Trade and Migration: a U-Shaped Transition in Eastern Europe 

Abstract

This paper proposes a 2-country 3-region economic geography model that can account for the most salient stylized facts experienced by Eastern European transition economies during the 1990s. In contrast to the existing literature, which has favored technological explanations, trade liberalization and factor mobility are the only driving forces. The model correctly predicts that in the first half of the decade trade liberalization led to divergence in GDP per capita, both between the West and the East and within the East. Consistent with the data, in the second half of the decade, internal labor mobility in the East reversed this process, and convergence became the dominant force. The model furthermore shows that the same U-shaped pattern applies to relative industrialization of West and East, although within the East the hinterland continued to lose industry throughout the decade.