DP715 The New Regionalism: A Country Perspective
Regional integration is on the rise again, despite its apparent failure among developing countries in the past. The paper first surveys the ambiguous economics of customs unions. We emphasize that the traditional dichotomy between `trade creation' and `trade diversion' is not particularly helpful for policy. In a world with trade restrictions, regional integration presents certain advantages including enhanced bargaining power and market access. We then turn to institutional aspects of regional integration, and point out that integration enforces arbitrage in institutions as well as in markets for goods and factors. This kind of arbitrage can lead to improved economic outcomes by rendering decision-making less sensitive to economically harmful factional interests, especially when regional institutions are designed properly. Finally, we turn to an empirical evaluation of existing schemes. We note there is no evidence that membership in integration schemes has any effect on growth. We close by noting that recent attempts at integration have very different starting points and objectives than past efforts. History is therefore a poor guide to the future of regional integration.
