Heterogeneous enlargement, regional convergence and international competitiveness: a model-based analysis

The enlargement of a highly developed trading bloc or economic union by much less developed countries (heterogeneous enlargement) and the subsequent convergence within the enlarged area presumably affect the international competitiveness of the latter vis--vis other large economies. The purpose of this article is to provide a model-based answer to the question that which are the impacts that the enlargement shock and following regional convergence have on the international competitiveness of the enlarged region measured by its terms of trade. Methodologically, the paper extends Zee's (1987) two-country model of the world economy by incorporating the enlargement of Home by a less-developed region. It is found that in the long run the terms of trade of enlarged Home deteriorate (Home's international competitiveness declines) by approximately that percentage by which the domestic population increases. As a consequence, Home's welfare decreases while Foreign's welfare increases in the long run. Along the transition path towards full convergence, the terms of trade of enlarged Home worsen and the capital intensity of the less-developed region in Home monotonically increases while the capital intensities of the developed Home region and of Foreign temporarily decrease.