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 3: Measuring the Effects of Economic Integration

Mordechai E. Kreinin and Michael G. Plummer

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


INTRODUCTION This chapter, presents various methods of estimating the economic effects of regional economic integration. The next section presents several ex ante approaches, including a price-elasticities approach and an import-demand regression model. Ex post models are the topic of the third section; they include a gravity model, an import-growth simulation, and another regression approach. Because computational general equilibrium (CGE) models have become very popular, the fourth section is devoted to an overview of recent innovations in CGE modelling. TRADE CREATION AND TRADE DIVERSION IN EX ANTE MODELS The purpose of ex ante estimation is to forecast changes in economic variables before they actually occur. Trade creation in country i is estimated as the difference between its expected TOTAL imports with and without integration: TC = (MTi2*– MTi2), (3.1) where the subscript 2 refers to post-integration year 2. Trade diversion is estimated as the difference between country i expected imports from nonpartners with and without integration: TD = (MNi2* – MNi2). (3.2) The change in economic welfare (including consumption and production effects) is the difference between the magnitudes of trade creation and trade diversion (net trade creation). 33 Kreinin 01 chaps 24/9/02 12:22 pm Page 34 34 Economic integration and development Price Elasticity Approach The most commonly used approach relies on price elasticities (PEA). Trade creation for each commodity group is obtained by multiplying the price elasticity of import demand for commodity group k (ηmk) by the percentage change in its price induced by the tariff changes due to integration (∆t/1+t1): TCk = [ηmk...

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