Report

Teaser, summary, work performed and final results

Periodic Reporting for period 2 - GEPPS (Globalization, Economic Policy and Political Structure)

Teaser

Globalization is expanding economic borders rapidly. Barriers to trade are now lower than ever and this has led to the creation of many truly global goods and asset markets. And yet globalization is changing political borders only slowly. The second wave of globalization that...

Summary

Globalization is expanding economic borders rapidly. Barriers to trade are now lower than ever and this has led to the creation of many truly global goods and asset markets. And yet globalization is changing political borders only slowly. The second wave of globalization that started after WWII found the world organized into a set of states or centralized jurisdictions that often go beyond cultural borders but that clearly fall short of economic borders. These centralized jurisdictions still hold most of the political and decision-making power.

This growing mismatch between markets and states lowers the quality of economic policymaking. Since constituencies are located inside the state, governments tend to disregard effects of economic policies that are felt beyond the political border. The result is a worsening in policymaking that could seriously mitigate the gains from globalization and even turn them into losses. The goal of this project is to improve our understanding of how this growing mismatch between economic and political borders affects economic policy and political structure. In particular, it focuses on the inefficiencies this mismatch creates and on how should we (“the citizens of the world”) handle them.

The project is organized around two themes. The first one is the handling of enforcement externalities. One of the key roles of governments is to enforce contracts. When these contracts involve domestic and foreign residents, governments have the temptation to enforce selectively so as to shift income to domestic residents at the expense of foreigners. The second theme is the evolution of political structure. The world is currently organized into state or centralized jurisdictions. This project studies the hypothesis that globalization leads to an alternative political structure based on a set of overlapping jurisdictions.

Work performed

Up to date, the project has been structured into four papers. The first one develops a theoretical framework to study the connection between globalization and political structure. The model predicts that early stages of globalization should be associated with an increase in country size, while later stages should be associated with declining country size and the appearance of international unions. The paper develops the theoretical predictions and provides a new test of them using historical data on country borders.

The second paper is empirical, and tries to measure the impact of country borders on trade. It constructs a new dataset of bilateral trade for more than 250 European regions. It then uses it to measure the so-called border effect. Preliminary estimates suggest that this border effect is still large in Europe.

The third and fourth papers are theoretical and return to the theme of international unions. One of them explores to assign decisions to the union vis-à-vis member countries (or central vs. regional governments). The other explores the factors that determine equilibrium policies in a union and its fragility.

Final results

The rest of the project will keep developing these four papers, and add a couple more that explore other aspects of international unions. One of them will be devoted to sovereign debt. The other one is still to be decided.