How Far Will International Economic Integration Go

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University of Toronto St. George
Political Science
Lilach Gilady

thPOL208Y1 Introduction to International Relations January 24 2012 How Far Will International Economic Integration GoRodrik Dani 2000 How Far Will International Economic Integration Go The Journal of Economic Perspectives 141177186 International price arbitrage in tradable commodities tends to occur very slowlyInvestment portfolios in advanced industrial countries exhibit large amounts of home biaspeople invest a higher proportion of assets in their own countries than the principles of asset diversification would seem to suggestNational investment rates remain highly correlated w and dependent on national saving ratesIn periods of exuberance capital flows bw rich and poor nations falls considerably short of what theoretical models would predictSevere restrictions on international mobility of labour are rule rather than exceptionWhile 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 integrationNational borders demarcate political and legal jurisdictionsSuch demarcations serve to segment markets in same way that transport costs or border taxes doExchanges that cross national jurisdictions are subject to wide array of transaction costs introduced by discontinuities in political and legal systemsMost obvious transaction cost arises from problem of contract enforcementWhen one party reneges on written contract local courts may be unwillingand international courts unableto enforce contract signed bw residents of 2 diff countriesThus national sovereignty interferes w contract enforcement leaving international transactions hostage to increased risk of opportunistic behaviourProblem 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 soProblem exists for any commercial contract signed by entities belonging to 2 diff jurisdictionsWhen contracts are implicit rather than explicit they require either repeated interaction or other side constraints to make them sustainableBoth are generally harder to achieve across national bordersDomestic context implicit contracts are often embedded in social networks provide sanctions against opportunistic behaviourImportance of group ties in facilitating economic exchangeContracts are neither explicit nor implicit simply remain incompleteLaws norms and customs are some ways in which problem of incompleteness of contracts is alleviated in domestic sphereInternational law provides at best partial protection against incomplete contracts and international norms and customs are hardly up to task either
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