Adding public expenditure to the core-periphery model creates a linkage that can override the agglomeration forces. Consequently, the equilibrium distribution of economic activity depends upon the nature and allocation of public expenditure. Appropriate public expenditure eliminates the possibility that economic integration results in total agglomeration of manufacturing. A corollary is that (contrary to the core-periphery model) location matters even in the absence of transport costs. Tied aid, and international transfers are also considered.