Martin Raiser on Regional Cooperation

1.      World Bank pays great attention to regional integration in the world. According to the WB report of 2002 regional integration has considerably progressed for two past decades. Meanwhile, it seems that the situation has been changing during the last two years. A number of agreements anticipating the creation of free trade zones starting from January 1, 2005 has never been fulfilled. Particularly, Pan American free trade zone has not been created either. In this regard, how does World Bank assess the prospects of regional integration in the world current? 

It is hard to generalise across all of the different trading blocs that exist in the world today. However, undoubtedly the last two decades have seen a proliferation of regional trading arrangements, including free trade agreements, regional customs unions etc. The evidence suggests that south-south regional trading blocs often have disappointing results because they can cause more trade diversion than trade expansion. (Suggested FN Trade diversion occurs when as a result of regional trade preferences, members of a regional trade bloc substitute intra-regional trade for trade with countries outside the region - this creates a welfare loss, because it means that countries no longer buy from the cheapest supplier. Moreover, unlike with a uniform external tariff, under trade diversion consumers pay more but the entire producer surplus is captured by the intra-regional supplier as no tariffs are charged on intra-bloc trade.) However, the experience since the late 1980s has been a lot more positive than earlier in the 1960s and 1970s, because the formation of regional blocs has gone hand in hand with an overall reduction in trade barriers between the bloc members and the rest of the world. In cases such as Mercosur, the formation of a free trade area was accompanied by aggressive external trade liberalisation and as a result Mercosur, as shown by the 2002 study you quote above (Winters and Schiff eds.), was trade creating rather than diverting during this second period.

With the worldwide reduction in protection levels for manufactured goods, negotiations over free trade agreements have become more complicated, because they often involve sensitive issues such as agriculture and services, as well as so-called behind the border measures to facilitate foreign investment. This may explain the delay mentioned in your question, although of course the multilateral trade liberalisation agenda faces the very same issues and as a result has also been moving forward slowly.

2.      Territorial and cultural commonality of peoples is conducive to regional integration in Central Asia, but similar, to certain extent, type of economy provoking competition hinders the process. In this regard, what is the best way, to your opinion, to set up priorities of foreign economic policy – focused either on globalization or on combining efforts for full-fledged development of the regional market? In other words, what to prefer – policy for globalization or regionalization? Or variants allowing combinations of these policies? 

Most economists favor a multilateral trade liberalisation strategy. As mentioned above, with regional trade preferences trade diversion is a real risk with significant welfare costs involved. But my own view is that if the counterfactual is no trade liberalisation, and countries find it politically easier to begin liberalisation in a regional context, then perhaps a sequenced strategy of opening up to regional neighbors as a first step towards a more general opening up makes sense. In Central Asia, Uzbekistan has the most restrictive trade regime (except Turkmenistan which in many ways is less integrated into regional trade anyway). If Uzbekistan were prepared to lower the barriers against regional trade, e.g. by eliminating differential excise taxes on imports (which hurt CIS imports despite of the existing free trade agreements with several CIS countries), by improving customs administration and reducing corruption, by reducing some of the administrative barriers against shuttle traders (as for instance embodied in resolution 407), that would be a significant step forward. Doing it on a regional basis only would of course require some system to verify the origin of goods imported into Uzbekistan and this may not be easy and quite costly to implement. Uzbekistan's level of protection against third parties would also need to come down, as otherwise the current incentives for smugglers would continue to exist. Thus, if Uzbekistan wanted to go in this direction it would need to greatly step up its overall trade liberalisation efforts in any case, because Russia and Kazakhstan are moving towards WTO membership and Uzbekistan is presently quite some way behind. Nonetheless, such a stepwise regional approach might attract investments from Russia and Kazakhstan, recapture some lost markets such as fresh and processed foods, open new export markets, and ultimately be a prelude to greater integration across the entire Eurasian continent.

The alternative of a multilateral liberalisation approach such as chosen by Kyrgyz Republic has the advantage of not binding Uzbekistan to the tariff level of its neighbours in pursuing negotiations for WTO entry. Note however that from the current position Uzbekistan has a higher level of protection on a large number of goods, mainly consumer goods, than either Russia or Kazakhstan, and the WTO is likely to ask at least as much from Uzbekistan as it is from its regional neighbors. Of course, Uzbekistan would be free to offer even lower tariffs in several areas, and this would benefit Uzbek consumers.

At the heart of the matter is the question whether Uzbekistan is ready to open its domestic market to real competition. So far this has not happened. I believe if it did, it would be hugely beneficial, but I also recognize that this is not an easy decision to take as experience around the world suggests. In my view, Uzbekistan is wrong to fear competition. With a large population, cheap and educated labor, significant natural resources and a strategic geographic position, Uzbekistan would be a natural centre of gravity for investments and for production in Central Asia. Building up a consumer goods industry behind protective barriers when you know that these barriers will need to come down eventually does not make a lot of sense. With comfortable reserve levels, with convertibility having brought real benefits in terms of export performance and some evidence for growing foreign investment, now is the right time to ask the question about trade liberalisation. The World Bank would be delighted to provide advice and assistance if the Uzbek Government decided to move decidedly to open its markets and liberalise its foreign trade regime - whether in a regional or multilateral context.