The post–World War II period is a historically unique economic experiment that combines a "proliferation of sovereigns" with "everything but labor" globalization.1 In 1940 there were only sixty-five independent countries. Twice that many—125 countries–have been created in the last 60 years.2 The newly created states varied enormously in size (in both territory and population), resources, location, income levels, and politics. Each nation-state is sovereign within its own boundaries and can determine its own economic policies, laws, regulations, political systems, and, most important, who can cross its borders. [End Page 1] The proliferation of sovereign states in the post-WWII period has been accompanied generally by a trend towards globalization of everything but labor. The postwar international system encouraged the reduction in the policy impediments to economic transactions across borders by regulating the means of payment (International Monetary Fund, IMF), providing a framework for negotiating reductions in trade barriers (General Agreement on Tariffs and Trade, or GATT, and World Trade Organization, or WTO), and providing for capital flows (World Bank), first directly by lending and more recently by encouraging financial liberalization. But unlike the first era of globalization from 1870 to 1914, which was an "age of mass migration," the post-WWII international system has, generally, tightly regulated movement of people across borders.3 While international organizations have been established to encourage free and open economic activity, no such international organization or mechanism exists to encourage nation-states to adopt more liberal policies for labor mobility.
Economic theories have different predictions about the outcome of slicing geographic space into smaller and smaller units, each with potentially different economic policies and institutions (proliferation of sovereigns) combined with free mobility of goods, capital, ideas, but not labor (everything but labor globalization).4 One collection of models predicts happy outcomes (at least conditionally). The Solow-Swan model of economic growth has constant returns to scale, has essentially no "geography," and when applied across nations often assumes diffusion of ideas and capital mobility and hence predicts that, if countries were to have identical policies and institutions, they would converge to equal levels of per worker income. Some simple trade models had even stronger predictions, showing that under certain conditions factor prices would converge without the mobility of either capital or labor.5 Alesina and Spolaore argue that [End Page 2] if the economic costs of sovereignty decline (say because of lower costs to trade across nations) and if there are political gains from sovereignty one would expect to see more and more sovereign nation-states, but each integrated economically more tightly into multinational agreements (for example, Czechoslovakia splitting into two nation-states, both of which join the European Union [EU], or the Baltic states splitting from the Soviet Union and joining the EU).6
But these relatively happy stories must confront the fact that neither income per capita across nation-states nor factor prices (wages) have converged.7 The semihappy interpretation is that levels (or growth rates) of income and wages are determined by policies and institutions. If the observed divergence is the result of divergence of policies and institutions, then at least policy reform or institutional changes can equalize incomes potentially (although the feasibility of purposive action to induce institutional change is hotly debated).
There are, however, other economic models in which the proliferation of sovereigns and labor immobility would lead to permanently divergent or even diverging levels of incomes. Region-specific shocks to productivity can come in a variety of forms, both positive and negative:
- The depletion of a location-specific natural resource (mine, forest, soil quality, or water table) can lead to a fall in the physical productivity of factors applied and a fall in labor demand. Ghost towns near depleted mines are the classic examples.8
- Technological changes can raise the productivity of a given region. Seeds developed during...