Working Paper: CEPR ID: DP2385
Authors: Stefano Manzocchi; Gianmarco I.P. Ottaviano
Abstract: We use a spatial model of endogenous growth to investigate the likely impact of discriminatory integration among two advanced insider countries on their own welfare as well as on the welfare of an outsider transition economy. A first point is that, since convergence in per capita income levels depends on relative market access and local market size, piece-wise integration causes insider-outsider divergence. Nonetheless, outsiders can gain in absolute terms if integration fosters the global growth rate. We also show that exclusion from a regional agreement and ongoing transition have unpredictable joint effects on the structural adjustment, which might even exhibit a swinging behaviour. Such swings may imply large adjustment costs, which can be reduced by careful integration design. In this respect, the asymmetric phasing-out of trade barriers built into the Europe Agreements seems to work in the right direction.
Keywords: trade; monetary integration; economic geography; transition economies
JEL Codes: F15; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| piecewise integration (F15) | divergence between insider and outsider economies (F69) |
| divergence between insider and outsider economies (F69) | relative loss of real income per capita for outsider (F69) |
| integration fosters overall global growth rates (F62) | outsider may gain in absolute terms (F29) |
| exclusion from regional agreement + ongoing transition (F15) | unpredictable joint effects on structural adjustment (F32) |
| careful design of integration processes (F15) | reduce adjustment costs (D61) |
| asymmetric phasing out of trade barriers (F15) | alleviate issues for outsider economies (F41) |