Towards a General Theory of Regional Cooperation and Defection

Our theoretical framework for the analysis of regional cooperation and defection starts from the assumption that there is not only one, but there are in fact two logics of regional integration. We call these the intraregional and the extra-regional logics (Krapohl and Muntschick 2009). The intraregional logic is the one that prevails in European integration theories. Here, the member states of regional organisations cooperate in order to benefit from and to regulate intraregional economic interdependence. The extra-regional logic is the one that can be deduced from the new regionalism literature. Here, the member states of regional organisations cooperate in order to achieve gains in their interactions with extra-regional actors. We argue that the cooperation problems within the extra-regional logic differ from those within the intraregional logic and that this has profound impacts on the course of regional integration.

The intraregional logic of regional economic integration builds on the creation of regional markets, that is, the liberalisation and regulation of intraregional trade. The benefits from regional integration within this logic result from the exploitation of comparative cost advantages and economies of scale through intraregional trade (Mattli 1999a). Thus, benefits are higher the more the regional member states are able to trade with each other. It is important to note that the creation of regional markets does not only include the abolition of tariffs and quotas; it may also address the abolishment of non-tariff trade barriers, the free flow of various production factors within the region, the fixing of exchange rates between the member states and the macroeconomic stabilisation of the region. Regional markets are club goods (Casella 1992; Fratianni and Pattison 2001). There is little rivalry among the member states for the consumption of these goods because intraregional trade of one member state does not reduce the utility of regional markets for other member states, and single countries can be excluded from the consumption of the goods by (re-)establishing trade barriers against them. These characteristics of club goods have positive effects for cooperation among the member states and for the provision of the good ‘regional market’ because there is little competition between the member states and defecting member states can be sanctioned by excluding them from consumption.

In contrast, the extra-regional logic of regional economic integration is based on improving regions’ competitiveness on the global market. The benefits of regional integration within this logic take the form of increasing investment inflows from other world regions (Bende-Nabende 2002; Jaumotte 2004) and of better market access to other world regions. The size and stability effects of regional integration—that is, the larger size of integrated regional markets and the political as well as macroeconomic stability of integrated regions—make regions more attractive as destinations for investments and as negotiation partners in international trade negotiations. It is important to note here that the gains from regional integration in this logic are not generated within the regions themselves but from their interaction with other world regions. Extra-regional investment and export flows are common pool resources (Hardin 1968; Ostrom 2003) for the regions concerned. Firstly, there is some degree of rivalry in their consumption because the countries of such regions not only compete with other world regions for these resources but also compete with their regional neighbours. And secondly, single member states cannot simply be excluded from the consumption of investment and export flows. Although single member states can be excluded from regional organisations, this does not necessarily imply that they are excluded from the common pool resources of extra-regional investments and exports. It is extra-regional actors who decide where to invest and whom to grant access to their markets, and these decisions may partly be independent from regional integration efforts. These characteristics of common pool resources make cooperation between regional member states more difficult because they compete with each other for extra-regional investments and exports and they alone cannot sanction defecting member states by excluding them from the consumption of these resources.

The different characteristics of the collective goods produced in the intraregional and the extra-regional logics imply that regional member states face different cooperation problems when producing these goods. Within the intraregional logic, trade liberalisation and trade regulation can be modelled respectively as a prisoner’s dilemma and as a battle of the sexes (Garrett and Weingast 1993; Krapohl 2008). When liberalising trade, each regional member state has to decide either to liberalise its domestic market or to protect its domestic producers against competition from imports from other member states. Here, each member state would prefer to protect its domestic market while simultaneously sharing in the advantages of exporting to other member states. If all member states tried to realise this interest, mutual protectionism would be the result, and the member states could not profit from regional markets. Although the prisoner’s dilemma is a problematic situation for regional cooperation, an iteration of the game (Axelrod 1984) and strong regional institutions for monitoring and dispute settlement (Pollack 1997) can help member states to cooperate and to achieve the Pareto-superior outcome of mutual market liberalisation. When regulating the resulting intraregional trade, member states probably agree about the need for common regulatory standards for traded goods, but they are likely to disagree about the concrete form of regulatory standards. Thus, they need to choose between several standards with different distributive effects. Such a battle of the sexes is also problematic because agreeing to particular policies is not a trivial task. However, issue linkages and package deals provide possible solutions, and regional institutions may help to reach agreements by setting the agenda or by allowing majority voting to take place (Pollack 1997).

Within the extra-regional logic, the games that the member states of regional organisations play depend on the behaviour of extra-regional actors. Firstly, extra-regional actors may reward regional integration so that all regional member states benefit from increasing extra-regional investment inflows and improved access to extra-regional markets. This does not necessarily imply that the extra-regional benefits of regional integration are symmetrically distributed across the region, but it does imply that all member states profit in absolute terms from cooperation. In this case, the member states play battles of the sexes. They all have an interest in regional integration, but they may disagree about the concrete form of cooperation. Issue linkages, package deals and regional institutions may help them to reach agreements. However, once agreements are reached, compliance cannot be effectively ensured by the regions themselves, but rather extra-regional actors need to sanction non-implementation with declining investment inflows and restricted access to extra-regional markets. Secondly, it may also be that regional integration leads to absolute losses for one or more member states. This happens if the respective member states are able to achieve or maintain privileges in their extra-regional relations when acting unilaterally. For example, privileged member states may enjoy disproportional extra-regional investment inflows, and regional integration may include the risk that such investments get diverted to other member states of the respective regions. Alternatively, privileged member states may have bilateral trade agreements with extra-regional actors, and these agreements may be at odds with deeper regional integration. In such circumstances, the privileged member states become regional Rambos. A Rambo situation is an asymmetrical game in which one player—unlike the other(s)—lacks any incentive to cooperate, and can only lose out if an agreement is reached. This Rambo’s dominant strategy is therefore defection (Holzinger 2003; Zurn 1992, 1993). It is important to note that regional institutions cannot help much to ensure the cooperation of Rambos because these do not defect in order to free ride on the cooperation of others (like in a prisoner’s dilemma); they instead do not have any interest in regional cooperation on the respective policy issues at all.

Developing regions profit less from the intraregional effects but more from the extra-regional effects of regional integration. Whereas well- developed regions with their diversified economies are able to profit much from comparative cost advantages and economies of scale within regional markets, developing countries, which usually depend on the export of few primary goods or labour-intensive products, do not profit that much from the liberalisation of intraregional trade (Langhammer 1992; Mattli 1999a; Robson 1993; Venables 2003). In contrast, developing regions rely heavily on extra-regional investment inflows and extra-regional export outflows when following an export-promoting development strategy. As a result, the size and stability effects of regional integration may be a valuable instrument to improve the competitiveness of developing regions on the global market. This does not imply that regional integration has no extra-regional effects for well-developed regions or no intraregional effects for developing regions, but the relative weights of the two logics differ. In fact, the importance of the intra- and extra-regional logics of regional integration correlates with economic development. The more the regional economies develop, the more important the intraregional effects become, and the extra-regional effects of regional integration become less important.

Because the demand for regional integration in developing regions mainly results from the extra-regional logic, regional integration can only be supplied as long as no regional power enjoys extra-regional privileges that are at odds with regional integration. Regional powers, that is, member states that dominate their regions in respect to economic power (Kappel 2010; Nolte 2010; Schirm 2010), profit less from the extra-regional effects of regional integration than their smaller neighbours but are more likely to achieve privileges in their extra-regional relations. Regional powers already constitute large and attractive markets on their own, so the additional effects of regionally integrated markets are comparatively low. Regional powers are already the most attractive partners for extra-regional economic actors, and this may lead to privileged extra-regional relations in comparison with their smaller regional neighbours. In order to protect such extra-regional privileges, regional powers are more likely than their smaller neighbours to become regional Rambos. In contrast to the argument of Mattli (1999a), which states that the existence of regional hegemons is supportive of successful regional integration, our argument points to the fact that regional powers in developing regions do not always behave benevolently, but rather may become regional Rambos with a dominant strategy of regional defection. Despite the fact that they often claim regional leadership for themselves, they may act against their intraregional interest in order to protect their more important extra-regional privileges. Thereby, regional powers become more an obstacle than a backer of regional economic integration.

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