The international political economy of economic integration - how international integration deters bilateral conflict

Abstract

This paper combines the economics conflict deterrence literature with the robust literature on economic integration agreements, connecting the once separate fields. This paper uses the gravity model on a panel dataset containing all of the bilateral country-pairs in the world, between 1976 and 2010, and finds evidence in favour of the capitalist peace theory hypothesis that theorises that increased trade and integration decrease conflict between trading partners. This paper constructs three additional informal integration action variables capturing monetary integration (exchange rate correlation), economic integration (consumption correlation), and political integration (UN voting similarity) – supplementing the formal economic integration agreement variable. It finds that higher levels of formal economic integration agreements and informal integration actions decrease both the level and probability of international conflict between bilateral country-pairs.