Faced with the developmental challenges of the planet, world leaders have often found that a concerted response tends to work better. The idea of interdependence is ripe in today’s world. We have put behind us the counterproductive ideologies governing the trade wars of 1930s and the economic nationalism of the 1970s, and liberalization has come a long way. The benefits of multilateral free trade might not be a given, but with globalization in no position to abate, more and more countries seek integration into the global economy.
But multilateralism is not the only form of globalization. In part due to their geographical proximity, countries have always found regional integration a logical means to growth. Scholars have for long debated whether regionalism threatens or reinforces WTO-governed multilateralism. And the nature of that debate is technical and also deeply political at the same time.
While there is a need to appreciate the complimentarity between the two, regional agreements do end up slightly distorting the global market, because some form of specialised treatment is now reserved for a group of countries who form a regional bloc.
But this apparent distortion in fact goes on to partly salvage the deeply uneven phenomenon that is western-led globalization. As a matter of fact, the ILO in a report remarks that regional groupings can ensure a ‘fairer globalization.’ Indeed the fact that the benefits of global free trade are not particularly equitably shared across geographies is one of the reasons why regional integration has caught the fancy of leaders in the global South.
Apart from acting as a counterbalance to lopsided North-South trade relations, it must be acknowledged that regional integration in the global South is as much about geopolitical strategising as it is about growth and development of a region. Ideally foreign policy and domestic development cannot really be decoupled. But foreign policy moves are not guided by concerns of human development alone. They are also about gaining and retaining power in the international relations forum. Accordingly, regional groupings are also about registering the claim to a collective and bigger say at global high tables.
So when Association of South East Asian Nations (ASEAN) nominates and backs one of its member-states for a UNSC seat or there is a joint COMESA (Common Market for East and South Africa) position on global climate change talks, we recognize the geopolitical angle to regional integration. And it is no secret – in fact a stated purpose of regional groupings.
These groupings have served to provide dynamism to these regions by not just boosting trade and investment among them (i.e., intra-regional trade), but also developing inter-regional trade, i.e. trade among regional groupings (e.g. ASEAN-EU FTA) and with other sovereign states (e.g., EU-India FTA).
Efforts at regional integration are expected to help realise much of the untapped potential of a region. It is hoped for instance that regional economic integration (henceforth, REI) will ‘save’ Africa, home to much of the world’s impoverished population.
The crux of the argument is that REI boosts trade, and consequently attracts investment to the region as a whole. Even as resources and markets are pooled, economic activity grows resulting in rising employment and development. Regional trade also involves local producers in member-states more directly. Besides, regional trade can help firms create local/regional value chains as a building block for potential international competitiveness. And institutional support can help local producers upgrade in the value chain.
Many regional integration efforts take the shape of free trade agreements (FTAs) but these days countries join to form comprehensive economic partnerships that include agreements on not just on trade, but investment, labour and the environment, among others.
Numerous FTAs have been signed in Africa; some of them are in effect. FTAs continue to grow at an even more rapid pace in the Asia-Pacific region where 113 regional FTAs are currently in effect. SAFTA (abbreviation for the FTA signed by SAARC in 2004) aims to record $40 bn worth of trade by 2015.
A better known free trade agreement is the one entered into by ASEAN which is heralded as a beacon for regional integration in the South. Figures pertaining to the ASEAN FTA or AFTA offer a glimpse into what regional economic integration is capable of achieving. In a mere two years time, from 2009 to 2011, intra-ASEAN trade went up four times even as tariffs fell rapidly.
Compared to Asia-Pacific’s successful integration, African integration has a long way to go, but intra-African trade did rise noticeably, from $50 bn in 1995 – following the establishment of the COMESA in 1994 – to $130 bn in 2011 (UNCTAD figures).
Along the way, COMESA deepened its economic cooperation through FTAs and investment pacts. Negotiations are currently under way to finalise a grand FTA involving COMESA, the East African Community (EAC) and South African Development Community (SADC) known as the COMESA-EAC-SADC tripartite FTA (TFTA). Taken together, the regions involving AFTA, TFTA and SAFTA together comprise almost 3 bn people.
The impact of regional free trade on development and poverty reduction however is less obvious. A study pertaining to ASEAN, and rooted in empirical inquiry, suggests that the impact is quite significant and it applies to even the less powerful in the bloc, namely Cambodia, Laos, Thailand and Vietnam. The benign effects of intra-ASEAN trade on poverty reduction are actually already documented. But, for all its developmental achievements, countries have also suffered from regional trade agreements.
Vietnam for instance is known to have had to bear the brunt of AFTA, thanks to its goods failing to compete regionally. Among a set of policy recommendations that a Center for ASEAN Studies report had for the Vietnamese government were efforts by the state to cooperate with the private sector to increase the competitiveness of its domestic industries.
In Africa too, the benefits of REI are not unqualified where discrepancies between member-states reflect internal power struggles. Zimbabwe for instance maintains dominance over intra-COMESA exports while investments tend to concentrate on a few advanced economies within COMESA. A study concluded that Sudan, a weak COMESA state, gained little from REI as Sudan’s integration into COMESA led to unemployment and rising poverty while agriculture and manufacture went on to suffer from negative growth. An effective state geared to create the preconditions for reaping the benefits of REI is the need of the hour, the paper argues. In this case, Sudan could not for instance compete in the import/export market on both quality and price and value chain upgradation remained a pipedream.
Strictly empirically speaking, the welfare effects of regional trade in Africa also varied significantly between member states, wherein Tanzania seemed to have done considerably better than the rest. Ultimately then, it all boils down to the question of under what institutional circumstances do trade and foreign investment benefit LDCs and developing countries.
Regionalism among emerging economies might very well be rooted in both a sense of political and cultural affinity and the fact that these economies broadly stand at the same stage of economic development. But Regional Trading Agreements themselves are of little developmental value if the member states don’t complement openness with the right set of policies.
In short, state capacity is a prerequisite, and REI and regional FTAs will not itself take care of issues of unemployment, poverty and malnutrition. There are some direct targeted ‘anti-poverty’ programmes but their scale is nowhere close to the sheer magnitude of maldevelopment in major parts of Asia and Africa.
Also, regional blocs are not monolithic entities. Formed as they are of sovereign territories, the groupings are often a divided house. Moreover within these blocs itself, there’s powerplay to the effect that some member-states are relatively less influential. For instance, India is accused of acting like the big brother in SAARC, much like Germany is in the EU.
While developing countries are doing the right thing by involving themselves in regional groupings, the potential gains to REI must not be jeopardised by internal power-struggles or by getting caught up in a regionalism vs. globalization debate.
More importantly, states should not make the mistake of believing regional FTAs are a panacea to the problems of the developing world. Benefits of REI can only be fully realized if member-states continue to play a role in the process of development, wherein states synchronize openness with the right institutional setting and domestic policies.