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European Economic Review: February 1999, AmsterdamAuthor(s): Carlos LozadaSource: Foreign Policy, No. 115 (Summer, 1999), pp. 129-130Published by: Washingtonpost.Newsweek Interactive, LLCStable URL: http://www.jstor.org/stable/1149500 .

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European Economic Review February 1999, Amsterdam

With economics already intersecting various disciplines such as law, politics, and even psychology, perhaps it was only a matter of time before the "New Economic Geography" (NEG) was born. This growing subfield of economics examines two main issues: the "clustering" of eco- nomic activity in certain locations and the disparities (or convergence) of economic growth and incomes among geographic regions.

These themes are highlighted in a special issue of the European Eco- nomic Review, a journal published nine times per year by the European Economic Association (EEA). The self-described mandate of the EEA is to foster closer links not only between theory-oriented and policy-ori- ented economists, but also among students and more senior economists from all parts of Europe. The studies in this volume assess the impact of European integration on the region's economic geography.

University of Toronto economist Diego Puga contrasts the eco- nomic geography of Europe with that of the United States, showing that income disparities are greater across Europe and manufacturing industries are less dispersed in the United States. Puga then asks if greater European integration will make the economic geography of Europe more like that of the United States.

The answer, he argues, depends on the degree of intercountry labor mobility in Europe. Finns tend to cluster in order to benefit from lower trading costs and other advantages resulting from proximity. But European workers are less likely than their American counterparts to migrate in search of

SUMMER 1999 129

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Global Newsstand

higher wages or greater opportunity. If firms relocate in order to cluster together but skilled labor does not migrate accordingly, labor shortages will drive up wages and mitigate the appeal of proximity. Eventually, high labor costs will prompt firms to relocate in search of cheaper manpower, until wages reach an equilibrium. Therefore, Puga concludes, further European integration may result in a leveling of wages across national borders; but firms will remain more dispersed than they are in the United States.

Economist Riccardo Faini, of the University of Brescia in Italy, comple- ments Puga's analysis by examining income disparities within the economies of the European Union (EU). Faini notes that although income gaps among EU economies have been declining, income differences within some Euro- pean countries-such as Italy-have stagnated or widened. Why?

Faini emphasizes institutional factors, particularly the role of organized labor. In seeking to set a common national wage-regardless of disparate skills or productivity-unions may hinder demand for labor in poorer regions, thus aggravating income differences. But even if unions cannot even out income disparities within countries, it is still likely that European inte- gration will cause average wages to converge across national borders. (Orga- nized labor-typically unable to coordinate wage demands from one country to the next-will not present an obstacle to this convergence) Like Puga, Faini stresses the significance of labor mobility: If skilled workers migrate in the face of stagnating incomes, unions may moderate their wage demands and thus exert a positive effect on employment, and therefore, on growth.

Work by Puga, Faini, and others in this volume suggests that even if the NEG remains in relative infancy, it already provides valuable insight into the outcomes of policies based on established, contemporary models. The NEG is not only pushing the boundaries of future economic study; it is helping to clarify the past and present as well.

-Carlos Lozada Economic Analyst

Federal Reserve Bank of Atlanta

Global Outlook Spring 1999, New York

The United States is experiencing record trade deficits as the global financial crisis limits the ability of American farmers and manufactur- ers to export overseas. Once again, the familiar coalition of labor unions, industrial lobbyists, and congressional critics of President

130 FOREIGN POLICY

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