The North–South model, developed largely by Columbia University economics professor Ronald Findlay, is a model in developmental economics that explains the growth of a less developed “South” or “periphery” economy that interacts through trade with a more developed “North” or “core” economy. The North–South model is used by dependencia theorists as a theoretical economic justification for dependency theory.
The model makes a few critical assumptions about the North and the South, as well as the relationship between the two.
- The Northern economy is operating under Solow-Swan assumptions while the Southern economy is operating under Lewis growth assumptions. However, for the purposes of simplicity of this model, the output of the traditional sector of the Lewis model is ignored, and we equate output in the modern sector of the South to total output of the South.
- The more developed North produces manufactured goods while the less developed South produces primary goods. These are the only two goods.
- Both economies undergo complete specialization
- There are no barriers to trade, and only two trading partners
- Income elasticity of demand equals unity in both countries, so economic growth results in a proportionate growth in demand.
- The South depends on the imported goods from the North in order to produce its own goods. This is because the heavy machinery required for production of primary products comes only from the North. The relationship is nonreciprocal, however; the North does not depend on the South, since it can use its own heavy machinery to produce manufactured goods.
Relationship to import substitution theories
Economic theories such as the North–South model have been used to justify arguments for import substitution. Under this theory, less developed countries should use barriers to trade such as protective tariffs to shelter their industries from foreign competition and allow them to grow to the point where they will be able to compete globally.
It is important to note, however, that the North–South model only applies to countries that are completely specialized; that is, they are not competing with foreign markets – they are the only ones producing whichever good they are producing. The way around the terms of trade trap predicted by the North–South model is to produce goods that do compete with foreign goods. For example, the Asian Tigers are famous for pursuing development strategies that involved using their comparative advantage in labor to produce labor-intensive goods like textiles more efficiently than the United States and Europe.
- ^Abdenur, Adriana “Tilting the North South Axis”, Princeton University, 2002, accessed June 24, 2011.
- ^Molana, H. “North South Growth and the Terms of Trade”, The Economic Journal, 1989, accessed June 24, 2011.
- ^Findlay, Ronald. Growth and Development in Trade Model.Handbook of International Economics, 1984, p. 185-236.
- ^Whalley, John. The North South Debate and the Terms of Trade. A Review of Economics and Statistics, 1984, Vol. 66 No. 2
- ^Krueger, Anne. Trade Policy as an Input to Development. NBER Working Paper No. 466
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.