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The Institutional and Cultural Determinants of European Integration Henri L.F. de Groot Dept. of Spatial Economics Vrije Universiteit Amsterdam.

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Presentation on theme: "The Institutional and Cultural Determinants of European Integration Henri L.F. de Groot Dept. of Spatial Economics Vrije Universiteit Amsterdam."— Presentation transcript:

1 The Institutional and Cultural Determinants of European Integration Henri L.F. de Groot Dept. of Spatial Economics Vrije Universiteit Amsterdam

2 Outline Background – mystery of missing integration Multiple dimensions of distance Some evidence Policy implications Open Days Brussels - October 5,

3 Some background – I Modelling of interaction going back to Newtons law of gravity Interaction function of mass and distance Basic application of this model results in mystery of missing interaction Open Days Brussels - October 5,

4 4 Some background – II Bilateral exports, trade, FDI or migration explained by – GDP and / or population representing size (mass) – geographical distance reflecting trade or moving costs – Additional indicators of size or trade costs (population, common language, common border, free trade bloc, etc.) – GDP per capita (proxy for natural resources, etc.; also Linder hypothesis or for wages in migration studies)

5 Some background – III Notion of border effects Evidence from meta-analyses revealing that distance decay effects have increased instead of decreased These results have led to hypothesis regarding importance of cultural and institutional barriers Multiple dimensions of distance Open Days Brussels - October 5,

6 6 Roadmap for this presentation Discuss evidence on the existence and effect of cultural and institutional barriers Focus on three aspects – Trade – Capital (FDI) – Migration

7 Open Days Brussels - October 5, Multi-dimensionality of trade costs Several dimensions of trade costs: – Geographical distance (transport costs) – Institutional quality (IQ): security of property rights; ease of contract enforcement, etc. – Institutional distance (ID): unfamiliarity with formal and informal rules and norms – Cultural distance (CD): difficulties in understanding, controlling and predicting behavior of others

8 Open Days Brussels - October 5, Institutional indicators Voice and Accountability (VA) Political Stability (PS) Government Effectiveness (GE) Regulatory Quality (RQ) Rule of Law (RL) Control of Corruption (CC) Source: Kaufmann et al. 2002

9 Open Days Brussels - October 5, Data on governance: an illustration

10 Open Days Brussels - October 5, Cultural indicators Power distance Individualism-collectivism Masculinity-femininity Uncertainty avoidance Source: Hofstede, 2001

11 Open Days Brussels - October 5, Data on culture: an illustration

12 Distance from average in Europe Open Days Brussels - October 5,

13 13 Open Days Brussels - October 5, Illustration: CD Netherlands versus rest

14 14 Open Days Brussels - October 5, Indicators for trust Trust (see Guiso et al. 2005) – Eurobarometer Based on questions like Generally speaking, do you trust people to a degree or very much Essentially percentage of people that says yes

15 15 Open Days Brussels - October 5, Trust of Dutch in other countries

16 Open Days Brussels - October 5, Quantitative illustration trade effects – I Basic dummies: Member of same trade bloc: +132% Adjacency: 90% extra bilateral export Institutional quality: One standard deviation increase: 45% (30%) more exports if IQ of ex- (im-)porter improves Institutional similarity (based on 2 s.d.): Common institutional quality: 16% more exports

17 17 Open Days Brussels - October 5, Quantitative illustration trade effects – II Two simple thought experiments: – Estimate what trade would be in the hypothetical situation in which there would be no cultural diversity in EU: +6% – Estimate what trade would be in the hypothetical situation in which bilateral trust between all EU-partners would be equal to the maximum in the EU (between Swedes and Danes): +56%

18 Open Days Brussels - October 5, EU integration and institutions Accession to EU means entrance to Single Market This implies: - reduction of administrative barriers - recognition/ harmonization of rules and regulations - reduction of insecurity in internal market trade So: Single Market forces EU institutions upon accession countries Gravity model with institutional quality to study impact

19 Open Days Brussels - October 5, EU accession and institutions CountryInst. gapExport eff. (%)Import eff. (%) Romania Bulgaria Latvia Slovak Rep Poland Estonia

20 Open Days Brussels - October 5, Sectoral disaggregation Classification by Rauch (aggregated from 4-digit SITC level) of goods into: – organized exchange (7.7%) – organized exchange exl. Petroleum (4.6%) – reference priced (14.3%) – differentiated products (50.7%)

21 Open Days Brussels - October 5, Differences in effects Control var.Org. exch. (%)Diff. prod. (%) Common language1563 Common trade area s.d. instit. quality exporter s.d. instit. quality importer s.d. in instit. distance-6-13

22 Open Days Brussels - October 5, Exports versus FDI Choice between export and local production is a trade- off between resource commitment and control: – export: little resources, little control – local production: substantial resources, much control

23 Open Days Brussels - October 5, Empirical evidence exportFDIshare Cultural distance -- Instit. quality home +++ Instit. quality foreign +++ Institutional distance -- No. of Observations R2R

24 Migration Clear negative effects of linguistic distance, religuous distance and cultural distance 1 s.d. Increase of distance results in about 15% less migration (as compared to 20% more if GDP per capita is 1 s.d. higher) Open Days Brussels - October 5,

25 Open Days Brussels - October 5, Concluding remarks Resistance towards international trade, FDI and migration partly explained by intangible factors: – quality and familiarity with institutions matter – differences in culture matter Economic effects are substantial Cultural and institutional upperbounds on integration

26 Implications for policy – I Cultural and institutional diversity is fact of life It acts as barrier to factor mobility It also results in different labour markets and trade-offs between, for example, equity and efficiency Open Days Brussels - October 5,

27 Implications for policy – II Barriers seem to be less relevant for high-skilled Heterogeneous impacts of policies requiring location- specific policies Open Days Brussels - October 5,

28 Open Days Brussels - October 5, Background Information Some own publications – The institutional determinants of bilateral trade, Kyklos, 57(1), pp , – Institutions, governance and international trade: opening the black box of OECD and GDP per capita effects in gravity equations, IATSS Research, 29 (2), pp , – Intangible Barriers to International Trade: A Sectoral Approach, in: S. Brakman and P. van Bergeijk (eds), The Gravity Model in International Trade: Adavances and Applications, Cambridge University Press, Cambridge, pp , 2010 (with J. Mohlmann, S. Ederveen and G.J.M. Linders). For further information:


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