Abstract
We argue that successful economic integration requires a regionally preponderant country that acts as a provider of goods. However, when a large member acts in a costly unilateral manner, regional integration suffers because of the asymmetric effects on smaller members. In contrast, when smaller members act in a costly unilateral manner, the preponderant power is likely to absorb costs. We propose to test these hypotheses by using the case of the Common Market of the South (MERCOSUR) during three crises: the attempted military coup in Paraguay in 1996, the 1999 devaluation of the Brazilian real, and the 2002 devaluation of the Argentine peso. Evidence shows that economic integration declined with costly Brazilian unilateral actions but improved when Brazil provided goods.
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