4:33 PM Jan 25, 1996

SQUARING THE REGIONAL/MULTILATERAL CIRCLE

Geneva 25 Jan (Chakravarthi Raghavan) -- Economic integration among industrial countries, by its dynamic effects, may improve world growth prospects and help producers of primary and least competitive products in developing countries, but would reduce the incentive to industrialize, if not actually discourage it.

This was one of the views that came out here last week, at an UNCTAD-organized seminar, funded by Japan, on regional economic arrangements and their relationship with the multilateral trading system.

With wide participation of government representatives, experts from capitals and secretariats of regional and integration groupings and background studies and papers from experts and UNCTAD secretariat, the seminar produced a lively debate on a wide range of issues.

However, there was no discernible policy consensus emerging out of the debate on the current paradoxical situation of regional arrangements and the multilateral system -- with each claiming to be both complimentary, but contending -- and what outsiders, particularly developing countries could do to safeguard and advance their development interests.

In opening the seminar on 15 January, UNCTAD Secretary-General Rubens Ricupero, noted that regionalism was here to stay, but seemed paradoxical since during the Uruguay Round, such regional moves were seen more as a substitute for possible failure of the multilateral negotiations rather than a historical trend. But despite the successful conclusion of the Round, and the establishment of the WTO which made regional integration more difficult than before, existing integration projects were being pursued and new ones being created.

Ricupero posed the issues in terms of not only liberalisation, but of the central trend of the world economy -- globalization towards a unified economic space -- and thus involving not only trade, but investment, technology, money and finance.

The seminar produced views and suggestions ranging from greater supervision and control by the WTO over the regional blocs to 'expanding' the orbit of the multilateral system to embrace more and more new issues -- both non-trade economic ones and non-economic ones -- to show that multilateral system can achieve what was being sought through regional processes.

This was a kind of 'if-you-can't-lick-it-join-it' philosophy that was used to push new issues, other than strictly international trade issues, (involving crossing of goods and services across national boundaries) and reducing the autonomy of decision-making of countries in domestic economy.

In a study presented at the seminar, Sheila Page of the British Overseas Development Institute, said that the regionalization was a complex one, and would remain so, with risks of complexity and change greatest for developing countries.

Integration groupings of industrial countries, given their similar economic and political conditions, are more likely to expand, beyond regional trading, towards integration of economic and non-economic sectors culminating in federal countries.

But developing countries, with weak or diverging economic interests and policy approaches, may find stable integration groupings more difficult, and could prove to be temporary alliances on common interests and ad hoc interest groups.

The Page paper casts some doubts about the long-term stability as an integration arrangements of groups avowing the 'open regionalism' concept as in APEC and in some Latin American grouping, whose 'simplistic definition' of open regionalism for many appear to be the opposite of whatever the EU is doing.

Somewhat coincidentally (with the UNCTAD seminar), the Netherlands-based, FONDAD (Forum on Debt and Development) which had held a seminar with ECLAC (the UN regional body for Latin America and Caribbean) on regionalism and the global economy, in a report on the seminar views the new "open" regionalism as likely to give new impulses for a more just and better functioning system of multilateral cooperation.

In a preface to the report of the seminar, Jan Joost Teunissen, Director of FONDAD, says that the views at its seminar fell mostly into the category of those that believed that regional integration of the right kind is an essential intermediate step towards genuine international cooperation in which developing countries and the transition economies would carry more weight than now, and regional economic integration as an important way for most developing countries to develop their economies in a more satisfactory manner under the new market-based development paradigm.

The Asian/APEC and Latin American (Mercosur etc) 'open regionalism' concepts, Page notes, has the central element of 'non-discrimination' between members and non-members. In the Asian/APEC model the principle seemed to be to negotiate concessions among themselves, and extend it to any outside country that was willing to reciprocate.

But while this could be applied to trade liberalization, it would be more difficult for new areas and issues.

In the ECLAC model, any group would allow any country willing to accept the agreements already reached to join it and, as in the case of Mercosur which followed the 'negative list' criteria towards trade liberalization, more difficult for outsiders.

In the FONDAD seminar, Percy Mistry (a former World Bank senior staffer and private consultant now) puts the regionalism drive, even after the establishment of the WTO, as due to the feeling that present-day multilateralism and the machinery serving it "are grinding slowly to a halt" -- given that there was no longer a universal belief in efficacy or need for the UN and strong belief of more than half of the world that the Bretton Woods institutions detract from, rather than enhance, global welfare.

Mistry sees a new assertiveness among developing countries, especially in Asia and Latin America and their view to be taken more seriously as economic partners rather than as recipients of OECD largesse, and "continuing to be patronized and condescended to by OECD countries as second or third class".

The FONDAD discussions brought out the importance of financial flows (regional payments arrangements, development funds etc) for successful regional integration. The Latin American Integration Association was more successful because of the payments arrangements and its provisions to prevent accumulation of arrears, while the Central American and Caribbean groupings ran into trouble for this very reason.

The discussions brought that the EU, with its core of highly advanced industrial countries, in expanding its space, has been setting up arrangements and institutions to compensate the less advanced an poorer countries and enable them to face the intense competition of a free market -- both within the EU and countries associated with it.

But in forming the NAFTA (US, Canada and Mexico) and trying to extend it further to the South in Latin America, through agreements with individual countries such as Chile, and others further down the road, the United States has provided, the US has come compensatory mechanisms for its workers and industries that face problems by US investments in Mexico and imports from Mexico. But US Commerce Secretary Ron Brown is quoted by ECLAC official, Ms. Barbara Stallings, as making clear that there would be no compensatory funds like that set up in EU, and those Latin Americans seeking to join NAFTA or other hemispheric organizations, must have other reasons than compensation to seek integration.

The Fondad discussions raised questions about the pre-conditions for success, that are often mooted, such as common neo-liberal approach to economics, macro-economic stability and other conditions of harmony.

While some discussants there stressed these, others questioned it. Several noted that neither multilateralism nor regionalism was the main force behind the trade liberalization. Rather it was the result of the IMF/World Bank structural adjustment policies and conditionalities and in turn has given rise to the new regionalism.

Trade liberalization and integration may promote investments, but the opposite could also happen. A number of Japanese industrial firms that had been operating in Latin America decided to close down their operations and export directly from Japan, because it was cheaper and they could make higher profits, Barbara Stallings an ECLAC official said.

According to Augusto Aninat, President of a large Chilean export firm, the rise in manufactured trade between Argentina and Brazil was not only a consequence of liberalization of trade but also of administered special trade regimes that gave protection to TNC subsidiaries. The automobile industry was cited as an example. These industries were located and remained in Latin America because of the protection, while any complex and sudden liberalization would result in many of them going away and export to Latin America from outside the region.

Percy Mistry said the view that Asian integration has been a market-driven process was "too simplistic". It was first driven by Japanese TNCs, then by Korean and Taiwanese TNCs, and later by Hong Kong/Singapore TNCs, and now by Malaysian/Thai/Indonesian/Philippine TNCs. But all these had "effective relationships" with their governments and it would be misleading to simply classify them as market-driven integration.

The late Shaheen Abrahamian (of UNCTAD's Global Interdependence Division) brought up the distinction between the process in Latin America and Asia. The US investments in Latin America is superficially like that of Japan's in Asia, but has not resulted in any relocation of production or resulted in structural changes as in Asia.

While there was a general support for the view that integration needs macro-economic convergence, a number of participants made the point that convergence comes about only after a high degree of intra-industry trade and economic integration and not the other way round. Even with high degrees of integration, as the EU case showed, macro-economic convergence is more difficult. How to converge was as important as convergence, as the Mexican peso crisis had shown.

In terms of regional groupings of the developing countries, Page in the UNCTAD seminar paper took the view that at the level of the international system, they would have the disadvantages of being fluctuating alliances, without the negotiating power of a mature regional group, but would have the advantage of not needing group agreement over all issues on a permanent basis.

It is unrealistic, Page says, to require a simple structure or even a tidy or logical one for an international institution to deal with such units, since it would put 'managing' ahead of development or welfare as an objective and would also be different from 'messy' solutions invariably found at national level and in the longest surviving region, the EU. But it is not wrong to seek to make any solution as simple as possible, for the sake of those not involved in any negotiations -- for countries excluded from a region, for participants excluded because they are economic agents, not countries.

In summing up of the discussions of the UNCTAD seminar, the Chairman of the seminar, Mr. T. Tsunozaki of Japan, said that large economic spaces could have positive development effects for developing country members, but there were also fears of adverse effects on trade and investment of developing countries outside such groupings, as preferential access was a big advantage on the world's largest consumer markets. "These risks are particularly pronounced for developing countries and regions which do not belong to any such large groupings; some of them belong to the poorest among the developing countries".

In terms of options, the UNCTAD seminar viewed strengthening of the multilateral liberalization as important, and that membership of regional and subregional groupings of developing countries did not provide benefits comparable to those of large economic spaces.

The Page study casts doubt on the view that the world is being divided or will divide into regions based conveniently on the continents. At present, the study says, there is currently one industrial-country region (Europe) which is becoming increasingly integrated while there are one or two others -- Mercosur and NAFTA -- which have the potential to so develop. In others, (as in South East Asia) where there are some moves and results, and many of the apparent conditions for regions, but where it is difficult to see political and social conditions as easier to meet than those for global integration, and hence difficult to see any argument (for regional integration) other than for limited bargaining ability.

From this view, the Page study suggests that the 'regions' were now so extensive that omitted countries need to form ones. In any event, such regions of developing countries would be 'unstable' and they would be better off in terms of stable trading environment through the WTO.

And because of the challenges under GATT Art XXIV of the WTO that new groupings would face, and the likelihood of more and more new areas being brought into the WTO, would make earlier stages of regional liberalisation and integration more costly. But existing ones might continue to advance faster.

At the UNCTAD seminar the idea of more disciplines, and more rights for outsiders under Art. XXIV, was advanced, but met with the counter-argument that more such rights for non-members would imply modification of Art. XXIV.

But several noted that large economic spaces were increasingly expanding into new sectors -- labour standards, movement of labour, immigration and social standards were some of the areas -- with substantial implications for third countries which, in terms of the multilateral trading system, had no defence. Hence the system should be able to supervise better what regional groupings do.

The UNCTAD seminar also brought out concerns over the rapidly expanding networks of various types of association agreements with different layers of preferential advantages centred around major trading nations.

The EU is the principal practitioner of this type of arrangements, but other groupings around major industrial nations too seem to be moving in this direction to gain advantages.

However it was argued in defense that these arrangements implied a dynamic process of liberalization as they are extended progressive to a larger number of countries and would ultimately facilitate multilateralization of advantages.

Many participants in the UNCTAD seminar favoured strengthening the multilateral trading system and effective application of its rules regarding regional arrangements, and that the rules merely dealing with tariffs and trade aspects were insufficient to capture the full dimension of such arrangements. While one of the experts explained the APEC and its open regionalism -- liberalization efforts of members that are intended to be extended to other developing countries on MFN basis, without reciprocity, others raised doubts as to how far such liberalization could progress within a non-contractual, informal and loose framework. One expert said that beyond a certain degree of integration, it would be difficult to practice open-regionalism.