Letters

Could an African or Asian Union catch up to the Global North?

Faced with developmental challenges of the planet, world leaders have often found that a concerted response to those challenges tends to work better. The idea of interdependence is ripe in today’s world. We have put behind us the counterproductive ideologies governing the trade wars of 1930 and the economic nationalism of the 1970s. Liberalization has come a long way. The benefits of multilateral free trade might not be a given, but with globalization in no position to abate, more and more countries are seeking integration into the global economy.

Multilateralism, however, is not the only form of globalization. In part due to their geographical proximity, countries have always found regional integration as a logical means to growth. Scholars have long debated whether regionalism threatens or reinforces WTO-governed multilateralism. Regional agreements end up slightly distorting the global market as specialized treatment is now reserved for a group of countries who form a regional bloc. But this apparent distortion partly salvages the deeply uneven phenomenon that is Western-led globalization. In a report, the International Labour Organization remarked that regional groupings can ensure a “fairer globalization”. The fact that the benefits of global free trade are not equitably shared across geographies is one of the reasons why regional integration has caught the fancy of leaders in the global South.

Free Trade Agreements and Rising Regional Trade

Geopolitical regional integration in the global South has served to provide dynamism to these regions not just by boosting trade and investment among them, but also developing inter-regional trade—that is, free trade agreements (FTAs) among regional groupings (e.g. the ASEAN-EU FTA) and with other sovereign states (e.g. the EU-India FTA).

Efforts at regional integration are expected to help realize much of the untapped potential of a region. Gabriel Nahimana, of the United Nations Economic Commission for Africa, has written of his hope that regional economic integration (henceforth, REI) could ‘save’ Africa, home to much of the world’s impoverished population.

The crux of the pro-REI argument is that REI boosts trade and consequently attracts investment to the region as a whole. As resources and markets are pooled together, economic activity grows, resulting in rising employment and development. Regional trade can also help firms create local/regional value chains as a building block for potential international competitiveness.

Many regional integration efforts take the shape of FTAs but these days countries join to form comprehensive economic partnerships that include agreements on not just trade, but investment, labor, and the environment, among others.

Numerous FTAs have been signed in Africa, and FTAs are developing at an even more rapid pace in the Asia-Pacific region where 113 regional FTAs are currently in effect. SAFTA (abbreviation for the FTA signed by SAARC in 2004) aims to record $40 billion worth of trade by 2015. A better known free trade agreement is the one entered into by ASEAN which is heralded as a beacon for regional integration in the South. Figures pertaining to the ASEAN FTA or AFTA offer a glimpse into what regional economic integration is capable of achieving. In a mere two years’ time, from 2009 to 2011, intra-ASEAN trade went up four times as tariffs fell rapidly. Compared to Asia-Pacific’s successful integration, African integration has a long way to go, but intra-African trade did rise noticeably, from $50 billion in 1995— following the establishment of the COMESA in 1994—to $130 billion in 2011 (UNCTAD figures). Along the way, COMESA deepened its economic cooperation through FTAs and investment pacts. Negotiations are currently on to finalize a grand FTA involving COMESA, the East African Community and South African Development Community known as the COMESA-EAC-SADC tripartite FTA (TFTA). Taken together, the regions involving AFTA, TFTA and SAFTA together comprise almost 3 billion people.

REI and Development

The impact of regional free trade on development and poverty reduction, however, is less certain. A study conducted by Pasha L. Hsieh of the Singapore Management University suggests that the impact is quite significant, and it applies to even the less powerful in the bloc, such as Cambodia, Laos, Thailand, and Vietnam. The benign effects of intra-ASEAN trade on poverty reduction have already been documented. But, for all its developmental achievements, countries have also suffered from regional trade agreements. Vietnam for instance is known to have had to bear the brunt of AFTA, thanks to its goods failing to compete regionally. Among a set of policy recommendations that a Center for ASEAN Studies report had for the Vietnamese government were efforts by the state to cooperate with the private sector to increase the competitiveness of its domestic industries.

In Africa too, the benefits of REI are questionable for some member states. Zimbabwe maintains dominance over intra-COMESA exports while investments tend to concentrate on a few advanced economies within COMESA. A study by Issam A.W. Mohamed from Al-Neelain University concluded that Sudan, a weak COMESA state, gained little from REI as Sudan’s integration into COMESA led to unemployment and rising poverty while agriculture and manufacture went on to suffer from negative growth. An effective state geared to reap the benefits of REI is the need of the hour, the paper argues. In this case, Sudan could not compete in the import/export market on either quality or price, and value chain upgradation remained a pipedream. The welfare effects of regional trade in Africa also varied significantly between member states wherein Tanzania seemed to have done considerably better than the rest. Ultimately, it boils down to the question of what institutional circumstances allow trade and foreign investment to benefit developing countries.

Regionalism among emerging economies might very well be rooted in both a sense of political and cultural affinity and the fact that these economies broadly stand at the same stage of economic development. But Regional Trading Agreements themselves are of little developmental value if the member states don’t complement openness with the right set of policies. In short, state capacity is a prerequisite, and REI and regional FTAs will not inherently tackle the issues of unemployment, poverty, and malnutrition. There are some directly targeted ‘anti-poverty’ programs, but their scale is nowhere the sheer magnitude of maldevelopment in major parts of Asia and Africa.

While developing countries are doing the right thing by involving themselves in regional groupings, states should not make the mistake of believing regional FTAs are a panacea to the problems of the developing world. Benefits of REI can be fully realized only if member states continue to play a role in the process of development, wherein states synchronize openness with the right institutional settings and domestic policies.

Abhirup Bhunia, M.A.
Researcher, Observer Research Foundation
New Delhi

To read more articles from the Spring 2014 issue, subscribe to our eReader edition.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s