
pins
down
cost
the
rate,
30ne can also show that, if N(q) s Nl, then N = N2 is the Uniwe
stable
equilibrium and if N(q) z N2, then N = N1 is the unique stable equilibrium.
14
8iL&
wi’Pi
—
[1OF
WiL
= PiL—
(30)
,
Hence,
Yi
=
fliL&
[1OF
(31)
and
(P3)~ =
By
inserting
consumer
these
expressions
w~N~&
into
=
Pi g
[
(32)
‘~:~’
l–
(1) , the
utility
of
the
representative
is,
(33)
for N = Nl and
(34)
for N = N2, where use has been made of
terms
of
depends
increase
change
on the
affects
equilibrium.
The World
the economy
of
the
If N = Nl, the
the welfare,
exports
Good
(28).
open
that a change
economy,
economy
while
Note
exports
it reduces
but
its
Good
in the
direction
1, hence
the welfare
an
if N =
2.
Economv.
we are now ready
at the world economy
possible
welfare
in q . P1/P2 improves
N2 , that is, when
4-B.
the
(16) and
equilibrium
to endogenize
as a whole.
allocations
the terms
of trade,
As shown in the previous
for each
15
country:
q = P1/P2, and to look
section,
there are two
N = Nl or N = N2.
Let f be
the fraction
For these
of the economies,
countries,
the relative
c1
C2
(Recall
that
countries
along
then those
as shown
q+
been
axis,
first
these conditions
Cobb-Douglas
the world
~
in
eq.
to
(27) .)
those in the second
can be depicted
preferences,
By
arranging
the
equilibrium,
and
by the step function,
the relative
For the economies
(1-133)Yf
Pi
=
of Goods
demand
for Good 1
with N . Ni, the output
= (1-p,)g+
[1
good is zero.
1 and 2 are
elL*(l.f)
(Ql)w
=
(1-133)L=
r
[1
and
(Q2)W =
respectively.
is
=9’.
(17)), while the output of the other tradeable
output
goods
by
(Qi)i
(see eq.
the two tradeable
it is equal
defined
and Good 2 are D1/D2 = (~1/62)/(P1/p2) .
i is given
equilibrium.
3.
From the assumed
of Good
EL
equilibrium,
the horizontal
in Figure
.
[1 aF
q- have
in the first,
in the second
cost of producing
(~z)~
at the first
and
find themselves
a2-al
2 .
(-)
For the countries
which
Hence,
the terms
(1-~3)Lm
of trade
16
02Lsf
,
[1
must
satisfy
Therefore,
PI
~=
which
is depicted
131D2
——
in Figure
At the intersection
is
smaller
economies,
than
hence
the relative
in Good 1.
.
M,&]
~, D,
its
3 as an upward-sloping
of the two curves,
relative
production
these economies
production
.(,,
.
,
l-f
elL&
OF
[–1
the relative
cost
specialize
curve.
for
price
the
f*
in Good 2, while
fraction
(f*, q’), thus depicts
1, q*,
of
q* is greater
cost in the rest of the world economy,
The intersection,
of Good
which
the
than
specializes
an equilibrium
of the world
economy.4
It is easy to see that the equilibrium
tiy point on the upward
with
the
sloping
equilibrium
equilibria,
with
of the world
curve @(f) between
conditions.
the associated
Hence,
range
this
=
f-
<
model
of equilibrium
f<
f+
is not unique.
f- c f c f+ is also consistent
>
[el/e210-l
~
I. + [ellezlo-1
economy
admits
a
coritinuum
of
values
>
161/e21”-l
,
>
+ [ellealc-1
.
I
and
which
is exactly
Figure
2
the
portrays
condition
the
(27) , imposed
situation
faced
by
when
each
drawing
economy
Figure
in
a
2.
world
Hence,
economy
equilibrium.
4A similar geometrical
(1996) in his model
representation
of a world
economy
of the equilibrium
with
17
a continuum
is used in yanagawa
of countries.
5.
Discussions
Despite
conditions
is rich
5-A.
.
a plethora
in its implications,
Cross-Country
this model,
countries
implication
(at least
First,
(27),
Thus , those
advantage
a theory of endogenous
about
economies
w
co-exist
cross-country
which
of the aggregate
an endogenous
also
section.
purpose
across
economy)
of building
the countries,
must
some
be in the first
variations
end
demand
up
in the world
show
true
when
in their
economy.
two
Therefore,
it
specializing
18
and
in
at
Good
2
thereby
in Good 1.
economy
looking
standard
of living.
From
that
externality,
of the world
across the countries;
comparisons.
than those specializing
separation
is
the main
differences
of the world
(34) , one can easily
standard-of-living,
This
indeed
let us look at the differences
(33), and
in this
that the model
(at least f- fraction) must be in the second equilibrium.
of economies
to talk
any innate
1 - f+ fraction
The model thus offers
sense
allocations
will be discussed
of the model,
without
and others
types
which
on possible
Comparisons.
is that,
equilibrium
different
indexed by f ~ [f-, f+] , the equilibrium
impose such strong restrictions
One major
makes
of equilibrium,
Hence,
into “Rich” and
the
factor
take
achieve
the
greater
the higher
the model predicts
“Poor” countries.
price
and
income
.5 From
differences
incomes
across
(27) and
the two parts
One of the classical
Cheaper
in
Samuelson
the
postulated
difference
present
across
Good
Poor
(1964),
(1988) , have
differences
across
problems
Kravis
and
this
the countries,
3, interpreted
Many
issue,
the
the countries
but
they
Rich
and
5-B.
The Welfare
The
others
are cheaper
mere
E2-m,
—a-l
From
~
Balassa
(1984),
all started
from
regions.
of price
(27) and
and
Panagariya
some
exogenously
Although
economy
levels
(1964) ,
no
equilibrium
and the income
difference
innate
in the
level
of the price of
(32),
al-a,
(P3)1
sector
is “Why Are Services
including
the world
e’
(P3)2 5
the Service
—0-1
[1F
is the most
labor
intensive,
then the
in the Poor countries.
Effects
fact
economics
Bhagwati
Poor
wages and
by
at the cross-country
[1F
Services
(1983),
is assumed,
as Services.
e’
for the relative
studies,
the correlation
by looking
Thus , if al > a>, i.e.,
is given
of development
Lipsey
across
can explain
(31) , the range
of the world
Countries?”
addressed
model
(30), or
that
of Trade.
international
does not necessarily
answer this, we must compare
imply
trade
made
that trade made
the utility
some
countries
them poorer
levels before
poorer
than before.
and after the trade.
than
To
From
5Although the factor mobility plays no role in creating the cross-country
differences
in this model, introducing a mobile factor might be an interesting
extension
of the model.
For example,
suppose that there are two factors,
immobile
labor L, and mobile capital K, which jointly forms a “generalized
factor, ” Z = F(K,L).
If the restriction of capital mobility is imposed, then the
present model can be directly applied by reinterpreted
by replacing
L by Z.
Then, if we allow capital to mover then capital flows from the Poor to the Rich,
which offers an answer to the question posed by Lucas (1990) . And the resulting
capital outflow magnifies the wage difference across the two regions.
19
(29),
(33), and
(34),
and
Thus , the Rich countries
countries,
the lower
unambiguously
bound
are
the
Poor
offsetting
benefits
of
parameter
may
have
gains
the
to the autarky:
5-c.
from
of
Recall
Poor
be clear
Regardless
whether
that
countries,
Poor
2 captures
in the bad
is because
Poor
captured
by
than one,
have
the
lost
change
condition
in their
there
favor,
in
some
its
for the
relative
at the same level with the autarky,
countries
in their
of a Poor country
trapped
the
that
(33) .
it is certainly
Figure
This
Stratecfies: An Individual
the
it is possible
(but not a sufficient)
to the good one and to become
the government
despite
externality,
price remains
of Development
equilibrium
trade.G
is that the terms of trade move
The Effects
trade,
from
specialization,
if the relative
c 1, as should
international
what
benefitted
demand
For the Poor
the upper bound may be greater
from 6A to .91. One necessary
Poor to gain from trade
ul/u*
However,
also
from
aggregate
from trade.
on U1/UA is less than one, hence
they may have lost from trade.
so that
have benefitted
have
interest
Rich.
Country
gained
to switch
The natural
can do to facilitate
the
situation
equilibrium,
faced
suffer
Perspective .
or
lost
from
question
from
the bad
to ask is
such a transition.
by each
from
the
country.
The
coordination
‘For example, if al = 0.2, CYz= 0.8, IY3= 0.1, 61 = 0.6, Dz = 0.2, and p3 =
02 . 0.66,
and 6A = 0.3, and the upper
bound
is
0.2, then
81 = 0.18,
(1.04544)0”06/(0-1)
.
20
failures.
Among a list of prescriptions
coordination
to direct
the least
failure,
a coordinated
in reaching
context
policy
equilibrium
(Indeed,
and
equilibrium.
Matsui
announcement
For
threshold
Hence,
with a more
to
intervention
the bad equilibrium.
economy
of East
policy
to move
interventionist
the
lower
N(q)
entry
of
Asian
miracles
measure,
the better
on Good
level
the
can
to
that N(q)
when
of such
between
the
be applied
In the
here.
such
this
may work.
base,
of
an
Nl and
Sector
1 or
which makes
extreme,
K Nl, which
(Rodrik
a
bad
game
cotiine
2, taxing
along
industrial
in the
the gap between
firms.
autarky
equilibrium
argued,
in this model,
can explained
sufficient
succeeding
in an abstract
is then N = N2.
a temporary
a
gap
want
to narrow
tariff
the threshold
the
logic
also
policy
import
on
argument
the
to such an extent
generates
toward
same
may
The only equilibrium
As a more direct
autarky
government
a coordinated
can reduce
The
thereby
I have
through
guideline
the effectiveness
things,
(1995) discuss
imposing
create
that the secret
level.
the
2 could
Sector
other
(1992),
that
firms,
of a government
their expectations,
model,
of the
is for the government
input producing
In Matsuyama
among
and Matsuyama
example,
subsidizing
it easier
depends,
the
coordination.)
the
to coordinate
in the economics
approach
The announcement
“
of the Murphy-Shleifer-Vishny
announcement
N(q) .
interventionist
plaming.
sector
a better
offered
entry of the intermediate
some sorts of “indicative
may help the private
commonly
the
eliminate
(1996) argues
line.)
If NA > N(q), then
which
the government
helps
the
removes
the
trade barriera.
5-D.
The Effects
of Development
In 5-C, I have discussed
take in order
to facilitate
Strategies:
a few policy
successful
A Global
options
development,
21
Perspective.
the government
might
from the perspective
want to
of an
individual
These
country.
work for some countries.
it is useful
succeed,
an “economic
Although
for thinking
the argument,
that helped
Rich
As a result,
remain
Poor.
countries.
viewpoint
Hence,
move
Furthermore,
terms of trade,
development,
discussed
The bigger
Poor.
N(q),
industry
of early
hand,
successful
from
effects
can
of such
succeeded
they remove
As more countries
manage
all the
to join the
curve in Figure
their
the terms
of trade
developments
viewpoint,
are
of
not
deteriorates
some
their
chance
effectiveness
implies
while
countries,
Pareto-improving
from
the
of the government
a
the
an increase
may
no
economy
removes
the
trade
in some countries,
22
level of
As
to direct
a
to eliminate
lead to NA K N(q) , so
generate
barriers.
and more generally
the Poor agricultural
that
Nl and N(q) grows.
is required
longer
in their
smaller.
announcement
in q could
autarky
may help
the threshold
development
intervention
on the
in q, provided
as the gap between
temporary
industrialization
industrializers,
from an increase
of a successful
that a bigger
miracle”
As an improvement
in q, by raising
firms harder
Furthermore,
to the
blessing.
benefit
an increase
the private
when
for the
economy.
makes
gap also
base,
successful
countries
that, once some countries
along the upward-sloping
Poor may be a mixed
the
among
return
Rich.
f increases
However,
the bad equilibrium.
the
spillover
to the good equilibrium,
the Poor countries
above,
coordination
about which
the terms of trade effect of such an “economic
who remain
they remain
the possible
I will assume
On the other
of the world
countries
is silent
rich, but may
q goes up and the terms of trade move in favor of the countries,
Pareto-improving
that
about
them become
club of the Rich countries,
which
make all the countries
the model
from the bad equilibrium
interventions
3.
cannot
miracle. ”
To simplify
in moving
policies
producers
a sufficient
In
summary,
a
the presence
by causing
a
favorable
terms of trade change,
extreme
the
case,
industrializing,
Rich
(without
Hence,
radical
poor
impoverishing
the
present
at the expense
severed
among
believe
that
that
that
choose
it would
Models
explaining
also
separate
Those
the
view
of
The model
only
finished
countries
to become
world
system
could
ill-fated
applies
enough
by
common
equally
Some of them
only
market
if they
union
agreements
to any subgroup
of
So,
of
and isolates
remain
many
the South
their own economic
themselves.
to
keeps
develop
into the Rich and the Poor
unlucky
held
in the North.
and formed
among
the
trading
countries
some
economy
world
countries.)
the world
North,
In
if a group
from the rest of
countries
Poor
may
through
hence
be
to drop out of the union.’
Remarks.
with
multiple
the diversity.
the variations
variations
Rich
the Southern
to trade
for them to follow.
for the remaining
forms their own trade union
and choose
Concluding
the
industrializers
in the sixties.)
symmetry-breaking.
explain
captures
the earlier
Poor countries
disappointed
6.
of
model
it harder
of
the currently
(This was the idea behind
countries
the world,
a
fraction
the link with the established
them.
e~ally
who
in the past
in Latin American
the
f+
it is no longer possible
economists,
even argued
after
and yet makes
equilibria
In a model
of per capita
in other variables,
are
with
the
unique
most
natural
equilibrium,
income across regions
framework
any attempt
for
to
forces us to introduce
such as saving rates and education,
as is commonly
71n the present model,
whether the Poorer countries
in the union want to
drop out of the Lion
depends solely on the terms of trade prevailing inside and
outside of the union.
One can modify the model, such as adding monopolistic
competitive
tradeable goods, so that there exist some benefits of trading in a
larger world.
Then, when countries became Poorer in the union, they have an
incentive to drop out of the union, because, if they had to be poorer, they would
rather be poorer in a larger trading community.
23
done
in growth
themselves
are
variations
growth
key
accounting
left
accounting
variables
countries
other
across
equilibria,
the
economics
they serve
drawback
is that they often
and
behaviors,
coordination
criticism.
isolated
hence
failures
In
these
entity.
coordination
of models
little
Hence,
each
multiple
country
equilibria
the co-existence
of Rich and Poor countries;
about
of inequality
the degree
a model
of
the
country
of the world
world
trading
differences,
think of trade
economy,
system,
in the world
explained
derived
and thereby
and development
the correlations
of
little
offered
as a model
without
development
is modelled
merely
24
with
multiple
assuming
inherent
previous
is subject
work
on
to such a
independently,
as
the possibility
an
of
do not tell us anything
This paper,
economy.
On the
on the equilibrium
suggest
the models
poor
as the critic might
The
content.
by developing
as an inevitable
predictions
and the inequalities
why
inequality.
equilibria,
different
about
of the key variables.
the inequality
some
introducing
of
so many possibilities
predictive
by
variables
the importance
of endogenous
with multiple
in the area of economic
studies,
us
economies
as a theory
seem to allow
have
tells
failures,
across
these
explained
way of summarizing
of the simultaneity
the diversity
and hence
One major
of
be
in
is not to deny
But , it
regions.
because
can explain
differences,
argue,
the
variations
to
This
as a useful
exercises,
the
need
set of variables.
remain poor,
hand,
or
unexplained,
in another
Yet
exercises.
concerning
implications
among
the
aspect
cross-
for the way we
nations.
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25
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