NCTAD in fresh push for regional cooperation among developing countries

Says it can help accelerate industrialisation and structural change; can strengthen development strategies and ease integration into global economy

Developing country trade tends to expand faster among countries in the same region than with other countries and the share of manufactures is also higher in intraregional trade than in trade with the rest of the world. Thus, despite the overall trend towards globalisation, regional integration can be beneficial for long-term development, a new UNCTAD report says. It can help countries develop their economic capabilities and leave them fit to compete on the global stage.

However, in order to achieve this, countries should not only rely on trade liberalisation. Regional cooperation should also include coordinated and joint action in policy areas that strengthen the potential for growth and structural change in developing countries, including macroeconomic, financial, infrastructure and industrial policies, the Trade and Development Report 2007 (TDR) contends. Regional cooperation between developing countries to improve transport facilities, provide commercial information and pool efforts in such areas as energy, water supply, research and development, and knowledge generation can be crucial for the success of development strategies.

Geographical proximity still offers considerable advantages in a time of economic globalisation, and regional cooperation among developing countries has the potential to support national development plans and to compensate for some of the gaps in global economic governance, the report maintains.

For many developing countries, a regional orientation involving partners at a similar level of development may be a more viable option than an exclusive focus on the world market, the report, known as the TDR, says. Foreign competition within the region may be less difficult to handle and the probability of finding a level playing field is greater.
The report says that for countries to get the most out of these opportunities, cooperation has to go beyond liberalisation of trade and financial relations. It must include joint action on macroeconomic, infrastructure and industrial aims to strengthen the potential for growth and structural change leading to more broad-based and sophisticated economic activity.

According to the report, which is subtitled ‘Regional Cooperation for Development,’ there is an untapped potential for such joint undertakings among developing countries. And this kind of cooperation can open policy options to developing country governments beyond those available at the national level.

Over the past 20 years, intraregional trade in all developing regions has expanded faster than extraregional trade. It has expanded most rapidly among the developing countries of East Asia, where today it represents almost half of that region’s total trade. In Latin America it has grown significantly since the late 1980s, and is now close to 30% of total trade. It also has increased in Africa, although it is still less than 10% of Africa’s overall trade.

According to the UNCTAD economists, it is not only the relative pace of trade expansion that makes regional integration a promising strategy for accelerating economic development. More important is the composition of intraregional exports. This has a strong influence on long-term growth. In all regions, the share of manufactures, including those that are relatively skill – and technology – intensive, in intraregional trade has been considerably higher than the share of such goods in total trade. The clear implication is that heightened regional economic activity supports industrial upgrading and diversification.

There are apparent ‘geographical biases’ related to trade and economic growth, the report finds. Formal cooperation schemes are easier to arrange among neighbours; proximity results in lower transport costs; tacit knowledge develops based on repeated interactions; and spillovers of technology and business practice are more likely because of similarities in climate, culture, language and other factors.

Cooperation should extend into public policy, from improving trade logistics and transport and energy infrastructure to developing closer financial cooperation and coordinated or common approaches in monetary and industrial policy, the report says.

Such arrangements could usefully complement an appropriate multilateral framework to help countries cope better with globalisation. Regional institutions could also fill gaps in global economic governance structures, for example by providing protection against exchange rate volatility, the report says. However, it remarks that there is no blueprint for such cooperation: “The form that such cooperation takes will depend not only on the specific historical, geographical and political circumstances in a region, but also on the relative weight given to market forces and state intervention.”

The TDR 2007 shows that formal regional cooperation can be accompanied by very different degrees of effective regional integration.

Such integration has sometimes occurred among countries without the prior conclusion of formal trade arrangements or other far-reaching policy cooperation, such as among the newly industrialised countries in East and South-East Asia. There, regional integration has been driven mainly by corporate strategies of large firms in the region, including Japan, and by a favourable macroeconomic environment with fast growth and high rates of capital accumulation. In Latin America, formal regional cooperation agreements played a more important role than in Asia, but intraregional trade has expanded more rapidly than extraregional trade even among countries in the region that are not members of the same formal agreement. That seems to confirm a natural geographical bias in trade. African countries typically belong to several regional trade arrangements, but in few cases has this led to significant intraregional trade, mainly because production structures are not sufficiently developed, export possibilities are limited and there are severe infrastructure constraints.

Promising areas of active regional cooperation can include apparently simple measures, such as trade and transit facilitation and the dissemination of commercial information, the report says. Regional cooperation in the planning and financing of transport infrastructure to make cross-border trade physically possible and reduce its cost is an equally important ingredient for development. Regional management and investment projects in the crucially important areas of energy and water supply, which in many developing countries represent serious bottlenecks, are other cases where regional cooperation can serve development. Large projects in industrial development, research and development and knowledge generation are often too costly and risky for an individual developing country, but may be viable if several countries pool their resources. The report notes that this experience was part of the history of West European economic integration.

In addition, UNCTAD suggests that regional cooperation may help developing countries deal with shortcomings in the international financial system in three areas: provision of regional payment facilities and short-term balance-of-payments financing; provision of long-term development finance; and protection against exchange rate volatility and currency misalignments that can distort trade flows and undermine fruitful trade relations. Since the financial system at the global level lacks appropriate instruments to reduce the volatility of international financial markets and its impact on developing countries, regional cooperation in monetary and exchange-rate policies has become an important issue in all developing regions, the TDR observes.

The report concludes that in the absence of a far-reaching reform of the international financial architecture, strengthened regional monetary and financial cooperation can be critical for achieving greater coherence between the international financial system and the international trading system while respecting specific developing-country interests
Obviously, the report notes, a developing country may benefit from expanding its exports globally as well as regionally. However, for a developing country seeking to upgrade its production structure and the technology content of its domestic industry, an orientation towards the regional market can be an important factor for enhancing the competitiveness of domestic producers and can be an effective initial step towards integrating into the wider international market.