Trade Liberalization and Economic Geography in Transition Countries: Can FDI Explain the Adjustment Pattern of Regional Wages?

LICOS Discussion Paper No. 222/2008

42 Pages Posted: 25 Nov 2008

See all articles by Jože P. Damijan

Jože P. Damijan

University of Ljubljana, Slovenia - Department of International Economics

Črt Kostevc

University of Ljubljana - Faculty of Economics

Date Written: November 2008

Abstract

Present paper studies the within-country regional effects of trade liberalization in transition countries. We argue that FDI inflows can be an important factor to accelerate the regional adjustment process in the home country. In order to underpin this theoretically, we first augment the new economic geography models by breaking the implied regional symmetry and by introducing capital as a second factor of production. Major contribution of our approach is that it allows for inter-regional as well as international capital mobility while labor is assumed to be immobile. Numerical simulations of our model indicate that this should contribute to faster convergence of relative regional wages in the smaller region. In addition, we examine the exact adjustment pattern of relative regional wages in five transition countries in the period 1990-2004 after they have liberalized their trade with the EU. First, we show that in four out of live transition countries there is a significant U-shaped adjustment pattern of regional wages after they opened up to foreign trade. And second, we find robust econometric confirmation that in three of the five countries FDI has contributed significantly to faster adjustment of relative regional wages. .

Keywords: economic geography, trade costs, wages, transition countries, foreign

JEL Classification: F16, P23, R13

Suggested Citation

Damijan, Joze P. and Kostevc, Crt, Trade Liberalization and Economic Geography in Transition Countries: Can FDI Explain the Adjustment Pattern of Regional Wages? (November 2008). LICOS Discussion Paper No. 222/2008. Available at SSRN: https://ssrn.com/abstract=1306925 or http://dx.doi.org/10.2139/ssrn.1306925

Joze P. Damijan (Contact Author)

University of Ljubljana, Slovenia - Department of International Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia
+386 61 189 24 00 (Phone)
+386 61 189 26 98 (Fax)

Crt Kostevc

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

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