Regional Integration Agreements: A Force for Convergence or Divergence?

29 Pages Posted: 20 Apr 2016

See all articles by Anthony J. Venables

Anthony J. Venables

University of Oxford; Centre for Economic Policy Research (CEPR)

Date Written: December 1999

Abstract

Developing countries may be better served by north-south than by south-south free trade agreements. Free trade agreements between low-income countries tend to lead to divergence in member country incomes, while agreements between high-income countries tend to lead to convergence. Venables examines how benefits - and costs - of a free trade area are divided among member countries.

Outcomes depend on the member countries' comparative advantage, relative to one another and to the rest of the world.

Venables finds that free trade agreements between low-income countries tend to lead to divergence in member country incomes, while agreements between high-income countries tend to lead to convergence.

Changes induced by comparative advantage may be amplified by the effects of agglomeration.

The results suggest that developing countries may be better served by north-south than by south-south free trade agreements, because north-south agreements increase their prospects for convergence with high-income members of the free trade area.

In north-south free trade agreements, additional forces are likely to operate. The agreement may be used, for example, as a commitment mechanism to lock in economic reforms (as happened in Mexico with the North American Free Trade Agreement and in Eastern European countries with the European Union). A free trade agreement may also - through its effect on trade and through foreign direct investment - promote technology transfer to lower-income members.

This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to study the effects of regional integration. The author may be contacted at avenables@worldbank.org.

Suggested Citation

Venables, Anthony J., Regional Integration Agreements: A Force for Convergence or Divergence? (December 1999). World Bank Policy Research Working Paper No. 2260. Available at SSRN: https://ssrn.com/abstract=629197

Anthony J. Venables (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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