On the origins of border effects: insights from the Habsburg Empire

Abstract

What are the origins of border effects on trade and why do borders continue to matter in periods of increasing economic integration? We explore the hypothesis that border effects emerged as a result of asymmetric economic integration in the unique historical setting of the multinational Habsburg Empire prior to the First World War. While markets tended to integrate mainly due to improved infrastructure, ethno-linguistic networks had persistent trade diverting effects. We find that the political borders which separated the empire's successor states after the First World War became visible in the economy from the mid-1880s onwards, already 25-30 years before the First World War. This effect of a 'border before a border' cannot be explained by factors such as administrative barriers, physical geography, changes in infrastructure or patterns of integration with neighbouring regions outside of the Habsburg customs and monetary union. However, controlling for the changing ethno-linguistic composition of the population across the regional capital cities of the empire does explain most of the estimated border effects.

Till localism do us part: Cultural identity and the costs of separation

“…Indeed, the latter may end up shunning the former. This idea is consistent with the findings in Suesse () from the collapse of Soviet Union, and Schulze and Wolf () from the Habsburg Empire, which emphasize the relevance of ethno‐linguistic factors for trade networks. Thus, the “marginal cost” of local cultural attitudes becomes higher when the weight of the domestic market is large, relative to international trade.…”

Is the Border Effect an Artefact of Geographical Aggregation?

“…Researchers have followed four different routes to solve the border puzzle. First, some authors (Rauch, 2001; Combes et al, 2005; Shulze and Wolf, 2009; Nitsch and Wolf, 2009) argue that large border effects should not constitute a puzzle, because information barriers increase gently the costs of doing business not only for partners located in different countries but even for patterns located in different regions within a country. Second, other authors point out that even when trade costs were low, a large elasticity of substitution between domestic and foreign goods may lead to large home‐bias effects (Evans, 2003).…”

The Empire is Dead, Long Live the Empire! Long‐Run Persistence of Trust and Corruption in the Bureaucracy

“… For historical background on different economic aspects of the Habsburg Empire, see, for example, Good (), Komlos (), and Schulze and Wolf (, ). …”