Industrialization of developing Countries in a Multicountry, Multisector Capital accumulation Model

Abstract

This working paper shows that developing countries industrialize, or start producing investment goods, when their relative share in global production becomes larger than the global demand for consumption goods. Industrialization is simulated in a capital accumulation model with two countries, three goods, and two factors. The model accommodates trade relations where countries specialize in producing certain goods and includes production under monopolistic competition and intermediate inputs. Capital mobility across the border can facilitate the industrialization of developing countries. They will continue borrowing capital from advanced countries even at the steady state.