Endogenous growth in a North - South framework with human capital accumulation and technology transfer

The purpose of this paper is to study the long run evolution of a world economy (divided into a North and a South) and to re-evaluate some conventional ideas regarding the inter-relation between the two economies. Here, a technologically backward South adopts the Northern technology by importing R&D-intensive intermediate inputs from the North. However the capability of its technology adoption (shown by the number of varieties of intermediate goods it uses) is constrained by its level of human capital. The results of the model suggest that (i) at the steady state, the two countries need not grow at the same rate and that the South can manipulates its own growth rate, (ii) the terms of trade (TOT) may rise, fall or remain static at the long run steady state depending on the growth rates of the two regions. A decline in the TOT of the South is associated with a higher growth rate and higher welfare (under certain conditions). This conclusion follows as a result of the incorporation of endogenous growth theory that generates increasing returns to scale through the use of different varieties of intermediate goods.