Trade has re-emerged as a central issue in global policy debates, as governments debate not only the costs and benefits of trade, but also the underlying determinants of market integration.

Economists and economic historians have long emphasised that the expansion of markets and the resulting gains from specialisation and division of labour have been a powerful engine of economic growth. It has also been argued that unequal patterns of market development played a key role in the divergence of economic performance within Europe and across different parts of the world.

While technological change is often highlighted as a major force behind declining trade costs and growing market integration, there is increasing recognition that institutional change is equally, if not more, essential for sustaining integration over the long term. As Rodrik (2013) argues, well-functioning markets depend not just on market institutions, but also on a broader institutional framework that ensures regulation, redistribution, monetary and fiscal stability, and conflict resolution.

To inform this debate, we offer a long-run historical perspective grounded in the experiences of the former Ottoman territories in the Middle East and the Balkans. Our research traces the evolution, underlying drivers and consequences of trade integration across these regions from the 16^th to the early 20^th century (Ceylan et al, 2024).

To investigate long-run market development, we have built the most comprehensive wheat price dataset yet assembled for the Middle East and the Balkans, consisting of 2,551 annual observations for 25 cities spanning the period from 1560 to 1914. Using this evidence, drawn from archival and published sources, we track market integration through different indices, including the coefficient of variation, bilateral price gaps, pair-wise price correlations and co-movement indices. 

Findings

In terms of timing, the empirical evidence that we gather suggests that integration levels in the Ottoman lands remained low between the 16^th and 18^th centuries, before a significant increase in the 19^th century. Geographically, integration was strongest in the core regions around Istanbul and along the coasts, while interior and peripheral regions remained less integrated due to their distance from administrative and trade hubs.

Figure 1: Domestic coefficient of variation indices for the Ottoman Empire and other European states, 1560-1910

Figure 2: Bilateral price correlations between Ottoman cities, 1680-1900

Determinants of market integration

In explaining the patterns of market integration, both institutional and technological factors appear to have played roles. Before the 19^th century, Ottoman central authority weakened progressively with distance from the core regions. This decline in administrative oversight led to inconsistent measurement standards, underdeveloped transport infrastructure and sporadic local conflicts, all of which contributed to fragmented and poorly functioning markets.

Moreover, unlike many parts of Europe, most of the rivers in the Ottoman Empire were not suitable for year-round navigation and costs of overland transport, often by camel caravans, remained prohibitively high.

As a result, we find that there were large differences in the degree of integration of locations on the coast and the interior. Starting early in the 19th century, the Ottoman government launched a broad modernisation programme that strengthened state capacity and introduced sweeping legal and administrative reforms.

These institutional changes coincided with, and are likely to have contributed to, the increased levels of market integration during the 19^th century. The introduction in the steamships in the 1830s and railroads in the 1870s also contributed to market development.

Implications

The historical evidence on market integration in the Middle East contributes to several debates. For long-run market development in the Middle East, our findings suggest that there were fluctuations without a clear trend up until the 19th century. This helps to explain the limited economic progress over that period.

In terms of drivers of market integration, we find that it was not only technology but also the combination of rising state capacity and institutional reforms that reduced trade frictions and which thereby unlocked deeper commercial ties. Modern trade policy often emphasises tariff reduction and investment in physical infrastructure, but our findings suggest that these alone are insufficient. Increasing state capacity, harmonising standards, ensuring contract enforcement and reducing bureaucratic fragmentation are equally critical.

These patterns also challenge the notion that states and markets are alternative and rival mechanisms for resource allocation. Historically, the evidence suggests, states and markets complemented each other. We hope that future research will shed additional light on the relationship between the rise of state capacity and market integration.

Further reading

Ceylan, Pinar, Kivanc Karaman and Sevket Pamuk (2024) ‘Market Integration in Eastern Mediterranean and Europe from the Sixteenth Century until World War I‘, Centre for Economic Policy Research Discussion Paper No. 18883.

Rodrik, D. (2013). Roepke Lecture in Economic Geography—who needs the nation-state?. Economic Geography, 89(1), 1-19.