Solving Leontief's Paradox with Endogenous Growth Theory

Theories of international trade have severe difficulties in explaining why, despite i) substantial differences in factor-proportions across industries and ii) considerable cross-country differences in capital-labor ratios, the iii) the evidence for factor-proportions trade is rather weak. We propose a simple explanation of this well known finding: standard trade theories treat important forces such as the distribution of productivity within the economy as exogenous. We argue instead that the productivity allocation is endogenous and counter-balances factor-proportion differentials be- tween countries. Consequently, comparative advantage across countries of different development levels is negligible and this is why the incentives for trade are low.