Outsiders in Economic Integration: The Case of a Transition Economy

Abstract

We use a spatial model of endogenous growth to investigate the likely impact of discriminatory integration among two advanced countries on their own welfare as well as on the welfare of an outsiders transition economy. On the one side, since per capita income convergence depends on relative market access and local market size, piece-wise integration causes insider-outsider divergence. This phenomenon is exacerbated by slow transition. On the other side, simultaneous exclusion from the integration process and ongoing transition have unpredictable effects on the structural adjustment, which might even exhibit swinging behaviour. Since in practice such swings imply large adjustment costs, careful integration design is required. Under this respect, the asymmetric phasing out of trade barriers built in the Europe Agreements works in the right direction.