Empirical tests of economic integration and estimates of transaction costs: A study of belt and road initiative = 經濟融合的實証檢驗和交易費用的估算: 一帶一路倡議的研究
Project title
Empirical tests of economic integration and estimates of transaction costs: A study of belt and road initiative = 經濟融合的實証檢驗和交易費用的估算: 一帶一路倡議的研究
Principal Investigator
Department
Grant Awarding Body
Research Grants Council
Grant Type
Faculty Development Scheme
Project Code
UGC/FDS15/B06/20
Amount awarded
HK$798,155
Funding Year
2020-2021
Duration of the Project
24 months
Status
Ongoing
Abstract
The Chinese Government launched its Belt and Road Initiative (BRI) in 2013, with the aim of fostering economic integration among countries along the two main Belt and Road (BR) routes: the land-based Silk Road Economic Belt and the ocean-going Maritime Silk Road. The professed goal of economic integration is to develop an integrated productive and competitive region to promote trade and development and the economic prosperity of the countries along the BR, strengthen regional economic cooperation and achieve mutual learning between different civilisations. The development of transportation infrastructure can augment connectivity along the BR routes and facilitate cross-border trade and investment flows linking cities in China to Europe and Africa via Asia, the Middle East, the Balkans, and the Caucasus. In designing the BR development plan, one important precondition for success is a high level of goods and labour market integration among the BR countries. Validation of purchasing power parity (PPP) requires a high degree of trade integration and the existence of a well-integrated goods market in the economies under examination. If there are PPP relationships among the BR countries, tradable goods will flow freely among them, resulting in the integration of the goods market. Similarly, validation of factor price equalisation or wage convergence indicates free labour mobility and labour market integration. Hence, free trade and free labour mobility encourage convergence in product and labour markets. As such, when the BR countries fulfil the preconditions for closer economic integration, the BRI may call for a platform to form an economic union, and ultimately a monetary union, among China and other BR countries as a long-term policy target. However, economic disparities between the BR countries result from observable and unobservable transaction costs, which are major obstacles to goods and labour market integration within the BR zone. If the product and factor price differentials do not exceed the transaction costs, the arbitrage process that equalises prices across cities will not be activated. The presence of transaction costs thus creates a neutral band within which the relative prices are too small to induce arbitrage so that deviations from long-run PPP equilibrium are non-mean reverting. When the product and factor price differentials exceed the transaction costs outside the band, the mechanisms of product and job switching are activated, with the resulting restoration of mean-reverting long-run equilibrium. This adjustment process is characterised as threshold nonlinearity...