Trade and inequality in developing countries: a general equilibrium analysis

Developing and newly industrialized countries that have experienced the sharpest increases in wage inequality are those whose export shares have shifted towards more skill-intensive goods. We argue that this can be explained by technological catch-up. We develop this insight using a model that features both Ricardian and endowments-based comparative advantage. In this model, Southern catch-up causes production of the least skill-intensive Northern goods to migrate South (where they become the most skill-intensive Southern goods). This raises wage inequality in both the South and the North. We provide empirical evidence that strongly supports this causal mechanism: Southern catch-up exacerbates Southern inequality by redirecting Southern export shares towards more skillintensive goods. D 2004 Elsevier B.V. All rights reserved.