Trade Policy and Urban-Rural Inequalities In LDCS: A Simulation Experiment With A New Economic Geography Model

This paper follows the new economic geography approach to model the relationships between trade policy and spatial agglomeration of production in the context of a small open developing economy. It constructs a general equilibrium model with interactions between centripetal forces and centrifugal forces that determine linkages between urban and rural regions. Centripetal forces such as labour migration, increasing returns, and transport costs tend to concentrate economic activities and population in the urban region. This causes the inequality between urban and rural areas to increase. On the other hand, centrifugal forces such as congestion and urban land rents favour dispersion of firms and workers. This favours a balanced urban system that is conducive for rural development. The authors concentrate on explaining how trade policy affects the interactions between these forces by implementing the theoretical model through numerical simulations.[Paper presented at International Conference on Globalisation and Development].