Trade, Technology and the Great Divergence

Abstract

This paper develops a model that captures the key features of the Industrial Revolution and the Great Divergence between the industrializing \North" and the lagging \South." In particular, a convincing story is needed for why North-South divergence occurred so dramatically during the late 19th Century, a good hundred years after the beginnings of the Industrial Revolution. To this end we construct a trade/growth model that includes both endogenous biased technologies and intercontinental trade. The Industrial Revolution began as a sequence of unskilled-labor intensive innovations which initially incited fertil- ity increases and limited human capital formation in both the North and the South. The subsequent co-evolution of trade and technological growth however fostered an inevitable di- vergence in living standards - the South increasingly specialized in production that worsened their terms of trade and spurred even greater fertility increases and educational declines. Biased technological changes in both regions only reinforced this pattern. The model high- lights how pronounced divergence ultimately arose from interactions between specialization from trade and technological forces.