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This article employs established techniques from the spatial economics literature to identify regional patterns of income and growth in Mexico and to examine how they have changed over the period spanned by trade liberalization and how they may be linked to the income divergence observed following liberalization. The article first shows that divergence has emerged in the form of several income clusters that only partially correspond to traditional geographic regions. Next, when regions are defined by spatial correlation in incomes, a south clearly exists, but the north seems to be restricted to the states directly on the United States (U.S.) border and there is no center region. Overall, the principal dynamic of both the increased spatial dependency and the increased divergence lies not on the border but in the sustained underperformance of the southern states, starting before the North American free-trade agreement, and to a lesser extent in the superior performance of an emerging convergence club in the north-center of the country.

Democratic countries with substantial inequality and where people believe that success depends on connections and luck induce political support for high tax rates and generous welfare states. Traditional wisdom is that such policies harm the economy, but there is not much evidence that countries with a large welfare state and substantial redistribution have worse economic performance and welfare. One important reason is that governments have been careful to invoke the principles of reciprocity and mutual obligations in the design of the welfare state. Unemployment benefits conditioned on work experience, no misconduct and search effort harm the economy less. Indeed, conditional benefits may even boost employment in an economy with efficiency wages. A second reason is that people care about relative incomes and become unhappy if others earn and consume much more than they do. This explains why people do not seem to get happier, even though societies grow richer and richer. With such consumer rivalry the government wishes to correct for the rat race, even if there is no need for redistribution, by taxing labour. A third reason is that in modern economies many distortions are present and removing one at a time may worsen economic performance. Conversely, increasing tax progression in economies with non-competitive labour markets induces wage moderation and boosts employment. A final reason is that countries with large welfare states typically introduce various pro-growth policies as well.

Democratic countries with substantial inequality and where people believe that success depends on connections and luck induce political support for high tax rates and generous welfare states. Traditional wisdom is that such policies harm the economy, but there is not much evidence that countries with a large welfare state and substantial redistribution have worse economic performance and welfare. One important reason is that governments have been careful to invoke the principles of reciprocity and mutual obligations in the design of the welfare state. Unemployment benefits conditioned on work experience, no misconduct and search effort harm the economy less. Indeed, conditional benefits may even boost employment in an economy with efficiency wages. A second reason is that people care about relative incomes and become unhappy if others earn and consume much more than they do. This explains why people do not seem to get happier, even though societies grow richer and richer. With such consumer rivalry the government wishes to correct for the rat race, even if there is no need for redistribution, by taxing labour. A third reason is that in modern economies many distortions are present and removing one at a time may worsen economic performance. Conversely, increasing tax progression in economies with non-competitive labour markets induces wage moderation and boosts employment. A final reason is that countries with large welfare states typically introduce various progrowth policies as well.

The effects of globalization on income distribution within rich and poor countries are a matter of controversy. While international trade theory in its most abstract formulation implies that increased trade and foreign investment should make income distribution more equal in poor countries and less equal in rich countries, finding these effects has proved elusive. The paper presents another attempt to discern the effects of globalization by using the new data derived directly from household surveys. The paper looks at the impact of openness (trade/GDP ratio) and direct foreign investment on relative income shares across the entire income distribution. In contrast to what one would expect from theory, we find strong evidence that at low average income level, it is the rich who benefit from openness. As income level rises, that is around the income level of $5-7,000 per capita at international prices, the situation changes and it is the relative income of the poor and the middle class that rises compared to the rich. It seems that openness makes income distribution worse before making it better—or differently that the effect of openness on on income distribution depends on country’s average income level.

This paper presents a simple theoretical framework in which immigrants have a relative incentive to cluster in host countries where cultural characteristics and imperfect information sustain the segmentation of the labor market and a higher wage in foreign communities. The hypothesis is tested on a panel of immigration flows to OECD countries. The pull effect of cultural communities is supported and it is found that the minimum size of a given cultural community is around 5% of the foreign population. It is also found that the pull effect weakens as the community grows as predicted by the theoretical framework.