International Integration and Growth: A Further Investigation on Developing Countries

By Economidou, Claire; Lei, Vivian et al. | International Advances in Economic Research, November 2006 | Go to article overview

International Integration and Growth: A Further Investigation on Developing Countries


Economidou, Claire, Lei, Vivian, Netz, Janet S., International Advances in Economic Research


Abstract

The paper examines empirically the linkages between international integration and economic growth in a panel of 47 developing countries and 18 trade blocs over the period 1970-1989. Specifically, it attempts to identify through which channel(s)--notably, specialization according to comparative advantage and increased efficiency, exploitation of increasing returns from larger market, and technology spillovers through investment and trade-trade blocs can affect the economic growth of their member countries. The results suggest that (1) intra-bloc trade does not affect growth significantly; (2) income diversion among member countries contributes positively and significantly to growth; and (3) the size of the trade bloc does matter in the sense that the bigger is not always the better for the welfare of the member countries. (JEL F15, 047)

Keywords: international integration, economic growth, trade blocs, developing countries

Introduction

Economists and policymakers have been interested in understanding whether and how a country's welfare can be affected by international integration. In general, international integration is known to improve a country's income growth mainly through the following channels: (1) by increasing production efficiency and competition due to specialization; (2) by enlarging its potential market and thus increasing the rate of return on research and development (R & D); and (3) by boosting the volume of trade and investment and, therefore, diffusing technology between countries. (1)

The latter part of the twentieth century witnessed a surge in the number and coverage of regional economic integration agreements (RIAs) (2) of various kinds. Interestingly, not much research has been done on regional integration, in general. Among what has been studied, the European Union, and its various integration schemes, have received the most attention. With only few exceptions [Landau, 1995], most of the empirical studies find evidence that the European Union and the European Free Trade Area have significantly increased their member countries' income growth rates over the past few decades [Ben-David, 1994; Kokko, 1994; Henrekson et al., 1997]. Technology diffusion, through increased trade, has been the main channel considered to cause this phenomenon.

However, what about those trade blocs formed mostly by developing countries? Work on this topic is even scarcer. Early assessments on a number of integration schemes among developing countries provide favorable outcomes, mainly through an increase of the intra-bloc trade volume [Balassa and Stoutjesdijk, 1975]. However, the effectiveness of regional integration among developing countries was severely questioned since most of the formal trade blocs among developing countries have failed to deliver any significant benefits, in part because the liberalization plans have not been actively carried out. (3)

Among recent empirical studies on the influence of international integration on growth is the study of Brada and Mendez [1988] who examine the dynamic effects of six regional integration schemes--most of them formed by developing countries--on the level of investment, factor productivity growth, and their influence on member countries' income growth over the period 1951-1977. The authors conclude that, although international

integration does increase the level of investment and growth rate of productivity growth in some of the regional integration agreements, income growth rates of their member countries' are largely unaffected by these gains.

De Melo et al. [1992], test for long-run effects of international integration by estimating a simple growth equation where the growth rate of income is regressed against individual trade bloc dummies and some control variables. Their specification is estimated over the period 1960-1985, as well as various sub periods, and for 101 countries, OECD and developing. …

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