Globalization and the Human Development Trap - IDB.pdf

Globalization and the Human Development Trap David Mayer-Foulkes CIDE Mexico December 28th , 2006. Abstract The feeble results of liberalization policies in Latin America are explained in terms of a multiple steady state model including a dynamic human develop- ment trap, endogenous technological change, technology transfer and trade. Divergent and convergent steady states, with and without a human develop- ment trap, exist under both autarchy and free trade. The model explains why import substitution is inferior to export promotion. While globalization is a necessary condition for convergence to development, it is not sufficient. Both trade and foreign direct investment create innovation assymetries hindering lagging countries that need to be balanced with export promotion and tech- nological transfer for their successful integration with the global economy. In addition, so long as the human development trap persists, unskilled and skilled workers will have a confl ict of interest between supporting human capital in- vestment and innovation. If only innovation is supported, the human capital trap will persist. If mainly human capital investment is pursued, technology levels will fall behind; switching to innovation will be necessary eventually. The world growth rate is maximized by regulating globalization so as to attain development in all countries. 1 1 Introduction In the Latin American context, a society-wide reevaluation of globalization is currently underway. The pro-market liberalization policies that have been followed for a decade and a half have only been mildly successful. These poli- cies have essentially followed the Washington Consensus, co