On regional integration, fiscal income, and GDP per capita
| Published date | 01 November 2022 |
| Author | Yutao Han,Zhen Song |
| Date | 01 November 2022 |
| DOI | http://doi.org/10.1111/sjpe.12281 |
506
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wileyonlinelibrary.com/journal/sjpe Scott J Polit Econ. 202 2;69:506–532.
© 2021 Scottish Ec onomic Society
1 | INTRODUCTION
Both regional inte gration and separatio n have considerably reshap ed Europe in the last few dec ades. The project
of European integr ation, originating in the 1950s, n ow includes 27 nations. At the sam e time, some nations have
broken up includi ng Yugoslavia, Czechoslovakia, an d the Soviet Union. The vigorou s debate about the economic
Accepted: 23 Marc h 2021
DOI: 10 .1111/sjpe.1 2281
ORIGINAL ARTICLE
On regional integration, fiscal income, and GDP
per capita
Yutao Han1 | Zhen Song2
1Department of Economics, University
of Internation al Business and Econ omics,
Beijing, China
2CEMA, Cent ral University of F inance and
Economics, Beijing, China
Correspondence
Yutao Han, Dep artment of Economi cs,
Universit y of International Bu siness and
Economics, 10 Huixindongjie, Chaoyang
District, Beijing 100029, China.
Emails: yutao.han@uibe.edu.cn; yutao.
han2014@gmail.com
Funding information
The Fundament al Research Funds fo r the
Central Universities in UIBE, Grant/Award
Number: CX TD11- 01; Huiyuan Excellent
Young Scholar, Grant/Award Number:
17YQ19; Beijing Socia l Science Foundatio n,
Grant/Award Number: 18YJC017
Abstract
This paper investig ates the economic impacts of reg ional in-
tegration on a small, le ss developed jurisdiction in a d ynamic
fiscal competition environment. The trade- offs between the
economic benefit s and the loss of polic y flexibility r esult-
ing from integration ar e analyzed from the p erspectives of
fiscal revenue and G DP per capita. O ur results show th at
the small jurisdic tion's loss of flexibility in policymak ing can
dominate the other ef fects of integration. Specif ically, if the
small jurisdictio n's efficiency in p roviding public input s is
originally sufficiently high (low), regional integration always
reduces (improves) its ne t revenue, independently of the e x-
tent of efficiency improvement due to integration. However,
when the small jurisdiction's efficiency is originally interme-
diate, the impact on n et revenue crucially de pends on the
magnitude of the eff iciency effe ct. Our analysi s also char-
acterizes the tra de- offs resulting from integration b etween
policy flexibili ty on the one hand an d capital mobili ty and
fiscal equalizat ion on the other.
KEYWORDS
differential game, fiscal revenue, policy flexibility, regional
integration
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507
HAN ANd SONG
benefits fr om regional integration is ong oing.1 In the UK for example, mem bership in the EU has been cont rover-
sial since the count ry joined in 1973, and the UK finall y left the EU in 2016. Skepticism abo ut the benefits of EU
membership is a lso growing in other parts of Euro pe, while other countries, suc h as Albania, Serbia and Turkey,
have expressed in terest in joining the EU.
The general issu e of economic integration has at tracted much scholar ly effort from both empi rical and theo-
retical sides , and it is particularly r elevant for small, less adva nced economies that are fac ing a choice of whether
to integrate with ot her economies. Henrek son et al. (1997) estimat e the economic growth ef fects from EC/EFTA
membership to b e about 0.6– 0. 8 percentage po int per year. Similarly, Bad inger (2005) esti mates that the GDP
per capita of th e EU would be approximately one- fifth lower to day if no integration had taken pla ce since 1950.
Another recent s tudy by Camp os et al. (2014 ) using the synth etic counter factuals met hod finds lar ge, positive
effects f rom EU membership (wit h the exception of a negati ve one for Greece). They sh ow that per capita inc omes
would have been, on ave rage, approxim ately 12 percent low er without integ ration. Amon g the eight countri es
that joined the EU i n the Eastern enlargem ent at the beginning of this cent ury, the difference bet ween actual and
counterfac tual (without i ntegration) GDP p er capita leve ls is largest for Es tonia, Lat via and Lithuan ia, large for
Hungary, Czech Re public, and Poland, and s mall but still positive for S lovak Republic.
On the theoret ical side, a pol itical economy l iterature addr esses the ben efits and cost s of integration .2 It
mainly focuses o n the trade- off bet ween the economic advant ages of unification, which co mes from the econo-
mies of scale and co ordination in public good p rovision, and the politi cal costs of policies in a un ified country that
are less close to th e preferences of local majorit ies.3,4 In Bolton and Roland (19 97), for e xample, the reasons for
integration are t hat unification may bring ab out productive efficie ncy gains and that unifica tion eliminates fiscal
competition. In Alesina and Spolaore (1997, 2003), the trade- off mentioned above endogenously determines the
size of jurisdictions.5 For compr ehensive surveys, see Bo lton et al. (1996), Ruta (2005) and Sambanis (2006).
These studie s, however, have ignored a cost associate d with regional integration , namely the loss of the flex-
ibility in poli cymaking, w hich we take to mean mo re responsive de cision making in a ch anging economi c envi-
ronment. Cons ider, for example, a small jurisdi ction that may integrate into a la rge entity. In this paper, smallness
refers to a jurisdi ction's economic size, as r epresented by the cap ital stock employed wi thin it. Moreover, the small
jurisdictio n in our model is less ef ficient at providing pu blic services. T hese and other featur es of the small jurisdic-
tion in our model a re in keeping with less deve loped economies, a nd hence, we refer to them inte rchangeably. The
large entity is a m ore developed economy and coul d be a country consisting of some r egions or a confederation
consisting of som e member countr ies. Upon integr ation, the sma ll jurisdicti on will suffer a lo ss in policyma king
flexibilit y upon joining the latter, as we argu e below.
First, smal lness brings f lexibility, in the s ense that it perm its a jurisdic tion to react mo re actively an d move
quickly to new st ates of the world. The mai n reason is that preferen ce heterogeneity in sm all jurisdictions te nds to
be smaller (Al esina & Spolaore, 2003, pp. 4), w hich allows them to reach poli tical consensus more easil y. Kuznets
(1960), Stree ten (1993), Armst rong and Read (1995), an d Alesina and Spola ore (1997) all recogn ize that small states
1Regional inte gration could r ange from econo mic to politica l to environment al, althoug h it has typical ly taken the for m of a political ec onomy
initiative w here commercia l interests ar e the focus for ach ieving broade r socio- political and secur ity objecti ves, as define d by national
governments.
2The theoretical literature distinguishes between economic and political integration and studies their relationship. Case lla and Feinstein (2002) and
Martin et al . (2012) show that marke t integration a nd political i ntegration are c omplementa ry. Instead, in A lesina et al. (2000), econ omic and
political i ntegration ar e substitutes . In this paper, regi onal integrati on refers to any for ms of economic an d political int egration that h as the impact s
we analyze be low.
3See also Bolt on and Roland (1996).
4Desmet et al. ( 2011) quantit atively analy ze the stabili ty and breaku p of nations and ide ntify the regi ons prone to sece ssion and the cou ntries most
likely to merge .
5Sorens (2005) su ggests that la rger richer reg ions with a diff erent language a re more likely to su pport seces sionist part ies.
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