【巴德学院利维经济研究所】技术差距与内生冲突-2026.6

WorkingPaperNo.1120

TechnologyGapandEndogenousConflict:ANorth-SouthTradeDynamicModel

by

XiyanGong

LevyEconomicsInstitute&YunnanUniversity

June2026

TheLevyEconomicsInstituteWorkingPaperCollectionpresentsresearchinprogressbyLevyInstitutescholarsandconferenceparticipants.Thepurposeoftheseriesistodisseminateideastoandelicitcommentsfromacademicsandprofessionals.

LevyEconomicsInstituteofBardCollege,foundedin1986,isanonprofit,nonpartisan,independentlyfundedresearchorganizationdevotedtopublicservice.Throughscholarshipandeconomicresearch,itgeneratesviable,effectivepublicpolicyresponsestoimportanteconomicproblemsthatprofoundlyaffectthequalityoflifeintheUnitedStatesandabroad.

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ABSTRACT

Thispaperinvestigatestheendogenousmechanismbywhichdecentralizedtechnological

imitationinSoutherncountriestransitionsfromcatch-uptocompetitiveconflictwiththeNorth.IntegratingintermediategoodsvarietyintoaNorth-SouthtrademodelwithBalanceofPayments(BOP)constraints,wedemonstratethatuncoordinated,profit-driveninvestmentbySouthern

firmsoftenexceedstheBOPconstraint.WhileconventionaltheorysuggeststhistightensBOP

constraintscausingstagnation,ourframeworkrevealsthatunexpectedtechnologicalprogress

altersNorthernimportelasticity,therebyrelaxingexternalconstraintsandenablingsustained

over-investment.However,thisexcessiveimitationredistributesNorthernprofitshares,

triggeringendogenoustariffretaliationandtechnologicalcontainment.Themodelillustratestwotypesoftradedynamicsdependingonthestrengthofanimalspirits,importelasticities,and

tariffs:atwo-stagepathendinginthemiddle-incometrap,orathree-stagepathachievingcatch-up.

KEYWORDS：North-SouthModel;TechnologyGap;TradeDynamics;BOPConstraint

JELCODES:F43;O33;F13

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1.INTRODUCTION

Sincethemid-20thcentury,astheworldwidemovementfornationalindependencehas

advanced,latecomercountrieshaveexperiencedrapidgrowthfollowedbywidespread

deindustrialization.Despitetherapidexpansionoftradevolumes,halfacenturyof

developmentalexperiencerevealsthatglobalizationandindustrializationhavefailedtoprovidereliableevidenceofconvergencefordevelopingnations.Instead,adistinctdivergenceinglobalgrowthpatternshasemerged(Rodrik2014;Johnson&Papageorgiou2020).Althoughthetheoryofcomparativeadvantageandneoclassicalgrowthmodelshighlightthedynamiclinksbetween

internationaltradeandtechnologicalinnovation—emphasizingtheimportanceoftechnological

spilloversandlearning-by-doingeffectsforlatecomerstonarrowthetechnologygap—these

frameworksoftenpresupposeaself-adjustingmarket-clearingmechanism,therebyneglectingthestructuralheterogeneityofdevelopingcountries.Consequently,thesetheoriesstruggleto

adequatelyexplainwhymanydevelopingnations,uponintegratingintotheglobalindustrial

divisionoflabor,notonlyfailtoachievesustainedtechnologicalcatch-upbutactuallyfallintothetrapsof"prematuredeindustrialization"andtechnologicalstagnation(Oreiroetal.2021;

Cimoli&Porcile2014).Inreality,microeconomicagentsfacebothtechnologicalbarriersand

externalconstraintsimposedbytheBalanceofPayments(BOP)(Thirlwall'sLaw),whichjointlydeterminethemultipleequilibriagoverninglatecomertechnologicalcatch-upandeconomic

structuraltransformation.

Neo-Schumpeterianeconomicsconceptualizeseconomicdevelopmentprimarilyasaprocessoftechnologicalcapabilityaccumulationthataccompaniestheupgradingofproductionstructures(Nelson&Winter2004;Baumol&Kou2016).However,duetothefundamentaldisparitiesin

initialtechnologicalendowmentsandinstitutionalstructuresbetweentheNorthandtheSouth,

technologicaldiffusiondoesnotoccurautomatically.SoutherncountriesengageintechnologicalimitationthroughGlobalValueChain(GVC)ParticipationorbyimportingNorthern

intermediateandcapitalgoods.Thisprocessisdeeplyinfluencedbytechnologicaldistanceandabsorptivecapacity(Knez2023;Hodgson1994),andconstrainedbydomesticinvestment

capacityandexportforeign-exchangeearningcapabilities(e.g.,Cimoli1988;Botta2009).Ifthe

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South'sindustrialstructurefailstogenerateasufficientlyhighexport-incomeelasticity,itstechnologicalcatch-uptrajectorywillbeinterruptedbyBOPdeficits.

TheexistingliteraturehasextensivelyexaminedtheinteractionbetweenNorth-Southtradeand

technologicalcatch-up,revealingcomplextransmissionmechanismsfrommacroeconomic

constraintstomicroeconomiccorporatedecisions.Themicroeconomicmotivationsof

heterogeneousSoutherncapitalists—whospontaneouslyundertaketechnologicalinvestments

andintertemporalprofitmaximization—arenotalwaysalignedwiththelong-termgrowth

requiredtomaintainmacroeconomicBOPequilibrium(Vetsikas&Stamboulis2023).This

impliesthatcapitalaccumulationandtechnologicalprogressarenotindependent,exogenous

variables;rather,technologicalcapabilitiesmustbejointlyshapedbyspecificinstitutional

frameworksandpolitical-economicforces(Porcileetal.2023).Thedevelopmentalpathways

availabletoSouthernenterpriseswheninvestingintechnologicalimitationdependheavilyontheevolutionoftheir"traderelations"withthecentral(Northern)countries.

ThispaperattemptstoconstructaNorth-Southtradedynamicmodelthatincorporatesboth

technologicalimitationandBOPconstraints.ItexaminestheendogenousgenerationofNorth-

SouthconflictduringtheSoutherntechnologicalcatch-upprocessandthemechanisms

underlyingcatch-upfailure.OurtheoreticalanalysisdemonstratesthatthecontradictionbetweenSouthernfirms'individualrationalityandmacroeconomicconstraintstriggersunanticipated

technologicalshocksintheSouth,whichsubsequentlyleadtoNorth-Southconflict.Drivenbydecentralizedprofitmaximization,Southerncapitalistsmayover-investintechnological

imitation,causingthespeedoftechnologicalcatch-uptoexceedmacroeconomicequilibriumintheshortrun(creatingan"expectationgap").Ifthisshockinducesashiftinthesteadystate

itself,thisover-investmentmaycausesustainablecapitalaccumulationandtechnologicalcatch-up.Meanwhile,thisunanticipatedSoutherninvestmenttranslatesintounexpectedreallocationsofprofitsharesbetweentheNorthernimportandexportsectors.Thereforeevenifthe

technologicalcatch-upofSouthernfirmsdoesnotdirectlyseizemarketsharefromNorthernenterprises,theresultantconflictsandtariffbarrierscanstillemergeendogenously.In

conclusion,thispaperoffersananalyticalframeworkforunderstandingtheevolving

competitive-cooperativedynamicsofNorth-Southtraderelationsacrossdifferentstagesof

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technologicalcatch-up,providingtheoreticalsupportforunderstandinglatecomertrajectoriesandtheflexibleapplicationofindustrialpoliciesacrossvaryingdevelopmentalphases.

Therestofthispaperisstructuredasfollows.Section2reviewstheliteratureontwomain

strands:howSoutherncountriesreducethetechnologicalgaptoachieveconvergencefroma

structuralistperspective,andhowinternationalrelationsevolvealongsidetechnologicalcatch-up.Section3outlinesthebasicmodelassumptionsregardingproduction,trade,and

technologicalimitationbetweentheNorthandtheSouth,andderivesSouthernmicro-behaviordrivenbyprofitmaximization.Section4introducesthebalance-of-paymentsconstraintto

examinetheendogenousnatureofNorth-Southconflict.Section5shows2(two)differenttypesoftradedynamicsundertheco-evolutionofthetechnologygapandtheNorth-Southconflict.

Thefinalsectionconcludeswithadiscussionofpolicyimplications.

2.LITERATUREREVIEW

2.1SouthernEconomicGrowthunderBalanceofPayments(BOP)Constraints

2.1.1BOPConstraints

OriginatingfromThirlwall'sclassicmodel,itispositedthattheeconomicgrowthoflatecomercountriesfacesstructuralconstraintsdictatedbyexternaldemandandexportcompetitiveness

(Thirlwall1979).BOPconstraintspreventthesupplysidefrombeingfullyutilized,suppressinginvestmentandconsequentlyslowingtechnologicalprogress,thusforgingaviciouscycle.

Addressingthisexternalconstraintonlong-termgrowthchallengestheneoclassicalassertionthat"relativepriceadjustmentscanautomaticallybalanceinternationalpayments,"pivoting

insteadtotheanalyticalapproachthat"outputleveladjustmentsdeterminethebalanceof

payments."Itisgenerallyacceptedthatstructuraladjustmentsrelatedtotechnological

capabilitiesrepresentthe"redline"thatlatecomercountriesmustcircumventtoachievelong-termgrowth(Verspagen1992).Whetheracountrycanfinanceitstradedeficitthrough

internationalcreditmarketsdictateswhethertheBOPconstraintbecomesimmediatelybinding(Blecker2022).

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Shouldacountryberequiredtomaintainalong-termcurrentaccountbalance,itslong-term

economicgrowthratecanbeapproximatedastheratioofitsexportgrowthratetoitsincome

elasticityofimports.ThisoverturnstheneoclassicalpremiseandestablishesthePost-Keynesiandemand-orientedframework,clarifyingthatlong-termgrowthisheavilyrestrictedbyexternal

demand.Theconvergenceofdemandandinstitutionsisbuiltuponanarrowingtechnologicalgap;hence,sufficienttechnologicalimitationcapabilitiesareaprerequisiteforlatecomer

countriestofullyunleashexternaldemand(Cimoli1988).

2.1.2BOPConstraintsandNorth-SouthModels

ByadoptingPrebisch's(1950)"center-periphery"paradigm,Dutt(2002)integratedthebalance

ofpaymentsconstraintintoaNorth-Southtrademodel,elucidatingthemechanismofuneven

development:NortherncountriesgrowfasterthanSoutherncountriesduetotheirlowerincomeelasticityofimports.Thesefindingsweresupportedbysubsequentempiricalresearch(Dutt

2003).StudiesbySasaki(2008)andVera(2006)introducedshiftsincomparativeadvantageandnetfinancialtransfersarisingfromtradeimbalances,respectively,intoBOP-constrainedNorth-Southmodels,discoveringthatthefactorscausinggrowthstagnationintheSouthmaybe

endogenoustobilateralNorth-Southinteractions.OvercomingBOPconstraintstoachievelong-termgrowthrevolvesfundamentallyaroundongoingstructuraltransformationandpersistent

domesticpolicyinterventions(Botta2009).Thus,transcendingBOPlimitationsbecomesa

criticalissueforSoutherneconomiccatch-up.The"structuralisttoolbox"developedbyCimoli

andPorcile(2014)confirmstheintractabilityofstructuralheterogeneitywhilesimultaneously

indicatingthatlaggingeconomiescanendogenouslyraisetheirexportincomeelasticityto

alleviateBOPconstraintsbysystematicallyengagingintechnologicallearningtoalterthesupplyside.

Whenlatecomercountriesfailtoenhancetheshareofhigh-technology-intensivesectorsvia

capitalaccumulation,stallingtechnologicalimitationlockstheirgrowthunderBOPconstraints(Oreiroetal.2011).Thedegenerationofspecializationpatternsduetothe"Dutchdisease"orinsufficientlearningcapabilityactsasamajorchannelfunnelingcapitalintolow-technology-intensivesectors(Oreiroetal.2020;Spinola2020;Oreiroetal.2022).Furthermore,the

ossificationofspecializationpatternsthroughoutthegrowthprocessrepresentsanothercritical

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conduit(Dávila-Fernándezetal.2018).PorcileandYajima(2019)examinedtheimportanceoftheevolutionofspecializationpatterns,drivenbySoutherntechnologicalinnovationand

imitation,forovercomingBOPconstraints,emphasizingthatSoutherninvestmentdemandsarevitalforlong-termgrowth.

Consequently,absentindustrialpolicyinterventions,theprofitsreapedfromtechnological

imitationinvestmentsdeterminetheincentivesforSoutherncapitalaccumulation.Oreiroetal.(2021)detailedthisincentivestructure,illustratingthattechnologicalimitationprofitsexhibitaU-shapedcurverelativetotechnologicaldistance.Thissuggeststhatsuccessfulcatch-upmayhingeontechnologicalimitationsurpassingaspecificcriticalthresholdtogenerateendogenouscatch-upincentiveswithintheeconomy.

Thedistributionallandscapedeterminedbystructuralheterogeneitywithinacountryalso

significantlyimpactsexternalconstraints.ResearchbyDávila-FernándezandSordi(2019)and

OreiroandSilva(2022)indicatesthatdomesticdistributionalshiftstriggerconflictsamong

differentinterestgroupsregardingexchangeratepreferences,redirectinggovernmentalexchangerateinterventions.Thiscanevenprecipitatebroadersocietalinstabilityresultingfrom

deterioratingdistributioncausedbyinvestmentcontraction(Porcile&Sanchez-Ancochea2021).Therefore,aviciouscycleofstagnantnon-pricecompetitivenessandovervaluedexchangeratesconstitutesaprimaryreasonfortheinstabilityorstagnationoflatecomereconomicgrowth.

Conversely,undervaluingtheexchangeratecandrivelong-termSoutherngrowthbybolsteringpricecompetitiveness(Dávila-Fernández&Oreiro2023).However,Porcileetal.(2023)temperthisbynotingthatawindowofexchangerateundervaluationdoesnotinevitablyinducecapitalaccumulationintheexportsector;complementaryindustrialpolicyportfoliosarecriticalfor

realizingtechnologicalcatch-up.

2.2TechnologyDiffusionandChangingInternationalRelations

WhilethefailureoftechnologydiffusioncertainlycausesSoutherntechnologicalstagnation,thisfailureisitselfanendogenousoutcomeofthelatecomercatch-upprocess.Hoyos(2025)

demonstratesthatinternationaltradedoesnotinherentlyguaranteesufficientincentivesfor

latecomerstoinvestintechnologydiffusion.Successfultechnologicaltransitionsalsodependon

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long-termco-evolutionwithfactorendowments;thestagnationoftechnologicalcatch-upcannotbeattributedsolelytoisolatedculturalorinstitutionalexplanations(Knez2023).The

interconnecteddynamicpathsoftechnologyandtradeinherentlyharborthepotentialfordeeperinternalandexternalconflicts.

SkøttandSethi(2000)interprettheintrinsiccausesofbilateraltradeconflictsascyclesof

leadershipsuccessiondrivenbytechnologicalcatch-up.Thecatch-upofEastAsianeconomies

rapidlyerodedthemarketsharesoftechnologicallyleadingnationsinhigh-techindustries

(Stehrer&Wörz2001),easilyprovokingtradeprotectionismandNorth-Southantagonism.

Variationsinexchangeratesandincomedistributioncontinuouslytriggerinternalconflicts

(Dávila-Fernández&Oreiro2023).ParticularlywhenSoutherncountriesattempttostimulate

exportsandtechnologicallearningthroughcurrencydevaluation,theyfrequentlyignite

distributionalconflictsamongdomesticclasses,leadingto"conflictinflation"(Rowthorn2024;Lima&Porcile2013).TheinternalandexternalcontradictionsfacingSouthernnationssuppresseffectivedemandandunderminethestableenvironmentnecessarytoaccumulatetechnologicalcapabilitiesvia"learningbydoing"(Dávila-Fernández&Sordi2019).Furthermore,asexport

structuresshifttowardsmoreskill-intensiveproducts,thecatch-upprocessdrivesupthedemandforhigh-skilledlaborwithindevelopingcountries,indicatingthattechnologicalcatch-upnot

onlyprovokesexternalfrictionbutcanalsoexacerbateinternalunrestbyfracturingdomesticwagedistributionstructures(Zhu&Trefler2005).

Risingtechnologicalcapabilitiesenablelatecomercountriestocontinuouslyascendglobalvaluechains(GVC).In2017,theU.S.NationalSecurityStrategyReportexplicitlyclassifiedsuch

industrial-strategy-backedtechnologicalcatch-upasastrategicthreat,escalatingeconomic

frictionintonationalsecurityconflicts(Capieetal.2020).Internationalpoliticaleconomy

contextualizestraderelationswithinbroaderstaterelations,highlightingthedeterminingroleofinternationalpoliticalfactorsonthe"possibilityfrontier"oftraderelations(Gowa&Mansfield

1993).Kirshner(2009)approachedtheinterest-drivenevolutionofstaterelationsfromapoliticaleconomyperspective,emphasizingthatshiftingeconomicstrengthsredistributerelativepower

overtime.Latecomercountriesfaceacatch-updilemmaofa"squeezeatbothends"causedbytechnologicaldecouplingandthelossofcostadvantages;currenttechnologicalstagnationisthe

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explicitresultofthisendogenousinteractionbetweenglobaleconomicsandgeopolitics(Yuan2024).

2.3ReviewandConceptDefinition

Formiddle-incomecountries,tradeopennessdoesnotautomaticallyconfertheanticipated

growthdividends.Manydevelopingnationsundergoasharpdeclineinmanufacturing

employmentandoutputsharesbeforereachingadvancedindustrialization,significantly

underminingtheirsubsequentgrowthmomentum(DiMeglioetal.2018).Technologicallagis

intimatelytiedtoslowingincomegrowthintheSouth.Howshouldthisphenomenonbe

interpreted?GrossmanandHelpman's(1990)seminalmodelillustratesthattradecan

endogenouslyenhanceenterpriseefficiencyinthetradablesectorthroughintermediategoods

diversificationandtransnationalknowledgespillovers.Consequently,technologicalstagnationisessentiallythedirectmanifestationofaninabilitytorealizefullydynamiccomparative

advantages.AnendogenoustensionformsbetweentheevolutionofcomparativeadvantageandBOPconstraints:Southerncatch-updoesnotsimplystemfromthecomplementaritiesofstatic

comparativeadvantages,butisratheraprofoundprocessintegratingtechnologicalimitationwithmarketcompetition,continuouslyadvancingalongsideshiftingbilateralcompetitive-cooperativedynamics.Thispaperdefinesthisinterconnectedprocessas"tradedynamics":theco-evolutionoftechnologicalimitation,importelasticityintheNorth,andendogenoustradeconflictduring

thecatch-upprocess(seeFigure1).MathematicallyformalizingthisdynamicprocessnotonlysupplementsexistingframeworksbutalsobearssignificantimplicationsforunderstandinghowcurrentSouthernnationscanseekbreakthroughsamidtechnologicalblockadesandtrade

barriers.

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Figure1ConceptDefine:TradeDynamic

Note:Bydividingin2dimensions,aSoutherncountrycanbecategorizedinto4different

situations.TheshifttrajectoriesamongthesesituationsaredefinedastheTradeDynamicofaSoutherncountry.

3TRADEDYNAMICMODEL

3.1ProductionFunction

Weconsideraglobaleconomycomprisingtworegions:thedevelopingSouthandthedevelopedNorth.Theeconomyproducestwotypesofgoods:anarrayofintermediategoodsandasinglehomogeneousfinalgood.Thefinalgoodsmarketisperfectlycompetitive,yieldinga

homogeneousproductyiineachregioni∈{N,S}accordingtoaCESaggregator:

wherexi(j)representsthevarietyjofintermediategoods,nistandsforthetotalmassof

availablevarietiesinregioni,andσdenotestheelasticityofsubstitutionbetweenvarieties.

Theintermediategoodssectorismonopolisticallycompetitive,whereeachvarietyisproducedusingsolelylabor.Weassumethelaborrequirementislinear,givenby:

l0

BoththeNorthandtheSouthareendowedwithanexogenouslaborsupply.Foranalyticalsimplicity,wenormalizethelaborproductivitysuchthataxi(j)=1.

3.2TechnologyGrowthandImitation

TheNorthbenefitsfromanexogenouslygivenrateoftechnologicalprogress,gnN.Conversely,technologicalgrowthintheSouthreliesentirelyonimitation,whichisfacilitatedbyimportingnorthernfinalgoods.SoutherncapitalistsinvestintechnologyassimilationtoreapmonopolisticprofitsfromintroducingnewintermediatevarietiesΔns.

ConsumersintheSouthstrictlydemanddomesticfinalgoods,whereasSoutherncapitalistsallocatetheirincomebetweendomesticfinalconsumptionandtheimportsofNorthernfinalgoodsfortechnologicalimitation,denotedasinvestmentIs.Theimitationtechnologyis

specifiedas:

whereG=ns/nNisthetechnologygapandβisacostparameter.

Southerncapitalistsmaximizetheirintertemporalutilityfromconsumptionbyselectingan

optimalinvestmentpath,subjecttotheirbudgetconstraintderivedfromintermediateproductionprofits:

Theintra-periodprofitconstraintis:

ll

whereq=PN/PSactsastherealexchangeratebetweenthetworegions.Similarly,Northerncapitalistsandworkersdistributetheirconsumptionacrossfinalgoodsfrombothcountries

accordingtoanexogenoussavingrate.

3.3PricesandCapitalistProfits

Givenanexogenouswagewi,thesymmetricsetupimpliesstandardmarkuppricingintheintermediatesector:

Thecorrespondingpriceindexforfinalgoodsis:

Theoptimalmonopolyprofitlimitsto:

3.4OptimizationofSouthernCapitalists

TheoptimizationoftheSoutherncapitalistrevolvesaroundequatingthemarginalprofittothemarginalcostofimitatingaunitoftechnology(∂nS).Themarginalprofitofimitationisgivenby:

Toobtainthesolutionofaboveequation,imposingtheBalanceofPayments(BOP)constraint,thetradestructurelinksoutputandexchangerates:

θSYSENS=qμN+μS__1YNESN

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whereεNSandεSNrepresenttheimportelasticitiesfortheNorthandtheSouth,respectively.WepositthattheNorth’simportelasticityεSNisapositivefunctionofthetechnologygapandthe

realexchangerate(RER):

εSN=+α1ln(G)+α2ln(q)

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Leveragingtheexchangeratedefinitionq=WGσ__1,wederivethemarginaleffectoftechnologicalconvergenceonSouthernoutputcapability:

Consequently,themarginalprofitofimitationsimplifiesto:

Thismarginalprofitequationaboveshowsthatasthetechnologygapnarrows,themarginalprofitdiminishes.AsshowninleftsideofFigure2,closingthetechnologygapinherently

diminishes.Conversely,themarginalcostofimitation—dictatedbyincreasesgeometricallyasthetechnologygapnarrows(seerightsideofFigure2).

Figure2MarginalGainofImitationandMarginalCostofImitation

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Astableinteriorequilibriumemergeswheremarginalcostintersectsmarginalprofit(seeleftside

ofFigure3).Notably,statessuchasGareinherentlyunstablebecausemarginalprofitsexceed

marginalcosts,continuallydrivingSoutherncapitaliststoincreaseimitation.Inasteadystate

likeGorG,capitalistshaveaninvestmentpathISthatstabilizesthetechnologygap.Ifan

unanticipatedshockshiftsthetechnologicalparameter(Δn_s>0),itwillboostbothprofits

andimportelasticities,shiftingthemarginalprofitupwardandyieldingatightersteady-stategapG米(rightsideofFigure3).

Figure3StableInteriorEquilibriumandUnanticipatedTechnologicalShock

4MECHANISMOFENDOGENOUSCONFLICT

4.1DeviationfromBalancedGrowthPath

AtaBalancedGrowthPath(BGP),thetechnologygapshouldremainconstant(gnN=gns),fixingtherelativeprices(q=q米).Therespectivegrowthratesforfinalgoodsscale

proportionallytotechnologicalvariety(gyigni).

However,undertheBOPconstraint,SouthernfinaloutputcanonlymatchNortherngrowthratesifaspecificgapthresholdG米米satisfiesESN(G米米)=ENS.Iftheprevailingoptimally-chosen

technologygapfallsbelowthisthreshold(G米<G米米),thesteadystategys<gyN,causesgnN≠gns,sothatG米wouldnotbestable,themarginalprofitoftheSoutherncapitalistwillbelowerthantheirexpectation.

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Theintertemporalbudgetconstraintmandatesthat,withoutsufficientelasticityparity,sustainedconvergenceinducessacrificeinSoutherncapitalistconsumption.Thus,structuraldeficitsin

externaldemandultimatelytranslatetooutputdivergence(Figure4),itmeanstheBGPisnotsustainable.

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Figure4DeviationfromSteadyState

4.2TheExpectationGap

ThemisalignmentbetweenoptimalinvestmenttrajectoriesandBOPconstraintsproducesan

"expectationgap."IfSoutherninvestmentswerecoordinatedcentrally,policymakersmight

adjustthelong-termconsumptionpathtomitigatethisdivergence.However,inourdecentralizedframework,monopolisticintermediateproducersdonotbearthemacroeconomicburdenofthe

BOPconstraintdirectly.Thus,individualfirmsretainincentivestoinvestaslongasprivate

marginalprofitsexceedmarginalcosts.Thisincentivegeneratesacontinuous,unanticipated

volumeofimitation(Δns)asa“shock”shiftsthetechnologicalparameter,asmentionedat

Figure3

.Thisshiftpersistentlyraisesimportelasticities,therebysustainingtheoverinvestmentitself.

1TheBOP-constrainedgrowthliteratureshowsthatcapitalinflowscanrelaxtheforeign-

exchangeconstraintinthemediumrun,butifthecurrent-accountdeficitandtheexternal-debt-to-GDPratiocannotbestabilized,growthmusteventuallyadjustthroughlowerinvestment,

exchange-rateadjustment,externaldebtaccumulationorfinancialcrisis(ThirlwallandHussain1982;Moreno-Brid1998;Blecker2013).SeeAppendixA.1.

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Thesedecentralizedover-investmentbehaviorscanalsobeexplainedbyacollective“animal

spirit”(Akerlof&Shiller2010),definedasaspontaneousurgetoactionandself-reinforcing

optimismthatoperatesatthemicroeconomiclevel.Whenconfrontedwithuncertainty,individualproducersexhibitcontagiousconfidenceintheiroptimalimitationstrategiesratherthanrelyingonaggregate-levelequilibrium.Bydisregardingmacroeconomicconstraints,thisdecentralized

investmentincentivesdrivenbyanimalspiritstransformrationalmicro-levelmotivesintoapersistentdriveroftechnologicalprogressandrelaxtheBOPconstraintcontinuously.

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4.3EndogenousTariffRetaliationfromtheNorth

Rowthorn(2024)notesthatthe“unanticipatedshock”introduces“conflicts”intothesystem.TheSouthernover-investmentdrivenbyanimalspiritsmanifestsasapersistent,

uncoordinatedwaveofimitation,transmittinganunanticipatedtechnologicalshocktotrademarketsandcompellingastructuralreallocationofglobaldemand.

WhiledecentralizedSouthernover-investmenttheoreticallyrelaxestheBOPconstraintby

increasingESN,itsimultaneouslydestabilizesNorthernprofitdistribution.Specifically,an

unexpectedsurgeinSouthernimitationincreasesNorthernimports(MN),shiftingprofitsharesfromdomestically-focusedtoexport-orientedNortherncapitalists.

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Weformalizeth