SPECIALIZATION, WAGE BARGAINING AND TECHNOLOGY IN A MULTIGOODS GROWTH MODEL a/

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1 SPECIALIZATION, WAGE BARGAINING AND TECHNOLOGY IN A MULTIGOODS GROWTH MODEL a/ Mario Cimoli ECLAC and Univrsity of Vnic Gabril Porcil Fdral Univrsity of Parana and CNPq, Brail Abstract Th papr dvlops th Ricardian multigoods modl in svral dirctions with a viw to studying th rlationship btwn th tchnology gap, th pattrn of spcialiation and th institutional framwork that organis tchnological larning and wag bargaining. Th intrnational conomy is formd by two countris, th North (tchnological ladr) and th South. Th volution of th North-South tchnology gap dpnds on th initial lvl of th gap (which dfins th potntial for imitation in th South) and on th dgr of divrsification of th conomic structur of th South (that givs ris to tchnological xtrnalitis). Th South-North rlativ wag rsponds to th bargaining powr of labor unions. Th intraction btwn th tchnology gap and rlativ ral wags ndognously dfins th pattrn of spcialiation, which is rlatd to conomic growth through th condition of quilibrium in currnt account (xtrnal constraint). a/ W ar gratful to th participants of th congrss on Th Institutional ad Social Dynamics of Growth and Distribution (hld in Lucca in Dcmbr 2007), and to two anonymous rfrs who providd valuabl suggstions to th final vrsion of th papr. Usual disclaimrs apply. Th papr only rflcts th opinions of th authors and not that of thir rspctiv institutions.

2 2 Introduction Pattrns of spcialiation ar shapd by th procss of tchnical chang and rflct lads and lags in innovation and th intrnational diffusion of tchnology. A usful short-cut to dscrib ths lads and lags is th volution of th tchnology gap. Changs in th tchnology gap giv ris to intrnational asymmtris in productivity, costs and quality of th goods producd, thrby rdfining dynamic comparativ advantags. Still, th rlationship btwn th tchnology gap and th pattrn of spcialiation dos not go just from th formr to th lattr, but also from spcialiation to tchnology. This point is a cntral tnt of both th Latin Amrican structuralism 1 and th Schumptrian-volutionary approach to conomic growth. From this prspctiv, th rats of larning and tchnical progrss ar diffrnt in diffrnt sctors of th conomy. Countris whos production and xport structurs alrady fatur a strong prsnc of high-tchnology sctors ar as wll mor likly to xprinc highr rats of tchnical chang and growth. Th aim of this papr is to highlight th structuralist dimnsion of tchnological larning within th contxt of a multigoods modl in which growth is constraind by quilibrium in currnt account. Th modl is dvlopd to mak xplicit th influnc of changs in th numbr and typ of goods producd on larning, trad and growth. Th papr consists of four sctions, bsids this introduction and th concluding rmarks. Th point of dpartur, in Sction 1, is th Ricardian modl originally suggstd by Dornbush, Fishr and Samulson (DFS) (1977) and subsquntly rvisitd from a Kynsian-Schumptrian prspctiv by Cimoli (1988,1992) and Dosi t al (1990). W xtnd th Ricardian modl to discuss how th volution of th tchnology gap (lads and lags in innovation and diffusion) and th rlativ North-South wag intract with th pattrn of spcialiation in a contxt of imprfct comptition in both th labor and goods markts. Thus, w includ Schumptrian and structuralist dimnsions along with wag bargaining in th procss of dfining comparativ advantags, dimnsions which ar not considrd in th original DFS modl. 1 S Prbisch (1963). A comprhnsiv analysis of this school of thought can b found in Rodrigu (1980).

3 3 Sction 2 discusss how th pattrn of spcialiation analyd in sction 1 affcts th rlativ North-South rat of growth. Th link btwn spcialiation and growth is providd by th condition of quilibrium in currnt account. In ordr to spcify this condition w dfin two dmand functions for xports and imports, which rndr diffrnt rsults from th point of viw of conomic growth. On of ths dmand functions allows th modl to produc qual growth in quilibrium, albit with diffrnt incom lvls. Th othr dmand function givs ris (undr crtain assumptions) to unqual growth and is consistnt with Thirlwall s Law (Thirlwall, 1979). In both cass th incom lasticitis of th dmand for xports and imports ar a function of th pattrn of spcialiation, rprsntd by th numbr and typ of goods producd by th South. Finally, sction 3 addrsss how changs in th institutional framwork organiing larning and wag bargaining influnc th pattrn of spcialiation, growth and th rlativ North- South ral wag. Th ffcts of ths changs ar analyd in trms of variations in th paramtr valus of th modl. Exrciss of comparativ dynamics suggst that tchnological policy can play a ky rol in intrnational convrgnc or divrgnc. In addition, it shows that whn incrasing rturns ar vry significant, an initial comptitiv advantag du to lowr wag costs may b conduciv to highr rats of larning in th South and to th rduction of th tchnology gap. 1. Tchnology, Rlativ Wags and Spcialiation a) Th Basic Ricardian Modl This sction prsnts svral xtnsions to th DFS modl, rlatd to th dynamics of th tchnology-gap and imprfct comptition in th goods and labor markts. Th intrnational conomy is formd by two countris, North (N) and South (S), which diffr in trms of thir tchnological capabilitis. Th North is mor advancd, having alrady rachd th tchnology frontir, whil th South lags bhind. Both countris ar opn to intrnational trad and compt in th production of a vry larg numbr of goods, using

4 4 labor as th singl factor of production. Comparativ advantag dpnds on rlativ labor a * rquirmnts dfind as A =, whr a* ar th hours pr workr rquird to produc a on unit of good in th North and a ar th hours pr workr rquird to produc on unit of th sam good in th South. Rlativ labor rquirmnts ar a function of th tchnology gap. In othr words, productivity varis in accordanc with th distanc of th South with rspct to th intrnational tchnological frontir (rprsntd by th tchnological capabilitis of th North). Th subscript![ 0,1] is dfind in such a way that goods ar rankd in a dscnding ordr in trms of th comparativ advantag of th South (i.. a lowr indx dnots a good whos production is rlativly mor fficint in th South). This implis that th curv A() (which plots rlativ labor rquirmnts A() = a */a against th indx numbrs ) falls monotonically (s figur 1). Why is th rlativ labor rquirmnt diffrnt for diffrnt goods? It is assumd that th South has its highr comparativ advantags in low-tch goods. As production bcoms mor tchnologically-intnsiv, th productivity gap btwn North and South incrass for a givn tchnology gap. As a rsult, th ranking of goods from th point of viw of comparativ advantags mirrors th ranking of goods from th point of viw of thir tchnological intnsity. Th sam distanc with rspct th tchnology frontir implis a largr diffrnc in productivity btwn North and South in th cas of high-tch goods. Th dclivity of th A() curv xprsss th rat at which th South looss comparativ advantags as th conomy divrsifis towards sctors that ar mor intnsiv in tchnology.

5 5 Figur 1. Spcialiation in th Ricardian Modl A,W A() W c

6 6 To find th pattrn of spcialiation, it is ncssary to combin th curv of rlativ labor rquirmnts with th curv of rlativ wags. Th W curv plots rlativ South-North wags against th numbr of goods producd in th South. Rlativ wags ar dfind as W = w/w*, bing th nominal xchang rat (units of th Southrn currncy pr unit of forign currncy), w ar Southrn nominal wags (in Southrn currncy units) and w* Northrn nominal wags (in Northrn currncy units). Th W curv monotonically incrass with bcaus th divrsification of th Southrn conomy incrass th dmand for labor (mor on this blow). Undr prfct comptition, unit costs and prics will b lowr in th South whnvr a w < a* w*, that is whn A() > W. This mans that in an opn intrnational conomy th South will spciali in th goods for which A() > W. It is thn clar in figur 1 that th South will produc goods from ro to th bordrlin good, whil th North will produc goods from to 1. In this papr w rmov th assumption of prfct comptition in both th goods and labor markts and allow for two classs in th conomy, labor and capitalists. Thr is still just on factor of production (labor); capitalists in this cas ar th class who owns th initial funds ncssary to hir workrs and organi production. Thy st prics by adding a markup (m > 1) ovr unitary labor costs. In addition, th labor markt is th arna of ngotiation btwn th two classs, as it is usually assumd in th Kalckian tradition (s for instanc Blckr, 1999). Th rlativ South-North nominal wag is formd out of a bargaining procss btwn labor and capital. For simplicity, th mark-up is assumd to b th sam and constant for all th goods producd in both North and South. This lavs th rlativ productivity and th rlativ nominal wag as th only factors affcting intrnational comptitivnss. In ffct, it will b tru that a crtain good will b producd in th South if mwa < m* w* a *, whr m and m* rprsnt th mark-up in South and North, rspctivly. Rarranging trms, th good will b producd in th South if A ( ) > mw m * w*. It is straightforward that such a condition boils down to A() > W whn m = m*. Th following sction discusss how th dynamics of W and A (which

7 7 mrgs from th intraction btwn spcialiation and tchnological larning) dfins th rlativ South-North incom and growth. b) Th Dynamics of th Tchnology Gap Rlativ labor rquirmnts (th A() curv) dpnd on tchnological asymmtris (lads and lags in innovation and th intrnational diffusion of tchnology), as rprsntd by th Tn tchnology gap. Th lattr is dfind as G =! 1, whr Tn and Ts ar th tchnological Ts lvls in North and South, rspctivly. Th volution of th tchnology gap, in turn, is drivn by th rlativ rat of innovation in th North with rspct to that of tchnological diffusion towards th South. Following Nlson and Phlps (1966), Fagrbrg (1988, 1994) and Narula (2004), tchnological spillovrs from North to South ar assumd to b a positiv function of th tchnology gap 2. In addition, tchnological larning in th South also dpnds on th lvl of divrsification achivd by th Southrn conomy 3. Basically, a largr implis a largr participation of tchnologically advancd sctors in th conomic structur of th South, giving ris to highr rats of larning. Formally: d T T T (1) Gˆ ( N / S ) S = = a! cg! b dt T N Th paramtrs a, b and c ar dfind by th charactristics of th National Systm of Innovation of th South. A National Systm of Innovation (NSI) is th st of formal and informal institutions that coordinat th intractions among svral htrognous agnts (such as firms, rsarch instituts, univrsitis) involvd in th procss of larning, and 2 It would b mor ralistic to assum a nonlinar rlationship btwn tchnological spillovrs and th tchnology gap, as suggstd by Vrspagn (1993, chaptr 5). Still, th linar assumption kps th modl much simplr and hlps to highlight how changs in th tchnology gap ar rlatd to changs in spcialiation and growth, which is th basic thm of th papr. Morovr, it can b assumd that th conomy has alrady dvlopd th minimum tchnological capabilitis rquird to ntr th catching-up stag (s Narula, 2004). In this stag, th vlocity of larning incrass with th tchnology gap. 3 Som sctors ar th main loci of innovation, whil othrs play a mor passiv rol. Pavitt (1984) offrs a classical typology of sctors rgarding thir position in th flow of innovation and diffusion of tchnology. Th ida that th structurs of production and xports mattr for growth is a long-standing point raisd by th Latin Amrican structuralism. S on this Prbisch (1963, 1981), Rodrígu (1977,1980) and ECLAC (2007, chaptr 2 and 4). A similar ida within a Kaldorian framwork can b found in Pugno (1996).

8 8 which contribut to shap th intnsity and dirction of tchnical chang 4. Each country has its NSI, whos faturs and fficacy in promoting tchnical chang vary widly. Clarly, in th cas of dvloping countris, institutions ar fragil and th NSI fails to fostr larning with th sam intnsity as th NSI of a dvlopd conomy. This fragility is capturd by th paramtrs of th modl. Th paramtr a is th xognous rat of growth of th tchnology gap, b rprsnts th ability of th South to tak advantag of th stock of knowldg of th tchnological ladr, and c capturs larning ffcts associatd with a mor divrsifid conomic structur. Whil th paramtrs a and b ar xpctd to b always positiv, th sign of c is lss clar-cut. If c > 0 a highr tchnology gap favors a highr rat of larning in th South. This implis that th South has alrady rachd th minimum tchnological lvl rquird to start a procss of catching up with th tchnological ladr. But if this is not th cas thn c < 0 and th gap would not rprsnt an opportunity for larning in th South; on th contrary, it would rinforc Southrn tchnological backwardnss. Throughout this papr w assum c > 0. Th mor dvlopd is th NSI of a crtain dvloping conomy, th highr will b th valu of th paramtrs c and b, and th lowr will b th valu of th paramtr a. Th tchnology gap affcts th position of th A() curv according to th following quation: a * ( ) (2) = A( ) = # $ " G $! a( ) whr α, β and γ ar positiv paramtrs. A rduction in th tchnology gap G shifts A() to th right, incrasing th rlativ labor rquirmnts of th North rlativ to that in th South for all goods producd in th intrnational conomy. This spcification of th curv A() implis that tchnical chang affcts rlativ labor productivity in th production of th diffrnt goods in xactly th sam proportion. Although this is a strong assumption, it maks th modl mor tractabl and will b kpt it in th rst of th papr. 4 For a dtaild discussion of th concpt of NSI s Frman (1987, 1995) and Lundvall (1992). For a historical approach s Abramovit (1986). A discussion of th shortcomings of th NSI in dvloping countris can b found in Fransman and King (1984), Albuqurqu (2007) and Cimoli and Porcil (2008).

9 9 It is important to strss that th modl is intndd to discuss North-South trad and growth and thrfor it dos not hold whn G < 1, that is, whn th South ovrcoms th North from a tchnological point of viw. Morovr, if th tchnology gap is compltly liminatd (G = 1), thr would b no productivity diffrncs btwn countris in any sctor ( A = 1,! ) and hnc th pattrn of spcialiation would b indtrminat. Thr still will b room for trad as a rsult of diffrntials in th wag lvls, but which country producs which goods is compltly insubstantial (DFS, 1977). In this spcific cas, th pattrn of spcialiation is dfind by chanc and history, as discussd in mor dtail in an Appndix at th nd of th papr. c) Rlativ Wags and Spcialiation Th rlativ South-North wag (W= w/w*) stms from th bargaining procss btwn capitalists and workrs, whos outcom dpnds on thir rlativ strngth. A high tchnology gap implis that th Southrn conomy facs a disadvantag as rgards productivity lvls, which constraints labor dmands for highr wags. Unions will rali that jobs ar at risk if th rlativ wag incrass in this contxt and will thrfor curb thir dmands. On th othr hand, a largr favors th bargaining powr of unions, sinc th rat of conomic growth and th dmand for labor incrass with. Labor will thrfor bcom a rlativly scarcr factor, inclining th balanc of forcs in favor of labor unions. Formally: (3) W =! ug + v In quation (3) u and v ar positiv paramtrs dfind by th institutional framwork of industrial rlations. In particular, if labor supply in th South is abundant (short) and/or th prvailing institutional framwork rstraints (favors) labor unions, thn u will b high (small) and v small.

10 10 Whnvr W < A(), thr will b an opportunity for th South to incras th numbr of goods it producs. This can b formally rprsntd as: (4) ˆ = " ( A! W ) ζ is positiv and rprsnts th vlocity with which th South racts to th opportunity of xpanding th production of goods for which it has comparativ advantags. For simplicity it is assumd that ζ = 1. Th pattrn of spcialiation will b in quilibrium whn A() quals W and hnc ˆ =! = 0. Using quation (2) and (3) in (4), w gt a nw diffrntial quation which givs th volution of th pattrn of spcialiation as a function of th productiv structur and th tchnology gap: (5) ˆ = $!# G! " + ug! v To simplify notation, w dfin f β + v and g α u: (6) ˆ = "! f! gg Whil f is a positiv numbr, th signal of g is ambiguous. If th variation of th gap has a strongr ffct on th rlativ wag than on rlativ productivity, thn u > α and g will b ngativ. In quation (6) this mans that an incras in th gap favors th divrsification of th Southrn productiv structur (lowr wags ovrcom th ngativ ffct of a lowr rlativ productivity). On th othr hand, if u < α, g is positiv and an incras in th gap lads to a lss divrsifid structur of Southrn xports. Th scond cas appars to b mor ralistic and thrfor g will b assumd a positiv numbr in th rst of th papr. Equations (1) and (6) form a systm of two diffrntial quations. To study this systm w will first analy th isoclins. Th isoclin GG (s figur 2) is obtaind by imposing G ˆ = 0 in quation (1):

11 11 (7) G = a! b c Th isoclin ZZ, corrsponding to ˆ = 0 in quation (6), is th following: (8)! f G = " g Th quilibrium valus of G and that satisfy G ˆ = ˆ = 0 ar: c! ag (9) = " cf! bg (10) G af! " b = cf! bg G and ar constraind to li in th closd intrval [0,1]. Sinc cf > bg, for having a maningful quilibrium it is ncssary that γc > ag and af > γb. Th Jacobian matrix of th systm of diffrntial quations formd by quations (1) and (6) is as follows: (11) J =! c! g! b! f Th trac of matrix (11) is ( c f), a ngativ numbr undr th assumptions of th modl (c > 0, f > 0), whil th dtrminant is qual to cf gb. Th systm will b stabl if th dtrminant is positiv which is always tru if cf > gb. Th lattr condition holds undr th assumption that in quilibrium G and must b positiv. Not that if th country has not rachd th catching up stag thn c < 0 and th systm would b unstabl 5. Th modl can b usd to analy th ndognous dynamics of th tchnology gap and th pattrn of spcialiation in a North-South contxt. Spcialiation is basd on intr-industry trad, sinc th modl compriss an infinit numbr of goods, ach of which can b 5 In this cas th dtrminant would b ngativ and th quilibrium a saddl point.

12 12 comptitivly producd in just on country (xcpt in th cas of th bordrlin good, which is producd in both countris). This mphasis on intr-industry trad is consistnt with th ida that North-South trad is mostly of th intr-industrial typ. Howvr, if it is admittd that goods with similar indxs prtain to th sam industry (i.., goods whos indxs ar arbitrarily clos to can b considrd goods producd in th sam industry), thn thr would b room for intra-industry trad within an intrval of. Of cours, th dimnsion of this intrval dpnds on how loosly th trm industry is dfind: th broadr this dfinition, th largr th intrval and th largr th scop for intra-industry trad. In th nxt sction, w associat th dynamics of tchnology and spcialiation with conomic growth by focusing on th conditions for currnt account quilibrium. This allows us to introduc mor rigorously th rol of th dmand-sid in th modl which taks th form of th Balanc-of-Paymnts constraint. By doing so w will b abl to discus how (supply-sid) Schumptrian larning affcts growth, which is through th rat of growth of xports and imports. 2. Currnt Account Equilibrium and Economic Growth Th modl assums that thr is no capital flows. Thrfor, th currnt account in th two conomis must b in quilibrium. To discuss th conditions rquird for currnt account quilibrium it is ncssary first to spcify th aggrgat dmand function and th dmand for xports and imports. Aggrgat dmand quals total nominal incom in ach country. To find aggrgat dmand w bgin with th nominal incom gnratd by th production of ach good, p y, whr p is th pric and y th quantity of. Rcalling that prics ar dfind by a mark-up rul ( p = mwa = mw L y ), thn th nominal incom in th production of ach good will b: (12) p y = mwl

13 13 Sinc w assum that m and w ar th sam for all th sctors of th conomy, thn total nominal incom will b =! mwl d = mw! Ld = = = 0 = 0 mwl, whr L is total labor mployd in th South and is th numbr of goods th South producs. Symmtrically, total nominal incom in th North will b m * w* L *. Total wags in th South ar qual to wl, whil total profits amount to wl ( m!1) (and Northrn wags and profits ar w*l* and w * L * ( m *! 1), rspctivly). By dfinition currnt account quilibrium rquirs that th valu of total xports quals that of total imports (in th sam currncy). In th following discussion w will assum that th nominal xchang rat is constant and qual to th unity. Such an assumption aims at simplifying th modl with a viw to highlighting th rol of th tchnology gap in growth and spcialiation, which is th focal point of th papr. To analy th dmand for xports and imports in ach country it is ncssary to mak som assumptions rgarding th spcific form of th dmand curv. Firstly w adopt th simplst spcification, in which ach of th goods has an qual shar in total nominal dmand in North and South (s DFS, 1977). In othr words, consumrs spnd xactly th sam proportion of thir incom in ach of th goods. Thn it will b tru that th shar of imports in th total nominal dmand of th North will b ( w * m * L *) (sinc th South producs all th goods up to ). Th rst of th goods (1- ) will b producd in th North, and thrfor th dmand for imports in th South quals ( wml )(! ) 1. Combining th dmands for imports in both countris w obtain th condition for currnt account quilibrium in North and South: & # (13) mwl = $ m * w* L * 1! % ' " Th rlativ South-North incom R is:

14 14 mwl (14) R = = m * w* L * 1! Equation (14) givs th rlativ nominal incom in South and North as a function of th pattrn of spcialiation. Rarranging trms in (14) and assuming m = m *, w find that rlativ wags ar rlatd to mploymnt lvls in North and South according with: (15) w & L * w* 1! # = $ % ' " L Howvr, w hav assumd in sction 1 (quation (3)) that th rlativ wag mrgs out of th bargaining procss btwn workrs and capitalists in th labor markt. Thrfor, in quilibrium mploymnt lvls must adjust so that quation (15) and (3) simultanously hold. In quilibrium it will b tru that: (16) w =! ug + v = w* 1! L L * Sinc G and ar constants (as thy ar th quilibrium valus producd by th dynamical systm formd by quations (1) and (6)), quality (16) is satisfid by mans of changs in rlativ mploymnt in North and South (changs in L L * ). This is consistnt with th ida that nominal wags ar rigid and hnc quantitis adjust. Formally: L # (17) = & 1 $! L * 1' % ' ug + v " Taking th drivativ of quation (17) with rspct to w obtain th following rsult: ( ) 1 &-. G * (' + )# + ' ug v u ( + v + > 0. L L * (18). = 1' $ + %,. ( ) 1'! "

15 15 Sinc W (! ug + v ) = is constraind to b positiv and! G! is ngativ 6, thn quation (18) givs a positiv numbr. This implis that th rlativ mploymnt lvl in th South with rspct to th North incrass with th numbr of goods South. producd in th W ar intrstd in rlativ rats of conomic growth. Th diffrntiation of quation (14) with rspct to tim givs: (19) ' (1 ) R! %!! +! = % & $ " = #! ( ) 2 1! " ( 1! ) 2 And by multiplying and dividing by w obtain: (19 ) R! 1 &! $ = ( ) $ 1' % ( 1' )!! " # Using that R (! ) = 1 and dividing both sids of quation (19 ) by R, allows for finding th rat of growth of R: (20) Rˆ ˆ = 1! Th analysis of quations (15) and (20) lads to two intrsting rsults rgarding th intraction btwn growth and structural chang. First, th incom gap is rducd whn th Southrn conomy divrsifis its conomic structur, i. whn ˆ > 0, sinc th South will b growing at highr rats than th North ( R ˆ > 0 ). Whn th procss of structural chang cass ( ˆ = 0 ), both conomis will grow at xactly th sam rat. Scondly, bing = and G = G constants in quilibrium, tchnical chang and productivity growth in 6 This is asy to confirm by diffrntiating quation (8) with rspct to, which givs! f g.

16 16 th South will b th sam as th xognous rats of growth of ths variabls in th North. Howvr, thr will still b an incom gap in favor of th North if < 1/ 2. Th typ of dmand function w assumd so far implis that all goods ntr with th sam wight in total nominal consumption. But othr dmand functions can b dfind as wll, which produc diffrnt rsults 7. W will rplac th initial dmand function by on in which th shar of goods in total xpnditur incrass xponntially with th numbr of goods. Undr this nw spcification, th aggrgat dmand up to good is givn by ( wml). Rcalling that th South producs goods up to, th condition for currnt account quilibrium bcoms: 1! (21) ( wml ) = ( w* m * L *) Th right hand sid of quation (21) is th Southrn dmand of imports and th lft hand sid is th Northrn dmand of imports. Taking logs in quation (21) and rarranging trms w gt: (22) ( 1! ) ln( wml) = ln( w* m * L *) Diffrntiating both sids of quation (22) with rspct to tim and assuming m and m* constants, thn w hav th dynamic condition for quilibrium in currnt account: (23) ( )( ˆ!! ln( wml) + 1! wˆ + L) =! ln( w* m * L *) + ( wˆ * + L ˆ *) In quilibrium! and thrfor quation (23) bcoms: = 0! = w + Lˆ (24) Rˆ ˆ = = wˆ * + Lˆ * 1! 7 For a discussion of diffrnt dmand pattrns and dvlopmnt s Avdo Araujo and Tixira (2004).

17 17 Clarly, this spcification of th dmand function has vry significant diffrncs rspcting th spcification usd in quation (14). In particular, quation (24), at varianc with quation (20), may ntail unqual growth btwn South and North in quilibrium (i., vn whn = and = 0!, Rˆ may b diffrnt from ro). Th divrsification of th conomy lads to diffrncs in growth rats, not just in incom lvls. In ffct, th South will b falling bhind th North if < 1/ 2. Morovr, quation (24) is quivalnt to th quation known as Thirlwall s Law 8, in which th ratio btwn th rat of growth of on country and th rst of th world in quilibrium is givn by th ratio btwn th incom lasticity of th dmand for imports (ε) and xports (π). Sinc =! is th incom lasticity of th dmand for Southrn xports, and ( " ) =! 1 is th incom lasticity of th dmand for imports in th South, quation (24) rprsnts Thirlwall s Law 9. Th ky rol of dmand in rlativ growth is highlightd by this rsult. In ffct, dpnding on how th dmand function is dfind, w hav vry diffrnt implications for conomic growth of with th sam tchnology gap and pattrn of spcialiation. Th pattrn of spcialiation is ndognous, supply-sid (i.. tchnology plus productiv structur) drivn, but th dmand functions dfin how a spcific pattrn translats into conomic growth. At th nd of th day, both th Schumptrian and Kynsian sids of th growth quation must b takn into account in th modl. 3. Tchnological policy and wag bargaining Th framwork prsntd abov can b usd to discuss th rol of conomic policy in long run growth. Industrial, tchnological and incom policis can altr th structural paramtrs of th modl, thrby changing th quilibrium valus of G and. To th xtnt that dfins th rat of growth with currnt account quilibrium in th South, thn conomic policy contributs to xplain convrgnc and divrgnc. 8 Avdo Araujo and Lima (2007) offrs an intrsting multigoods modl in which Thirlwall s Law is drivd from a Pasinttian framwork. 9 It should b obsrvd that in quilibrium purchasing powr parity holds (as it dos in Thirlwall s Law). Rlativ prics ar constant in North and South and hnc th ral xchang rat is constant too.

18 18 With a viw to addrssing mor rigorously this point, th isoclins corrsponding to G ˆ = 0 and ˆ = 0 ar writtn down bllow (s sction 1): a b (25) G =! c c f (26) G = "! g g Th curvs dfind by quations (25) and (26) ar labld as GG and ZZ curvs, rspctivly (s figur 2a). Th GG curv givs all th combinations of G and that mak G ˆ = 0, whil ZZ giv th combinations for which ˆ = 0. Th position of ths curvs shifts whn th structural paramtrs of th systm vary. As mntiond, such shifts ar rlatd to changs in policy. W will tak first th cas of a nw policy that fostrs tchnological fforts in th South by raising autonomous invstmnts in R&D and/or th lvls of human capital. This policy rducs th valu of a: th rat of tchnological divrgnc btwn North and South for givn valus of and G thn gos down. As a rsult, th GG curv shifts to th lft and a nw quilibrium is obtaind, with a lowr G and a highr. Th lattr, in turn, givs ris to a highr rat of growth. Figur 2b rprsnts th incom growth ratio btwn South and North as a function of th numbr of goods producd in th South in quilibrium (corrsponding to quation (24) in sction 2). Th incras in Southrn autonomous invstmnt in tchnology (rprsntd by a fall in a) lads to a procss of convrgnc in both tchnological capabilitis and growth. Figur 2a shows that th numbr of goods producd by th South incrasd from 1 to 2 out of th chang in policy, and this in turn incrass th rlativ rat of growth of th South from R 1 to R 2. Th horiontal lin R ˆ = 1 indicats th minimum dgr of divrsification that would b rquird for avoiding divrgnc.

19 19 Figur 2a. Tchnology Policy and th Pattrn of Spcialiation: Th Cas of a Fall in a G ZZ G 1 G 2 GG 1 2 GG Figura 2b. Convrgnc, Divrgnc and Structural Chang wˆ + Lˆ = wˆ * + Lˆ * 1! ˆ = 1 R ˆR 2 R ˆR 1 R 1 2 = 1/2

20 20 Th situation rprsntd in figurs 2a-2b is what Fajnlybr (1990) considrd a ris in authntic comptitivnss, dfind as th simultanous incras in th divrsification of xports and ral wags. Th xport driv is basd on fastr tchnological larning, not in lowr rlativ wags. In th xampl providd abov, th fall of G and th ris of both contribut to rais th Southrn rlativ wag along with th incras in xports. In ffct, by substituting G and in quation (3) by its quilibrium valus givn by quations (9) and (10), w can hav th quilibrium valu of W as a function of th xognous paramtrs of th modl: & af ' ( b # & ( c ' ag # (27) W = ' ug + v = ' u$! + v$! % cf ' bg " % cf ' bg " Taking th partial drivativ of quation (27) with rspct to a rndrs: (28) # W # a (" c =!! ag)( ub + cv) ( cf! bg) 2 Th rsult of quation (28) is a ngativ numbr sinc γc > ag. Hnc, a fall in a (highr invstmnts in R&D in th South) boosts th Southrn rlativ ral wag. It should b obsrvd, howvr, that it is not always possibl to rduc a. In many dvloping countris institutional constraints, th lack of th minimum capabilitis rquird to ffctivly larn from th tchnological frontir, along with hystrsis phnomna, may impd th upgrading of th NSI (Sttrfild and Cornwall, 2002; Cimoli and Porcil, 2008). As a rsult a vry high tchnology gap will rmain as major barrir to growth. What happns if xport divrsification coms from a fall in th bargaining powr of Southrn labor unions, which rducs th South-North rlativ wag? This may occur, for instanc, if it is approvd a nw lgislation granting fwr rights to workrs or making asir to hir and fir workrs bypassing unions rsistanc. It may also happn whn thr is a spurt in labor supply bcaus of an inflow of migrant workrs coming ithr from th countrysid or from abroad. Such a situation rsmbls what Fajnylbr (1990) labld as

21 21 spurious comptitivnss : th incras in xports is not rlatd to highr productivity but to th dtrioration of labor wlfar (as compard to that of Northrn workrs) 10. Yt in th contxt of our modl this may not b ncssarily th cas. Thr ar som dynamic ffcts that th modl may hlp to idntify which qualifis this viw. In ffct, assum that institutional chang rducing labor s bargaining powr licits a fall in th paramtr v (and hnc in f), out of which incrass and G gos down, as rprsntd in figur 3a. Th nw quilibrium valus for th tchnology gap and productiv structur nhancs th rlativ wag, whil th fall in v rducs it. Which of ths two forcs would prvail? An answr can b obtaind by taking th partial drivativ of quation (27) with rspct to v. (29) # W # v ( c! ag)( = " cf! bg! ub! cv) ( cf! bg) 2 Th signal of this drivativ is ambiguous and dpnds on whthr th inquality cf > b(g + u) + cv is satisfid or not. Rcalling that f β + v, g α u, such inquality boils down to cβ > bα. If it is valid, thn a rduction in th bargaining powr of Southrn workrs brings about a rduction in th rlativ wag. This will b clarly th cas whn thr ar no incrasing rturns stmming from structural chang, i.. whn th divrsification of th conomy provids no stimulus to larning and productivity growth; in this cas b will b qual or vry clos to ro. On th othr hand, whn incrasing rturns ar significant and b is high, thn th inquality will show th opposit signal. Th lattr would b a somwhat paradoxical rsult, sinc lss bargaining powr for Southrn labor raiss th rlativ wag in th South. Still, two diffrnt momnts can b idntifid in this procss. Th initial fall in th rlativ wag will produc highr spurious intrnational comptitivnss. But it would subsquntly favor th upgrading of th conomic structur in th South. Th lattr in turn brings about larning xtrnalitis that rduc th tchnology gap and fostrs authntic comptitivnss. At th nd of th day, whn th intrnational conomy rachs a nw 10 Th dfinition w usd hr is mor rstrictiv than that st forth by Fajnylbr (1990). For this author spurious comptitivnss implis lowr wags in th South. In our modl th focus is on th rlativ wag. Thus, if wags in th South incrass lss than in th North thr will b spurious comptitivnss.

22 22 quilibrium, th South will display a lowr tchnology gap and a highr rlativ wag than at th initial momnt. Th movmnt from spurious to authntic comptitivnss can b sn in figur 3a and 3b using th curvs W and A() prsntd in sction 1. Th initial fall in v maks W rotat and shift to th right (from W 1 to W 2 ), whil th consqunt chang in G (from G 1 to G 2 ) and (from 1 to 2 ) shifts A to th right (from A( 1 ) to A( 2 )). Whn b is larg nough, th shift of A() is so strong that it producs a nw quilibrium with both a highr rlativ wag and a mor divrsifid pattrn of xports in th South. On th othr hand, if b is ro, th A() curv would not shift at all and th rlativ wag would ncssarily fall.

23 23 Figura 3a. Institutions Rgulating th Labor Markt: Th Cas of a Fall in v G ZZ ZZ G 1 G GG Figur 3b. From Spurious to Authntic Comptitivnss: Th Cas of a Larg b W A( 2 ) W 1 A() 1 W 2 W 2 W

24 24 Th procss dscribd abov is far from automatic. Th paramtr b that dfins th intnsity of incrasing rturns critically dpnds on ducation and tchnology policy. Ths variabls (takn as xognous in th modl) dfin th xtnt with which th divrsification of th conomy givs ris to diffrnt forms of larning (such as larning by doing, larning by invsting and larning by intracting; s Rosnbrg, 1982, chaptr 6). In this sns, it is important to rcall that b is not just a tchnological paramtr, but a spcific dimnsion of th National Systm of Innovation. Concluding rmarks This papr prsntd a North-South modl in which th tchnology gap and rlativ wags intract with th pattrn of spcialiation to produc convrgnc or divrgnc in th intrnational conomy. Th ida that th tchnology gap affcts th pattrn of spcialiation has a strong tradition in th Schumptrian litratur on growth and trad. At th sam tim, th Latin Amrican structuralist tradition argus that spcialiation has an ffct of its own on th rat of tchnological progrss. W combind ths viws in a modl in which th tchnology gap and th pattrn of spcialiation ar ndognously dtrmind. In turn, th condition of currnt account quilibrium is usd to analy how th pattrn of spcialiation lads to conomic growth, and to convrgnc or divrgnc in th intrnational conomy. It is shown that diffrnt dmand functions ntail vry diffrnt consquncs for conomic growth. In particular, Thirwlall s Law, a ky rsult of th Kynsian growth litratur, is obtaind whn th incom lasticity of th dmand for xports incrass along with th numbr of goods producd by th conomy. In this cas th pattrn of spcialiation may lad to unqual growth in quilibrium. Morovr, vn in th cas in which all goods hav th sam incom lasticity of dmand, th pattrn of spcialiation affcts th rlativ North-South incom. Both countris will grow at th sam rat in quilibrium, but thr still b an incom gap which cannot b closd. Th structural paramtrs of th modl dpnd on th institutions dfining both th intnsity of tchnological larning and th rlativ bargaining powr of capital and labor in th South. As rgards larning, th faturs of th National Systm of Innovation xplain

25 25 th capacity of th South to tak advantag of its tchnological backwardnss so as to nhanc th procss of catching up. In addition, thy dfin th xtnt in which th divrsification of th Southrn conomic structur (towards tchnology-intnsiv sctors) crats xtrnalitis that contribut to rduc th tchnology gap. Th valus of th paramtrs govrning th dynamics of th tchnology gap vary with institutional chang in South and North. Thus, for instanc, a chang in policy lading to a strngthning of th National Systm of Innovation in th South lads to a fall in a (th paramtr giving th autonomous rat of growth of th tchnology gap). This in turn brings about a simultanous incras in xports, conomic growth and rlativ wags, which has bn labld authntic comptitivnss. Th papr xtnds th DSF modl to a framwork in which thr is imprfct comptition in both th labor and goods markts. In ths conditions, rlativ mploymnt in North and South adjust so as to b compatibl with th rlativ wag mrging from wag bargaining. Institutional chang affcting th procss of wag bargaining will altr th paramtr valus of th labor markt, in th sam vin as changs in th NSI altr thos of larning. But policis affcting th institutions of th labor markt hav lss clar-cut implications for rlativ wags than tchnological policy. Whn institutional changs wakn th powr of labor unions, growth may b nhancd by mans of spurious comptitivnss : highr rats of growth ar licitd by a fall in th rlativ wag. If th larning paramtrs rlatd to incrasing rturns ar sufficintly high, a lowr rlativ wag at th initial momnt may gnrat a procss of structural chang which will subsquntly rais th South-North rlativ wag in quilibrium. In othr words, undr crtain conditions (strong tchnological xtrnalitis stmming from th divrsification of th productiv structur), th comparativ advantag providd by lowr wags may turn into a comparativ advantag basd on tchnological capabilitis.

26 26 Bibliography Abramovit, M. (1986) Catching Up, Forging Ahad and Falling Bhind, Journal of Economic History, 46 (2); Albuqurqu, E.M. (2007) Inadquacy of Tchnology and Innovation Systms in th Priphry, Cambridg Journal of Economics, 31 (5), pp Avdo Araujo, R. and Tixira, J. (2004) Structural Economic Dynamics: An Altrnativ Approach to North-South Modls, Cambridg Journal of Economics, 28 (5), pp Avdo Araujo, R. and Lima, G.T. (2007) A Structural Economic Dynamics Approach to Balanc-of-Paymnts-Constraind Growth, Cambridg Journal of Economics, 31(5), pp Blckr, R. (1999) Kalckian Macro Modls for Opn Economis, in Johan Dpr and John T. Harvy (d.) Foundations of Intrnational Economics: Post Kynsian Prspctivs, London: Routldg. Cimoli, M. (1988) Tchnological gaps and Institutional Asymmtris in a North-South Modl with a Continuum of Goods, Mtroconomica; 39; Cimoli, M. (1992) Exchang Rat and Productiv Structur in a Tchnological Gap Modl, Economic Nots by Mont di Paaschi di Sina, vol. 21, n.3, pp Cimoli, M. and G. Dosi (1995) Tchnological paradigms, pattrn of larning and dvlopmnt: an introductory roadmap, Journal of Evolutionary Economics, 1995, vol. 5, No. 3, pp Cimoli, M. and Porcil, G. (2008) Sourcs of Larning Paths and Tchnological Capabilitis: An Introductory Roadmap to Dvlopmnt Procsss, Economics of Innovation and Nw Tchnology, forthcoming. Dosi, G.; Pavitt, K. and Sot, L (1990) Th Economics of Tchnical Chang and Intrnational Trad. Brighton: Whatshaf. Dornbusch, R.; Fishr, S. and Samulson, P. (1977) Comparativ Advantag, Trad and Paymnts in a Ricardian Modl With a Continuum of Goods, Amrican Economic Rviw, 67, Economic Commission for Latin Amrica and th Caribban (ECLAC) (2007) Progrso Técnico y Cambio Estructural. Santiago: CEPAL-IDRC-CRDI. Fagrbrg, J. (1988) "Intrnational Comptitivnss", Economic Journal, 98, pp Fagrbrg, J. (1994) Tchnology and Intrnational Diffrncs in Growth rats, Journal of Economic Litratur, 32, Fajnylbr, F. (1990) D la Caja Ngra al Casillro Vacío. Santiago d Chil: CEPAL. Fransman, M. and King, K. (1984) Tchnological Capability in th Third World, London, Macmillan. Frman, C. (1987) Tchnology Policy and Economic Prformanc: Lssons from Japan. London: Pintr Publishrs. Frman, C. (1995) Th National Systm of Innovation in Historical Prspctiv, Cambridg Journal of Economics, v. 19, pp Lundvall, B.A. (1992) National Systms of Innovation: Towards a Thory of Innovation and Intractiv Larning. Londrs: Pintr. McCombi, J.S.L and Thirlwall A.P. (1994) Economic Growth and th Balanc of Paymnts Constraint. Nw York: St. Martin Prss.

27 27 Narula, R. (2004) Undrstanding Absorptiv Capacitis in an Innovation Systms Contxt: Consquncs for Economic and Employmnt Growth, DRUID Working Papr n , Dcmbr. Nlson, R. and Phlps, E. (1966) Invstmnts in Human, Tchnological Diffusion and Economic Growth, Amrican Economic Rviw, 61, Pavitt, K (1984) Sctoral pattrns of tchnological chang: towards a taxonomy and a thory, Rsarch Policy, 13(6), pp Prbisch, R. (1963) Hacia una Dinámica dl Dsarrollo Latinoamricano. México: Fondo d Cultura Económica. Prbisch, R. (1981) Capitalismo Priférico: Crisis y Transformación. México: Fondo d Cultura Económica. Pugno, M. (1996) A Kaldorian Modl of Economic Growth with Labour Shortag and Major Tchnical Changs, Structural Chang and Economic Dynamics, 7, pp Rodrígu, O. (1977) On th Concption of th Cntr-Priphry Systm, CEPAL Rviw, First Smstr, pp Rodrígu, O. (1980) La Toría dl Subdsarrollo d la CEPAL. Mxico: Siglo XXI. Rosnbrg, N. (1982) Insid th Black Box: Tchnology and Economics. Cambridg Univrsity Prss. Sttrfild, M. and Cornwall, J. (2002) A no-kaldorian prspctiv on th ris and dclin of th Goldn Ag, in M. Sttrfild (d.), Th Economics of Dmand-Ld Growth, Chltnham, UK: Edward Elgar. Thirlwall, A.P. (1979) Th Balanc of Paymnts Constraint as an Explanation of Intrnational growth rats Diffrncs, Banca Naional d Lavoro Quatrly Rviw, 32 (127), pp Vrspagn (1993), B. Unvn Growth Btwn Intrdpndnt Economis. Avbury: Aldrshot; 1993.

28 28 Appndix: Th Cas of th Closur of th Tchnology Gap Th suggstd modl applis to a North-South contxt in which G < 1. Still, it can b xtndd to a situation in which th tchnology gap is compltly closd. With a viw to discussing this spcific cas, w will assum that th function A() is discontinuous at G=1. At this point β = 0, γ = 1 + α, and thrfor A=1 for all goods. Is trad possibl whn thr ar no diffrncs in productivity across sctors? Sinc th rlativ wag of th South incrass as th South producs an incrasing numbr of goods, at a crtain point (rprsntd by th good ) th rlativ wag of th South will qual th unity (s figur A.1). This is th bordrlin good for th South, aftr which production will no longr b comptitiv. Rcalling that A=G=1, quation (3) bcoms: (A.1) W =! u + v = 1 (A.2) + u = 1 v In othr words, trad will mrg from th fact that no country could comptitivly produc all goods without raising its rlativ wag abov th unity. On th othr hand, although th total numbr of goods producd by th South is clarly dtrmind, th typ of goods producd is not dfind bcaus th A() curv collapss. It is no longr possibl to build a maningful ranking of th continuum of goods and thr ar no constraints on th typ of goods ach country producs. Anothr implication of this scnario is that th potntial for trading goods prtaining to th sam catgory (intra-industry trad) is no longr limitd to an intrval around, but it could tak plac within a crtain intrval of any of th goods producd in th South. Last but not last, it is important to strss that vn if thr ar no diffrncs in trms of productivity, th rlativ incom may still diffr btwn th two countris. Whn ach good rsponds for th sam shar in total dmand, rlativ incom will b givn by quation (14). In quilibrium w hav:

29 29 (A.3) R = mwl = m * w* L * 1! Thrfor, with no tchnology gap, qual incoms in South and North rquirs that v = 2(1 + u). But v and u ar xognous paramtrs and thrfor qual productivity dos not ncssarily lad to qual incom lvls. Figur A.1. Th numbr of goods producd in th South whn G=1 W W A = 1