Globalization and the Ladder of Development: Pushed to the Top or Held at the Bottom? (Paper Summary)

This is a narrative summary of the paper by economists from MIT titled “Globalization and the Ladder of Development: Pushed to the Top or Held at the Bottom?” by David Atkin, Arnaud Costinot, and Masao Fukui (March 2024). The aim here is to translate the key theoretical and empirical insights of the paper into plain, accessible language without compromising on its core arguments and findings.

Globalization has long been hailed as a force for good in development economics—a pathway through which countries integrate into global markets, specialize based on comparative advantage, and grow richer in the process. But in their compelling paper, “Globalization and the Ladder of Development: Pushed to the Top or Held at the Bottom?”, economists David Atkin, Arnaud Costinot, and Masao Fukui challenge this narrative. Through a novel theoretical framework called the Ladder Economy model and rigorous empirical evidence, they show that trade can just as easily hold countries back as help them climb forward—depending on what it does to the complexity of what they produce.

At the core of their analysis is a vivid metaphor: think of countries as sitting on different rungs of a development ladder, where higher rungs correspond to the ability to produce and export more complex goods—items like pharmaceuticals, advanced machinery, or precision instruments. Lower rungs represent simpler products such as basic textiles or plastic ornaments, which require fewer capabilities and offer limited learning potential.

What sets the Ladder Economy model apart from classical trade theories is that it embeds a dynamic relationshipbetween a country’s specialization and its future growth. According to the model, a country’s capability increases faster when more of its workforce is employed in complex sectors. These sectors generate knowledge spillovers, require high skill levels, and foster technological learning—mechanisms that help a country grow beyond its current production frontier. But whether trade pushes countries into these complex sectors or pulls them out of them depends on the structure of global competition.

The authors identify two critical conditions under which trade promotes development for all: first, that more complex sectors lead to faster capability growth, and second, that these complex sectors face less foreign competition—giving countries room to specialize in them. If both conditions are met, then trade acts like a rising tide: all countries get nudged into more sophisticated sectors and collectively move up the development ladder.

To test this theory, the authors construct a massive empirical dataset—examining export patterns of 146 countries across 715 manufacturing products over more than five decades (1962–2014). Using this, they estimate the capability of each country and the complexity of each good, revealing intuitive but quantitatively grounded rankings. For instance, medicaments, chemical products, and cars are among the most complex products, while men’s underwear, wood panels, and plastic ornaments rank at the bottom.

On the country side, the model confirms that high-income countries like the United States, Germany, and Japan consistently demonstrate high capability. Meanwhile, much of sub-Saharan Africa and parts of South Asia—including countries like Ghana and Bangladesh—remain on the lower rungs. Middle-income countries vary: South Korea and Thailand are showcased as success stories that have climbed the ladder, while Argentina and Egypt show more stagnation.

One of the most striking aspects of the paper is its use of natural experiments—specifically, the entry of countries into the World Trade Organization (WTO)—to study how changes in global trade access affect others. For example, China’s accession to the WTO in 2001 is used to assess its impact on competitors. Because China exports complex products—like electronics and machines—it ends up displacing other countries from these high-complexity sectors. Countries with similar export baskets but lower capabilities are pushed out of these sectors, often into simpler ones where China imports. This is particularly evident for African countries, which the model shows were pushed down the complexity scale as a direct consequence of China’s rise.

The model goes further. After calibrating it with real-world data, the authors simulate what would happen under autarky—a hypothetical world where each country produces only for itself. Counterintuitively, they find that most countries would have ended up with higher capabilities under autarky than in a globally integrated economy. That’s because, in isolation, countries wouldn’t be displaced from complex sectors by tougher foreign competition. Instead, they would be “forced” to maintain a broader and more sophisticated domestic production base, even at higher costs.

While the median country experiences a modest 2.5% dynamic welfare loss due to globalization, the loss is far more severe for the poorest nations. Countries that were pushed out of complex sectors saw significantly reduced growth potential, which the model captures as a long-term decline in capabilities and GDP per capita.

Another powerful finding comes from the structure of competition: contrary to the Ladder Economy’s optimal conditions, the real world more closely resembles what the authors call an “Inverted Ladder Economy”. Here, the most complex goods face the most intense international competition, and poorer countries get crowded out of the very sectors that could help them grow. Under this inverted structure, trade produces pervasive dynamic losses, especially in the absence of strong domestic policies.

What does all of this mean for policymakers? The implication is clear: laissez-faire trade liberalization is not a guaranteed development strategy. Countries cannot simply rely on open markets to drive structural transformation. Instead, targeted industrial policies—subsidizing complex sectors, supporting R&D, investing in worker skills—may be essential to correct for the externalities the market fails to internalize. In the Ladder Economy model, these complex sectors are “good” sectors: they deliver more than just GDP—they generate learning, capabilities, and future competitiveness.

India’s experience is particularly relevant here. While it has made some strides in pharmaceuticals and information services, much of its manufacturing base remains concentrated in mid-to-low complexity sectors. Without proactive efforts to shift into more sophisticated areas—like advanced electronics, electric vehicles, or defense manufacturing—it risks being stuck on the middle rungs, vulnerable to being outcompeted by countries with deeper industrial policies, like China or Vietnam.

In conclusion, the Atkin-Costinot-Fukui paper forces a rethink of the globalization narrative. Trade is not neutral—it shapes what countries do and, by extension, what they become. The development ladder exists, but who climbs and who stalls depends on how the global economy is structured—and how nations respond to it. As globalization evolves, so must the strategies of those seeking to rise.

Ref – https://economics.mit.edu/sites/default/files/2024-03/mutvc_LATEST.pdf