UNU/IAS Working Paper No. 38

Regionalism in the World Political Economy

--An Empirical Assessment & A Conceptual Framework1

Shaohua Pan

1 The author wishes to thank UNU/IAS for granting him the Ph.D. Fellowship Award, which make itpossible for him to conduct research in Japan between March and November 1997.

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The fact that the world has become more integrated regionally poses a great challenge to

many existing frameworks of the world political economy. Today regionalism has

become the centerpiece in the debates about the nature of the post-Cold War

international order. To policy makers in both developing and developed countries, there

are two major concerns on regionalism. What is the current trend of regionalism? To

what extent does regionalism pose constraints and/or opportunities for national and

international development? The former is relatively an empirical question and the later

requires both an empirical analysis and a theoretical conception. This paper attempts to

address both of them. For the first one, this paper provides a preliminary assessment of

current regional arrangements on economic, institutional and political aspects. For the

second, the paper assess the pros and cons of regionalism on economic, social, political

and ecological dimensions and proposes a systemic framework to highlight the potentials

of regionalism. Given the fact that regionalism has become a central reality of the world

political economy without any significantly adversary impact being found, it is important

for policy makers to recognize the positive contributions of regionalism and strengthen

their leadership to capture its full benefits.

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To understand what are the current trends of regionalism, one has to make clear what

regionalism means. In fact, the definition of regionalism remains in dispute and it has a

different meaning to different people. In this paper, regionalism is broadly defined as the

disproportionate concentration of economic activities, institutional-building and policy

coordination in the economic-political-social-ecological domain of certain regions of the

world. Explicitly, regionalism concerns economic welfare, institutional linkages, and

political order in the areas of economic integration, political cooperation, social cohesion,

and regional eco-systemic balance. Such a definition allows us to grapple with the multi-

facet features of regionalism; and it is also methodologically easier for us to tackle the

problems surrounding regionalism in a comprehensive and integrative manner.

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Economic regionalism is affected by a number of factors such as historical experience,

cultural connectivity, settlement geography, political continuity, and various economic

interactions. (Table 1 highlights some of the factors affecting economic regionalism and

their positive and negative impacts in the case of Asia Pacific.) Economic regionalism

also involves various formats. It can be market-led, and/or policy-induced in approach; it

can be complementary or competitive in structure; it can be positive or negative in

measure; it can be open or closed in orientation; it can be deep or shallow in depth; and it

can cause trade creation and diversion. (See Table 2 for a summary of the dimensions of

economic regionalism.)

Table 1. Factors Affecting Regional Economic Integration

Factors Positive Impact Negative ImpactHistorical ExperienceInternal RelationsExternal Relations

Social cohesionColonial Linkages

racial, religious, class divisionJapanese Colonialism, Chinese Communism

Cultural ConnectivityLanguageReligion

Communication, understandingConfucian & Buddhism Division

Settlement GeographySpatial characterConnectivity

Overseas Chinese, Japanese, KoreaBorder regions

Immigration problemsdisputes

Political ContinuityRegime TypesFiscal, Monetary & Trade PolicySecurity Concerns

Flexible engagementStabilityPeace & Prosperity

China-USUS-JapanTaiwan, Korean Peninsula, Russia-Japan,South China Sea

Economic InteractionTradeStandard of LivingLabor FlowsInvestmentFinanceTechnologyEnergy & Resource

Labor, tech, market linkagesGrowthSkill & unskilled laborCross-economy, division of laborFunds, currency zoneSpilloverlow-cost

ProtectionCompetitive SqueezeNew ImmigrantsCapital flightFluctuationBarriersInefficiency, environment damage

Both economists and policy makers concern whether regionalism is welfare improving or

reducing and whether it would discourages further global economic integration. On one

extreme, one can claim that regionalism not only may create trade diversion and fill

protectionism, it also may derail multilateral economic order. On the other extreme, one

can argue about the necessity of policy coordination and the economic benefits arising

from factor flows, scale economy, R&D cooperation, and the necessity to protect infant

industries on a regional basis and so on. The divide is generally both technical and

normative.

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Table 2 Dimensions of Regional Economic Integration

Approach Market-led

Policy-driven

Cross-border capitalCross-border zone

Growth triangleOpen economic associationFree trade areaCustom unionCommon marketEconomic union

Structure Complementary

Competitive

Comparable levelsSimilar factor endowments

Incomparable levelDissimilar factor endowments

Orientation Open

Closed

Non-exclusivity of membershipNon-discrimination

Exclusivity of membershipDiscrimination against outsiders

Measure Positive

Negative

Eliminating certain obstacles or impediments to integration

Creating the harmonizing conditions for improved integrative coordinationDepth Deep

Shallow

Reducing all impediments both at the border & within borders: tariff and non-tariffHarmonizing national norms & practicesComprehensive liberalizationDisputes settlement by courts & supranational institutions

Reducing cross-border barriers through unilateral or negotiated waysImpact Static

Dynamic

Trade-creation: Growth of inter-regional trade & growth of intra-regional tradeTrade-diversion: Reducing intra-regional trade & diverting trade from low cost third parties

Members: Increase of scale economies, competition, term of trade, FDI, bargaining leverageNon-members: exclusion of benefits, decline of term of trade, FDI, & bargaining position

A general consensus among economists is that the market-led approach, the

complementary structure, open orientation and the depth-focused integration are welfare

enhancing; whereas others have to be analyzed on a case by case basis as theory is not of

much help. The problem is that a regionalism often involves both market and policy

functions. Whether structurally complementary or competitive is not only country

specific but also industry specific, which means using income difference or even

divergence of development levels to judge whether a group of countries are structurally

complementary and competitive is not reliable. Besides, a regionalism can be initially a

closed one but opened up when internal integration reaches to a certain level. What’s

more, a regionalism may aim at shallow integration at the beginning but when the

process builds up the momentum, a deep integration may follow; or even reverse the

cause due to significant difficulties such as political obstacles not only preventing further

integration but also pushing back initial arrangements. Hence the impact internally and

externally varies according to time. Nevertheless, in order to measure the effects of

economic integration, some economists still try to distinguish the policy-induced

integration from market-led one. Since the market-led regionalism is commonly viewed

as part of the globalization process and taken as given, the general assumption is that if

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we can establish a welfare relationship of policy-induced regionalism vis-à-vis the total

welfare or internal vis-à-vis the external, we would be able tell whether such a regional

arrangement is welfare enhancing or reducing. Many recent research on regional trade

arrangements based upon econometric models is following this line of thinking; but so

far the results are largely inconclusive. As Winters (1996) put it: “One can build models

that suggesting either conclusion but to date these are sufficiently abstract that they

should be viewed as parables rather than sources of testable predictions”2. For example,

Panagariya (1994) evaluated the welfare effects of three styles of trade arrangements in

East Asia: ASEAN Free Trade Area, East Asian trade bloc in line with the EC and non-

discriminatory free trade in East Asia (EA). Lewis, Robinson and Wang (1995) explored

the welfare implications of different scenarios in forming a full or partial free trade area

of APEC and a global area of free trade. A general problem confront those scholars is the

arbitrary separation of what constitutes the real natural part and what is really policy-

induced. Historically, the regional difference always exists and factors that cause the

distinctive regional patterns are complicated.

However, by observing the bilateral trade flows, we can still derive some regional

patterns and from there we can reasonably obtain some knowledge on regionalism at an

aggregated level and on an ex port basis. The straight-forward intensity indexes on trade

investment used by various authors3 for example can serve this purpose. Figure 1, 2 and

3 illustrate in selected years the trade patterns of five major regional groupings: the EU-

15, NAFTA-3, APEC-18, ASAEN-7 and EAEC-11 (East Asian Economic Caucus) in

terms of their internal and external trade relations. The trade intensity index4 is based

upon the ratio of bilateral flow to its expected value. As illustrated by Figure 1, all the

regions except the EU show a decline in their intra-regional trade, which means that

given the regional factors, market-led and/or policy-induced, intra-regional trade except

2 See Winters (1996) for a review of current econometric models on regional trade and global trade3 See Anderson and Horheim (1993) in Garnaut and Dysdale (1994) pp.125-142

4 The trade intensity index is defined as: iw

i

j

ijij XX

X

M

XI

−= / , (see ADB (1996) pp. 191) where

ijI is the index of intensity between country i and country j ; ijX is the exports from country i to

country j ; jM is the total imports of country j ; iX is the total exports of country i ; wX is the total

world exports. By comparing country i ’s actual export to country j ’s total import to country i ’s total

export to the rest of world, the effects of countries’ size to their trade share can be isolated. Specifically,

the intra-regional trade intensity inI is derived as the average of the trade intensity of the average of

each member to all the other members in the region. The extra-regional trade intensity exI is derived as

the average trade intensity of all the regional member’s net trade outside the region.

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EU has become relatively less important over the years. While the EU’s internal trade

seems to have increased over the years, seemingly the result of the policy-induced

regionalism, its intra-regional trade intensity has consistently been the lowest among the

five regional groupings, which means that the total regional factors are not significant

compared with other regions. On the other hand, as illustrated by Figure 2, all five

regions have increased their trade intensity with outside regions from 1985 to 1995

without exception although ASEAN, EAEC and the EU maintain a relatively more

consistent increase than both NAFTA and APEC.

Note: Computed based upon the formula of trade intensity index defined in footnote 4 & 5.Sources: the Directions of Trade Statistics Yearbook, 1993, 1996, IFM

Figure 3 indicates the regional trade bias, which favors the intra- over the extra-regional

trade and finds trade bias exists in all five regions5. Under this measure, regional trade

bias is high in ASEAN but it also drops very quickly over the years. NAFTA also has one

of the highest regional trade biases. In fact, the EU’s regional trade bias is the lowest

among the five regional groups and it is followed by that of the APEC group. It seems to

imply that both the EU and APEC, if taken as two trading blocks, are more natural than

others. Comparing the EU with others, it seems to imply quite strongly that regional

arrangements do not necessarily increase trade bias. What’s more, the general trend as

indicate by Figure 3. and 2. is that regional trade bias is decreasing or remains relatively

low and international trade relations have become increasingly open. Indeed, as the only

regional economic arrangement that is big, long lived, and substantial enough to affect

the pattern of both internal and external trade relations, the case of the EU seems to reject

the significance that regional arrangements, assessed in an ex post basis, are creating

more regional bias than without.

5 The intra-regional trade bias intensity is defined as 1)/( −= exinbias III .

00.5

11.5

22.5

33.5

44.5

55.5

1985 1990 1995

Figure1. Intra-Regional Trade Intensity

ASEAN EA NAFTA APEC EU

0.930.940.950.96

0.970.980.99

11.011.021.03

1985 1990 1995

Figure 2. Extra-Regional Trade

Intensity

ASEAN EA NAFTA APEC EU

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

ASEAN EA NAFTA APEC EU

Figure 3. Regional Trade Bias Intensity

1985 1990 1995

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As for whether economic regionalism in general would hinder the further global

economic integration, one can take on some broad perspectives and all the answers are

No in current circumstance. The reasons are clear. Firstly, current economic regionalism

is largely driven by the same forces that drive globalization. It is led by private

enterprises large or small to improve efficiency, competitiveness, better access to

resources and customers by increased specialization due to comparative advantage

among firms and increased production levels due to increased size of the market.

Secondly, current policy-induced economic regionalism is largely outward oriented.

Regional policy arrangements are basically to facilitate further integration into the global

economy instead of withdraw. It places more emphasis upon freeing market mechanisms

rather than more tightening government intervention. Finally, regional arrangements in

general are rule-conforming, that is, they are pro-multilateralism and multilaterlism-

complementary rather than disarraying away from multilateral standards. What’s more,

they are aiming at deeper economic integration in a much more broad areas that include

goods, investment and service than what current multilateral arrangements are generally

made possible. In terms of harmonizing internal rules, regulation and setting up

enforcement mechanisms, regionalism can go far beyond than multilateral regimes

currently can. As a recent OECD report argues: “internal adjustments related to intra-

regional liberalization can make the constituting economies more competitive and better

prepared to accept, economically and politically, multilateral liberalization. Regional

integration agreements also contribute, through a greater awareness of interdependence,

to greater acceptance of more effective international rules and more independent

procedures for their enforcement. Regional arrangements have been test beds or

laboratories of approaches and techniques which have subsequently found application in

the multilateral trading system.”6 Empirically, given the increasing numbers of regional

arrangements, tariff barriers have come down consistently and the growth of the world

trade and investment has surpassed that of the GDP across all regions of world. Arguably

world economy is becoming more and more integrated in spite of the mushrooming

regionalism around the world. One may even argue global integration has lots to do with

the economic regionalism since the latter may have injected lots competitive energies

into the spurs of globalization and provided the necessary infrastructure for further global

integration. After all, one should not forget that the so-called economic multilateralism as

represented by the GATT system historically started in a form of economic regionalism.

In Geneva in 1947, when GATT was established, its membership was only 23 and they

6 See OECD (1995) on regional integration and multilateral trading system.

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were mostly the rich Western countries led by the US. Japan was not included, nor the

majority of the developing countries in Asia, Latin America and Africa, not to mention

the remaining Communist countries at that time.

Source: World Investment Report 1996, UN

Anther concern on regionalism is marginalisation, which refers to the excessive

concentration of economic activities in certain regions would deprive the rest of the

world of the chances of the benefits to integrate globally and achieve economic

convergence. If regionalism on international trade does not indicate the tendency of

reinforcing marginalisation, as illustrated by the declining trend of trade against members

outside the regions, would foreign direct investment (FDI) be affected more significantly?

The question is put forward as the balk of FDI is clearly concentrated in the three regions,

the EU, NAFTA, and the EAEC. As FDI constitutes the main source of technology

transfers, does current pattern of FDI flows mean that the regions outside the industrial

triad have been left out of technological advance? To qualify for the claim of

marginalization, one has to measure in two terms. First is to compare the sources of FDI

with their hosts. The second is to compare the FDI inflows to a region with the region’s

economic activities. If the sources generate the comparable volumes of FDI as what they

receive, and if a regional FDI inflows are comparable with its GDP (rather than

population), then there should be nothing to complain about regional arrangements.

For the first one, the EU, NAFTA plus EAEC both generate and consume over four fifth

of the world total FDI flows. For the second criterion, we can measure it by the

international investment intensities7, the share of inward and outward of FDI stock in

terms of GDP. Figure 4 shows the results of the FDI intensity of eight exclusive regions

of the world with that of the world average. It is true that the EU, NAFTA and EA have

been the privileged class as their FDI intensities are higher than the world average. Yet,

both the EU and NAFTA are merely modest players. The EU replaces NAFTA as a more

7 The regional investment intensity index is defined as the regional average of each country’s ratio ofinward and outward FDI stocks to its GDP.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1980 1985 1990 1994

Figure 4. The Investment Intensity by Region

EAEUNAFTAWorldOil-exporting CountriesAfricaWest AsiaL. America & the CaribeanC.& E. Europe

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favorable place for FDI in 1985, seemingly attributable to the European integration. Even

so, the record for the EU is not significantly higher than the world average. It is the EA

region that has emerged as the world champion in terms of attracting and retaining FDI8.

It emerged as the leading FDI hosting region in the1990s replacing both the EU and

NAFTA. However, it is the EA that lacks policy-induced regional arrangements! The

global investment shift into the high growth region where regional arrangement barely

exists9 is clearly a response of market integration. On the other hand, the world average is

increasing almost a two-fold between 1980 and 1994. The other five regions also

increased theirs during this period of time and there seems a trend to converge to the

average too, especially the oil-exporting countries, Africa, West Asia and some less

extent, Latin America and the Caribbean.

Table 3 A Comparison of Alternative Modalities of Economic Integration

Elements

Form

Tariff &Quota

Abolition

CommonTariff &

Quota

FactorMovements

Unification ofEcono-Political

Institutions

LegallyBinding

DiscriminationAgainst

OutsidersGrowth Triangle Yes No Yes No No Yes

Open Economic Association Yes No No No No NoFree Trade Area Yes No No No Yes YesCustom Union Yes Yes No No Yes Yes

Common Market Yes Yes Yes No Yes YesEconomic Union Yes Yes Yes Yes Yes Yes

The argument so far is not to claim that the fear of discrimination arising from

regionalism is unjustifiable, however. Theoretically, trade creation and trade diversion

would coexist after countries form free trade area and custom union. But such problem is

not only confined to regional agreements. Bilateral agreements or even unilateral

arrangements can also create similar problem; and if the involved countries are big, so the

potential of big diversion. To equate regionalism with trade discrimination is

oversimplified. It would blind us from recognizing the deeper gains out of the some

regional arrangements. Moreover, to equate regionalism with the arrangements described

in the free-trade-area and custom union framework is too narrow in scope as there are

always alternatives. Sub-regional integration, or the so- called growth triangle based upon

geographical connectivity and resource complementarity is one and open economic

8 FDI reflects only loans and equity investment. It does not reflect the international strategic allianceand other non-equity arrangements such as locally financed loans and local shareholders, reinvestedprofits. However, as an indicator of internationalization, FDI flows do reflect the increase of MNCactivities; and FDI stocks, the potential structural developments of the economies.9 ASEAN adopted Industrial Joint Venture and Promotion and Protection of Investments (binding) in1987. APEC adopted Non-Binding Investment Principles in 1994. Both are modest facilitatinginstruments.

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association10 base upon non-discriminatory principle is another. (See Table 3) Growth

triangles have effectively creating border-less regions cutting across nation-states,

striving to become the growth poles for further expanded integration. (Table 4 provides a

summary of some major growth triangles in APEC region.) The modality of open

economic association as demonstrated by APEC is also impressive in strengthening both

internal and external liberalization processes. Both of them are empirically rich examples

of regionalism that are taking shape in the Pacific region; yet both are seldom recognized

in the mainstream international economics. Given the overall liberal stance, the

theoretical foundation of trade and investment in modern international economics still

remains largely on a country-to-country basis. One has to wonder how global integration

would happen if all countries have to wait until the last country is ready. Open

regionalism11, to put it simply, represents a modality of letting the ready ones to move

ahead and invites the others to join at a later stage without penalty. It also intends to

explore its collective leverage to prevent other forms of regionalism from turning inward.

The conclusion so far is that current regionalism empirically does not appear to reinforce

global or regional trade and investment divergence nor appear to hinder global or

regional integration. It is true that one may even argue at least in the case of EA that

global and regional integration does not necessarily have to have to depend upon policy

arrangements. Moreover, I would argue that what appears to be important to increase

international trade and attracting foreign investment has more to do with the health and

dynamics of the domestic economy. The predominant economic capacity of the EU,

NAFTA and EA is not simply derived from trade and/or investment. What fundamentally

support their economic strength has more to do with their indigenous scientific power,

technological potential, human resource, infrastructure and sound economic management

and so on so forth. Of these criteria, East Asian developing countries are still relatively

weak and further regional cooperation with developed countries to strengthen their

indigenous capacity is badly needed. The two regional cooperation modalities, open

economic association and growth triangle, will further strengthen the foreign trade and

investment-led, foreign market and technology-dependent growth strategy of EA

developing economies. The former is aimed at macro-level, that is country to country

basis; and the latter, the micro-level, sub-national region to sub-national region basis.

They are mutually supporting in that the former helps to sustain an open and favorable

10 See Yamazawa 1996 on such new model of regional integration11 It will be dealt with in the session on politics.

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international economic system for the latter’s border-dismantling integration. The latter

internalizes the both the benefits of border-dismantling integration and global

liberalization and strengthens the economic base for and political commitment to further

global liberalization and integration.

Both Mexico and Southeast Asia currency crises highlight the importance of economic

integration. In the former case, it was the US. that initiated the monetary support and in

the later it was Japan that came to the rescue, although in both cases IMF was in the

limelight. If one understands that the inter-locking interests have the strongest base

between neighboring countries, understand the so-called multilateral agencies are at their

best sustained by the big powerhouses, one would find out how important regionalism is

in sustaining the economic vitality of those relatively small and weak countries. Indeed,

we have many currency crises around the world. Poor countries that are not integrated

regionally particularly with the powerful economies are not very well appreciated by

those multilateral agencies. All this underlines the importance of regional integration. It

provides the individual economies the convenient space for market expansion to take

fuller advantages of the economy of scales and the economy of scope to achieve both

competitive and comparative advantage. For the poor and small economies, regionalism

provide them the secured chance to reap the benefit of all kinds of economic externalities

spilled over from the rich including the assurance of economic rescue in time of trouble

maybe. We don’t want to deny that world economy is increased globalized where all

economies are increasingly integrated but unevenness and disparity exist and they make a

huge difference. Policy that would strengthen the economic linkages and access is

important. Recent Asia-Europe Meeting once again reflects the strong motive of East

Asia, particularly the relatively small nations’ group, ASEAN, to strengthen the global

linkages networked in overlapping regionalisms. Indeed, market based regionalism can

be achieved with or without institutional arrangements but it is clear that deeper and

wider integration has to depend upon certain levels of arrangements and that is why we

need institutional bases.

Table 4 Asia-Pacific Growth Triangles

GrowthTriangle

Popm.

Area,000skm.

GDPb. US$

Complementarity Time Sponsor LeadingCounty

Leadingindustry

Purpose

South ChinaGuangdong,Fujian, HK,Macao &Taiwan

120 340 80 Culture, Capital,Labor

1980s Private HK, Taiwan Manufacturing Greater Chinaintegration

Tumen RiverVostochnyy,

20 200 Natural resources,Land, Energy,

1991 UNDP China ResourceProcessing

DevelopmentCooperation

11

Nokhoka,Vladivostok;Ch’ongjin; Jinlin

Environment, LaborJapan & S. Korea:Capital

SouthernGrowthTriangleSingapore, Johor,Riau

8 115 40 Singapore: Capital,Johor & Riau:Labor & Land

1989 Singapore Singapore Aagribusinss,Tourism

Verticalspecialization

NorthernTriangleIndonesia-Malaysia-Thailand

21 NE Malaysia:CapitalS Thailand & N.Indonesia: Labor

1991 ADB Malaysia Electronics

East GrowthTriangleMindanao,Sulawesi,Sarawak andSabah andBrunei

30 500 Mindanao: LaborSarwak & Sahah:Resource & capitalSulawesi: Tourism& agricultureBrunei: Capital

1993 ASEAN PhilippinesMalaysiaIndonesiaBrunei

Processingindustry

Crossresourcesdevelopment

GreaterMekongSub-regionCambodia,Yunan, Laos,Myanmer,Thailand,Vietnam

200 Natural resources,Land, Environment,Labor

1992 ADB Thailand Agro-industry,manufacturing,tourism

Agro-industry,manufacturing,tourism

East PacificBeltVancouver-Seattle-SanFrancisco-LosAngeles

40 1700 1115 4 million OverseasAsian, PacificConnection Belt,Consume &Production Market

1950s Private US, Canada Transportation,Aerospace,Electronics,Computer,R&D

Multiple

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Institutions mean different things to different people. In relation with regionalism, we

would define institutions as structural components in a regional setting through which

essential social activities were organized and social needs were met that are either

integrative or fragmentational towards regional formation of various kinds. In a more

narrow term, institutions more or less equate with organizations with their distinctive

functions and purposes. Even so, the complexity of institutions and their developing

process are still difficult to grapple with. However, if we believe that these institutions to

a large degree represent the needs of their constituents at large, believe that they reflect

and shape public intentions and believe that they forge bonds among their stakeholders,

and believe that they provide the necessary governing infrastructure, then where the

memberships of those institutions are originating from, what are their orientations and

where their affiliates are all become a meaningful indicator. Let’s take a look at the first

group of transnational organizations, the transnational corporations and then the second,

civil organizations.

We know that transnational corporations (TCs) are the dominant and active players in

international economic activities and in general they are both globally and regionally

12

oriented. They are the sources of FDI, international merge and acquisitions and transfer

of technology. The distribution of parent firms and their foreign affiliates of TCs often

serve as a strong binding force across nations and regions. Clearly, it demonstrates a

regional preference12.

Source: World Investment Report 1996, UN

Today, out of over 38,700 TCs and their 265,551 affiliates in the world, about 78.4% of

TCs and 64% their affiliates are based in the EU, NAFTA and EA. This clearly indicates

a triad pattern of global distribution of TCs, which coincides with the trade pattern. But

there is a difference between different regional groupings in terms of their parent firm

and foreign affiliate concentration. Measured by concentration index13, Figure 5 shows

both the EU and NAFTA have a higher parent firm concentration indexes than their

foreign affiliate concentration indexes, whereas the other groupings have higher foreign

affiliate concentration indexes than their parent affiliate indexes. If we assume that a

transnational parent firm generally tend to be more in favor of an open system for its

global reach vis-a-vis a foreign affiliate which has a relatively narrow focus, the pattern

may indicate that the business interests in both EU and NAFTA would tend to favor a

more globally oriented rather than regionally oriented international economic relations.

Such an interpretation is chiefly derived from the assumption that global firms have a

broad scope of business interests and also globally competitive. A bit of caution is

needed however as preferring global to regional may be quite industry specific, it also

depends upon the context and strategy of the firm. A small and local firm can also be

very globally oriented whereas a big and global firm may also be quite inclined to seek

regional shelter. Nevertheless, the concentration indexes of parent and affiliate provide

12 The major R&D functions are concentrated at the parent firms and technology diffusion usually takesplace between the parent firms and their foreign affiliates. The distribution of parent firms can indicatethe overall technological strength of the economies while the distribution of the foreign affiliates, thetechnological linkages with others.13 Defined as defined as follows: Index = (actual x value – minimum x value) / (maximum x value –minimum x value), where x is the ratio of the number of parent firms or foreign affiliates to the numberof world total parent firms or foreign affiliates.

F i g u r e 5 . P a r e n t F i r m & F o r e i g n A f f i l i a t e s C o n c e n t r a t i o n I n t e n s i t y I n d e x e s

A S E A N

E A

N A F T A

A P E C

E U

A S E A N

E A

N A F T A

A P E C

E U

0

0 . 2

0 . 4

0 . 6

0 . 8

1

0 1 2 3 4 5 6

P a r e n t F i r m I n t e n s i t y F o r e ig n A f f i l i a t e s I n t e n s i t y

13

an important reference at least to ponder about why over the years protectionism

sentiments both in the EU and NAFTA do not propel regional closure whereas market

opening and liberalization in EA and ASEAN are slowly paced.

In terms of the civil organization, As illustrated in Figure 6, currently at the global level,

regional civil organizations constitute the dominant group in international civil

organizations14. Non-governmental civil organizations outplay inter-governmental civil

organizations in number both at international and regional levels. This implies that

significant civil institutional development is largely concentrated at regional level. This

also indicates that the inter-societal development is more intensive in scale than inter-

governmental relations.

The institutional intensity index based on the membership and regional comparative

stance in this regard helps us distinguish some basic patterns. Our target regions are

again the APEC, EA, ASEAN, NAFTA and the EU. Based on the institutional intensity

index, Figure 7 represents “the official response sheet” 15. In terms of global institutional

intensity index, which measures the relatively degree of global institutional building at

regional level, the EU is on the top followed by APEC, ASEAN and EA together.

NAFTA is at the bottom. In terms of regional institutional building at regional level, the

EU again is the top followed by NAFTA, APEC, and ASEAN, and EA is at the bottom.

It indicates that both ASEAN and APEC are more pro-global than pro-global. EA is pro-

global only and NAFTA is pro-regional only and the EU is pro- both. It also indicates in

terms of pro-global, APEC has a higher degree than ASEAN, followed by EA and

NAFTA; and in terms of pro-regional, NAFTA has higher degree than APEC, followed

by ASEAN and EA. But on both terms, the EU registers a significantly higher degree

than all the other groupings, that is, it is officially pro-both.

14 As classified in the Yearbook of International Organizations, regional membership inter-governmental and regional membership non-governmental organizations are regionally orientedmembership organizations; international membership inter-governmental and international membershipnon-governmental organizations are inter-continental membership organizations. See Table 2. UN,1996b pp.1636-715 The “official institutional intensity index” is defined as follows: Index = (actual x value – minimum xvalue) / (maximum x value – minimum x value), where x is the average number of the internationalmembership inter-governmental organizations by country or the average number of regionalmembership inter-governmental organizations by country.

14

Source: Yearbook of International Organizations 1996/1997

Sources: Yearbook of International Organizations 1996/1997; World Development Report 1996

Figure 8. represents “the societal response sheet” 16. In terms of both global and regional

institutional intensities, the EU registers extremely higher degree than all the other

groupings and is followed by NAFTA, ASEAN, and APEC. EA is at the bottom on both

terms. Compared with the official indexes, societal indexes indicate a consistent pattern

of correlation between pro regional and pro-global among all the five groupings. The EU

registers a predominant high degree of pro both regional and global position, followed by

NAFTA, whose degrees are less than one fifth of that of the EU. ASEAN ranks behind

NAFTA, and EA is at the bottom in both regards.

The distance that the EU is on the “institutional ladder” in both at official and societal

accounts and both at global and regional institutional levels shows how far the EU has

gone ahead of others on all dimensions.

16 The “societal institutional intensity index” is defined according to the same formula as the “officialinstitutional intensity index”. But x is the average number of international membership non-governmental organizations in a region by its total population or the average umber of regionalmembership non-governmental organizations in a region by its total population.

255

2991

50

859283

3383

51

792285

3382

51

807230

3259

45

796217

3406

41

770215

3457

36

774191

3653

37

801186

3933

37

1007

0

1000

2000

3000

4000

1981 1984 1986 1988 1990 1992 1994 1996

Figure 6. Organisations by Year & Type

Regional Membership Inter-governmental Regional Membership Non-governmentalInternational Membership Inter-governmental International Membership Non-governmental

Figure 8. Global First or Regional First & How Far?

--An Societal Response

EAEC-11APEC-18

ASEAN-6NAFTA-3

EU-15

EAEC-11APEC-18 ASEAN-6

NAFTA-3

EU-15

0

0.2

0.4

0.6

0.8

1

0 1 2 3 4 5 6

Global Institutional Intensity Regional Institutional Intensity

Figure 7. Global First or Regional First & How Far?

--An official Response

EAEC-11 ASEAN-6

APEC-18

NAFTA-3

EU-15

EAEC-11ASEAN-6

APEC-18

NAFTA-3

EU-15

0

0.2

0.4

0.6

0.8

1

0 1 2 3 4 5 6

Global Institutional Intensity Regional Institutional Intensity

15

If we regard the official intensity index indicates the policy orientation and the societal

index indicates the communal integration, globally and regionally, there are a number of

interesting questions and each requires a careful thought:

1. Would we agree that the EU is much more oriented and integrated both regionally

and globally than others institutionally?

2. Would the bigger gap existed between EU and each of the others at societal level

than they are at official level indicate that official orientation towards integration in

all the other groupings is ahead of what their current stages of integration at societal

are? (Or say, societal integration of those groupings are far more lacking behind the

EU than the lacking in their official orientation?)

3. Within APEC and at societal level, would we think that NAFTA is more globally and

regionally integrated than ASEAN and EA is the least integrated both globally and

regionally?

4. Again, within APEC and at official levels, would we agree that both ASEAN and EA

is more globally oriented than NAFTA and NAFTA is significantly more regionally

oriented than ASEAN, and EA is the least regionally oriented?

5. At the official level, what does it indicate that NAFAT’s global intensity index is

below its regionally index against the patterns of all other groupings as well as its

own index pattern at societal level? Does it indicate that officially NAFTA lacks

global orientation?

6. Except the abnormality of NAFTA’s official institutional intensity index, there is a

correlation between global and regional institutional intensity indexes at both official

and societal levels. Does it indicate that a more regionally oriented or integrated a

grouping is the more globally it is and vice versa?

Given the controversial tendency of questions number 4 and 5, the answers that need to

explore are beyond the scope this paper. For others, we may be able to make a fairly

quick judgement. For example, If the answers to question number 1 and 6 are both yes,

we apparently may vindicate that regionalism is a “half-way house” of globalism. That is,

16

regionalism is a preparatory stage to globalism. If the answer to question number 2 is

also a yes, we may further vindicate that the EU’s experience is forging a much stronger

social cohesion than that of others. That means societal linkages across nations are

stronger in the EU than anywhere else. If the answer to question number 3 is again a yes,

we may vindicate another case of regional integration, NAFTA, which is more mutual

than others within APEC. Based upon them, we may argue that to certain extent that

institutional regionalism, at least at societal level like economic regionalism analyzed on

an empirical basis seems to be also constructive toward a more open and rational

integration of the globe society at large. Indeed, it appears to be the case that a more

mutual a regional institution is, the more global it orients and more comprehensive its

development strategy towards the rest of the world.

However, since we are dealing with numbers at an aggregated level, we need some

cautions. What is important for an institution is its objective as well as its capacity. The

purposes that those institutions serve and the ways that they confront the reality are too

complicated to allow any simplified judgement purely based on numbers. Nevertheless,

the above indexes do indicate a pattern and it also confirm with our perception. Both pro-

regional and pro-global are pro-open! The growing cobweb centered in certain regions or

spread round the world is creating an inter-dependence institutional structure and

facilitating our nation-based economy, society and polity to orient increasingly outward.

3ROLWLFV�DQG�5HJLRQDOLVP

Contrary to the claim that economics can replace politics in a globalized international

economy driven by de facto, or market-led integration across national borders. Politics

are still very much alive even in the form of “open economic association”17 such as the

APEC. Broadly speaking, we can observe four major political currents in the

international economy today; and they are protectionism, mercantilism, market liberalism

17 Yamazawa (1996) defines the modality of APEC as an “open economic association”:nondiscriminatory, economic focused and voluntary. Some people argue that politics have beenignored in the economic approach to APEC and they point out that security and environment issues areequally important in the region. These people forget that the agenda selection itself is politics.Moreover, cooperation starting from less sensitive areas such as economic issues tend to facilitatecooperation in other areas. This functional perspective is widely accepted in East Asia and it has provedto be right in the experience of the EC.

17

and social liberalism18. They can be analyzed from five areas (see Table 5 for a

summary).

Firstly, it is the value and the objective projected from the value or belief carried by the

currents. For protectionists, they believe that international engagement incurs cost, risk,

drain and burden for national welfare and therefore it is vital to preserve national welfare

from necessary measures of protection. For mercantilists, they hold economic gains in

international competition are an essential means to enhance national power and believe in

active strategic engagement through state intervention. Market liberals believe free

market is the best means to maximize efficiency, productivity, consumption, and freedom

of choice; whereas the basic stance of social liberals is that development and democracy

constitute the vital goal to build an international society of freedom and justice for all.

Secondly, it is the relations between politics and economics. For proectionists, to

safeguard national economic well-being, it is right for a nation to disengage itself from

international involvement through political means. For mercantilists, politics should be

actively pursued in international economy to promote national economic position in the

international competition against others. For market liberals, however, international

economy should be free from political interventions in order to achieve optimal economic

growth, distribution, inter-dependence and peace. For social liberals, they advocate that

international economy should be politically managed under the legitimate principles of

rights and fairness.

Table 5 Four Responses to International Economy

Protectionism Market Liberalism Mercantilism Social LiberalismValue-Objective

International engagementincurs tremendous costand burden for national

welfare; It is vital topreserve national welfare

Free market is the bestmeans to maximize

efficiency, productivity,consumption,

& freedom of choice

Economic gains ininternational competitionsare an essential means toenhance national power

Development anddemocracy constitute the

vital goal to build aninternational society of

freedom and justice for all

Politics---EconomicsTo safeguard national

economic well-being, it isright for a nation to

disengage itself frominternational involvementthrough political means

International economyshould be free from political

interventions to achieveoptimal economic growth,

distribution interdependenceand peace

International economyshould be subjected to the

need of national wealthcreation so as to promote

national power

International economyshould be political managed

under the legitimateprinciples of rights and

fairness

18 We see some authors use neo- to highlight the current states of those political views. Forsimplification, we skip the neo- distinction.

18

Orientation---IdeologyNationalistic &

non-interventionalisticInternationalistic &

non-interventionalistic,political failure

Nationalistic &interventionalistic,

Internationalistic &interventionalistic, market

failure

Deliberation---PolicyNational producers,

consumers, and laborsshould be shielded from

foreign competition

International Economyshould be free to benefit themost efficient ones: skills,

technology, company,industry, economy,

country(?) & class(?)

International economyshould be managed by

government intervention tonurture national

competitiveness, protectingjob, industry, market share,national security, retaliating

foreign unfairness

International economydemands collectively

management to achieveopen and fair competition,development & democracy

Action-AgendaTariff and non-tariff

barriers, Import quota,voluntary export restraintslocal content requirement,

administrative policy,

Enforcing property rights,free trade, deregulation,privatization, structural

adjustment, flexible wage,enhancing private sector

competitiveness, attractingFDI

Soft: Tariff & non-tariffbarriers, subsidy, importquotas, voluntary exportrestraints, local content

requirement, administrativepolicy,

Aggressive:Coercion, retaliation, war

Fair trade, internationalinstitution & regulation to

correct market failure

Thirdly, each of the four trajectories of politics has its own orientation and is associated

with certain dominant ideology. For protectionism, it is inward-looking and non-

interventionalistic, and it is to some extent connected with nationalistic views; in

contrast, mercantilism is outward-looking and internetionalistic, and it is highly

associated with nationalistic political belief. Market liberalism is outward-looking and

advocates non-interventionalistic because of political failure. It is highly associated with

internationalistic and globalistic beliefs but has a faith in market vis-à-vis in politics. In

comparison, social liberalism is also outward-looking and associated with

internationalistic and globalistic beliefs; but in contrast, it advocates government

intervention in international economy to correct market failure.

Fourthly, all these value-objective, politics and economics and orientation and ideology

have a significant impact on deliberation and administration of government policies.

From protectionalist stance, policy would stress the importance of national producers,

consumers, and labors to be shielded from foreign competition whenever it is possible

and as far as it can. From mercantilistic view, international economy should be managed

by government intervention to nurture national competitiveness, promote domestic job,

industry, market share, security and retaliating foreign aggressiveness. From market

liberal position, policy of international economy should address the barriers that prevent

the freedom to benefit the most efficient ones: skills, technology, company, industry,

economy… In contrast, the policy stance of social liberalism is that international

19

economy demands collectively management to achieve open and fair competition,

development and democracy.

Fifthly, policy is translated into action agenda. Protectionistic measures would include

elevating any of the shelters or barriers. Mercantilistic measures, in comparison however,

include both protectionistic ones and more aggressive and confrontational ones ranging

from trade and economic coercion, retaliation, to trade and economic war. The action

agenda of Market liberalism places emphases on a number of market oriented measures,

which include enforcing property rights, liberalization of trade and investment,

deregulation of national economy, privatization of public sector, structural adjustment to

market functions, flexible wage to reduce unemployment and boost international

competitiveness, and enhancing private sectors to replace inefficient public ones. The

action agenda for social liberalism is also emerging recently. They are embodied in

various principles of international institutions and regulations recently under discussions

and debates such as the competition policies, labor standards, and environment issues.

Both the scope and depth of them are significantly beyond any single-issue area and the

impact is bound to profound given the current confusions that they have generated.19

One may ask what the dominant political trend is among the above four. It is really

difficult to generalizing or even to speculate without a framework as to how, why and

where each of them is like to occur. We see them somewhere, sometime and somehow

and one may be dominant in one area at one time in one manner and others in other areas

at other times and in other manners. For example, in the mid-1980s, we saw the market

liberalism appeared to be winning in the West; but the recession period followed

witnessed the rise of both protectionism and mercantilism. Currently we see the social

liberalism is emerging in the Western industrial societies and the developing areas are

becoming more market-oriented. But it is also in the West that protectionistic sentiments

are potentially strong and in the developing areas that nationalistic stance still retains a

strong foothold. East Asian developmentalism is rooted very much in the mercantilism

and its future evolution seems very much dependent upon the internal dynamism to

balance market oriented and socially democratic governing principles; and the global

environment may facilitates or hinders the transformation.

19 The scope of the emerging social concerns mixed with economic issues is very broad. Given thespace, we have to skip the discussion of it.

20

Indeed, regionalism seems to offer a plausible framework for us catch the trace and

symptom of the four political currents. The rise of regionalism gives the four currents an

international anchor; it also renders them with new and perhaps more constraints. First,

competitive and divergent forces at regional level would make both protectionistic and

mercantlistic interests difficult to capture the policy agenda. The bigger the region, the

more members the region and the more open the region, the more divergent interests and

more competitive forces against one another. Consumer interests and producer interests,

importers’ interests and exporters’ interests plus inter-countries’ bargaining would

undercut one another and making protectionalism and mercantilism difficult to surge.

Secondly, it contains aggressive unilateral actions of member nations either under

mercantilistic motive or market liberal inclination. Such an example can be found in

Canadian motive in signing NAFTA agreement with the US. to constrain the latter’s

aggressive free market unilateralism and in France and other small nations’ motive to join

the EMU in order to minimize the disruptive impact of interest rate management of the

conservative Bundesbank. By doing so, all are bonded together and the national

autonomy is surrendered to various extents. By doing so, the national base of

mercantilism would be significantly undermined and the expansionary free capitalist

force would be faced with greater social and political constraints across nations. Thirdly,

nation states would like to cooperate with their most immediate economic partners to

make sure their smooth relations would not be interrupted by any unforeseeable events.

The most recent case is the Asian currency crisis. Although it happens in Thailand and

Malaysia, Japan is affected because of its huge investments in these countries. Japan

therefore takes a strong interest in bailing them out. Hence we see that national interests

are emerged with regional interests owing to the growingly strong inter-dependence

structure at regional level. The inter-locking interests across national boundaries would

further render nation-based protectionism and mercantilism increasingly irrelevant. But

would region-based mercantilism and protectionism emerge? If it would it would

certainly be more threatening! But so far we have not found a case to justify the validity

of such worry, except, maybe, the Common Agriculture Policy (CAP) of the EU. But

measured in producer subsidy equivalents per full-time farmer equivalent and share of

total monetary transfers in GDP, both of the records of the EU are significant lower than

that of Japan.20 One may quite reasonably doubt the level of protection in the EU could

have been lower without the CAP.

20 Measured by producer subsidy equivalents per full-time farmer equivalent in thousands US dollarsand share of total transfers in GDP in 1996, the EU’s records are: 20 and 1.1 and the Japan’s 28 and

21

Regionalism can not and should not be thought only based upon simple economic models

in the textbook that have left out so many things untouched. Politics like the institutional

developments highlighted in the previous session are a key ingredient in it and should in

any measure be analyzed and assessed. Fundamentally, one has to understand that politics

moving beyond their parochial base, a nation, toward an international one, a region, is

anything but a progress. In this regard, there are a number of crucial facts that we need to

recognize.

Firstly, the beginning of a process to confront in the collective manner the issues arisen

from interdependence by the regional members is also the beginning of a process to build

mutual understanding, common bond in interest, obligation, and responsiveness towards

each other. Such contractual relationship, be it at cognitive or normative level, between

policy makers of different nation states is bound to unleash a fundamental change in the

perception and outlook towards one another from the top. It will help to broaden and

deepen the political space of cooperation among nations. In the case of APEC, though it

is a loose economic association legally unbounded, the common interests to maintain an

open, comprehensive and non-discriminatory framework of economic system and the

aversion to protectionism arise from extensive policy dialogue and institutional linkages

would encourage greater room and freer space to forge a collective policy position and

political commitment to further the integration process rather than withholding progress.

Secondly, in order to reach solutions on substantive regional issues and to enhance power

and influence of individual members through collective actions, member states will have

to establish open and transparent interaction among each other, which may eventually

lead to legally bonded relationship. With certain collective bondage, regional cooperative

schemes set implicit or explicit rules to regulate the behaviors of participating members.

Standards can only be maintained by endorsing mutual or collective monitoring or

appraisal system. As such, individual national sovereignty will be, to varying degrees,

challenged, comprised and subordinated to the regional collective agenda and

regulations. The most significant case of this is the EU, though the hurdles ahead are

nevertheless formidable. Whether APEC would evolve into the stage of deep integration

is debatable. Current unilateral economic liberalization schemes facilitated with region-

wide unilaterally coordinated programs on such issues areas such as trade, investment,

1.7. See OECD 1997, p. 33

22

technology, food, energy, environment, populations21 would nevertheless harmonize

national economic regimes, make them more in line with one another and converge to the

international norms and practices.

Table 6 Open Economic Association

Principle22 Open

Economic

Voluntary

Structure & policy do not discriminate trade and investment with the restof the world.Economic issues are the primary policy focus & chief policy mechanism toconsolidate regional integration.Members do not have to cede sovereignty to any supranational regionalinstitution but actively participate in the collectively process & are free toestablish linkages outside the region without any constraints.

Dimension23 LiberalizationFacilitation

Development

Non-discriminatory reduction of protection.Expanded provision of public goods relevant to the efficient operation ofthe regional market.Process of market integration

Pragmatism Limits of multilateralismLimits of regionalism

Anti-closenessExtra-regional interestsTheory conforming

Slow progress, complication, domination & exclusionThe conditions for free trade area may not be attainable in substance dueto divergence & by schedule and timetable.Guide against close regionalism both internally and externallyThe crucial interests of APEC economies extend beyond APEC.Trade discrimination induces unnecessary costs of trade diversion.

Finally, regionalism provides the opportunities for societies of member countries to

widen considerably their communication and mutual understanding. The socialization

effects in the process affect the convergence of public interests and identity among

different societies and cultural groups. Regional interests will emerge to replace the

national ones as greater flows of people, ideas, and products, activities across the regional

space, and social and political outlook of the general public will be broadened from the

national to a more international one. As such, regionalism will in the long run undermine

nationalism and pave the way for a truly globalized society.

The idea of “open regionalism” embodied in both the APEC’s concept and its practice is

certainly a great challenge to the centrifugal approaches of both nation-based and region-

based protectionism and mercantilism both internally and externally. (See Table 6) It is

based upon the principle of open, economic focus and voluntary participation24. Regional

structure and policy do not discriminate trade and investment with the rest of the world.

Economic issues are the primary policy focus and chief policy mechanism to consolidate

regional integration. Members do not have to cede sovereignty to any supranational

21 See Yamazawa (1997) “How should we approach the FEEEP issues in APEC?” the keynote addressto the International Symposium on APEC Cooperation for Sustainable Development, June18-19, 199722 Open regionalism is equated with open economic association (OEA) since the former is a highlyequivocal term yet the later best reflects the essence. The concept of OEA is developed by Yamazawa,see Yamazawa, 199623 ibid.24 See Yamazawa 1996

23

regional institution but actively participate in the collectively process. What’s more,

members are free to establish linkages outside the region without any constraints. Open

regionalism has a three-fold dimension: liberalization, facilitation and development and

built-in pragmatic objectives.

Table 7 Concerted Unilateral Approach

Organizing principle Voluntary, non-binding commitments vis-à-vis reciprocal, binding concessionalcommitment

Enforcement mechanism Peer pressure & recognition vis-à-vis negotiation & disputes settlement regimeMotivation Liberalization is in the interest of development of the liberalizing economy itself vis-à-vis

concession benefiting others as a price for securing liberalization in othersCharacteristics The characterization of “prisoners’ delight” in Asia Pacific

Consistent with growth strategy--opening up to the worldNo-leadership & no-Hegemony

Conditions Continued & substantial trade liberalization internally & joint liberalization externallyThe US’s demand on reciprocity perceived to be observed by othersThe EU’s commitments to liberalization perceived to be on track

If open regionalism is taken as APEC’s external principle, its internal principle is called

“concerted unilateral approach” (CUA). (See Table 7) In terms of its organizing internal

affairs, APEC advocates a voluntary, non-binding commitments vis-à-vis reciprocal,

binding concessional commitment among members. In terms of mechanism to deliver

policy, APEC applies peer pressure and recognition vis-à-vis negotiation and disputes

settlement regimes. To motivate members’ market opening procedures, APEC holds that

liberalization is in the interest of development of the liberalizing economy itself instead

regarding liberalization as a concession that benefits others as a price for securing

liberalization in others. APEC’s such characteristics can be called as “prisoners’ delight”

in Asia Pacific and it is consistent with the growth strategy of East Asian developing

economies, that is opening up to the world. Such modality of APEC would not need

depends upon one economy to be the leader and hence no Hegemony. But the success of

APEC is highly dependent upon Continued & substantial trade liberalization internally &

joint liberalization externally, hence the success of multilateralism. If successful, open

regionalism would also give rise to a more integrative identity to the region of diversity

as articulated in the APEC’s vision of building “a community of Asia-Pacific

economies”25. The case of APEC illustrates a new modality of regionalism and contests

how far a regionalism can go and how broadly it can incorporate economic, social and

political objectives in various realistic modalities under diversified economic conditions

and various public understandings across the world.

25 See Eminent Persons Group Report “A Vision for APEC: Towards an Asia Pacific EconomicCommunity” November 1993

24

What’s more, like “open regionalism” in Pacific, current politics of regionalism in

Europe also has a strong outward motion. The EC 1992 program preempted the

individual trade policy of member states, The Uruguay Round forced the EU to low trade

barrier Union wide including phasing out voluntary export restraints. The prolonged

economic recession and rising unemployment problem, the growing importance of East

Asian market, the increasing integration of Asia Pacific, the relatively declining trans-

Alantic economic relations and, above all, the organizing of East Asia prompt the

rethinking of the EU’s long-term engagement strategy towards East Asia.26 All this was

well reflected in the enthusiasm among the heads of states of the EU in participating the

ASEM meeting in Thailand in March 1996 and the subsequent development of between

the 15 EU members and their 10 East Asian counterparts.

26 See Pelkmans, in Yue & Tan, 1996

25

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To policy makers, the regionalism poses both challenges and opportunities. As partially

illustrated at the beginning, from the perspective of the world political economy,

regionalism has an important dimension in regional economic integration. Regionalism

affects economic welfare in terms of trade creation or diversion, import prices,

competition, economies of scale, resource allocation, factor productivity, sources of

finance, options for consumers, and exposure to new ideas, technology, products and so

on. Also as mentioned before, regionalism has politics hidden in side. Regionalism links

domestic and international political sources and the development of national and regional

institutions. Regionalism also has a dimension in the development of social discourses of

regionalisation. Moreover, regionalism is taking on an ecological dimension because of

the neighborhood effects. Owing to the complex nature of regionalism in relation to

economy, society, polity and ecological development, we need a multi-causal logic in

accounting regionalism.

Regionalism and Economic Integration

As a widely shared perspective among social scientists, the economic dimension of

regionalism aims at generating more trade, investment and economic growth. Countries

entering regional agreements to reduce their tariff and non-tariff barriers can result in

more trade and investment among themselves. Viewed from this dimension, regionalism

holds the potential to enhance the trading position. Regional integration can improve

term of trade of member countries vis-à-vis non-number ones as it can strengthen the

exports of member countries and weaken the trading position of importing non-member

countries. It can attract more FDI. Regional integration is a major mechanism in

attracting FDI as multinational companies would establish local production to overcome

regional discrimination. Both sound mercantilistic in nature, however. Recently

arguments for regionalism are growingly emphasizing the increase of economies of scale,

competition and efficiency27. Regional integration increases market size so that the large-

scale production is justified and the low production cost is obtained. Common market

permits factors of production to flow freely across borders, so firms will have better

chance to access to easy finance, cheaper labor, suitable technology, and larger consumer

base. Product and service can thus be provided at a lower cost. Regional integration also

26

can improve competition and efficiency. The increased number of competing firms will

result in greater efficiency, lower price and more options of products for consumers.

Moreover, there is an argument for enhanced social cohesion as a result of economic

integration. Factor mobility not only foster deeper market integration but also a higher

level of communication across culture, nation and different sectors of an economy.

Economic integration therefore may weaken nationalism and pave the way for greater

economic cooperation and social cohesion.

Regionalism, however, may also cause many kinds of market distortions such as trade

and investment bias against non-members directly and/or indirectly both in theory and in

practice. There are various compelling arguments for cautious approaches. For instance,

regional arrangements may induce bias against non-members, and formal arrangements

in Europe and North America have more bias towards intra-regional trade and

investments than informal ones like in East Asia as a number author argued28.

Specifically, there is also an argument that the cost of regional preferential trading

schemes in East Asia far outweighs the expected benefits and the actually execution of a

formal trading bloc is difficult29. Therefore, Lewis, Robinson and Wang30 propose that

there are gains from making APEC free trade area as broad as possible. They maintain

the global integration remains the most favorable outcome of all. A recent study by the

OECD31 goes further to argue that regional trading arrangements and multilateral trading

system general being complementary is not automatic but the result of deliberate policy

choice. It advocates that international multilateral surveillance against regional bias is a

must. Indeed, concerns for the destructive outcomes of the economic integration to the

national development are growing in both developed and developing countries. The

economic as well as social and political consequences of regionalism driven by market

mechanism begin to be highlighted. Trade and economic disputes at both regional and

international level seem increasing. The increasing potentials of Labor and capital

conflicts may threaten domestic social order. Fundamentally, nations are still very much

27 See El-Agraa (1994)28 See Dhar and Panagariya, (1994) gravity model analysis of trade flows.29 Panagariya (1993) examines three approaches to regionalism in East Asia. He argues that AFTA’scosts are far outweigh benefits; a formal East Asian trading bloc along the lines of the EC is difficult toexecute because of the diverse levels of protection in East Asia and possible US retaliation; openregionalism is good in long run but may be resisted in the short run in East Asia because of adverseeffect on terms of trade.30 Lewis, Robinson and Wang (1995) examine three approaches: APEC FTA, partial FTA, and therelative benefits of APEC FTA and global trade liberalization.31 For details, see OECD (1996) report on the Workshop on Regional Integration and its Place in theMultilateral Trading System held in July 1995.

27

concerned about how benefits and costs of the integration are distributed both internally

and externally. As such, regionalism even aiming at reaping the benefits of economic

integration is called for revaluation in a broader perspective. Whether regionalism is

“building blocks or stumbling blocks”, a stepping stone or halfway house towards

multilateral rule become a function of how potential conflicts of economic interests

among difference countries, between labor and capital, between producers and

consumers, and between competing firms are resolved. It is also a function of how the

emerging regional governance structure is developed. Looking from this perspective, we

begin to realize that regionalism is not a structured format with fixed norms and

unchangeable objectives. Regionalism is shaped and will continue to be shaped by

various social, economic and political forces. What is important is to make sure that

regionalism won’t be taken advantage by those narrow focused objectives and won’t

become the battleground of those conflicting forces.

Regionalism and Political Cooperation

Over the past two decades, integration of global economy has been accompanied by

uneven growth in different parts of the world and by growing economic and political

uncertainty. To the general knowledge, globalization of financial markets at best is a

mixed blessing. It has speeded up economic and technological process. But the capital

mobility driven by speculative activities is potentially disturbing and dangerous for

inexperienced, small and relatively poor nations. In fact, it can gravely undermine

governments’ macroeconomic management capacity, reduced national tax income and

effectively put governments into debts. The growth of international trade generates new

benefits around the world. It also has brought tremendous pressure upon income

distribution and employment structure among different nations, between different

economic sectors, between producers and consumers, between capital and labor. Global

competition disciplines companies’ behavior and rationalizes them into the most efficient

way of production. It also has disrupted the established industrial structures, leading to

the replacement of skills by technology and labor by capital and wage stagnation.

Corporate downsizing, plant relocation and structural unemployment in certain sectors

and geographical locations have become a worldwide phenomenon. International

production increases geographical scope of transitional activity and interdependence of

trade, investment and technology. It also has led to increased erosion of national

28

autonomy, vulnerability from the international shocks and disturbances and the potential

of national economic “hollowing-out”.

In responding to these problems, governments have adopted various policies to mitigate

the cost and buffer the transition. But the current trend is that governments are less

willing to get involved with social subsidies. Indeed, they have reduced their scope of

action in economic management and retreated from their social obligations. Slashing

public spending in health, education, social insurance in many countries is the case. All

this generates both heated economic, political and social problems. Given its highly

contested dynamics and logic in reality, regionalism, from the perspective of the world

political economy, like globalization is far more complex and uncertain in nature. The

notion that regionalism can serve as effective interface in reorganizing international

political economy from the parochial mode of national development towards the

enlightened system of one-world prosperity, therefore, requires comprehensive and

critical scrutiny.

Regionalism and Social Cohesion

From history, modernization, and social development perspectives, some analysts

maintain that regionalism, to be justified, has to have its profound social root in a way of

the development of regional cohesion and awareness. Economic and political factors

aside, the proponents of this view highly stress the fundamental impacts of history,

geography, culture, social relations and beliefs, values, norms and practices in the

development of regionalism along with their distinctive features. In the global resurgence

of identity and belonging, regional awareness or identity search movements are also

growing. But the linkage between the identified ideational factors and the concrete

schemes of regionalism remain to be a difficult subject in both in theory and in practice.

Regionalism and Eco-systemic Balance

Another emerging dimension of regionalism has gained growing recognition, which is far

broader and more compelling than any other dimension. It is helping crystallize the

notion of a community with a common future. It is the regional ecological sustainability.

Regional integration transcending the national borders cause the “spill over” of

environmental problem into neighboring countries that demands a regional approach

29

paralleling the bilateral and global ones. Those regional environmental issues such as

land degradation, desertification, deforestation, and acid rain, and poverty-induced and

regional development-related environmental changes and the consequences of the cross-

border environmental disputes may be largely confined in certain regions. They are less

severe and pressing than global ones. So concerted regional solutions can be explored. In

times when a global consensus concerning a global environmental issue is difficult to

reach, like-minded countries may join forces to alleviate the impact on their regional

basis. But to what extent, regionalism can play a role in environmental development need

further exploration both on theoretical and empirical grounds.

$�3DUDGLJP�RI�5HJLRQDO�,QWHJUDWLRQ

To conceptualize regionalism in a relatively systemic manner, a multidimensional

paradigm is constructed as follows (see Figure 9). From the economic dimension,

regionalism may be seen in cell I, II to cell III. From pure economic point of view,

regionalism falls squarely in cell I. It implies economic regionalisation coupled with

certain effects of economic policy. Its sources are chiefly the private market functions

facilitated by some market conforming government policy with neither significant

political implications nor profound social consequences. Conventionally this is what

some economists described as “shallow integration”, sociologists, “informal integration”

and political scientists, “soft regionalism”. This is a stage of regional economic inter-

dependence. Higher economic transaction in the region may led to higher level of

economic inter-dependence within the region vis-à-vis the rest of the world.

From political and institutional viewpoint, regionalism can be grappled from a broader

base, which can be indicated from cell I to cell V. Regionalism like many other

institutional phenomena is politically contested. This is because there is no “natural”

region in the world. All regions are defined to suit for certain purposes: Whom is to be

included and whom excluded and when and how. As a matter of fact, political

interactions usually constitute a great part of regional development process and signing

regional agreements and setting up institutions are a major expression of regionalism.

The variation of regionalism in terms of the purpose and institutional form remains to be

the central and contested issue for many current regionalist schemes. The purposes such

as responding to external challenges, coordinate regional positions in international

30

institutions and secure welfare gains by promoting regional commons, and the

institutional forms such as formal or informal, extensive or intensive, and loose or tight

to manage regional inter-dependence constitute the major part of a regional governance.

Regionalism for security concerns is even more politicized. Moreover, the consequence

of regionalism, in terms of the welfare gain or loss, is both an economic and political

issue for both member economies and non-member economies. What’s more, the

intensive flows of goods, capital, and people would inevitably nurture the development

of multi-channel and complex economic and social networks by which ideas, attitudes,

norms and rules of all kind are transmitted through the economic transactions across the

region. It may eventually lead to the creation of a transactional civil society, a

“consolidified regionalism”, so to speak. This formation of a new region, therefore, does

not necessarily coincide with the borders of states, nor does it presuppose any particular

impact on the relations between the states of the region. Many across-border growth

triangles, industrial corridors are of this kind. On the whole, this view suggests, regional

inter-dependence is the precondition of regionalism, be it in the form of economic

development, or social-political one or both.

From social and epidemic point of view, all regions are to some extent subjectively

defined and can be understood as the so-called “cognitive regions”. A region can be

seen as an extended form of a nation, a mental discourse that is historically contingent

and socially constructed. Regional cohesion provides the real base for regionalism. The

process factors in terms of ethnicity, race, language, religion, culture, history, geography,

consciousness of a common heritage, and economic and political development construct

the regional cohesiveness and lead to the formation of regional awareness and identity,

the corner stone of regionalism. The strength of regional cohesion would determine the

strength of regionalism. The key lies in searching for the clues of how regionalism and

regional identity are defined and redefined and how mutual interests are cultivated and

how shared understandings are accepted. Regional identity can be developed by long

time sophisticated arguments such as the influence from academia and pressure groups.

Regionalism also can be shaped by popular sentiments such as East vis-a-vis West, South

vis-a-vis North. Regionalism therefore extends beyond the spheres as previous views

identified and reaches to cell IX. Regionalism seen from social and epidemic views is

therefore a social phenomenon that mixes with truth of historical origin and reality, and

myth of political making.

31

Figure 9 A Paradigm of Objective & Outcome of Regional Integration

OBJECTIVE

OUTCOME

ECONOMIC

OBJECTIVES

POLITICAL

OBJECTIVES

SOCIAL

OBJECTIVES

ECOLOGICAL

OBJECTIVES

AS ECONOMIC

INTEGRATION

T& I intensity;Structural

compatibility;policy

convergence...I

Exercisepreference;

Insulate externalImpacts;

Regain controlIII

Known;Closeness; andConvenience

VII

Efficient use ofnatural resources

due to scaleeconomies

X

AS POLITICAL

COOPERATION

Regimesmanaging

Inter-dependence;

Public good;Transaction cost

II

Security,Hegemony, and

Economicdevelopment

IV

Compatible inValue, belief,

andsocial system

VIII

Efficient use ofnatural

resources due toeffective

management

XIII

AS SOCIAL

COHESION

Establishment ofacross boarder

channels,networks, trust

V

Convergence ofIdeology,

Belief,Expectation

VI

UnderstandingAnd

Appreciation

IX

Publicconscience ofenvironmental

protection

XV

AS ECO-SYSTEMIC

BALANCE

Establishingeconomic valuesof eco-resources,product, service

XI

Coordinatedsystems

promotingenvironmental

values, protectionXII

Appreciation ofnature as part of

humandevelopment

XIV

HumanSystem as partof ecological

system

XVI

The ecological dimension of regionalism constitutes the “outer-space” of regional

schemes and is progressively permeate into both theory and practice (from cell X to cell

XVI). Given the unevenness of world development in different parts of the world, eco-

systemic approach calls for a major change in all aspects of human to human and human

to nature relations. It undoubtedly has a huge impact upon economic, political, and social

dimensions of regionalism.

The paradigm that distinguishes four-dimensional objectives of regionalism on one hand

and four consequential impacts of regionalism on the other is a heuristic devise in order

32

to understand the broad implications of regionalism. It is attempted to locate regionalism

in a wide range of dynamic perspectives, where economic, political, social and our

knowledge of the environment may collectively construct a broad framework to capture

the multi-dimensional nature of the developments of regionalism.

5HJLRQDOLVP�LV�LQ�GHPDQG�

Indeed, regionalism has become the world reality across economic, political, social,

institutional and geographical dimensions. To policy makers, there are a number of

reasons why regionalism is attractive and can constitute an effective policy instrument.

The first is the neighborhood effects. Regionalism encourages close international

relationship, as cross-border externalities may be a great advantage to be explored or

issues of common concern to be dealt with collectively. Secondly, regionalism may take

on various norms of flexible organizing principle that can effect economic liberalization,

political cooperation, social cohesion and collaboration to combating regional

environmental problems without having to incur serious problems such as free riders,

security trade-offs, ethnic tensions and the “tragedy of the commons”. Regionalism does

not necessarily require strict reciprocity on issue such as trade that multilateral

organizations insist upon. Thirdly, regionalism allows closely related nations to

coordinate their efforts on issues of common concern more easily, deeply and efficiently

than through multilateral lengthy negotiation schemes. It allows various venues of

cooperation and coordination particularly at the grass-roots level. Fourthly, there may

have some existing structures of regional pattern or network such as trade, investment,

production, labor, market and intensive social and political interactions to effectively

sustain the deepening and widening process of regionalism on those and other related

issues. Finally, mercantilism and protectionism always pose potential threats to peaceful

international order. Market liberalism may bring about destructive effects upon national

development and incur disparities at all levels. Attempting to move to the track of social

liberalism, multilateralism at current stage is not without exclusion of the week and the

poor, and the domination by the strong and the rich. Regionalism in this regard can be an

alternative option to balance power and adjust interests in spite of its own limitations and

constraints. Indeed, given the fact of the increased concentration of economic integration,

political cooperation, social interaction and institutional construction at the regional

level, regionalism has began to play its role in the world political economy.

33

5HIHUHQFHV�

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