Trade and nationalism: Market Integration in Interwar Yugoslavia

Abstract: After the First World War, several countries from the Balkans merged into the Kingdom of Yugoslavia – a newly established state, which from its early existence advocated free trade. With no formal trade barriers, some improvements in transportation and similar languages spoken within the Kingdom, one could expect considerable economic market interconnectivity to emerge within the Kingdom. Integrated markets that are dependent on one another should be less incentivized to engage in military conflict. However, at the beginning of the Second World War different parts of the Kingdom ended up on different warring sides, suggesting that the markets within Yugoslavia were not connected to a point that would prevent military conflict. This paper, therefore, presents an investigation of why economic integration in the Kingdom was not fast enough to create an environment wherein the forced of market integration were strong enough to avoid inter-regional military conflict within the state. We present evidence that suggests that the nationalistic sentiments which formed political bases for the military conflict between different parts of Yugoslavia also played a role in slowing down or completely stopping the process of economic integration in the Kingdom by preventing the creation or destroying the pre-existent multi-ethnic trade networks. This analysis is undertaken by combining historical context with formal econometric estimations, and with the special emphasis on the fact that ruling elites did almost everything in their power to deter nationalistic and ethnocentric sentiments.