Growth in Stages

Abstract

Existing North–South growth models generally ignore the possibility that the South becomes an innovating high-wage country. The present paper presents an analytically tractable North–South growth model in which the North innovates all the time, while the South is at first engaged in imitation and potentially starts to innovate too, later on. Three interesting results emerge from the analysis. First, a perfect foresight growth equilibrium may fail to exist. Second, there may be global indeterminacy in that both convergence to the steady state of the regime with imitation in the South and switching to the regime with innovation in the South represent perfect foresight equilibria. Third, technology policies in the South may have hysteresis effects: a temporary policy may lead the South permanently from imitation-driven to innovation-driven growth.