regional integration and international trade

REGIONAL INTEGRATION AND INTERNATIONAL TRADE: ANALYTICAL MODELS FOR LATIN AMERICA AND ASEAN

MARIO ARTURO RUIZ ESTRADA

FACULTY OF ECONOMICS AND ADMINISTRATION, UNIVERSITY OF MALAYA JANUARY 2006 Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

REGIONAL INTEGRATION AND INTERNATIONAL TRADE: ANALYTICAL MODELS FOR LATIN AMERICA AND ASEAN

BY MARIO ARTURO RUIZ ESTRADA

A THESIS SUBMITTED IN FULFILMENT OF THE REQUIREMENT FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN THE FACULTY OF ECONOMICS AND ADMINISTRATION UNIVERSITY OF MALAYA JANUARY 2006 Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

Content Content

i.

Content of Tables, Figures, Diagrams and Programs

viii.

Acknowledgment

xii.

Abstract

xiii.

Chapter 1:

Introduction

1.1. Rationale of Research

1.

1.2. Hypotheses of Research

2.

1.3. Methodology of Research

3.

1.4. Objectives of Research

4.

1.5. Organization of the Thesis

5.

1.5.1. Section 1: Regional Integration 1.5.1.1. Regional Integration Evaluation Methodology (RIE-Methodology) 5. 1.5.1.2. Regional Cooperative Scheme (RC-Scheme) Theoretical Framework 6. 1.5.2. Section 2: Trade Liberalization 1.5.2.1. Trade Liberalization Evaluation Methodology (TLE-Methodology)Theoretical Framework 7. 1.5.2.2. Openness Growth Monitoring Model (OGM-Model) 1.5.2.3. The External Sector Development Index (SXi) 9. 1.5.3. Section 3: Economic Methodology 1.5.3.1. The Multidimensional Cartesian Space Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

8.

(MD Cartesian Space) Literature Review

10.

2.1.

Introduction

11.

2.2.

Globalization, Regionalism and Regionalization

11.

2.2.1. Globalization

12.

2.2.2. Regionalism

15.

2.2.3. Regionalization

16.

2.3.

Regionalism and Multilateralism

17.

2.4.

Analysis of Custom Union Theory and Trade Liberalization Literature Review

25.

Background Research and Analysis of Different Fields of Research in the Study of Regional Integration

33.

Application of Different Type of Cartesian Spaces in Economics

38.

Chapter 2:

2.5. 2.6.

SECTION 1: REGIONAL INTEGRATION Chapter 3: Regional Integration Evaluation Methodology (RIE-Methodology) 3.1. Introduction

41.

3.2. The Regional Integration Evaluation Methodology (RIE-Methodology)

43.

3.3. The Domestic System Development Concept

44.

3.4. Phases in the Regional Integration Evaluation Methodology (RIE-Methodology)

46.

3.4.1. Phase I: Design of the Multi-Input Database Table

46.

3.4.1.1. Rational Selection of Sub-variables in each Multi-input Database Table

48.

3.4.1.2. Types of Multi-input Data Base Table

53.

Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

3.4.2. Phase II: Measurement of Regional Development Indexes (Xi) 3.4.2.1. Steps to Obtain Regional Development Indexes (Xi)

54. 69.

3.4.2.2. Introduction to the Analysis of Regional Development (RD) and Regional Integration Stage (RIS) Index 69. 3.4.3. Phase III: Measurement of the Regional Development (RD) Index 71. 3.4.3.1. Steps to Obtain the RD Index

71.

3.4.3.2. Analysis of RD Index

73.

3.4.4. Phase IV: Measurement of the RIS Index 3.4.4.1. Analysis of RIS Index 3.5.

Application of the RIE-Methodology in a Single Trade Bloc

75. 76. 80.

The Central America Common Market (CACM) 3.5.1. The Growth Stage of Central American Regional Integration in the 1960’ s

80.

3.5.2. Recession Stage of Central American Regional Integration in the 1970’ s

82.

3.5.3. Crisis in Central American Regional Integration in the 1980’ s

84.

3.5.4. Emerging Stage of the Central American Regional Integration in the 1990’ s

85.

3.6. Application of the RIE-Methodology to Different Trade Blocs

88.

3.6.1. European Union: Advanced Regional Integration Development

88.

3.6.2. NAFTA: Constant Regional Integration Development

89.

3.6.3. ASEAN: Slow Regional Integration Development

90.


3.6.4. MERCOSUR: Fast Regional Integration Development 91.

3.6.5. Andean Community: Stagnation of Regional Integration Development Chapter 4:

93.

Regional Cooperative Scheme (RC-Scheme)

4.1. Introduction

97.

4.2. Regional Cooperative Scheme (RC-Scheme)

98.

4.3. Regional Cooperative Scheme (RC-Scheme) Modules

101.

4.3.1. Education and Technical Training Standardization Cooperation Module (M1)

101.

4.3.2. Social and Productive Infrastructure Cooperation Module (M2)

104.

4.3.3. Trade and Tourism Promotion Cooperation Module (M3)

106.

4.3.4. Public Administration Development Cooperation Module (M4)

109.

4.4. Prior to Application of RC-Scheme

111.

4.5. After Implementing the RC-Scheme

116.

4.6. RC-Scheme Modules Objectives

117.

4.6.1. Education and Technical Training Standardization Cooperation Module (M1) Objective

117.

4.6.2. Social and Productive Infrastructure Cooperation Module (M2) Objective

119.

4.6.3. Trade and Tourism Promotion Cooperation Module (M3) Objective

119.

4.6.4. Public Administration Development Cooperation Module (M4) Objective

120.

4.7. Considerations in the Application of RC-Scheme Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

120.

SECTION 2: TRADE LIBERALIZATION Chapter 5: Trade Liberalization Evaluation Methodology (TLE-Methodology) 5.1. Introduction

126.

5.2. The Trade Liberalization Evaluation Methodology

127.

5.3. Trade Liberalization Evaluation Methodology (TLE-Methodology) Phases

128.

5.3.1. Phase I: Design of the Multi Input Tariff Database Table

128.

5.3.2. Phase II: Measurement of the Trade Liberalization Index by Production Sector

130.

5.3.2.1. Steps to Obtain Each Trade Liberalization Index by Production Sector (Xi)

133.

5.3.3. Introduction to Analysis of Trade Liberalization Trend (TLT) Index and Trade Liberalization Stage (TLS) Index Based on Trade Liberalization Index by Production Sector (Xi) 134. 5.3.4. Phase III: Measurement of the Trade Liberalization Trend (TLT) Index 5.3.4.1. Steps to Obtain TLT Index

135.

5.3.4.2. Analysis of the TLT Index

138.

5.3.5. Phase IV: Measurement of the Trade Liberalization Stage (TLS) Index 5.3.5.1. Analysis of TLS Index Chapter 6:

135.

138. 140.

Openness Growth Monitoring Model (OGM-Model)

6.1. Introduction Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

143.

6.2. Steps to Apply OGM-Model

144.

6.2.1. Step-1: Measurement of the Degree of Openness Growth by Production Sector (Oi) 144. 6.2.2. Step-2: Measurement of Average Openness Growth Rate (Ō)

145.

6.2.3. Step-3: Measurement of Average of Openness Growth Rate ( Ō) 146. 6.2.4. Step-4: Measurement of Harmonization of Openness Growth Rate (HO) 146. 6.2.5. Step-5: Measurement of the Income Growth Rate (ΔY)

147.

6.2.6. Step-6: Plotting of Openness Diamond Graph

148.

6.2.7. Step-7: Creation Openness/Income Growth Rate (O:Y) Chart 149. 6.2.8. Step-8: Measurement of the Openness/Income Growth Rate (O:Y) Sensitivity Analysis 150. 6.3. Application of OGM-Model and Findings 6.3.1. Findings Pertaining to Correlation between Openness Growth and Income Growth

6.3.2. Finding Pertaining to Regional Integration Chapter 7:

153.

156.

The External Sector Development Index (SXi)

7.1. Introduction

161.

7.2. The External Sector Development Index (SXi)

162.

7.2.1. Step-1: Trade Volume Growth Rate (ΔTV) Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

163.

7.2.2. Step-2: Foreign Direct Investment Growth Rate (ΔFDI) 163. 7.2.3. Step-3: GDP Growth Rate (ΔGDP)

163.

7.2.4. Step-4: External Sector Main Variable (ESi)

164.

7.2.5. Step-5: External Sector Development Index (SXi)

165.

7.3. Application of the External Sector Development Index (SXi)

169.

SECTION 3: ECONOMICS METHODOLOGY Chapter 8:

The Multi-Dimensional Cartesian plane (MD Cartesian Space)

8.1. Introduction

172.

8.2. Comparison of 2-D, 3-D and MD Cartesian Space

173.

8.3. Application of the Multi-Dimensional Cartesian Space (MD Cartesian Space) 173. Chapter 9:

Conclusions

Bibliography


178. 183.

CHAPTER 1 Introduction 1.1. Rationale of Research The research in this thesis is carried out based on two general observations: First, the lack of alternative regional integration (RI) and trade liberalization (TL) monitoring models. Second is a new regional integration scheme theoretical framework proposal to integrate middle and low income countries 1)1. In recent years, there have been a large number of documents related to regional integration (RI) research. Usually, in the case of RI research is based on economics or political analysis (single-dimensional analysis) under different theoretical frameworks, models, methods and techniques of analysis. These

1

“ Middle-income country is a country having an annual gross national product (GNP) per capita equivalent to more than $760 but less than $9,360 in 1998. The standard of living is higher than in low-income countries, and people have access to more goods and services, but many people still cannot meet their basic needs. In 2003, the cutoff for middle-income countries was adjusted to more than $745, but less than $9,206. At that time, there were about 65 middle-income countries with populations of one million or more. Their combined population was approximately 2.7 billion.” “ The Low -income country is a country having an annual gross national product (GNP) per capita equivalent to $760 or less in 1998. The standard of living is lower in these countries; there are few goods and services; and many people cannot meet their basic needs. In 2003, the cutoff for low-income countries was adjusted to $745 or less. At that time, there were about 61 low-income countrieswith a combined population of about 2.5 billion people” (See: http://www.worldbank.org/depweb/english/modules/basicdata/datanotbasic.html).


analyses (economics or political) on RI do not offer multi-dimensional analysis based on specific monitoring models to show complex regional integration sequencing and timing for liberalization and integration. However, in the process of building new monitoring models for RI and TL, it is important to consider a conceptualization to be used. In our case we use two basic regional integration schemes, namely Custom Union (e.g. European Union) and Free Trade Area (e.g. NAFTA). However, the implementation of these two regional integration schemes in the regional integration process between middle and low income countries presents many difficulties and poor results. It is due to the above reasons that new regional integration (RI) and trade liberalization (TL) monitoring models are presented in this thesis to offer alternative analytical tools in the study of RI and TL. The new regional integration and trade liberalization monitoring models are intended for the evaluation of existing policies in these two categories of countries (middle and low income countries), and subsequently for the creation and implementation of new policies that fulfill the needs of these countries. 1.2. Hypotheses of Research There are two general hypotheses in this research. First hypothesis: “ The study of regional integration (RI) and trade liberalization (TL) research need to consider multi-dimensional analytical models (economic, social, political and technological analysis simultaneously) to understand the behavior of


different regional integrations and trade liberalization process around the world, especially in the case of middle and low income countries” . Second hypothesis: “ The regional cooperative scheme (cooperation creation effect) is a precondition to generate strong regional trade blocks (trade creation effect) between middle and low income countries into the same region” .

1.3. Methodology of Research In the attempt to prove the above hypotheses, the research for this thesis is divided into two phases. The first phase is theoretical research and the second phase is technical research. In the theoretical research phase, strong theoretical frameworks based on different regional integration (RI), trade liberalization (TL) and economics analytical (EA) issues are identified to support the research. Thereafter, based on the results and observations derived from the different stages of the theoretical research frameworks, a series of new concepts and definitions are introduced. These new concepts and definitions can be appreciated in different chapters of this thesis. In the technical part of this thesis, several new RI and TL monitoring models based on new indicators and new types of graphs are introduced. These new monitoring models are: regional integration evaluation methodology (RIEMethodology), regional cooperative scheme (RC-Scheme) theoretical framework, trade liberalization evaluation methodology

(TLE-Methodology) theoretical


framework, openness growth monitoring model (OGM-Model), external sector development index (SXi) and multi-dimensional Cartesian space (MD-Space). The new monitoring models are supported by basic mathematics applications (rates, basic arithmetic functions, measurement of areas and basic geometry), statistical indicators (average) and methods (correlation and regression). The new types of graphs are based on new graphic concepts they are introduced in different chapters of this thesis. While the models are meant to function with both primary and secondary data, for demonstrations purposes, only secondary data is used in this thesis. Specifically, both qualitative and quantitative data are used in the regional integration evaluation methodology (RIE-Methodology); all the other models use quantitative data. 1.4. Objectives of Research This research is motivated by two-fold objectives: Firstly, the application of each monitoring model is demonstrated fully in the relevant sections of the thesis. The explanations and application of each monitoring model is supported by a small manual application. It is hoped that these new monitoring models will provide good support to economists, academicians and policy makers in their decision-making regarding regional integration and international trade issues. Secondly, it aims to present an alternative regional integration scheme proposal to integrate middle income and low income countries into a single trade bloc based on the concept of regional cooperative scheme (RC-Scheme). 1.5. Organization of the Thesis


The theoretical and technical research of this thesis consists three large sections. The first section is on regional integration issues. The culmination of this section is to propose an alternative regional integration scheme: Regional Integration Evaluation Methodology (RIE-Methodology). In the same section, we propose an alternative regional integration scheme theoretical framework proposal to help integrate middle income and low income countries, called “ Regional Cooperative Scheme (RC-Scheme) Theoretical Framework” . The second section of the research attempts to study all matters relating to international trade research. This section sees the introduction of three trade liberalization monitoring models: The trade liberalization evaluation methodology (TLE-Methodology) theoretical framework, openness growth monitoring model (OGM-Model) and external sector development index (SXi). The last section of the thesis highlights the multi-dimensional Cartesian space (MD-Space) as an alternative Cartesian space to visualize any economic phenomena in space and time from the multi-dimensional perspective. 1.5.1. Section 1: Regional Integration 1.5.1.1. Regional Integration Evaluation Methodology (RIE-Methodology) The RIE-Methodology presents a new model of analysis to study the trend of regional integration from a multi-dimensional perspective. This model is created based on the belief that it is necessary to study regional integration using political, social, economic and technological analysis simultaneously. The general objective of the RIE-Methodology is to offer policy-makers and researchers a


new analytical tool to study the evolution and stages of any regional integration process from a multidimensional analysis based on a group of indexes and graphs. The RIE-Methodology is not intended to be a forecasting model in any case. However, its application is not limited to a specific group of countries or regions. It is also not constrained by issues of a region or the development stage of any member in the region that is interested in integrating into a single regional trade bloc. The RIE-Methodology, in effect, is a simple and flexible scheme, which can be applied to any case of regional integration.

1.5.1.2. Regional Cooperative Scheme (RC-Scheme) Theoretical Framework The RC-Scheme theoretical framework is intended to be a proposal to offer a new scheme for regional integration between middle income and low income countries. The RC-Scheme theoretical framework demonstrates the basic conditions to succeed in any case of regionalism between middle income and low income countries, whether open regionalism (as that of the export-led oriented) or closed regionalism (as that of import substitutions). This thesis proposes the implementation of the RC-Scheme to facilitate a new regionalism scheme to integrate middle income and low income countries. The RC-Scheme will generate the cooperation-creation effect in the same regional bloc. In turn, the cooperation-creation effect will generate strong regional integration agreements (intra-regional trade creation effect in the short run and inter-regional trade creation effect in the medium run). In the long run, this is Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

helpful in regionalism between middle income and low income countries. The regional cooperative scheme will create a harmonization of the development cooperation for all members in the region. 1.5.2. Section 2: Trade Liberalization 1.5.2.1. Trade Liberalization Evaluation Methodology (TLE-Methodology) Theoretical Framework The trade liberalization evaluation methodology (TLE-Methodology) is created in this thesis as an alternative model to measure the trend and stage of trade liberalization of any country. The difference between the TLE-Methodology and the conventional trade liberalization analysis is that the TLE-Methodology can show the trends and stages of any trade liberalization process based on a series of new indexes and a new type of graphs; On the other hand, the conventional trade liberalization analysis only offers a partial explanation about the effect of regional integration from a theoretical perspective. With the TLEMethodology, policy-makers and researchers can visualize the past and present situations of the trade liberalization process of any country from a global perspective. The TLE-Methodology is not intended to be a forecasting model in any case. Its application is also not limited to the study of a specific group of countries or regions. It is not constrained by issues of the region or countries that is interested in negotiating for a Free Trade Area or the development stage of any country in the concerned region. The TLE-Methodology is a simple and flexible scheme like the RIE-Methodology and it can be applied to any case of Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

trade liberalization. 1.5.2.2. The Openness Growth Monitoring Model (OGM-Model) The openness growth monitoring model (OGM-Model) presents a new methodology for the study of the openness of trade. The mission of this model is to offer policy-makers and researchers new analytical tools to study the impact and trend of openness in the economy of any country from a new perspective. The application of the OGM-Model is not limited to study a specific group of countries or regions. It is also not constrained by the development stage of any country under study or issues of the region concerned. The OGM-Model, in effect, is a simple and flexible scheme. The general objective of the openness growth monitoring model (OGM-Model) is to analyze the impact of average openness growth ( Ō) on income growth (ΔY) in a specific period of time (in the short run). The period under study in this thesis is from 1995 to 2001. The chapter on OGM-Model consists of three parts. The first part is the literature review on conventional analytical methods that evaluate openness based on political economy, economic theory, and trade policy approaches. The second part presents a new analytical model to evaluate the trend, vulnerability and harmonization of openness growth or trade orientation. A new group of indicators and a new type of graph are used to show the relationship between openness growth and income growth. There are altogether six basic indicators in the implementation of OGM-Model. The first indicator measures the degree of openness by sectors (Oi): agriculture (Oa), manufacturing (M), energy (Oe) and


services (Os). The rest of the indicators are average openness rate (Ō), harmonization of openness (HO), openness diamond graph, average openness growth rate ( Ō), per-capita gross national income (Y), income growth rate (ΔY), openness/income growth rate (O:Y) sensitivity analysis chart. The third part of this chapter shows the results obtained from the application of the OGM-Model to different countries. 1.5.2.3. The External Sector Development Index (SXi) The external sector development index (SXi) is a new analytical tool for studying the trend of external sector in any country or region. The SXi is strongly affiliated with the openness index. The difference between these two indices is that the SXi includes foreign direct investment (FDI) in its analysis while the openness index does not. This thesis considers FDI volume as an import item in any country. In the measurement of SXi, three basic growth rates are used: trade volume growth rate (ΔTV), FDI growth rate (ΔI) and GDP growth rate (ΔY). The simultaneous application of these three growth rates makes it possible to observe the trend of the external sector of any country or region. 1.5.3. Section 3: Economic Methodology 1.5.3.1. The Multi-Dimensional Cartesian Space (MD-Cartesian Space) This section features only one model, namely the “ Multi-Dimensional Cartesian Space (MD-Cartesian Space)” . This Cartesian Space is meant for analyses of both microeconomics and macroeconomics levels. Unlike the traditional 2-Dimensional Cartesian plane (x,y) and 3-Dimensional Cartesian


Plane (x,y,z), the MD-Cartesian Space consists of five axes ([x1,x2,x3,x4],y), where each axis has both positive and negative values. In this thesis the MDCartesian Space is applied to a macroeconomics level analysis, specifically to observe the global dimension of the gross domestic product (GDP). Prior to the detailed application of MD-Cartesian Space, one chapter of the thesis (see Chapter 8) explores the different types of graphs that have been applied in economics so far, for comparison purposes. The MD-Cartesian Space is highly flexible. It can be adapted not only to microeconomics and macroeconomics analyses, but also to research in other areas such as finance, accounting, management, business and public administration. The MD-Cartesian Space is essentially an alternative analytical tool for policy makers, researchers and academicians in all fields.

CHAPTER 2 Literature Review 2.1. Introduction In the past two decades different authors from different fields of research (economic, political and social view points) have explained the evolution and effects of globalization and regionalism on the world economy. Different theories and analytical tools have been developed and applied in these studies. All these theories and analytical tools permit visualize globalization and regionalism from a single dimension of analysis (economic, political, social or technological). In our Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

research, the single dimension of analysis is not enough to explain these two complexes and multi-dimensional phenomenon. For this reason, this thesis suggests the creation and implementation of new monitoring models based on a multi-dimensional analysis to help in the study of globalization and regionalism. The new multi-dimensional monitoring models are based on the criteria of new regionalism according to Hettne and Söderbaum (2002).

2.2. Globalization In the past twenty years, the whole world has been experiencing dramatic changes in the economic, technological, political and social arenas. Many academicians and researchers in the fields of economics, politics and sociology refer to these transformations as “ globalization2)2” . Globalization started as a general concept among certain specialized academic groups in the middle of the 1980’ s, with reference to regionalism and the rapid development of new advanced technologies. Later, the concept and uses of the word “ globalization”started to expand in the universal language, until it became adapted into our common lexicon. It is no longer a special term used by economists, political scientists and sociologists. It is regarded to as the most relevant economic phenomenon these days. Probably, there is no other concept that can better define the fundamental 2

David Held (2000) defines globalization as a process (or set of processes) which embodies a transformation in the spatial organization of social relations and transactions - assessed in terms of their extensity, intensity, velocity and impact - generating transcontinental or inter-regional flows and networks of activity. For Juan Jose Toribio (2000) define globalization as an accelerated process of the world economies integrated through the integration of the production, trade, financial flows, technological diffusion, information networks, and cultural currents. Both authors show that globalization is a dynamic and global process based on regional integration.


challenges in the world economy in this century than “ globalization” . But it was not until the 1990’ s that globalization made its formal appearance and consolidation in the international context. Furthermore, globalization is a complex and multidimensional phenomenon taking place simultaneously in different levels and transforming the political, social, economic and technological scenarios in different parts of the world. However, globalization embodies particular characteristics which are as follows: First Characteristic of Globalization: Institutional and Political Reforms The first characteristic of Globalization is the institutional and political reforms based on less public sector participation into the economic activity or market. The institutional focus is supported by the idea to reduce public sector participation into the economic activity under the argument of unnecessary bureaucracy (non-efficient allocation of resources and production factors). The elimination of unnecessary bureaucracy uses the mechanism of privatization based on the sale of assets from the public sector enterprises (products and services) to the private sector. The sell of public sector to the private sector assumes a better performance in the productivity and efficiency of public services and products. The mission of privatization is to look for an efficient allocation of resources into the economy of any country under the private sector management. The new institutional focus and deep political reforms that constitute the first pillar of globalization is based on less public sector participation in economic activity. The idea behind the reduced public sector participation is that


unnecessary bureaucracy creates non-efficient allocation of resources and production factors.

The elimination of the unnecessary bureaucracy is

implemented through the mechanism of privatization, where goods and services from the public enterprises are sold to the private sector. The sale of public sector assets to the private sector is assumed to give rise to higher productivity and efficiency in the public sector. This is in line with the mission of privatization, that is, to achieve efficient allocation of resources in a country’ s economy. Since the end of the Cold War -- with the collapse of the bipolar order (communism and capitalism) that reigned since 1945, a new phase of reform in the economic, institutional and political arenas has been created. A new institutional world order has been structured under deep political, economic, technological and social challenges (Gaspar, 2000). Indeed, the analysis of postCold War regionalization process and international order cannot be separated from the globalization process (Hveem, 2002 and Sideri 2000). The new international order in the political and institutional is supported by the strong promotion of democracy (more participation of the civil society into the democratization process) and human rights. Second Characteristic

of Globalization: Development of

Information

Communication Technology (ICT) The second characteristic of globalization is the development of information communication technologies (ICT) tools resulting in the use of advanced technologies. The ICT sector uses technological innovative tools such


as Internet services (Web), sophisticated software and hardware, satellite T.V. and satellite mobile phone systems. These tools enable quick accessibility of information and hence, easier business transactions. The present advances in technology have come a long way since the industrial revolution in England. With advanced technology, new Research & Development (R&D) methods and tools emerged, which in turns led to expansion in world production and business. However, the above benefits of technological revolution are mainly enjoyed by high income countries. This results in concentration of high technology amongst high income countries. Therefore, middle income and low income countries continue to be highly dependent on high income3)3 countries for their technological needs.

Third Characteristic of Globalization: Trade Liberalization The final characteristic is the expansion of regional integration agreements (RIA’ s) around the world based on custom union (CU) and free trade areas (FTA) schemes. This issue will be explained with more details in the section 2.3. 2.3.

Regionalism and Multilateralism

3

“ High-income country is a country having an annual gross national product (GNP) per capita equivalent to $9,361 or greater in 1998. Most high-income countries have an industrial economy. There are currently about 29 high-income countries in the world with populations of one million people or more. Their combined population is about 0.9 billion, less than one-sixth of the world’ s population. In 2003, the cutoff for high-income countries was adjusted to $9,206 or more” . (see: http://www.worldbank.org/depweb/english/modules/basicdata/datanotbasic.html)


According to Winters (1999) the literature about multilateralism4)5 vs. regionalism5)6 is growing among policy makers, economists and political scientists regarding the question of whether regional integration arrangements are favorable or non favorable for the multilateral system. Are regional integration arrangements "building blocks or stumbling blocks," in Bhagwati's (1993.b) phrase, or stepping stones toward multilateralism? Government agencies, economists and policy makers are observing the ability of the world trade

5

“ Multilateralism is considered a basic principle of globalization. This principle tries to promote the free market through trade and non-trade barriers measures among nations without discrimination or some preferences under the control of the general agreement trade and tariffs (GATT). From 1947 until today, GATT is considered by many experts in the international trade field as an organization that plays the role of mediator and moderator in the international trade legal framework among all members of GATT that have trade differences. The GATT base is supported by the application of the unconditional and voluntary principles of non-discrimination and reciprocity based on the GATT Art. 1: General mostfavored-nation (MFN) treatment clause. The MFN complies with the modus operandi of the GATT, and it is given the basic elements to bilateralism in all GATT negotiations among its members. Usually, when we refer to GATT, some confusion may arise especially when the GATT focus its attention on multilateralism, and we forget that the importance of bilateralism which is a vital complementary part of multilateralism. After this clause was implemented, it gave rise to article XXIV. Article XXIV refers to regional agreements based on custom union and free trade areas.”(see Deardorff and Stern, 1994). “ GATT Article 1: Most-favored-Nation (MFN): “ 1. With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraphs 2 and 4 of Article III,* any advantage, favor, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties. 2. The provisions of paragraph 1 of this Article shall not require the elimination of any preferences in respect of import duties or charges which do not exceed the levels provided for in paragraph 4 of this Article and which fall within the following descriptions (see: http://www.wto.org/english/docs_e/legal_e/gatt47_02_e.htm) “ GATT Article XXIV: Territorial Application — Frontier Traffic — Customs Unions and Free-trade Areas: 1. The provisions of this Agreement shall apply to the metropolitan customs territories of the contracting parties and to any other customs territories in respect of which this Agreement has been accepted under Article XXVI or is being applied under Article XXXIII or pursuant to the Protocol of Provisional Application. Each such customs territory shall, exclusively for the purposes of the territorial application of this Agreement, be treated as though it were a contracting party; Provided that the provisions of this paragraph shall not be construed to create any rights or obligations as between two or more customs territories in respect of which this Agreement has been accepted under Article XXVI or is being applied under Article XXXIII or pursuant to the Protocol of Provisional Application by a single contracting party. For the purposes of this Agreement a customs territory shall be understood to mean any territory with respect to which separate tariffs or other regulations of commerce are maintained for a substantial part of the trade of such territory with other territories”(see: http://www.wto.org/english/docs_e/legal_e/gatt47_02_e.htm)

6

Regionalism is often given different names, shapes and forms, each with different implications and nuances. In this chapter, regionalism from a trade point of view is defined broadly: as the deepening of intra-regional economic interdependence in a given region through intra-regional trade, foreign direct investment and commercial regulations, standards and practices (Baldwin, 1998).


organization (WTO) to maintain the GATT's unsteady yet distinct momentum toward liberalism, and as they contemplate the emergence of world-scale regional integration arrangements (RIA’ s). Baldwin (1999) argues that the GATT/WTO’ s incapacity to solve trade differences among its members could be rectified through the expansion of large number of regional integration agreements (RIA’ s) around the world. The Regional Integration Agreements (RIA’ s)6)7 basically is based on two schemes of regional integration, namely customs union (CU) and free trade areas (FTAs). According to world trade organization (WTO), the fast growth of RIA’ s around the world was generated between 1992 and 2005 (Figure 1). Around 186 RIA’ s existing around the world were registered in the GATT/WTO under different status, and up till 2005, the GATT/WTO had a total of 11 custom unions (5%), 120 free trade areas (65%) and 55 enabling clause and GATT Art. V7)8 (30%) around the world (see Table 1 and 2). For this reason, Cable and Henderson (1994) present strong claims in

7

RIA’ s can be defined as agreements of mutual support between interested parties to remove total or partial tariff barriers and non-tariff barriers among all members in order integrate into a single trading bloc

8

“ GATT Article V: Freedom

of Transit: 1. Goods (including baggage), and also vessels and other means of transport, shall be deemed to be in transit across the territory of a contracting party when the passage across such territory, with or without trans-shipment, warehousing, breaking bulk, or change in the mode of transport, is only a portion of a complete journey beginning and terminating beyond the frontier of the contracting party across whose territory the traffic passes. Traffic of this nature is termed in this article “ traffic in transit” . 2. There shall be freedom of transit through the territory of each contracting party, via the routes most convenient for international transit, for traffic in transit to or from the territory of other contracting parties. No distinction shall be made which is based on the flag of vessels, the place of origin, departure, entry, exit or destination, or on any circumstances relating to the ownership of goods, of vessels or of other means of transport. 3. Any contracting party may require that traffic in transit through its territory be entered at the proper custom house, but, except in cases of failure to comply with applicable customs laws and regulations, such traffic coming fromor going to the territory of other contracting parties shall not be subject to any unnecessary delays or restrictions and shall be exempt from customs duties and from all transit duties or other charges imposed in respect of transit, except charges for transportation or those commensurate with administrative expenses entailed by transit or with the cost of services rendered. (see: http://www.wto.org/english/docs_e/legal_e/gatt47_02_e.htm)


favor of regionalism: that regionalism breaks down economic nationalism and increases awareness of economic interdependence; that it is a useful laboratory for new approaches to deeper integration which can be applied multilaterally (in relation, for example, to product and technical standards, services, government procurements, state subsidies, competition policy and dispute settlement); that it makes negotiation easier by reducing the number of players; and that it encourages the codification and formalization of rules and regulations affecting trade, making them more transparent and less capricious and discretionary, if not always more liberal. On the other hand, Bhagwati (1993.a), for example, maintain that regionalism reduces the motivation and commitment for multilateralism. They have several counter-arguments against the above favorable claims of Calb and Henderson for regionalism (as mentioned earlier in this section on regionalism). These agreements originated from the fast expansion in the number of RIA’ s around the world. Further, Krugman (1991) argues in favor of multilateralism and supports the idea that multilateralism brings more benefits to international trade than regionalism. He asserts that if the number of custom unions and free trade areas increases, then trade welfare in the world trade will decrease. Another reason for the counter-argument against regionalism is mentioned by Fernandez (1998). She highlights that there are two types of trade restrictions, namely hard restrictions and soft restrictions that have spouted inside and outside of RIA’ s. Hard restrictions are tariff measures (import tariffs) and non-tariff measures Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

(quotas) in the manufacturing and agricultural sectors. Soft restrictions pertain to sanitary measures and focuses on health and environmental issues. These measures create restrictions and obstacles against development of international trade, especially trade between middle income and low income countries.


Figur e 1: Evolution of Regional Integr ation Agr eement’ s (RIA’ s) in the Wor ld register ed by GATT/WTO (1948-2005)

Source: Wor ld Tr ade Organization (WTO) Secr etar iat Moreover, two categories of regionalism are applied in this research. These Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

two categories of regionalism, as suggested by Bhagwati (1999), there are closed regionalism and open regionalism. Closed Regionalism Closed regionalism is based on the import-substitution industrialization (ISI) strategy or inward oriented model under the infant industry argument. The ISI strategy uses a common import tariff that is a form of government intervention to protect the domestic industries and to create a large market (Balassa, 1985). Closed regionalism has observed a series of phases in the process towards the creation of a single trading bloc. These six phases are first preferential trade arrangements. Second, is the free trade area (FTA), where the FTA will eliminate internal tariff and non-tariff barriers but not harmonize external barriers. Third, is the Customs union (CU), which is trying to remove internal barriers and establish a common external tariff. Fourth, is common markets (CM), which is formed by a customs unions (CU) and where free mobility of labor (L) and capital (K) are eliminated. The fifth phase is to establish a common currency and common economic policies based on an economic and monetary union. Finally, nations can form a single state in a confederation (Lawrence, 1996). The application of the ISI strategy in the case of developing countries and less developed countries is assumed to help enhance economic development in these countries. However, disappointing results were obtained by many countries in Latin America in the 1980’ s, for example, in countries in the Central America Common Market

(CACM)

and Caribbean Community.

These countries


experienced high costs, economically (low economic growth), socially (poverty) and politically (political instability). In fact, the application of the ISI strategy gives rise to problems, such as imbalanced industrial concentration, high cost of production (i.e. non-efficient allocation of factors of production (L,K) in different production sectors such as agriculture, manufacturing, industry and services), as well as problems relating to bureaucratic negotiations among governments. In addition, economic and political influences from large economies on small economies have always been prevalent under this strategy. Open Regionalism Open regionalism was developed and promoted at the end of the 1980’ s. Based on trade liberalization or open market, it uses the export-led oriented or outward oriented model. Contrary to closed regionalism, open regionalism seeks to eliminate all trade barriers and non-trade barriers in the same region based on a minimal government intervention which is applied to protect domestic industries from foreign competition. Cable and Henderson (1994) consider open regionalism as a negotiating framework consistent with and complementary to GATT/WTO. The authors cite the Asia Pacific Economic Cooperation (APEC) as a model of this approach. But, as they point out, ‘ openness’carries at least two different meanings: openness in terms of non-exclusivity of membership; openness in terms of contributing economically to the process of global liberalization than Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

detracting from it through discrimination. According to Baldwin (1999), there are two reasons for the success of this new regionalism: (i) GATT/WTO’ s unsatisfactory performance in terms of multilateralism and its incapacity to dissolve trade differences among its members with the first regionalism; (ii) United States’ changed position on multilateralism and the move in its trade policy towards open regionalism. It can be argued that open regionalism helps to manage the world trade. NAFTA, for example, started to adopt the open regionalism model. The results it obtained were positive, especially for the United States and Canada. In order to achieve a stream of open regionalism based on North America Free Trade Area (NAFTA) experiences, the following conditions must be considered, such as (Ruiz, 2005.d): Economic Conditions: market proximity (gravity model), foreign direct investment (FDI) incentives and strong legal framework among its members, different production structures, efficient combination of production factors (K, L), low inflation rates, stability in the exchange rates, maximized uses of economies of scales and large market size. Political Conditions: democracy, economic power group’ s willingness to integrate the countries in the region, strong legal framework, political stability and ability to solve geographical border problems. Social Condition: historical antecedents among countries in the same region Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

originated by the immigration from small economy to large economy. The combination of the above conditions constitutes the factor leading to the present success of open regionalism. It is difficult to implement open regionalism between middle income countries and low income countries. This is because these countries lack the same kind of economic, political, social and technological conditions as those present in the NAFTA. However, it is inappropriate to argue that open regionalism is the ideal scheme to integrate middle income countries with low income countries in order to compete in world trade. 2.4.

Analysis of Customs Union Theory and Trade Liberalization Literature Review

Custom Union Theory Literature Review The effects of regional integration have been studied by many economists based on the Custom Union theory. There are two basic concepts in this theory, namely trade-creating effect and trade-diverting effect. These two concepts are used by many economists and non-economists as the general framework of introduction to the study of regional integration. Viner (1950) argues that where the trade-creating force is predominant, at least one of the custom union members must benefit. Where two members receive net benefit together, all members in the union will benefit accordingly. However, the world outside the customs union loses in the short-run; gaining in the long run only if there is diffusion of increased prosperity in the member countries of the customs union. Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

Where the trade-diverting effect is predominant, at least one of the member countries is bound to be injured. However, in the short run both may be injured and will suffer a net injury together. There will be injury to the outside world at large in the long run as well. The main focus of the Customs Union Theory is the markets of goods and services. A partial equilibrium is applied in this theory and the central objective of this theoretical approach is to improve the national income. The Second Best theory proposed by Lipsey and Lancaster (1997) should also be mentioned here. These two authors apply a general equilibrium to explain the customs union effects on world trade. The contribution of Lipsey and Lancaster on the Customs Union Theory follows the Pareto optimum which requires the simultaneous fulfillment of all the optimum conditions based on the general economic problem of maximization. A function is maximized subject to at least one constraint, which in this case is production function or utility function. The customs union theory is still used today and continues to be used by many economists. The partial equilibrium analysis used in the customs union theory posts a problem: it frequently uses a partial competitive equilibrium framework to arrive at a general conclusion about a process that is a general equilibrium phenomenon. (Devlin and Ffrench-Davis, 1998)


Trade Liberalization Literature Review We can observe the fast expansion of trade liberalization8)9 under the preferential trade agreements (PTAs) concept that has taken place throughout the world up to today. In the shape of Free Trade Area (FTA), the participant countries agree to eliminate the internal tariff barriers but set their external tariffs barriers independently. It is important to remember that the Customs Union (CU) constitutes the other main shape of PTAs. CU differs from FTA essentially because its members have a common external trade policy (Breton, Scott & Sinclair, 1997). The study of PTAs revolves around trade creation and trade diversion effects. This is partly due to the fact that many economists consider these effects to be the fundamental dimension for evaluating trade blocks (Devlin and EfrenchDavis, 1998). However, it is of our view that these models of analysis require considerable transformation for application in the study of trade liberalization issues. The core idea presented here is that the study of trade liberalization should encompass more than one isolated economic or political analysis revolving around one specific problem. However, the literature on trade liberalization can be studied from three different approaches: first, the political economy approach; second, the economic 9

Trade liberalization generally means that there are no artificial impediments (tariff) to the exchange of goods across national markets and that therefore the prices faced by domestic producer and consumers are the same as those determined by the world market (allowing for transportation and other transactions costs). These prices reflected the relative scarcity and abundance of goods around the world and constitute a relevant opportunity cost to domestic firms and households (and hence to the country as a whole) because the world market is always available for trades at those prices (Irwin, 1998).


theory approach and the third, the trade policy approach. In this part of our research it is important to mention that work on trade liberalization based on the political economy approach may be grouped into two large areas of study: free trade9)10 under the laissez faire argument (outward oriented strategies or export orientation) and protectionism based on infant industry argument (inward oriented strategies or import substitution industrialization –ISI). Firstly, in the case of the literature on free trade, the idea receives support from The Wealth of the Nations10)11 by Adam Smith (1776) under the Laissez Fair argument. In the Wealth of the Nations framework, Adam Smith does not present some analytical method or model, his contribution is the introduction of a clear theoretical framework based on a system of clear ideas to generate trade policies to support the promotion of free trade. Additionally, the free trade literature in classical economics is based on Smith’ s ideas in terms of theoretical detail through to David Ricardo and its

10

“ Free trade is considered as an economic policy. In theoretical terms, free trade generally means that there are no artificial impediments (tariff) to the exchange of goods across national markets and that therefore the prices faced by domestic producer and consumers are the same as those determined by the world market (allowing for transportation and other transactions costs). These prices reflect the relative scarcity and abundance of goods around the world and constitute a relevant opportunity cost to domestic firms and households and hence to the country as a whole) because the world market is always available for trades at those prices). In reality, free trade describes a policy of the nation-state toward international commerce in which trade barriers (tariff barriers, quantitative restrictions, and other import barriers) are absent, implying no restrictions on the import of goodsfrom other countries or restraints on the export of domestic goods to other markets. These trade interventions distort the prices faced by domestic producers and consumers away from those arising in the world market”(Irwin, 1998). 11

The wealth of the Nations presents that the application of free trade can generate wealth and welfare among nations. “ According to Adam Smith, trade between two nations is based on absolute advantage. When one nation is more efficient than (or has an absolute advantage over) another in the production of one commodity but is less efficient than (or has an absolute disadvantage with respect to) the other nation in producing a second commodity, then both nations can gain by each specializing in the production of the commodity of its absolute advantage and exchanging part of its output with the other nation for the commodity of its absolute disadvantage (Salvatore, 2001)” .


theory of comparative advantage 11)12. In this section of our research the introduction of the theory of comparative advantage is considered as a strong analytical method to study and support the free trade literature. According to Haberler (1952), the theory of comparative advantage has a strong relationship with opportunity cost theory 12)13. The comparative advantage theory is simple and uses the model to understand the behavior of trading between two countries (A,B) and two goods (X,Y), where each good uses one production factor either labor, capital (L,K) or price (with a monetary value –P-). Labor is represented by manhours and the value of one unit is represented by its price. Secondly, in contrast to the idea of free trade is the protectionism literature that supports the idea regarding the accumulation of treasure or bullion; the protection of national wealth; the achievement of a favorable balance of trade; the protection of domestic industry; and increase of the role of the state in economic activity. Usually, protectionism literature follows the infant industry argument. At the same time, protectionism literature offers a variety of perspectives based on factors like the terms of trade argument by Torrens in 1808; Infant Industry Argument by Mill in 1848; Increasing Returns Argument by

12

The comparative advantage has strong relation with opportunity cost theory (Haberler, 1952). The opportunity cost theory can be illustrated with the production possibility frontier or transformation curve. It can show alternative combinations of the two commodities that a nation can produce by fully utilizing all of its resources with the best technology available to it (Salvatore, 2001). In the analysis of the comparative advantage is based on a basic mathematics and graphs to explain the relationship between two nations and goods based on the absolute advantage that each one country present. 13

The opportunity cost theory can be illustrated with the production possibility frontier or transformation curve. It can show alternative combinations of the two commodities that a nation can produce by fully utilizing all of its resources with the best technology available to it. In the analysis of the comparative advantage is used a basic mathematics and graphs to explain the relationship between two nations and goods based on the absolute advantage that each one country present


Graham in 1920; Wage Difference Argument in 1830 and the general theory of employment, interest, and Money by Keynes in 1936. All authors’contributions have a significant influence on the development of new theories and models of analysis up to today supporting the protection of domestic industry. Free trade literature and protectionism literature offer

a general

understanding about the trade policy orientation among different kinds of thinkers through its different ideas, concepts and theories that try to show the pros and cons of both sides (free trade and protectionism), At the same time, both literatures asses the strong and weak points. All of them have played important roles in the development of new analytical methods and models to generate logical explanations about the impact of free trade. The difference between the political economy and economic theory approach, and the trade policy approach is that the political economy approach creates criteria based on a general theoretical framework explaining two different sides of the trade orientation (free trade vs. Protectionism). The political economy approach takes a more qualitative analytical path. Trade Liberalization using the Economic Theory Approach is basically one that tries to explain the effect of openness from two angles of analysis: microeconomics and macroeconomics. Each focus also applies two types of methods: qualitative (arguments, theories, principles and concepts) and quantitative (econometrics or analytical methods based on mathematical and statistical methods). The studies can be classified by period of time (ex-ante and Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

ex-post) and dimension of analysis: partial equilibrium or static and general equilibrium or dynamic. This observation is drawn from approximately 500 different papers from various journals13)14 related to trade liberalization, regional integration and international economics issues, from 1991 to 2001. Based on our analysis of the documents, several pertinent points may be noted: application of microeconomics (70% of cases), qualitative methods were observed in the application of common theoretical analytical issues: comparative advantage (30% of cases), H-O theory (25% of cases), trade restrictions: tariff and non-tariff barriers (40% of cases), and trade creating custom union (65% of cases). Quantitative methods were applied in 85% of cases in our review. The common models used to measure trade liberalization are the elasticity approach (ex-ante), general equilibrium models (ex-ante), import demand regression approach (ex-ante), gravity model (ex-post), an import-growth simulation and other regression approaches (ex-post), import demand regression approach (expost). General equilibrium or dynamic models are applied in 80% of cases. All the above economic models of analysis persist in measuring changes in welfare based on cost/benefit consideration. This chapter, on the other hand, asserts that the study of trade liberalization should not focus merely on the cost/benefit analysis; instead it should take into consideration a series of

14

American Economic Review, Canadian Journal of Economics, Econometrica, Economic History Review, Economic Journal, International Economic Review, Journal of Economic History, Journal of Economic Literature, Journal of Political Economy, Journal of Policy Modeling, Economic Development Journal, Oxford Economic Papers, Quarterly Journal of Economics, Review of Economic Studies, Review of Economics and Statistics , Canadian Journal of Economics and Political Science, Journal of Economic Abstracts, Contributions to Canadian Economics, Journal of Labor Economics, Journal of Applied Econometrics, Journal of Economic Perspectives, Publications of the American Economic Association, Brookings Papers on Economic Activity. Microeconomics and American Economic Association Quarterly.


favorable conditions that the Trade Liberalization presents in each country in the same region. The difference in the economic theory approach from that of the political economy and trade policy approaches is that economic theory will offer the basic analytical tools to observe the impact of free trade using either qualitative methods (theoretical framework) or quantitative methods

(statistics and

mathematical methods). The economic theory approach is therefore necessary as it provides an important tools to understand free trade and protectionism. The last 25 years, many economists have tried to build alternative indicators to measure openness or trade orientation. It is important to mention that these different indicators have significantly contributed to the study of openness up to the present time. Usually, a major part of this type of work applies cross-country comparative studies to explain the link between openness and growth, productivity or income distribution. These indicators are trade dependency ratios and rate of growth exports (Balassa, 1985); the heritage foundation index (Edwards,1998.a); Sachs and Warner Openness Index (1995); Leamer’ s Openness Index (Barro,1991); Trade Liberalization Index (Lopez,1990); Average Coverage of NTB –QR- (Edwards, 1998.b); black market premium (Harrison,1996); Index of real exchange rate variability and index of real exchange rate distortion (Dollar, 1992). Edwards (1997) presented an interesting paper entitled “ Trade Policy, Growth and Income Distribution.”This paper applied different trade policy indices Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

(e.g. Deviation from Actual Trade Shares; Trade Liberalization Index; Sachs and Warner Openness Index; QR; Deviation of the black market rate; black market exchange rate premium and real exchange distortions and variation) and the coefficient of Gini to prove the link between openness and income distribution. Edwards concluded that there is no evidence linking openness or trade liberalization to increases in inequality. 2.5.

Background Research and Analysis of Different Fields of Research In the Study of Regional Integration Regional Integration can be studied and researched based on different

focuses and approaches. This paper applies four traditional fields of research in the study of Regional Integration: economic, political, social and technological fields of research. In the first part of the research pertaining to this study, an effort was made to identify the inclination of the fields of research in the study of regional integration. 500 papers (100%) on regional integration from 75 journals published between the 1950’ s and the 1990’ s were selected for this purpose (see: www.jstor.org and www.Elsiever.com). Next, the percentage of participation by fields of research (economic, political, social and technological) in the study of regional integration was calculated. The following trend in terms of fields of research in the study of regional integration was observed: 50% from the economic field of research, 40% from the political field of research, 7% from the social field of research and 3% from the technological field of research. It was also observed that, compared to the 1950’ s, 1970’ s and 1980’ s, the topic of regional integration was more frequently Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

researched and discussed in journals in the 1960’ s (25%) and 1990’ s (35%). Economics Field of Research in the Study of Regional Integration In the economic field of research (i.e. the largest field of research) in the study of regional integration, attention was placed on three specific areas: economic theory, political economy and applied economics. Economic theory is divided into two parts, namely microeconomics and macroeconomics, each of which has a different focus. Some of these focuses are: partial or general (type of equilibrium), ex-post or ex-antes (method analysis), static or dynamic (behavior), short term or long term (time frame). Method analysis is either quantitative (econometrics, statistics and mathematics) or qualitative (in the form of comparative studies based on theories or historical data). It is observed that the study of regional integration from the economic perspective mainly centers on macroeconomics

applications (80%), quantitative methods

(65%), partial

equilibrium (60%), ex-antes approach (65%), static models (65%)14)15. Besides, these applications are used in the short term in most research. The common theories, models and theorems used by researchers in the economic field of research in the study of regional integration are: International Trade Policy15)16 framework, Optimal Current Area theory 16)17 , Fiscal Federalism 15

American Economic Review, Canadian Journal of Economics, Econometrica, Economic History Review, Economic Journal, International Economic Review, Journal of Economic History, Journal of Economic Literature, Journal of Political Economy, Journal of Policy Modeling, Economic Development Journal, Oxford Economic Papers, Quarterly Journal of Economics, Review of Economic Studies, Review of Economics and Statistics , Canadian Journal of Economics and Political Science, Journal of Economic Abstracts, Contributions to Canadian Economics, Journal of Labor Economics, Journal of Applied Econometrics, Journal of Economic Perspectives, Publications of the American Economic Association, Brookings Papers on Economic Activity, microeconomics and American Economic Association Quarterly. 16

It includes the basic tariff analysis; cost and benefits of trade; tariff and non-tariff trade barriers analysis and the new


theory17)18, Heckscher-Ohlin model18)19, Kemp and Wan theorem19)20 . All these theories, the most important theory applied is the Customs Union theory20)21 (including the Second Best theory21)22 ). The Customs Union theory is still used today by many economists to choose between trade creation and trade diversion

protectionism. (Krugman and Obstfeld, 2000). 17

The optimal currency areas were introduced by Mundell (1961) and Mckinnon (1963). “ This approach based its study on monetary policy issues (money, markets for goods, and markets for production factors.) First, we will present the concept of a currency area defined as an area in which a common currency exists (Mattli, 1999). Optimal is defined in terms of the ability of an area to achieve both internal balance (maintenance of full employment and stable internal average price level) and external balance (maintenance of balanced international payments equilibrium). The main idea of optimal currency area was developed because of a dilemma between introducing fixed versus flexible exchange rate. Therefore, Mundell’ s argument that before applying the optimum currency area, it is necessary to ask what economic characteristics determine the optimum size of the domain of a single currency.” 18

“ The fiscal federalism is an offshoot of public finance theory that analyzes the special fiscal problems which arise in federal countries, drawing on the literature on public goods, taxation, income distribution and public debt incidence, and various parts of location theory”(Mattli,1999). We can observe that this approach focuses on fiscal policy issues based on the fiscal coordination. The general objective of this theoretical approach is the improvement of market efficiency focused on the interaction of market and public goods. The method was applied in the fiscal federalism is positive dynamic (general equilibrium). 19

The Heckscher-Ohlin (H-O) model (Breton, Scott, and Sinclair, 1997), “ which is the whole theoretical construction concerning trade and production based upon a difference between countries in their factor endowments, and four hypotheses or propositions which arise from this model. The H-O model hypothesis that each country will export products that are intensive in the use of that country’ s abundant factor of production (labor or capital), and will import products that are intensive factor of production (labor and capital) in the use of the country’ s scarce factor of production.” 20

Kemp and Wan theorem present this proposition related to the formation of custom unions. “ It is consider any competitive world trading equilibrium, with any number of countries and commodities, and with no restrictions whatever on the tariffs and other commodity taxes of individual countries, and with costs of transportation fully recognized. Now let any subset of the countries form a customs union. Ten there exists a common tariff vector and a system of lump-sum compensatory payments, involving only members of the union, such that there is an associated tariff-ridden competitive equilibrium in which each individual, whether a member of the union or not, is not worse off than before the formation of the union.”(Kemp and Wan, 1976). 21

“ The custom union argument is based on the free-trade point of view, whether a particular custom union is a move in

the right or in the wrong directions depend, therefore, so far as the argument has as yet been carried, on which of two types of consequences ensue from that custom union. Where the free trade-creating force is predominant, one of the members at least must benefit, both may benefit, the two combined must have a net benefit, and the world at large benefits; but the outside world loses, in the short-run at least, and can gain in the long-run only as the result of the general diffusion of the increased prosperity of the custom union. Where the trade-diverting effect is predominant, one al least of the member countries is bound to be injured, both maybe injured, the two combined will suffer a net injury, and there will be injury to the outside world and to the world at large.”(Viner, 1950). 22

“ The second best theory was presented by Lipsey and Lancaster (1997). These two authors present a deeper study about the custom union theory of Viner based on the application of a positive dynamic method (general equilibrium) to explain the custom union effect on the world trade. The contribution of Lipsey and Lancaster in the custom union theory follows the Paretian optimum which requires the simultaneous fulfillment of all the optimum conditions based on the general economic problem of maximization. A function is maximized subject to at least one constraint, in this case production function and utility function.”


22)23

for evaluating regional integration. However, the static analysis used in the

Customs Union theory poses a problem: it frequently uses a partial competitive equilibrium framework to arrive at a general conclusion about a process that is a general equilibrium phenomenon (Devlin and Ffrench-Davis, 1998). According to Winters (1997), many economists are of the stand that trade creation versus trade diversion is not the core of the problem. The problem lies with the deficiency of the models of dynamics and empirical foundations used for testing them. In effect, Mordechai and Plummer (2002) point out that, economists whose research into regional integration is based on ex-post models include a gravity model, an import-growth simulation and other regression approaches. This is because computational general equilibrium (CGE)23)24 model (multi-country and multi-commodity dimension) has become very popular among economists. Furthermore, the economic field of research merely applies the positive theories of welfare gains and losses associated with regional integration; it provides no explanations of the political choices that allow for integrated fields of research. As such, the economic field of research negates the global context of 23

“ Trade-creation effect occurs when some domestic production in a nation that is a member of the custom union is

replaced by lower-cost imports from another member nation. Assuming that all economic resources are fully employed before and after formation of the custom union, this production is based on comparative advantage. The Trade-diversion effect occurs when lower-cost imports from outside the custom union are replaced by higher cost import from a union member. This result because of the preferential trade treatment given to member nation. Trade-diversion effect, by itself, reduces welfare because it shifts production from more efficient producers outside the custom union to less efficient inside in the union. Thus, trade diversion worsens the international allocation of resources and shifts production away from comparative advantage.”(Salvatore,2001)

“ The CGE models are standard tool for analyzing trade policy. The case of general equilibrium models are: first liking trade and productivity growth; second foreign investment and productivity growth; third, endogenous growth and CGE modeling.”(Mordechai and Plummer, 2002). 24


the evolution and trend of regional integration process as a whole. In a nutshell, this thesis maintains that the economic field of research poses many limitations in the study of the effects of regional integration, and that it is merely one part of the complicated puzzle of regional integration research. On this account, this study further maintains that the study of regional integration requires

a

multi-dimensional

analysis

(economic,

social,

political

and

technological dimensions simultaneously). Political, Social and Technological Fields of Research The study of regional integration from the political dimension is also pervasive. It is observed many studies on regional integration involves extensive elaboration of the following politically oriented topics: institutional framework (functionalism

or neo-functionalism),

policy

dimensions

and agreements

(negotiation) and international law issues. As observed, more qualitative rather than quantitative methods of evaluation are used in the political dimension of research. Just as in the economic dimension of research, the political dimension of research in the study of regional integration has many limitations. However, as pointed out by Mattli (1999), the political context in which integration occurs has been specified in the political dimension of research and this has provided insightful accounts of the process of integration. The third field of research, that is the social field of research, focuses on Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

issues such as history, culture, education, social welfare programs and social policies applied by governments. Usually such research is in the form of comparative studies based on basic statistical comparison, feedbacks, interview results, history and social theoretical frameworks. Many of these studies are confined to highly important issues that are worthy of consideration in the study of the effects of regional integration. The fourth field of research, that is the technological field of research, has a relatively smaller presence. It focuses mainly on four specific topics: regional electrical

inter-connection,

telecommunications,

technology

transfer,

and

Research and Development (R&D). Some of these research documents involve advanced technical terminologies and the application of quantitative methods (statistics and mathematics). 2.6.

Application of Dif ferent Types of Cartesian Spaces in Economics In economic analysis, so far two systems of graphs have been used:

basic analytical graph system and complex analytical graph system. The basic analytical graph system was first used in the 19 th century. It started with Antoine Augustin Cournot’ s work, where mathematics began to be used in Economics. The basic analytical graph system consists of Utility Theory, General Equilibrium, Optimal of Pareto, Partial Equilibrium and Indifference Curves. These graphs were introduced by innovator economists: William Stanley Jevons, Leon Walras, Vilfredo Pareto, Alfred Marshall and Francis Ysidro Edgeowrth respectively (McClelland, 1975). Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

The complex analytical graph system has its origin in the 20th century. It started with the introduction of sophisticated mathematics techniques in the development of new economic models. Calculus, trigonometry, geometry, statistical methods and forecasting methods are used in these graphs. Three dimension (3-D) graphs are also part of the complex analytical graphs system and are applied in economic research (Avondo-Bodino, 1967). Using the complex analytical graph system were the following economic models: General equilibrium and Welfare Theory (John R. Hicks), IS-LM Curve (Alvin H. Hansen), Development of Economic Theory: Static and Dynamic Analysis, (Paul A. Samuelson), Econometrics (Lawrence R. Klein), Phillips Curve (Alban W. Phillips), Okun Law (Arthur M. Okun), Economic Growth Theory (Robert M. Solow), Game Theory (John F. Nash and John von Neumann), Introduction of Dynamic Models and Econometrics (Jan Tinbergen), Monetary Theory (Milton Friedman), Rational Expectations Theory (Robert J. Barro). The rapid development of complex analytical graph system was facilitated by high technology and sophisticated instruments of analysis such as the electronic calculator and the computer. The development of the instruments of analysis in economics took place in two stages. The first stage involved the “ Basic Computational Instruments” , where electronic calculators were used to compute basic mathematical expressions (e.g. long arithmetic operations, logarithm, exponents and squares). This took place between the 1950’ s and 1960’ s.


The second stage of development took place in the middle of the 1980’ s. This is when high speed and high storage computers with sophisticated software were first used. Called “ High Computational Instruments” , such sophisticated software enables easy

information management, application of difficult

simulations as well as the creation of high resolution and 3-D graphs. These instruments contributed substantially to the development and research of economics. Each of the basic graph analysis system and complex graph analysis system can be categorized according to functions or dimensions. In terms of functions, the graphs are either descriptive or analytical. In terms of dimensions, the graph can be either 2-D or 3-D.

In descriptive graphs, arbitrary information is used to

observe the effect of theories. Analytical graphs on the other hand are timeseries graphs, cross-section graphs and scatter diagrams. In analytical graphs, statistical data is used to show trends and relationships between two or more variables, and hence the effects of economic phenomena resulting from trade policy,

monetary

policy,

fiscal

policy, economic

growth

and economic

development. The analytical focus of the graphs is supported by the application of high computational instruments based on sophisticated hardware and software. Based on 500 papers published in recognized economic journals24)25 between 1940’ s and 2005 (JSTOR and ELSEVIER, 2005), it is observed that the common

25

American Economic Review, Journal of Policy Modeling, Economic Literature, Economic Development, International Economics Review, World Bank Economic Review, Economic Integration Journal, Econometrica, Journal of Policy Modeling, Cambridge Journal of Economics, Journal of Economic Development, Journal of Economic Integration, Oxford Review of Economic Policy, Quarterly Journal of Economics and Economica.


types of graphs applied in the study of social sciences, especially in economics, are 2-D and 3-D graphs. MD-Cartesian space introduced in this chapter, however, is a multi-dimension focus. It enables economists to analyze economic phenomena from multiple perspectives and facets in space and time.

CHAPTER 3 Regional Integration Evaluation Methodology (RIE-Methodology)

3.1. Introduction Over the past 60 years, the field of research on regional integration has changed dramatically, with the discovery and implementation of new theories, models and techniques. In this thesis, the study of regional integration is approached from a few different perspectives, namely, economic, political, social and technological analysis. In addition, the orientation of these perspectives in the context of regional integration is also accounted for. Evaluating regional integration and its benefits is not an easy task. The nature of the subject matter constitutes part of the problem in this regard (Devlin and Ffrench-Davis, 1998). Much of the study related to Regional Integration has so far been done from the economic perspective. According to Winters (1997), the study of regional integration from the economic perspective is typically evaluated in light of the probable scenario in the absence of such an approach to the study. Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

Also, as pointed out by Winters, with complications in defining and measuring changes in economic welfare for a particular sub-region, economists use proxy summary statistics that reflect growth of trade. On the basis of the above idea, this thesis introduces a new methodology of analysis that monitors regional integration process from a new perspective. Called regional integration evaluation methodology (RIE-Methodology), this methodology will study all areas of development (political, social, economic and technological

analysis

simultaneously)

that

each

country

or

domestic

development system (DDS) in the same region (same geographical position) shows based on the results of the regional development indexes (Xi)25)26. The idea is to demonstrate that the regional development (RD)26)27 can affect the evolution of regional integration process considerably. It is based on the application of a group of indexes and graphs. The group of indexes and graphs show the evolution and stages of the regional integration process of region from a multi-dimensional analysis. It is assumed in the RIE-Methodology that the basic pre-condition to start a stronger regional integration process in any type of trade bloc is a stronger 26

Regional development index (Xi) is formed by: Regional Political Development Index (X1) will show the level of political environmental that this specific region shows. Regional Social Development Index (X2) is interested to show trend of the social agenda under regional level. Regional Economic Development Index (X3) will present the economic trend that the region shows. Regional Technological Development Index (X4) is trying to present the level of technology development that this specific region shows. Each regional development indices (Xi) by area together will try to present the different stages that any country can chart its own evolution. 27

Regional Development (RD) originates from the different levels of political, social, economic and technological development that each member in the same region shows. If the gap of all areas of development (political, social, economic and technological) among all members is considerable large then the regional integration process can experiment serious difficulties.


domestic development experienced by each country or domestic development system (DDS) in the same region. Another pre-condition for a stronger regional integration process is a combination of historical timing and political and social willingness. For the latter, the countries involved must be interested in creating a formal or informal agreement with all its members so as to consolidate themselves into a single region. The difference between the RIE-Methodology and the traditional models of analysis is that RIE-Methodology will analyze regional integration from a new perspective of analysis under a multi-dimensional analysis based on the study of all areas that domestic development evolve such as political development, social development, economic development and technological development. It allows for the detection of the pros and cons in the evolution of regional integration blocs in any region from a different perspective. The main idea is to show that successful regional integration blocs depend on majority of the members being interested in building a trade bloc and there cannot be large margin of difference in the domestic development (political development, social development, economic development and technological development) among its members. The objective of the RIE-Methodology is to offer to policy-makers and researchers a new alternative analytical tool for studying the results achieved with regional integration. This will benefit the parties concerned in their policy-making and program development. 3.2. The Regional Integration Evaluation Methodology (RIE-Methodology)


Economic, political, social and technological dimensions of research into regional integration clearly do not provide a global perspective in the understanding of regional integration. For this reason, the Regional Integration Evaluation Methodology (RIE-Methodology) is proposed in this thesis to address the issue. The RIE-Methodology is a measuring tool for studying regional integration from a global perspective. The proposed RIE-Methodology is a simple and flexible model. It applies dynamic and general equilibrium analysis to show the past and present situations in the regional integration process of any region based on a set of indexes and graphs. Its field application is not constrained by region or the development stage of each member interested in integrating into a single regional bloc. The RIE-Methodology can be applied to any form of regional integration process: between developed countries and developing countries, North-South Integration (e.g. within Europe Union –EU-), between developed and developing countries (e.g. within North America Free Trade Area –NAFTA-), between developing countries or South-South Integration (e.g. within MERCOSUR and ASEAN), and between developing and less developed countries (e.g. within Central America Common Market -CACM-). The application of the RIE-Methodology is based on the characteristics, conditions and historical moments of a region’ s regional integration development. The RIE-Methodology is like a simulator that applies a series of simulations in Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

different scenarios and in different phases of the regional integration process. This model does not attempt in any case to be a forecasting model. It focuses on the past and present situations in the regional integration process as a whole. It helps to provide a general idea about the situations and evolution of the regional integration process in any region.

3.3. The Domestic Development System Concept This part of the research presents a new concept entitled “ Domestic Development System (DDS).”DDS incorporates all economic, political and social characteristics that any country can show in its different phases of development. RIE-Methodology assumes that each country has its own domestic system development. At the same time, it defines regional integration as the joining of a certain number of different countries (or DDS) that are interested to create a strong regional development system (RDS). The DDS concept is based on five assumptions (Ruiz, M., 2004.b.): 1. Change of domestic development system (DDS) in any country cannot be forced; it can only be induced by material incentives and motivation. 2. The domestic development system (DDS) of any country is spurred by the limitation of resources. 3. Each domestic development system (DDS) has its unique characteristics. Therefore it might be difficult to try to implement a successful domestic development system (DDS) in another less successful domestic development system (DDS). Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

4. The RDS concept attempts to integrate different DDS into a regional integration agreement (RIA) depending on the different domestic developments system (DDS) that are available for integrating into a single regional system. 4.

The creation of regional development system (RDS) depends on the flexibility of each domestic development system (DDS). The domestic development system (DDS) concept offers a new

perspective of analysis and research in the field of regional integration and development economics. The traditional research is based on economic, political, social and technological point of view; but with the DDS concept, it is possible to visualize different countries’developments from a global perspective.

3.4.

Phases in the Regional Integration Evaluation Methodology (RIE-Methodology)

3.4.1. Phase I: Design of the Multi-input Database Table The multi-input database table is an alternative style of database analysis framework that permits storage of large amount of data to measure a single variable. This single variable can show the evolution of any phenomenon from a general perspective. The multi-input database table is designed to evaluate either by country or region (see Diagram 1). The multi-input database table is focused on measuring four main independent variables (e.g. X 1, X2 , X 3, and X4). Each main independent variable


is formed by “ n”number of sub-variables. The number of sub-variables in each main independent variable is non-limited, for this reason the multi-input database table concept does not have any specific ranking, instead exists there a basic classification of sub-variables. Only two main independent variables have classification. First, political (X1 ) is divided in two large sections which are external and internal factors. Second, economic (X3) is divided on production, consumption,

trade,

labor,

investment,

infrastructure,

government

and

international cooperation. However, each sub-variable has a code number respectively. The code number depend on the area of development (X1 = political; X 2 = social; X 3 = economic and X 4 = technological). The reason why all subvariables have the same importance (weight) is because we are interested to measure a single value, in our case each main independent variable (X1 , X 2, X3 and X4 ). To give the same weight to all sub-variables is necessary to use a binary system. The binary system helps to maintain a balance among all variables in each multi-input database table. Another reason is that the binary system helps to create an alternative model of analysis of countries with limited information, especially in the case of developing countries and less developed countries (LDC’ s). The idea to apply multi-input database is to find the domestic development system –DDS- (country) and finally the regional development –RD- (regional bloc). The idea to find DDS and RD is to demonstrate that successful regional integration process depends on major part of DDS being enough strong and


there can only be a small gap among its members. In this case, RD is result of the DDS sum. The four main independent variables will show RD in different areas of development (political (X1 ), social (X2), economic (X3 ) and technological (X 4 ). The number of variables used in the RIE-Methodology varies, depending on the objectives of the researchers or policy-makers and the orientation of the cases of research. In the case of this thesis, 98 variables with their respective parameters were selected: 19 variables for regional political development index (X 1 ); 15 variables for regional social development index (X 2 ); 54 variables for regional economic development index (X3) and 10 variables for regional technological development index (X4). Once the number of sub-variables is determined, the next step is to collect the statistical and historical data that constitute sub-variables (“ n”number) in each main independent variables (X 1, X2, X3 and X4 ). All sub-variables in each main independent variables X 1 , X 2, X3 and X4 ) may not have a direct relationship between them -- they may be independent variables or endogenous variables. However, all the sub-variables in each multi-input database table are meant to measure a single variable or main independent variable, that is, each of the Regional Development Indexes (X i). Each of the four Xi indexes (X1 , X2, X 3 and X 4 ) to be measured is viewed as a main independent variable (i.e. endogenous variable). However, there is no connection and interdependency among these four X i indexes when they are


joined in the graph. These four Xi indexes are used to draw a graph that represents the evolution and stages of the regional integration process of the region from a general perspective. The objective of this chapter is to apply the RIE-Methodology in the case of single trade bloc (e.g. Central America Common Market –CACM-) and many trade blocs simultaneously (e.g. European Union – EU-, North America Free Trade Area –NAFTA-, Association of Southeast Asian Nations –ASEAN-, MERCOSUR, and Andean Community –AC-). 3.4.1.1. Rational Selection of Sub-variables in each Multi-input Database Table Regional Political Development The regional political development is divided in two large sections: external factors and internal factors. The external factors Colonization: The model assumes that countries which here colonized for a long time or continue under the hegemony center domination can stop the process of regional integration anywhere. Group negotiation power: This can be visualized by the constant number of meetings try to merge all members into a single region. Foreign Policy Orientation in each Member: The foreign policy is divided into two large focuses under regional and global level (world). Negotiation Style: This sub-variable can show the style of negotiation under individual or grouping behavior.


The internal factors International Organization Support: The international organizations can facilitate financial and technical support. Intra-regional institutions number:

The number of institutions can play an

important role in the development of regional integration process. Political regime: This sub-variable can offer political stability in the region Legislative background: This can help to facilitate the regional legal framework environmental Internal Security: Security for local and regional citizens Human Rights: The level of protection of human rights in each member in the same region Border Problems: If there are border problems then this problem can stop regional integration process Political Stability: This is a basic condition to integrate all countries into the same region Public Administration: Good public administration can facilitate regional integration process management Army size: Less spending on army services can help to allocate resources on social public services Bureaucracy level: Large bureaucracy can generate difficulties in the regional integration process Regional Social Development


The regional social development is formed by seven sub-variables: Literacy: This sub-variable can show the human capital stock under regional level Social Problems: These can generate instability in one member country or regional level Health and Medical programs: The social welfare orientation of the region External Culture Influence: Society behavior to become an individual or a collective society Food Security: Prevents regional disasters and emergencies Public Education: Infrastructure for training and high education at the regional level Low Cost Housing Projects: The equity in the distribution of income under regional level Regional Economic Development The regional economic development is formed by eight large sections which are production consumption, trade, labor, investment, infrastructure, government and international cooperation. Production The eleven sub-variables are considered in this section. Among the eleven variables, we include the study of the GDP to observe the production structure and growth. In the same item is considered natural resources, oil production and environmental protection to detect the supply of resources for the regional


production. Market location, industrial concentration and subsidies level can generate distortions in regional prices. Export structure can help to visualize if there exist similarities in the export products that members in the same region offer to the international market. The copyright of patents and marks can play an important role in the control of pirated massive production. Consumption In the consumption section seven sub-variables are considered. It considers income per-capita, buyer purchase, poverty level, saving rate, inflation rate and wealth distribution. All these sub-variables need to be found among all members to determine the consumption behavior under the regional level. The market size can play important role in the regional integration process can help to join small markets into a single market. Trade The trade section has five sub-variables. All these variables will show the behavior of the external sector under the regional level and the possible obstacles that each member or the region may have. These variables are intraregional trade volume, extra-regional trade volume, intra regional tariff application, openness and monopoly controls. Labor The labor section is formed by six sub-variables. This section considers that international social division can facilitate the regional integration process together with labor distribution under urban and rural area. The immigration and


emigration levels can show the mobility of labor into the region and the rest of the world. The population growth is considered a vital variable in the study of labor to observe the population pyramid of the region and future human capital stock supply. The labor productivity also plays an important role to observe the possibility of FDI attraction to expand regional production and exports. Investment This section is divided into seven sub-variables. Three categories of investment, which there are domestic, intra-regional and foreign direct investment are used in this section. We are interested to study how these three types of investment play an important role in the regional integration process of any region. Additionally, the same section considers that the privatization process (public goods) needs to be considered in the analysis of regional integration process to facilitate the mobility of capital at the regional and international level. The interest rate, exchange rate stability and stock market activity can show the level of banking and stock market development in the region, and the possibility to of joining the financial regional system. Infrastructure The infrastructure is formed by six sub-variables and this section will show the level of physical infrastructure under the regional level, and how it can facilitate in the mobility of labor and goods (transport system, intra-regional physical projects and tourism),

communication services (telecommunications)

and energy (electricity production).


Government The government section has seven sub-variables. The inclusion of this section into the analysis of regional economic development is to study the tax income distribution (taxation), domestic debt and foreign debt of each member in the same region. In the same issue, it is possible to observe the level of government income and spending (e.g. government expenditures and planning economy sub-variables) of the different governments in the same region. We assume that good performance of governments can help the standardization and management of public finances (income and spend). Additionally, in the same study we include the level of corruption. This can help to observe how corruption can affect the regional integration process originated by political groups to protect its personal interests. Regional Technological Development The regional technological development is formed by ten sub-variables. This section aims to show the level of technological development of each member in the same region. We assume that if majority of members in the same region have a small gap of technological development this can facilitate the regional integration process. The variables are technology (R&D) level, internet hosts, software production, internet access, telecommunications, research institutes, biotechnology advances, Import of new technologies, R&D public investment and IT development.


3.4.1.2. Types of Multi-input Data Base Table The first type of multi-input database table pertains to “ country or domestic system development” . It uses “ N”number of variables. The number ‘ N’is decided by researchers or policy-makers. The number of cases in the study is represented by “ M” . In the case of RIE-Methodology, “ M”represents only one country (domestic system development). The time factor “ T”is dependant on the time parameters that the researchers or policy-makers are interested in using. Therefore, “ T”can be in terms of years or decades. The second type of multiinput database table pertains to “ region or regional system development” . All the conditions and functions of “ N” ,“ M”and “ T”factors are the same as that in the first type of multi-input database table, except that “ M”here represents a “ region or regional system development”rather than a “ country or domestic system development” . For this chapter, the second type of multi-input database (by region) is adopted. 3.4.2. Phase II: Measurement of Regional Development Indexes (Xi) The second phase of the implementation of the RIE-Methodology involves the measurement of regional development indexes (X i) using the variables in four basic multi-input database tables (see Diagram 1). The regional development indexes are regional political development index (X1)27)28, regional social

28

The measuring of regional political development index (X1) originates from the calculus obtained from the politics multiinput database table (see table 3 and 5). After we obtain the result of X1, we can proceed to classify our results into three


development index (X 2) 28)29, regional economic development index (X 3 )29)30 and regional technological development index (X 4).30)31These variables are analyzed with their codes, descriptions and parameters respectively (see Tables 4, 7, 10, and 13).

different parameters. These parameters are under-developed stage or level 1 (0 X1 0.33), X1 index is developing stage or level 2 (0.34 X1 0.66) and X1 index is developed stage or level 3 (0.67 X1 1). 29

The measuring of regional social development index (X2) originates from the calculus applied in the social multi-input database table (see table 6 and 8). After we obtain the result of X2, we can proceed to classify our results into three different parameters. These parametersare under-developed stage or level 1 (0 X2 0.33), X2 index is developing stage or level 2 (0.34 X2 0.66) and X2 index is developed stage or level 3 (0.67 X2 1). 30

The measuring of regional economic development index (X3) originates from the calculus applied in the economic multiinput database table (see table 9 and 11). After we obtain the result of X3, we can proceed to classify our results into three different parameters. These parameters are under-developed stage or level 1 (0 X3 0.33), X3 index is developing stage or level 2 (0.34 X3 0.66) and X3 index is developed stage or level 3 (0.67 X3 1). 31

The measuring of regional technological development index (X4) originates from the calculus applied in the technological multi-input database table (see table 12 and 14). After we obtain the result of X4, we can proceed to classify our results into three different parameters. These parameters are under-developed stage or level 1 (0 X4 0.33), X4 index is developing stage or level 2 (0.34 X4 0.66) and X4 index is developed stage or level 3 (0.67 X4 1).
















The parameters are divided into two categories. The categories are: (i)

Quantitative variables

(i.a.) The measurement of regional variation rate (RVR) consists of two phases. The first phase is to measure the variation rate by country (VRC). VRC is calculated based on two periods: present period data minus last period data. The data of each period can be in percentage or absolute values. In the second phase, the sum of all VRC is divided by the total number of countries in the trade bloc. The end result is the number RVR. RGR = ΣVRC / total number of countries RGR = Σ(present period data –last period data) / total number of countries The RVR can then be compared against each VRC. The final result obtained presents two possible scenarios: first, if RVR

VRC then this specific country in

the trade bloc obtains a value of 1; second, if RVR

VRC then this specific

country in the regional bloc obtains a value of 0. (i.b.) the regional average rate (RAR) is obtained by dividing the sum of the local input data of each country in the trade bloc by the total number of countries in the trade bloc. RAR = Σlocal input data / total number of countries


The RAR is fixed parameters that can be compared against each local input data by country. The final result of RAR presents two possible scenarios: first, if the RAR

country value, then the final data has the average rate = 0; second, if the

RAR

country value, then the final data has the average rate = 1.

(ii)

Qualitative variables (ii.a.) the historical data focalization (HDF) can be classified by existence (i.e. an attempt is made to prove if 1 = existing data or 0 = non-existing data). This type of qualitative variables provides an alternative to measure non-quantitative variables that affect ranking regional integration process. (ii.b.) the ranking list (RL) originates from the best results of certain areas (social, economic, political and technological) in some countries. RL can be found in international organizations such as United Nations, World Bank, International Monetary Fund and etc. The size of the RL is determined by the researcher or policy maker interested in applying the RL. Once the RL is established, countries in the trade bloc can be compared. The RL can present two possible results: first, if the country in the trade bloc is found in the RL, then this country receives a value of 1; second, if the country in the trade bloc cannot be found in the RL, then this country receives a value of 0.


3.4.2.1. Steps to Obtain Regional Development Indexes (Xi ) There are four regional development indexes (Xi) to be obtained. These four Xi indexes are: regional political development index (X1), regional social development index (X2 ), regional economic development index (X3 ) and regional technological development index (X 4). The first step is to define all variables and parameters. Once all the variables and parameters are defined, all the data based on the variables and parameters is listed in each multi-input database table. The next step is to add the values of all variables in the column of the actual situation (AS) in each multi-input database table. The total possible results (TPR) obtained are then located in the TPR column next to AS column. With TPR in place, the next step is to compute each regional development indexes (X i). The computation is done by applying the expression (1) to the values in the multiinput database tables.

(1)

4 Xi = ΣX i = ΣASi x 100 / ΣTPRi i =1

Following the above four steps, the fifth step is the plotting of two graphs: (a) the regional development indexes (X i) (see Figure 2), (b) the regional political, social, economic and technological diagnostic (see Figure 3). The latter graph serves as a means to study the balance between achievements and difficulties Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

that any region may experience in its regional integration process (see Figure 3).

3.4.2.2. Introduction to Analysis of RD Index and RIS Index Each of the regional global indexes (X i’ s) plays an important role in the measurement of the regional development (RD) index and the regional integration stage (RIS) index. These two indexes can be affected by any change in the Xi indexes in the short and long run. The Xi indexes may reflect one of two different scenarios. First, if some or all-regional development indexes which are political (X1), social (X 2), economic (X3 ) and technological (X4 ) increase, then RD index and RIS index may increase. The second scenario is, if some or all regional development Indexes (Xi) by area of development (political, social, economic and technological) decrease, then the RD index and RIS index may decrease.


3.4.3. Phase III: Measurement of the Regional Development (RD) Index The third phase of the implementation of the RIE-Methodology presents a general definition of the regional development indexes (Xi) (see Diagram 1). The Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

RD index is an indicator to compare different historical periods of the regional integration process in any region. It is based on the regional development indexes (X i) of a region. Therefore, the RD index is a means of analyzing the evolution of any regional integration process from a global perspective. 3.4.3.1. Steps to Obtain the RD Index The first step is to plot each (X i) index: regional political development index (X1 ), regional social development index (X 2 ), regional economic development index (X3) and regional technological development index (X4) on the Cartesian plane (see Figure 4 and Figure 6). It should be noted that the RD index value (single percentage) is an approximation of the past and present situations that any trade bloc may encounter in its evolution. The RD index is the summation of all the four regional development indexes (Xi ). The second step is to plot the RD graph based on the total value of the four regional development indexes (Xi ). This is followed by the calculation of the regional technological index (X 4) based on expression (2). It should be noted that the values of the Xi indexes are independent of one another. The RD graph consists of four different areas, where each area has a limit equivalent to 0.25. The total value of these four areas is equal to 1 as observed in the expression (2.6.) Each axis of Figure 4 and Figure 5 is either the base or the height of the graph (represented by B and H respectively in the graph). The RD1 uses the result of the global development index in the axis X1 which is equal to B1, and the


global development index in the axis X2 which is equal to H1, followed by the application of (2.1.) The same steps and expression are used for RD1, RD2, RD3 and RD4 (see Figure 5). The total RD index for this period is the sum of all the RD’ s. This is depicted in expression (2.5.) The total area is divided into four dissimilar triangles each of area equal to {Base (=Bi ) x Height (=Hi)}/2. Therefore, the triangles areas have to be summed to derive the total surface area (See expression 2.5.) (2)

4 4 ΣRDi = Σ{Base (=X i) x Height (=Hi)} / 2 i=1 i=1

2.1.

)

[B1 = H4]: RD1 = {X 1(=B1) x X2(=H1)}/2

2.2.

)

[B2 = H1]: RD2 = {X 2(=B2) x X3(=H2)}/2

2.3.

)

[B3 = H2]: RD3 = {X 3(=B3) x X4(=H3)}/2

2.4.

)

[B4 = H3]: RD4 = {X 4(=B4) x X1(=H4)}/2

2.5.

)

RD = RD1 + RD2 + RD3 + RD4 B= Base

H= Height

The main reason to apply this formula is based on the measure of the area of the four sides figure on the horizontal plane. Therefore, the value of each area will be used to measure the final result on the origin (Y) or fifth axis. Y is based on the result of the four triangles areas under the horizontal plan. 3.4.3.2. Analysis of RD Index The analysis of the RD index is based on the comparison of two periods or


regions. In the case of this thesis, two periods (i.e. first period and second period) are compared. The total RD index may present three possible scenarios, namely ’ (a) expansion (RD’first period < RD’ second period), (b) stagnation (RD’first

period = RD’’second period) and (c) contraction (RD’first period > RD’’second period). In terms of time-span, the RD index can be measured and compared on a yearly basis, five-yearly basis, and by decades. For this research, the time-span is divided into four specific decades (the 1960’ s to the 1990’ s), which can later be compared. In terms of space, the RD index can be measured and compared in relation to countries or regional blocs. At any historical moment, the regional integration process in any region is based on the comparison of the size of the regional development index (Xi).



3.4.4. Phase IV: Measurement of the Regional Integration Stage (RIS) Index The last phase in the implementation of the RIE-Methodology is the measurement of the regional integration stage (RIS) index (see Diagram 1). The RIS index measures the degree or stage of the regional integration development that any region achieves in its different stages of evolution. The RIS index is considered a dependent variable in the RIE-Methodology. In the measurement of the RIS index, four regional development indexes (X i) are used: regional political development index (X1), regional social development index (X2 ), regional economic development index (X3 ) and regional technological development index (X4 ). A constant coefficient – regional integration approach incline (RIAI) is also used concurrently. The RIAI is represented by a, b, c, and d in expression (3) and is applied to each global development index (Xi). Each RIAI (a, b, c, or d) has a limit that is equal to 1 Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

[Refer to expression (3)]. The weighted sum of the RIAI’ s cannot be more than 1. The application of the RIAI is twofold. The first application is the RIAI Homogeneous Interest. In this application, each RIAI has the same level of importance in the analysis [Refer to expression (3.1.)]. The second application is the RIAI Incline. There are four possibilities in this application: political approach incline (3.2.), social approach incline (3.3.), economic approach incline (3.4.) and technological approach incline (3.5.)

Analysis of RIS Index After the type of RIAI to be applied is determined, the regional integration stage (RIS) index is measured according to expression (3). The RIS index analysis may reveal one of three different scenarios, namely (a) under-developed stage (0

RIS

0.33), (b) developing stage (0.34

developed stage (0.67

RIS

RIS

0.66) and (c)

1). The analysis of the RIS index can provide a

general idea or approximation of the stage of regional integration achieved in any region through time and space. The following is a suggested combination of the application of the RIAI in the measurement of the RIS index: (3.)

Y = RIS = aX1 + bX2 + cX3 + dX4

1

(3.1.)

a = 0.25, b = 0.25, c = 0.25, d = 0.25 = 1 => RIAI homogeneous

(3.2.)

a = 0.40, b = 0.20, c= 0.20, d = 0.20 = 1 => RIAI political approach incline

(3.3.)

a = 0.20, b = 0.40, c = 0.20, d = 0.20 = 1 => RIAI social approach incline

(3.4.)

a = 0.20, b = 0.20, c = 0.40, d = 0.20 = 1 => RIAI economic approach incline

interest


(3.5.)

a = 0.20, b = 0.20, c = 0.20, d = 0.40 = 1 => RIAI technological

approach incline

It must be highlighted that the above combination represents only several of many possibilities or permutations. This should draw attention to the flexibility of the RIS index in adapting to any situation or chosen policy mode. The RIS index presents an approximation of the global development from the political, social, economic and technological perspectives concurrently based on a new concept of graphic representation (see Figure 7). This new concept of graphic representation consists of five axes, each of which has a positive value (in the case of this research, the value in each axis is represented by a percentage). Once the axes of the graph are in place, the next step is to plot the four Xi indexes (political, social, economic, and technological X i indexes) in four of the axes respectively. These Xi indexes are independent variables. The total value of the four axes is equal to 1 (see Figure 7). The fifth axis, which is represented by Y and positioned in the center of the graph (among the other four axis) represents the dependent variable RIS index. This fifth axis is the convergent point of all the other four axes or more precisely, the four areas - political, social, economic, and technological - of regional development indexes (X i). The RIS index (Y) is depicted as follows in expression (4): Y = F (X 1, X 2, X 3, X4)

1




3.5.

Application of the RIE-Methodology into a Single Trade Bloc: The Central American Common Market (CACM)

In this

thesis, the regional integration evaluation methodology (RIE

Methodology) is applied to the case of the Central American Common Market (CACM).

31)32

The CACM has a long history and has encountered many

difficulties in its regional integration process. With the application of the RIEMethodology, this research paper seeks to compare the regional development indexes (Xi), regional development (RD) index and the regional integration stage (RIS) index by decade, from the 1960’ s to the 1990’ s. These indexes are evaluated in relation to the historical framework of CACM. The RIEMethodology can provide a global view about the evolution and stages of the Central American regional integration process. 3.5.1. The Growth Stage of Central American Economic Integration in the 1960’ s The establishment of the Central American Common Market (CACM) scheme was based on the development strategy known as import substitution industrialization strategy (ISI). The ISI32)33 strategy was taken as the basic pillar

32

Central America Common Market (CACM) was formed in 1960 by four countries Guatemala, El Salvador, Honduras, and Nicaragua, two years later Costa Rica opted to join to integrate in this trade bloc. The CACM was reactive in 1993 (see: www.sieca.org.gt).

33

ISI in Central America was surged by the variation of the international prices of the traditional agriculture product exported from Central America to the rest of the world, and its impact under five small economies. The production structure of Central America is vulnerable to speculation and economic cycles in the international market. ISI would be improving the scale of economy across a new technology introduced in its industrial sector, creation of a modern infrastructure, and fiscal policy harmonization.


for integrating Central America into a single market. The initial stage of this scheme was considered successful in some countries in this region. The regional economic development index (X3) then was 0.55 (see Figure 8). In this period the closed regionalism approach was applied by the CACM. It is now being suggested that much of the growth during this period was actually due to export and, more specifically, to exports that were destined abroad rather than among the countries. Favorable terms of trade, especially with respect to coffee, sugar cane and bananas had helped to provide the foreign exchange necessary for importing machinery and equipment. The regional technological development index (X4 ) was recorded as 0.55. It is important to note that in the 1960’ s the major Central American countries presented a better political situation compared to the 1970’ s and the 1980’ s. This was reflected in the regional political development index (X1) of 0.50. The significant progress in the industrialization process in Central America in the 1960’ s was achieved in terms of labor productivity. It can be observed in the higher regional social development index (X 2) of 0.48, which falls within the developing stage or level 2. The regional development (RD) index was then 0.54 (see Figure 9). This reflects a good initial stage of the CACM regional integration process. With the regional integration stage (RIS) index being 0.52, the CACM was in the developing stage of regional integration (see Figure 9). It can be concluded that in the 1960’ s CACM witnessed a strong base in its initial stage.


3.5.2. Recession Stage of Central American Regional Integration in the 1970’ s The Central American regional integration process started to decline in the 1970’ s. The average growth rates relative to those achieved in the previous decade declined. The CACM crisis was a result of oil price shocks (end of 1972 and 1973) that affected the world economy. The CACM could not cope with this crisis. The regional economic development index (X3 ) of the CACM then fell to 0.52 (see Table 23). The root of the problem was that CACM depended mainly on oil and capital goods imports and these were reduced during that time. The regional technological development index (X 4) was then 0.50 (see Table 24). Consequently, CACM saw a drastic shift in the terms of trade, as well as increased production cost. The latter generated high levels of inflation and Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

negative payoff trade with the rest of the world. Consequently, the interregional system of payments of the region collapsed and a foreign exchange crisis developed. There was growing disillusionment among CACM members. Honduras complained that the benefits of integration were not being equally shared. The concentration of investment and industry in Guatemala and El Salvador then constituted a large obstacle in the regional integration process of the CACM. The only two countries that benefited under the CACM were Guatemala and El Salvador. Both countries obtained trade surpluses as a result of increasing interregional trade. This prompted Honduras’to eventually abandon the CACM (Fernandez, 1986). Honduras departure from the CACM was justified by the famous football war (Guerra Del Futbol) between El Salvador and Honduras, but the real reason behind its action was strongly debated. Several social problems also started to surface in CACM in the 1970’ s. Such problems included poverty, reduction of government expenditures in social programs and higher corruption levels. This situation was reflected in the regional social development index (X2) of 0.46 (see Table 22). It was also in the 1970’ s that several social movements (e.g. guerrilla warfare) were formed against the military regimes especially in Nicaragua, Guatemala, and El Salvador. As a result, the regional political development index (X1) decreased to 0.44 (see Table 21). Natural disasters were another negative contributory factor to the regional integration process of Central America. Guatemala, Nicaragua, and El Salvador


were hit by massive earthquakes in 1976, 1978 and 1979 respectively. These earthquakes generated a higher social and economic cost for these three countries in the 1970’ s. In this decade, all regional development indexes (X i) for CACM were located in the developing stage or level 2. The regional development (RD) index was 0.46 compared to 0.54 in the 1960’ s. Obviously there was a contraction in the regional integration process of Central America in the 1970’ s (see Figure 9). Also, in the 1970’ s the RIS index for Central America was 0.48. This constitutes a shift from a high developing stage in the 1960’ s to a low developing stage in the regional integration process of CACM (see Figure 9). 3.5.3. Cri sis in Central American Regional Integration in the 1980’ s In the 1980’ s, Central America experienced difficult times with armed conflicts and political crisis that affected major parts of the countries in the region. This decade was even referred to as “ the lost decade”of Central America by many social scientists. In this decade, major Central American countries were governed by military governments. Armed conflicts were widespread between revolutionary groups33)34 and armed forces34)35 led by groups of dictators from the military cupolas. The latter justified their rule on the pretext of containing the advances of communism following the Cold War between capitalism and socialist

34

In Guatemala with the URNG (Union Revolcionaria Nacional Guatemalteca); Nicaragua with the FMLN (Frente Sandinista de Liberacion Nacional); El Salvador FMLN (Frente Faraundo Martin de Liberacion Nacional); trained by personnel from Cuba, Eastern Europe, and the ex-Soviet Union. 35

Guatemala, El Salvador and Nicaragua armies were supported by the U.S. Government.


ideologies. Three Central American countries that suffered from armed conflicts were Guatemala, El Salvador, and Nicaragua. The crisis that started at the end of the 1970’ s and lasted till the middle of the 1990’ s brought negative social and economic impacts to this region. The CACM then witnessed higher inflation rates, higher unemployment rates, higher level of poverty (because population growth was bigger than the total output growth) and especially higher per-capita income losses compared other periods (1950’ s and 1960’ s). Guatemala, El Salvador, and Nicaragua were especially badly hit by the crisis. The decline of regional political development index (X1) to 0.10 (see Table 29) was a testimony to the crisis. Another testimony to the crisis was the severe decline of the regional economic development index (X3 ) to 0.08 (see Table 31). As a result of the widespread economic, social and political problems, the import volume contracted and the caused a decline in the regional technological development index (X4) decline to 0.12 (see Table 32). 3.5.4. Emerging Stage of the Central American Regional Integration in the 1990’ s In the 1990’ s, the major Central American countries made significant progress towards stability. A notable improvement in the democratic process and human rights aspect were made by Nicaragua (1991), El Salvador (1992), and Guatemala (1996). The regional political development index (X1 ) of 0.20 (see Table 37) testified the improvement in the political situation in Central American countries. The 1990’ s were a new era for Central American countries. The


Esquipulas Meeting among Central American countries in 1986 created a bigger impact in the evolution of CACM and its continued integration. In this period all Central American countries recognized that economic integration is an important mechanism which can bring more negotiation power to this region in the new world trade context (Fernandez, 1986). For sometime in the 1990’ s, Central America remained in a fragile and unchanged production structure. Many Central America countries’production and trade structures continued to depend on traditional agriculture export products with low added value. Nevertheless, there was improvement in the major Central America countries in the economic area. This improvement was reflected in the increased regional economic development index (X 3 ) of 0.40 (see Table 39). The economic recovery of Guatemala, El Salvador, and Costa Rica was an important factor that generated increased import volume of technology in this region. This is clearly discernible from the regional technological development index (X4) of 0.46 (see Table 40). In this decade, Central American countries saw some improvement in the regional development indexes (Xi). However, these improved indexes were not comparable to those in the 1960’ s. Meanwhile, the regional development (RD) index increased to 0.19 (see Figure 9). This is an expansion compared to the 1980’ s. However, the RD index and RIS index of the 1990’ s were lower than those of the 1960’ s due to the introduction of a new scheme of regionalism. Called ‘ new regionalism’or ‘ open regionalism ’ , this scheme is based on the individual countries’negotiation of trade and investment liberalization


agreements. The open regionalism actually changed the original CACM framework of the 1960’ s. The regional integration stage (RIS) index, which was located at 0.23, clearly mirrors the decline in the RD index and RIS index. The RIS index continued to be at as under-developed stage for sometime in the 1990’ s (see Figure 10). In this decade, each Central American country experienced prolonged

economic

structural

problems

and

different

socio-economic

development stages. The five major countries in Central America also experienced common social problems. Consequently, the regional social development index (X 2) for these countries in the 1990’ s persisted at 0.17 (see Table 38), which is the lowest compared to those of the previous three decades. The minimum willingness of different social groups in these countries to address social issues was a major contributory factor for the persistent social problems.

1960’ s = Expansion

1970’ s = Contraction

1980’ s = Contraction

1990’ s = Expansion


3.6. Application of the RIE to Different Trade Blocs The RIE can be also applied to different trade blocs in different regions around the world. The trade blocs under study in this thesis are the European Union (EU), the North American Free Trade Area (NAFTA), the Association of Southeast Asian Nations (ASEAN-5), the Market of the South Cone (MERCOSUR) and the Andean Community (AC). The two periods identified in the application of RIE are the 1980’ s and the 1990’ s. 3.6.1. European Union (EU): Advanced Regional Integration Development The regional integration of EU is based on the old or closed regionalism. The Custom Union scheme in EU generated the highest level of regional Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

development indexes

(Xi)

by

area (political,

social,

economic

and

technological). The result of the regional political development index (X 1) was 0.80 and the regional social development index (X 2) was 0.71 (see Table 39 and 40). These two results locate EU in the top position of regional integration development stage in the world (see Figure 11). Meanwhile, the regional economic development index (X 3) and regional technological development index (X 4) were 0.83 and 0.88 respectively (see Table 47 and 48). The X 3 and X 4 were located in the developed stage, but not at the same level as the regional political development (X1 ) and regional social development (X2). While the RD index of the EU in the 1980’ s was 1.30. The RD of the same trade bloc in the 1990’ s was 1.39. The RD index in 1990s was located in the developed stage, as shown in Figure 11. In the 1990’ s all regional development indexes (Xi ) of EU (politics, social, economic, and technology) present a stronger growth. The regional political development index (X 1) and regional social development index (X 2) present the highest value ever of 0.81 and 0.78 respectively (see Table 53 and 54). The RIS index in the 1990’ s is located in the developed stage of 0.85 (see Figure 11). It is clear that the strong regional development indexes (X i) in EU are the regional political development index (X1 ) and the regional social development index (X2 ). The regional economic development index (X 3) and regional technological development index (X 4) present positive advances of 0.85 and 0.89 respectively (see Table 55 and 56). The EU scheme proves Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

that if each member in the same region presents strong regional development indexes (X i) in each area (political, social, economic, and technological), then regionalism can be successful. At the same time, successful regionalism can generate expansion of the regional development indexes (Xi) in each member. 3.6.2. NAFTA: Constant Regional Integration Development Unlike the EU, the North America Free Trade Area (NAFTA) applies the Free Trade Areas scheme. The regional development in NAFTA in the 1980’ s saw a high regional economic development index (X3). X 3 is located in the developed stage with the value of 0.74 (see Table 63). X3 of NAFTA is a higher value compared to the rest of the regional development indexes (Xi) of other areas: political, social and technological development indexes. The regional technological development Index (X4) was in the development stage of 0.90 (see Table 64). The regional political development index (X 1) and regional social development index (X 2) have lower results of 0.65 and 0.48 respectively (See Table 62). While the regional development (RD) index in NAFTA in the 1980’ s is 0.96, the same in the 1990’ s experienced an expansion to the level of 1.26. Meanwhile the regional integration stage (RIS) index in the 1980s and the 1990s are both located in the developed stage with the value of 0.60 and 0.70 respectively (see Figure 11). In the 1990’ s, the favorable conditions resulting from the improvement of global development of Mexico made it possible to join NAFTA. The regional political development index (X1) of NAFTA was 0.67 and the regional Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

economic development index (X 3) of NAFTA was 0.82. While X1 continued in the same stage level (developed stage), the regional social development index (X 2) in the 1990’ s saw a rise compared to 0.76, but continued to be in the developed stage. The regional technological development index (X4 ) also observed an expansion to 0.93 (see Table 72). The improvement of Xi originated mainly from a strong regional economic development (X3 ). 3.6.3. ASEAN: Slow Regional Integration Development The following are the results of the regional development indexes (Xi) by area in the Association of Southeast Asian Nations (ASEAN) in the 1980’ s: regional political development index (X 1) was in the under-developed stage of 0.23; regional social development index (X2 ) was in the developing stage of 0.37; regional economic development (X3 ) was in the developing stage of 0.36 and the regional technological development (X4) was located in the underdeveloped stage of 0.22 (see Tables 77, 78, 79 and 80). The low regional development indexes (X i) by area in ASEAN originated from the different levels of development in all member countries. There was a large gap in the regional development among most ASEAN members. However, in the 1990’ s the regional political development index (X 1 ) of ASEAN expanded to 0.33 (see Table 85). X 1 was located in the developing stage. The regional social development index (X 2) maintained a high rate of 0.46. X 2 is in the developing stage. It is important to note that in the 1990s, the financial crisis of 1997 affected several ASEAN members; especially Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

Indonesia, Thailand and Malaysia. In fact, the financial crisis in these three countries affected the regional economic development index (X3) of ASEAN in the 1990’ s, as it was located in the developing stage of 0.41 (see Table 87). The regional technological development index (X 4) also received a negative impact; with the value of 0.51. It was in the developing stage. Comparing the RD index in the 1980’ s to that in the 1990’ s, there was a rise from 0.17 to 0.36. The RIS index in the 1980’ s was located in the under-developed stage with 0.28, but with the value of 0.30 in the 1990’ s. It is continuing to be in the under -developed stage (see Figure 11). From the above, it can be observed that the major factor that contributed in the small improvement of the regional development index (X i) of ASEAN is the improvement of the regional political development (X 1). 3.6.4. MERCOSUR: Fast Regional Integration Development The Market of the South Cone (MERCOSUR) followed the NAFTA regional integration scheme (Open Regionalism). The RD index of MERCOSUR in the 1980’ s was 0.13, but in the 1990’ s the RD expanded to 0.41. The regional global development indexes (Xi) by area of MERCOSUR in the 1980’ s exhibited these results: the regional political development index (X1 ) was in the under-developed stage of 0.11; regional social development index (X 2) was in the developing stage with a value of 0.36; regional economic development index (X3) was located in the under-developed stage of 0.32 and regional technological development index (X 4) was in the under-developed Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

stage with the value of 0.23 (see Tables 93, 94, 95 and 96). It could be observed that X1 in the 1980’ s was weak and non-stable. The lower value of X 1 in the 1980’ s originated from military governments led by dictators and copula military groups. In the 1990’ s, the regional development (RD) index reached 0.41. This is an expansion compare to RD of the 1980’ s. The regional integration stage (RIS) attained the value of 0.46 (see Figure 11). Therefore, RIS in the 1990’ s was located in the developing stage. The better results of the RD index and RIS index in the 1990’ s originated from the improved regional political development index (X1 ) of 0.44, which located in the developing stage. However, the regional social development index (X2 ) was in the developing stage with a value of 0.46. Regional economic development index (X 3) moved to the developing stage of 0.41. Meanwhile

regional technological

development index (X 4) was in the developing stage with a value of 0.51 (see Tables 101, 102, 103 and 104). Two basic factors that led to the formation of MERCOSUR are: (i) better conditions in external debt and stable exchange rate in Argentina in the 1990’ s. (ii) the strengthening of democracy in the 1990’ s (democracy is a decisive factor that consolidated the formation of MERCOSUR. Two main reasons for the improvement of the regional economic development index (X 3) among MERCOSUR members in the 1990’ s were the privatization of public enterprises coupled with the attraction and greater Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

dynamism of foreign direct investment (FDI). Countries of MERCOSUR encouraged the transfer of technology which gave then a greater dynamism in

their

market.

Transfer

of

technology

also

permitted

a

higher

competitiveness and greater productivity among MERCOSUR members. Comparing MERCOSUR with Central America Common Market (CACM) and Andean Community (AC) in the 1990’ s, MERCOSUR can be considered the leader of the regional integration process of Latin America. It can be concluded that MERCOSUR has higher regional development indexes (X i) value compared to the rest of the trade blocs in Latin America (e.g. CACM and AC), especially in the regional political development index (X1) and regional economic development index (X 3). 3.6.5. Andean Community (AC): Stagnation of Regional Integration Development The regional integration process of Andean Community (AC) in the 1980’ s saw a RD index result of 0.02. However, the RD index in 1990s expanded to 0.34 (see Figure 11). The Xi indexes by area in the 1980’ s are as follows: regional political development index (X 1) in the under-developed stage with the value of 0.11; regional social development index (X 2) in the underdeveloped stage of 0.11; regional economic development index (X3) in the under-developed stage of 0.20 and regional technological development index (X 4) in the under-developed stage of 0.04 (see Tables 117, 118, 119 and 120). The origin of these low results, especially in the regional economic Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

development (X3 ) was high inflation, depreciation of the exchange rates and large external debts in the major part of AC members. The low level of regional economic development (X3 ) in the 1980’ s prompted the international financial agencies (i.e. the International Monetary Fund –IMF - and the World Bank -WB-) to initiate an alternative economic development model. The alternative development model recommended by

these

international financial agencies is based on a structural adjustment program. This structural adjustment program was applied in the major part of the Latin American countries during the 1980’ s. The general objective of this program was to promote the free market concept by following three measures. The first measure is the privatization of public enterprises focused on the sale of public services (communications, electricity and transportation). The second measure is the implementation of free trade policy based on free trade bilateral agreements that are oriented to the export-led growth (The export-led growth changes the traditional regionalism scheme35)36 that was adopted by Caribbean, Central America and South America in the 1960’ s and the 1970’ s. The traditional regional integration scheme in all Latin America was based on the Customs Union scheme). The third measure is the reduction of the size of the government. These three measures are able to generate economic and social developments in this region.

36

The Latin America regional integration concept change dramatically in the 1980’ s. It moved from closed regionalism (Custom Union scheme) to open regionalism scheme (Free Trade Areas scheme) (Deardorff, 1994).


In the 1990’ s the regional integration process in the Andean Community (AC) member countries present better panorama. This is observed in the regional integration stage (RIS) index of 0.21. The regional political development index (X 1) experienced better conditions with the value of 0.25, which is located in the developing stage (See Table 125). The improvement of X1 is a consequence originated by the democratic process in the major AC member countries. The regional social development index (X2) increase to 0.18, and continued to be in the under-developed stage. The low stage of X 2 was due to the reduction in the number and budget of social welfare programs, especially in education and health programs. The low level of X2 is a common factor in all trade blocs in Latin America, resulting from the high rates of poverty and social problems in the region till today. The improvement of regional development indexes (Xi) in AC is brought about the regional economic development (X 3 ) in trade blocs such as NAFTA, MERCOSUR and CACM. The RD index in the 1990’ s experienced an expansion to reach the level of 0.39. In conclusion in the 1980’ s a large number of trade blocs in Latin America, especially MERCOSUR, CACM and AC encountered many obstacles in their respective regional integration processes. The regional integration of Latin America in the 1980’ s can be called “ The Latin America Regional Integration Recession Period.”



CHAPTER 4 A Proposal of a New Regional Integration Scheme to Integrate Middle and Low income countri es: The Regi onal Cooperative Scheme Theoretical Framework (RC-Scheme) 4.1. Introduction

The Regional Cooperative Scheme (RC-Scheme) is applicable to the study of regional integration between middle income and low income countries 36) 37

. In proposing the application of the RC-Scheme, this study presents a

three-part analysis: (i) introduction to RC-Scheme; (ii) the scenario of the preapplication of the RC-Scheme -- a diagnosis of the pros and cons that middle income countries and low income countries encounter in integrating into a single trading bloc; (iii) the effects generated by RC-Scheme in the regional integration process between MIC’ s and LIC’ s in the effort to create a stronger single trading

“ Middle-income country is a country having an annual gross national product (GNP) per capita equivalent to more than $760 but less than $9,360 in 1998. The standard of living is higher than in low-income countries, and people have access to more goods and services, but many people still cannot meet their basic needs. In 2003, the cutoff for middle-income countries was adjusted to more than $745, but less than $9,206. At that time, there were about 65 middle-income countries with populations of one million or more. Their combined population was approximately 2.7 billion” . 37

“ The Low-income country is a country having an annual gross national product (GNP) per capita equivalent to $760 or less in 1998. The standard of living is lower in these countries; there are few goods and services; and many people cannot meet their basic needs. In 2003, the cutoff for low-income countries was adjusted to $745 or less. At that time, there were about 61 low-income countries with a combined population of about 2.5 billion people” . (see: http://www.worldbank.org/depweb/english/modules/basicdata/datanotbasic.html)


bloc. The last part of the analysis aims to demonstrate that the basic condition to generate intra-regional (short run) and extra-regional (medium run) trade-creating Effects 37)38 , and thus, to integrate MIC’ s and LIC’ s is the regional cooperative scheme (RC-Scheme)38)39. 4.2. Regional Cooperative Scheme (RC-Scheme) The RC-Scheme is an equitable and harmonious regional economic development scheme. It is based on the interaction between a series of socioeconomic assistance programs and the Custom Union scheme concept. More precisely, the implementation of RC-Scheme involves the application and coordination of a series of programs with social and economic implications at different priorities respectively as well as the application of Custom Union for the integration among a group of MIC’ s and LIC’ s. Its application can be tailored to the needs of the region concerned. This said interaction is based on four programs (Ruiz, 2005.a.): (i) education and technical training standardization cooperative module (M 1); (ii) social and productive infrastructure cooperative module (M2); (iii) trade and tourism

38

Viner distinguished between trade-diverting and trade-creating customs unions. He argued that the case for customs unions was a mixed bag, since trade-diverting customs unions would worsen, and only trade-creating unions would improve world efficiency (welfare). Viner defined a trade-diverting union as one that would shift production from lower-cost nonmember country to a higher-cost member country, and a trade-creating union as one that would do the opposite (Bhagwati,1999). 39

The cooperation-creating effect is originated from the different levels of global development comparative advantage that each country in the same region presents. We assume that all members that present some stronger area or areas into its global development by area (politics, social, economics, and technology) are interested in information exchange between same members to design, implement and coordinate a set of modules that the intra-regional cooperative advantage (ICA) model offers. The global development comparative advantage is build through success reached in some specific economic or social area for a member, in the same region, that contributes in the socio-economic development of this country, and applying experiences bridged from other countries.


promotion cooperative module (M3) and (iv) public administration development cooperative module (M4 ). The coordination and systematic control of these modules can create favorable conditions for economic development at the regional level, and thereby enables counties in the region to compete in the international market. As indicated above, the RC-Scheme adapts its programs to the requirements and characteristics of any region. The general objective of the RC-Scheme is to increase the intra-regional trade and extra–regional trade through productivity, efficiency and competitiveness. The principles behind RCScheme are non-discrimination, voluntarism, tolerance, respect and flexibility. There are seven specific objectives of the RC-Scheme theoretical framework:

(i)

Through the combination of its four modules and the new focus on open regionalism, the RC-Scheme seeks to serve as a new approach (regional economic development model) suitable for integrating middle income countries with less developed countries.

(ii)

The RC-Scheme seeks to offer a basic mechanism to strengthen the weak areas of regional integration within regions of middle income and low income countries according to the social, economic, technological and political situations in these countries. It also takes into account the internal and external conditions of each region.


(iii)

With its emphasis on the new world order and international trade in the globalization process, as well as its adoption of multifunctional and flexible structure, the RC-Scheme presents a new focus for integrating middle income and low income countries into a single trading bloc.

(iv)

Taking education and training as the pillar of the formation of regional human capital, the RC-Scheme seeks to create an intraregional information/education exchange network that is, through the promotion of information exchange and coordination of academic programs at elementary, high school, technical/vocational training, universities and research levels.

(v)

The RC-Scheme seeks to generate equal benefits to every country in a region. This is done by attaching much attention to: firstly, the building of a regional physical infrastructure to help in the mobility of goods and labor factor; secondly, the search for efficient financial resource allocation and employment in the same region based on bilateral and multilateral negotiations in different intra-regional projects.

(vi)

The RC-Scheme places much emphasis on intra-regional trade, investment and tourism promotion issues. It seeks to sell a single region

in

the

international

market

by

encouraging active


participation in international fairs and expositions, where all member countries of the region are grouped together in the same physical space and with the same patent. This helps easy identification of the region concerned in the international market. In addition, the costs of trade, investment and tourism promotion in the same region are reduced. (vii) Through the standardization of training courses in different Government and public institutions in each participating country in the region, the RC-Scheme helps to identify solutions to problems in public administration and management, the legal system and in public institutions generally. 4.3. The Regional Cooperative Scheme (RC-Scheme) Modules 4.3.1. Education and Technical

Training Standardization Cooperation

Module (M1) The first program in the RC-Scheme is the education and technical training standardization cooperation module (M1). This program uses an action framework to create regional human capital based on the standardization of education at the regional level. In this program, an action framework is used to standardize education in the region and to concurrently create the conditions to produce highly qualified regional labor with high productivity and competitiveness. This pool of capable human capital in turn produces goods and services with Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

high added value that compete well in the international market, as well as serving as the pull foreign direct investment (FDI) into the region. There are four principal intra-regional activities in this program, namely: (i) implementation of literacy campaign in certain countries to raise their basic education level; (ii) coordination and standardization of elementary and high school programs; (iii) development of technical training program; (iv) setting up of a university information network based on joint research and development projects capitalizing on these four activities. The general objective of this program is to lay a solid education foundation for the younger generation in the region so that they are able to compete internationally. At the tertiary level, the development of technical training program try to join academic programs in different scientific fields through the exchange of academic programs at the intra-regional level including the exchange of professors and experts and joint research and development (R&D) in different scientific fields. An exchange of foreign professors (and experts) in different fields (for short courses and seminars) at all levels should be implemented. This approach, accompanied by scholarships at the Master’ s and Doctoral programs around the world, together with joint research and development (R&D) among universities in the same region is more likely to meet with success. This approach should be complemented with the offer of post-graduate scholarships among universities in the region. With regard to technical training, this program proposes a common strategy for Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

the coordination and standardization of training in different sectors such as agriculture, industry and services to be put under the purview of technical institutes and engineering faculties of the universities in the region. Meanwhile, information technology should be considered as the basis of regional education development, given that it is instrumental to information exchange in the coordination and standardization effort of this education and technical training program. It has the responsibility to coordinate all programs using information exchange at different levels based on the education and technical training standardization program (see Program 1 and Diagram 2).

Program 1: Education and Technical Training Standardization Cooperation Module (M1 ) ·

Literacy campaign

·

Standardization of elementary and high school programs (especially in science, mathematics, and the English language)

·

Tertiary level academic exchange and joint R & D network The standard program in different science subjects Intra-regional and foreign/inter-regional exchange of professors Intra-regional student (information and exchange) network Intra-regional scholarship information network Inter-universities/Intra-regional research and development (R&D) assistance

·

Standardization of technical training in agriculture, industrial and services sectors

·

Information technology cooperation & exchange

Source: Designed by the author. Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

4.3.2. Social and Productive Infrastructure Cooperation Module (M2 ) Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

This study takes into consideration two types of infrastructure in the economic development in developing and less developed countries. It is especially pertinent to pay attention to these two types of infrastructure in countries with limited budget for infrastructure. This is because inadequacy of infrastructures creates a constant poverty cycle in these countries and thereby inhibits production growth and human development within the region concerned (see Program 2 and Diagram 2). The general objective of this joint infrastructure program between middle income countries and low income countries is to solicit financial support from international technical and financial organizations. These organizations may help to develop better infrastructure in the region under bilateral or regional negotiations. In this regard, this program serves as a guide for developing intraregional mega-project proposals to obtain credit from different international financial organizations. The social infrastructure aims to promote efforts relating to social well-being such as supplies of foods and nutrition, medical assistance in times of natural disasters or plagues, human rights, ethnic mediation, provision of education, as well as installation of sound immigration database for security issues. All these efforts can significantly serve as a base for economic development in any region concerned: the favorable social conditions resulting from the improvement of social infrastructures in middle income countries respectively to increase their bilateral trades. The other aspect of the module of the productive infrastructures Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

refers to communication services, public transportation joint ventures, physical infrastructure cooperation (bridges, highways, railways, airports, and ports).

Program 2: Social and Productive Infrastructure Cooperation Module (M2)

Productive Infrastructure: · ·

Intra-regional transportation system connection at border points (airports, ports, highways, railways), energy, communications Intra-regional control and management of natural resources Program (removable and non-removable)

Social Infrastructure: · · · · ·

Food and nutrition security cooperation Immigration and security information network exchange Medical assistance in cases of natural disasters and plagues Human rights and ethnic cooperation program Education infrastructure in rural areas program

Source: Designed by the author.

4.3.3. Trade and Tourism Promotion Cooperation Module (M3) The third program of the RC-Scheme is the trade and tourism promotion cooperation module (M3 ). The general objective of this program is to concentrate efforts within the region to create a common module to promote trade, investment and tourism at an intra-regional level. More specifically, this module of the RC-Scheme seeks to expand the export Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

potential of the region in different international markets based on productivity and competitiveness, as well as to attract into the region foreign direct investment (FDI) and tourists from different parts of the world. This module can also reduce the cost of marketing of intra-regional products promotion at the international level. All these contribute to the promotion of intra-regional trades and tourism at the same time. The efforts adopted for the above objectives include: the search for platforms that enable each country in the region to sell its goods and services internationally, participation as a region and a single trade bloc in international fairs and seminars. By participating as a single trade bloc in international fairs and exhibitions, member countries of the region will be easily identified and recognized by the international community. This in turns enables them to compete under the same conditions in the international market. It also becomes easier for international sellers and buyers to locate and negotiate with this specific region. As a result of the above, all members who participate in this program have the same opportunity to participate based on opinions and the vote of each member. When organizing the stands, the members can rent the same physical space to compete under the same conditions with another member in the international market. Besides, the trade and tourism promotion cooperation (M 3) has undergone an intensive training program with an emphasis on English and foreign languages, Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

international marketing, international economics, management, design and organization of event management as well as information technology. For this reason, a training module is incorporated into this program (see Program 3 and Diagram 2).


Program 3: Trade and Tourism Promotion Cooperation Module (M3 ) TRADE · The joint trade advisor network information center is based on a general database of the companies’profiles from each country in the same region. Additionally, this center can help with export and import procedures, list of tariffs and trade regulations, logistic procedures, taxation, list of seminars, overseas fairs and expositions, production standards, trade and market research and development and country profile for each market in the same region. All these information is accessible through the Internet. This center will offer a complete list of magazines and directories from each country, after which the same information can be distributed by each embassy of these countries under the same promotion standard. The active and constant participation in international fairs, expositions, and seminars · The regional standardization of quality controls of products and services · Business facilitation program · The competitiveness and productivity program · The trade research and development program Diagnostic and tendencies of international markets research (business intelligence) Research and development of new products and services Research and development in branching, packing and marketing Research and development in transportation and logistic distribution channels Research and development of new technologies, production techniques and the environment The training of trade promotion and negotiation program The trade, investment and tourism promoters program The trade negotiations and mediation negotiators program · The trade negotiation, mediation and conciliation program Origin Rulers Copy right and intellectual property Free trade areas negotiations FDI and IDI protection agreements INVESTMENT · Joint stocks and exchanges regional markets program · Foreign Direct Investment and Foreign Regional Investment promotion and protection under a general intra-regional legal framework foreign and regional investors advisor program · Financial support and credit for small, medium enterprises and cooperatives · Privatization based on leasing, free zones, and fiscal incentives programs TOURISM ·

· · ·

Joint tourism organizations in the same region Intra-regional tourism information center Intra-regional standardization tourism services program

Source: Design by the author.


4.3.4. Public Administration Development Cooperation Module (M4) The public administration development cooperation module (M4) is the fourth module in the RC-Scheme. The central idea of this module is to look for a solution to different problems in the public administration of each country in the region. The focuses of this module are administrative procedures, legal framework and institutional organizations based on research and specialized training to the public sector workers at every level: high, middle and low. Additionally, it is proposed here that specialized R&D centers be set up to provide consultation and advice to common regional problems. At least four categories of R&D with their respective centers should be put in place: (i) economic information, (ii) public, legal and institutional information, (iii) technology information and (iv) social information. It is proposed that each of these centers is be further compartmentalized into various specialized sections as detailed in Program 4 and Diagram 2.


Program 4: Public Administration Development Cooperation Module (M4) Ø ECONOMICS: The economic information, research and training center The rural economic and agrarian productive restructuring section The productive restructuring and economics modernization R&D section Monetary policy section (banking, stock market, finances and stock exchange studies) Fiscal policy section (taxation and national budget design) The management of internal and external debt section Foreign trade policy section: Negotiation of free trade areas and trade differences Economic and social planning section Technical and financial section Environmental and natural resources management section Ø LEGAL: The public, legal and institutions information, research and training center Human rights and minorities section Judicial and fiscal framework section Constitutional sections Law and politics studies section Diplomatic studies section Strategic and security studies section Ø TECHNOLOGY: The technology information, research and training center Training and systematization of offices section Management systems and R&D of new technologies section Ø SOCIAL: The social information, research and training center Popular housing and urbanism section Public health preventive, food security and basic diet section Population and geography section Drugs, narcotics, violence, delinquency, and terrorism Source: Designed by the author.


After the regional cooperative scheme (RC-Scheme) is implemented a constant feedback from the different countries from the same region is vital. The constant feedback can help rectify the failures and shortcomings of this model in the medium and long term.

4.4. Prior to Application of RC-Scheme For demonstration, this study presents two trade blocs, A and B and two goods, g1 (agricultural goods) and g2 (industrial goods) in the application of the RC-Scheme. Trade bloc A consists of one developing country (Aa) and two low income countries (A b & Ac) with similar production structures in the last two countries. Trade bloc B is made up of developed countries, B a, B b and B c. The three countries in trade bloc A are at different trade liberalization levels based on the application of different trade barriers and non-trade barriers structures applied by each member in the same region. Trade Bloc A It is postulated that the higher trade protection of small countries creates division, distrust, and loss of credibility in the intra-regional negotiations among countries in any region. In the case presented here, however, trade bloc A is trying to attempt the process of creating a Customs Union (CU) agreement among its members based on the common external tariffs applied to third parties (see Diagram 4).


The three countries in trade bloc A produce the same type of export products, that is, agricultural products g1 in raw forms. As raw materials, g1 has low added value and thus commands low prices in the international market. Similarly, the industrial structure of trade bloc A is minimal and limited in number. In addition, industries in this trade bloc concentrate on the production of manufactured goods only. Although country Aa has a higher number of manufacturing firms compared to countries A b and Ac, all A a, Ab and A c, it lacks heavy or technological industries. The deficit in the balance of trade shows the trade dependency level of capital goods and intermediate goods imported from developed countries or trade bloc B in this case. Therefore, trade bloc A would have to depend on the developed countries of trade bloc B for capital goods and intermediate goods. As a result, trade bloc A always has a higher deficit in its balance of trade in relation to trade bloc B. Thus, trade bloc A always has a high deficit in its balance of trade. Besides a high deficit in its balance of trade, trade bloc A also has a low per capital average income amongst all its member countries. Consequently, both the saving level (saving = investment) and the capital productive volume supply (or investment) are low. In the case of investment, it is divided into three types: domestic direct investment (DDI)39)40, intra-regional direct investment (IDI)40)41 and foreign direct

40

The DDI is the domestic capital formation in the local operations of domestic firms through acquisition of a local operation, establishment and expansion of operations in the same country. 41

The IDI consists of the mobility of investment from one member to another member in the same trade block.


investment (FDI)41)42 . The DDI and IDI are expensive and difficult to obtain by the private sector at the domestic and regional levels, because the interest rate is higher for the limited productive capital volume supply. The capital productive volume supply faces a series of obstacles in its attempt to increase domestic production. Therefore, the export supply is smaller. Additionally, the small export supply is also affected by poor trade promotion with minimal performance and scarce aggressive programs. The high cost of production stems from the higher capital productive cost. The high cost of production affects the market price directly. As a result, the internal rate of return (IRR) is lower; consequently the profit of the local and regional firms is lower. In addition, the foreign direct investment (FDI) in trade bloc A is smaller. In this case, FDI of trade bloc A comes from countries formed by trade bloc B. Our assumption as to why the FDI in trade bloc A is smaller is based on the fragile legal framework, political instability, corruption, complicated bureaucracy, limited information about the country and the region, limited highly qualified labor, scarce physical infrastructure, and lower income. However, on the exchange rate issue, trade bloc A has constant devaluations arising from speculative and black-market transactions. Countries in trade bloc A are faced with high rate of unemployment. This

42

The FDI is all investment in the foreign operations of a company through acquisition of a foreign operation, or establishment of a new site. It implies control and managerial and perhaps technical input and is generally preferred by the host country (Bannock, 1998).


constitutes a large obstacle to the effort of uplifting the standard of education in these countries and the reason behind the low labor productivity at the regional level. The smaller human capital supply also creates a large obstacle to the introduction of research and development (R&D) and hence, the quest to produce new goods and services. In addition to the above shortcomings, trade bloc A has scarce physical infrastructure, high gross population rate, high level of poverty as well as imbalance wealth distribution (see Diagram 3). As regard politics, trade bloc A experiences an unstable political instability. This is due to fragile democracies with soft legal framework and lack of government institutions in each member country. The economic elites also have minimal interest to integrate within a single trade bloc. Last but not least, there are problems relating to the borders amongst some member countries in the trade bloc. Trade Bloc B Trade bloc B has a better scenario compared to trade bloc A. While trade bloc A has starting a Customs Union (CU), the three countries in this trade bloc (B a , Bb and B c) are in the process of signing a Free Trade Area (FTA) agreements among themselves. All countries from trade bloc A are excluded from this agreement. Compared to trade bloc A, trade bloc B shows a stronger trade and investment exchange between its members and higher level of income. The countries formed by trade bloc B base their economies on high technology industries and services, in this case the production of g2, or in other words, the Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

production of industrial goods, g 2. Countries in this trade bloc have a comparative advantage of producing g2 based on low cost of production. Hence, this trade bloc offers products with high value-added products to the international market. Meanwhile, based on g2 trade, a trade-creating effect is generated among the member countries in this trade bloc. The customs union formed by the trade bloc B which stops to import g1 from trade bloc A and starts to produce more g 1 in trade bloc B can generate tradediverting effect, and at the same time, trade diversion between trade bloc A and trade bloc B. The crux of the problem comes about when, due to comparatively higher cost of producing g1 in trade bloc B due to higher labor cost, trade bloc B experiences a lower comparative advantage in the production of g 1 in relation to trade bloc A. Nevertheless, as shown in Diagram 3, in the case of the model trade bloc A, the opposite situation is true (see Diagram 4). This is, in effect, the situation prior to the implementation of the RC-Scheme. The following section will explain how the situations within trade bloc A changes for the better after the RC-Scheme is implemented.


Diagram 3: The Common Problems Hindering Middle income and Low income countries from Integrating into a Single Trade Bloc ▼Foreign direct

▼Income

investment

▼Domestic Direct Investment

▼Saving

▼Investment

▼Intra-regional Direct Investment

▲Interest Rate

▼Capital Productive Supply

▲Cost of Production

▼Trade Promotion

▲Trade Dependency

▼InternalRare Return(IRR) =▼Profit

▼Production ▼Export

▼Human

▲Unemployment

Capital Supply

▼Added Value

Agriculture goods

▲Import

(-) Balance Trade

▼Exchange ▼Productivity

▼ R&D

Rate

▲Industrial Goods Import


▲ = Increase ▼ = Decrease Source: Designed

by the author

Diagram 4: Regional Cooperative Scheme (RC-Scheme) before its Implementation between Trade Bloc A and Trade Bloc B BEFORE:

A

B

CU g1

Aa

Ba

Bc

Ac

Ab

Bb g2

Sour ce: Designed by the Author

4.5. After implementing the RC-Scheme Before the RC-Scheme is applied in any type of regional integration initiative around the world, it is recommended that an analysis of the following aspects of each member country of the region and the region as a whole be carried out: culture, history, stage of economic and social development, stage of regional Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

integration process, political situation, legal framework, regional institutions available and the needs of each country. This thesis proposes the application of the modules priority mobility (MPM) concept to the analysis. The MPM is used a list of necessities and priorities that each member country in the same trade bloc present. The four modules of the RC-Scheme, as explained in the earlier part of this paper are: (i) education and technical training standardization cooperation module (M1); (ii) the social and productive infrastructure cooperation module (M2); (iii) intra-regional trade and tourism promotion cooperation module (M3); and (iv) public administration development cooperation module (M4 ). (see Diagram 2) Additionally, each of the four modules of the RC-Scheme should be applied in conjunction with Custom Union Scheme or open regionalism approach (Garnaut, 1994 and Bergsten, 1997). Both the RC-Scheme and the Custom Union approach can promote trade liberalization42)43 with other trade blocs (see Diagram 5).

4.6.

The RC-Scheme Modules Objectives

4.6.1. Education and Technical Training Standardization Cooperation Module (M1) Objective

As indicated in this thesis, the general objective of the intra-regional education 43

International trade and exchange between more than two countries or regions without non discrimination trade bar riers between those involved, in contrast to bilateralism.


and technical training standardization cooperation module (M1) is to increase the supply of regional human capital or soft technology43)44 based on knowledge economy (K-economy). This leads to improvement in research and development (R&D), which not only enhances productivity, but also creates new goods and services with high added value for new niches in the international market. It is based on ideas, working group, innovation, strategies, and plans to create new goods and services for the international market. The production intra-regional education and technical training standardization cooperation module (M1 ) can generate new goods and services with high added value through the gross of the domestic direct investment (DDI) and intraregional direct investment (IDI). The above development, in turn, brings about a rise in the income per capita and hence the saving rate of people in the region. The next positive result will then be an increase in the productive capital volume supply derived from the regional capital accumulation process. If the productive capital volume supply is higher then the interest rate, it pushes down the cost of production and thereby the market price. All the above benefits obtainable from the implementation of M1 , if applied to trade bloc A will enable all goods and services from trade bloc A to compete in

44

We will define soft technology as all general knowledge, technical and theor etical lear ning, experiences, training, and adaptability to challenges. It includes cultural and environmental changes that the workers of a country present.


the international markets. The positive outcomes of the implementation of M 1 also include improvement in the internal rate of return (IRR) and higher profits for domestic, regional and multi -national firms. This, coupled with the growth of purchasing power within the trade bloc, will readily attract foreign direct investment (FDI) into trade bloc A. The growth of regional production spurred by all the DDI, IDI and FDI will invariably lead to an increase in the export volume, followed by a decrease in the import volume. The ultimate benefit for trade bloc A will then be reduced trade dependency and an improvement in the balance of trade (see Diagram 6) 4.6.2. Social and Productive Infrastructure Cooperation Module (M2) Objective

This module is meant to create the conditions for the formation of intraregional infrastructure for the mobility of goods and labor in the intra-regional and extra-regional trade (import & export). The social infrastructure can help reduce the difficulties in income inequality among the countries in the same region based on the implementation of our regional integration proposal for middle income countries. The (M 2) Module can help the construction sector create employment at the regional level. 4.6.3. Trade and Tourism Promotion Cooperation module (M3 ) Objective In the light of new international image of trade bloc A following the developments achieved through M1 and M2, the promotional programs in M3 further strengthens these developments by generating from the international Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

market and thereby create more business opportunities at the regional level. M3 is based on open consensus in both private and public sectors of each member country of the region or trade bloc. Such open atmosphere created in trade bloc A provides equal opportunity and equal conditions to all its member countries in all aspects of trade, investment and tourism. This is manifested in the design of common and equitable strategies for all the member countries, where the promotion and negotiation of free trade agreements, intra-regional export, FDI and tourism are done collectively and efficiently. In short, through M3, all countries in trade bloc A and the region as a whole will not only have an improved image, but a shared identity as a single market. Trade bloc A will then is easily identified by international sellers, buyers and investors

in the international market. This program demands the

collaboration and coordination of ministry of economy or trade, exporters union (traditional and non traditional products), chambers of trade, and ministry of foreign affairs in each country in the same region. 4.6.4. Public Administration Development Cooperation Module (M4) Objective The last module, the public administration development cooperation module (M4) (see Diagram 2 and 6), aims to look for a solution to different problems that the public administration faces while trying to increase productivity through intensive training programs and further research. This module will try to improve the administrative procedures, legal framework and institutional organizations. Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

4.7. Considerations in the Application of RC-Scheme The application of RC-Scheme is slightly varied for regional integration of middle income and low income countries. It is important to note that the basic step to take in the RC-Scheme for integrating middle income countries and low income countries (e.g. CACM and Andean group) is to foster an open cooperation (in the form of participation in socioeconomic aid assistance) to solve the differences among members of the two regions. In the case of regional integration agreements between middle income countries and developed countries (e.g. ASEAN and NAFTA), it depends on the application of RC-Scheme being geared towards a high open trade level in addition to high open cooperation level (in the form of participation in socio-economic aid assistance). This is the first step towards helping middle income countries that do not have sufficient trade volume to compete in the international market. The trade volume is the deciding factor for the priority step to take in the RCScheme. Countries and regions with a high trade volume in the international market is resulting from a large diversity of products and services with high added value. They need to seek free trade agreements with another region that has the same condition. This is the case for regional integration between two regions of developed countries. An example of regions that have taken this step in their regional integration process is Europe Union –EU- and North American Free Trade Area –NAFTA-. Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

On the other hand, for countries/regions whose trade volume in the international market is small, due to their small diversity of products and services with low added value, then their priority should be open cooperation rather than open trade (see Diagram 8 and 9). This is the step to be taken in the regional integration process of middle income countries and less developed countries, for example, between CACM and the Andean Community.

Diagram 5: Regional Cooperative Scheme (RC-Scheme) Modules after its implementation CU

Custom Union Scheme

A a

Regional Cooperative Scheme (RC-Scheme)

B

g1

FTA

a

c

c g2 b

INTRA-REGI ONAL COOPERATION EFFECT CREATION

INTRA-REGIONAL TRADE-CREATING EFFECT

Y

b

Y

MULTILATERALISM

INTER-REGIONAL TRADE-CREATING EFFECT


Source: Designed by the A uthor

Diagram 6: Regi onal Cooperative Scheme (RC-Scheme) Modules Effects

Imagination & Knowledge Working Group Innovation

Ideas

Negotiation Strategy

Promotion

R&D FDI

Plan

Trade

Tourism

Soft technology

▲Add Value

Labor Mobility New products

K-Economy

M2


Intra &Extra Regional

▲Competitiveness ▲Income

▲Productivity ▲Saving

Human Capital Supply

▲Investment

M1

M3

Goods Mobility

M4 Direct domestic investment

▼ Productivity

▼Interest rate

▲Construction ▲Production

Intraregional direct Investment

▼ Bureaucratic

▲Export ▼Import

▲ = Incr ease ▼ = Decr ease

▲Balance trade

Sour ce: Designed

by the author

Diagram 7: dependency Priority between Open Cooperation and Open Trade in Different Regi onal Integration Schemes Based on Income Level ▼Trade

Low Income Countr ies

Middle Income Countries

OPEN COOPERATION

Middle Income Countries

High Income Countr ies

OPEN TRADE & COOPERATION


High Income

High Income Countr ies

Diagram 7 Sour ce: Designed by the A uthor

Diagram 8: The Interaction between the Cooperation Effect Creation and Trade-Creating Effect Multilater alism INTER-R EGIONAL TR ADE-CREATING EFFECT

R egiona lism I NTR A-R EGI ONAL TR ADE -CR EATI NG E FFECT

Regional Cooperative Scheme (RC-Scheme) depends on the global development cooper ative advantage that each countr y in the same region shows.

Cooperation Creation Effect Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

Source: Designed by the A uthor

CHAPTER 5 Trade Liberalization Evaluation Methodology (TLE-Methodology) Theoretical Framework 5.1. Introduction This study proposes a new trade analysis model to evaluate the trend and stages of trade liberalization of any country. This new trade analysis model is entitled “ The Trade Liberalization Evaluation Methodology (TLE-Methodology)” (Ruiz, 2004.a.) We would like to clarify that The TLE-Methodology is based on the regional integration evaluation methodology (RIE-Methodology) theoretical framework. The difference between TLE-Methodology and RIE-Methodology is that TLE-Methodology is focused on international trade and RIE-Methodology on regional integration issues. The TLE-Methodology will introduce new indexes and Figures. There are four basic phases in the implementation of TLE- Methodology. The first phase is the design of a multi-input tariff database Table by production Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

sector (agriculture, heavy industry 44)45, light industry45)46 and services). The second is the measurement of the trade liberalization index by production sector (X i). It is divided by the agriculture trade liberalization index (X1 ), heavy industry trade liberalization index (X2 ), light industry trade liberalization index (X3 ), and services trade liberalization index (X4 ). The third phase is the measurement of the trade liberalization trend (TLT) Index. The last phase is the measurement of the trade liberalization stage (TLS) Index. The general objective of TLE-Methodology is to offer policy-makers and researchers a new analytical tool to study the trade liberalization trend and stages of any country from a global perspective based on a group of indexes and Figures. The TLE- Methodology is not intended to be a forecasting model in any case. However, its application is not limited to the study of a special group of countries or regions. It is not constrained by issues about the region or the development stages of any country in a region that is interested in integrating into a Free Trade Area. TLE-Methodology, in effect, is a simple and flexible scheme, which can be applied to any case of trade liberalization.

5.2. Trade Liberali zation Methodology)

Eval uation

Methodology

(TLE-

The trade liberalization evaluation methodology (TLE-Methodology) is a

45

Heavy industry relies on the use of intensive Capital (K) factor in its production process 46 Light industry relies on the use of intensive Labor (L) factor in its production process.


measuring tool for studying regional integration from a global perspective. The proposed trade liberalization evaluation methodology (TLE-Methodology) is a simple and flexible model. It applies dynamic and general equilibrium analysis to show the past and present situations in the trade liberalization process of any country based on a set of indexes and Figures. Its field application is not constrained by regions or the development stage of each country interested in negotiating a free trade area (FTA). The TLE-Methodology can be applied to any form of country in its trade liberalization issues, whether it is developed country (e.g. Japan), developing country (e.g. Malaysia) and less developed country (e.g. Cambodia). The application of the TLE-Methodology is also based upon the characteristics, conditions and historical moments that any country presents in its trade liberalization development. In its application, TLE-Methodology is like a simulator that allows the application of a series of simulations in different scenarios and in the different phases of the trade liberalization process of any country. This model does not try at any time to be a forecasting model. It is focused upon showing the past and present situation in a free trade area process as a whole. It can help to provide a general idea about the situations and evolution of the trade liberalization process of any country.

5.3. Trade Liberalization Evaluation (TLE) Methodology Phases 5.3.1.Phase I: Design of the Multi-input Tari ff Database Table The multi-input tariff database Table is a new style of analysis framework that permits storage of a large amount of data to measure a single variable. This Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

single variable can show the evolution of any phenomenon from a global perspective. The multi-input tariff database Table is designed to evaluate two countries or many countries simultaneously (see Diagram 9 and Table 15). The country multi-input database Table pertains to “ country” . It uses “ n”number of variables. The number ‘ n’is decided by the researchers or policy-makers. The number of cases in the study is represented by “ m” . In the case of TLEMethodology, “ m”represents one country. The time factor “ t”is dependent upon the time parameters that the researchers or policy-makers are interested in using. Therefore, “ t”can be in terms of years or decades.



5.3.2.Phase II: Measurement of the Trade Liberali zation Index by Production Sector (Xi) The second phase of the implementation of the trade liberalization evaluation methodology (TLE-Methodology) involves the measurement of the trade liberalization index by production sector (Xi) using the variables in four basic multi-input tariff database tables (see Diagram 9). The trade liberalization evaluation methodology (TLE-Methodology) indexes are agriculture trade liberalization index (X 1) 46)47, heavy industry trade liberalization index (X2)47)48, light industry trade liberalization index (X3)48)49 and services trade liberalization index (X 4 )49)50 . These variables (tariff and non-tariff barriers) are analyzed with their codes, descriptions and parameters respectively. The parameters are divided into two categories. The categories are: tariff barriers rate based on limits (e.g. we have tariff rate acceptable (TRA)50)51 and actual tariff rate (ATR), if ATR is

47

The measuring of agriculture trade liberalization index (X1) originates from the calculus obtained from the agriculture multi-input tariff database Table (See Table 15). After we have obtained the result of X1, we can proceed to classify our results into three different parameters. These parameters are lower trade liberalization or level 1 (0 X1 0.33), stagnation trade liberalization or level 2 (0.34 X1 0.66) and higher trade liberalization or level 3 (0.67 X1 1). 48

The measuring of heavy industry trade liberalization index (X2) originates fromthe calculus applied in the heavy industry multi-input tariff database Table (See Table 15). After we have obtained the result of X2, we can proceed to classify our results into three different parameters. These parameters are lower trade liberalization or level 1 (0 X2 0.33), stagnation trade liberalization or level 2 (0.34 X2 0.66) and higher trade liberalization or level 3 (0.67 X2 1). 49

The measuring of light industry trade liberalization index (X3) originates from the calculus applied in the light industry multi-input tariff database Table (See Table 15). After we have obtained the result of X3, we can proceed to classify our results into three different parameters. These parameters are lower trade liberalization or level 1 (0 X3 0.33), stagnation trade liberalization or level 2 (0.34 X3 0.66) and higher trade liberalization or level 3 (0.67 X3 1). 50

The measuring of services trade liberalization index (X4) originates from the calculus applied in the services multi-input tariff database Table (See Table 15). After we have obtained the result of X4, we can proceed to classify our results into three different parameters. These parameters are lower trade liberalization or level 1 (0 X4 0.33), stagnation trade liberalization or level 2 (0.34 X4 0.66) and higher trade liberalization or level 3 (0.67 X4 1). 51

Tariff rate acceptable (TRA) is fixed by the researcher, policy maker, or based on parameters of international. trade organizations (e.g. World Trade Organization (WTO) or UNCTAD) interested to evaluate the tariff structure of any country or region.


large than TRA, then it is equal to 0, but if ATR is equal or less than TRA, then it is equal to 1) and non-tariff barriers analysis based on the existence or nonexistence of non-tariff barriers) (e.g. an attempt is made to prove the following: if the non-tariff barriers exist, then it is equal to 0; if non-tariff barriers do not exist, it is equal to 1.)


The number of variables used in the TLE Methodology varies, depending on the objectives of the researchers or policy-makers and the orientation research. In the case of the present study, 40 items from the tariff manual of Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

each country under analysis with their respective parameters were selected: 10 items for Agriculture Trade Liberalization Index (X 1); 10 items for heavy industry trade liberalization Index (X 2); 10 items for Light industry trade liberalization index (X 3 ) and 10 items for services trade liberalization index (X4). Once the number of variables is determined, the next step is to collect the statistical and historical data that constitutes the variables. Variables in each multi-input tariff database Table may not have a direct relationship among them, they may be dependent variables or exogenous variables. However, all the variables in each multi-input tariff database Table are meant to measure a single general variable, that is, each of the trade liberalization index by production sector (X i). Each of the four trade liberalization indexes by production sector (X i) by sector to be measured is viewed as a dependent variable (i.e. exogenous variable). However, there is no connection and interdependency among these four trade liberalization indexes by production sector (X i) when they are joined in the Figure. These four trade liberalization indexes by production sector (X i) are used to draw a Figure that represents the evolution and stages of the regional integration process of the region from a global perspective. The objective of this study is to apply the TLE-Methodology to the case of the trade liberalization trend and stage between developing and developed country.


5.3.2.1. Steps to Obtain Each Trade Liberalization Index by Production Sector (Xi) There are four trade liberalization indexes by production sector (X i) to be obtained. These four trade liberalization indexes by production sector (Xi ) are: agriculture trade liberalization index (X1 ), heavy industry trade liberalization index (X 2 ), light industry trade liberalization index (X3) and services trade liberalization index (X 4 ). The first step is to define all variables and parameters. Once all the variables and parameters are defined, all the data based on the variables and parameters are listed in each multi-input tariff database table. The next step is to add up the values of all variables in the column of the actual situation (AS) in each multi-input tariff database Table. The total possible results (TPR) obtained is then located in the TPR column next to AS column. With TPR in place, the next step is to compute each trade liberalization index by production sector (X i). The computation is done by applying expression (1) to the values in the multi-input tariff database Tables. (2)

4 ΣX i = ΣASi x 100 / ΣTPRi i =1

Following the above four steps, the fifth step is the plotting of a Figure: (a) the trade liberalization index by production sector (X i) diagram (see Figure 12).


5.3.3.

Introduction to Anal ysis of TLT Index and TLS Index Based on Trade Liberali zation Index by Production Sector (Xi) Each Trade Liberalization Index by Production Sector (Xi) plays an

important role in the measurement of the trade liberalization trend (TLT) index and the trade liberalization stage (TLS) index. These two indexes can be affected by any change in the Xi indexes in the short and long term. The liberalization index by production sector (Xi) may reflect one of two different scenarios. First, if some or all-trade liberalization indexes (agriculture, heavy industry, light industry and services) increase, then TLT index and TLS index may increase. The second scenario is, if some or all-trade liberalization indexes by production sector (agriculture, heavy industry, light industry and services) decrease, then the TLT index and TLS index may decrease.


5.3.4.Phase III: Measurement of the Trade Liberalization Trend (TLT) Index The third phase of the implementation of the trade liberalization evaluation methodology (TLE-Methodology) Model presents a general definition of trade liberalization trend (TLT) index (see Diagram 9). The TLT index is an indicator to compare different trends of the trade liberalization process in any country. It is based on the trade liberalization index by production sector (Xi) of a country. Therefore, the TLT index is a means of analyzing the evolution of any trade liberalization process from a global perspective.


5.3.4.1.

Steps to Obtain the TLT Index

The first step is to plot each (Xi) index: agriculture trade liberalization index (X 1 ), heavy industry trade liberalization index (X 2), light industry trade liberalization index (X 3) and services trade liberalization index (X4) on the Cartesian plane (see Figure 13 and 14). It should be noted that the TLT index value (single percentage) is an approximation of the past and present situations that any trade bloc may encounter in the evolution of its trade liberalization. The TLT index is the summation of all the four trade liberalization indexes by production sector (X i). The second step is to plot the TLT Figure based on the total value of the four trade liberalization indexes by production sector (X i). This is followed by calculation of the trade liberalization trend (TLT) index based on expression (2). It should be noted that the values of the X i indexes are independent of one another. The TLT Figure consists of four different areas, where each area has a limit equivalent to 0.25. The total value of these four areas is equal to 1 as observed in the expression (2.6.)


Each axis of Figure 2 and Figure 3 is either the base or the height of the Figure (represented by B and H respectively in the Figure). The TLT1 uses the result of the production sector X 1 which is equal to B1 , and the production sector X 2 which is equal to H1, followed by the application of (2.1.) The same steps and expression are used for TLT1 , TLT2 , TLT3 and TLT4 (See Figure 14). The total TLT index for this period is the sum of all the TLT’ s. This is depicted in expression (2.5.)

The total area is divided from four dissimilar triangles each of area equal to {Base (=Bi ) x Height (=Hi)}/2. Therefore, the triangles areas have to be summed to derive the total surface area (see expression 2.5.)

(2)

4 4 ΣRDi = Σ{Base (=X i) x Height (=Hi)}/2


i=1

i=1

2.2.

)

[B1 = H4]: RD1 = {X 1(=B1) x X2(=H1)}/2

2.3.

)

[B2 = H1]: RD2 = {X 2(=B2) x X3(=H2)}/2

2.5.

)

[B3 = H2]: RD3 = {X 3(=B3) x X4(=H3)}/2

2.6.

)

[B4 = H3]: RD4 = {X4 (=B4) x X 1(=H4 )}/2

2.6.

)

RD = RD1 + RD2 + RD3 + RD4 B= Base

H= Height

We have applied the same concept as regional integration evaluation (RIEMethodology) (See Chapter 3) to apply this formula to measure the area of the four sides of the figure on the horizontal plane.

5.3.4.2.

Analysis of TLT Index

The analysis of the TLT index is based on the comparison of two periods or countries. In the case of this study, two periods (i.e. first period and second period) are compared. The total TLT index may present three possible scenarios, namely:

(a) The trade liberalization expansion (TLT’first period < TLT’’second period) (b) The trade liberalization stagnation (TLT’first period = TLT’’second period) (c) The trade liberalization contraction (TLT’first period > TLT’’second period) In terms of time-span, the TLT index can be measured and compared on a yearly basis, five-yearly basis, and by decades. For this research, the timeUnofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

span is one decade (the 1990s), which can later be compared. In terms of space, the TLT index can be measured and compared in relation to countries or regions. At any historical moment, the regional integration process in any region is based on the comparison of the size of the trade liberalization trend (TLT) index. 5.3.5. Phase IV: Measurement of the Trade Liberalization Stage (TLS) Index The last phase in the implementation of the trade liberalization evaluation (TLE) Methodology is the measurement of the trade liberalization stage (TLS) (see Diagram 9). The TLS index measures the degree of the trade liberalization that any country achieves in the different stages of its evolution. The TLS index is considered a dependent variable in the TLE Methodology. In the measurement of the TLS index, four Trade Liberalization Indexes by Production Sector (Xi ) are used: agriculture trade liberalization index (X1), heavy industry trade liberalization index (X 2), light industry trade liberalization index (X 3) and services trade liberalization index (X 4). A constant coefficient, focal trade policy approach incline (FTP-Approach Incline) is also used concurrently. The FTP-approach incline is represented by a, b, c, and d in expression (3) and is applied to each trade liberalization index by production sector (Xi). Each FTPapproach incline (a, b, c, or d) has a limit that is equal to 1 [Refer to expression (3)]. The sum of the FTP-approach incline cannot be more than 1. The application of the FTP-approach incline is twofold. The first application is the FTP-approach incline Homogeneous Interest. In this application, each FTP -approach incline has the same level of importance in the analysis [refer to


expression (3.1)]. The second application is the FTP-approach incline. There are four possibilities in this application: agriculture trade liberalization approach incline (3.2.), heavy industry liberalization approach incline (3.3.), light industry trade liberalization approach incline (3.4.) and services trade liberalization approach incline (3.5.)

5.3.5.1.

Analysis of TLS Index

After the type of FTP-approach incline to be applied is determined, the trade liberalization stage (TLS) index is measured according to expression (3). The TLS index analysis may reveal one of three different scenarios, namely: (a) The trade liberalization under-developed stage or level 1 (0

TLS

0.33)

(b) The trade liberalization developing stage or level 2 (0.34

TLS

0.66)

(c) The trade liberalization developed stage or level 3 (0.67

TLS

1).

The analysis of the TLS index can provide a general idea or approximation of the stage of regional integration achieved in any region through time and space. The following is a suggested combination of the application of the FTPapproach incline in the measurement of the TLS index: (3.)

Y = TLS = aX 1 + bX2 + cX 3 + dX 4

1

3.1.

a = 0.25, b = 0.25, c = 0.25, d = 0.25 = 1 => FTP Homogeneous

3.2.

a = 0.40, b = 0.20, c= 0.20, d = 0.20 = 1 => FTP Agriculture Approach Inclined

3.3.

a = 0.20, b = 0.40, c = 0.20, d = 0.20 = 1 => FTP Heavy Industry Approach Inclined

3.4. a = 0.20, b = 0.20, c = 0.40, d = 0.20 = 1 => FTP Light Industry Approach Inclined Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

3.5.

a = 0.20, b = 0.20, c = 0.20, d = 0.40 = 1 => FTP Services Approach Inclined It must be highlighted that the above combination represents only several

of many possibilities or permutations. This should draw attention to the flexibility of the TLS index in adapting to any situation or chosen policy mode. The TLS index presents an approximation of the development stage of trade liberalization concurrently based on a new concept of graphic representation (see Figure 15). This new concept of graphic representation consists of five axes, each of which has a positive value, (in the case of this research, the value in each axis is represented by a percentage).


Once the axes of the Figure are in place, the next step is to plot the four Xi indexes (agriculture, heavy industry, light industry, and services Xi indexes) in four of the axes respectively. These Xi indexes are independent variables. The total value of the four axes is equal to 1 (see Figure 15). The fifth axis, which is represented by Y and positioned in the center of the Figure (among the other four axes) represents the dependent variable TLS index. This fifth axis is the convergent point of all the other four axes or more precisely, the four areas agriculture, heavy industry, light industry and services- of Trade Liberalization Level index (Xi). The TLS index (Y) is depicted as follows in expression (4). (4) Y = F (X 1, X2, X 3, X 4)

1


CHAPTER 6 Openness Growth Monitoring System (OGM-Model) 6.1. Introduction The Openness Growth Monitoring System (OGM-Model) (see Ruiz, 2005.b) is a new analytical model for studying the impact of openness growth on the income growth in any country or region. Its application is not constrained with respect to the income level stage of the relevant country or region, regardless of whether it is a high, middle and low income level. This model applies new types of indicators to show the evolution, sensitivity and harmonization of Openness Growth, as well as, the effect of Openness Growth on the Income Growth in any type of country. It is generally a simple and flexible model. There are two general objectives for the proposal of the Openness Growth Monitoring Model (OGM-Model): (i) to quantify and analyze openness growth; (ii) to measure the impact of Average Openness Growth rate (ΔŌ) on Income Growth rate (ΔY) in a specific period of time (in the short term). The OGM-Model will test prove the following a general hypothesis:

1.

High openness growth does not necessarily generate income growth in any country in the short term

2.

The Customs Union Scheme performs better than Free Trade Areas


scheme in terms of income growth

The OGM-Model is based on a series of steps/elements in its application to study the Openness Growth and Income Growth: (i)

Degree of Openness by Production Sectors (O i)

(ii)

Average Openness rate (Ō)

(iii)

Average Openness Growth rate ( Ō)

(iv)

Harmonization of Openness Growth rate (HO)

(v)

Income Growth rate (ΔY)

(vi)

Openness Growth Diamond Diagram

(vii)

The openness diamond graph

(viii)

Openness/Income Growth Rate (O:Y) Sensitivity Analysis (See Diagram 10).

6.2. Steps to Apply OGM-Model 6.2.1. Step-1: Measurement of Degree of Openness by Production Sectors (O i)

The Degree of Openness by Production Sectors (Oi) will present the degree of Openness in four different production sectors, namely agriculture, manufacturing, energy (fuel) and services sectors. This indicator can also show the comparative degree of Openness of different production sectors (e.g. more Openness in agriculture sector than the manufacturing sector). The first step in the application of the OGM-Model is to measure the Degree of Openness by


Production Sectors (Oi) (See Diagram 10). The Oi is equal to the sum of real Exports (Xi–FOB ) by production sectors and the real Imports (Mi–CIF ) by production sectors divided by the real Gross Domestic Product value (GDP -real) (see Expression 1). 4 (1.) ΣOi = (Xi-FOB constant prices by production sector + Mi-CIF constant prices by production sector) / real GDP) i=1 Degree of Openness in the Agriculture Sector (Oa ) (1.1) Oa = (X a-real + Ma-real) / GDP -real Degree of Openness in the Manufacturing Sector (Om) (1.2) Om = (X m-real + Mm-real ) / GDP -real Degree of Openness in the Energy (Fuel) Sector (Oe ) (1.3) Oe = (Xe-real + Me-real) / GDP -real Degree of Openness in the Service Sector (Os ) (1.4) Os = (X s-real + Ms-real) / GDP -real Analysis of Oi Rate Results The results of Oi reflect two possible scenarios: (i) If

Oi is positive (+) or high, then the country has open economy

(ii) If Oi is negative (-) or low, then the country has closed economy 6.2.2. Step-2: Measurement of Average Openness Rate (Ō) The Ō is equal to the sum of the Degree of Openness (∑Oi) of all the production sectors divided by four (i.e. number of production sectors under analysis) (see Expression 3). Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

(3) Ō = ∑(Oa + Om + Oe + O s)/4

6.2.3.Step-3: Measurement of Openness Growth Rate ( Ō) The

Ō is equal to the average openness rate in a given period (Ō’ )

minus the average openness rate of the previous period (Ō o) divided by the average openness rate of the previous period (Ō o) (see Expression 5). (Ō’ ) –(Ō o) ΔĀO =

(5.)

(Ō o ) Analysis of Ō Results (i)

If Ō Rate is high, then the country experiences strong Openness Growth

(ii)

If Ō Rate is low, then the country experiences weak Openness Growth

6.2.4. Step-4: Measurement of Harmonization of Openness (HO) HO is equal to the maximum degree of by production sector minus the minimum degree of openness by production sector in the same year divided by the average openness (Ō) (See Expression 4). This indicator also shows the trend of the liberalization process of any country from a general perspective. HO is useful in the making of policies that help to improve the harmonization of openness in all production sectors (see Diagram 10). (4.) HOi = (O i-Max) –(Oi-Min ) / (Ō) i= 1,2,3,4 Analysis of HO Results Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

(i)

If HO is equal to 3, then its Openness Growth is proportional Proportional indicates a good openness in all sectors of productions.

(ii)

If HO is equal to 2, then its Openness Growth is acceptable Acceptable indicates a good performance, but no harmony to open all sectors in the same level.

(iii)

If HO is equal to 1, then its Openness Growth is non-proportional. Non-proportional is indicates a non-balance in the openness of the different sectors of production among all sectors. The analysis of HO Rate can provide a general idea about the orientation

of the trade policy in the trade liberalization process of any economy. 6.2.5. Step-5: Measurement of the Income Grow th Rate (ΔY) The ΔY is equal to the Per-capita GNI in a given period (ΔY ’ ) minus the Per-capita GNI of the previous period (ΔYo ) divided by the Per-capita GNI of the previous period (ΔYo ) (See Expression 5). The per-capita GNI (Y) income level is based on the World Bank data classification. They are high income51)52, middle income52)53 and low income 53)54 under World Bank classification. “ High-income country is a country having an annual gross national product (GNP) per capita equivalent to $9,361 or greater in 1998. Most high-income countries have an industrial economy. There are currently about 29 high-income countries in the world with populations of one million people or more. Their combined population is about 0.9 billion, less than one-sixth of the world’ s population. In 2003, the cutoff for high-income countries was adjusted to $9,206 or more” . 52

“ Middle-income country is a country having an annual gross national product (GNP) per capita equivalent to more than $760 but less than $9,360 in 1998. The standard of living is higher than in low-income countries, and people have access to more goods and services, but many people still cannot meet their basic needs. In 2003, the cutoff for middle-income countries was adjusted to more than $745, but less than $9,206. At that time, there were about 65 middle-income countries with populations of one million or more. Their combined population was approximately 2.7 billion” . 53

“ Low-income country is a country having an annual gross national product (GNP) per capita equivalent to $760 or less in 1998. The standard of living is lower in these countries; there are few goods and services; and many people cannot 54


(ΔY’ ) –(ΔYo ) ΔY =

(5.)

(ΔY o) Analysis of ΔY Rate Results The results of ΔY reflect two possible scenarios: (i) If ▲ΔY, then there is growth in income (ii) If ▼ΔY, then income level remains unchanged

6.2.6. Step-6: Plotting of Openness Diamond Graph The Openness Diamond Graph (see Diagram 10) presents a general idea about the current global development of trade liberalization based on a new concept of graphic representation (see Figure 16). This new concept of graphic representation consists of six axes, each of which has a positive value. In the case of this research, the value in four of the axes is represented by the Degree of Openness by Production Sectors (O i) (Agriculture Sector, Industrial Sector, Energy Sector, and Services Sector). These Oi indexes are independent variables (see Figure 16). They can be joined together to create a general area. This general area is called “ Area of Coverage of Openness–ACO-” . This area shows the dimension of Openness from a general perspective. For comparison purposes, ACO can be applied to different years for one country or two countries. The analysis of the ACO is based on the comparison of two periods or regions. In meet their basic needs. In 2003, the cutoff for low-income countries was adjusted to $745 or less. At that time, there were about 61 low-income countries with a combined population of about 2.5 billion people” . (see: http://www.worldbank.org/depweb/english/modules/basicdata/datanotbasic.html)


the case of this research paper, two periods (i.e. first period and second period) are compared. The total ACO may present three possible scenarios, namely: (a) Expansion (ACO’first period < ACO’’second period) ’ (b) Stagnation (ACO’first period = ACO’ second period) ’ (c) Contraction (ACO’first period > ACO’ second period).

The fifth and sixth axes are represented by the dependent variables Y1 ( Ō) and Y2 (ΔY). They are positioned in the center of the graph which is the meeting point of the other four axes.

Figure 16: THE OPENNESS DIAMOND GRA PH

Y1 = ΔŌ

ENERGY SECTOR (Oe) MANUFACTURING SECTOR (Om )

AREA OF COVERAG E OF OPENNESS (ACO)

Oi

SERVICES SECTOR (Os ) AGRICULTURE SECTOR (Oa )

Y2 = Y Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

6.2.7.Step-7: Creation of Openness/Income Growth Rate (O:Y) Chart

Based on all the results of Average Openness Growth Rate (ΔŌ) and Income Growth Rate (ΔY) obtained from step-3 and step-5 respectively, a chart showing the trends of both openness growth and income growth is drawn. This chart serves the purposes in the next step (step-8). The (O:Y) chart compares the trend of the Average Openness Growth Rate (ΔŌ) with the trend of the Income Growth Rate (ΔY) (see Figure 17).

Figure 17: Openness/Income Growth Rate (O:Y) Chart (Fictitious data)


6.2.8.Step-8: Measurement of the Openness/Income Growth Rate (O:Y) Sensitivity Analysis This Indicator measures how sensitive an economy is under constant changes in its openness growth (see Diagram 10). Specifically, it measures the relationship between the Average Openness Growth rate ( Ō) and the Income Growth rate (ΔY). Hence, it can be used to test if Openness Growth influences Income Growth in the country under study. It simultaneously compares the trend of Average Openness Growth rate ( Ō) and Income Growth rate (ΔY) trends by the years for the same country or between different countries. The Openness/Income Growth Rate (O:Y) Sensitivity Analysis compares the trend of Openness Growth and the Income Growth (see Expression 6) based on the Openness/Income Growth Rate (O:Y) Chart (see Figure 17). (6.) Openness/Income Growth Sensitivity Analysis Rate (O:Y) = ΔŌ : ΔY Results of (O:Y) Sensitivity Analysis The (O:Y) Sensitivity Analysis reflects several possible scenarios: (i) If ▲ΔŌ : ▲ΔY then income has high sensitivity to openness (ii) If ▼ ΔŌ : ▼ΔY then income has high sensitivity to openness (iii) If ▲ ΔŌ : ▼ΔY then income has low sensitivity to openness (iv) If ▼ ΔŌ : ▲ΔY then income has low sensitivity to openness Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

(ΔŌ) : Average Openness Growth Rate ▲: Increase (ΔY) : Income Growth Rate

▼: Decrease

Diagram 10: Steps to apply Openness Growth Monitoring System (OGM-Model) Openness Growth Monitoring System (OGM-Model) Oa

Om

Step -1 Degree of Openness by Production Sector (Oi)

Oe

Os

Step -2 Openness Average Rate (Ō)

Step -3 Average Openness Growth Rate (ΔŌ )

Step -6 Openness Diamond Graph

Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada Malaya/Faculty of Economics, Malaysia © 2006

Step -5 Harmonization of Openness Growth Rate ( HO)

Step -4 Income Growth Rate (Δ Y)

Step -7 Openness/Income Growth Rate Chart

Step -8 Openness/Income and University ofGrowth Sensitivity Analysis (O:Y)

6.3. Application of OGM-Model and Findings For the research in this thesis, the OGM-Model was applied to 38 different countries in seven different trading blocs between 1995 and 2001 (see Table 16). This period of time was chosen because the general objective of OGM-Model is to observe the link between the Average Openness Growth rate and Income Growth rate in the short term in this specific period of time. In the case to apply OGM-Model on regional integration to compare Free Trade Area (FTA) and Custom Union (CU) scheme, we assume that both schemes of regional integration schemes are used in different regions around the world, perhaps both scheme of regional integration did not start in the same period, but both schemes have something in common, they examine the trade liberalization in different ways. 6.3.1. Findings Pertaining to Correlation between Openness Grow th and Income Growth

The results of the correlation between Average Openness Growth rate (ΔŌ) and Income Growth rate (ΔY) among 38 countries (equal to 100% of cases) classified into low, middle and high income countries. They show in the majority of high income countries, that is, 85% of cases (United States, Canada, Japan and Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

Europe Union) and few number of middle income countries, that is 22% of cases (Argentina, Uruguay, Costa Rica, Panama), Income Growth was highly dependent on Openness Growth between 1995 and 2001 (see Table 16). For the rest of the countries in the analysis, there was no correlation between Average Openness Growth rate (ΔŌ) and Income Growth rate (ΔY) shows that a few high income countries 15% of cases (Australia, Singapore, New Zealand), a large number of middle and low income countries (around 78% of cases between 1995 and 2001). Even countries such as Singapore (see Table 137), El Salvador (see Table 145) and Chile (see Table 150), whose levels of Openness Growth were high, it did not show any correlation between Average Openness Growth rate (Δ Ō) and Income Growth rate (ΔY). These results suggest that, for some middle income countries and for all low income countries. Openness Growth cannot generate Income Growth in the short term. In terms of the Degree of Openness by Production Sectors (Oi), it is observed that for U.S.A., Openness in the agriculture (Oa ) and energy (Oe) sectors was low in the period 1995-2001. Such low level of Openness can be attributed to the high level of trade protectionism in the form of non-tariff barriers that the U.S.A. government imposed on foreign trading partners. The U.S.A., however, showed high a level of Openness in the manufacturing (Om) and services (Os) sectors during the same period. The low performance of the (HO) of U.S. is originates from the high protectionism of the agriculture and energy sectors (see Tables 142 and Figure 18). Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

It can be observed that Singapore (see Table 137) had a negative Average Openness Growth rate (ΔŌ) between 1995 and 2001. The reason for this negative value in the Average Openness Growth rate (ΔŌ) of Singapore, it is the possibility of different proportions in the growth between openness and income growth rates, in the case of countries with high level of openness. However, during this period, Singapore saw negative values in the income growth rate (ΔY). The same situation, high level of Openness Growth but low level of Income Growth is observed in the cases of middle income countries (e.g. Malaysia, Chile, Mexico, Brazil and Indonesia) and low income countries (e.g. Nicaragua and Indonesia) (see various Tables). The Application of the OGM-Model to most high income countries (e.g. European Union, Japan, Australia and Canada) shows that these countries had high levels of Openness in the manufacturing and energy sectors. It is understood that their agriculture and services sectors were under high levels of trade protectionism, compared to middle and low income level countries. During the same period, middle income countries (e.g. Malaysia, Thailand, Mexico, Brazil and Chile) presented different results of Openness by production sector from those of high income countries. In middle income countries, the agriculture and energy sectors had high level of Openness (Oi), but the manufacturing and services sectors maintain a high level of trade protectionism. These countries saw an increasing Average Openness Growth rate (ΔŌ) but proportional growth across production sectors in their Harmonization of Openness Growth rate (HO). Among middle Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

income countries, none showed a correlation between Average Openness Growth rate (ΔŌ) and Income Growth rate ( Y). In low income countries (Nicaragua and Indonesia) between 1995 and 2001, the agriculture sector was under a high level of trade protectionism, but the manufacturing, energy and services sectors (see Figure 21) presented a higher level of Openness (Oi) compared to high and middle income countries (see Figures 19 and 20). On the other hand, both their Average Openness Growth Rate (ΔŌ) and Harmonization of Openness Growth Rate (HO) appeared to be low. The low level of ΔŌ and Y in low income countries were due to a low level of participation in world trade on the part of these countries. Amongst low income countries none showed a correlation between Average Openness Growth rate (Δ Ō) and Income Growth rate ( Y) in its economy between 1995 and 2001. 6.3.2. Findings pertaining to Regional Integration The results between Average Openness Growth rate (ΔŌ) and Income Growth rate ( Y) in Table 16 provide a means for comparing the performance of the Customs Unions and the Free Trade Area in terms of Average Openness Growth rate (ΔŌ). The results provide a good indication of whether Average Openness Growth rate (ΔŌ) under a certain regional integration scheme generates desirable Income Growth rate ( Y) which determine the success of the scheme. The application of the OGM-Model to the European Union (EU) under the Customs Union (CU) Scheme reveals an Average Openness Growth rate (ΔŌ) of -2 and a positive Income Growth Rate ( Y) of 7. For the Free Trade Area (FTA) Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

Scheme, North America Free Trade Areas (NAFTA) recorded an Openness Growth rate of 1 -- the highest among all trade blocs under the same scheme, and an Income Growth Rate of 4. These two results show that NAFTA had a higher level of Average Openness Growth rate (ΔŌ) but a lower level of Income Growth rate ( Y) compared to the EU. In other words, the results indicate that FTA cannot yield as much Income Growth rate ( Y) as CU even with their higher level of Average Openness Growth rate (ΔŌ). The rest of the trading blocs analyzed were the Association of South East Nations (ASEAN), the Australia-New Zealand Free Trade Area (ANZFTA), the MERCOSUR and the Central America Common Market (CACM), all of which are under the FTA scheme. ASEAN had the highest Average Openness Growth rate (ΔŌ) of 4 and negative Income Growth rate ( Y) of -3. ANZFTA, with its Income Growth rate ( Y) of –0.4, showed the same high Openness Growth rate (ΔŌ) of 4 as that of ASEAN. MERCOSUR’ s Income Growth Rate ( Y) was as low as -1. However, it had the second highest level of Average Openness Growth Rate (ΔŌ) among all trading blocs analyzed: an Average Openness Growth rate (ΔŌ) of 3 (see Table 16). In contrast to the results obtained for EU (under the Customs Union scheme), the results for ASEAN, ANZFTA, MERCOSUR AND CACM (under the FTA) constitute yet another ground for the claim in this thesis that the Customs Union scheme can generate more income growth than the FTA scheme. Equally important, all the above results testify the viability of the OGM-Model as an alternative analytical tool to analyze regional integration. Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

FIGURE 18: THE OPENNESS GROWTH DIAMOND DIAGRAM OF U.S.A.

Y1 = ΔŌ

MANUFACTURING SECTOR (Om ) ENERGY SECTOR (Oe) (6)

(15)

(2)

ACO

(2)

(5)

(2)


Y2 = Y FIGURE 19: THE OPENNESS GROWTH DIAMOND DIAGRAM FOR HIGH INCOME COUNTRIES

Y1 = ΔOĀ

(High) MANUFACTURING SECTOR (Om ) ENERGY SECTOR (Oe)


(High) (Low)

ACO

(Low)

(High)

(High) SERVICES SECTOR (Os ) AGRICULTURE SECTOR (Oa ) Y2 = Y FIGURE 20: THE OPENNESS GROWTH DIAMOND DIAGRAM FOR MIDDLE INCOME COUNTRIES

Y1 = ΔOĀ

MANUFACTURING SECTOR (Om ) ENERGY SECTOR (Oe) (High) (Low)

(High)

ACO

(11) (High)

(Low) (Low)


Y2 = Y


FIGURE 21: THE OPENNESS GROWTH DIAMOND DIAGRAM FOR LOW INCOME COUNTRIES

Y1 = ΔOĀ

MANUFACTURING SECTOR (Om ) ENERGY SECTOR (Oe) (Low) (Low)

(Low)

ACO

(11) (High)

(Low) (Low)


Y2 = Y



CHAPTER 7 THE EXTERNAL SECTOR DEVELOPMENT INDEX (SXi) 7.1.

Introduction For many decades, economists and policy makers have been using a

variety of analytical tools in the study of the external sector behavior in different countries and regions. The most common analytical tools applied in such studies so far are the Terms of Trade (ToT) 54)55 and the Openness Index (Oi)55)56 . This chapter introduces an alternative index to measure the external sector from different focus. Called “ The External Sector Development Index (SXi)” (see Ruiz, 2004.c), this indicator is a new analytical tool for studying the external sector behavior of any country or region. The SXi is strongly affiliated with the Openness Index (Oi ). The difference between these two indices is that in the measurement of SXi replace absolute values by growth rates (or relative values), these growth rates are trade volume growth rate (ΔT = ∑export growth rate plus ∑import growth rate), foreign direct investment growth rate (ΔFDI) and gross domestic product growth rate (ΔGDP). The SXi analysis also will introduce a new

55

Terms of Trade (ToT) ToT - is considered an analytical tool can explain the relationship between the ratio of the export prices (Export Index Price = IPx) and the ratio of the import prices (Import Index Price = IPm) to find the deteriorating terms among countries (Balassa, 1985). However, ToT is continue be used by many experts on international trade to explain the behavior of the external sector of any country. ToT = IPx/IPm x 100% 56

The Openness Index (Oi) on the other hand, studies the relationship between the total trade volume (i.e. Exports plus Imports) and GDP (Edwards, 1998). It measures the level of trade liberalization as well as the orientation of the trade policy of any country. The objective of the Oi is to show how much of participation has the external sector (export plus imports) on the GDP or how open is an economy to the international markets. Oi = X+M/GDP x 100%


variable called “ the external sector main variable (ESi)” . The ESi is equal to the trade volume growth rate (ΔT) plus foreign direct investment growth rate (ΔFDI) (see Diagram 17). The SXi has four objectives they are: first, measure the vulnerability of the external sector of any country. The second objective is to evaluate the external sector performance. Third, is the relationship between ESi and GDP growth rates. Finally is the evaluation of the external sector (SXi ) cycle based on the table of possible combinations between ESi and GDP. However, the three indicators (ToT, Oi and SXi) have different objectives and focus of analysis, but they share something in common in that all these indicators will evaluate the external sector of any country (see Table 19). 7.2. The External Sector Development Index (SXi ) The objective of the External Sector Development Index (SXi) is to observe the External Sector behavior of any economy from a new angle of analysis based on three basic variables: Trade Volume Growth Rate (ΔT), Foreign Direct Investment Growth Rate (ΔFDI) and GDP Growth Rate (ΔGDP). The external sector of the SXi is represented by two specific growth rates are trade volume growth rate (ΔT) and the Foreign Direct Investment growth rate (ΔFDI). In this part of the research, it is maintained here that the Trade Volume is equal to the sum of Exports flows (FOB) plus Imports flows (CIF) in US$ per year. On the investment side, it is represented by the variation of the FDI growth rate between two years. The idea to include the FDI growth rate (ΔFDI) and trade volume growth (ΔT) together into the study of the external sector is analyzed the


external sector like as a whole. The computation of the SX i Index requires four preceding steps detailed below (see Diagram 11). 7.2.1. Step-1: Trade Volume Growth Rate (ΔT) The Trade Volume Growth Rate (ΔT) is the difference between the Trade Volume of a given year in millions of US$ (X+M) n+1 and the Trade Volume of the previous year in millions of US$ (X+M)n divided by Trade Volume of previous year in millions of US$ (X+M)n. (1.1.) ΔT =

(X+M)n+1 - (X+M)n (X+M)n

7.2.2. Step-2: Foreign Direct Investment Growth Rate (ΔFDI) The Foreign Direct Investment Growth Rate (ΔFDI) is the difference between the Foreign Direct Investment Volume of a given year in millions of US$ (FDI)n+1 and the Foreign Direct Investment of previous year in millions of US$ (FDI)n divided by the Foreign Direct Investment of previous year in millions of US$ (FDI)n. (1.2.)

ΔFDI = (FDI)n+1 - (FDI)n (FDI) n

7.2.3. Step-3: GDP Growth Rate (ΔGDP) The Growth Domestic Product Rate (ΔGDP) is equal to the Growth Domestic Product of a given year in millions of US$ (GDP)n+1 minus the Growth Domestic Product of the previous year in millions of US$ (GDP) n divided by the Growth Domestic Product of the previous year in millions of US$ (GDP)n . Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

(1.3.) ΔGDP = (GDP) n+1 - (GDP) n (GDP)n 7.2.4. Step-4: External Sector Main Variable (ESi ) The External Sector Main Variable (ESi ) is equal to the sum of Trade Volume Growth Rate (ΔO) and Foreign Direct Investment Growth Rate (ΔFDI) (see Table 17). (1.4.

ESi = ΔT + ΔFDI

Possible results If any value is located in ESi+ then this value can get the category of acceptable performance in the external sector. If any value is located into ESi- or ESi = 0 then this value can get the category of weak external sector performance TABLE 17: Possible combinations between ΔT and ΔFDI to Obtain ESi

ΔFDI/ΔT

+ΔT

-ΔT

ΔT = 0

+ΔFDI

ΔT + ΔFDI = ESi+

▲(-ΔT) + ▼ΔFDI = ESi▼(-ΔT) + ▲ΔFDI = ESi+

0 + (ΔFDI) = ESi+

-ΔFDI

ΔFDI = 0

▲ΔT + ▼(-ΔFDI) = ESi+ ▼ΔT + ▲(-ΔFDI) = ESi-

ΔT + 0 = ESi+

▲(-ΔT) + ▼(-ΔFDI) = ESi ▼(-ΔT) + ▲( -ΔFDI) = ESi-

0 + (-ΔFDI) = ESi-

-ΔT + 0 = ESi-

0 + 0 = ESi0

▲ = High ▼ = Low ΔFDI = Foreign Direct Investment Growth Rate ΔT = Trade Volume Growth Rate (-) = Negative and (+) = Positive ESi = External Sector Main Variable 0 = Zero

7.2.5. Step-5: External Sector Development Index (SXi Index) Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

The External Sector Development Index (SX i) is equal to the External Sector Main Variable (ESi ) divided by GDP Growth Rate (ΔGDP) (1.5.) SXi = ESi ΔGDP Analysis of the SXi Results Highly Vulnerability If ESi and ΔGDP are located in these parameters (+ESi/+ΔGDP) or (-ES i/ΔGDP) or (ESi = 0 / ΔGDP = 0), then the SXi can be classified into the category of highly vulnerability (see Table 18). The highly vulnerability has something in common is that the ESi and GDP are moving in the same direction. It can show the strong link between ESi and GDP. Normal Vulnerability If ES i and ΔGDP are located into these parameters (+ESi /-ΔGDP) or (+ESi / 0) then the SXi can be classified into the category of normal vulnerability (see

Table 18). The category of normal vulnerability can show how ES i grow more fast than the GDP, and this result will show how the external sector depend on the world trade trend, but it cannot be affected so much under the GDP growth. Less Vulnerability If ESi and GDP are located into these parameters ( -ESi / +ΔGDP) or (-ESi/0) or (0 /+ΔGDP) or (0/-ΔGDP) then the SXi can be classified into the category of less

vulnerability (see Table18). The category of less vulnerable can show how ESi Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

growth is slower than the GDP growth, this result will show clearly that the external sector is not a key factor to affect the GDP growth of any country. TABLE 18 SXi Cycles Level Table

ΔGD P

+ΔGDP

-ΔGDP

ΔGDP=0

Level-1.1

Level-1.2

Level-1.3

Highly Vulnerability

Normal Vulnerability

Normal Vulnerability

+ESi /+ΔGDP =+SXi

+ESi /-ΔGDP = -SXi

+ESi / 0 = SXi = ∞

Acceptable performance

Weak performance


Level-2.1

Level-2.2

Level-2.3

Less Vulnerability


Less Vulnerability

-ESi / +ΔGDP = -SXi

-ESi /-ΔGDP = +SXi

-ESi /0 = SXi = ∞

Weak performance


Weak performance

Level-3.1

Level-3.2

Level-3.3

Less Vulnerability

Less Vulnerability


0 /+ΔGDP = SXi = 0

0/-ΔGDP = SXi = 0

0/0 = SXi = 0

Weak performance

Weak performance

Weak performance

ESi

+ESi

-ESi

ESi= 0

Variables: ▲ = High ▼ = Low ΔGDP = Foreign Direct Investment Volume Growth Rate ESi = External Sector Main Variable (-) = Negative and (+) = Positive 0 = Zero

TABLE 19: Comparison of Terms of Trade, Openness and External Sector Development Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

Index (SXi)

Concept Terms of Trade -ToT-

Openness

Measure s X Price/MPrice X = Export Index Price M= Import Index Price

TV/GDP x 100% TV = X+M

-Oi-

External Sector Developme nt

ESi/Δ GDPx100% ESi = ΔT + ΔFDI

-SXi -

Functio n

Advantag Disadvantag e e

To study the relationship between exports price ratio and imports price ratio to find the deteriorating terms of trade among countries

Permits the visualization of the relationship between various international prices in the international market

Difficult to be applied to many countries and goods simultaneously

To measure the level of trade liberalization and the orientation of trade policy

Gives a general idea about how open an economy is in its international trade

It is focused to study how open is an economy from the specific trade point of view

To measure the level of trade liber alization and investment mobility simultaneousl y

Observes the trends of the external sector from international trade and finance sector from both perspectives of international trade and finance simultaneously

Difficult to monitoring the FDI mobility in the short term

Sour ce: Designed by the A uthor.

DIAGRAM 11: PROCEDURE TO MEASURE THE EXTERNAL SECTOR DEVELOPMENT INDEX (SXi )


Step-1 Trade Volume Growth Rate (ΔT)

Step-2 FDI Growth Rate (ΔFDI)

Step-3 GDP Growth Rate (Δ GDP)

Step-4 External Sector Main Variable (ESi)

Step-5 External Sector Development Index (SXi)

7.3.

Application of the External Sector Development Index (SXi)


The External Sector Development Index (SXi) will analyzed ASEAN-5’ s (Indonesia, Malaysia, Philippines, Singapore, Thailand) and China external sector performance and vulnerability between 1986 and 2001 respectively through application. The reason for applying the SXi is to observe the performance, vulnerability and SXi cycles. The objective to applied SXi Index is to observe how trade and investment growth together can affect on the GDP growth. The reason to incorporate FDI growth together with trade volume growth is to observe how both variables can be affected by possible deep international trade or financial crisis. Specifically, the SXi is applied to the ASEAN-5 members, as well as China to observe the effect of the 1997 financial crisis on these countries. The application of SXi to the above countries shows that the countries most affected by the 1997 financial crisis were with Philippines SXi-1998 = -23 (See Table 177), Singapore SXi-1997 = 20 (See Table 174), Thailand SX i-1997 = -6 (See Table 176), Malaysia SXi-1997 = -4 (See Table 175), Indonesia SXi-1997 = -3 (See Table 173) and China SXi-1997 = 0 (See Table 179). We can observe clearly that the financial crisis strongly affected to Philippines (1997), Singapore (1997-1998), Thailand (1997-1998), Indonesia (1997) and Malaysia (1997). In the case of China (1998), it was affected but not at the same level among ASEAN-5 members. The results can show how strong the dependency is on the external sector of ASEAN-5 members and China are


highly vulnerable to financial and world trade crisis. In the period of 1986-2001, we can show that the external sector of ASEAN-5 members and China present an acceptable external sector performance, but in two ASEAN-5 members can be observed irregularities into its external sector behavior between 1986 and 2001. They are Philippines (low participation of the external sector on the world trade) and Singapore (high exposure of the external sector on the world trade). In the case of China can show the best performance of its external sector compare in many ASEAN-5 members between 1986 and 2001. On other hand, in this part of our research is interested to show if ESi and GDP growth have correlation. The results shows that in China (r = 0.68), Malaysia (r = 0.67) and Indonesia (r = 0.77) these exist strong correlation between ESi and GDP, in the case of Singapore (r = 0.30), Thailand (r = 0.23) and Philippines (r = -0.23) have been showed a lower or negative correlation. It shows that China, Malaysia and Indonesia have high dependency its external sector performance on international trade and FDI growth together. In the case of Thailand and Singapore, they have been classified in the category of normal vulnerability, the normal vulnerability of Thailand is causal by the lower trade volume and FDI, but in the case of Singapore (low correlation) which also shows normal vulnerability, it is due to different proportions of growth between trade volume and FDI growth. The Philippines case can show a negative correlation between ESi and GDP growth, it can show low vulnerability of the external sector, where its trade volume growth and FDI growth are slow and small.


In the ASEAN-5 and China SXi cycles between 1986 and 2001 (16 years) among ASEAN-5 members and China, we can observe into the SXi cycles follow the next results: China shows the best performance, it is located in Level-1.1 (15 years) and Level-2.1 (1 year). Among ASEAN-5 members the SXi cycles shows that Malaysia has in the Level-1.1 (12 years) and Level-2.2 (3 years) and Level1.2 (1 year). In other hand Indonesia and Thailand shows close behavior into its SXi cycle, Indonesia has Level-1.1 (11 years), Level-2.2 (4 years), Level-1.2 (1 year) and Thailand is located into Level-1.1 (11 years), Level-2.2 (1 year), Level2.1 (1 year) and Level-1.2. (3 years). In the specific case of Singapore is located into Level-1.1 (9 years), Level-2.2 (1 year), Level-2.1 (5 years) and Level-1.2 (1 year). The reason why Singapore shows different results into its SXi cycles is originated by the high dependency on the international markets, especially with United States of America. In the case of Philippines are located into Level-1.1 (8 years), Level-1.2 (5 years), Level-2.1 (3 years), it is originated by the low participation of the external sector into the world economy, it is originated by the small amount of export products with high add value to the international markets.


CHAPTER 8 THE MULTI-DIMENSIONAL CARTESIAN SPACE (MD) 8.1.

Introduction In MD Cartesian space (see Ruiz, 2005.c), the Cartesian plane consists of

five axes ([x1, x2, x3, x4], y), representing four independent variables “ x1” ,” x2” ,“ x3”and “ x4”and one dependent variable “ y”respectively. Each “ x”variable (x1, x2, x3, x4) and “ y”variable has its individual axis that is a vertical line with both positive and negative values. The positive and negative values are represented by ([(x1,-x1), (x2,-x2), (x3,-x3) (x4,-x4)], (y,-y)] on the MD Cartesian plane (see Table 20). In the case of 2-D and 3-D Cartesian plane, the individual variables can be anywhere along the vertical and horizontal axes; but in the case of MD Cartesian space all variables (xi) and the “ Y”variable are either on the positive side of respective axes together on the negative side of their respective axes together. In other words, the values of all “ xi”(x1, x2, x3, x4) and “ y”increase or decrease in the same direction. Therefore, any change in some or all “ xi”will affect “ y” directly. (see Figure 22). Representing the dependent variable, the fifth axis, “ y”is positioned in the center of the Graph (among the other four axes). “ y”has a positive value and negative value. It is the convergent point of all the other four axes x1, x2, x3 and x4. In other words, all “ xi”axes converge at the “ y”axis. The result is a graph Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

represented by a pyramid that can be reshaped into two cubes or one cube.

8.2.

Comparison of 2-D Cartesian plane, 3-D Cartesian plane and MDCartesian Space 2-D and 3-D Cartesian plane have the limitation of not being able to show

the relationship of several variables at the same time. 2-D Cartesian plane shows the relationship between one independent variable “ x”and one dependent variable “ y” . 3-D Cartesian plane (x, y, z) shows the relationship between two independent variables (x, y) and one dependent variable is “ z” . MD-Cartesian space with its five axes ([(x1, x2, x3, x4), y)] however, shows the relationship between four independent variables ([(x1,-x1), (x2,-x2), (x3,-x3) (x4,-x4)] simultaneously and one dependent variable (y,-y). In the case of 2-D and 3-D Cartesian planes, only the positive axes can be used by economists to analyze changes in some economic phenomenal (resulting from inflation, economic growth, unemployment). In the case of MD Cartesian space, both positive and negative axes can be used to observe any economic changes (see Figure 22.) 8.3.

Application of the Multi-Dimensional Cartesian plane (MD-Cartesian Space) In this study, the application of MD Cartesian space is demonstrated by its

use in finding the national income “ y”accounts divide GDP into four broad categories of spending. In particular, the GDP is the sum of consumption, Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

investments, government purchases and net exports, represented by “ C” ,“ I” ,“ G” and “ (X-M)”respectively in the expressions below (Mankiw, 2000). In the Figure 23, these four broad categories of spending of GDP are independent variables represented by x1, x2, x3 and x4 respectively, while the national income is represented by “ y” . MD Cartesian Space is applied in any year of any Country. For demonstration purposes, the following data are used: consumption (C) = 3; investment (I) = 2; government purchases (G) = 2; exports (X) = 5 and imports (M) = 7. Steps involved in the application of MD Cartesian space are as follows.

First step - to define national income: Expression (1) (1.)

Y = GDP = C+I+G+(X-M).

Second step –to input all data into Expression (1) Y = GDP = [C = (x1)] + [I = (x2)] + [G = (x3)] + [(X-M) = (x4)] Y = GDP = 3 + 2 + 2 + (5-7) Y = GDP = x1 (3) + x2 (2) + x3 (2) - x4 (2) Y=5 Third step - to plot the resultant GDP in its four broad categories of spending of C, I, G and NT (X-M) The MD Cartesian Space shows the national income from new visual perspective. Concurrently it shows the relationships between all the GDP spending variables (C, I, G, NT) and the national income (Y). This feature in MD Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

Cartesian space represents multiple perspectives or more precisely, the global dimension of the national income (Y). In other words, the MD Cartesian space shows the global dimension of the national income by observing the movement of one or all variables (x1, x2, x3, x4) along with their respective axes simultaneously on the same plane as a whole. It also shows how changes in one or all “ xi”affect “ y”in space and time (see Figure 23). TABLE 20: Difference between 2-D, 3-D and MD Cartesian Space

DIMENSION

AXIS

VARIABLES

2-DIMENSIONAL

Cartesian plane

VALUES (x,y) & (-x,-y)

2 Axes (x,y)

1 Dependent (Y) 1 Independent (X)

3 Axes (x,y,z)

1 Dependent (Z) 2 Independent

2-D 3-DIMENSIONAL

Cartesian plane

(X,Y)

3-D MULTI-DIMENSIONA L

Cartesian Space

(x,y,z) & (-x,-y,-z)

5 Axes ([x1,x2,x3,x4],y)

MD

1 Dependent (Y) 4 Independent (X1,X2,X3,X4)

([ x1,x2,x3,x4] , y) & ([ -x1,-x2,-x3,-x4], -y)

Sour ce: Designed by the A uthor


Figur e 22 The 2-D, 3-D and Multi-Dimensional Car tesian Space (MD Cartesian Space) (a.) 2-D Cartesian plane

(b.) 3-D Cartesian plane

y Z

-z -y -x

x

y x

z

-y

(c.) MD Cartesian Space

-x


P o

Negative

Source: Plane designed and developed by the Author

Figure 23 The Multi-Dimensional Cartesian Space (MD Cartesian Space)


Source: Plane designed and developed by the Author

Chapter 9 Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

Conclusi ons It is discernible from the different phases of this thesis that as far as regional integration and trade liberalization monitoring models are concerned, there have been a limited number of alternative monitoring methods and theoretical approaches based on a multi-dimensional analysis framework. Such a constraint compels regional integration and trade liberalization monitoring models to use methodologies and approaches founded on traditional monitoring models (singledimensional analysis). These methodologies and approaches focus mainly on the economic aspect and measure the cost/benefit effect of economic phenomena; they do not project any multi-dimensional analysis view in regional integration and trade liberalization issues. Thus, their adaptation on the new world trade order is not fruitful. The above, being the general conclusion of the thesis, is also the preliminary conclusion in the individual research that led to the creation of each new regional integration and trade liberalization monitoring models in this thesis. With that as the basis, the thesis derives further conclusions from its research on regional integration, trade liberalization and economics methods. The conclusions are as follows: REGIONAL INTEGRATION Regional Integration can be given a new definition (see Chapter 3). It can be defined as a process that combines different domestic development systems (DDS) (countries) into a single regional development system (trade bloc). Strong Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

regionalism, whether old regionalism or new regionalism, it depends on the favorable conditions derived from Regional Development (RD), where RD is the combined result of all or most individual domestic development systems in the same trade bloc. Meanwhile, growth of RD in a trade bloc can be generated through strong domestic development systems (DDS) in the same region. If the domestic development systems (DDS) in some or most member countries in the trade bloc are weak, then the trade bloc cannot be successful. This thesis maintains that there is a strong inter-dependency between Regional Global Development (RGD) and domestic development systems (DDS). This can be observed from the application of the RIE-Model (Chapter 3) to different trade blocs (i.e. European Union –EU-, North America Free Trade Area –NAFTA-, Association of Southeast Asian Nations –ASEAN-, Central American Common Market –CACM-, Andean Community –AC- and MERCOSUR). Through the RC-Scheme (Chapter 4), this thesis recognizes the importance of Viner’ s contribution in the field of regional integration. Based on the theory of Customs Union (CU) and through the application of the partial equilibrium system, Viners presented a general explanation on the impact of the formation of CU. He used the concepts of trade-creating effect and trade-diverting effect to analyze the regional integration process and its impact on world trade. The RC-Scheme is a showcase of how the regional integration process could be analyzed using the concepts of trade-creating effect and trade-diverting effect. It is concluded here that for regional integration between middle and low income countries, the trade-creating effects at the intra-regional level and inter-regional Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

level (that are achieved in the short run and the medium-run respectively) could be causal by the cooperative creating effect through the implementation of the RC-Scheme. Specifically the Custom Union Scheme (trade-creating effect) is achievable through open cooperation in the social assistance modules of the RCScheme -- coupled with Custom Union –CU’ s. This thesis asserts that neither the Customs Union (CU) nor the Free Trade Agreements (FTAs) can be successful without the concurrent implementation of socio-economic cooperation programs.

TRADE LIBERALIZATION This thesis has presented the Trade Liberalization Evaluation (TLE) Methodology (Chapter 5). The focus of this methodology is a trade liberalization diagnostic. As such, it enables policy makers and researchers of trade issues to observe and analyze any country’ s trade liberalization trends and stages from a new perspective. The new series of indexes and graphs that are introduced in the TLEMethodology are useful for the study of trade liberalization. This Methodology can certainly be taken as a means to study the level of trade liberalization that a country or region has applied in its trade evolution. This thesis concludes through the Openness Growth Monitoring Model (OGMModel) (Chapter 6) that growth in Openness does not necessarily generate income growth. As show in the research in this thesis, between 1995 and 2001 only high income countries saw a strong link between openness growth and income growth (See Chapter 6). In the same model, the application of the OMGModel in this thesis shows that between the free trade areas (FTA’ s) scheme and Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

the Custom Union (CU) scheme is a better regionalism scheme for integrating middle and low income countries. These results can help policy makers and researchers of trade issues to visualize the trends of trade liberalization and trade policy in any country or trade block (see Chapter 6). With the application of the external sector development index (SXi) (Chapter 7) to the study of trade liberalization and openness, it is possible to observe that trade volume and FDI volume growth need to be joint into a single variable to study the external sector of any country or region. The single variable will be called external sector main variable (ESi). The external sector development index (SXi) can thus be used as an alternative index to study the trade liberalization cycles. In fact, SXi can be considered as a complementary analytical tool together with terms of trade (ToT) and openness index (O i) (see Chapter 7). ECONOMICS METHODS The Multi-Dimension Cartesian Space (MD-Cartesian Space) (Chapter 8) is a different analytical tool compared to the conventional 2-D and 3-D Cartesian planes. The MD shows the global context of any economic phenomena; Hence it allows for Macro-Microeconomics focus of analysis in economics. It is an efficient analytical tool to explain complex economic phenomena from a global perspective. It is obvious that the new Cartesian Space in this thesis is a better tool to visualize the correlation between the independent variables (X1, X2, X3 and x4) and dependent variable (Y). As such, the MD Cartesian Space provides Unofficial Copy. Copyright under Mario Arturo Ruiz Estrada and University of Malaya/Faculty of Economics, Malaysia © 2006

a good alternative basis to design new types of graphs in economics.

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