Does Trade Integration Contribute to Peace?

From a paper by Jong-Wha Lee & Ju Hyun Pyun. The abstract

We investigate the effect of trade integration on interstate military conflict. Our empirical analysis, based on a large panel data set of 243,225 country-pair observations from 1950 to 2000, confirms that an increase in bilateral trade interdependence significantly promotes peace. It also suggests that the peace-promotion effect of bilateral trade integration is significantly higher for contiguous countries that are likely to experience more conflict. More importantly, we find that not only bilateral trade but global trade openness also significantly promotes peace. It shows, however, that an increase in global trade openness reduces the probability of interstate conflict more for countries far apart from each other than it does for countries sharing borders. The main finding of the peace-promotion effect of bilateral and global trade integration holds robust when controlling for the simultaneous determination of trade and peace.

From the conclusions

Our findings also suggest that trade integration not merely results in economic gains, but can bring about significant political gains as well—such as a peace dividend between trading partners. It also explains why economic integration, whether regional or global, is often initiated to satisfy political and security motives. For example, the raison d’etre behind the formation of the European Union following World War II was the desire for peace—particularly between France and Germany. Further research on quantitative assessments of peace dividends resulting from economic integration would be of great interest. (p. 23).

A stronger version of that argument is the movement of people. Besides some studies that look at migration and peace within countries, I have not seen studies linking migration flows and peace among countries and regions - a nice research topic. 

Trust and Development: Full Circle?

I recently posted abstracts of two articles on trust: One reports that trust affects economic development via 1) institutions and the rule of law, and 2) education. According to  another one trust explains almost half of the variation of entrepreneurship activity in a sample of countries [a friend said this is a full circle for a theory of economic development]. 

In the latest number of the QJE, Bloom, Sadun and Van Reenen have a new article titled "The Organization of Firms Across Countries" (a draft is here), and they say:

We argue that social capital as proxied by regional trust and the Rule of Law can improve aggregate productivity through facilitating greater firm decentralization. We collect original data on the decentralization of investment, hiring, production and sales decisions from Corporate Head Quarters to local plant managers in almost 4,000 firms in the US, Europe and Asia. We find Anglo-Saxon and Northern European firms are much more decentralized than those from Southern Europe and Asia. Trust and the Rule of Law appear to facilitate delegation by improving co-operation, even when we examine "bilateral trust" between the country of origin and location for affiliates of multinational firms. We show that areas with higher trust and stronger rule of law specialize in industries that rely on decentralization and allow more efficient firms to grow in scale. Furthermore, even for firms of a given size and industry, trust and rule of law are associated with more decentralization which fosters higher returns from information technology (we find IT is complementary with decentralization). Finally, we find that non-hierarchical religions and product market competition are also associated with more decentralization. Together these cultural, legal and economic factors account for four fifths of the cross-country variation in the decentralization of power within firms.

It seems then that trust is extremely important for economic development (and this is very old news). The questions are: Where does trust come from? And how individuals in a society can increase trust levels? Could we import or export trust? 

In the book Making Democracy Work (1994) Robert Putnam argues that northern Italy is more developed than the south because it had associations and clubs that created trust and social capital. And he indicates that the associations, clubs, etc., came from guilds that existed during the dark ages, and we don't know much beyond that . . . 

Interestingly it seems that trust comes from peace. Societies should look for peace first and trust will follow. Not surprisingly Adam Smith was right regarding the requirements for prosperity: rule of law, low taxes, and peace. He did not talk about trust but probably understood that peace is a prerequisite for it. 

The Peace Dividend

The story:

Conflict is expensive. People die and it gets messy. There is a "peace dividend" (Steven Pinker explains it here) which opposing parts can gain if they cooperate with each other and trust one another. The division of labor helps promote cooperation and trust. 

High homicide rates in Latin America is partially explained by conflict among drug cartels and its effects. Drug prohibition in Latin America limits the division of labor, reduces cooperation, and lowers trust (Adam Smith). Eliminating (or reducing) prohibitions can make peace more valuable than conflict. For selfish reasons.

See more on the relation "division of labor" --> "cooperation" --> and "trust" in this review of Paul Seabright's book The Company of Estrangers, in the section "evolutionary affairs."