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The Impact of European Integration on Adjustment Pattern of Regional Wages in Transition Countries: Testing Competitive Economic Geography Models

  • Joze P. Damijan
  • Crt Kostevc

In the present paper, we augment the Fujita-Krugman-Venables (FKV) economic geography model by breaking the implied regional symmetry and by introducing a second factor of production, capital, in order to study the within-country regional effects of trade liberalization. In contrast to the Krugman (1991) model, the FKV and our model do not predict typical core ?periphery regional polarization as labor is assumed to be either imperfectly mobile and/or capital is perfectly mobile between regions. Both models result in a non-monotonic, U-shaped response of relative regional wages to trade liberalization. Major difference between the two approaches is that our model allows for FDI flows between countries. FDI inflows are shown to accelerate the regional adjustment process in the home country, as they are initially attracted to poor, border regions characterized by lower wages and higher returns to capital. Our model therefore results in a faster convergence of relative regional wages, i.e. in a more upward and to the right shifted U-shaped response of relative wages. In addition, we then examine the exact adjustment pattern of relative regional wages in five transition countries after they have liberalized their trade with the EU. We study which of the three competitive EG models is a more appropriate approximation of the actual regional adjustment pattern in selected transition countries.

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Paper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 11802.

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Length: 27 pages
Date of creation: 2002
Date of revision:
Handle: RePEc:lic:licosd:11802
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  1. Lancaster, Kelvin, 1980. "Intra-industry trade under perfect monopolistic competition," Journal of International Economics, Elsevier, vol. 10(2), pages 151-175, May.
  2. Donald R. Davis & David E. Weinstein, 1997. "Economic Geography and Regional Production Structure: An Empirical Investigation," Harvard Institute of Economic Research Working Papers 1802, Harvard - Institute of Economic Research.
  3. Puga, Diego, 1999. "The rise and fall of regional inequalities," European Economic Review, Elsevier, vol. 43(2), pages 303-334, February.
  4. Krugman, Paul R & Venables, Anthony J, 1995. "Globalization and the Inequality of Nations," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 857-80, November.
  5. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
  6. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  7. Forslid, Rikard & Haaland, Jan I. & Ulltveit-Moe, Karen-Helene, 1999. "A U-Shaped Europe? A Simulation Study of Industrial Location," CEPR Discussion Papers 2247, C.E.P.R. Discussion Papers.
  8. Paul Krugman, 1998. "Space: The Final Frontier," Journal of Economic Perspectives, American Economic Association, vol. 12(2), pages 161-174, Spring.
  9. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  10. Hanson, Gordon H, 1997. "Increasing Returns, Trade and the Regional Structure of Wages," Economic Journal, Royal Economic Society, vol. 107(440), pages 113-33, January.
  11. James R. Markusen & James R. Melvin, 1981. "Trade, Factor Prices, and the Gains from Trade with Increasing Returns to Scale," Canadian Journal of Economics, Canadian Economics Association, vol. 14(3), pages 450-69, August.
  12. J. Peter Neary, 2000. "Of Hype and Hyperbolas - Introducing the new Economic Geography," Working Papers 200019, School of Economics, University College Dublin.
  13. Helpman, Elhanan, 1981. "International trade in the presence of product differentiation, economies of scale and monopolistic competition : A Chamberlin-Heckscher-Ohlin approach," Journal of International Economics, Elsevier, vol. 11(3), pages 305-340, August.
  14. Brülhart, Marius, 1996. "Regional Integration, Scale Economies and Industry Location in the European Union," CEPR Discussion Papers 1435, C.E.P.R. Discussion Papers.
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