Poverty Reduction Strategies

Europe and Asia provide two different models of integration and growth. The former relied on political willpower to create a unified common market; the latter based its integration on a buildup of regional trade, investments, and production networks—eschewing a formal link-up in political or monetary terms. Interestingly, although economic integration has occurred along different lines, both regions have attained high internal trade intensity. Against this background, is it possible to say that one model of regional integration is more effective than the other? Is de jure integration better than de facto cooperation?

The case of East Asia would suggest not. In comparison with its neighbors to the west, Asia can be said to have a quasi-common economy (QCE). As such, the region has a high level of physical integration, minimal barriers to intraregional trade, interlinked and interdependent production structure, and no formal or centralized body for coordination of the entire region’s economic policies. The rise of the Asian QCE was neither abrupt, nor was it micro-planned. Rather, factors such as advantageous geography, high infrastructure investment, technological diffusion, an export-led growth model, and economic openness led to the development of the region’s QCE.

This begs the question: Is there a way other regions can reap the benefits of integration, in the absence of supranational governance? In the newest edition of the Economic Premise series, Manu Sharma and I argue that such integration is indeed possible, and perhaps preferable, for other regions of the world, most notably Latin America. But does the shoe fit?

The global economic crisis uncovered many of the vulnerabilities of an increasingly integrated world. So much so, that even though we are now well on the path to recovery, many questions persist regarding the future risks of economic integration and openness.

There are reasons for a broad reassessment of economic integration. A crisis that started in the industrial world suddenly spread to developing countries that had nothing to do with the casino-like financial practices taking place in the world’s financial centers. Spreading rapidly through financial and trade channels, the crisis brought about a sudden collapse of capital flows and a freeze in trade credit lines. The blow was so severe that the world experienced the largest drop in global trade volumes since World War II, with world trade of goods falling by 23 percent in 2009.

Now trade is growing again. In 2010, trade volumes increased robustly by 20 percent. But this doesn’t mean we can just put all the drama behind us and move on as if nothing happened. On the contrary, it is now time for countries to learn lessons from the crisis, and make sure they are in better shape to counteract external shocks in the future.

Globalization and economic integration do create vulnerabilities. But not all open economies are equally exposed. As a new World Bank study shows, openness is not the whole problem; rather, troubles ensue when exports are concentrated in very few products and markets. As Managing Openness: Trade and Outward-Oriented Growth after the Crisis indicates, export diversification reduces the vulnerability of countries to global shocks by moderating the impacts of market volatility.

It’s no secret that current account imbalances exist around the world. In many cases, these imbalances may be benign and merely reflect market-driven differences in savings and investment or differences in stages of development. In other cases, persistent global imbalances may be unsustainable and may threaten growth in the long-run. Thus, it’s no surprise that addressing imbalances has been a key focus in recent G-20 discussions. Nor is it surprising that the World Bank and IMF are working with key partners such as the OECD, ILO, WTO, and UNCTAD to provide technical inputs to help coordinate economic policy among the G-20 members.

Despite a brief decline during the global financial crisis, current projections show that imbalances could widen again as the world economy recovers. In the most recent Economic Premise, the World Bank’s research series on good practices and key policy findings, author Zia Qureshi explores the relationship between global imbalances and growth. In his note, “Rebalancing, Growth, and Development in a Multipolar Economy,” Qureshi argues, “In a progressively multipolar world economy, the goals of global growth, rebalancing, and development are increasingly interlinked.” He continues, “Looking ahead, developing countries will likely continue to lead growth in the global economy.”

Indeed, the increasing role of developing countries in fueling global growth is precisely what Marcelo Giugale and I highlight in our recent book, The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World.

Over the past three decades, global trade grew almost twice as fast as global gross domestic product (GDP). The massive process of commercial integration was made possible by technological revolutions in transport (like containerized shipping) and communications technologies, and by a dramatic decline in import tariffs. This allowed many developing countries to implement export-led growth strategies that lifted hundreds of millions of people out of poverty. Some succeeded in sought-after manufacture markets and, more recently, even in services.

But the 2008–09 crisis showed the volatile side of integration. In two years, the volume of world trade fell by a third. International production networks carried along country-to-country contagion at staggering speed. Naturally, calls for government intervention have multiplied. The question is: what kind of intervention will that be? The probability of going back to pre-globalization, import-substituting industrial policy is not high, but is not negligible either—concern for unemployment may still trigger protectionism, especially amongst rich nations.