The previous chapter discussed the economic motivations for regional integration and the likely trade and welfare consequences of forming RTAs. But despite the growing propensity for countries, including most developing countries, to enter into RTAs, and the evidence cited in Chapter 1 that more ambitious objectives are being set for RTAs, few have as yet developed much beyond preferential trade arrangements (Schiff and Winters, 2003). Forming and sustaining a regional integration arrangement is hard work, and success is by no means guaranteed. While the economic outcomes of an RTA (particularly, the extent of trade diversion and the working out of agglomeration economies in the regional distribution of economic activity) will be the most important factors in determining its long-run viability, aspects of its institutional design can be a facilitating factor.
Given the poor performance record of many RTAs involving developing countries, it is important for those who work with RTAs to promote, inter alia, food security to appreciate some of the institutional issues in the design of RTAs. This brief chapter draws attention to three issues in particular: (i) the extent to which countries are prepared to commit to sharing sovereignty in the policy areas covered by the RTA; (ii) the scope of regional integration and the role of regional public goods; (iii) factors likely to enhance the sustainability of RTAs over time. The chapter concludes with some reflections on the relevance of these issues for food security policies in developing countries.
Intergovernmentalism versus supranationalism
Economic integration can be pursued either through an intergovernmental or supranational approach. Supranationalism implies that member states agree to exercise some of their sovereignty jointly. Law passed at the regional level in those areas where the region is granted competence prevails over national legislation and is binding directly on member states and citizens of those states (the principle of direct effect). Supranationalism can be seen as a stepping stone to a federal political structure or confederation but more recent thinking, based on the EU experience, envisages a more diversified political outcome in which power is shared at various levels and interacts in complex ways. A key issue with supranational arrangements is ensuring the democratic participation of stake-holders, the transparency of supranational decision-making and the accountability of regional institutions. In their absence, the shift of sovereignty to supranational bodies may weaken democratic control and strengthen the political influence of groups able to organize effectively at the regional level, with possible negative consequences for poverty and food security.
With intergovernmentalism, there is no sharing of sovereignty and each member state effectively retains a veto on the application of regional agreements. Intergovernmentalism requires close coordination of national policies, and intergovernmental bodies typically have a secretariat that has no independent power. Most integration bodies in developing countries are intergovernmental. A weakness of intergovernmental bodies is the lack of enforcement mechanisms to ensure that states abide by the common rules. To counter this, agreements increasingly include some form of dispute settlement procedure to resolve difficulties which may arise.
Variable speed and variable geometry
Another weakness of intergovernmentalism is that progress is determined by the pace of the slowest member. Particularly as integration widens (i.e. the number of participants in an RTA grows), it can be more difficult to secure agreement on integration deepening. Awareness of this dilemma in the EU experience in coping with a larger and more diversified membership has given rise to the concepts of variable speed and variable geometry in designing RTAs.
Variable speed refers to situations where all members agree to be bound by common aims or objectives, but some members are allowed a longer time to meet these objectives. Rather than holding all members back to the pace of integration of the slowest and most reluctant member state, some member states can move ahead to a common policy and the others can catch up when they are ready. Variable geometry, on the other hand, refers to situations where sub-groups of members (and possibly different sub-groups on different issues, hence the term variable) wish to pursue deeper and more intensive forms of integration and co-operation on specific issues, while other members wish to remain outside these initiatives on a permanent basis. These concepts are clearly relevant to developing countries where there are multiple economic groupings with overlapping memberships and different integration objectives.
Regional economic integration versus cooperation
The previous chapter focused specifically on regional trade integration, but many forms of regional cooperation take place on an ad hoc basis around specific projects or thematic issues. Such sectoral cooperation can have advantages such as: decreasing duplication of functions in different countries; enhancing efforts to deal with issues such as human, animal and plant diseases which know no borders; facilitating the sharing of regional resources and experience in activities such as research and training; or building a regional infrastructure. Characteristic for many of these activities is that they are regional public goods (Cook and Sachs, 1999).
Cook and Sachs offer a number of examples of regional public goods, which they define as “public goods that must be delivered on the supranational level by a number of national governments acting in concert” (ibid., p. 437).[9] They include: environmental management issues including watershed management, pollution, management of natural reserves and scientific research on issues of ecozone management; public health issues including management of infectious disease and basic research on diseases endemic to a particular region; financial market regulation issues; co-ordination of cross-border transport networks, telecommunications, power grids and data transmission; agricultural research and extension; and law enforcement.
The prospect of overall welfare gains from regional co-operation does not make the negotiation of such agreements easier than trade agreements. Schiff and Winters (2002) point out that countries may be unwilling to co-operate because of national pride, political tensions, lack of trust, high coordination costs among a large number of countries, or the asymmetric distribution of costs and benefits. In a formal analysis, they show that there are strong incentives to behave strategically in one-off negotiations. Countries will be tempted to ‘play games’ during negotiations, pursuing short-run advantage at the cost of souring relations and making future cooperation more difficult. Cooperative solutions are more likely where there is trust between the partners, but because the enforcement of property rights is weak and ambiguous at the regional or international levels, cooperation agreements at these levels are hard to achieve.
Regional co-operation is not the same as regional integration and, as Schiff and Winters (2002) point out, there is rarely little connection between them. Countries can agree to cooperate on a wide range of issues without necessarily linking them to trade preferences. Figure 2 shows a continuum of regional integration initiatives distinguishing between trade integration (as discussed in Chapter 2) and regional cooperation (as discussed above). Policy coordination and harmonisation is shown as occupying an intermediate position. The arrows make it clear that policy co-ordination can take place either on a functional basis outside a regional trade arrangement or within the framework of a regional integration arrangement.
In spite of this formal independence between trade integration and regional cooperation in the supply of public goods, RTAs can be a help in cooperating on non-trade issues (Schiff and Winters, 2002). Three arguments are relevant here. First, RTAs can help in brokering regional cooperation agreements by putting more issues on the table and embedding them in a wider agreement, which may lower the transfers necessary to ensure that all parties feel they have something to gain from sustaining the agreement. Second, the habits of cooperation and frequent interactions at policy level generated by some RTAs may raise the degree of trust between parties which was shown above to be important in reaching cooperative regional agreements. Third, regional cooperative agreements will often need specialized institutions such as dispute settlement procedures, and rather than custom-build a separate institutional structure for each regional agreement, it may be more efficient and effective to make use of the institutional structures of an RTA. Schiff and Winters sum up this discussion by arguing that “although assisting cooperation may add to the benefits of forming an RTA, only very rarely will it be the principal motivation” (2002, p. 3).
Figure 2 - Typology of regional integration initiatives
In similar vein, Cook and Sachs (1999) also recognise that the transaction costs in creating institutions to manage regional public goods will often be insurmountable. They assert that regional bodies that aim to provide regional public goods are underfunded and frequently incapacitated, and conclude that there is an important role for international development assistance to support their provision. This may be a further linkage between RTAs and regional public goods in that the former may help to create a greater visibility for a region among potential donors and help to attract greater flows of funds.
Subsidiarity
Where RTAs take on responsibility for policy coordination and the direct provision of public goods and services, the question of which powers and responsibilities should be allocated upwards to be undertaken at the regional level and which powers should be retained at the national (or sub-national) levels needs to be addressed. This debate is referred to as the operation of the subsidiarity principle in the EU. The principle of subsidiarity was defined in the Treaty of Maastricht as follows:
“In areas which do not fall within its exclusive competence, the Community shall take action, in accordance with the principle of subsidiarity, only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the Community.”
The appropriate division of powers between different levels of government has been addressed from an efficiency standpoint by economists using the economics of multi-tier government. Using the classic distinction between the allocation, stabilization and redistribution functions of government, this literature suggests that stabilization and redistribution functions are best performed at the regional level, while the allocation function is usually best exercised at more local levels where it can respond to differences in preferences for public goods.
For example, one community may prefer a more varied and diversified rural environment and may be willing to make environmental payments to its farmers to achieve this objective. Because this more attractive rural environment mainly benefits local citizens, it is argued that the decision to provide these payments should also be made locally rather than at the regional level. However, exceptions are made when allocation choices in one area have spillovers or implications for those living in other areas, or where there may be economies of scale in the provision of joint infrastructure or facilities. In these situations, there are clear efficiency benefits to transferring the decision-making level upwards to the region to facilitate the internalization of these externalities or the exploitation of these scale economies.
Efficiency, of course, is not the only value at stake. Considerations of accountability or democratic involvement may run counter to those of efficiency. As noted above, supranational institutions may make even more difficult democratic participation and accountability. An important constitutional issue is where residual powers lie. Residual powers are those not expressly provided for in the treaty constituting the regional union. An expansive interpretation is that any powers can be exercised at the union level provided member states agree. A more restrictive arrangement is one where there is a deliberate attempt to constrain these powers to those which can be exercised more effectively at the union level. This latter was the intention of those who drafted the subsidiarity principle incorporated in the EU Treaty of Maastricht which foresees the EU exercising powers only in areas where action by Member States alone is likely to be ineffective and where there is reason to believe EU action could be more effective.
In asking whether the new generation of regional trade arrangements involving developing countries are likely to be more successful than the earlier generation, it is useful to have a conceptual model to identify the conditions under which implementation of an integration scheme is likely to succeed or fail. Mattli (1999) builds such a model assuming a rational approach to behavior. He argues that two types of conditions need to be satisfied if integration is to succeed.
First, there must be a demand by market actors for greater integration. Market actors must perceive a significant potential for economic gains from extending market exchange within the region. If there is little potential for gain, perhaps because regional economies lack complementarity or because the small size of the regional market does not offer important economies of scale, the process of integration will eventually peter out. He notes that the potential for gain is not static but may grow with the diffusion of new technologies. Market players will then have “an incentive to lobby for regional institutional arrangements that render the realization of these gains possible”.
Second, there must be the fulfillment of supply conditions. Mattli defines these as the conditions under which political leaders are willing and able to accommodate demands for regional institutions at each step of the integration process. Political leaders anxious to improve their chances of retaining power will support integration if it helps to improve domestic economic conditions. The implication is that interest in promoting integration increases during periods of economic difficulty, and wanes during periods of economic success. But he notes that political will alone is not sufficient, given the collective action problems which arise, notably coordination, in the integration process. This leads to a key supply condition: “the presence of a benevolent leading country within the region seeking integration”. Such a country serves as a focal point for the coordination of rules, regulations and policies. It also has the capacity and incentive to ease the distributional tensions that may arise in the integration process. Another useful, but less important, supply condition is the establishment of what Mattli calls “commitment institutions” to improve compliance with the rules of cooperation.
Mattli’s conclusion is that “areas with strong market pressure for integration and undisputed leadership are most likely to experience successful integration; ‘commitment institutions’ help to catalyze the process. Regional groups that do not satisfy either of the two strong conditions are least likely to succeed.”
Are unbalanced RTAs stable?
Mattli’s emphasis on the importance of a benevolent dominant country for the sustainability of an RTA has not gone unchallenged in the political science literature where there is a lively debate on whether regions with a single dominant member (referred to as the regional hegemon) are likely to be more or less successful. Those who side with Mattli claim that examples of successful regional integration point to the central role of economically powerful states as the core and motor of integration. Acknowledging that regional benefits take the form of public goods, including benefits such as regional peace, stability and order, these are public goods which the hegemon would be expected to supply. Because, as the largest state, it has the most to gain from these public goods, the argument is that it will be willing to shoulder a disproportionate amount of their costs, thus facilitating agreement on distributional issues. Alternatively, the role of the hegemon may be to carry the burden of enforcement of regional cooperation agreements in order to prevent free rider problems (Schiff and Winters, 2002).
The counter-argument is that the presence of a regional hegemon undermines the stability of the grouping because of fears among the remaining members about the distribution of benefits and their concerns that the grouping is simply a mechanism for the hegemon to extend its economic and political influence. Evidence for both arguments can be found in the experience of developing country regional groupings. The negative effect of large size is likely to be compounded where it is accompanied by wide income disparities. Where the larger country is also more industrialized, this will accentuate the fears of smaller members that it is the larger country which will benefit most from the arrangement.
This chapter has highlighted a number of institutional issues in the design of RTAs which may affect their capacity to act effectively. Most RTAs between developing countries are intergovernmental with little evidence that countries are prepared to cede authority to supranational bodies. As a result, the ‘commitment institutions’ seen as important by Mattli in underpinning the sustainability of these arrangements are likely to be weak. Mattli also highlights the importance for sustainability that the private sector is a ‘demandeur’ of further integration, in other words, that the schemes are driven by bottom-up pressures seeking economic advantage rather than by top-down considerations pursuing political goals.
The role of flexibility in setting integration ambitions was highlighted, including the possible value of variable speed and variable geometry formulations for developing country economic groupings with overlapping memberships and different integration objectives.
The chapter also distinguished between regional integration based on the exchange of trade preferences and policy coordination, where the objectives are to promote a more efficient allocation of resources, to intensify competition and to underpin political credibility vis-à-vis private investment, on the one hand, and regional cooperation where the primary objective is to ensure the supply of regional public goods, on the other hand. The possibility that a successful RTA could have positive spin-offs in improving the supply of regional public goods was highlighted. Both aspects are shown to be relevant in the discussion of regionalism and food security in Chapter 5.
Finally, the chapter highlighted the subsidiarity principle as a way of organizing discussion on the appropriate role and competences of regional authorities vis-à-vis national and local ones. This is a good starting point to think about the role of regions in promoting food security. It is precisely those regional food security activities which add value to national efforts through stabilization or redistribution, or where there are strong efficiency arguments for a regional approach, which should be encouraged at the regional level. Possible examples of such initiatives are considered further in Chapter 5.
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[9] Formally, public goods have
two characteristics. They are non-divisible in the sense that enjoyment of the
benefits by one state does not reduce their value to another state. Second, they
are non-excludable in the sense that once these goods are provided to any state,
it is impossible or very costly to prevent other states from
benefiting. |
