PRODUCTIVITY DIFFERENCES: The Basic Model 2

Therefore, increases in Nh (Nl) improve the productivity of skilled (unskilled) workers in all sectors. Nh and Nl are the only state variables of this economy.

R&D (in the North) leads to the discovery of new machine types (blueprints). We assume that technical change is directed, in the sense that the degree to which new technologies are skill-complementary is determined endogenously (see Acemoglu, 1998). Some firms improve technologies complementing unskilled workers, while others work to invent skill-complementary machines. The cost of discovering a new machine complementing workers of group z (z ~ L от H) is 1 /фг units of final output, so Nz = фг • Xz where Xz denotes total output devoted to improving the technology of group z. We assume that фг — ф(хг), фг w6879-4 Continue reading »

PRODUCTIVITY DIFFERENCES: The Basic Model

New technologies are developed using final output. As we will see shortly, due to a market size effect in the creation of new technologies, countries in the South will perform no R&D. All technological progress will therefore originate in the North. But the South can adopt these technologies. All consumers have linear preferences given by f Ce~ridt, where С is consumption and r is the discount rate, which will also be the interest rate. We suppress time indexes when this causes no confusion.

Technology

We first describe the production technology which is common across countries, and the R&D technology in the North. To simplify notation, we omit the country indexes for
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where kz(i, v) is the quantity of machines of type v used in sector i together with workers of skill level г (i.e. this is sector and skill-specific capital). There is a continuum of machines, denoted by j [0,A^], that can be used with unskilled workers, and a continuum of machines (different) j € [0, N# ] used with skilled workers. Technical progress in this economy will take the form of increases in NL and JV#, that is, technical change expands the range of machines that can be used with unskilled and skilled workers.
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PRODUCTIVITY DIFFERENCES: Introduction 4


Second, our results do not follow because productivity depends on the exact capital-labor or skilled-unskilled labor ratios in use, but because skilled workers use different technologies than unskilled workers, and in the North skilled workers perform some of the tasks performed by unskilled workers in the South. Third, and perhaps most important, technological change is not an unintentional by-product of production, but a purposeful activity. In particular, R&D firms in the North direct their innovations towards different technologies depending on relative profitability. All our results originate from the fact that the relative abundance of skills in the North induces “skill-biased” innovations. In this respect, our model is closely related to Acemoglu (1998), which models directed technical change, but primarily focuses on its implications for wage inequality.

Finally, there is now a large literature on innovation, imitation and technology transfer, for example, Vernon (1966), Krugman (1979), Grossman and Helpman (1991), River a-Batiz and Romer (1991), Eaton and Kortum (1997) and Barro and Sala-i-Martin (1997). Some of these models, as well as the more traditional models of trade and innovations, such as Krugman (1987), Feenstra (1991) and Young (1991), obtain the result that trade may reduce the growth rate of less developed countries, but the channel is very different.
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PRODUCTIVITY DIFFERENCES: Introduction 3

When property rights are enforced internationally, firms in the North have more incentive to develop technologies suited to the South, and output per worker differences decline. However, each less developed country individually benefits from not enforcing these rights, creating a potential for a classic Prisoner’s Dilemma.

Finally, our theory suggests a stylized pattern of cross-country convergence in productivity and GDP. A less developed country diverges from the technological leader when it chooses to use local technologies for which there is no (or little) R&D, but eventually cross-country productivity and income differences tend to become stable as the LDCs start importing the technologies developed in the North. On the other hand, productivity (and income) convergence occurs when a country improves its skill base relative to the North, which concurs with the experiences of Korea and Japan (see for example, Rhee, Ross-Larson and Pursell, 1984; Lockwood, 1968).

The two building blocks of our approach, that most technologies are developed in the North and that these technologies are designed for the needs of these richer economies (directed technical change), appear plausible. For example, over 90% of the R&D expenditure in the world is carried on in the OECD, and over 35% is in the U.S..

Moreover, many recent technologies developed in the North appear to be highly skill-complementary and substitute skilled workers for tasks previously performed by the unskilled (e.g. Katz and Murphy, 1992; Berman, Bound and Machin, 1998). So it should perhaps not be surprising that there are many examples of developing countries, abundant in unskilled workers, which adopt labor-saving technologies requiring specialized technical skills. This has led many development economists, like Frances Stewart (1977, p. xii), to conclude that “…the technology Third World countries get from rich countries is inappropriate”, which is consistent with the approach in this paper.
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A number of other papers have emphasized the difficulties in adapting advanced technologies to the needs of the LDCs. Evanson and Westphal (1995) suggest that new technologies require a large amount of tacit knowledge, which cannot be transferred, slowing down the process of technological convergence. The importance of “appropriateness” of technology has also received some attention, for example Salter (1966), Atkinson and Stiglitz (1969) and David (1974). Diwan and Rodrik (1991) use some of the insights of this literature to discuss the incentives of Southern countries to enforce intellectual property rights, as we do in Section V.

An important recent contribution to the appropriate technology literature is Basu and Weil (1998), who adopt the formulation of Atkinson and Stiglitz whereby technological change takes the form of learning-by-doing and influences productivity at the capital labor ratio currently in use (see also Temple, 1998). Basu and Weil characterize the equilibrium in a two-country world where the less advanced economy receives productivity gains from the improvements in the more advanced economy. Our paper differs from Basu and Weil, in particular, and the rest of the appropriate technology literature, in general, in a number of ways. First, what matters in our theory is not capital-labor ratios (as in Atkinson and Stiglitz and Basu and Weil) or size of plants (as in Stewart), but relative supplies of skills, which we believe to be more important in practice.

PRODUCTIVITY DIFFERENCES: Introduction 2

Our model gives a simple expression for output per worker as a function of the ratio of capital per worker, ratio of skilled to unskilled workers, and the equilibrium skill-bias in the North’s technology. By considering the U.S. as the North, we perform some back-of-the-envelope calculations. These exercises suggest that the differences predicted by our model are sizeable, and significantly larger than those predicted by a simple “neoclassical” model. More concretely, for example, using cross-country variations in physical and human capital (secondary school attainment), we find that the neo-classical model predicts, on average, that output per worker in the LDCs should be approximately 40% of the U.S.

while our model predicts the same number to be 23%, much closer to the 21% number we observe in the data. Moreover, our calculations suggest that if technologies were not biased towards the needs of the U.S. economy, output per worker differences would be much smaller. For example, when technologies are appropriate to the needs of the “average” country in our sample, predicted differences in output per worker axe reduced by a factor of more than two.
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