Government Procurement, International Specialization, and Income Inequality

Over ten years after the launching of the Single Market the EC?s directives aimed to the liberalization of government procurement remain largely unimplemented. This paper analyses the consequences on the pattern of specialization, on welfare and on income inequalities of the persistence of a strong domestic bias in government procurement. The study, because of the model used, falls in the new economic geography literature. Research in this field has shown that market integration may increase the degree of international specialization. The reason is that, as trade costs fall, the linkages that favor the geographical agglomeration of industries are likely to be stronger than the linkages that favor geographical dispersion. As a consequence, as trade barriers fall in Europe, the models predict that the European economic landscape become similar to the North American one. Yet, when government procurement is biased towards domestically produced commodities the model exhibits quite different results. The findings are as follows. A fall in trade cost, no matter how large, is now much less likely to trigger the agglomeration phenomenon described above. If some industrial agglomeration occurs, it will be much less pronounced than if government procurement were fully liberalized. Because biased government procurement reduces international specialization, it also reduces international income inequalities. Finally, under certain conditions, there exists an optimal degree of liberalization of government procurement such that world welfare is higher than if government procurement were fully liberalized. Under this circumstance, an optimally liberalized government procurement is a superior tool to international transfers for the objective of preventing the emergence of international income inequalities