Was Germany ever united? Borders and domestic trade, 1885 - 1933

Was Germany ever united? Given the historical circumstances of Germanys unification in the 19th century there is no obvious answer to this question. But such an answer can affect the prospects of the post-1989 unification process, and beyond this of European integration. We provide an econometric analysis of Germanys economic integration across various internal borders from the foundation of the Kaiserreich until the end of the Weimar Republic. This analysis is based on a new comprehensive set of domestic trade flow data on railways and waterways, covering all parts of Germany 1885-1933. First, the disintegration effects by the separation of Alsace-Lorraine and Western Poland from Germany after the Versailles treaty were somewhat limited by previous disintegration of these regions. Second, while there is broad support for increasing integration across old political, administrative, and confessional borders between 1885 and 1933, a geographical divide between eastern and western parts of Germany had a persistent trade diverting effect well into the 1930s. --Germany,Economic Integration,Railways,Waterways

Endowments vs market potential: what explains the relocation of industry after the Polish reunification 1918?

How did the location of industry across interwar Poland react to the Polish reunification? After more than 120 years of political and economic separation, Poland was reunified at the end of 1918. In consequence, the removal of internal tariff barriers and improved infrastructure strengthened the domestic market, while foreign market relations were cut off. Similarly, the geographical distribution of factor endowments was changed, for example through internal migration. How did these forces interact to determine the location of industry? We survey the dynamics of industrial location between 1902 and 1925-1937 and estimate a specification that nests market potential and comparative advantage to quantify their respective impact during the interwar years. The results point to a role for both, comparative advantage and access to markets. We show that both statistically and economically the most important factors were the endowment with skilled labour and interindustry-linkages. --

Tear Down this Wall: On the Persistence of Borders in Trade

Why do borders still matter for economic activity? The reunification of Germany in 1990 provides a unique natural experiment for examining the effect of political borders on trade both in the cross-section and over time. With the fall of the Berlin Wall and the rapid formation of a political and economic union, strong and strictly enforced administrative barriers to trade between East Germany and West Germany were eliminated completely within a very short period of time. The evolution of intra-German trade flows after reunification then provides new insights for both the globalization and border effects literatures. Our estimation results show a remarkable persistence in intra-German trade patterns along the former East-West border; political integration is not rapidly followed by economic integration. Instead, we estimate that it takes at least one generation (between 33 and 40 years or more) to remove the impact of political borders on trade. This finding strongly suggests that border effects are neither statistical artefacts nor mainly driven by administrative or “red tape” barriers to trade, but arise from economic fundamentals.integration, home bias, globalization

Comparative Advantages in Italy: A Long-Run Perspective

The history of Italy since her unification in 1861 reflects the two-way relationship between foreign trade and economic development. Its growth was accompanied by a dramatic increase in the country’s integration with European and global commodity markets: foreign trade in the long run grew on average faster than the overall economy. Behind the dynamics of aggregate trade, Italy’s comparative advantage changed fundamentally over the last 150 years. The composition of trade, in terms of both commodities imported and exported and in terms of trading partners, developed from a high concentration of a few trading partners and a handful of rather simple commodities into a wide diversification of trading partners and more sophisticated commodities. In this chapter we use a new long-term database on Italian foreign trade at a high level of disaggregation to document and analyze these changes. We will conclude with an assessment of Italy’s prospects from a historical perspective.international trade, 19th-20th century, Italy

Endogeneity of Currency Areas and Trade Blocs: Evidence from the Inter-War Period

Empirical research on the gravity model of international trade in the wake of Rose (2000) affirms that currency union formation doubles or triples trade. However, currency unions could also be established precisely because trade among their members was already high. In OLS estimation, this would cause endogeneity bias. The present paper employs both fixed effects and binary choice methods to trace endogeneity in the formation of historical currency arrangements. Studying the formation of currency blocs in the 1930s, we find strong evidence of endogeneity. We work with country group fixed effects and find that already in the 1920s, trade within the later currency blocs was up to three times higher than on average. The formal establishment of these blocs had only insignificant or even negative effects on the coefficients. We also employ a probit approach to predict membership in these later arrangements on the basis of data from the 1920s. Results are remarkably robust and again indicate strong self-selection bias. Evaluated against the control groups, treatment effects in the 1930s were mostly absent. Even the post-war currency arrangements are visible in the inter-war data. In line with the theory of optimum currency areas, our results caution against optimism about trade creation by currency unions. --Currency blocs,gravity model,endogeneity,treatment effects

The Frequency of Wars

Wars are increasingly frequent, and the trend has been steadily upward since 1870.The main tradition of Western political and philosophical thought suggests that extensive economic globalization and democratization over this period should have reduced appetites for war far below their current level. This view is clearly incomplete: at best, confounding factors are at work. Here, we explore the capacity to wage war. Most fundamentally, the growing number of sovereign states has been closely associated with the spread of democracy and increasing commercial openness, as well as the number of bilateral conflicts. Trade and democracy are traditionally thought of as goods, both in themselves, and because they reduce the willingness to go to war, conditional on the national capacity to do so. But the same factors may also have been increasing the capacity for war, and so its frequency. We need better understanding of how to promote these goods without incurring adverse side-effects on world peacewars, state capacity, democracy, trade

Shooting on a Moving Target: Eyplaining European Bank Rates during the Interwar Period

This paper describes the monetary policy response of countries during the inter-war period. How did central banks react to the Great Depression? How did countries balance the externals demands of the gold standard with domestic policy pressures? What was the optimal level of international policy coordination? We use weekly data over the period 1925-1936 to estimate central bank rate reaction functions for a panel of 22 countries during the inter-war gold standard. The estimates suggest to us changing objectives for monetary policy. Countries moved away from the sole objective of convertibility and towards a more ‘modern’ monetary policy based on exchange rate stabilization, but not yet output stabilization or even modern price level targeting. Importantly, this move to exchange rate stabilization was accompanied by the formation of monetary policy blocs around pre-existing economic relations. Countries’ interwar policy choices offer lessons for countries remaining in or choosing to join the European Monetary Union today.monetary policy, great depression, reaction functions

Estimating medieval market integration: Evidence from exchange rates

In this paper we present a new method for estimating market integration under a commodity money system such as that which existed in Europe until the demise of the gold standard. The approach is based on the analysis of deviations between exchange rates and parity, which under conditions of a perfectly functioning and fully integrated market should not exceed the bullion points. Consequently the time needed for adjustment, following a violation of the bullion points, can be used as an indicator of market imperfections and as a measure of integration. We apply this approach to trade between late medieval Flanders, Lübeck and Prussia, our results showing that Flanders-Lübeck constituted a much better-integrated market than Flanders-Prussia. Moreover, the results indicate that the degree of market integration increased between the early fourteenth and the middle of the fifteenth century. --

Economic integration across borders : the Polish interwar economy 1921-1937

In this paper we study the issue of economic integration across borders for the case of Poland's reunification after the First World War. Using a pooled regression approach and a threshold cointegration framework we find that the Polish interwar economy can be regarded as integrated with some restrictions. Moreover, a significant negative impact of the former partition borders on the level of integration that can be found for the early 1920s vanishes in the middle of the 1920s. This suggests that the integration policy after the reunification of Poland in 1919 was surprisingly successful. --Economic integration,Border effects,Law of one price,Poland,Threshold cointegration