ABSTRACT
This chapter discusses features of the new era of ‘South-North integration’ in the global economy over the past two decades. By a new era of ‘SouthNorth integration’ is meant that a significant part of the global dynamic in trade and investment patterns is currently shaped by economic integration between countries with significant differences in income levels. This era follows the early post-war period when economists were busy explaining why the dominant trade flows were happening between advanced economies which showed rather small differences in income levels (i.e. ‘North-North integration’). This empirical observation gave rise to the development of ‘new trade theory’ in which the gains from trade were explained by gains from product differentiation (‘variety’), product-specific economies of scale and ‘pro-competitive effects’ of integration (Ethier, 1982, Helpman, 1981, and Helpman and Krugman, 1985). The older branches of trade theory, Ricardian theory and H-O-S (Heckscher-Ohlin-Samuelson) theory were not that useful in explaining the dominant pattern of North-North integration as advanced economies did not differ much in technological levels or in relative factor endowments.
