The Institutional and Cultural Determinants of European Integration Henri L.F. de Groot Dept. of...

The Institutional and Cultural

Determinants of European Integration

Henri L.F. de Groot

Dept. of Spatial Economics Vrije Universiteit Amsterdam

Outline

Background – ‘mystery of missing integration’

Multiple dimensions of distance

Some evidence

Policy implications

Open Days Brussels - October 5, 20102

Some background – I

Modelling of interaction going back to Newton’s law of gravity

Interaction function of mass and distance

Basic application of this model results in ‘mystery of missing interaction’



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)

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



Roadmap for this presentation

Discuss evidence on the existence and effect of cultural and institutional barriers

Focus on three aspects– Trade– Capital (FDI)– Migration


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


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


Data on governance: an illustration

VA PS GE RQ RL CC

NLD 1.61 1.48 1.84 1.50 1.67 2.09

USA 1.24 1.18 1.58 1.19 1.58 1.45

COL -0.41 -1.36 -0.38 0.02 -0.77 -0.39

Mean

(s.d.)

0.22

(0.92)

0.15

(0.88)

0.14

(0.92)

0.18

(0.79)

0.16

(0.95)

0.09

(1.00)


Cultural indicators

Power distance Individualism-collectivism Masculinity-femininity Uncertainty avoidance

Source: Hofstede, 2001


Data on culture: an illustration

PD UA Ind Masc Long-term

NLD 38 53 80 14 44

USA 40 46 91 62 29

PRT 63 104 27 31 30

Mean

(s.d.)

56.8

(21.8)

65.5

(24.3)

43.1

(25.4)

48.7

(18.3)

41.3

(21.6)

Distance from average in Europe


13 Open Days Brussels - October 5, 201013

Illustration: CD Netherlands versus rest

0 0.5 1 1.5 2 2.5 3 3.5 4

Finland Zweden

Denemarken Luxemburg

Verenigde Staten Duitsland

Verenigd Koninkrijk Ierland

Frankrijk Tsjechië

Italië Spanje België Polen

Hongarije Oostenrijk

Portugal Griekenland


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’


Trust of Dutch in other countries

2 2.25 2.5 2.75 3 3.25 3.5

Italië

Griekenland

Spanje

Frankrijk

Tsjechië

Hongarije

Portugal

Polen

Ierland

Duitsland

Oostenrijk

Verenigde Staten

Verenigd Koninkrijk

België

Finland

Denemarken

Luxemburg

Zweden


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


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%


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


EU accession and institutions

Country Inst. gap Export eff. (%) Import eff. (%)

Romania 1.49 93 59

Bulgaria 1.21 71 46

Latvia 0.97 53 35

Slovak Rep. 0.88 48 32

Poland 0.74 38 26

Estonia 0.48 24 16


‘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%)


Differences in effects

Control var. Org. exch. (%) Diff. prod. (%)

Common language 15 63

Common trade area 186 88

1 s.d. instit. quality exporter -36 108

1 s.d. instit. quality importer 11 60

1 s.d. in instit. distance -6 -13


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


Empirical evidence

export FDI shareCultural distance - -

Instit. quality home + + +

Instit. quality foreign + + +

Institutional distance - -

No. of Observations 2927 723 723

R2 0.73 0.68 0.28

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)



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

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


Implications for policy – II

Barriers seem to be less relevant for high-skilled

Heterogeneous impacts of policies requiring location-specific policies



Background Information

Some own publications – The institutional determinants of bilateral trade, Kyklos, 57(1), pp. 103-

124, 2004.– Institutions, governance and international trade: opening the black box

of OECD and GDP per capita effects in gravity equations, IATSS Research, 29 (2), pp. 22-29, 2005.

– 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. 224-251, 2010 (with J. Mohlmann, S. Ederveen and G.J.M. Linders).

For further information: [email protected]

The Institutional and Cultural Determinants of European Integration Henri L.F. de Groot Dept. of...

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