The available literature on regionalism covers the contributions of economics, international relations and international political economy. This review focuses on the contributions of economists who investigate the potential and actual economic impacts of forming regions. Economists' analysis of regions begins with the classic theory of customs unions formulated by Viner, Meade and others and has been developed more recently in the context of imperfect competition1.
The motivations for countries to participate in regional integration initiatives are political and economic. From a political point of view countries may wish to group or unite in order to assure peace; stabilize their region or their country; to foster security; and to seek possible benefits from political cooperation. Whereas the economic motive is essentially to reap the trade benefits. The world economy of today is dominated by a small number of large national economies and a large number of economic groups, a good number of which are groups among large national economies. Within this economic environment, smaller countries are finding it difficult to compete and harness adequate resources for their development. Regional economic cooperation among developing countries became a must to:
The growth of interest in regional integration is not based on trade motives alone given that tariff levels in most regions have been falling and are now at relatively low levels. All successful regional groupings have objectives other than freeing trade, and that this may be essential for the will to evolve. In many instances, trade may well be secondary to political or security objectives or a tool rather than an objective in itself.. However, with growing propensity of Regional Trade Agreements (RTAs), it is still of great relevance to appreciate the emerging new concepts and trends on the gains from integrating services of trade and from regulatory integration.
While there were 125 RTAs notified during the GATT years, a further 125 new RTAs have been notified since the establishment of the WTO on 1 January 1995 up to April 2002. This represents an average of 15 notifications every year to the WTO, compared with an annual average of less than three during the four and a half decades of the GATT (Figure 1).2 On average, each WTO Member is involved in five RTAs, though some are parties to ten or more. According to WTO, study, most developing countries now participate in RTAs. Of the 243 RTAs estimated to be in force in April 2002, between 30-40 per cent are agreements concluded between developing countries (WTO, 2002).
The traditional economic approach to regional trade integration assumes perfect competition in markets and is concerned with the implications of forming a region for the allocation of resources in a static sense. This static analysis distinguishes between the trade creation and trade diversion effects of regional trade integration.
This implies that for a country which unilaterally eliminates tariffs on all imports, the domestic price falls to the world price. As a result, domestic production falls, domestic consumption increases and total imports increase. The reduction in tariffs leads to additional trade, or trade creation. The effect of the tariff reduction on economic welfare can be decomposed into three effects: (1) the gain to consumers from lower domestic prices; (2) the loss of profits to producers; and (3) the loss of tariff revenue to the government. Under the standard assumptions that resources remain fully employed and that prices reflect marginal costs and benefits, it is easily shown that the consumer gain exceeds the combined losses of producers and the government from reducing tariffs and that there is an overall gain in national welfare as a result of this policy change.
In some cases, the barriers to trade are not rent-creating policies such as tariffs but policies leading to cost-increasing barriers which raise the real cost of importing. Typical examples of such policies are complicated/slow customs procedures, or the imposition of spurious health, safety or technical standards. Resources which could be employed productively elsewhere in the economy are tied up (wasted) as a result of these barriers. The removal of such cost-increasing barriers magnifies the gain in national welfare from their elimination.
If a country (the home country) eliminates trade barriers with its regional partners but maintains them on trade with third countries. If the partner country is already the low-cost supplier, then preferential trade liberalization leads to the same trade creation effect as earlier identified for unilateral trade liberalization. Trade creation takes place when preferential liberalization enables a partner country to export more to the home country at the expense of inefficient enterprises in that country.
But preferential liberalization, by maintaining tariffs against the rest of the world, may cause enterprises in the home country to switch supplies from the rest of the world to higher-cost suppliers in the partner country. The partner country again increases its exports to the home country but this time at the expense of exports from third countries. Trade diversion occurs when imports from a country which were previously subject to tariffs are displaced by higher cost imports which now enter tariff-free from partners. While trade creation contributes positively to welfare in the home country, trade diversion results in a welfare loss. The consumer gain on the volume of imports previously imported from third countries is less than the tariff revenue lost by the government (because, if the partner country is a less efficient supplier, the domestic price in the home country does not fall to the world price level).
As regards the experience of a single partner in an RTA, it is possible that one or more partners in an RTA can gain from trade diversion in their favor. This is more likely if a country initially has lower tariffs or smaller imports from its partner. However, trade diversion is always a loss for the RTA as a whole. .
The size of the market share of the RTA in the world market is an important factor. A third effect comes into play in the traditional analysis if the RTA is large in world market terms, so that a change in its demand for imports influences the price at which those imports can be purchased. If, as a result of the formation of an RTA, the demand for imports in competitive markets is switched from third countries to a partner country, this leads to a decline in the price of third country imports and improves the union's terms of trade vis-à-vis the outside world. In imperfectly competitive markets, there may be collective gains if regional integration makes it possible to shift rents away from third countries. Rents exist if firms in the Rest of the World can exercise market power and price above marginal cost. Forming an RTA increases the amount of competition in the market and this affects not only domestic firms but also the firms in other countries which will find their ability to extract these rents eroded. This movement in the term of trade will result in gains to both the consumers and the RTAs.
Not only market power but also bargaining power can be increased by forming an RTA. To the extent that an RTA increases the joint bargaining power of its members, it may be more successful in obtaining tariff reductions from its trading partners (or avoiding the imposition of trade sanctions such as 'Super 301' threats). This assumes that the countries making up an RTA have a sufficient economic size relative to the third countries with which it must negotiate, and this requirement limits the relevance of this argument in the case of developing countries.
Economic analysis has emphasized the overall welfare consequences of regional integration at the expense of the distributional or transfer implications which are often crucial in determining its political sustainability. Transfers occur between members of a trade bloc because removal of tariffs between them means that exports obtain better prices in the partners' markets (a positive transfer), while the costs of imports net of tariffs increase (a negative transfer). Assume that the home country continues to import from the Rest of the World following formation of the RTA. Thus, the domestic price continues to be the world price plus the tariff on third country imports. The partner country, which previously would also have had to sell at the world price, now can sell at the domestic price in the home country. The home country loses the tariff revenue it previously collected on imports from its partner, and pays its partner more for its imports than it did previously. This amounts to a transfer from the home country to its partner exporting country. If the partner country also happens to be more developed or better off than the home country, then such transfers are clearly regressive and, over time, will call into question the sustainability of the integration arrangement.
The past experience of developing countries with regional integration schemes is not positive. As illustrated above, the reasons for this can be illuminated with the aid of the simple theory of customs unions. Preferential trade arrangements give rise both to trade creation and trade diversion effects, as well as to transfers between the member countries. The design of RTAs among developing countries in the past tended to maximize the costs of trade diversion (because of high external tariffs) and also encouraged regressive transfers from poorer to better-off members of such arrangements.
The recent more favorable assessment of regional integration arrangements involving developing countries is based on the following considerations: Regionalism will lead to net trade creation as long as it is coupled with a significant degree of trade liberalization and where emphasis is put on reducing cost-creating trade barriers which simply waste resources. Regional economic integration may be a precondition for, rather than an obstacle to, integrating developing countries into the world economy by minimizing the costs of market fragmentation.
North-South RTAs have been seen as more likely to result in gains to developing countries as compared to South-South RTAs, on the grounds that they minimize trade diversion costs and maximize the gains from policy credibility. Closer examination of these arguments, however, suggests that the assumptions on which they are based may not always stand up. Positive economic outcomes will depend on the deliberate design of these agreements, and cannot simply be assumed.
The following represents a quick listing and explanation of the major preconditions required to achieving economic cooperation. These include political will, political stability, harmony of the socioeconomic environment, state of transformation among countries and comparable states of economic development, and diversions in per-capita incomes.
This section displays the factors to be considered in the formulation and implementation of economic cooperation. They are the participation of stakeholders, good preparation and gradual implementation, and immediate benefits to participants.
Participation of all stake holders, particularly the civil society with its different organizations, is important for the success of economic cooperation among countries. The rational of participation is founded on the argument that development cannot be achieved without active participation of those to whom it is addressed and that demand driven process need to be based on and serve actual needs. For these reasons it is important to put beneficiaries, as represented by private sector organizations, civil society associations, and popular organizations, in the center of the development process and empower them to drive and adjust according to their own needs and capacities. Participation, can therefore, be defined as the process of equitable and active involvement of stakeholders in formulating strategies and policies. It draws from this definition that empowerment is a necessary condition for participatory approaches and that disadvantaged groups should be assisted through appropriate institutions to improve knowledge, influence and control.
A whole range of tools can be suggested for increasing participation. These include tools for consultative and advisory roles, co-decision making and self-management, contracting, appropriate investment opportunities, partnerships devolution depending on negotiating powers, influence, capacity and skills legitimization, etc.
The formulation of economic cooperation among countries is a very complicated and tedious process , especially that the concept of economic cooperation embraces a wide range of arrangements among countries ranging from joint ventures to the formulation of a full fledged common market. It might even extend to include unification of countries under one flag. Technical capacities of the Secretariats of the Regional Economic Organizations (REO) are crucial in leading the economic initiatives and promoting serious economic integration involving the stakeholders in a systematic and professional context.
While the full benefits of economic cooperation might take time to materialize, emphasizing immediate benefits is of utmost importance. People have to realize benefits to get their full cooperation. In this respect special measures may need to be introduced. Careful examination should be undertaken on a priori basis to assess the needed compensation criteria for the parties to be hurt in the short run. Also, the private sector should be encouraged to establish inter-country joint ventures of complementary nature to benefit from the differences in resource endowments between member countries.
The Near East countries have been parties to a plethora of RTAs, principally involving preferential trading arrangements. The vast majority of these agreements are among Arab countries (Table 1). They include the Agreement for Facilitation and Promotion of Intra-Arab Trade, the Council for Arab Economic Unity (CAEU), the Economic Co-operation Organization (ECO), the Gulf Co-operation Council (GCC) and the Arab Maghreb Union (AMU). All these groupings have in common the objective of promoting intra-regional trade, including agricultural trade, and co-operation between member countries.
Table 1: Major Regional Trade Agreements in the Near East
|
Organization/Agreement |
Member countries |
Date of establishment |
Present state of the Agreement/ |
|
The Convention for Facilitating Trade and Regulating Transit among Arab League members |
Egypt, Iraq, Jordan, Lebanon, Saudi Arabia, Syria |
1953 |
- |
|
The Agreement for Facilitation and Promotion of Intra-Arab Trade |
All members of the Arab League1 |
1981 |
Active |
|
Council of Arab Economic Unity (CAEU) |
Egypt, Iraq, Jordan, Somalia, Libya Mauritania, Sudan2, Syria, Yemen |
1957 |
Active |
|
Arab Common Market (ACM) |
Egypt, Iraq, Jordan, Libya, Mauritania, Syria, Yemen |
1964 |
Re-activated in 1998 |
|
Economic Co-operation Council (ECO) |
Afghanistan, Azerbaijan, Iran, Kazakhstan, Kyrgyzstan, Pakistan, Tajikistan, Turkey and Turkmenistan |
1985 |
Active |
|
The Gulf Co-operation Council (GCC) |
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE |
1981 |
Active |
|
Arab Maghreb Union (AMU) |
Algeria, Libyan Arab Jamahiriya, Mauritania, Morocco, Tunisia |
1989 |
Active |
|
The Arab Co-operation Council (ACC) |
Egypt, Iraq, Jordan, Yemen |
1989 |
Frozen |
1Members of the Arab League include Algeria, Bahrain, Djibouti, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Somalia, Sudan, Syria, Tunisia, United Arab Emirates and Yemen.
Despite all these regional and sub-regional integration agreements, the performance of intra-regional trade including agricultural trade remained low and stagnant. This is more or less a common phenomenon in the developing countries, the Near East being no exception. Paucity of up-to-date and detailed data precludes comprehensive examination of the structure and performance of intra-regional agricultural trade. With the available sketchy data, the silent features of the overall regional agricultural trade seem to include the following:
Low share of intra-regional trade in total trade: the share of intra-regional agricultural trade in total agricultural trade in the Near East stagnated at the 8% to 10% range and the region is becoming increasingly dependent on world market for its food supplies. There are considerable differences in the share of intra-trade and in the evolution of this share across sub-regional blocs and individual countries. In the GCC, the share of agricultural exports going to the Near East appeared to have an increasing trend, while in the other groupings it showed a declining trend. This general situation becomes less homogenous when trade orientation of the individual member countries is analyzed. The Near East market represents for certain countries the main external market outlet. Countries such as Somalia and Saudi Arabia sold more than 80% of their agricultural exports to the Near East markets, while Lebanon sold 70%, Jordan 50% and Sudan 40%.
For the NE as a whole, there is a potential for intra-regional trade in agricultural products that has not been fully exploited and which could be particularly beneficial in view of the small size of their domestic markets. All such trading efforts have come up against structural and policy obstacles. The major constraints for intra-regional include inadequate international transport and communication facilities and poor information about markets and investment opportunities. Moreover, the existence of administrative and procedural obstacles to trade and absence or inadequacy of a system for standardized packing, grading and quality control systems at the regional level continue to frustrate efforts to expand trade and establish transparent information systems. Improvement and harmonization of inspection and certification systems are among the missing ingredients for promotion of intra and extra-regional trade. Inadequate financing and guaranteeing of regional exports/imports has also been a factor.
Given the difficulties the NE countries are currently facing in global markets, regional integration may, despite its challenges, be an important way forward for them. It can be a learning ground for more ambitious global trading if they can resolve the bottlenecks that constrain even the limited existing trade opportunities. In addition, there is a need for effective and well-developed domestic market, which is a building block for promoting intra- and extra-regional trade.
Declining trends of agricultural exports: The export of agricultural products is essential for economic growth in many NE countries as agriculture plays a major role in most of these economies. The value of total agricultural exports of the NE, which amounted to US$ 14.4 billion in 2001, is growing extremely slowly, having been US$12 billion in 1990. The share of the NE in world agricultural exports has dropped steadily, from 7 percent in 1971-80 to 3 percent in 1991-2000. Reversing this decline will require increased efforts by the NE countries, with the assistance of the international community, to alleviate their domestic supply-side and other constraints.
While products such as live animals, cotton lint, pulses and cereals are principal agricultural exports for a few countries in the Near East, exports of fruits and vegetables are important for almost all the countries in the region (Table 2). On average, exports of fruits and vegetables constituted about 40% of the region's total value of agricultural exports during 1992-96. This share exceeded 50% in Algeria, Lebanon, Morocco, and Islamic Republic of Iran. These shares are expected to increase further in the future as the growing scarcity of water region-wide may drive many countries to shift further to the production of fruits and vegetables, which have relatively high returns to water use.
The bulk of the NE agricultural exports are destined to developed country markets, of which EU is by far the largest. Therefore, conditions of market access to these countries are of critical importance in defining the trading opportunities for NE agricultural exports. Support to agriculture in these countries and the increasingly higher safety and quality standards they adopt as well as the gradual erosion of trade preferences constitute the main difficulties that face the NE countries in their endeavour to improve their access to the developed country markets.
Table 2: Agricultural Trade in the Near East Region: Major Exporters and Importers,
1995-2001
|
Total exports of the region (000 MT) |
Major exporters |
Total imports of the region (000 MT) |
Major importers |
Total exports as % of total imports | |
|
Wheat |
4321 |
Turkey |
29949 |
Egypt, Algeria, Morocco |
15 |
|
Rice |
2465 |
Pakistan, Egypt |
4420 |
Iran, Saudi Arabia, UAE, Syria, Turkey |
56 |
|
Live animals (sheep) |
7176 |
Somalia, Sudan |
13983 |
Saudi Arabia, Kuwait, UAE, Oman |
52 |
|
Meat and meat products |
109 |
Turkey, Saudi Arabia, Sudan, Kazakhstan, Kyrgyz Republic |
1277 |
Saudi Arabia, UAE, Egypt, Iran, Oman, Yemen |
9 |
|
Sugar |
1125 |
Turkey, Pakistan, Sudan, Kyrgyz Rep. |
8184 |
Egypt, Algeria, Saudi Arabia, Morocco, Syria |
14 |
|
Fruits + Vegetables |
8368 |
Iran, Morocco, Turkey, Lebanon, Jordan, Egypt, Syria |
6382 |
Saudi Arabia, UAE, Kuwait, Kuwait, Bahrain, Qatar |
131 |
|
Oils and fats |
873 |
Turkey, Tunisia, Iran, Sudan |
6958 |
Pakistan, Turkey, Egypt, Algeria, Iraq, Morocco |
13 |
|
Pulses |
566 |
Turkey, Syria, Iran, UAE |
1105 |
Pakistan, Algeria, Egypt, Turkey, Saudi Arabia, UAE |
51 |
|
Milk and products |
286 |
Kazakhstan, Turkey |
6282 |
Algeria, Saudi Arabia, Egypt, UAE |
5 |
|
Eggs |
45 |
Turkey, Saudi Arabia |
80 |
UAE, Oman, Kuwait, Kyrgyz Rep. |
56 |
Source: FAO (2002) FAOSTAT
Despite progress made in the implementation of the Uruguay Round Agreements, support to agriculture in the OECD countries continues to be high ($310 billion in 2001). Tariff peaks still persist in several products (e.g. in meat and horticultural products), and tariff escalation (higher tariff on more processed products, which given greater protection to the processing industry of the importing country) still prevails in several important product chains (e.g. vegetables, fruits, meat and hides and skins). In addition, most of the fruits and vegetables in the EU are protected by the 'entry price' system, and most of the Near East's exports of fruits and vegetables to the EU are subject to seasonal tariff quotas, which are, except for meeting the entry price, duty free.
High dependency on food import: Most of the Near East countries are net food importers with high dependence on food imports. For the region as whole, imports of cereals, as a proportion of the total annual consumption, expanded from 15% in 1970-75 to 37% in 1995-2001.The import dependence varies considerably between countries. In 1995-200, for instance, Egypt, Algeria and Yemen imported about 44%, 70% and 90% of their requirements of wheat and wheat flour, the staple food in these countries. Such dependence was disquieting to policy makers, who feared that reliance on foreign supplies was 'too risky' whether economically or politically.
High dependence on food imports means that countries are exposed to some risks. Ability to import is, therefore, an essential component of a sustainable food security in the region. Because of this high import dependence, the Uruguay Round Agreement has prompted widespread concern in the region, as it is expected to reduce subsidised food exports and result in some increase in world food prices. Although oil exporters are unlikely to face significant challenges to their ability to import food, the non-oil exporters face greater challenges. The Low-Income-Food-Deficit countries (LIFDCs) in the region in particular are facing difficulties in developing adequate foreign exchange earnings to finance food imports.
Heavy reliance on exporting primary commodities: Many of the NE countries are vulnerable to high fluctuations incommodity prices in the international market. Some of these countries depend heavily on a few primary commodities for their export revenue. Thus, unstable and generally declining commodity prices greatly compound the problems of these economies, especially in the rural sectors. Large fluctuations in export proceeds are believed to have adverse short-term effects on income, investment, employment, and the price level with consequent detrimental effects on growth.
Excessive dependence on a narrow range of products has a number of important consequences: it exposes farmers unduly to the vagaries of climate, pests and diseases and to price fluctuations; leads to fluctuations in farm income and government revenue; contributes to environmental degradation; may result in failure to take advantage of complementarities (e.g. between livestock and crops); and has negative effects on diet and health. In addition, adverse international terms of trade facing the primary agricultural commodity sector are a further constraint on growth of the sector.
There is a clear need to diversify the production and export base (both horizontally and vertically) from low value added to high value added agricultural products. The challenge is to initiate and sustain the momentum for diversification in order to realize the considerable potential that undoubtedly exists.
A plethora of measures at different levels will be necessary, the most important of which are: the maintenance of a stable and predictable macroeconomic and political environment; establishing a fair and open regulatory framework; improving the efficiency of financial institutions, strengthening research and extension for developing and adopting relevant technology; improving rural services; upgrading the marketing, transport and communication infrastructure; and development of human resources.
Areas and commodities on which the diversification programmes focus should be selected on the basis of potential viability as well as technical sustainability. A multidisciplinary and holistic approach needs to be adopted to all aspects of diversification and not only to production. Activities involved relate not only to on-farm production technologies but also to upstream and downstream constraints to production such as input supply, technical advisory services, storage, processing and marketing. While the focus of such programmes in NE countries may require a rapid increase in productivity, the approach should be holistic to ensure that all major issues affecting diversification are taken into account in an integrated manner.
1 Several parts of the Paper are drawn from "Regional Integration and Food Security in Developing Countries" prepared by Alan Matthews for the Agricultural Policy Support Service (TCAS) of FAO in February 2003; and "Towards a Strategic framework for sustainable agricultural development in the Near East Region" prepared for the 25th FAO Regional Conference for the Near East.
2 The WTO figures only include notified agreements, and there are many other non-notified, or not yet notified, agreements in existence. Also, non-reciprocal preferential agreements covered by waivers are not included in these numbers.
