Trade integration and regional income disparities in a growth model with the service sector and footloose capital

ABSTRACT

This paper proposes a North–South growth model of endogenous industry location which is consistent with recent empirical work showing that regional income disparities have increased in many countries with the process of trade integration. The model incorporates a service sector that benefits from intersectoral knowledge spillovers from the manufacturing sector. We find that, when these spillovers are local, trade integration leads to an increase in interregional real income inequality.

KEYWORDS:

• Trade integration
• regional income disparity
• economic growth

JEL CLASSIFICATION:

• F12
• R12
• D31
• O31

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ There are a lot of three-sector closed or open growth models with structural change. It means that the agricultural employment share kept decreasing, manufacturing employment share kept increasing up to a level; after that, it kept decreasing, and service employment share kept increasing. Sequeira and Reis (2006), Ngai and Pissarides (2007), Foellmi and Zweimüller (2008), Buera and Kaboski (2012), and Ngai and Petrongolo (2017) show that a structural change occurs in a closed economy. Uy, Yi, and Zhang (2013) show that trade liberalization plays an important quantitative role in structural change. However, these studies analyze structural change but do not analyze the effects of trade liberalization on regional income inequality.

² Fukuda (2017) shows that full agglomeration in the North occurs and convergence occurs when iceberg cost is not high using Minniti and Parello (2011). Thus, this paper can show Global Kuznets Curve as trade liberalization occurs.