INTEGRATION AMONG UNEQUALS

In this paper we show that in the case of two countries with different sizes and divergent resource endowments, the presumption that growth rates increase in both countries when the size of the market expands t hrough integration, evaporates. Allocation effects that contract the r esearch sector in the human capital-abundant country can in principle reverse the growth-prompting effects of scale. Sufficiently strong dif fusion of technology is crucial for a positive growth effect. When one country is chronically non-innovating, unskilled labor migration towa rds its innovating trading partner is growth-reducing. However, our an alysis suggests that when integration is accompanied by migration, the marginal effects of the latter are small relative to the effects obta inable from integration.