The dynamic process of economic takeoff and industrial transformation

Abstract

This paper studies the patterns and key determinants of staged economic development. We construct a two-sector dynamic general equilibrium model populated with one-period lived non-overlapping generations, featuring endogenous enhancement in modern technology and endogenous accumulation of labor skills and capital funds. We consider preference biases toward the traditional sector of necessities, capital barriers to the modern sector, and imperfect substitution between skilled and unskilled workers. By calibrating the model to �t historic U.S. development, we fi�nd that modern technologies, saving incentives and capital fundings are most important determinants of the takeoff time. By evaluating the process of economic development, we identify that saving incentives is most crucial for the speed of modernization. We also study how labor and capital allocations toward the modern industry respond to various preference, technology and institutional changes. We further establish that labor, capital and output are most responsive to the initial state of modern technologies but least responsive to the initial state of skills, along the dynamic transition path.Economic takeoff and industrial transformation; endogenous skill and technological advancements; saving incentives, preference biases and capital barriers