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Friday, November 19, 2010

Regional Integration: ?

Since the time of Aristotle, it has been said that every State is a political partnership that is formed to attain some good. And an extension of it is the partnership between States—‘regional integration’—for attaining some ‘good’. To be precise, regional integration is nothing but an association of states in close geographical proximity to foster the betterment of member states as governed under a treaty or a supranational decision-making body—mostly of a federal character. It is the coming together of individual states within a region to form a larger whole. Such coming together is, of course, governed by the willingness of member countries to share sovereignty.

Though many theories have come into existence to explain regional integration, right from the beginning, it has been evident that such coming together of independent states is more for garnering economic benefits. Indeed, as early as in 1846, a French economist, Frederic Bastiat, said, “May all the nations soon throw down the barriers which separate them.” Since then, it is the economic good that has been fostering regional integration among countries, for the ‘gain’ from such partnerships is perhaps more tangible and, particularly, easy to assess.

Of course, with the pulling down of the Berlin wall, coupled with the collapse of ‘cold war’ politics, the concept of sovereign states as autonomous power centers is slowly losing its significance. And, the emergence of globalization has only hastened the whole process. With the result, the nation states have started losing control over the production of goods and trade. As the power moved away from the states, a majority of policy decisions are being taken at the regional-entity level. The European Union (EU) is the classic example of such a shift—an advanced form of supranational regionalism, duly backed by strong institutional setup and legal framework.

Many such regional institutions have emerged across the globe—though not of the scale of EU integration—all to leverage on economic advantages: Association of South East Asian Nations (ASEAN), Asia Pacific Economic Cooperation (APEC), North American Free Trade Agreement (NAFTA), etc. These arrangements, no doubt, have challenged the very assumptions of governance, for they have significant consequences for the social and economic policies of the member countries.

For instance, the current fiscal problems in Greece and Spain are, to a great extent, a direct fallout of such regional integration—the EU. As Paul Krugman observed, adoption of a single currency, Euro, by member countries well before the continent was ready for such an experiment is the cause for today’s crisis in the EU. In order to catch up with the prescriptions of the EU—reducing deficit from 12.7% in 2009 to 2% by 2013—Greece is now cutting down expenditure and increasing taxes. The net result would be: one, its manufacturing sector, which is already suffering from recession, is now set to face a ‘double dip’. Industrial output will further contract, that too, much faster; two, the rise in VAT and special duties and reductions in wages and salaries of civil servants will further reduce the buying power of consumers; three, with the resultant fall in the purchasing index, its credit rating will get hit, resulting in high interest rate on fiscal borrowings; and four, its citizens taking to streets—all owing to its inability to have independent monetary and fiscal policies.

It is needless to stress here that during a crisis of this nature, member countries have a greater role to play in bailing out the affected country/countries. Contrary to the expectations, member countries like Germany—Europe’s biggest economy—and France are vague in their promised rescue proposals to Greece. Many Germans indeed, wonder why any of them should cough up their savings made through hard labor and frugal living to save the profligate Greeks. On the other hand, many economists, particularly non-German, feel that Germany can assist the affected countries come out of the crisis by stimulating its domestic consumption. But that appears to be a distant dream from what Chancellor Merkel has said—she does not expect anyone would ask her country to pay for someone else’s mismanagement. Now, it is the crisis of this magnitude that highlights the importance of the willingness of member countries to share their sovereignty for the success of ‘integration’.

That aside, there are also arguments from economists like Bhagavati of Columbia University against regional integration such as ASEAN, APEC, and NAFTA, for they are, unlike multilateral trade negotiations, discriminatory in nature. And also, as Jacob Viner, a Canadian Economist, has said, they could lead to trade diversion and be harmful both to the members of the Free Trade Agreements (FTAs) and to worldwide efficiency of resource allocation. In any case, many are of the opinion that free global trade under the aegis of the WTO is certainly better than carrying out trade under regional trade agreements.

In the light of these embedded complexities, there is a need to understand the scope & necessity for integration with maturity and work towards leveraging on the advantages thrown open by regional integration.
-         GRK Murty


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