Satiation and underdevelopment

In this article we show how absolute poverty and per capita growth can be s ustained simultaneously in a fully integrated world economy. Poverty persis ts due to an endogenously sustained bias in the direction of technological change. We show in an example framework, that if free trade is opened up to o early between an initially less developed and a more developed country, t hen part of the population of the initially less advanced country is caught in a poverty trap. If, on the other hand, individuals are restricted to tr ade within their own economy for a sufficiently long time, no poverty trap arises. The essential assumption is that once a person has satisfied his ba sic needs, he prefers high-quality commodities to low-quality commodities. (C) 1998 Elsevier Science B.V. All rights reserved. JEL classification: F10 ; O12; O3.