Economic Transformation, Population Growth, and the Long-Run World Income Distribution

http://www.nber.org/papers/w12038

Summary

Marcos Chamon and Michael Kremer present an interesting yet somewhat farfetched argument on the evolution of the global economy. This argument is based around a model that assumes that developing nations can increase the growth in their economies solely by trading with powerful economic nations, denoted in the paper as “advanced” economies. The nations with the least barriers to trade and the lowest costs of production become the external suppliers of manufactured goods and off-site services for these advanced economies. The authors believe that this interaction alone is capable of raising growth in these developing nations to a high sustainable level until the developing nations themselves become advanced. As the process naturally continues the proportion of world population living in advanced nations continues to grow, which creates more export opportunities for the ever decreasing number of developing nations. This snowball effect continues until there are no more developing nations and the long run level of level of GDP has risen to a new higher steady state. This whole story is possible if either population growth rates in developing nations drop to levels of advanced nations or if developing nations become advanced at a rate that neutralizes the population growth differences.

Class Discussion

• Most of the class, including Professor Everbach, believed that this new long run steady state outcome is infeasible
• There is no mention of levels of GDP for newly advanced nations as they compare to other advanced nations, i.e. when the whole world becomes advanced then the cycle can just reset and nations will be considered developing all over again
• This seems like a very convenient argument for an economist from the IMF to be making