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Michael Kremer is Gates Professor of Developing Societies in the Department of Economics at Harvard University. The authors are grateful to seminar participants at the IFPRI/Cornell conference on threshold effects and non-linearities in growth and development for helpful comments.
Tamura (1996) presents a model with endogenous choice between fertility and human capital investment, which addresses some of these issues. In his model, as rich countries grow they raise the return on human capital, causing demographic transition and growth in poor countries as they shift from high fertility and low human capital investment to lower fertility and higher human capital investment.
A benevolent social planner would like to tax the traditional sector in order to subsidize the modern one.
If NA/ND grows without bounds, eventually its growth will be lower than the one indicated by (2). For example, at some point ND < iNA (i.e., even if all the remaining population in developing countries migrates to the advanced ones, they would still account for less than a share i of the latter).
Note that the right-hand side is negative when γD − γA < i + p, implying NA/ND will grow without bounds (assuming that (3) does not hold, otherwise it would already grow without bounds to begin with).
If that was not the case, then (1) would not hold, and the world economy would have never moved to the second stage to begin with. Note that if the world economy had initially started in the second stage, then it would be possible for it to switch to the first one (for example, if the population growth differential is sufficiently large).
Basing the comparison on the income of the leading country as opposed to say the world average is more suitable to our model and it avoids causing the income threshold to mechanically increase as more countries develop.
The main countries that experienced prolonged periods above the income threshold and later declined below it were Argentina and Uruguay, whose high income can largely be attributed to primary commodities. Another noteworthy case is Czechoslovakia, which had been above the income threshold since1820 at the time it became a communist country. Hungary and Poland were also above the income threshold prior to World War II and communism.
For example, the following countries classified as advanced declined below the threshold as a result of World War II: Austria: 1945–48, Finland: 1943–45, France: 1942–45, Germany: 1946–48, Ireland: 1942–46, Italy: 1943–47, Japan: 1942–59, Netherlands: 1944–45, and Norway: 1944. Finland also declined below the threshold in 1917–20.
As indicated in Table 1, the only transition from developing to advanced in the first half of the 20th century was Japan in 1932. Japan’s income declined below the advanced status threshold during 1942-1960 as a result of the devastating effects World War II had on its economy. If we had classified Japan as a developing economy until 1960, the resulting estimate of p(A(1 − α)/(1 + δ))1/α for the second half of the 20th century would increase to 0.79%. This higher transformation rate would suggest better prospects for developing countries (and would also suggest that development has become “easier” from the first to the second half of the 20th century).
Taiwan Province of China is excluded from their sample.