John Sutton

Published September 2001

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What economic mechanisms underlie the polarization of the world economy into the 'high wage' industrialized countries and the less developed 'low wage' countries? Should we expect the two groups to converge over time, or to diverge? What economic mechanisms come into play as LDCs attempt to 'catch up'? How does the current liberalisation of world trade, or 'globalisation', impinge on these countries, and how does it affect the prospects for 'convergence'?In this paper, I bring together two recent economic literatures which have developed independently of each other over the past decade. The first if the 'Geography and Trade' literature, which has cast new light on how the dichotomy between 'rich' and 'poor' countries evolves. The second literature is the modern 'market structure' literature, which examines how global industries may of necessity be dominated by a relatively small number of leading producers.At the heart of this discussion is what I shall label 'scarce capabilities': just as the Golden Age of the Dutch republic was founded on the establishment of its dominance of the 'rich trades' (the maritime sea-routes to the Indies and Carribean), so the wealth of modern industrialized economies rests on the network of firms that enjoy 'scarce capabilities', the rent from which manifests itself primarily in the form of high real wages in their domestic labour markets. How this comes about, and how it persists, is my central theme.