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?