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Was Germany ever United? Evidence from Intra-and International Trade 1885 - 1933
 N
IKOLAUS
W
OLF
 
CES
IFO
W
ORKING
P
APER 
 N
O
.
 
2424
C
ATEGORY
7:
 
T
RADE
P
OLICY
 O
CTOBER 
2008
 An electronic version of the paper may be downloaded 
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from the SSRN website: www.SSRN.com
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from the RePEc website: www.RePEc.org
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from the CESifo website:
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www.CESifo-group.org/wp
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CESifo
Working Paper No. 2424
Was Germany ever United? Evidence from Intra-and International Trade 1885 - 1933
Abstract
When did Germany become economically integrated? Within the framework of a gravitymodel, based on a new data set of about 40,000 observations on trade flows within and acrossthe borders of Germany over the period 1885 – 1933, I explore the geography of trade costsacross Central Europe. There are three key results. First, the German Empire before 1914 wasa poorly integrated economy, both relative to integration across the borders of the Germanstate and in absolute terms. Second, this internal fragmentation resulted from culturalheterogeneity, from administrative borders within Germany, and from geographical barriersthat divided Germany along natural trade routes into eastern and western parts. Third, internalintegration improved, while external integration worsened after World War I and again withthe Great Depression, in part because of border changes along the lines of ethno-linguisticheterogeneity. By the end of the Weimar Republic in 1933, Germany was reasonably wellintegrated.JEL Code: F15, N13, N14, N90.Keywords: Germany, economic integration, aggregation bias, border effects.
 Nikolaus Wolf  Department of EconomicsUniversity of Warwick Coventry, CV4 7ALUnited Kingdomnikolaus.wolf@warwick.ac.uk 
The author gratefully acknowledges financial support form the Fritz Thyssen foundation,Cologne, and excellent research assistance from Katja Bruisch, David Stenzel, and Hans-Christian Heinemeyer. Thanks to participants of the Berlin Colloquium, the Verein fuer Socialpolitik, Munich 2007, and seminar participants in Zurich, Warwick, Barcelona andelsewhere, especially Stephen Broadberry, Nicholas Crafts, Volker Nitsch, Dennis Novy,Stephen Redding, Albrecht Ritschl, Daniel Sturm, Ulrich Woitek, and Fabrizio Zilibotti. Allerrors are of course my own.
 
3
Introduction
Was Germany ever united? Or for that matter the Habsburg Empire, Italy, Spain, theSoviet Union? Germany was certainly unified politically, from the day Wilhelm I was proclaimed German Emperor in January 1871. But it is much less obvious whether Germanywas then or thereafter a social and economic entity. The German state of 1871 had severalstrong regional centres besides the capital of Berlin. It was also divided culturally betweenCatholics and Protestants and between Germans and ethnic minorities (especially Poles in theeast and French in the south-west), and the economy was fragmented by the geography of resource endowments and natural trade routes. Indeed, modern historiography have oftenargued that the quest for internal “unity” to complete the political unity achieved in 1871 wasa driving force of German politics.
2
It is in fact far from obvious to what extent Germany wasever united within her external political borders. In this paper I explore the more specificquestion, whether there ever existed an integrated German economy within these external political borders.Put into a broader perspective, the paper shows that aggregation bias involved intaking states as units of analysis can be large. It also sheds light on the question of why andhow borders matter. Much empirical research in economics does of course take the politicalstate as its basic unit of analysis, and treats it as an exogenously given entity. While statisticsdesigned and collected by states often leave us little choice, this choice of units introducesaggregation bias into economic analysis.
3
For example, international comparisons of GDP per capita based on state level GDP and population data can be seriously misleading when thereare large differences in GDP or population density within a state (see the recent debate on the
2
Kehr,
 Der Primat 
, Fischer,
Griff 
, Wehler,
 Das Deutsche
.
3
For an early theoretical exposition see Theil,
 Linear Aggregation
.
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