A joint CEPR/International University workshop on 'Globalization, Regional Integration and Development' took place at the International University of Venice on 31 January/1 February 1998. Globalization, seen as the rapid growth of economic integration through international transactions, is today an important issue for debate. Part of the extensive literature focuses on the resurgence of regionalism in a multilateral world. In this workshop, several papers examined the relationship of issues such as industrial development or fiscal policy to regional integration. Other topics discussed included inequality, technology diffusion, contagion in security markets and deep integration. Riccardo Faini (Università degli Studi di Brescia and CEPR), Joseph Francois (Erasmus Universiteit Rotterdam and CEPR) and Bernard Hoekman (World Bank and CEPR) were the organizers of the workshop.

Diego Puga (London School of Economics and CEPR) and Anthony J Venables (London School of Economics and CEPR) presented 'Trading Arrangements and Industrial Development', in which they analysed the influences of different trading arrangements on the industrialization process in developing countries. Traditional analysis of this issue had been based on the ideas of trade creation and trade diversion, which occurred as a result of different comparative advantages. The experience of the newly industrialized countries in Asia, however, suggested the need for a framework in which the pattern of comparative advantage is not set in stone, but is potentially flexible.

The authors developed an alternative approach in which interactions between imperfect competition, trade costs, and an input-output structure create incentives for firms to locate close to supplier and customer firms. Working against this clustering of firms are the standard 'neo-classical' forces of factor-market and product-market competition, which encourage firms to locate where labour is cheap and where there is little supply from other firms. The outcome of the tension between these conflicting pressures determines whether or not agglomeration occurs, and in this, the level of trade barriers is crucial. Within this framework, trade liberalization changes a country's attractiveness as a base for manufacturing production, and can trigger – or postpone – industrial development.

Puga and Venables used this approach to explore a variety of trade liberalization experiments, and derived a number of conclusions. Unilateral liberalization of manufacturers’ imports can promote industrialization by making available cheaper imported intermediate goods. Membership of a preferential trading arrangement (PTA), however, would be likely to create larger gains. South-South PTAs will be sensitive to the market size of member states, while North-South PTAs seem to offer better prospects, at least for participating Southern economies, if not for excluded countries. Arvind Panagariya (University of Maryland) pointed out that countries in the South currently have higher tariffs, which would have an effect on the experiments. Joseph Francois mentioned that it is possible for a country to affect the outcome by offering high subsidies to attract firms.

Olivier Cadot (INSEAD, Paris) presented 'Can Bilateralism Ease the Pains of Trade Liberalisation?', written with Jaime de Melo (Université de Genève and CEPR) and Marcelo Olarreaga (World Trade Organization, Genève, and CEPR). Looking at the political economy of integration, they argued that regionalism can help sustain multilateralism by emphasizing the hitherto neglected possibility of compensation. Using the influence-driven approach to endogenous trade-policy determination, they showed that a free-trade agreement (FTA) with rules of origin can work as a device, not available in multilateral negotiations, for compensating losers from trade liberalization.

They considered two symmetric countries, A and B. Each country's government trades off contributions from industry lobbies (conditioned on the adoption of distortionary trade taxes) against the social costs that such taxes entail. Next, they showed how an FTA with rules of origin can enable both countries to selectively reduce external tariffs, while at the same time maintaining producer prices in import-competing sectors at their initial level. This guarantees the political support of the producers. The FTA constructed here is characterized by external tariff structures that are negatively correlated across members, ensuring efficiency gains and, through reduced average protection, compatibility with the multilateral trading system. Francesca Sanna-Randaccio (Universitá degli Studi di Roma, ‘La Sapienza’) remarked that within the model the assured definition of rules of origin is crucial, though it does not match actual practice. Anthony Venables noted that production volumes do not change as a result of forming a FTA, but that it would be interesting to add some production effects for measuring changes in welfare. In 'Technology, Trade and Growth: Some Empirical Findings', Michelle P Connolly (Duke University) analyzed empirically the role of trade in the international diffusion of technology working with the endogenous growth model presented in one of her earlier (1997) papers. Connolly considered first the role of trade in the process of imitation and innovation, and second the effect that these processes had on growth. Her paper provided empirical analysis, including of some developing countries, based on international patent data for 39 countries from 1970 to 1985. These data were used to create proxies for imitation and innovation. Special focus was given to evidence on the diffusion of technology from developed to less developed nations.

The results from the regressions gave general support to the hypotheses and implications of the earlier model in respect of technological diffusion through trade and imitation. Domestic imitation and innovation both appeared to depend positively on high-technology imports from developed countries, transportation and communication infrastructure, intellectual property rights, and the size of the economy. Imports of non-high technology from developed countries entered negatively. Maurice Schiff (World Bank) suggested that this might be explained by the fact that countries that import non-high-technology goods do not have the possibility to imitate them. Connolly's further findings that growth in real per capita GDP was positively related to physical capital-stock growth and foreign innovation, and negatively related to initial GDP levels, were consistent with conditional convergence hypotheses. Interestingly, foreign technology from developed countries appeared to play a greater role in per capita GDP growth than did domestic innovation. Thus the role of high-technology goods from developed countries in the international diffusion of technology was supported by the empirical results. The results were also consistent with the idea that trade with developed countries benefits less developed countries.

Arvind Panagariya (University of Maryland) offered a paper on 'Trade, Wages and all that'. He carefully examined the validity of the factor-content approach, often used in the literature to explain increased wage inequality in the North. Using simple diagrammatic techniques, he offered a detailed critique of empirical and policy studies, supporting the claim of modest to large effects of trade and immigration on unskilled wages. Panagariya first explored the connection between the factor content of trade and factor prices, in order to clarify and make accessible some of the existing results and to derive the demand-for-labour curve more rigorously than had hitherto been done. Next, he discussed the key problem encountered in translating the factor content of trade into a factor-price effect and the problems created by it.

Panagariya also used his paper to offer a critique of some earlier works. First, he argued that the Borjas, Freeman and Katz (1992) methodology for estimating the effects of immigration on wages was seriously flawed, because it ignored the fact that immigration induces trade flows whose factor content nullifies its effect on factor supplies. Second, he claimed that Wood (1994, 1995) was wrong in suggesting that technical change induced by import competition from the South in the unskilled-labour-intensive sector of the North had contributed positively to wage inequality there. He argued instead that the primary effect of technical progress in the unskilled-labour-intensive sector is to raise, not lower, the return to unskilled labour.

Enrique G Mendoza (Duke University) presented a joint paper with Guillermo A Calvo (University of Maryland) on the highly topical issue 'Rational Contagion and the Globalization of Securities Markets'. In the aftermath of the Mexican crash of 1994, and also in the current Asian crisis, investors often followed the 'market' rather than taking the time and expense to assess each country’s fundamentals. The authors devised a model to demonstrate that contagion can be an outcome of optimal portfolio diversification that becomes more prevalent as securities markets grow. They used a model of international portfolio diversification with incomplete information, in which investors acquire country-specific expertise at a fixed cost and incur variable reputational costs.

They demonstrated analytically that globalization of securities markets reduces incentives for information gathering, producing high volatility in capital flows as a result of optimal contagion among global investors. This occurs because: a) globalization reduces the gains derived from paying fixed costs for country-specific information, and b) in the presence of reputational effects, globalization widens the range of portfolios within which investors find it optimal to mimic arbitrary market portfolios. Simulations based on equity-market data and country credit ratings suggested that this phenomenon could induce large capital outflows from emerging markets. For example, a rumour that reduces the forecast expected return on the Mexico equity market from 22.4% to the OECD mean-return level of 15.3% leads to a capital outflow of $15.3 billion. This would be a large amount for a country whose foreign reserves rarely exceed $20 billion. Finally, these results raised the question of whether globalization is necessarily welfare improving, leading to the suggestion that the merits of abolishing capital controls may deserve further consideration.

In 'Economic Geography and the Fiscal Effects of Regional Integration', Ian Wooton (University of Glasgow and CEPR) and Rodney D Ludema (Georgetown University, Washington) analysed two related issues which arise frequently in discussions of economic integration but are seldom examined together. One is the erosion of fiscal autonomy that countries may experience when economic integration leads to a more mobile tax base. The other is the possibility that integration will lead to spatial agglomeration of economic activity. Wooton and Ludema examined tax competition between national governments to influence the location of manufacturing activity and asked, in particular, whether economic integration, by intensifying agglomerative forces, intensifies tax competition and leads to lower equilibrium tax yields. They constructed a variant of Krugman's 1991 economic geography model, in which labour is imperfectly mobile and governments impose redistributive taxes. Regional integration is modelled through either increased labour mobility or lower trade costs.

The authors showed that either type of economic integration might reduce the intensity of tax competition, thus restoring rather than eroding fiscal autonomy. Moreover, in the case of the core-periphery pattern, reductions in trade costs must, under certain assumptions, increase taxes. Angel de la Fuente (Institut d’Anàlisi Econòmica, CSIC, Barcelona, and CEPR) pointed out that, in the case of Europe, capital is probably more mobile than labour and therefore tax policy is directed more towards capturing capital instead of labour. With this model, however, the same type of results emerges. The key difference is that when labour is mobile, consumption moves with it, but the same does not necessarily apply to mobile capital.

Marcel Olarreaga (World Trade Organization, Genevè, and CEPR) presented the paper 'Does Globalization Cause a Higher Concentration of International Trade and Investment Flows?', written with Patrick Low (World Trade Organization, Genevè) and Javier Suarez (World Trade Organization, Genevè, and CEPR). The authors were interested in this question because it is sometimes argued that the globalization process has benefited only a small number of countries, with many others failing to reap the benefits of rapid increases in international trade and investment flows. They used three different concentration indicators to estimate the concentration of world trade and investment flows from 1972 to 1995. Their results revealed no trend towards more concentrated flows. The authors also ranked countries into fast and slow integrators and repeated the calculations for each group. In this case it appeared that the concentration of trade and financial flows had fallen among rapidly-integrating countries, and had increased among slow-integrating countries. This suggested that marginalization is more likely to be explained by domestic policies in relatively closed countries. Maurice Schiff (World Bank) noted that it may be that small countries are content with only a 2% increase when the whole-world average increases by 5%.

In Deep Integration, Regionalism and Non-discrimination', Bernard Hoekman (World Bank and CEPR) focused on the aspect of 'deep' integration within preferential trading agreements (PTAs). The paper was written with Denise Konan (University of Hawaii) and Keith Maskus (University of Colorado). They defined deep integration as explicit actions by governments to reduce the market-segmenting effect of differences in national regulatory policies that increase foreign suppliers' costs in contesting a domestic market. In this respect, they noted that traders often complain about the additional costs imposed by differences in, for example, health and safety standards, testing requirements and environmental norms. The authors noted that in Egypt's then current negotiations with the EU to establish a bilateral free trade agreement, matters of deep integration – such as technical assistance and opening up of the service sector – were proving important. They therefore attempted to quantify the importance of deep integration using a CGE model for the Egyptian economy. They simulated 11 PTA scenarios for Egypt, involving various configurations with the EU, the United States and the Arab region. As is often the case with such quantitative analyses, the exercise was plagued by a lack of data for estimating the exact tariff equivalents of the various trade costs. The results nonetheless demonstrated that any of the PTAs would be beneficial to Egypt's welfare, but only very marginally. The paper concluded also that liberalizing the service market, which is rather non-competitive, could have a large positive impact on welfare. Akiko Suwa-Eisenman (OECD, Paris, and CEPR) mentioned that non-tariff barriers can also create rents, with important welfare implications.

In 'Changing Attitudes Towards Immigration: A Trade Theoretic Approach', Sanoussi Bilal (European Institute of Public Administration, Maastricht), Jean-Marie Gether (Université de Genève and University of Neuchâttel), and Jaime de Melo (Université de Genève and CEPR) analysed the determinants of voter attitudes towards immigration under 'direct democracy'. Owing to deteriorating conditions in OECD labour markets for unskilled labour, resistance towards immigration had risen sharply in recent times. This had been reflected in a shift in migration requirements towards favouring immigrants with capital and skill ownership – the point system adopted in Canada exemplified this trend. The authors made use of the 'direct democracy' approach, because it captures the fact that attitudes towards immigration are still largely guided by the fear of job losses or wage deterioration. Within this framework, following Mayer, they used the three-factor (low-skill labour, high-skill labour and capital), two-household (low-skill and high-skill households) and two-sector model. Here, households will oppose immigration if their income decreases following the arrival of immigrants. Using diagrammatic presentations, they showed that the critical level of household capital ownership, which determined households’ attitudes towards immigration, depended on endowments and technology. Finally, they examined how changes in product prices, factor endowments and technical progress also affected attitudes towards immigration.

Akiko Suwa-Eisenman (OECD, Paris, and CEPR) presented 'Trade Integration with Europe, Export Diversification and Economic Growth in Egypt', written with Sébastien Dessus (OECD, Paris). They focused especially on the export diversification aspect of Egyptian trade integration with Europe. Such diversification had become a major goal for Egypt, which was seeking to overcome the decline of its traditional industries, including oil and gas, tourism and the Suez Canal. In addition, the post-Uruguay Round multilateral liberalizations, and the bilateral agreements between the EU and other Mediterranean countries, were eroding the preferential access to Europe granted to Egyptian products. The paper offered a quantitative analysis, again using a CGE model, of the Partnership Agreement in the long run, and evaluated its outcome in terms of sectoral reallocation.

The Partnership Agreement contained three features. The first was a progressive elimination of Egyptian import tariffs on European industrial goods in a 12 year transition period. The second was a financial transfer of 1% of GDP over four years. The third involved aspects of 'deeper integration' which had been the subject of the Hoekman-Konan-Maskus paper. The results provided some evidence that the agreement could promote the desired diversification of the Egyptian economy. The welfare costs of the trade opening, however, would be overcome only if the agreement was able to provide better market access for Egyptian goods in Europe.