North–South Trade as a Source of Uneven Development: A Critical Literature Review on the Role of Absorptive Capacity

An idea from classical development theory is that North–South trade is harmful to the South. This idea has been countered by recent models of trade and endogenous growth that claim that North–South trade only leads to uneven development when international technology diffusion is absent. This paper provides a selective critical review of this consensus. I first document selective theoretical literature suggesting that North–South trade can generate uneven development even if international technology diffusion exists. Vital to this result is that technology diffusion depends on absorptive capacity. Specifically, North–South trade leads to uneven development whenever: (i) technology diffusion becomes easier as the South catches up with the North, (ii) technology diffuses internationally but is biased towards specific production factors, or (iii) economic sectors differ in their ability to learn frontier technologies. I then review selective evidence and specifically document the practical relevance of absorptive capacity along these three dimensions, thereby partially supporting the theoretical mechanisms outlined.