The Supply of Regional Integration in Developing Regions

Because the demand for regional integration in developing regions results mainly from the extra-regional effects of regional integration on the global market, the likelihood of cooperation and the supply of regional integration depend on the reactions of extra-regional actors. On the one hand, extra-regional actors may systematically reward regional integration with increasing investment inflows and preferential market access. In such cases, all regional member states profit in absolute terms from regional integration even if these gains may be distributed unevenly across the respective regions. Consequently, the member states play battles of the sexes with each other. They may negotiate the distribution of gains from regional integration, but they all have a general interest in regional cooperation, so that cooperation is likely to take place. Regional institutions may help to achieve cooperation, but they are not mandatory because package deals and issue linkages make negotiated solutions possible as well. Thus, Hypothesis 1 about regional cooperation in developing regions can be formulated as such:

Hypothesis 1: As long as regional integration is systematically rewarded by extra-regional actors, the member states ofdeveloping regions cooperate within battles of the sexes.

On the other hand, extra-regional actors may not reward regional cooperation nor punish regional defection systematically. For example, some regional member states may receive disproportionately high shares of extra-regional investments because of their huge market size. Alternatively, some member states may be able to sign bilateral trade agreements with extra-regional partners that grant them privileged access to important extra-regional markets. The more integration proceeds, the more likely it is that such privileges will be in conflict with regional cooperation, because integration necessarily reduces the differences between the regional member states. For example, investment inflows may be redirected to regional neighbour states, or bilateral trade agreements may have to be abolished when customs unions require the harmonisation of external trade regimes.

As soon as such losses of extra-regional privileges exceed member states’ gains from regional cooperation, these member states necessarily defect from regional integration and become regional Rambos.

The probability of Rambo situations increases with growing asymmetries in market size between the member states of regional organisations because member states with large markets profit less from regional integration and are more likely to gain extra-regional privileges than smaller member states. The most asymmetric situation within regional organisations exists when regions are dominated by only one regional power,² and the other member states are economically relatively unimportant. The large domestic markets of regional powers already provide possibilities for exploiting comparative cost advantages and economies of scale, and the smaller markets of neighbouring countries do not add much to this situation. Thus, whereas the smaller states need the regional powers in order to escape economic marginalisation, the regional powers themselves do not gain much in economic terms. In addition, regional powers are probably able to attract disproportionately high shares of investments and to achieve better market access to other world regions than their smaller neighbours because they represent the most attractive markets in their respective regions. When regional integration endangers such privileges, the regional powers face the risks of losing investment and trade flows to their smaller neighbours, and consequently, the regional powers become regional Rambos with a dominant strategy of defection in order to protect their extra-regional privileges. As a result, Hypothesis 2 about regional defection can be formulated as such:

Hypothesis 2: As soon as regional integration is at odds with important extraregional privileges, the regional powers of developing regions become regional