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TRADE LIBERALIZATION, DIVERGENCES AND REGIONAL POLICIES:
THE CASE OF MEXICO
Liliana López Chamorro*
Abstract
Mexico’s economy has put into practice the idea of regional free trade agreements, such as North
America Free Trade Agreement (NAFTA). The results of this system has put Mexican
commercial activity as one of the 8th most powerful ones of the World and as the first one in
Latin America. NAFTA has increased trade and factor mobility between Mexico, USA and
Canada significantly; however, this has also increased the divergence between poor and rich
regions across Mexico. Although several papers have addressed these divergences, no studies
have been undertaken a new economic geography (NEG) approach to describe and explain the
spatial characteristics of Mexico. The main contribution of this paper is based on NEG
framework, as the main tool for this kind of analysis since it does not only rely on pecuniary
externalities but it also takes into account technological externalities on productivity, industrial
location and policy. Based on different estimation strategies and taking a number of features of
the regions in Mexico into account, this paper will try to find out the spatial disparities among
Mexican regions, and the effect of regional policies on reducing these disparities.
* Ph.D. Student, University of Antwerp, Belgium> Economics Department, Universidad Externado de Colombia
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
INTRODUCTION
Mexico’s economy has put into practice the idea of regional free trade agreements, expressed in
the North America Free Trade Agreement (NAFTA). The results of this system has put Mexican
commercial economy as one of the 8th most powerful commercial economies of the World and as
the 1st one in Latin America. The NAFTA has increased trade and factor mobility between
Mexico, USA and Canada significantly. However, this has also increased the divergence between
poor and rich regions across Mexico. Today, regional disparities among Mexican regions are one
of the main problems of the country. There is extensive literature about Mexico and its economic
disparities. Esquivel (1999), using a regression model, analyzed the divergence between Mexican
regions during 1940 and 1999. Messmacher et al. ( 2000) executed an empirical work trying to
analyze these divergences, and showed how the GDP per capita in Mexico DF became 6.4 times
bigger than the one in Oaxaca. Messmacher also analyzed how the NAFTA and other structural
reforms generated inequalities among Mexican regions. However, most of these studies were
based on samples including oil regions and recession periods, and therefore, they did not explore
the complete forces that may have affected negatively the convergent behavior across Mexico’s
regions.
This paper, using the so called “new economic geography”, (NEG), as a framework, clarifies that
the divergent performance of the regions, is not only the result of the international trading
systems, but it is also caused by diverse internal and external factors. Clearly, differences in
exogenous factors as nature or factor endowments (what is called “first nature”) are responsible
for some of the core-periphery results that we observe nowadays. However, some agglomeration
results are present in regions with similar characteristics, which might imply that endogenous
characteristics (“second nature factors”), such as economic organizations, are also responsible of
these divergences.
From the theoretical standpoint, particularly on the basis of New Economy Geography models,
NAFTA could be one of the reasons that brought specialization and polarization in the Mexican
regions, and also contributed to grow the core-periphery –divided regional income. The so-called
“New economic geography models (NEG)”, studies how a close but imperfect integration may
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Liliana Lopez
create regional winners and losers. However, some other factors might also have influenced on
these divergences.
Due to these divergences among regions, regional policies exist. Governments in order to
diminish this kind of disparities implement policies, which can take any form, from infrastructure
spending to tax reduction. However, theoretical and empirical works argue and debate the need of
these regional policies and whether they can be justified from an distributional efficiency
perspective. The principal aim of this paper is to apply the NEG framework to study the spatial
characteristics of Mexico, and to see whether or not regional policies can be justified on this
scenario (Mexico). The NEG framework is a good tool for this kind of analysis because it does
not only rely on pecuniary externalities but it also takes into account technological externalities
on productivity, industrial location and policy.
The outline of this paper is as follows: the first part reviews relevant literature on international
trade, divergence and regional policy. Here we aim to take seriously NEG to regional policy
focusing on NEG models literature, its implications in welfare and policy. Understanding how
the NEG models work, its economic insights and what would be its equilibrium outcome is
intended. Thereafter a review of the most important regional policy instruments are mentioned,
and at the end, the relation between these instruments and the NEG models is established.
The next Section presents data and some important facts of Mexico, summarizing the existing
literature concerning Mexico and its regional effects after the reforms . In doing so, the next step
is to relate these outcomes regarding the question about the economic divergence, the broad
integration of the world market and to see whether or not regional policy has worked in
diminishing these divergences.
Section three describes methodology and data used to carry out an econometric analysis taking
into account distinct features of Mexican regions. The methodology is based on the estimation of
income, population and housing prices growth regressions over a set of explanatory variables.
These regressions are a good tool to understand the evolution and the drivers of regional
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differences in productivity levels and quality of life across Mexico. The last section provides the
main findings of the model, concludes and discusses policy implications.
THEORETICAL BACKGROUND
This section reviews the main New Economy Geography models. This review is focused on the
models’ hypothesis, its main results and relevance in terms of regional policy analysis. In order to
do so, it is important to take the models literally and analyze what their exact policy implications
are.
Measuring the gap existing between regions, using as a framework new economic geography
models, the insight to the policy domain can be explained. It is useful to start with a simple static
NEG model and then build it up, adding or subtracting assumptions, following the logic and the
labels of Baldwin et al. (2003).
Since 1980, new theory has been developed, particularly on New Economy Geography, where
there is a new perspective of the integration process, because it takes into account microeconomic
foundations, the non-homogeneity of the space1 , the presence of increasing returns to scale and
trade cost. For these reasons these kind of models are an essential tool to study the impact of
trade liberalization.
One of the main key references for New Economy Geography models is Krugman (1991). His so
called core-periphery model (CP) puts together urban economics, regional economics and
international trade into one framework. The model highlights the reinforcing linkage-based
agglomeration; firms will allocate in the largest market. In other words, the CP model shows that
competition, low trade freeness and large market will produce agglomeration. High competition,
low level of freeness and small market will cause dispersion.
“places differ in terms of their relative abundance of natural resources proximity to natural means communication
and climate conditions” Ottaviano (2002)
1
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The CP model assumes initially symmetric regions, two factors of production: skilled workers
and unskilled workers (agriculturist), and two sectors: agricultural and manufacturing sector.
Regional supplies of both factors are fixed, but interregional distribution of labor is endogenous
with labor mobility between regions due to wage differences. The difference between regions lies
in their demand structure. The manufacture sector is monopolistic competitive, with increasing
returns to scale, however, the agricultural sector produces an homogeneous good, produced under
perfect competition and constant returns. Both sectors are traded. The CP model introduces the
cost of trade in an iceberg form (for one unit of a good to arrive, τ >1 units must be shipped). The
preferences of all citizens are identical. Preferences of the representative consumers are in a
Cobb-Douglas form.
The key factors that produce agglomeration, as mentioned above are competition, low trade
freeness and large market. Taking into account these factors, the first key effects of the model
are:
MARKET ACCESS EFFECT. It refers in the sense that in the presence of imperfect competition
an increasing returns to scale, a monopolistic firm would rather to be in the larger market.
Exogenous change in the location of demand leads to a more than proportional relocation of
industry to the enlarged region, this is called “HOME MARKET EFFECT REFLECTS”.
COST OF LIVING EFFECT. Goods will be cheaper in the region with more industrial activity
since consumers will avoid more trade costs by importing a less range of products.
The combination of these two effects with interregional migration creates the potential for
“CIRCULAR CAUSALITY”. When some migration process takes place, since workers spend
their income locally, the region that host the new workers, becomes larger. Due to the market
access effect, the changing market size tends to encourage some industrial firms to relocate in the
host region. This relocation will impact on the local cost of living and therefore on real wages.
The initial migration shock might be self-reinforcing since migration may alter the real wages in
a way that encourages further migration. There are two cycles of causality in the CP model, one
linked to demand and one linked to cost. As workers shift, it implies that expenditure shifts, even
a small migration shock will change relative market size and some industrial firms will move to
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the larger market (demand or backward linkage). This will be reinforced by the reduction of cost
of living that makes this market more attractive for the workers, reinforcing the original workers
movement, and further, increasing the share production carried out there (forward linkage).
Compared with others, circular causality on NEG models depends on the level of trade freeness.
On the NEG model the relation between these two causes what Ottaviano called “the humpp
shaped agglomeration rent” which refers to the cost faced by a firm when it reallocates.
On the other hand, the dispersion force is driven by large competition, low level of freeness and a
small market. In terms of competition, when you compare one firm with another, maybe one
firm wants to be in the small market as the unique producer. The degree of competition of one
market is big relative to market size in one region if there are more firms relative to the other
region, this implies that workers will move to the bigger region, and then this will have a
negative impact on the manufacturing wages, acting as dispersion force, this is called “MARKET
CROWDING EFFECT”.
Whether the agglomeration forces are stronger or the dispersion force dominates, it depends on
the parameters of the model, particularly on the degree of regional integration among the regions.
Agglomeration and dispersion forces are influenced by the degree of freeness. The strength of
agglomeration forces diminishes as trade becomes freer. For instance, considering the cost of
living effect, if regions have very low trade costs, there will be nearly no differences in prices
between the two regions whatever the spatial allocation of production is. Therefore, shifting
industrial production does not have an important impact on the relative cost of living. The
strength of the dispersion forces also diminishes when particular region is more open. On the one
hand, if trade is almost completely free, competition from firms in the other region is as
significant as competition from local firms, hence in this case, competition is not very localized.
Moving firms from one region to other will not have very much impact on firm’s revenues and
therefore on the wages that they pay to industrial workers. On the other hand, if freeness is low,
the shifting of firms has very large impact on competition for customers and therefore an
important effect on wages.
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Further reductions in trade costs also diminish the power of agglomeration forces. Importance of
cost of living effect is reduced because of the difference in prices between regions gets smaller,
and something similar happens with the market access advantage, since the consumers are more
easily reachable no matter where they are located. However, this takes place at a slower pace than
the weakening of the dispersion force. As a result, there is a range of trade costs at which
agglomeration forces are not strong enough to undermine a dispersed equilibrium, but they are
sufficiently potent to also sustain an agglomerated equilibrium. When trade costs fall enough and
pass a threshold level or break point, the industrial structures, and hence the income level of the
two regions must diverge, and the result is a core hosting of all industries and a periphery without
any industry2 . This process reveals the ”HOME MAGNIFICATION EFFECT” which shows that
industry becomes more footloose as trade gets freer.
The CP model presents two more important effects. Locational hysteresis: this feature arises
when the level of freeness is such that the model presents multiple stable equilibrium. In such
situation, history matters. If the economy starts out near a CP outcome, it will move to it and stay
there. If a temporary shock moves the economy from a stable equilibrium to other, then the
removal of the shock would not reverse the effects of such shock. Hump-Shaped
Agglomeration Rents: agglomeration rents measure the loss a worker would incur by relocating
from the core to the periphery when full agglomeration is a stable equilibrium. In the CP model
as trade gets freer agglomeration rents first rise and then fall. When trade is completely free,
agglomeration rents are zero implying equalization of real incomes in both regions.
Summarizing, there are three effects that makes either agglomeration or dispersion: Market
Access effect; Market crowding effect and cost of living, the last one is also a cause of
agglomeration, taken the prices as given; the price index is lower in the larger market. Due to
these effects, the Krugman model evidences that trade policies and labor mobility play an
important role in shaping the spatial allocation between regions; both sources interact to affect
spatial distribution. In this model, plausible international trade integration and labor migration
2
These results correspond to a situation of initially symmetric regions. Size and openness asymmetries, while more
difficult to work with, yield qualitatively similar outcomes.
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cause divergence among regions if the measure of trade cost reduction is sufficiently important to
cross the break point.
In order to see how rich and poor regions may engage in a trade integration process it is
important to analyze the cases where regions are not identical. The CP framework allows for
asymmetries of first nature. Particularly, they come from the fact that regions may have different
stock of immobile factor. The logic is as follows: the well-endowed region will present a higher
expenditure level that will affect nominal wages of the mobile factor and as a consequence its
real wage. Hence, the real wage gap between the rich and the poor region will be positive. This
difference will give the incentive to the mobile factor to move from the less-endowed region to
the well-endowed one. The CP model presents important features which help to explain the
agglomeration outcome. However this model is difficult to work with. More compliant models
which deal with the difficulties presented by CP model are the Footloose Capital model(FC) and
The Footloose Entrepreneur Model(FE) presented by Martin and Rogers (1995) and Forslid
and Ottaviano (2002) respectively.
Martin and Rogers (1995), consider all the characteristics of the CP model, but it is assumed that
the mobile factor is capital (nevertheless, capital owners are totally immobile between regions).
Then it is plausible to interpret the two regions as different countries. The circular causality that
appears in the CP model is broken if one assumes that the mobile factor repatriates all of its
earnings to its country of origin.
In this model, backward linkage effect and forward linkage effect disappear. The interregional
capital relocation leads to production shifting without expenditure shifting, and the mobile factor
(capital) is spent in the owners region of origin.
The home market effect occurs, however it is not self reinforcing. The market access effect is
opposed by the market crowding effect when trade costs are in place, and if we assume initially
symmetric regions the result is always dispersion until completely free trade is attained.
Nevertheless, as with low trade costs capital is extremely footloose, assuming slight asymmetries
in the endowment of capital restores the trade-induced agglomeration in the richer country.
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Forslid and Ottaviano (2002) merge the previous models and therefore display all the features of
the CP model while still assuming (humpan) capital as the mobile factor. In this case, the owners
move along with their factors, so backward and forward linkages are guaranteed. As in the FC
model, the production technology of the industrial sector relates fixed costs only with (humpan)
capital and the variable cost only with unskilled labor (immobile factor). The mobility of the
skilled entrepreneurs is an assumption in line with the experience in several regions of the world.
This model shares all the characteristics of the CP model, it also has the same relation between
the opening of the regions to trade and an equilibrium involving first dispersion when trade costs
are high, but then a divergent location of industries is reached catastrophically3 when a threshold
level of trade costs is trespassed. There is also an intermediate range of trade costs in which either
dispersion or symmetric equilibrium are possible stable equilibriums.
Veneables (1996), shows that agglomeration could be induced by the presence of input-output
linkages among firms. His model, The vertical linkages model (VL) does not rely in factor
mobility but nonetheless displays agglomeration as the economies are gradually opening to trade.
According to Venables, industrials firms prefer to be close to each other not only due to the
market-access effect, but also because they buy and sell their goods to each other as intermediate
inputs (the backward and forward linkages are then present).
The VL model allows for two regions, two sectors and one primary factor of production (labor).
Both regions are endowed with the same technology and labor force. The agricultural sectors as
in the CP model produce an homogenous good under constant returns in a perfectly competitive
environment using labor only. Its output is freely traded. Restricting parameter values, so that
this sector be active in each region or country at any equilibrium, ensures that labor wage is
equalized across space and sectors. The supply of labor to the manufacturing sector is perfectly
elastic; the manufacturing sector produces different varieties of an horizontally differentiated
product using both labor and intermediates under increasing returns. Its output is both consume
3
In order to use regional policiesn tools, in this paper catastrophically locations are not allow, otherwise there will be
not effectiveness of regional policy at all.
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by final consumers and used as intermediate inputs by other manufacturing firms. In this way,
firms are said to be vertically linked with each other.
The key variable in this model is the share of total labor force working in the differentiated
sector. As workers are mobile between sectors, they split between sectors according to the
differential in nominal wages, and the industry concentration or dispersion will follow
accordingly.
The Scissors diagram below is an easy way to show the behavior of the model. The figure plots
the north’s expenditure share se on the horizontal axis and the north’s share of industry sn on the
vertical axis. (Baldwin et al 2003).
Sn
Eeo
EE
nn
½
0
½
1se
Looking at the diagram we can see “how a slight increase in the northern market size leads to a
shift of the ee curve to the right. Presuming that trade costs are high enough for the interium
equilibrium to be stable, the shock will lead to a more than proportional increase in the north’s
share of industry since, and in this case, the nn line is steeper than the 45 degree line. Moreover,
home market magnification also occur, the home market effect gets stronger as trade gets freer
since freeing up trade makes the nn line steeper. The same rightward shift in the ee curve would
lead to a higher degree of relocation” (Baldwin et at 2003). In other words, in the VL model we
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can find the same relation as in the CP model between trade freeness and divergence in the level
of industrialization, namely, there is dispersed equilibrium when trade costs are high, multiple
possible stable equilibriums for intermediate trade costs, and complete agglomeration when trade
costs fall below the break point can be presented. Notice that here the results are obtained without
resorting to factor mobility. In particular, the role played by the cost of living effect in producing
circularity as it does in the CP model; here it is obtained with the cost of production effect.
Furthermore, agglomeration is driven by an entry and exit of firms, since the firms buy their
inputs locally, they care about the local cost of production, this means that entry decisions will be
based on real reward to production, so cost-linked circular causality come into play via the
production cost effect. The fact that firms spend locally ties production shifting to expenditure
shifting, so that demand-linked circular causality operates in both models. Empirically, vertical
linkages are a strong explanation of international agglomeration patterns than labor migration.
Agglomeration can occur without factor migration in an alternative way. In the models
introducing growth, factor accumulation can play the same role as factor mobility in foster
divergence between levels of industrialization and among levels of income.
The dispersion force in this model as in the previous ones is the market crowding effect, and what
determine the relative strength of agglomeration and dispersion forces are, again, trade costs.
Krugman and Veneables, collapse the two models into one, with their Core-Periphery Vertical
Linkage model (CPVL). They introduce an alternative feedback mechanism: intermediate goods
drive agglomeration thought input-output linkages, so the relationships switch from vertical
linkages to horizontal linkages. As in the VL model, this assumption seems to be more
appropriate since inter-regional labor migration is done. Three effects are present in the CPVL
model: the well-known market access effect and the production cost effect. The latter reflects the
fact that the region with the larger number of firms will enjoy lower goods prices due to the
possibility of consumers and firms to avoid trade costs. Both effects act as agglomeration forces.
A circular causality emerges from the combination of these effects and the mobility of
intermediate goods among firms. Finally, the market crowding effect also works as the dispersion
force. Like all static models, agglomeration and dispersion forces weaken as the level of freeness
increases. When free trade is very free, market access will be similar for firms wherever they are
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located, production cost of imported varieties is slightly higher than that of produced locally, thus
competition from foreign firms is almost as important as competition from domestic firms.
Again, dispersion forces weaken faster than agglomeration ones.
Baldwin 1999, created a model within the CP family models, called constructed capital model.
A new R&D sector is added to the agricultural and industrial sectors (sectors that remain as in the
previous models). Innovation takes place in this sector through the use of labor to invent and
patent new varieties of the industrial goods. As patents are non-tradable and last forever,
production takes place where the invention was produced. The existence of decreasing returns to
patent accumulation implies that innovation stops at some point, which prevents the economy of
growing once the equilibrium is reached4 . The CC model displays catastrophic agglomeration, as
the other models, if trade is sufficiently free so that the pro-agglomeration circular causality
dominates the anti-agglomeration market-crowding effect. However, the region of multiple
equilibriums is absent in this setting.
As the core-periphery outcome comes about as a result in a change in relative factor endowments
in both regions, even at free trade a divergence between the per capita real income of the rich and
that of the poor will be permanently observed. Thus, economic integration produces divergence
in real per capita incomes, a result that is contrary to the neoclassical growth models’ prediction.
When we allow growth, economic integration of the regions can come from a lowering of trade
costs and from capital mobility. Accordingly, it is useful to add capital mobility to the CC model.
Perfect capital mobility of the FC type model breaks all circular causality5 , and the outcome is a
stable spatial distribution of industry for all levels of trade costs. However, if one allows for
mobility of capital owners, complete agglomeration occurs at any level of trade costs, because
everyone will try to avoid them. Therefore, a trade liberalization process can produce very
different impacts on geography according to the barriers to capital movement that are in place.
4
The CC model can be regarded as a neoclassical growth model. The long run growth rate in these models is
completely exogenous.
5
The explanation for this was proveded zhen the FC model was discussed in this section.
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The following two models take into account factor accumulation or innovation. There are
different ways of factor accumulation, but the most important is the one related with
technological change. There are two types of innovation: first, horizontal innovation, and second,
vertical innovation. In the first one, the innovation is characterized by the expansion of new
products varieties, while the vertical innovation is characterized by an improvement on the
quality of the existent product.
The model from Grossman and Helpman (1991) studies the horizontal innovation. Here we can
have cost of innovation as a constant and the number of firms does not grow in the long run, in
this case the size is important, Exogenous growth. On the other hand, when cost of innovation is
decreasing with the number of firms, the more innovation is in the past the cheaper the
innovation gets; Endogenous growth. Within this framework we can have spillovers and the
growth will continue in the long run.
Perhaps some of the richest and most interesting models, in respect to the debate about
integration and divergence, are the models of endogenous growth. Two of these kind of models
are discussed below, where the endogenization of the long-run growth rate comes from the fact
that the cost of making new capital falls because of the assumption that capital construction
follows a learning curve. Capital is viewed as knowledge capital, and it is assumed that the
experience gained on past innovation spills over all present innovators. The spillovers can be
perfectly transmitted between firms in different regions, giving rise to the global spillovers
model (GS), or, as the localized spillovers (LS) assumes, the intensity of this technological
externality could disappear with distance.
The spillovers can be global when innovation on the past affect everywhere; and spillover can
also be partial, in this case, innovation in the past is going to affect growth in the future only in
some part, in this case the innovation is local.
Martin and Ottaviano, (1999) created the so called global and local spillover models; the global
spillover model shows how the agglomeration process is caused by the constant growth rate of
capital knowledge. The key feature of the model is the innovation sector and its technology.
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The Global Spillover model (GS) model consists in two regions: two consumption good sectors,
a traditional sector (agricultural) and an industry sector (manufacture); and two factors of
production, capital and labor. The agricultural sector only uses labor to produce its homogenous
output, there is perfect competition in the agricultural sector with constant returns to scale, then
inter-regional trade in the agricultural sector is costless. As other models, the industry sector or
manufacture sector is under monopolistic competition with increasing returns, this sector use
only capital as its fixed cost and only labor as its variable cost.
Continuous growth in the GS model is driven by continuous expansion of the world’s knowledge
stock. Since each unit of capital knowledge is associated with a variety, the range of varieties will
be continually expanding. Such an expansion is inevitably associated with a falling grate of
operating profit per variety. (Baldwin et al, 2003). The marginal cost of production of one unit of
capital knowledge declines as the cumulative production of ideas rises, in other words, with
endogenous growth the marginal cost of innovation can go down with the amount of the number
of patterns.
There are stabilizing and destabilizing forces that interact affecting the stability of the
equilibrium. The stabilizing force is present due to the well-known crowding market effect. The
demand-linked effect reflects the destabilizing forces. An increment in the capital share of one
region increases production. This production shifting leads to expenditure shifting. The
enlargement of market size increases profits and the capital value creating the incentive to
innovate. At high level of trade costs, stabilizing forces are stronger than destabilizing ones. But
again, as trade gets freer, destabilizing forces become stronger than the stabilizing ones. Starting
from a stable symmetric equilibrium, crossing a certain threshold, the equilibrium becomes
unstable: spatial concentration takes place in the large region. In this region accumulation is
always profitable since the value of knowledge capital is equal to its replacement cost. The small
region has no incentive to innovate since the value of innovation is lower than its replacement
cost. Similar adjustments are present when one considers asymmetric regions.
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The GS model displays home market effect and its magnification, demand-linked circular
causalityand endogenous asymmetry. Furthermore, if knowledge capital is immobile it will cause
location hysteresis, and humpp-shaped agglomeration rents. Moreover, when capital incomes are
spent locally, growth can affect geography in the sense that the process of accumulation of capital
can lead to catastrophic agglomeration; however, geography does not affect growth. In a
symmetric scenario, capital grows at the same rate on both regions no matter which is the
resulting equilibrium configuration, in the core periphery outcome, only one region built capital
although the growth rate is the same. Capital continuue to exist only in regions where it earns
enough to repay its owner for investing in it, and due to the global spillover assumption the cost
is the same no matter where the investment is made on. The income growth is directly linked to
the growth rate of capital. We know that due to an increase on the number of varieties, the price
index in both regions will fall and this implies continual real income growth.
The movement from a symmetric equilibrium to one of fully concentration creates faster
investment, capital accumulation and growth in the favored region, called the growth pole. The
other region becomes the growth sink since delocation involves low investment, capital
accumulation and growth. The agglomerated region has a higher capital-labor ratio, thus income
per capita is also higher. This difference does not disappear as trade gets free.
THE LOCAL SPILLOVER MODEL(LS). The local spillover model is characterized by letting
distance affect knowledge diffusion, the only assumption different from the ones of the GS model
is that marginal cost of an innovation now are not identical in both regions, the cost of innovation
also depends on the location of the capital.
Agglomeration helps economy to grow faster. The firms located in the core region, which is the
region that innovates, will grow faster. Faster growth is good, also for the periphery region,
because there are going to be gains in terms of trade from this region. When innovation takes
place, the relative prices will go down and then the periphery region can import at lower prices.
This model also displays the home market and the market crowding effect, and their relative
strength continues to be governed by trade costs. As in the previous models, when the level of
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freeness is quite low the symmetric equilibrium will be stable and for trade costs sufficiently low
the core-periphery result will prevail. As before, when an agglomeration result is obtained, the
core region has a higher income per capita than the periphery because of the higher capital labor
ratio. This difference does not disappear even when trade is completely free.
In addition to the demand linked effect and the market crowding effect, a destabilizing localized
spillover effect is operating in the LS model. This is independent of trade freeness, since it
reflects the fact that growth raises the productivity of the innovating sector in the larger market
and makes this market more attractive for innovation, given that learning spillovers are localized.
This can be understood as a sort of cost-linked circular causality or intertemporal vertical linkage.
After reviewing the main NEG models, its assumptions and equilibrium outcome, we can
understand how NEG models give a better understanding of how the economic landscape
involves as trade impediments are gradually eliminated. The agglomeration takes place when the
final impact of the market expansion effect dominates the impact of the market crowding effect.
To give more substance of these statements, and to see how these models can be a good tool to
analyze the impact of regional policy on agglomeration and on the divergence between poor and
rich regions, it is important to summarize the key properties of the models mentioned above. This
will be a benchmark for the analysis. (Appendix 1).
REGIONAL POLICY AND WELFARE ISSUES
After reviewing the contributions of NEG models, it is important to discuss the contributions and
the effects that regional policy can bring under the eyes of NEG models.
Regional policy can be regarded as an active policy intervention into the economy process in
favor of a certain region. According to Boden (2002), regional policy can be justified if:
-
An integration process produces market failure, this failure can be due to distance or to
space reasons.
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
-
An integration process produces regional income differentially. Some factors can not
move, then workers and consumers are stuck in the poor region (Midelfart 2004) causing income
differentials. In other words, a lower demand of labor in a region will generate an adjustment
downwards on real wages or an increase on unemployment.
In an economy characterized by imperfect competition and increasing returns to scale, the
government can help to reduce the divergence among regions, by promoting and accelerating the
industrialization process in a region through regional policy. Theory has shown us that regional
policy, such as subsidies, taxes, infrastructure, social aid, antitrust, etc., can reduce these
inequalities by slowing down the agglomeration process and affecting regional income disparities
and growth. Some authors emphasize on the importance of the analysis of these regional policies
effects regarding equity and efficiency on the region.
The effectiveness with which regional policy can slow down the agglomeration process and
affect the income disparities and growth, depends on the relative size of the regions population,
on the efficient level of administration for regional policies measures, and on the choice of
efficient instruments. The optimal instruments of regional policy depend on the level of trade
costs, on the degree of pecuniary externalities and on the magnitude of localize inter and intra
industry knowledge spillovers.
Regional Policy Instruments
Nowadays, policy analysis tends to be specialized, for example, tax experts will look at tax
policies, trade experts will look at trade policies while competition experts will look at
competition policies. The optimal instrument depends on the level of trade costs, and on the
degree of pecuniary externalities, as well on the magnitude of localized inter and intra industry
knowledge spillovers. According to Baron (2004) it is possible to differentiate policy instruments
in two types: microeconomic instruments and macroeconomic instruments. The first one is
related with labor and capital mobility due to a regional policy. The second one is related to
monetary and macro policies. Taking into account that geographical distribution of economic
activities is endogenous to most policy interventions, the impact of a policy, whatever the policy
Trade Liberalization, divergences and regional policy: The case of Mexico
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is, needs to be analyzed considering the mobility of labor and capital around the regions. For this,
the need of the so called Micro-instruments6 are used.
Microeconomic instruments are those instruments which affect directly labor and capital mobility
among the regions. The ones that affect labor mobility can be characterized by migration policies,
mobility policies and improvement efficiency policies.
Migration
labor policies
Mobility
subsidies
LABOR
MOBILIT
Y
Labor
Mobility
Policies
Improve
effectiveness
of labor
The other kind of micro-instruments are the ones related to mobility of capital. Within these
instruments the most important ones are those related to administrative controls, the taxes and
subsidies, policies that generate social development, policies that improve the efficiency of the
firms and policies that improve the efficiency of capital markets.
6
Baron Juan David, Colombian Central bank (2004).
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
Taxes and
Subsidies
Policies of
social
development
CAPITAL
MOBILIT
Y
Administratio
n controls
Policies that
improve the
efficiency of the
firms and capital
Regional Policy Implications
Ottaviano (2002) using NEG literature, point out some key policy implications taking into
account the policies specializations and the instruments mentioned above. These implications are:
regional side effects (competition policy), trade interaction effects (trade policy), lock-in effects,
and coordination effects. According to Ottaviano, regional policies need to be analyzed taking
into account these kind of implications in order to have a better approach of its effects under the
key features of the NEG models.
The central concern of regional policy is the spatial distribution of economic activities. A
regional policy can not only influence the market expansion of a region but it can influence its
market crowding effect.
Regional side effects refer to non-regional policies that affect the location of economic activity.
For example, reducing power market of the firms is influenced by the antitrust law and this
would reinforce the market crowding effect.
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
From the NEG models mentioned above, it is known that firms are more footloose when the trade
barriers are lower. As trade cost fall, the regional policy contracts because firms will locate
wherever there is a better market access, thus the firms become more receptive to any subsidy.
Within this analysis it is important to mention the agglomeration rent. It is known that firms are
attracted to central regions, therefore, even these regions do not have policy attractiveness, firms
will not locate there, however, if the tax competitive subsidy or any policy intervention is very
high such that it rises above the threshold level (below this point nobody will move). This policy
would lead the firms to reallocate. Threshold effect.
Agglomeration rents
Threshold point
A temporally policy can have permanent location effects lock-in effects. When firms move due
to a policy implementation, that policy does not need to exist any longer. Once the firms are
reallocated the new agglomeration is self-enforcing. On the other hand, when reversing the effect
is the objective, it is necessary to have a policy which reforms are much more sever in order to
led to the initial effect.
Ottaviano highlights the importance the policy instrument, due the selection effect that this will
bring to the region. In order to see which instrument is an optimal one, it is important not only to
look at the region environment but also at the characteristics of the key firms localized in the
region, then if the instrument attracts the key firm, the rest of the firms will follow.
Furthermore, using Baldwin et al. (2003), these instruments and their implications can be
analyzed more deeply; especially its impact on the spatial allocation of an industry and its effects
on growth. The relative size of the regions has an ambiguous effect on the equilibrium policy. For
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
example a subsidy; on the one hand, if a larger fraction of the population lives in a given region,
the equilibrium subsidy to the other region tends to be reduced as more voter favor a lower value
of subsidies. On the other hand due to the home market effect, an increase in a regions size
increases its equilibrium share of industry, and hence, its real income for any given subsidy level.
This aspect of the home market effect allows all political candidates to raise the subsidy to the
other region without altering individual’s welfare. In essence, the very fact the economically
bigger region is large, which means that its people is willing to accept larger taxes, the net effect
of the relative population size is then ambiguous. Moreover, starting from a core-periphery
situation, that is when the economy activity is concentrated in one region, subsidies can not turn
an unstable dispersed equilibrium into a stable equilibrium (Iranzo).
According to Iranzo and Venables(1996), and taking into account the implications mention from
Ottaviano, a very good instrument that can help to reverse the agglomeration effect are the
redistributive interregional transfers and the non- discriminatory consumption taxes. If a
consumption tax raises more funds in the more active region and these funds are send to the
poorest region the policy helps to leveraging the demand level across regions so it offsets.
After reviewing some instruments and some implications of the instruments according to the
theory, the next section will try to do an empirical work in order to counteract this implication
with the reality.
EMPIRICAL EVIDENCE
This session is characterized by an empirical analysis of Mexican regions. This is done in order
to see the effect of the divergences among regions and whether the regional policies implemented
in Mexico had been successful or not. Before starting analyzing the regional policies
implemented in the regions, it is important to see the effect and cause of divergence among the
regions. To do so, this paper summarize the existing literature concerning Mexico and its regional
effects after reforms, and it will focus on differentiating first nature factors that might cause
divergence from the second nature ones, in order to identify the key features of divergence using
NEG as a framework. After that, the identification of main policy instruments in the regions is
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
done using the microeconomic instruments. Based on an econometric model, the next step is to
test the spatial disparities among Mexico, and to see the effect of regional policies on reducing
these disparities.
As we mentioned before, according to Ottaviano, the first nature factors can be expressed taking
into account communication and climate features, therefore, this part will focus more deeply on
those two aspects. Mexico is bordering the Caribbean Sea and the Gulf of Mexico, between
Belize and the US and bordering the North Pacific Ocean, between Guatemala and the US. Its
geographic coordinates are 23 00 N, 102 00 W. It has a total area of 1,972,550 sq km with
1,923,040 sq km of land and 49,510 sq km of territorial seas. Within its land it has boundaries
land with more than 3000 km with the US and 250 km with Belize and 962 with Guatemala.
Mexican climate varies from tropical to desert areas, high, rugged mountains; low coastal plains;
high plateaus; desert. Its lowest point is Laguna Salada -10 m and its highest point is Volcano
Pico de Orizaba with 5,700 m. Mexico’s natural resources are petroleum, silver, copper, gold,
lead, zinc, natural gas and timber.
The climate, the proximity to the coast, the distance between mountain and flat regions, and
alsothe borders are key elements that influenced the population growth as well on the
development of the region. However, the distance between the regions and the US border is a
special issue due to the influence that the neighbor country has on the Mexican economy as a
whole. Mexico is characterized for been a country which climate varies from tropical to desert
areas; Tabasco is one of the most humpid areas in Mexico while Baja California is one of the
most arid ones. Federal district and Mexico are temperate areas ( The table below shows the
distributions of the federations according to climate characteristics). Approximately, t climate
conditions and the coast had influenced the location of the population in Mexico as well as its
development.
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
Humid Area
Tabasco
Quintana Roo
Temperate Area
Dry Tropic Area
Arid Area
100%
Distrito
Federal
100%
Yucatán
90.20%
92.40%
Tlaxcala
90.20%
Morelos
73%
63.7
Colima
69.80%
Baja
California Sur
Baja
California
Coahuila de
Zaragoza
97.50%
Guanajuato
72.50%
79.60%
Aguascalientes
San Luis
Potosí
67.70%
63.40%
63.10%
43.10%
35.90%
31.20%
Campeche
Veracruz de
Ignacio de la
Llave
Chiapas
70.50%
50.60%
Michoacán de
Ocampo
Oaxaca
57.8
50.3
Sinaloa
Guerrero
56.10%
54.10%
Chihuahua
Sonora
57.50%
51.50%
Colima
Oaxaca
19.60%
16.50%
Puebla
Durango
47.1
46
47.10%
37.70%
Zacatecas
28.40%
26.80%
Nayarit
15.70%
Hidalgo
Guerrero
Jalisco
41.9
41.3
41
Nayarit
Jalisco
Michoacán de
Ocampo
Oaxaca
Tamaulipas
Nuevo León
Tamaulipas
Querétaro de
Arteaga
Zacatecas
34.40%
28.10%
26.20%
Nuevo León
Sinaloa
Durango
23.90%
20.50%
18.80%
Hidalgo
Sonora
Durango
Hidalgo
79.10% México
Semiarid Area
14.60%
76.30%
65.40%
55.10%
50.60%
The northern regions of the country have larger endowments of communication and
transportation infrastructures. At the same time this distribution and these differences between
regions had been reflected on the GDP percapita of the regions. During the 1970’s, the highest
GDP percapita was in Mexico City and in most of the northern regions from while the lowest was
in Oaxaca and in the rest of the southern regions . The northern regions were the regions with the
lower concentrations of rural population and the highest level of schooling while the ones in the
south had a very low development in schooling and in infrastructure. However, history has
showed us (Gallup et. al. 2003) that this differentiation between the regions from the North to the
South, is not only a cause of natural source differences. Since the colony period, Spanish
implemented certain political power in the southern regions, such as Oaxaca, Yucatan and
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
Michoacan. This power controlled the people, mainly because the land where this people worked
was own by the Spanish government, therefore in order to have a job they had to do whatever the
government required, while in the North side, due to land characteristics and low population
during that period, this system never existed, therefore it grew faster and it was able to develop in
other activities besides the agricultural ones.
Before 1985, the growth performance of the Mexican regions were consistent, with a
convergence hypothesis (Esquivel 2000)7 , the poorer regions were growing faster than the richer
regions, it can be seen easily looking at the maps above, the highest growth rate were register in
the region with lowest initial level of percapita output, in particular in those regions closed to the
federal district. However, after 1985 this behavior broke down, the regions with higher growth
rate were the northern ones. It is important to take into account technological, localized and
pecuniary externalities, to understandwhy after 1985 the regional inequalities increased making
the richest regions richer and the poorest regions poorer. Using the results found by Cikurel’s
research and other researches, we can observe how before 1985 due to home market effect
7
Esquivel, using data from 1940 and 1995 developed a research in order to analyze the convergence between the
Mexican regions. He found out that the convergence parameter decreased after 1960
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
agglomeration localized in the capital of the country, where the larger demand was located,
however, due to circular causality, firms also localized around the southern regions close from
Mexico city, in order to have access to lower wages and to avoid congestion cost. nevertheless,
after 1985, when trade became freer, localized externalities and pecuniary externalities played an
important role in the localization of the firms and therefore in the growth of the region. (see
appendix 2) Regions with a high level of humpan capital and a high share of transportation
displayed a better subsequent growth perform while the regions with high agricultural activities
showed lower growth rates.
Esquivel(1999), Rivera Batiz(1997), Messmacher(2000), also studied these differences between
regions taking into account the localized externalities such as trade cost, infrastructure, labor
skills, etc. Esquivel and Messmacher(2002) developed an econometric model which shows the
difference of the regions’8 GDP per-capita during the last decades, compared with the GDP percapita of the Federal District. They studied the evolution of the GDP per-capita during 1960 and
2000, using as explanatory variables, demographic components, labor market and productivity9 .
The difference on the GDP among the regions between 1980 and 1990 was caused by the
difference on labor productivity among the regions(y/l) and by the low participation on the
employment rate ( emp/wap) as well as on the average of people on age to work (wap/n). During
the 1990’s the high difference between the GDP per-capita among the regions was the higher
difference on labor productivity between the regions (/l) and the reduction on the difference on
emp/wap and wap/n. The variable that explain the main difference between the GDP per-capita
during both periods studied was the difference on labor productivity among the regions(y/l) ( it
explains 84% of the differences in y/n during all the periods), one more time humpan capital
played an important role on the difference between the GDP per-capita growth in the regions.
8
9
During this analysis the regions of Campeche, Chiapas and Tabasco were not analyzed due to their oil production.
Productivity of a person is equal to the production divided into the number of employees used.
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
LOG Difference of one variable of certain State and the average of the Federal District.
y/n
y/l
l/emp
emp/wap
wap/n
1960
Promedio
Desviacion est.
-0.986
0.444
-0.87
0.44
-0.005
0.009
-0.05
0.05
-0.07
0.046
Promedio
Desviacion est.
-0.857
0.4
-0.675
0.375
0.011
0.013
-0.08
0.046
-0.113
0.042
Promedio
Desviacion est.
-0.811
0.399
-0.652
0.388
-0.006
0.007
-0.027
0.05
-0.126
0.043
Promedio
Desviacion est.
-1.04
0.426
-0.832
0.343
-0.001
0.007
-0.064
0.072
-0.143
0.051
Promedio
Desviacion est.
-1.049
0.43
-0.961
0.408
0.014
0.005
0.013
0.057
-0.116
0.045
1970
1980
1990- 1993
1994- 2000
Gamboa and Messmacher taking into account the results from Esquivel and Messmacher research
developed an econometric model in order to see that the difference and disparities among
Mexican regions can not only be explained looking at the GDP per-capita. In their model, they
analyzed more deeply variables such as GDP rate of each region, unemployment rate, the region
population in relation with the manufacture sector, the distance, and the GDP per-capita.
Change rate of the GDP, GDP per-capita, employment and population
DDPIB
DDPIBPC
DDEMP
DDPOBL
c
15.593
13.04
4.397
1.146
-6.104
-5.883
-7.931
-2.248
IDIST
-2.101
-1.638
-0.769
-0.427
0.745
0.718
0.968
0.274
MANUF 80
6.927
5.26
-6.781
0.872
-3.093
-2.981
-4.019
-1.139
IPIBPC 80
-0.88
-1.274
1.078
0.455
-0.948
-0.914
-1.232
-0.349
R square
0.397
0.289
0.138
0.265
R square adjusted
0.324
0.204
0.035
0.177
Number of observations
29
29
29
29
F statistics
5.482
3.387
1.336
3.007
The results found by Gamboa and Messmascher are similar than the ones found in previous
studies, the difference between the GDP per-capita and the GDP of each region is similar,
however the effects that variables such as distance and proportion of manufacture sector on the
regions were not the expected ones.
Furthermore, Cikurel (2002) developed a model allowing mobility of inputs, technology and
goods across the regions. The results showed that the northern regions had more benefits from the
open trade reform than the southern regions, mainly because location specific externalities: high
level of humpan capital, industrial capital, better communication and transportation
infrastructure. However, the fact that the northern regions of Mexico were influenced by lower
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
transport cost to reach the US markets, attracted firms to locate in those regions (but not as it was
expected).
After reviewing the characteristics of divergence between the regions among Mexico, the results
of the different studies suggest that there is a need for some regional policies that may improve
the regional distribution of output in Mexico. Transportation , communication infrastructure as
well as humpan capital level are one of the main differences between northern and southern
regions, and these may be improved by true regional policies. Mexican government has already
implemented regional policies in order to diminish these divergences. In Mexico, there are public
policies between the federal government and the regions. Since the 1980’s, Mexico has
implemented the Fiscal Coordination System (SNCF), which put together all the income and
liabilities of the country(Gamboa 2002). The SNCF system classified the transfers of the
government into Conditional and unconditional transfers. The first ones are related with adds,
“convenios”, and public investment in general. Adds are the transfer that involve investments on
education, health, social infrastructure and multiple transfers. “Convenios”, are those agreements
for common projects between the local government and the federal government (Ottaviano called
this kind of projects inter and intra regional transaction costs). Public inversion is the transfer
related with infrastructure inversion from the federal government to the regions. The so called
unconditional transfers are those related with tax collection, decentralization process and
privatizations10.
During the last 10 years, federal spending has increased compared with the spending done during
1987-1992, specially after 1998 the spending has been focused on the inclusion of add and
“convenios” in order to help the poorest regions. Different studies had evaluated these policies,
Gamboa and Messmacher (2002) did a regression analysis in order to see the relation between the
net refunding resources of the government from each region with the marginal index. The
correlation showed that the regional policiy in Mexico is offsetting. For example, in regions such
as Baja California Sur, which GDP per-capita is very high, the level of assets collect is very high
but the level of resources received from the government is very low, while in regions such as
10
Taxes such as: income tax, consumer taxes, service and transactions and consumptions, add valorem tax and
others.
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
Oaxaca, Chiapas and Guerrero, which GDP per-capita is very low, the level of resources received
from the government is very high. This means that the federal system of Mexico is
compensatory, it spends more in the regions with very high marginal index ( see figure below).
R E IN T E G R O S Y S A L ID A S P O R E S T A D O v s . IN D IC E D E M A R G IN A C IÓ N
5
M ile s d e p e s o s d e 2 0 0 0
3
- 2 .5
-2
- 1 .5
-1
- 0 .5
0
0 .5
1
1 .5
2
2 .5
-3
-5
y = 1 .9 3 9 7 x - 1 .6 8 1 5
R 2 = 0 .2 4 2 5
-8
-1 0
R -S v s .IM A R G IN A C IÓ N
L in e a l ( R - S v s . I M A R G IN A C I Ó N )
-1 3
-1 5
-1 8
-2 0
IN D IC E
Furthermore, they also try to evaluate the relation between public spending and GDP per-capita,
and GDP growth during 1980 and 2000. Without taking into account the regions of Campeche,
Chiapas and Tabasco, (because they are oil producers) the relation of public spending and GDP
per-capita was negative during 1993 and 1999, the respective correlations were -0.293, and 0.62011 ( see figures below).
ii. 1999
30
30
25
25
20
20
PIB/N
PIB/N
i.1993
15
15
10
10
5
5
0
0
0
2
4
6
8
gasto/PIB
10
12
14
0
2
4
6
8
10
12
14
16
gasto/PIB
Gamboa and Messmacher tried to see which instruments under the public spending reflect the
negative relation found above. In order to do that, they did another regression analysis using
11
According to this result, it could be possible that even when the interregional transfers are compensatory, this does
not mean that this reverses the agglomeration market equilibrium. It is necessary to evaluate in a more deeply way
the characteristics of the public spending
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
public spending and public investment and their relation with the GDP growth. They found that
the relation between public spending and growth rate is negative, and the relation between public
investment and growth rate is also negative. However, they also found a positive relation between
public investment and the level of employment which means that public investment help to
growth the level of employment., Nonetheless, theory showed us that this is a short term effect,
therefore it might be not the right policy. Within the regression analysis variables such as
education spending were also used having a positive relation, but it was very low.
Divergence/Convergence Estimation
From the empirical evidence mention above, we can see how divergence has increased after the
NAFTA, furthermore, spending on localized externalities within Mexico policies still not as big
as it should be, and therefore it does not reach the benchmark or the threshold point point that
help to reduce the agglomeration effect. Nevertheless, further analysis needs to be done in order
to have a better picture of what has happened in the region after the NAFTA, then, it will be
possible to identify the right instrument for each region in order to reduce these divergencesby
applying the analytical framework of the so-called “new economy geography”. The analysis
must be desegregated by region and by industry giving the opportunity to relate the instruments
with technical and pecuniary externalities. As we mentioned above, the optimal instruments of
regional policy depends on the level of trade costs, and on the degree of pecuniary externalities,
on the magnitude of localize inter and intra industry knowledge spillovers, therefore when we are
evaluating certain regional policy instrument, this kind of variables must be analyzed as well.
Using as a framework the NEG’s models mention on the first part of this paper, a cross section
econometric model will be discussed now.. The methodology used on this model will be based on
an empirical work done by Ottaviano12 . An econometric analysis that takes into account income,
population, real state value and growth regressions over a set of explanatory variables will
provide a better picture on the evolution and the drivers of regional differences.
Ottaviano Gianmarco and Dino Pinelli (2004) “Finish regions in the Global economy: a ‘new economic
Geography’ perspective”.
12
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
As mentioned above, the NEG framework has a new perspective of the integration process,
because it takes take into account three main points that will affect the region crucially. On the
first place, the presence of increasing returns to scale and trade cost generates a trade off between
concentration of production in few plants, and proximity of plants to costumers and suppliers.
Second, market power of the firms could beincreased due to its geographical positioning. And
third, the location decision of the firms generates localized externalities that determine regional
attractiveness. Within this framework, labor mobility plays an important role in given rise to
cumulative processes of regional divergences. On the other hand, theory has also showed us how
workers find jobs more easily where there are more firms, and viceversa. As skilled workers are
more mobile than unskilled ones, cumulative causation is stronger in sectors that are intensive in
humpan capital.
Using data from the INGE of Mexico and covering the time between 1985 and 2003, taking the
recession years and the oil regions out of the sample, this paper runs an estimation of income,
population and real state value growth over a set of explanatory variables13 . These regressions
allows to have a better view on productivity levels and quality of life differences between the
regions, and therefore it permits to see whether or not divergence has increased after the NAFTA.
Economic growth theory shows how growth regression can be a good measure of national
economic performance, most of the time, per-capita income growth is used as an explanatory
variable. However taking into account NEG framework and analyzing the economic growth of
the regions within a country, the standard macroeconomic approach using income per-capita
growth as a measure of productivity is not completely good, basically because workers and firms
are not immobile. Considering this arguments, the only non trade good is land, which is used not
only by firms but also by workers, then rent differential can be a good instrument to show the
regional price differentials which will show the productivity and the quality of life of a region,
which are good instruments to analyze convergence or divergence on the region.
“Each regression on its own bear no clear information about regional economic performance, however when
considered together, those regressions allow one to gain insight on the evolution and the drivers of regional
differences in productivity levels and quality of life”( Ottaviano et al 2004).
13
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
In order to understand the importance of price differentials, we must highlight the concept of
market power within the NEG framework, which is attributed to geographical areas. According to
Ottaviano and Pinelli, it can be nominal market power (NMP) which captures costumer/supplier
proximity, and real market power (RMP) which captures customer/supplier proximity and
competitor proximity. These can be related with nominal and real wages, the first (NMP) one
predicts the nominal wages that a worker can obtain in certain areas, while the second one (RMP)
is related with real wages that workers can make if located in that area. In the long run, if workers
can freely relocate, real wages differences should eventually disappear as nominal wage
differential are capitalized in local price differences. Therefore, a higher NMP should be
associated with higher local prices, higher revenues and higher nominal wages.
Subsequently, using the price of a land as an explanatory variable, if a region productivity grows,
then both its rent and nominal wage should also grow. On the other hand, if a regional quality of
life deteriorates, only the nominal wage will grow, the land price will fall.
Positive
Income/wage
variation
Population/local price variation
Negative
Positive
higher Productivity
Lower quality of life
Negative
higher quality of life
Lower productivity
ottaviano and Pinelli(2004)
Then, taking into account the importance of per-capita income growth, but also the population
growth and the land rent price growth, these are the dependent variables of the models. Each
variable will be run separately; however, its results must be interpreted together, so as it was
mention above, these will allow to gain insight on the evolution and the drivers of regional
differences in productivity levels and quality of life.
Economic growth theory shows how economic growth across geographical areas can be
explained in two set of variables: proximity variables and wider influences. The first one refers to
productive factors of growth such as, humpan capital and knowledge capital. The second one is
related with other variables that can affect growth indirectly. On a NEG framework, these
variables can be divided on first nature factors and second nature ones.
Proximity Variables
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
Humpan capital: this variable is measured by three ways: the number of population in the region
with at least elementary school, the number of population of the region with at least secondary
education degree, and the number of population of the region with at least university degree.
Wide Influences
These variables are those that affect growth indirectly by improving input allocation as well as
knowledge and technology transfers, differences in exogenous factors as nature or factor
endowments (what is called “first nature”) are responsible for some of these improvements.
However, in regions with similar characteristics, endogenous factors (what is called “second
nature”), such as advance economic interactions and economic organizations, are also responsible
of these improvements.
First nature factors
According to Ottaviano , natural factors can be represented by communication and climate
structure.
Natural communication: this variable is capture by the distance between the region and the
border, in this case according to Haralambides and Londoño (2002), the largest crossing points
between the United States and Mexico are Nuevo Laredo border and Monterrey, therefore, these
will be the points used as a distance parameter.
Climate: the climate condition is measured by the average of temperature in the region, using 1
for dry areas, 2 for warm, 3 for template and 4 for humpid.
Second Nature factors
As it was mentioned on the first part of this paper, geographical economic present two types of
localized externalities “pecuniary externalities” and technological externalities.
Peculiar externalities: market power or market potential shows the market interaction among
regions, and it is constructed as the weight average of economic size, which can be determined by
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
income, population, income per-capita and population density. It is determined by the size of the
region and the distance of the region with the border.
MPI   Sizei
j 1
dij
Technological externalities: the variable to measure technological externalities is population
density mainly because non-market interaction are mainly found in densely populated areas.
There are other wide influences variables that can also affect growth:
Regional policies: impact of local policies on growth can be captured by the level of government
expenditure on education and infrastructure.
Labor market: the unemployment rate is used to proxy the efficiency of local labor market.
Descriptive Analysis
The analysis is done between the period before and after 1993, the time of the analysis is divided
in three periods, the first period is between 1985 and 1993, the second period between 19961999 which can show the first effect of the NAFTA, and the third period between 2000 and 2002
which will show the impact of the regional policies on the regions. The period between 1994 and
1995 are removed because of the recession of Mexico during that period. The oil regions
(Campeche, Chiapas and Tabasco) are also removed from this analysis.
Figure 1: Convergence in the First period: GDP per capita growth
Trade Liberalization, divergences and regional policy: The case of Mexico
GDP per capita growth 1985-1993
Liliana Lopez
40.00
30.00
20.00
10.00
(10.00)
0
2
4
6
8
10 12 14 16 18 20 22 24 26 28 30
(20.00)
(30.00)
(40.00)
GDP per capita 1985
24
21
18
15
12
9
6
3
0
-3 0
-6
-9
-12
3
6
9
12
15
18
21
24
27
30
33
GDP per capita growth 2000-2002
GDP growth 1996-1999
Figure 2 and 3. Convergence on the 2nd and the 3rd period. GDP growth
15
12
9
6
3
0
-3 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40
-6
-9
-12
-15
GDP percapita 1996
GDP per capita 2000
The figures above show very interesting results. Figure 1 shows the results on the first year, there
is a positive relationship between the two variables, which indicates that initially poor regions
have been growing slower. However, on next figure, the relation between the variables is not
clear, and on the third period, there is a negative relationship between the GDP per capita growth
and the GDP per capita from the first year of the analysis. The convergence after the NAFTA is
clear; however it has been done gradually.
The figures 4, 5 and 6 below show the growth rate of population on the vertical axis against its
initial level in the three periods. On the first period the relation is weakly negative, although this
relation becomes stronger on the second and on the third period, it starts to diminish.
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
Figure 4. Convergence on the first period. Population growth
population growth 1985-1993
60.0
50.0
40.0
30.0
20.0
10.0
0.0
-10.0 0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
-20.0
-30.0
Population 1985
16
16000
14
14000
Population growth 00-02
Population growth 1996-1999
Figure 5 and 6. Convergence on the 2nd and the 3rd period. Population growth
12
10
8
6
4
2
12000
10000
8000
6000
4000
2000
0
0
0
2000
4000
6000
8000
Population 1996
10000
12000
14000
-1
0
1
2
3
4
5
6
7
8
9
Population 2000
Figures 7 and 8 show the relation between the GDP per capita growth on the first period and the
GDP Per capita growth on the second and the third period, separately. There is no evidence of
persistence.
Figure 7
Trade Liberalization, divergences and regional policy: The case of Mexico
GDP per capita grwoth 19961999
Liliana Lopez
25
20
15
10
5
0
(40.00 (30.00 (20.00 (10.00 -5
)
)
)
)
-10
10.00
20.00
30.00
40.00
GDP per capita grow th 1985-1993
GDP per capita growth 2000-02
Figure 8
15
10
5
(40.00) (30.00) (20.00) (10.00)
0
-5
10.00
20.00
30.00
40.00
-10
-15
GDP per capita grow th 1985-1993
The same exercise is done having as an analysis variable the population growth from the first
period against the population growth of the other periods. The results, show a clear positive
relationship between the two variables, this implies some degree of persistence of population
Population growth 1996-1999
growth differentials as the same regions grow faster in both periods.
16
14
12
10
8
6
4
2
0
0.0
10.0
20.0
30.0
40.0
Population grow th 1985-1993
50.0
60.0
Trade Liberalization, divergences and regional policy: The case of Mexico
Population growth 2000-02
Liliana Lopez
9
8
7
6
5
4
3
2
1
0
-1 0.0
10.0
20.0
30.0
40.0
50.0
60.0
Population grow th 1985-1993
Previous descriptive analysis shows a clear evidence of divergence between the Mexican regions,
in particular on the second period of the analysis where populations grew faster on those regions
with higher market potential.
Regression Analysis
The regression analysis will be estimated in three periods separately, the first period is the one
before the NAFTA agreement, the second one between the recession period and the beginnings of
the NAFTA period and the third one is five years after the NAFTA. Income, population and
house pricing growth as dependent variables, and the initial levels of a set of explanatory
variables are estimated. A variable with a significant coefficient (positive or negative) implies
that its initial level has a positive or negative influence on growth in the subsequent period.
1985-1993
Population regression on the first period shows how coefficients such as GDP per-capita in the
initial period, education, government expenditure and education are significant on the population
growth during 1985 and 1993. GDP per capita is significant at 10% and positive, which means
that population growth is stronger when there is a positive GDP per capita on the initial period.,
This demonstrates some convergence on the period, however the significance of this variable is
only at 10%. During this period, the GDP growth was more concentrated on the center part of the
country than on the north, it is clear then why market potential was not significant during this
period.
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
Regarding Income regression the results were quite similar. Income per capita, elasticity of
agricultural GDP in the region and government expenditure had important impact on the GDP per
capita growth.
Results from house prices growth regression are also interesting, government expenditure and
house prices on the initial period had a significant impact on growth.
Regression 1985-1993
Population Growth pop85_93
GDP per-capita growth gdpg85_93
logpibpc85
46.605*
-87.548*
Income per-capita Initial period
[26.050]
[48.620]
House Prices grwoth rent85_93
Market Potential
logep85
Education
-75.098***
238.719
[24.673]
[210.781]
temp
0.684
1.184
-24.851*
Temperature
[1.337]
[3.736]
[12.233]
logpexpend85
19.581**
51.260**
117.846*
[8.229]
[23.526]
[59.565]
Government expenditure
logpo85
116.384***
21.867
-9.092
Total employment
[26.890]
[64.493]
[351.386]
logpib85
-71.533**
GDP initial period
[25.932]
logpiba85
-0.913
-44.520**
GDP agriculture
[6.022]
[17.686]
logpibma85
3.914
GDP manufature
[4.871]
dfront
0.051
19.805
Dummy USA border states
[3.920]
[13.758]
logdistn
4.166
Distance from USA crossing borders
[10.945]
logipv88
36.343
-1,089.909***
House prices
[69.570]
[195.181]
logpop85
-247.538
[378.479]
Constant
Observations
R-squared
-150.694
401.589
283.574
[102.136]
[262.462]
[855.226]
27
26
27
0.85
0.52
0.74
Standard errors in brackets
All explanatory variables are in log terms
Standard errors in brackets
* significant at 10%;
** significant at 5%;
*** significant at 1%
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
1996-1999
The first column from table 3 reports the results of population regression. Population growth has
been stronger in regions with lower GDP in agriculture and with higher market potential. The
market potential coefficient is positive and significant showing how people tend to move to
regions where there is high market potential., During this period the NAFTA started 14 , this result
explains what was suggested on the NEG literature mentioned.
Within this regression distance is positive and significant, which shows how transport cost effect
is still significant in terms of location. An interesting result during the regression is the
government expenditure coefficient, which is negative and significant. Population growth has
been stronger in regions with lower initial government expenditure, this can be explained due to
the fact that government expenditure may have been financed through increased taxation.
Another interesting variable is the income per-capita, its coefficient is positive and significant
showing the output divergence observed on the regions across Mexico, effect that confirmed the
decrease of convergence after the NAFTA.
Income regression results (column 2 from table 3) show three important outcomes. First, holding
all other factors constant, income per capita growth has been stronger on regions close to the
USA border, which explains how location promotes growth on the northern regions, specially
after the NAFTA. However, education and infrastructure on those regions were also important for
its growth.
Second, the coefficient of GDP of the manufacture sector is also significant and positive, which
indicates how income per capita growth has been stronger in regions with a higher initial level of
manufacture in their GDP. Regions, such as Aguascalientes and Queretao, were able to improve
their GDP per capita growth significantly as a result of their increase on manufacture export
oriented activities. First nature factors are also important, although this variable is becoming less
and less important within the studied period.
14
The agreement started in 1986, but it was signed in 1994.
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
House price growth regression results show how market power and distance to the USA border
influence growth of house prices during this period.
Regresion 1996-1999
Population growth
pop96_99
logpibpc96
3.123
Income per capita
[6.016]
logmpi00
9.719*
Market Potential
[5.566]
logdp96
-0.989
Density of Population
[0.925]
GDP growth
gdpg96_99
House prices
rent00_02
loggexpent96
-7.668***
-5.528*
Government expenditure
[2.269]
[2.856]
logpoa96
4.115**
2.981
-4.443
agricultural employmetn
[1.546]
[1.817]
[3.236]
logpoi96
1.642
3.195**
-4.680*
industrial employment
[0.959]
[1.487]
[2.433]
logditsn
12.649**
-13.429***
14.638*
Distance from USA crossing borders
[5.665]
[4.379]
[7.440]
logpib96
1.767
7.196
2.977
GDP initial period
[3.385]
[5.081]
[7.961]
logpiba96
-3.688*
GDP in agriculture
[2.051]
logpibma96
1.485
10.449***
-5.026
GDP in manufacturing
[1.556]
[2.156]
[3.672]
logmpp00
-15.423***
13.458*
Market Potential
[4.210]
[7.046]
ipv96
0.004
House prices
[0.038]
Constant
-26.136
-22.95
66.221*
[21.792]
[15.872]
[34.071]
Observations
28
28
28
R-squared
0.75
0.76
0.34
All explanatory variables are in log terms
Standard errors in brackets
* significant at 10%;
** significant at 5%;
*** significant at 1%
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
2000-2002
The period 2000 and 2002 shows very interesting results. Market potential is still positive and
much more significant than other periods. Initial GDP per-capita is significant and negative
showing some kind of convergence on this period. However, the results from population growth
and house price growth regressions are very unclear, therefore the quality of life during this
period might have implications that only can be shown on future periods.
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
Regression 2000-2002
Population Growth pop00-02
GDP per-capita growth gdpg00-02
8.591**
8.606***
[3.001]
[2.294]
House Prices grwoth rent00-02
logpib00
logpiba
logpibm
logmpi00
logdp00
loggov_expttotal
logpagri
2.892**
logpindut
2.352**
logdistn
10.304***
[1.219]
[0.943]
[3.092]
dfront
-6.580**
[2.710]
logedus00
-6.765**
[2.897]
logpibpc00
-14.698*
[8.326]
logpibindu
logpibco
temp
2.349*
[1.270]
logipv00
logedusu00
Constant
Observations
R-squared
-34.127**
83.706*
-43.73
[15.482]
[40.458]
[82.031]
27
28
27
0.68
0.6
0.52
Standard errors in brackets
All explanatory variables are in log terms
Standard errors in brackets
* significant at 10%;
** significant at 5%;
*** significant at 1%
INTERPRETATION
Taking into account the literature mentioned above, regional performance is determined by a set
of explanatory variables explained on income, house prices and population regressions. If the
variable presents a positive coefficient in all the regressions, then we can conclude that its impact
on productivity is positive. On the other hand, if the variable presents a positive coefficient in the
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
income regression but it has a negative coefficient on the other regression, a negative impact of
the variable on the quality of life is identified.
The regressions results can help us to understand better the productivity and quality behavior of
life across Mexican regions. During the period 1996 and 2000, Mexico presented its highest level
of divergence across its regions. Table two clearly presents how the initial level of income percapita had a positive relation with the GDP per capita growth, showing how there is an impact on
differences of productivity among the regions. During this same period population growth and
house pricing also showed some divergences. However, on the last period, it is clear how
productivity divergences stared to shrink, showing then fewer differences on productivity among
regions. The government expenditure helped to increase this productivity, however, quality of life
is becoming much more uncertainty than before.
The distance and the advantage to be located in a region sharing borders with USA has a positive
impact in the second and the third periods on populations growth, income growth and house
prices growth regressions. This shows how distance helps to improve not only the productivity of
the region but also the quality of life. However its effect in the third period is more dominant on
productivity than on quality of life.
Pecuniary externalities are explained by the market potential variable, and then, as the literature
suggest, it has a positive influence on income, house prices and population in the last two
periods. “In the long run regions that enjoy easier market interactions tend towards higher levels
of productivity”15.
CONCLUSIONS
The new economy geography literature argues that trade integration tends to result in
agglomeration of economic activity. Mexico regional inequalities showed this kind of effect,
most of the economy activity is located in the north of the country and in the Capital; regions
from the south have been badly affected, not only on their productivity but also on their quality of
15
Ottaviano (2004)
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
life. Mexican government is aware of these inequalities and they had intervened with regional
policies that try to make a more proportional distribution of the economy activity, however, the
effectiveness of these policies is not clear yet. Different researches about divergence between
regions showed that one of the main differences is not only the distance between the region and
the US, but also the communication, and the transportation infrastructure as well as the humpan
capital development.
Mexico’s geographical imbalances during the last 17 years can be attributed to some important
facts: before NAFTA was signed, the divergence on productivity was clear, however in a very
low level, but the divergence on quality of life was not present; Distance from USA border
promote productivity and quality of life in a high level; productivity is also promoted by market
potential, infrastructure and education.
The results suggest that even when divergence on productivity among Mexican regions is
decreasing, education, infrastructure and location, will always affect the terms of quality of life
among the regions. Therefore in order to have an optimal scenario is important to work on
policies that rely not only on productivity but also on quality of life. A new evaluation of the
regional policy needs to be done, in order to find optimal instruments of regional policy that
focus on these objectives, these instruments depend on the level of trade costs, the degree of
pecuniary externalities and on the magnitude of localize inter and intra industry knowledge
spillovers.
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
REFERENCES

Baldwin R. E., Forslid R., Martin P., Ottaviano G., Robert F. ( )” Public Policy and
Economic Geography” draft of a chapter for a book on public policies and economy geography.

Baldwin R.E., P. Martin, and G.I.P. Ottaviano (2001) Global Income Divergence, Trade
and Industrialization: The Geography of Growth Take-Offs, Journal of Economic Growth 6, 5-37

Baldwin, R.E., Forslid R., Martin P., Ottaviano G.I.P. and F. Robert-Nicoud (2003)
Economic Geography and Public Policy, (Princeton: Princeton University Press), forthcoming.

Baldwin. RE, and Forslid R.(1999) The core –Periphery model and Endogenous Growth:
Stabilizing and Destabilizing integration.

Barro , R. and X Sala-i-Martin (1995). Economic growth, Macgraw Hill.

Cikurel D. (2002) “ Why Mexico’s region convergence broke down?” University of
California.

Biblioteca Raul Baillares Jr. www.biblioteca.itam.mx.

Diaz Alejandro, (2003) “Apertura comercial convergencia regional en México” comercio
exterior, vol. 53, 11, Noviembre

Esquivel G., Lederman D., Messmacher M., Villoro R. ( )¿Por qué el TLCAN no llegó
hasta el sur de México?

Fujita, M., P. Krugman and A. Venables (1999) The Spatial Economy (Cambridge
(Mass.): MIT Press).

Gollás Manuel (2003) “ México crecimiento con desigualdad y pobreza (de la sustitución
de importaciones a los tratados de libre comercio con quien se deje)” Colegio de México

Grossman G. and E. Helpman (1991) Innovation and Growth in the Global Economy
(Cambridge (Mass.): MIT Press).

Hanson H Gordon. ( ) “What has happened to wages in Mexico since NAFTA?
Implications for hemispheric free trade” NBER Working Paper 9563

Iranzo Susana( ) “ Trade liberalization, Agglomeration and public policies: the case of the
European Regional policies” University of Sydney.

INEGI, Instituto Nacional de Estadísticas y Geografía. México. www. Inegi.gov.mx,
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez

Krieger Christine (2002) “European Integration and The Case for Compensatory Regional
Policy”The Kiel Institute of World Economics, May 2002

Krugman Paul (1991) “ Geography and trade Cambridge MIT Press.

Krugman Paul (1991) Increasing returns and Economic Geography” Journal of Political
economic, 99 483-499

Martin P. and G. Ottaviano (1999) “Growing Locations: Industry location in a Model of
Endogenous growth”, European Economic Review, 43 281-302.

Martin Philippe(1999) “ The role of public policy in the process of regional convergence”
CERAS of the National des ponts et chausses , Paris.

Messmacher M. (2002) “ Desigualdad regional en méxico. el efecto del tlcan y otras
reformas estructurales”

Messmacher M., Gamboa R.(2002) “ Desigualdad regional y Gasto publico en mexico”
BID.

Midelfart Helen (2004) “ Regional Policy design: An analysis of relocation, efficiency
and Equity” Norwegian School of Economics and Business Administration.

Organization for Economic Co-operation and Development (2002)
“Policy Brief.
Territorial Review on Mexico.

Ottaviano Gianmarco (2002)“ Regional Policy in the Global Economy: Insights from
New Economic Geography”, discussion paper 211, Hamburg Institute of International Economics

Ottaviano Gianmarco and Dino Pinelli (2004) “Finish regions in the Global economy: a
‘new economic Geography’ perspective”, University of Bologna.

Puga D (2001) “European regional policy in light of recent location theories” Discussion
paper 2767. Centre for Economic Research, London

Torres F. and Mendez J. (2000). Geography and Economic Development in Colombia.
Inter America Development Bank. Working paper #R408.
Trade Liberalization, divergences and regional policy: The case of Mexico
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Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
Home Market
Magnification
CORE PERIPHERY
VERTICAL LINKAGES
GLOBAL SPILLOVERS
LOCAL SPILLOVERS

Exogenous change in location demand
leads to more than proportional relocation
of industry in the larger region
Expenditure production function is not
based on the physical mobility of the
factor



Agglomeration
Forces
reinforcing.
Onle linked to demand
One linked to cost

Exogenous change in location demand
leads to more than proportional relocation
of industry in the larger region
Richer region hosts more than
proportionate share of accumulated
capital
Connection between production and
expenditures
Agglomeration
Forces
are
selfreinforcing.
Does not feature cost linked causality
(factor migration is not linked to regional
prices index

Circular
Causality



Endogenous
Asymmetry

are
self-
Lower trade cost between two regions
produce regional asymmetries



Catastrophic
Agglomeration

Massive agglomeration in reaction to
minor changes in trade cost.

Location
Hysteresis


Temporary shocks have hysteric effects
Arise only when the level of trade costs is
such that there are multiple stable
equilibrium
The ultimate region of concentration is
indeterminate so economy is subject to
location hysteresis

Growths Affect
Geography
Permanent
Income
Differences




Exogenous change in location
demand leads to more than
proportional relocation of industry in
the larger region
Agglomeration Forces
reinforcing.
One linked to demand
One linked to cost
are
self-





Exogenous change in location
demand leads to more than
proportional
relocation
of
industry in the larger region
Richer region hosts more than
proportionate
share
of
accumulated capital
Agglomeration Forces are selfreinforcing.
There is cost linked causality ,
due to inter-temporal vertical
linkages
Lower trade cost between two
regions
produce
regional
asymmetries
Partial agglomeration is not an
stable outcome,
Massive agglomeration in reaction to
minor changes in trade cost

Lower trade cost between two regions
produce regional asymmetries

Lower trade cost between two
regions
produce
regional
asymmetries

Massive agglomeration in reaction to
minor changes in trade cost

Temporary shocks have hysteric
effects

The ultimate region of concentration is
indeterminate so economy is subject to
location hysteresis

Does not break in a catastrophic
manner, increasing trade freeness
destabilizes
the
symmetric
equilibrium.
There are two locally stable
equilibrium so temporary policies
could have permanent effects by
selecting one of the two
equilibrium

Capital accumulates then capital’s income
is spent locally,
growth can affect geography
The
connection
between
spatial
distribution of income and the spatial
distribution of capital implies that
regional asymmetries in industrial
structure cause
This is caused by regional asymmetric in
factor endowments







Capital
accumulates
then
capital’s income is spent locally,
growth can affect geography
The connection between spatial
distribution of income and the
spatial distribution of capital
implies that regional asymmetries
in industrial structure cause
This is caused by regional
asymmetric
in
factor
endowments
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez
APPRENDIX 2
Results from Cikurel analysis
Trade Liberalization, divergences and regional policy: The case of Mexico
Liliana Lopez