North-South Models

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North-South Models

The large difference in the levels of economic development between the countries has made many view the world as being divided between the rich North and the poor South. North-South models divide the world economy along these lines and examine the interaction of the two regions through trade and other economic relationships.

The classical economists, including Adam Smith (who discussed the importance of increasing productivity due to the division of labor as economies grew) and David Ricardo (who examined the role of trade in postponing the arrival of the stationary state in rich countries by enabling cheap food imports and in having the opposite effect for poor countries), discussed North-South issues. Subsequently, Marxist writers on imperialism and dependency theorists, and development economists more generally, stressed the role of the South in providing markets and investment outlets for the North, and examined the problems of surplus transfers from the South, the deterioration of the southern terms of trade, and of uneven development.

MODELS WITH STRUCTURAL ASYMMETRIES

More mathematically explicit North-South models emerged from the early 1980s. In a 1980 article for the American Economic Review, Ronald Findlay examined capital accumulation in a global economy with the North growing with full employment and the South with unlimited supplies of labor at a fixed real wage. In 1983 Lance Taylor allowed for unemployment in the North as well, assuming that effective demand determines northern growth. These and other models can be thought of as special cases of a general framework, in which the northern good is a consumption-cum-investment good, and the South a consumption good. The models embody specific behavioral and institutional assumptions for the North and the South, thereby highlighting their structural differences. They have been used to examine the effects of changes in such things as technology, consumption expenditure patterns, and savings rates. Of particular interest are results which demonstrate that southern growth depends on northern growth (which is determined independently of the South), the relationship between the southern terms of trade and southern growth, and the possibility of uneven development (reflected by a rise in the relative size of the North) due, for instance, to technological change and changes in consumer preferences. Some of these mechanisms of uneven development have been endogenized to model processes of cumulative causation due to factors such as the income-inelastic demand for southern products, international demonstration effects, and endogenous technological change, as expressed in Amitava Krishna Dutt’s book Growth, Distribution, and Uneven Development (1990). These results confirm some of the informal ideas of earlier writers on uneven development, but they depend on some of the specific assumptions made about the structures of the northern and southern economies.

The basic trade models have also been extended in several directions. For instance, international capital movements from the North to the South in search of higher profits have been shown to exacerbate uneven development, due to a fall in the price of the southern good because of increases in southern production, and to profit repatriation to the North, although under certain circumstances foreign direct investment, by making possible the production of the northern good in the South, can result in greater North-South equality.

The models stressing structural asymmetries between the North and the South do not explain why such asymmetries arise. Implicitly they assume that events in the past, such as the Atlantic slave trade or colonial domination, create and lock in these structural differences. Models which assume identical structures for the two regions have also been developed to show how small historical events can make one region (the North) end up exporting manufactured goods exhibiting increasing returns to scale, while the other region (the South) becomes more agriculturally oriented, so that there is uneven development.

NEOCLASSICAL MODELS

The models discussed so far can be seen as reactions to the dominant neoclassical Heckscher-Ohlin-Samuelson (HOS) trade models, which contain optimizing agents, are usually static in nature, and assume that markets clear so that labor and other resources are fully employed everywhere. However, the neoclassical approach has also contributed to the development of North-South models. For instance, environmental factors have been introduced into them to examine how stricter pollution control in the North can lead to a movement of “dirty” industries to the South, thereby exacerbating southern environmental problems, as seen in Brian Copeland and Scott Taylor’s 1994 article for the Quarterly Journal of Economics. Most of the North-South models from the neoclassical perspective, however, have followed the contributions of new growth theory, which emphasize the role of increasing returns and externalities in the growth process; this can be seen, for example, in William A. Darity and Lewis S. Davis’s 2005 article for the Cambridge Journal of Economics.

Many new growth theory models imply economic divergence between rich and poor countries due to economies of scale along Smithian lines even without any interaction between the two. These results often carry over to models with North-South trade. For instance, trade can increase (reduce) the wage of skilled labor, the abundant factor in the North (South), thereby increasing (reducing) the incentives for education, labor productivity, and growth. This is not a necessary outcome, however; the increase in the wage of skilled labor may slow down research and development and hence technological change and growth in the North and increase it in the South.

Neoclassical models have also been used for examining North-South technology transfers. It may be supposed that if knowledge is something that all countries can share, the South will eventually catch up to the North. However, those who have studied the process of technology transfer recognize that it is not very easy to transfer technology and it requires southern countries to build up technological capability to be able to learn from, and adapt to, foreign technology. Moreover, the protection of international property rights (IPR) can serve as a barrier to technology transfers. The protection of IPR has been a major source of conflict between the North and the South, and it has been claimed that the lack of such protection will slow down innovation in the North and hence the world. A number of models, however, suggest that weaker protection of IPR will not only speed up technology transfers, but also accelerate innovation in the North as northern resources are devoted more to innovation activity than to production.

North-South models are useful for understanding the nature and consequences of the interaction between rich and poor countries, and to address key issues concerning international inequality and global growth. They can be criticized for downplaying the differences within rich and poor countries, and the possibility that poor countries may grow and join the ranks of the rich. However, two-region models have been extended to include a third, consisting of newly industrialized countries, to explore the causes of its growth and to analyze whether its growth results in the end of uneven development or the exacerbation of the gap between the rest of the South and the North.

SEE ALSO Development; Economics; Heckscher-Ohlin-Samuelson Model; Trade; Trade, Anglo-Portuguese; Unequal Exchange