Convergence in a Dynamic Heckscher–Ohlin Model with Land

• Date: 01 August 2015
• DOI: http://doi.org/10.1111/rode.12158
• Author: Maria Dolores Guillo,Fidel Perez‐Sebastian
• Published date: 01 August 2015

Convergence in a Dynamic Heckscher–Ohlin Model

with Land

Maria Dolores Guillo and Fidel Perez-Sebastian*

Abstract

Convergence among nations that share the same preferences and technologies is a key result of the closed-

economy neoclassical growth framework that has received substantial support in the data. However,

Heckscher–Ohlin versions of the two-sector neoclassical growth model predict that nations that differ in

their capital–labor ratios may not converge to the same steady state, even if they are identical in all other

aspects. This is a puzzling result that warns us about potential dangers of international trade. In this paper

we show that when land, an input in fixed supply, is introduced into the model, international trade in goods

no longer limits the capacity of poor nations to catch up with the advanced world.

1. Introduction

Convergence across economies, or the lack of it, is a main research agenda in the eco-

nomic growth literature. The question asked is whether income per capita in poor

countries or regions tends to grow faster than in rich ones. The answer to this ques-

tion has clearly important implications for the expected evolution of welfare levels in

developing nations. The closed-economy neoclassical growth framework helps in that

direction by offering an important insight. It predicts that economies that have the

same fundamentals and only differ in the initial capital–labor ratios will eventually

share the same levels of output per capita. This has become the well-known condi-

tional convergence hypothesis.1

Open economy frameworks, however, challenge the above prediction. Among

them, we find the dynamic Heckscher–Ohlin model. First introduced by Oniki and

Ozawa (1965) and Bardhan (1965), it represents a widely used setup to analyze trade

and growth issues that embeds the standard Heckscher–Ohlin theory of trade into the

neoclassical growth model. One of its important predictions is that developing coun-

tries that are identical to developed nations in all aspects except for the capital stock

level can remain permanently poorer, as Chen (1992) and Atkeson and Kehoe (2000)

show. This result, besides being in stark contrast to the predictions of closed-economy

models, also warns us about the dangers of international trade.

In this paper, we show that the above lack-of-convergence prediction among econo-

mies that share the same technologies and preferences heavily depends on the charac-

teristics of production inputs. In particular, when land is introduced into the model,

international trade in goods does not limit the capacity of poor nations to catch up

with the advanced world.2

* Perez-Sebastian: University of Alicante, San Vicente, 03080 Spain. Tel: +34-965903400; Fax:+34-

965903898; E-mail: fidel.perez.sebastian@gmail.com. Also affiliated to the University of Hull, UK. Guillo:

School of Economics, University if Alicante, 03080 Spain. The authors are grateful to the Spanish Ministry

of Science and Innovation (ECO2012-36719) and the Generalitat Valenciana (PROMETEO/2013/037) for

financial support.

Review of Development Economics, 19(3), 725–734, 2015

DOI:10.1111/rode.12158

© 2015 John Wiley & Sons Ltd