Greater global integration may hurt particular interest groups, but will lead overall to a rise in the real income of most nations. This conventional view of standard trade models is reconsidered by Research Fellow Paul Krugman and Programme Director Anthony Venables in Discussion Paper No. 1015.

The authors consider a model in which an imperfectly competitive manufacturing sector produces goods which are used both for final consumption and as intermediates. Intermediate usage creates cost and demand linkages between firms and a tendency for manufacturing agglomeration. How does globalization affect the location of manufacturing and the gains from trade? With high transport costs, all countries have some manufacturing industry, but when transport costs fall below a critical value, a core-periphery pattern forms spontaneously, and nations that find themselves in the periphery suffer a decline in real income. As transport costs continue to fall there comes a second stage of convergence in real incomes, in which the peripheral nations gain and the core nations may well lose. The authors thus conclude that concerns over uneven development and worries about maintaining First World living standards may be justified given the different stages in the process of globalisation.

Globalization and the Inequality of Nations
Paul Krugman and Anthony J Venables

Discussion Paper No. 1015, September 1994 (IT)