Inequality, Openness, and Growth through Creative Destruction

Ulrich Schetter, Maik Schneider and Adrian Jaeggi ()
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Adrian Jaeggi: SIAW at University of St. Gallen, Switzerland

No 2024-16, Graz Economics Papers from University of Graz, Department of Economics

Abstract: We examine how inequality and openness interact in shaping the long-run growth prospects of developing countries. To this end, we develop a Schumpeterian growth model with heterogeneous households and non-homothetic preferences for quality. We show that inequality affects growth very differently in an open economy as opposed to a closed economy: If the economy is close to the technological frontier, the positive demand effect of inequality on growth found in closed-economy models may be amplified by international competition. In countries with a larger distance to the technology frontier, however, rich households satisfy their demand for high quality via importing, and the effect of inequality on growth is smaller than in a closed economy and may even be negative. In such case trade can give rise to the endogenous emergence of a 'dual economy' where some domestic sectors are highly innovative while others are not.

Keywords: Distance to frontier; dual economy; Dutch disease; growth; inequality; infant industry protection; non-homothetic preferences; small open economy; trade openness. (search for similar items in EconPapers)
JEL-codes: D30 F43 O30 O40 (search for similar items in EconPapers)
Date: 2024-10
New Economics Papers: this item is included in nep-gro
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Related works:
Working Paper: Inequality, Openness, and Growth through Creative Destruction (2021)
Working Paper: Inequality, Openness, and Growth through Creative Destruction (2021)
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