Economic Integration and Structural Change

Abstract

The dynamic evolution of sectoral production - structural change - is associated with systematic changes in the geographic dispersion of activity. In developing countries, sectoral diversification is accompanied by geographic agglomeration, and regions become heterogeneous. In advanced economies, sectoral specialization is accompanied by geographic dispersion, and regions become homogeneous. We argue that developing countries diversify because their regions integrate with each other, and can specialize according to regional comparative advantage. Advanced economies specialize because they integrate internationally and their regions produce according to the global pattern of comparative advantage. We find systematic support for these claims in international data on sectoral production at the regional level, including in the US, Europe, China and India. Consistent with our theory, we find no such evidence once the samples focus on non-traded sectors. Economic zones formed by specialized, regionally homogeneous countries, such as Europe, tend to diversify and agglomerate, consistent with their constituent countries integrating with each other.

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