ASEAN and the Theory of Regional Economic Integration: A Survey

Abstract

The theoretical literature concerning the economic effects of regional integration has made considerable progress since the seminal work by Viner (1950). However, the majority of theoretical and empirical research in this area continues to focus on the static effects of Preferential Trade groupings (PTGs). Designed as a selected survey, this article suggests that, for developing countries like ASEAN, the more relevant areas pertain to the effects of regional integration, as well as the implications of PTGs in a dynamic-policy-reform context. It is argued that ASEAN will continue to benefit from AFTA and further deepening measures through the effects on reinforcing macroeconomic stability, encouraging investment flows, fostering technology transfer, reducing intra-regional transactions costs to doing business, and supporting policy reform in the region. ASEAN's new member states will likewise be able to benefit from the regional integration programme in Southeast Asia. Finally, we predict that ASEAN regional integration will help ASEAN countries overcome periodic crises by, among other things, locking in regional economic reform and providing information sharing regarding crisis management. I. Introduction Although the body of research on economic reform in developing countries is impressive (see, for example, James, Naya and Meier 1991; Edwards 1993; Rodrik 1996), one area that the economics literature has tended to neglect has been the relationship between economic reform and formal regional economic integration through preferential trade groupings (PTGs). To the extent that this literature focuses on the developing world at all, it is mainly aimed at the economic effects of integration agreements on these countries (for example Kreinin and Plummer 1992; Anderson and Snape 1994; Cuyvers 1995; Ariff 1996), descriptions and taxonomies of such arrangements (World Trade Organization 1995; Pomfret 1997) or applications to developing-country groupings but with the use of theoretical and empirical models more relevant to a developed-country context (Brown, Deardorf and Stem 1995; DeRosa 1995; Adams 1995). The recent strain in the literature focusing on 'natural' economic blocs, which provides a key role for geography and evidence from pre-integration trading patterns (Krugman 1991 and Frankel 1992), circumvents the need for standard neoclassical assumptions and parametric estimation - an advantage for developing countries in which such estimation is often difficult - but at the cost of weak conclusions with respect to the effects on static resource allocation (Pomfret 1997). Moreover, the core academic debate over regional economic groupings as building vs. stumbling blocs (Lawrence 1991) largely skips over the important relationship between regional integration and domestic economic policy formation in developing countries. This void in the literature is particularly problematic for the ASEAN countries, which have been strengthening regional economic integration at the same time that they embrace extensive policy reform. If the PTG movement were implicitly a threat to these economic reform programmes, officials would presumably be following contradictory policy stances. On the other hand, if formal PTG agreements strengthen economic reform, such accords would reinforce the domestic policy agenda and, hence, should be advocated, especially if they are also able to generate benefits. The purpose of this article* is to review the extensive theoretical and conceptual literature pertaining to regional integration and consider applications to developing countries in general and ASEAN in particular. As research in this area is vast, we limit ourselves to a selective review of old and new approaches to regional integration, with a focus on the so-called dynamic and policy dimensions. Section II reviews basic definitions of various regional groupings and associated effects of preferential treatment, followed by a discussion of static and aspects of regional integration. …