THE WZORLDBANK Public Disclosure Authorized BCONOMVICREVIEW ume 12 \I. Lbs _ l UMON REGIONALISMAND DEVELOPMENT Public Disclosure Authorized _ = c cs and Politics in Regional Integration _rrangements: An Introduction aurice Schiffand L. Alan Winters _egionalism: An Analysisof Nontraditional s from Regional Trade Agreements e uel Fernandez and Jonathan Portes _rrangementsand Industrial Development lgo Puga and Anthony J. Venables - ial Integration and Economic Growth Athanasios Vamvakidis Public Disclosure Authorized 'egional Integration as Diplomacy aurice Schiff and L. Alan Winters *.- s * Tariff Formation: The Case of Mercosur *rcelo Olarreaga and Isidro Soloaga A REVIEWESSAY _uryof Development Economics: A Review _=e * he Handbook of Development Economics Jean Waelbroeck Public Disclosure Authorized 15s\()AWNE /)_.)XA-() THE WORLD BANK ECONOMIC REVIEW EDITOR Moshe Syrquin CONSULTING EDITOR Sandra Gain EDITORIAL BOARD Kaushik Basu, Cornell University and Universitv of Delhi David Dollar Francois Bourguignon, DELTA, Paris Gregory K. Ingram Willem H. Buiter, University of Cambridge Lant H. Pritchett Gerald K. Helleiner, University of Toronro Jacques van der Gaag Mark R. Rosenzweig,University of Pennsylvania John Williamson L. Alan Winters The World Bank Economic Review is a professional journal for the dissemination of World Bank- sponsored research that informs policy analyses and choices.It is directed to an international readership among economists and social scientists in government, business, and international agencies,as well as in universities and development research institutions. The Review emphasizespolicy relevance and opera- tional aspects of economics,rather than primarily theoretical and methodological issues.It is intended for readers familiarwith economic theory and analysisbut not necessarilyproficient in advancedmathematical or econometric techniques. Articles will illustrate how professional research can shed light on policy choices. Inconsistency with Bank policy will not be grounds for rejection of an article. Articleswill be drawn primarily from work conducted by World Bank staff and consultants. 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This journal is indexed regularly in Current Contents/Social& Behavioral Sciences,Index to Interna- tional Statistics, Journal of Economic Literature, Public Affairs Information Service, and Social Sci- ences Citation Index". It is available in microform through University Microfilms, Inc., 300 North Zeeb Road, Ann Arbor, MI 48106, U.S.A. THE WORLD BANK ECONOMIC REVIEW Volume 12 May 1998 Number 2 A SYMPOSIUM ON REGIONALISM AND DEVELOPMENT Dynamics and Politics in Regional Integration 177 Arrangements: An Introduction Maurice Schiff and L. Alan Winters Returns to Regionalism: An Analysis of Nontraditional 197 Gains from Regional Trade Agreements Raquel Fernindez and Jonathan Portes Trading Arrangements and Industrial Development 221 Diego Puga and Anthony J. Venables Regional Integration and Economic Growth 251 Athanasios Vamvakidis Regional Integration as Diplomacy 271 Maurice Schiff and L. Alan Winters Endogenous Tariff Formation: The Case of Mercosur 297 Marcelo Olarreaga and Isidro Soloaga A REVIEW ESSAY Half a Century of Development Economics: A Review 323 Based on the Handbook of Development Economics Jean Waelbroeck A SYMPOSIUMON REGIONALISMAND DEVELOPMENT This symposium draws on papers originally prepared as part of the World Bank Development Economics Research Group's research program on regionalism and development. The articles in the symposium, which focus on dynamics and politics, were refereed in the usual way. The Editorial Board invited Maurice Schiff and L. Alan Winters, who led the research project, to write an introduc- tion to the symposium. THE WORLD BANK ECONOMIC REVIEW, VOL. 12, NO. 2: 177-95 Dynamics and Politics in Regional Integration Arrangements: An Introduction Maurice Schiff and L. Alan Winters Overwhelmingevidence links opennessand economicgrowth. In recentyears many developingcountries have attemptedto liberalizetheir tradeand investmentregimes, mostly throuighautonomous unilateral liberalization. At the same time, a growing numberof governmentshave begun to exploreand participate in regionaltrading agree- ments. The agreementsgrant reciprocaltrade preferencesto participatingcountries, resultingin discriminrationagainst nonmembers. The causesand consequencesof regionalintegration have given riseto an extensive and vigorousdebate among both scholarsand policymakers.However, the qualityof this debatehas beenseriously hampered by the absenceof clearanalytical models and empiricalevidence on many of the factorsunder discussion.Few of the recentargu- ments in favor of regionalintegration arrangements have been satisfactorilyformal- ized or tested. To addresssome of these issues,a WorldBank researchprogram fo- cuseson new and developingcountry aspectsof regionalism.The programexplores iacunaein the traditionalstatic analysis of regionalintegration arrangements; addresses the dynamiceffects of integration,the economicsof deepintegration, and the politics and politicaleconomy of regionalintegration arrangements; and comparesregional- ism with multilateralism.The articlesin this symposiumaddress the topicsof dynami- ics, politics,and politicaleconomy in regionalintegration agreements. Overwhelming evidence links openness and economic growth. In recent years many developing countries have made efforts to liberalize their trade and invest- ment regimes. To a great extent these reform efforts have been consistent with the policy prescriptions that emerge from economic first principles: trade barri- ers should be low, more or less uniform across sectors, transparent, and nondiscretionary and should operate through the price mechanism. Most devel- oping countries have sought to apply these principles through a process of au- tonomous unilateral liberalization. At the same time, a growing number of governments have begun to explore and participate in regional trading agreements. The agreements grant reciprocal trade preferences to participating countries, resulting in discrimination against nonmembers. Indeed, nearly every country in the world is a member of-or in the process of discussing participation in-one or more regional integration ar- Maurice Schiff and L. Alan Winters are with the Development Economics Research Group at the World Bank. This symposium is made up of articles that were originally prepared as part of the group's research program on regionalism and development. ©i1998 The International Bank for Reconstruction and Development/THEWORLD BANK 177 178 THE WORLD BANK ECONOMIC REVIEW, VOL. 12, NO. 2 rangements (RIAs),and some 55 to 60 percent of world trade now occurs within such trading blocs. Although most preferential trading arrangements are regional in the geographical sense, this is not necessary for