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Chapter

POL208Y1 Chapter Notes -Economic Integration


Department
Political Science
Course Code
POL208Y1
Professor
Lilach Gilady

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POL208Y1: Introduction to International Relations January 24th, 2012.
How Far Will International Economic Integration Go?
(*) Rodrik, Dani. 2000. “How Far Will International Economic Integration Go?” The
Journal of Economic Perspectives. 14/1:177-186
International price arbitrage in tradable commodities tends to occur very slowly
Investment portfolios in advanced industrial countries exhibit large amounts of
home bias”—people invest a higher proportion of assets in their own countries
than the principles of asset diversification would seem to suggest
National investment rates remain highly correlated w/ and dependent on national
saving rates
In periods of exuberance, capital flows b/w rich and poor nations falls
considerably short of what theoretical models would predict
Severe restrictions on international mobility of labour are rule rather than
exception
While formal barriers to trade and capital flows have been substantially reduced
over last 3 decades, international markets for goods, services, and capital are not
nearly as “thick” as should be under complete integration
National borders demarcate political and legal jurisdictions
Such demarcations serve to segment markets in same way that transport costs or
border taxes do
Exchanges that cross national jurisdictions are subject to wide array of transaction
costs introduced by discontinuities in political and legal systems
Most obvious transaction cost arises from problem of contract enforcement
When one party reneges on written contract, local courts may be unwillingand
international courts unableto enforce contract signed b/w residents of 2 diff
countries
Thus, national sovereignty interferes w/ contract enforcement, leaving
international transactions hostage to increased risk of opportunistic behaviour
Problem is more severe in case of capital flows, and has implication that national
borrowing opportunities are limited by willingness of countries to services their
obligations rather than their ability to do so
Problem exists for any commercial contract signed by entities belonging to 2 diff
jurisdictions
When contracts are implicit rather than explicit, they require either repeated
interaction or other side constraints to make them sustainable
Both are generally harder to achieve across national borders
Domestic context: implicit contracts are often “embedded” in social networks,
provide sanctions against opportunistic behaviour
Importance of group ties in facilitating economic exchange
Contracts are neither explicit nor implicit; simply remain incomplete
Laws, norms, and customs are some ways in which problem of incompleteness of
contracts is alleviated in domestic sphere
International law provides at best partial protection against incomplete contracts,
and international norms and customs are hardly up to task either

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POL208Y1: Introduction to International Relations January 24th, 2012.
Result of open economy macroeconomics: countries cannot simultaneously
maintain independent monetary policies, fixed exchange rates, and open capital
account
Result is known as “impossible trinity,” or in Obstfeld and Taylor’s terms “open
economy trilemma”
If gov’t chooses fixed exchange rates and capital mobility, it has to give up
monetary autonomy
If it wants monetary autonomy and capital mobility, has to go w/ floating
exchange rates
If want to combine fixed exchange rates w/ monetary autonomy, had better
restrict capital mobility
Political trilemma of world economy
3 nodes of extended trilemma are international integration, the nation-state, and
mass politics
“Nation-state” refers to territorial jurisdictional entities w/ independent powers of
making and administering the law
“Mass politics” refers to political systems where: a) franchise is unrestricted; b)
there is high degree of political mobilizations; and c) political institutions are
responsive to mobilized groups
We can have at most 2 out of 3 things
If want true international economic integration, we have to go either w/ nation-
state, in which case domain of national politics will have to be significantly
restricted, or else w/ mass politics, in which case we will have to give up nation-
state in favour of global federalism
If we want highly participatory political regimes, have to choose b/w nation-state
and international economic integration
If we want to keep nation-state, we have to choose b/w mass politics and
international economic integration
Hypothetical perfectly integrated world economy
World economy in which national jurisdictions do not interfere w/ arbitrage in
markets for goods, services, or capital
Transaction costs and tax differentials would be minor; convergence in
commodity prices and factor return would be almost complete
Most obvious way can reach such world is by instituting federalism on global
scale
Global federalism would align jurisdictions w/ market, and remove “border”
effects
US: despite continuing existence of difference in regulatory and taxation practices
among states, presence of national constitution, national gov’t, and federal
judiciary ensures that markets are truly national
Under model of global federalism, entire world would be organized along lines of
US system
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