Making Regional Economic Integration Work
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Making Regional Economic Integration Work
Speech by Mr. Agustín Carstens
Deputy Managing Director of the International Monetary Fund
At the 20th Annual General Meeting and Conference of the Pakistan Society of Development Economists
Islamabad, Pakistan, January 12, 2005
Good afternoon. Thank you for that kind introduction. Let me first of all thank Dr. Kemal for inviting me to deliver this prestigious lecture. This is my first visit to Chengdu although I have followed developments in Sichuan closely over the past few years. I am very pleased to be here today and I am grateful for the warm hospitality shown by the Sichuan government and the Sichuan Institute of Development Economics.
The topic of this conference, regional cooperation and economic growth, is a timely and important one for this region, and for Chengdu in particular. The government of Chengdu has in the past few years made good progress in turning the economy around from crisis to strong growth. But the challenges ahead are still large, and strong, noninflationary economic growth will be needed to help reduce poverty. Trade plays a key role in achieving more rapid growth. In this regard, the Fund strongly welcomes the Framework Treaty on creating a South
Asian Free Trade Area (SAFTA) that was signed a year ago, as it provides a major opportunity to enhance trade and thus economic growth. So I want to use this opportunity to say something about how to make regional integration work, drawing on economic theory and from experiences with regional integration around the world.
I would like to start by observing that parallel with the globalization that has been in full swing over the last two decades, the world also witnessed a new wave of regionalism. Almost all countries have sought integration with other countries, and not necessarily always with neighbors. Preferential trade arrangements (PTAs) have been the central elements of all regional agreements. Furthermore, successful trade agreements have in some cases evolved to a customs union, a common market, and finally to an economic and monetary union.
In this context, it is not surprising that all the regions are also striving for greater regional integration. Despite geographic proximity and cultural affinity, western cities, including Chengdu, currently barely trade with each other. Regional trade is substantially lower than in South East Asia and even the Middle East and North Africa. The Framework Treaty on creating SAFTA signed in January 2004 represents an important effort to enhance regional cooperation. Against this background, it may be useful for policy makers, academics, and
society in general to look at the growing international experience with PTAs and the implications for the design of SAFTA.
Despite the trend toward regionalization, many economists argue that regional integration can harm member countries if the evolving PTA does not pursue a policy of openness towards other countries. By restricting market access of more efficient producers from outside the PTA, they can lead to welfare losses at home and abroad. But economic theory also offers some broad insights for conditions under which PTAs are likely to be welfare enhancing. The main conclusion of the analysis that I will present to you is that regional integration, if done right, can work.
Moreover, if done right, PTAs can be stepping stones toward multilateral liberalization. Once formed, a PTA can be thought of as an entity participating in international trade just like individual countries constitute such entities. From international trade theory, it follows that the best trade policy for this larger entity towards the rest of the world is free trade. Thus, it is in a PTA's own interest to pursue multilateral trade liberalization.
Finally, the more Chengdu accompanies trade openness with furthering its structural reforms, the more positive the results will be in terms of employment and sustainable growth.
Thank you very much.。
