Introduction

In this chapter we examine the consequences of increased economic integration between nations within a region. We assume that the countries already have made significant strides towards a common market by lowering trade costs and impediments to factor mobility. However, some barriers remain, and we shall consider economic integration as a combination of dropping barriers to factor mobility and reducing transport costs. We are interested in determining the circumstances under which economic integration will lead to agglomeration of economic activity, whereby one part of the region will accumulate virtually all of the manufacturing activity, while the remainder will become largely de-industrialised. This clearly is an important issue for a regional grouping such as the EU, particularly given its recent efforts to deepen the level of integration between member states.

We adopt Krugman's general equilibrium, economic-geography model (1991a) to characterise what we refer to as the ‘labour-demand’ side of the model. This produces the agglomerative forces that can lead to a core–periphery pattern through backward and forward ‘demand linkages’. The backward linkage captures the notion that manufacturing production will tend to concentrate where there is a large market, but that the market will be large where manufacturing production is concentrated (because this is where the manufacturing workers live and consume). This is reinforced by the forward linkage in which, other things being equal, the cost of living will be lower in the country with the larger manufacturing sector, because consumers in that location can rely less on imports (which are subject to transport costs).