  This paper proposes a two blocks and three regions economic geography model
that can account for the most salient stylized facts experienced by Eastern
European transition economies during the period 1990 2005. In contrast to the
existing literature, which has favored technological explanations, trade
liberalization is the only driving force. The model correctly predicts that in
the first half of the period, trade liberalization led to divergence in GDP per
capita, both between the West and the East and within the East. Consistent with
the data, in the second half of the period, this process was reversed and
convergence became the dominant force.
