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A Case Study of Effects of Developing Country Integration on Trade Flows: The Andean Pact*

Published online by Cambridge University Press:  05 February 2009

Khashayar Khazeh  and
Don P. Clark
Khashayar Khazeh
Affiliation:
Assistant Professor of Finance at Salisbury State University, Maryland.
Don P. Clark
Affiliation:
Professor of Economics at the University of Tennessee.
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Extract

Cooperation among developing countries in the form of economic integration has received increased attention as a development strategy. About one-half of all developing countries currently participate in integration schemes.1 Yet there have been few attempts to measure the effects on trade flows associated with these integration efforts.2 The scarcity of such studies stems from a dissatisfaction on the part of some investigators regarding the applicability to developing countries of evaluative criteria formulated by Viner to assess world-wide allocative gains from industrial nation integration schemes.3 A lack of interest in the traditional method of evaluating integration efforts is also motivated by the expectation that static gains will be small or nonexistent in developing country integration schemes, where even collectively markets are often small and members display little differences in relative factor endowments.

Type
Articles
Information
Journal of Latin American Studies , Volume 22 , Issue 1-2 , March 1990 , pp. 317 - 330
Copyright
Copyright © Cambridge University Press 1990

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References

1 UNCTAD, ‘Economic Cooperation Among Developing Countries’, in Sauvant, K. P. and Hasenpflug, H. (eds.), The New International Economic Order: Confrontation or Cooperation Between North and South? (Boulder, Colo., 1977), pp. 437–56.Google Scholar

2 Su, Loweret, Cline, W. R. and Delgado, E., Economic Integration in Central America (Washington, D.C., 1978)Google Scholar; Willmore, L., ‘Trade Creation, Trade Diversion, and Effective Protection in the Central American Common Market’, Journal of Development Studies, vol. 12, no. 4 (1976), pp. 96–414CrossRefGoogle Scholar; Elkan, P., ‘Measuring the Impact of Economic Integration Among Developing Countries’, Journal of Common Market Studies, vol. 14, no. 1 (1975), pp. 56–68CrossRefGoogle Scholar; Pazos, F., ‘Regional Integration of Trade Among Less Developed Countries’, in Streeten, P. (ed.), Trade Strategies for Development (New York, 1973), pp. 145–75Google Scholar; and Pearson, C., ‘Evaluating Integration Among Less Developed Countries’, Journal of Common Market Studies, vol. 8, no. 3 (1970), pp. 262–75.CrossRefGoogle Scholar

3 Viner, J., The Customs Union Issue (New York, 1950)Google Scholar; Kahnert, F., Richards, P., Stoutjesdijk, E. and Thomopoulos, P., Economic Integration Among Developing Countries (Paris, 1969)Google Scholar; Jaber, T. A., ‘The Relevance of Traditional Integration Theory to Less Developed Countries’, Journal of Common Market Studies, vol. 9, no. 3 (1971), pp. 254–67CrossRefGoogle Scholar; and McClelland, D. H., The Central American Common Market: Economic Policies, Economic Growth, and Choices for the Future (New York, 1972).Google Scholar

4 Dynamic gains refer to the impact on long-run growth. See Kreinin, M. E., ‘On the Dynamic Effects of a Customs Union’, Journal of Political Economy, vol. 72. no. 2 (1964), pp. 193–5CrossRefGoogle Scholar; Yeats, A. J., Trade and Development Policies: heading Issues for the 1980s (New York, 1981)CrossRefGoogle Scholar; and Sellekaerts, W., ‘How Meaningful are Empirical Studies on Trade Creation and Diversion?’, Weltwirtschaftliches Archiv, vol. 109, no. 4 (1973), pp. 519–51.CrossRefGoogle Scholar Sellekaerts argues empirical studies attempting to measure static effects actually measure a combination of static and dynamic effects.

5 W. R. Cline and E. Delgado, Economic Integration in Central America.

6 Since members failed to reach an agreement on a common external tariff, the Andean Pact is best described as a free-trade area with some policy coordination.

7 Difficulties involved in attempting to achieve an equitable distribution of benefits among members are discussed in Hojman, D. E., ‘The Andean Pact: Failure of a Model of Economic Integration?’, Journal of Common Market Studies, vol. 20, no. 2 (1981), pp. 139–60.CrossRefGoogle Scholar

8 Cline, W. R., and Delgado, E., Economic Integration in Central America, p. 3Google Scholar; Hojman, D. E. ‘The Andean Pact: Failure of a Model of Economic Integration?’, p. 140Google Scholar; and Pazos, F., ‘Regional Integration of Trade Among Less Developed Countries’, p. 147.Google Scholar

9 F. Pazos, ‘Regional Integration of Trade Among Less Developed Countries’; and Vargas-Hidalgo, R., ‘The Crisis of the Andean Pact: Lessons for Integration Among Developing Countries’, Journal of Common Market Studies, vol. 17, no. 3 (1979), pp. 213–26.CrossRefGoogle Scholar

10 Sauvant, K. P., ‘Controlling Transnational Enterprises: A Review and Some Further Thoughts’, in Sauvant, K. P. and Hasenpflug, H. (eds.), The New International Economic Order, p. 366Google Scholar; Moxon, R. W., ‘Harmonization of Foreign Investment Laws Among Developing Countries: An Interpretation of the Andean Group Experience’, Journal of Common Market Studies, vol. 16, no. 1 (1977), pp. 22–52CrossRefGoogle Scholar; and Cherol, R. L. and Arco, J. Núñez Del, ‘Andean Multinational Enterprises: A New Approach to Multinational Investment in the Andean Group’, Journal of Common Market Studies, vol. 21, no. 4 (1983), pp. 409–28.CrossRefGoogle Scholar

11 W. R. Cline and E. Delgado, Economic Integration in Central America, and Avery, W. P. and Cochrane, J. D., ‘Subregional Integration in Latin America: The Andean Common Market’, Journal of Common Market Studies, vol. 11, no. 2 (1972), pp. 85–102.CrossRefGoogle Scholar

12 These biases are discussed in Kreinin, M. E., ‘Effects of the EEC on Imports of Manufactures’, Economic Journal, vol. 82 (09, 1972), pp. 897–920.CrossRefGoogle Scholar

13 All Andean Pact members were original members of LAFTA.

14 See Table 1 notes for a list of normaliser countries.

15 These approaches are discussed in Kreinin, M. E., ‘Effects of European Integration on Trade Flows in Manufactures’, Seminar Paper No. 125, Institute for International Economic Studies, Stockholm, 1979.Google Scholar

16 Tironi, E., ‘Customs Union Theory in the Presence of Foreign Firms’, Oxford Economic Papers, vol. 34, no. 1 (1982), pp. 150–71.CrossRefGoogle Scholar

17 Ibid., p. 150. Over one-third of Andean Pact manufactured goods sales were made by foreign-owned firms in the early 1970s.

18 Ibid. See also Caves, R., ‘Multinational Firms, Competition and Productivity in Host Country Industries’, Economica, vol. 41, no. 1 (1974), pp. 176–93.CrossRefGoogle Scholar

19 Only US-owned MNEs are included in US Department of Commerce, U.S. Direct Investment Abroad, 1977 (Washington, D.C. 1981).Google Scholar Reported figures are for total US direct investment income, making it necessary to assume all income remitted can be attributed to the Andean Pact.

20 UNIDO, Handbook of World Development Statistics, 1982 (New York, 1982)Google Scholar, and US Department of Commerce, U.S. Direct Investment Abroad, 1977.

21 Due to unavailability of data, estimates could not be performed on a disaggregated industry basis.

22 Kreinin, M. E., ‘Effects of the EEC on Imports of Manufacturers’, p. 908.Google Scholar

23 Morawetz, D., ‘Extra-Union Exports of Industrial Goods from Customs Unions Among Developing Countries’, Journal of Development Economics, vol. 1 (1974), p. 247.CrossRefGoogle Scholar

24 de Palacios, A. Puyana, Economic Integration Among Unequal Partners: The Case of the Andean Group (New York, 1982), pp. 208–10.Google Scholar Average rebates ranged between 18 and 31 percent. State trading comprised the following percentages of total imports: Colombia, 23, Peru, 26; Venezuela, 16.

25 Ibid., p. 210.

26 Morawetz, D., ‘Harmonization of Economic Policies in Customs Unions: The Andean Group’, Journal of Common Market Studies, vol. 11, no. 4 (1973), pp. 299.CrossRefGoogle Scholar

27 MNEs influence integration in other ways which could not be taken into account in the present study. For example, retained earnings that are reinvested in the firm might improve welfare. MNEs could stimulate exports of members to non-members over and above what would occur in their absence. To the extent that MNEs use transfer pricing policies to augment the flow of legal income remittances, reported profits will understate the negative impact of MNEs. See Caves, R., ‘Taxation, MNEs' Behavior and Economic Welfare’, in Caves, R. (ed.), Multinational Enterprises and Economic Analysis (Cambridge, 1983), pp. 226–49.Google Scholar

28 W. R. Cline and E. Delgado, Economic Integration in Central America, found corresponding annual static gains for the CACM were between 1.62 and 1.98 percent of 1968 and 1972 GNP, respectively.