DP11159 Globalization and Political Structure
This paper develops a theoretical framework to study the interaction between globalization and political structure. We show that political structure adapts in a non-monotonic way to technological progress that expands opportunities for global trade. Borders hamper trade. At an earlier stage, the political response to expanding trade opportunities consists of removing borders by increasing country size. At a later stage,
however, the political response to expanding trade opportunities is to remove borders by creating international unions, and this leads to a reduction in country size. Moreover, negotiation replaces war as a tool to ensure market access. These predictions are consistent with historical evidence on trade, territorial expansion and war.