Industrialization of Developing Countries in a Multicountry, Multisector Capital Accumulation Model

This paper shows that industrialization of developing countries, defined as start of production of investment goods, happens when their share in global production exceeds the global demand for consumption goods. Industrialization is simulated in a capital accumulation model with two countries (advanced and developing), three goods, and two factors. The model accommodates trade relations where countries specialize in the production of one or two goods, which happens when countries have relatively different factor endowments. The model includes production under monopolistic competition and with intermediate inputs. Capital mobility across the border can facilitate industrialization, but the developing country continues borrowing capital from the advanced country at the steady state where capital accumulation stops. The model also shows that a gap in per labor capital between countries narrows, but the developing country never catches up with the advanced country. Gaps between the countries are smaller in per labor gross domestic product and consumption, than in per labor capital.