Regional Integration and Poverty

Dirk Willem te Velde, the Overseas Development Institute

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351905473
• Edition: 1
• Topic: Politik & Internationale Beziehungen
• Subtopic: Internationale Beziehungen

Relatively little is known about how regional integration affects poverty. Many suggest that increased investment would be one of the benefits of agreeing on regional integration provisions but this has not been put to the empirical test for South-South integration. This volume examines the channels through which regional integration affects poverty and empirically analyzes the effects on foreign direct investment.

Chapter 1
Regional Integration and Poverty: Introduction

Dirk Willem te Velde

Currently there is a renewed emphasis on encouraging regional integration processes in the belief that this is good for development and poverty reduction. Unfortunately, a framework for mapping regional integration (RI) onto poverty does not exist, and this premise is therefore difficult to assess ex ante or even ex post. However, there is a lot of research that is directly relevant. For some time now (at least as far back as Viner, 1950), there have been studies examining the effect of regional integration on trade. More recently researchers have begun to extend this to RI and foreign direct investment; Ethier (1998) suggested that in the ‘new’ regionalism countries seek to form regions in order to attract investment. Researchers have also begun to address the effects of trade and investment on poverty (see, for example, McCulloch et al., 2001; McKay et al., 2000; ODI, 2002). However, the evidence has never been put together into a single framework to address the links between RI and poverty. The purpose of this book is to provide such a framework. It is hoped that such a mapping exercise will inform those responsible for regional trade policy with respect to the presence of such links and, where available, with respect to the effects of available policy options on poverty. The resultant mapping should also be useful in identifying a checklist of areas relevant to assessing the impact of regional integration on poverty in individual countries.

There are many ways in which a book on regional integration and poverty can be structured. We have opted for a relatively simple approach (Chart 1.1). Regional integration affects the movements of products and factors of production across borders – trade in goods and services and movement of people and capital – and these in turn affect poverty through various routes. Regional integration can also affect poverty directly through special initiatives and programmes (although, strictly speaking, some of this could be seen as movement of capital) and other functional cooperation. The movements of products and factors of production are related, and there may be relevant relationships here. Finally, there may be feedback from economic variables back to the regional integration processes.

The central part of this book is to develop the causal mappings in Chart 1.1 (Chapters 2–4) and test them empirically in the case of two countries (Chapters 6 and 7). The starting point is that trade, investment, migration and other regional provisions can each affect trade, investment and migration. Trade, investment and migration and complementary conditions that include public policies are causal links through which regional integration affects the poverty level of a specific country. Thus RI can affect poverty at the country level through a number of routes:

• Route 1 through the volume and poverty focus of trade
• Route 2 through the volume and poverty focus of investment
• Route 3 through the volume and poverty focus of migration
• Route 4 through other routes.

The book will essentially go through four basic steps to assess each route:

• Step 1 Identify relevant provisions on trade, investment and migration
• Step 2 Identify the effect on the volume and poverty focus of trade, investment and migration
• Step 3 Identify how this change in volume and poverty focus maps onto poverty
• Step 4 Identify how complementary conditions affect the relationship between the change in volume and poverty focus and poverty.

Regional integration can also affect poverty through other routes (including migration).

There are various reasons that further motivate us to examine the subject of RI and poverty. First, the number of regional trade agreements notified under the World Trade Organization has increased rapidly in recent years (Chart 1.2), with some regions much more advanced than others.¹ What effect does this have on development and poverty in developing countries? Secondly, (current) negotiations at the WTO are usually slow and long-drawn-out, and this has led some countries to focus on regional and bilateral trade negotiations. In the Americas, negotiations for the Free Trade Agreement of the Americas (FTAA) and others such as EU-MERCOSUR have also been underway for some time but have currently reached an impasse, and the North American Free Trade Agreement (NAFTA), now ten years old, has inspired a range of other regions. In Asia, ASEAN has recently started discussions with other Asian countries.

The formation of a region may be seen as a tool for development, but this is not always the sole, or even the main, reason for countries to come together. The development policy of the European Union (EU) is based to a large extent on supporting the formation of regions amongst developing countries. The European Commission is currently initiating negotiations on Economic Partnership Agreements with African, Caribbean and Pacific countries under the Cotonou Partnership Agreement before 2008. The EU appears to assume that the question is not whether a region should be formed, but rather what type of region can help to achieve development objectives such as poverty reduction.

However, there remain a number of unanswered questions related to how regional integration affects poverty. For example, there is a lack of a suitable framework for analysis. There has also been insufficient attention to the detail of regional provisions on trade, investment and other matters. Finally, there has been very little analysis of the effects of regional integration on poverty in individual countries. This book will address these issues.

There are several terms that we use frequently in this book which may need some clarification from the outset. One is regional integration. By this we mean to describe the situation where two or more countries come together to discuss common provisions to create a Regional Trade Agreement in the WTO sense of the word (see Chapter 2) with the aim to regulate or encourage cross-border trade, investment and migration. It is not geographically bound to regions or continents of the world and specifically refers to the intentional integration amongst countries. Development and poverty are other terms we use particularly in Chapter 3 and in the case studies. Both poverty, defined in section 3.1.3, and development are multidimensional concepts which are not easy to operationalise. In many cases we use monetised measures, such as income or growth and output measures, to describe poverty and development empirically. Thus, by operationalising the concept through mainly economic and socio-economic lenses, we may loose some of the important aspects of development, such as political development.

The book is in three parts. Part 1 deals with conceptual issues and the evidence thus far, the aim being to provide a theoretical structure or mapping of regional integration on poverty. It consists of three chapters by te Velde, Page and Morrissey. Chapter 2 discusses the upper part in Chart 1.1 – how regional provisions affect trade, foreign direct investment (FDI) and migration. Chapter 3 discusses how trade, FDI and migration affect poverty. Chapter 4 combines the main routes of these two chapters and presents the building blocks for a mapping of regional integration onto poverty.

Part 1 argues that much of the evidence is based on multi-country or multi-region studies. It deals with averages and fails to identify which provisions in which RTAs have what effect (on trade, FDI, poverty, etc.) in which countries. Studies that examine the effects of regional integration often use simple dummy variables to describe regions. This is problematic for those who want to negotiate the best possible type of region: in reality no two regions are the same, and some guidance is required on best practices in provisions in Regional Trade Agreements. For many other links we have no evidence at all.

In Part 2 (Chapter 5), therefore, te Velde and Fahnbulleh measure trade and investment provisions in several key regions and discuss how these affect

Chart 1.1 Mapping the regional integration process onto poverty Source: Author's own.

investment. The chapter confirms and describes the fact that regional provisions related to investment differ markedly across RTAs and across time. The chapter focuses on how regional integration provisions affect FDI. In principle, there are two other types of empirical studies that would help to provide a balanced Part 2. First, it would be useful to include a detailed study on the effects of regional integration provision on trade, but as we explain in Part 1 some of this literature is only beginning to emerge and we refer to these studies in Part 1 rather than present our own, new evidence. Second, it would be useful to include a detailed study on the effects of regional integration provision on migration. This book does not include such a study, in part because the data on bilateral migration flows are even weaker than for bilateral investment flows and the necessary data has only recently begun to be developed. Thus, this is left for further research.

Most analyses of regions are carried out at the regional and not the country level. Part 3 addresses the effects of regional integration on poverty in two individual countries; this provides a good test of the mapping structure set out in Part 1. There are various countries that would be relevant for this exercise and Part 3 will discuss the experience of two countries, Bolivia by Nina and Andersen in Chapter 6 and Tanzania by Kweka and Mboya in Chapter 7. Bolivia is part of the Andean Community, is an associate member of the Southern Common Market (MERCOSUR) and a member of other regional groupings, and has been included in the EU and US Generalised Systems of Preferences. It has also one of worst poverty records in Latin America. Tanzania is a member of regions such as the East African Community (old and new) and the Southern African Development Community, and is also part of other groupings such as the GSP systems and the Cotonou Agreement, but it has withdrawn from the Common Market for Eastern and Southern Africa. While the implementation of regional trade provisions has been slow in Tanzania, it does not appear to have been much slower than in comparable countries. Chapter 8 provides a brief conclusion

Chart 1.2 The number of GATT/WTO notified RTAs in force Source: WTO.

¹ The European Union and Central and East European countries account for a significant number of agreements, between and amongst them.

References

Ethier, W.J., ‘Regionalism in a Multilateral World’, Journal of Political Economy, 106 (1998): 1214-45.

McCulloch, N., Winters, L.A, and Cirera, X., Trade Liberalization and Poverty; A Handbook (London: Centre for Economic Policy Research, 2001).

McKay, A., Winters, L.A. and Kedir, A.M., ‘A Review of Empirical Evidence on Trade, Trade Policy and Poverty’, a report for DFID prepared as a background document for the Second Development White Paper (London: DFID, 2000).

ODI, Foreign Direct Investment. Who Gains? (London: Overseas Development Institute, 2002).

Viner J., The Customs Union Issue (New York: Carnegie Endowment for International Peace, 1950).