Regional Groupings Among Microstates

Abstract

This model shows that a microstate's decision to form, expand, or join a regional organization is based on reduced negotiating costs and increased bargaining power, rather than on the traditional costs and benefits of trade integration. Forming a regional grouping with neighboring nations may be one way for microstates to overcome a major problem: Because of their weak bargaining power and high fixed costs of negotiation, microstates are at a severe disadvantage in dealing with the rest of the world. They don't have the human and physical resources to unilaterally conduct the various bilateral and multilateral negotiations a developing nation typically conducts. Andriamananjara and Schiff present a model in which the decision to form, expand, or join a regional club is based on reduced negotiating costs and increased bargaining power, rather than on the traditional costs and benefits of trade integration (which might be miniscule for a microstate and might even generate welfare losses). Under various conditions for entry, the model is used to determine the equilibrium group size, which is shown to be positively correlated with the number of issues to be tackled, the degree of similarity among countries, and the per-issue costs of international negotiation. They use the case of the Caribbean Community (CARICOM) to show the model's relevance in the real world. The countries that belong to CARICOM pooled their negotiating resources and formulated common policy stances. Despite its relatively limited impact on trade and investments, CARICOM served as a political instrument in joint negotiations on trade and investment with larger countries and regional trade blocs. By establishing a union, the CARICOM countries succeeded in making their voices heard on a variety of issues in a way none of them could have done alone. This paper - a product of the Development Research Group - is part of a larger effort in the group to examine the economics of regionalism and development. Maurice Schiff may be contacted at [e-mail].

JEL Classification: D7, F0, H8, O1