22143 ~ UNDP-WORLDBANK December1991 TRADEEXPANSION PROGRAM OCCASIONALPAPER 7 Public Disclosure Authorized Public Disclosure Authorized REGIONAL INTEGRATION AMONG DEVELOPING COUNTRIES SURVEY OF PAST PERFORMANCE AND AGENDA Public Disclosure Authorized FOR FUTURE POLICY ACTION Rolf J. Lan;hammer and Ulrich Hiemenz The Kiel Institute of World Economics Public Disclosure Authorized FILECOPY Thisoccasional paper is a productof the jointUNDP/World Bank Trade Expansion Program which provides technicaland policy advice to countiesintending to reformtheir traderegimes. The views contained herein are tose ot the aufors anddo not necessarilyreflect those ot the UnitedNabons Development Programme or the WorfdBank. REGIONAL INTEGRATION AMONG DEVELOPINGCOUNTRIES: Survey of Past Performance and Agenda for Future Policy Action Rolf J. Langhammerand UlrIch Hlemenz The Kiel Institute of World Economics December 1991 Trade Policy Division The World Bank Washington, D.C. Summary Experience with regional integrationamong developingcountries over the past twenty-fiveyears has been far from satisfactory. Most integrationschemes were based on the European Economic Communitymodel and failed to meet their own targets for the establishmentof free trade areas or customs unions. Tariff preferenceswere biased toward costly trade diversion based on regional import-substitutionstrategies instead of increasedcompetition between domesticproducers and regional suppliers. Distributionalconflicts broke out in most regional schemes as less developed partners began to view themselvesas net losers from integration. These countries then either imposed unilateral import restrictionsto intraregionaltrade or demandedsubstantial compensation. Nor did the regional integrationschemes lead eventuallyto increasedtrade outside the region-the training ground argumentfor openingmarkets to regional competition. Nor was success much greater in achievingother, more modest goals. Clearing and credit arrangement cured symptoms,at best, while failing to contributeto savings in foreign exchangeor to more balanced intraregionaltrade. Regional industrialplanning, designed in some schemes as a complementto integrationand in others as a substitute,failed to take off as well. Most projects were never implementedand the remainder collapsedafter a short time under the weight of disputes over management,location, financing, and purchase guarantees. ln the end, equity constraints dominatedefficiency criteria, and concerns for national sovereignty proved stronger than the desire to submit economicpolicies to supranationaldiscipline. Recent attempts to revitalize integration schemesare concentratingon looser, less binding and more bilaterallyoriented approaches. Greater opportunitiesseem to lie in cooperation than in more traditional models of economicintegration. Cooperationprojects should be initiatedby countries through bilateral negotiations,but should also remain open to other member countries. Particularly u1 promising areas of cooperationare in regionalpublic goods, such as defense, environmental protection, and training, as well as in supranationalefforts in human capital formation and instituti)n building. But regional cooperation,like regional integrationbefore it, will fail unless countries male the courageousand consistentreforms needed to open their markets. ,_i Table of Contents Summary ii Abbreviations v Integrationand Cooperation 1 Argumentsfor RegionalIntegration 2 RegionalIntegration Schemes in Operation 5 RegionalIntegration in Latin America 8 The Latin AmericanFree Trade Association 8 The Latin AmericanIntegration Association 10 The AndeanPact 14 The Central AmericanCommon Market 17 The CaribbeanCommunity 20 RegionalIntegration in Sub-SaharanAfrica 21 Current Conditionsfor Integrationin Sub-SaharanAfrica 21 The West African EconomicCommunity 21 The Economic Communityof West African States 23 The Central African Customsand EconomicUnion 24 The East African Community 26 The Southern African DevelopmentCoordination Committee 27 The Preferential Trade Area of Eastern and SouthernAfrican States 28 Regional Integrationin the Middle East and Asia 29 CooperationSchemes 29 The Associationof SoutheastAsian Nations 30 Recent Changes in RegionalIntegration 32 Agenda for Policy Action 33 Promoting CooperationRather Than Integration 33 Support for Economic Cooperation 34 Bibliography 38 IV Abbreviations ASEAN Associationof SoutheastAsian Nations CACEU Central African Customs and Economic Union CACM Central AmericanCommon Market CARICOM CaribbeanCommunity EAC East African Community ECOWAS Economic Communityof West African States GCC Gulf CooperationCouncil LAFIA Latin AmericanFree Trade Association LAIA Latin AmericanIntegration Association PTA Preferential Trade Area of Eastern and SouthernAfrican States RCD RegionalCooperation for Development SAARC South Asian Associationfor RegionalCooperation SADCC Southern African DevelopmentCoordination Committee WAEC West African Economic Community _ ~~~~~~~~~~~~~~~~~~~~~~~~~~v Integration and Cooperation Developingcountries have been involved in regional integrationefforts for almost three decades. Although it often remained open whether regional integrationwas an instrumentor the target of policy, views were almost all positive. Voicesopposing regional integrationwere rare, and most politicians argued that "cooperation,"a term often used interchangeablywith regionalism,contributed to economicdevelopment. Despite considerabledifferences in the historical roots of integrationactivities among different regions of the developingworld, early approachesto integrationhad in commona lack of conceptual clarity and a tendencyto apply inappropriatetheoretical models. Regional integration was simultaneouslylabelled a process and a condition, and discussionsoften confusedthe concepts of integration and cooperation. These concepts are not the same, however, and need to be distinguished (Balassa 1976). Integrationaims at abolishingdiscrimination between local and foreign goods, services, and factors. It is a process with at least four stages: free trade area, customsunion, common market, and economic union. This sequence of stages is not immutable,but experiencesuggests the value of starting integration by having partner countries remove barriers to trade among each other while each maintains its national tariff against nonmembercountries (free trade area). The second stage, which builds on the first, is the establishmentof a common external tariff against nomember countries (customsunion). Liberalizationof the movementof factors of production within the customs union then moves the customs union to the common market stage, while harmonizationof remaining national economicpolicies characterizesthe fourth stage, the economicunion. Finally, countries may opt for total economicintegration with a supranationalauthority (Balassa 1962, 2). 1 By contrast, cooperationentails concertedaction aimed at lessening discriminationin certain areas of common interest. Cooperationis clearly much more limited in scope than integration. A second element of conceptualconfusion can be termed the 'fallacy of transposition." Governmentsof developingcountries tried to take as a model the European Economic Community, which implementedthe first two stages of integration simultaneouslybetween 1957 and 1968. Developingcountries misunderstoodthis process, viewing it as a case of limited cooperation with no relinquishmentof national sovereignty,and tried to replicate it. However, developingcountries overlookedthat fact that many of the initialconditions in Europe that were particularly conducive to integration did not exist among developingcountries, for example, an initial high level of intraregionaltrade, congenialityof foreign policy, capabilityand willingnessto provide compensarion payments, and similaritiesin income and industrializationlevels, which enabled intraindustry specialization. It has taken quite some time for developingcountries to become aware of the nonreplicabilityo)f the European experienceand to draw appropriatelessons for their own efforts at regional integration. This paper examineswhy the European way to integrationdid not work in developingcountries a,rui suggests alternativeavenues to integrationand cooperationthat might be pursued more successful]y. Argumentsfor Regional Integration Several argumentshave been presented for the economicbenefits developingcountries can expect to gain from regional integration. Some of the more prominent arguments are discussed in the followingparagraphs. * The Training Ground Argument. The Vinerian customsunion theory (Viner 1950) prese its two short-run, once-and-for-alleffects of the liberalizationof intraregionaltrade: the replacement of domesticproduction with imports from partner countries (trade creation) and the replacementof 2 imports from nonmembercountries with those from member countries (trade diversion). Both effects emerge as a result of the liberalizationof trade among members and changes in the relative prices of imports from member countries and from nonmembercountries. Policymakersin developingcountries and many scholarsdealing with issues of regional integration among developingcountries dismissed the Vinerian conclusionas irrelevant for the conditions prevailingin the third world (for example, idle capacities).They viewed intraregionaltrade expansion as beneficialin itself and even advocatedtrade diversion (see, for example, Linder 1966 or Jaber 1970 and the literature cited there). Their argumentswere in large