Human capital and measurable dynamic gains from economic integration: An application to the economic integration of North and South America

The paper looks at the source of dynamic gains to trade liberalization using a two-country model with both physical and human capital accumulation. The model is calibrated and used to examine the effect of the economic integration of Canada and the United States with Latin America. The analysis assumes that differences in productivity levels between regions are due entirely to differences in human and physical capital endowments. Key assumptions are that capital is internationally mobile and human capital formation is income constrained. The simulated impact of moving to a hemispheric free trade area is significant. The long-run impacts are also different from the short-run efficiency effect predicted by conventional static triangle-rectangle analysis. The long-runmultiplier effect on static output gains are on the order of 2.0 to 2.5 for the South—that is long-run output gains are 2.0 to 2.5 times predicted short-run static gains. In the case of the North, static predictions of gain are ambiguous in sign over the longer run; in some cases there are small dynamic gains-in others. small losses. Investment diversion toward Latin America is a prominent characteristic of the results.