Globalization, Interregional and International Inequalities

This paper examines interregional and international inequalities in a setup of two countries and four regions. Different from the existing literature, countries and regions are not required to be symmetric in size. Capital but not labor is mobile across regions and countries. We find that the interregional and international inequalities are closely related to globalization and the efficiency of local governance. In other words, they are jointly determined by the domestic transport costs (e.g., infrastructure, administrative barriers, etc) in the two countries and the international trade cost. Particularly, the interregional inequality may be either a monotonically increasing or an inverted U-curve function of its own domestic transport costs. Also, the interregional inequality decreases with the national manufacturing share. These results shed light on the so-called "deindustrialization"phenomenon.