Behind the Eastern-Western European Convergence Path: The Role of Geography and Trade Liberalization

Abstract

This paper proposes a 2-country 3-region economic geography model that can account for the most salient stylized facts experienced by Eastern European transition economies during the period 1990-2003. In contrast to the existing literature, which has favored technological explanations, trade liberalization and factor mobility are the only driving forces. The model correctly predicts that in the first half of the period trade liberalization led to divergence in GDP per capita, both between the West and the East and within the East. Consistent with the data, in the second half of the period, this process was reversed and convergence became the dominant force. We suggest that the initial East-West divergence would have been mitigated in the presence of significant migrations within the East.