The Demand for Regional Integration in Developing Regions

It is often stated in the academic literature that the economic gains of intraregional trade correlate positively with economic development, and that they are much smaller for developing regions than for well-developed regions (Langhammer 1992; Robson 1993; Venables 2003). In order for increasing intraregional trade to produce economic gains for the member states, the latter need to be able to utilise comparative cost advantages and economies of scale by trading with each other (Mattli 1999). And yet, such economic advantages can only be exploited if the factor endowments and production structures of the member states are diversified and complementary to each other. The problem is that developing countries and emerging markets rely on the export of labour-intensive goods and on a few primary products like raw materials and agricultural goods. The neighbouring countries in developing regions are usually not able to consume these goods or to process them further. Moreover, regional neighbours may even compete with each other by exporting similar products. Even if tariffs and non-tariff trade barriers were completely abolished in developing regions, intraregional trade would remain low in the short run because the regional economies cannot trade with each other. Only in the long run, when regional economies develop and diversify further, may intraregional trade increase to levels similar to that in well-developed regions. But so far, the main export markets for developing countries are well-developed countries in other world regions. This dependence of developing countries has been stressed by scholars of dependency theory during the 1960s and 1970s (Cardoso and Faletto 1979), and even if the policy advice of this literature is somewhat outdated, their empirical findings are supported by economic analyses (Hout and Meijerink 1996; Smith and White 1992; Van Rossem 1996).

Even if the intraregional gains from regional integration are lower in developing regions than in well-developed regions, developing countries and emerging markets may profit from the extra-regional effects of regional integration. Since import substitution failed to generate economic development during the 1950s to 1970s (Krueger 1997), many developing countries and emerging markets have followed an export-promoting development strategy (Bhagwati 1988) during and since the 1990s. At the core of such a (neo-)liberal strategy are the attraction of investments and the increase of exports in order to create economic activity and growth. Developing countries and emerging markets compete with each other for investment and export shares, and regional integration may be one instrument to improve one’s own competitiveness within that struggle. Regional integration has size and stability effects for developing countries and emerging markets. Thus, integrated developing regions should ceteris paribus attract more market- and efficiency-seeking investments from other world regions than the single member states would do on their own. In addition, integrated regions should ceteris paribus gain more leverage in global or interregional trade negotiations than each of their member states would, which may improve the regions’ access to important extraregional export markets.

Because extra-regional economic relations are more important for developing regions than intraregional ones, regional cooperation within such regions is to a large degree motivated by its extra-regional effects. Mattli (1999) argues that regional integration in developing regions is doomed to fail because developing regions cannot exploit significant comparative cost advantages and economies of scale through intraregional trade. Thus, according to Mattli, the demand for regional integration in developing regions is necessarily low. However, this argument neglects the positive extra-regional effects of regional integration. These positive extra-regional effects may lead to demands for regional integration, even if this demand is different from that in well-developed regions. Developing regions do not integrate in order to exploit comparative cost advantages and economies of scale through increasing intraregional trade but do so in order to improve their competitiveness on the global market by generating size and stability effects.

The dominance of the intraregional logic in well-developed regions and of the extra-regional logic in developing regions does not imply that well-developed regions cannot profit from the extra-regional effects of regional integration, or that developing regions cannot profit from the intraregional ones. The intra- and extra-regional logics of regional integration are not mutually exclusive, but the relative weights of the two logics differ between world regions. Well-developed regions like Europe may well attract more extra-regional investments or may achieve advantages in international trade negotiations with other world regions when they constitute large and stable regional markets, but it is unlikely that these effects will weigh more than the gains from liberalised trade and the resulting intraregional economic interdependence. Thus, in cases where the member states have to choose between their intra- and extra-regional interests, the former are likely to prevail. Developing regions may also profit from increasing intraregional trade due to regional integration, but it is unlikely that this intraregional trade will become important enough to trump dependence on extra-regional investments and exports—at least in the short run, as long as the participating economies have not developed and diversified any further. In fact, the more developed that regional economies are, the more important intraregional effects become and the less important are the extra-regional effects of integration.

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