...to comparative advantage and increased efficiency, exploitation of increasing returns from larger market, and technology spillovers through investment and trade-trade blocs can affect the economic growth of their member countries. The results suggest that (1) intra-bloc trade does not affect growth significantly; (2) income diversion among member countries contributes positively and significantly to growth; and (3) the size of the trade bloc does matter in the sense that the bigger is not always the better for the welfare of the member countries. (JEL F15, 047)

Keywords: international integration, economic growth, trade blocs, developing countries

Introduction

Economists and policymakers have been interested in understanding whether and how a country's welfare can be affected by international integration. In general, international integration is known to improve a country's income growth mainly through the following channels: (1) by increasing production efficiency and competition due to specialization; (2) by enlarging its potential market and thus increasing the rate of return on research and development (R & D); and (3) by boosting the volume of trade and investment and, therefore, diffusing technology between countries. (1)

The latter part of the twentieth century witnessed a surge in the number and coverage of regional economic integration agreements (RIAs) (2) of various kinds. Interestingly, not much research has been done on regional integration, in general. Among what has been studied, the European Union, and its various integration schemes, have received the most attention. With only few exceptions [Landau, 1995], most of the empirical studies find evidence that the European Union and the European Free Trade Area have significantly increased their member countries' income growth rates over the past few decades [Ben-David, 1994; Kokko, 1994; Henrekson et al., 1997]. Technology diffusion, through increased trade, has been the main channel considered to cause this phenomenon.

However, what about those trade blocs formed mostly by developing countries? Work on this topic is even scarcer. Early assessments on a number of integration schemes among developing countries provide favorable outcomes, mainly through an increase of the intra-bloc trade volume [Balassa and Stoutjesdijk, 1975]. However, the effectiveness of regional integration among developing countries was severely questioned since most of the formal trade blocs among developing countries have failed to deliver any significant benefits, in part because the liberalization plans have not been actively carried out. (3)

Among recent empirical studies on the influence of international integration on growth is the study of Brada and Mendez [1988] who examine the dynamic effects of six regional integration schemes--most of them formed by developing countries--on the level of investment, factor productivity growth, and their influence on member countries' income growth over the period 1951-1977. The authors conclude that, although international

integration does increase the level of investment and growth rate of productivity growth in some of the regional integration agreements, income growth rates of their member countries' are largely unaffected by these gains.

De Melo et al. [1992], test for long-run effects of international integration by estimating a simple growth equation where the growth rate of income is regressed against individual trade bloc dummies and some control variables. Their specification is estimated over the period 1960-1985, as well as various sub periods, and for 101 countries, OECD and developing. With one exception, none of the integration dummies prove to be significant.

Finally, Haveman et al. [2001] consider the impact of different avenues of international interactions, and aspects of trade arrangements on the growth rate of income of 74 countries, developing as well as developed, over the period 1970-1989. Their findings support that general openness, foreign direct investment, and membership in a trade bloc facilitate growth, the variation in income across member countries matters, and trade bloc size does not play any role in determining a country's growth rate. Overall, the approach adopted by the existing empirical literature in answering the question of whether international integration affects the economic growth of developing countries, and if so how, is rather piecemeal and, in most of the cases, provides conflicting results.

The purpose of this paper is, therefore, to investigate empirically, in a comprehensive manner, the effects of various forms of international integration on income growth in the case of developing countries. More specifically, it attempts to identify through which channel(s) mentioned above trade blocs affected developing countries' income growth. Do all of these channels have the effects implied by theory? If not, which of them has failed to deliver its benefit?

The investigation is limited over the period of 1970-1989; the longest period where the maximum information is available for all countries and variables in the analysis. During these 20 years, the results support that trade blocs facilitated growth mainly through improving production efficiency due to specialization. Further, the intra-bloc trade and foreign direct investment in general have an insignificant contribution. Finally, a bigger market size in fact was detrimental rather than beneficial, and its damage was far beyond the benefit associated with specialization.

The last finding seems quite astonishing and counter-intuitive. Understanding how trade bloc size is measured might be helpful to comprehend such a result. The size of the potential market is measured by the sum of GDP of all member countries net of country i's own GDP. There are two possible ways to enlarge country i's market size associated with regional integration agreements: (1) by increasing the number of member countries within a single trade bloc, and (2) by joining several trading blocs at a time. The former is likely to cause further cultural and political disparity, which could harm the efficiency of the trade bloc. As for the latter, Wonnacott [1996] proposes several potential disadvantages associated with being a member of overlapping trade blocs, known as the hub-and-spoke (H & S) arrangement. (4) For instance, trade barriers remain in an H & S arrangement; excess cost would have to occur whenever spoke-spoke trade is re-routed through the duty-free hub; n-fold trade diversion might offset the benefit generated by trade creation; and efficiency can be further damaged by rent seeking and policy inconsistency between countries within H & S or against nonmember countries. In addition, Freund and McLaren [1999] demonstrate significant adjustment costs that have occurred long before...

NOTE: All illustrations and photos have been removed from this article.



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