Developing country growth and developed country response

This paper makes a theoretical argument that growth in developing countries is likely to worsen the income distribution in developed countries and lead to a protectionist response that undermines the incentives for developing country growth. The model for this purpose is the two-cone version of the Heckscher-Ohlin (HO) trade model, in which countries have different factor prices even with free trade, and in which they produce mostly different groups of goods. In this model, unlike the HO model with factor price equalization, growth by the poor country expands the output of its capitalintensive good, which is also the labour-intensive good of the other country. Regardless of whether factors are mobile or immobile across sectors, this reduces the real wages of factors that are either intensive or specific in the labour-intensive sector of the rich country. The paper argues that this will then lead to the rich country restricting trade. This, in turn, will lower the return to capital in the poor country and reduce the incentive for further growth.