Broad versus regional integration: what matters more for economic development?

Abstract

In this paper, we examine the impacts of broad and regional integration on long-run economic development.We construct cross-country measures of regional integration that account for both the magnitude and the endogeneity of individual regional integration agreements. We then include our regional integration measures along with the broad trade share, institutions and geography in a deep determinants regression. Our results show that regional integration, unlike broad trade, can raise the long-run level of real gross domestic product (GDP) per capita.

Keywords:

• regional integration
• trade share
• development
• deep determinants

JEL Classifications:

• F15
• F43
• O11

Acknowledgements

We would like to thank the editor, two anonymous referees, Scott Baier, Jeff Bergstrand, Daniel Bernhofen, Jay Shimshack, Chih Ming Tan, and participants of the Midwest International Economic Group Meetings, Brandeis University, Clark University, Cleveland State University and the University of Connecticut for their helpful suggestions and comments.

Notes

1. There are two exceptions in that Alcalá and Ciccone (2004) and Badinger (2008) estimate a positive relationship between the real trade share and the level of productivity when controlling for institutional differences.

2. We use the heading regional integration agreements (RIAs) to describe all regional agreements, given that these arrangements can extend well beyond international trade into areas such as investment, domestic regulation, standards, infrastructure and politics (Schiff and Winters 2003).

3. The impact on per capita income could also vary across the regional trading agreements themselves. We control for this by including only FTAs, currency unions and economic unions.

4. Hoekman (1998) contends that the two types of integration are not mutually exclusive in that you can have four types of FTAs: (i) shallow integration but no deep integration, (ii) no shallow integration but deep integration, (iii) shallow and deep integration and (iv) neither shallow nor deep integration.

5. Walz (1997), Ethier (1998), Puga and Venables (1998) and Venables (1999) use three-country models to examine the impact of an RIA on industrialization and growth. Each study finds that regional integration has a larger impact than unilateral reform if the combined market of the two member countries is sufficiently large.

6. Hall and Jones (1999), Easterly and Levine (2001) and others have found a high correlation between output per person and various estimates of technology and/or productivity.

7. The Cragg–Donald statistic is the minimum eigenvalue of the generalized F-statistic from the first-stage regression.

8. Albouy (2008) has documented the weakness of settler mortality data as instruments.

9. The average value of RIA equal-weighted is 7.2, 11.7, 15.8 and 28.4 for 1995, 2000, 2005 and 2010, respectively. At the same time, the value of RIA equal-weighted for Mexico went from 14 in 1995 to 74 in 2010

10. The GADP index is the mean value of five variables averaged from 1984 to 1995: law and order, bureaucratic quality, corruption, risk of expropriation and government repudiation of contracts.

11. We would like to thank the first referee for raising this issue.

12. Notable WTO-X provisions are anti-corruption, competition policy, investment measures, IPRs, and research and technology.

13. In particular, the number of WTO features is w_j in Equation (4(4) ). We use equal-weighting w_j,₀ = 1 in Equation (5(5) ) to create the instruments.