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

Abstract

We construct and calibrate a model of the world economy in which countries' opportunities to develop depend on their trade with advanced economies. Trade opportunities in turn depend on the relative population of the advanced and developing world. As developing countries become advanced, they further improve the trade prospects for the remaining developing countries. As long as the population growth differential between developing and advanced countries is not too large, the rate at which countries transition to prosperity accelerates over time. However, if population growth differentials are large relative to the transition rate, the world economy converges to widespread prosperity if and only if the proportion of the world population in advanced countries is above a critical level. The model suggests that countries which become more open are more likely to grow, but that increased openness by developing countries as a whole may lead to only modest increases in growth for developing countries in aggregate. The rapid rise of China may hurt some developing countries in the short-run, but will open tremendous opportunities for the remaining developing countries in the long-run.