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Inequality, Openness, and Growth through Creative Destruction

Author

Listed:
  • Ulrich Schetter

    (University of Pavia, Italy)

  • Maik T. Schneider

    (University of Graz, Austria)

  • Adrian Jaeggi

    (SIAW at University of St. Gallen, Switzerland)

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.

Suggested Citation

  • Ulrich Schetter & Maik T. Schneider & Adrian Jaeggi, 2024. "Inequality, Openness, and Growth through Creative Destruction," Graz Economics Papers 2024-16, University of Graz, Department of Economics.
    • Handle: RePEc:grz:wpaper:2024-16
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    More about this item

    Keywords

    Distance to frontier; dual economy; Dutch disease; growth; inequality; infant industry protection; non-homothetic preferences; small open economy; trade openness.;
    All these keywords.

    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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