Neoclassical Growth, Manufacturing Agglomeration and Terms of Trade

This paper presents an integrated view of economic growth, development traps, and economic geography. We explain why there is income convergence among some countries (neoclassical regime) and income divergence among others (poverty trap regime). Income convergence (divergence) and manufacturing industry diffusion (agglomeration) are re-enforcing each other in a cumulative process. Moreover, trade openness may trigger a catch-up process of an economy that is stuck in a \"poverty trap\". This catch-up is characterized by an increase in the investment-to-GDP ratio and an improvement of the terms of trade. A new dynamic welfare gain of trade liberalization is identified, which is likely to be large.