Working Paper: NBER ID: w22046
Authors: Gino Gancia; Giacomo A.M. Ponzetto; Jaume Ventura
Abstract: This paper develops a theoretical framework to study the interaction between globalization and political structure. We show that political structure adapts in a non-monotonic way to declining transport costs. Borders hamper trade. At an earlier stage, the political response to expanding trade opportunities consists of removing borders by increasing country size. At a later stage, instead, it consists of removing the cost of borders by creating international unions. This leads to a reduction in country size. Moreover, diplomacy replaces conquest as a tool to ensure market access. These predictions are consistent with historical evidence on trade, territorial changes and membership of international unions.
Keywords: Globalization; Political Structure; International Unions; Trade Opportunities
JEL Codes: D71; F15; F55; H77; O57
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| declining transport costs (R41) | adaptation in political structure (P26) |
| adaptation in political structure (P26) | formation of larger countries (F55) |
| formation of larger countries (F55) | creation of international unions (F53) |
| expanding trade opportunities (F19) | political unions (J51) |
| political structure (H11) | political fragmentation (F12) |
| desire for trade (F19) | diplomatic approach replacing conquest (F51) |