Economic Integration and Development

Economic Integration and Development

Has Regionalism Delivered for Developing Countries?

Mordechai E. Kreinin and Michael G. Plummer

Mordechai Kreinin and Michael Plummer consider the implications of the emerging global trend of economic regionalism for developing countries. The analysis focuses on the trade and investment effects of integration in developed countries on developing countries, as well as the ramifications of regional integration in the latter. After an extensive review of the theoretical and empirical literature pertinent to the economics of regionalism, the book considers the ex-post trade and direct-foreign-investment effects of the Single Market Program in Europe and NAFTA, followed by chapters on ASEAN and economic integration in Latin America, primarily MERCOSUR.

Chapter 2: The Theory of Preferential Trading Arrangements: An Overview

Mordechai E. Kreinin and Michael G. Plummer

Subjects: development studies, development economics, economics and finance, development economics, international economics


INTRODUCTION It is a standard result of international trade theory that free trade maximizes global efficiency in a distortion-free world. All Pareto-efficient conditions are met; free trade is the ‘first-best’ solution. However, a world ridden by multiple distortions (such as, tariffs, quotas and exchange controls) does not necessarily move closer to Pareto optimality by the removal of one distortion. Some Pareto-efficient conditions will be satisfied, but others may be disturbed because of the change. The net result could be either a gain or a loss relative to the status quo; a priori we cannot determine which. This is the fundamental result of the ‘general theory of second best’. The formation of a free-trade area involves such a trade-off of distortions. It eliminates tariffs between member states and, therefore, establishes an undistorted price relationship between the home and partner countries. But there is a perversion in price relationships between partner and non-partner countries, as the latter are discriminated against. The net welfare effect is ambiguous, and cannot be determined a priori. It is, therefore, necessary to investigate the conditions under which a freetrade area (FTA) or a customs union (CU)1 represent a movement toward the Pareto optimum, that is, free trade. This chapter reviews theoretical models that attempt to answer this question. For consistency with the literature, we refer here mostly to CUs, but the effects of an FTA are similar. The next section begins by outlining the logic of the pre-Vinerian analysis of the effects of CUs, followed by...

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