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  5. A Technology-Gap Model of ‘Premature’ Deindustrialization

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

A Technology-Gap Model of ‘Premature’ Deindustrialization

  • Ippei Fujiwara
  • Kiminori Matsuyama
American Economic Review (Forthcoming)

Abstract

We propose a parsimonious mechanism for generating premature deindustrialization (PD). In the baseline model, the Baumol effect drives the hump-shaped path of the manufacturing share. Countries follow different paths due to the difference in the sector-specific adoption lags. The condition for PD under which countries differ only in technology gap implies that the cross-country productivity dispersion is the largest in agriculture. Moreover, when calibrated to match Rodrik (2016)’s findings, it is the smallest in manufacturing. In three extensions, we add the Engel effect, international trade, and catching-up by late industrializers, to demonstrate the robustness of the mechanism.

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