ABSTRACT
The opening-up of transition countries and their trade integration with the European Union (EU) provides a natural experiment to test new economic geography (EG) models. Before 1990, most transition countries were completely closed in terms of trade with western countries. Trade liberalization after 1990 makes it, therefore, very appealing to study the impact of trade liberalization on the regional relocation of manufacturing activity. Since the beginning of the 1990s, several alternative EG models were established in order to explain the spatial repercussions of trade liberalization in terms of inter-regional manufacturing relocation and the evolution of relative regional wages. Despite the scepticism due to simplifying assumptions and special functional forms that has been expressed by Neary (2001) in an excellent overview of the field, the EG models enable us to analyse the effects of trade liberalization on international as well as intra-national relocation of manufacturing activities. While, in the absence of trade, economic activity is concentrated in locations near home economic centres, trade liberalization may lead to the relocation of manufacturing activities. The exact pattern of relocation of manufacturing activity, however, is ambiguous and dependent on the underlying assumptions. Crucial here is the assumption of inter-regional labour mobility. A first approach, based on Krugman’s (1991 a, 199 lb) model, assumes perfect inter-regional mobility of labour. This approach predicts a monotonic relationship between the reduction of trade costs and the relocation of manufacturing activity. When trade is opened up, larger regions, in terms of industrial activity, will gain from trade liberalization due to existing agglomeration effects. A core-periphery solution, i.e., complete specialization of manufacturing activity in only one region is the likely outcome of this
model. This will diminish the initial differences in per capita income levels due to further divergence in relative regional wages.
