Economic Integration and Structural Change
We argue that developing countries diversify because their regions integrate with each other, and can specialize according to regional comparative advantage
Abstract
The dynamic evolution of sectoral production - structural change - is associated with systematic changes in the geographic dispersion of activity: in developing countries, sectoral diversification is accompanied by geographic agglomeration, and regions become heterogeneous. In advanced economies, sectoral specialization is accompanied by geographic dispersion, and regions become homogeneous. We argue that developing countries diversify because their regions integrate with each other, and can specialize according to regional comparative advantage. Advanced economies specialize because they integrate internationally and their regions produce according to the global pattern of comparative advantage. We find systematic support for these claims in international data on sectoral production at the regional level, including in the US, Europe, China and India. Consistent with our theory, we .find no such evidence once the samples focus on non-traded sectors or relatively closed regions. Economic zones formed by specialized, regionally homogeneous countries, such as Europe, tend to diversify and agglomerate, as if their constituent countries were integrating.
Citation
Imbs, J.; Montenegro, C.; Wacziarg, R. Economic Integration and Structural Change. (2012) 37 pp.