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.

Moreover, in our model, trade affects TFP and GDP in opposite directions, and affects only relative GDP levels, not long-run growth. The most important difference from our work, however, is that these papers do not analyze an economy in which technological knowledge flows freely across countries, and they do not allow technical progress to be directed towards different levels of skills.
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The plan of the paper is as follows. Section II introduces our basic model and characterizes the equilibrium in the North and the South in the absence of commodity trade and intellectual property rights in the South. Section III shows that productivity is higher in the North than the South and performs some simple back-of-the-envelope calculations to evaluate the potential contribution of our mechanism to the differences in output per worker.

Section IV analyzes technical change and productivity differences in a world with commodity trade. Section V analyzes the impact of property rights enforcement in the South on technical change. Section VI endogenizes skill acquisition decisions and shows that improvements in the relative supply of skills in the LDCs lead to productivity convergence, and Section VII analyzes the choice between local and imported technologies in the South. Section VIII concludes, while Appendix A contains the main proofs. Appendix B, which contains some additional results, is available upon request.

The Basic Model

Countries, Agents and Preferences

We consider a world economy consisting of two groups of countries. There is one large advanced country which we call the North, and a set of small less developed countries which we refer to as the South. To simplify the analysis, we assume all Southern countries to be identical. What distinguishes the North and the South, other than their relative sizes, is the abundance of skills. The North has Hn skilled workers and Ln unskilled workers, whereas the South has Hs skilled workers and Ls unskilled workers. We assume that Hn/Ln > HSJLS, so the North is more abundant in skills.