A new research paper titled Trading Population for Productivity: Theory
and Evidence by Oded Galor and Andrew Mountford focuses on a novel Unified
Growth Theory. The paper argues that the -
differential effect of international trade on the demand for human
capital across countries has been a major determinant of the distribution
of income and population across the globe. In developed countries the gains
from trade have been directed towards investment in education and growth in
income per capita, whereas a significant portion of these gains in less
developed economies have been channeled towards population growth.
Cross-country regressions establish that indeed trade has positive effects
on fertility and negative effects on education in non-OECD economies, while
inducing fertility decline and human capital formation in OECD
economies.
The researchers suggest that more than “the geographical and
institutional factors, human capital formation, ethnic, linguistic and
religious fractionalization, colonialism and globalization”, it is
international trade that has had an “asymmetrical effect on the
evolution of industrial and non-industrial economies” leading to a
remarkable change in the distribution of world income in the past two
centuries.
The expansion of international trade in the second phase of the
Industrial Revolution enhanced the specialization of industrial economies
in the production of industrial, skilled intensive, goods. The associated
rise in the demand for skilled labor has induced a gradual investment in
the quality of the population, expediting a demographic transition,
stimulating technological progress and further enhancing the comparative
advantage of these industrial economies in the production of skilled
intensive goods. In non-industrial economies, in contrast, international
trade has generated an incentive to specialize in the production of
unskilled intensive, non-industrial, goods. The absence of significant
demand for human capital has provided limited incentives to invest in the
quality of the population and the gains from trade have been utilized
primarily for a further increase in the size of the population, rather than
the income of the existing population. The demographic transition in these
non-industrial economies has been significantly delayed, increasing further
their relative abundance of unskilled labor, enhancing their comparative
disadvantage in the production of skilled intensive goods and delaying
their process of development.
The most interesting portion of the paper is Part 6, the one dealing
with Historical Evidence, which includes an analysis of the contrasting
paths of development of UK and India over the last two centuries.
The evidence demonstrates that during the nineteenth century the UK
traded manufactured goods for primary products with India. Consistent with
the proposed hypothesis, industrialization in India regressed over this
century whereas industrialization in the UK accelerated. The process of
industrialization in the UK led to a significant increase in the demand for
skilled labor in the second phase of the industrial revolution, triggering
a demographic transition and a transition to a state of sustained economic
growth. In India, in contrast, the lack of demand for skilled labor delayed
the demographic transition and the process of development. Thus, while the
gains from trade were utilized in the UK primarily towards an increase in
output per capita, in India they were more biased towards an increase in
the size of the population.
The concluding remark about the “slow transition of less developed
economies into a state of sustained economic growth” is likely to
gladden the hearts of most Indians. If “international trade
accentuates the initial patterns of comparative advantage” and once
India has slowly transited onto the path of sustained growth, then the
Indian policy makers can rejoice at having done all the dirty, hard work.
The growth trajectories of population, human capital and per capita income
will take care of themselves, courtesy the Unified Growth Theory. Is it
really that simple?