A Provincial View of Economic Integration

How integrated are national economies? In a world abuzz with the word globalization many might think that the answer to this question is very integrated. However, recent evidence from a number of different sources indicates that national borders are still a significant impediment to economic integration. This paper uses trade data to compare integration within and between countries, using the intertemporal approach to the balance of payments as our guide. After deriving a simple and easily implementable specification for the intertemporal trade balance, we adapt the model to allow for different levels of economic integration across groups of countries or regions. The model is applied to data on trade balances for individual Canadian provinces, differentiating integration within Canada from that between Canada and the rest of the world. Canada has relatively open internal borders and a common currency, factors which are likely to produce close integration of markets. At the same time, the markedly different economic structures and disturbances across different provinces provide significant potential for intertemporal trade. Our results indicate that economic integration is indeed high within Canada. Integration with the rest of the world, however, is considerably lower, with trade balances responding only about half as much to events in the rest of the world as they do to events within Canada. These results are interesting on both a methodological and empirical level. Methodologically, we are unaware of any other work with intertemporal models that enables one to identify zones of economic integration. Our empirical results indicate that a relatively simply intertemporal model can explain the behavior of trade balances between Canadian provinces quite well, as well as showing that national borders matter for intertemporal behavior.