Regional Integration: European Lessons for Asia?

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Regional integration as a means to upgrade competitiveness. A look at the Baltic Sea Region and what its integration experience can tell Asia. The answer?

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Regional Integration: European Lessons for Asia?

  1. 1. New Approaches to Regional Integration: Lessons for Asia from Europe’s Baltic Sea Region? Dr Christian H. M. Ketels Institute for Strategy and Competitiveness Harvard Business School ADB Workshop on Regional Integration 3-5 March 2014 Manila, Philippines
  2. 2. • Proximity still a key factor in driving trade and investment relations • However, strong ties with neighbors are not automatic; policy matters • Asian countries traditionally more focused on global markets than on regional integration 2 2014 © Christian Ketels
  3. 3. • The two different faces of regional integration • A European Experience: Collaboration across the Baltic Sea Region • Implications for Asia 3 2014 © Christian Ketels
  4. 4. Different Modes of Regional Integration Competitiveness Tipping Point Trade Liberalization • Focus on the removal of tariff barriers • Logic of tit-for-tat agreements; liberalization as concession • Potential for ‘easy’ tariff reductions exploited • Balance between economic gain and political pain increasingly unfavorable • Focus on activities where regional collaboration can enhance national competitiveness • Logic of win-win participation Retardation • Lack of progress in ‘sensitive’ areas • Rising complexity of tariff rules • Regional approach as second best to global liberalization • “Dual economy” for exports vs domestic market 4 2014 © Christian Ketels
  5. 5. Different Modes of Regional Integration: Taking A Closer Look Trade Liberalization Competitiveness • Focused on barriers to trade (and investment) at the border • Broad set of trade-related and other joint measures to upgrade competitiveness • Aims to achieve better exploitation of gains-from-trade; largely one-off • Aims to achieve business environment improvements; potentially on-going benefits to innovative capacity • Clear winners (consumers, exporters) and losers (import competing sectors) • All can be winners, but only if they leverage the opportunities through internal changes Different economic mechanisms, policy tools, and political economy 5 2014 © Christian Ketels
  6. 6. Upgrading Competitiveness via Regional Collaboration Types of Collaboration Joint action • No independence • Includes common standards and policies as well as joint positioning of the region abroad, including towards investors and in international/supranational bodies Coordinated National Policy Reforms • Limited independence • Includes negotiated policy packages that tie participation in joint regional programs and access to funds to domestic policy reform Cross-Border Activities • Medium level of independence • Includes joint efforts to upgrade border procedures, improve infrastructure, and develop cluster linkages Learning and benchmarking • Leaves national autonomy fully intact • Includes networks covering all areas of policy in an “open model of cooperation” 6 2014 © Christian Ketels
  7. 7. • The two different faces of regional integration • A European Experience: Collaboration across the Baltic Sea Region • Implications for Asia 7 2014 © Christian Ketels
  8. 8. Profile of the Baltic Sea Region • Countries bordering the Baltic Sea, i.e. the Nordics, Baltics, and relevant coastal regions of Germany, Poland, and Russia • • • • Modest overall size (roughly 55% of German GDP, 10% of EU GDP) Small Open Economies Huge heterogeneity in terms of economic development Some overlap in sectorial specialization patterns • Close historical connections, but disrupted during the Cold War • All core countries EU members; Russia connected through joint institutions • Most core countries entirely within the geographic boundaries of the region 8 2014 © Christian Ketels
  9. 9. Context for Regional Integration • EU Membership sets the key context for regional integration – Four freedoms across the region (free movement of goods, services, capital, and people) – acquis communautaire (overall set of EU legislation, legal acts, and judicial decisions) that set standards for the regulatory context – Limits to state aid and any government action discriminating between firms based on their nationality • Strong political support for regional collaboration, especially in the core countries – Baltic countries view tight economic integration with European partners as guarantee against Russian pressure – Scandinavian countries see the Baltic Sea Region as their home turf in which they can play a dominant role; their small size often makes them marginal players in the broader context of the EU’s political system – There are a number of specific regional issues, especially the environmental state of the Baltic Sea and sea transport 9 2014 © Christian Ketels
  10. 10. Baltic Sea Region: Signs of Economic Integration Share of flow to other parts of the BSR 30% 25% 20% East-East East-West West-East West-West 15% 10% 5% 0% Export Source: WTO, UNCTAD, national agencies, author’s calculations Migration 10 FDI 2014 © Christian Ketels
  11. 11. Institutional Architecture • CBSS • BDF • NIB • Nordic Council • Baltic Council of Ministers/ Baltic Assembly • Bilateral programs • EU InterReg 11 2014 © Christian Ketels
  12. 12. EU Strategy for the Baltic Sea Region Key characteristics • Initiative by Nordic countries and group of EU parliamentarians • Approved in 2009 by the European Council • Core objective to better prioritize and coordinate collaborative actions across the region • Action agenda based on priorities set by the region • No new institutions; High-Level coordination group • No new budget lines; national and InterReg funds Action Priorities 12 2014 © Christian Ketels
  13. 13. Cluster-Based Programs with a Regional Scope Baltic Sea Region ScanBalt • Bottom-up coalition of local clusters, companies, research institutions, and others active in Life Sciences • Attempt to overcome lack of critical mass in individual clusters trough closer linkages between them • Focus on pre-market activities like joint academic training programs, research collaborations, marketing, etc. • www.scanbalt.org BSR STARS • Top-down effort as part of EU BSR strategy to create networks of regional clusters in five areas of regional economic strength • Attempt to create stronger regional value chains and enhance innovation in markets with perceived global potential • Focus on developing linkages and collaborate on selected pilot initiatives • www.bsrstars.se 13 2014 © Christian Ketels
  14. 14. Creating Corridors in the Baltic Sea Region • A number of cross-border projects to enhance collaboration along physical corridors – – – – Oresundbridge Rail Baltica Femern Sund Tunnel Motorways • Effective to enhance common planning across public administrations • Challenges are financing and company engagement 14 2014 © Christian Ketels
  15. 15. Baltic Sea Region Integration: A Preliminary Assessment • Solid economic performance – Economic performance is solid – Catch-up of the Baltics is happening – Crisis in the Baltics was severe, but regional linkages were critical buffers both during the crisis and the post-crisis recovery – Cross-regional linkages are well-developed, and in parts slowly rising 15 2014 © Christian Ketels
  16. 16. Prosperity Decomposition Selected Cross-national Regions in 2012 GDP per Capita (PPP) EmploymentFactor ProductivityFactor (PPP) Oceania NAFTA British Isles Core Euro-zone Asian tigers EU-15 EU-27 Baltic Sea Region PIGS Iberian Peninsula Danube Region EU-8 Asian tigers Oceania EU-8 Baltic Sea Region NAFTA British Isles Danube Region EU-27 EU-15 PIGS Core Euro-zone Iberian Peninsula Core Euro-zone Oceania EU-15 British Isles NAFTA EU-27 Iberian Peninsula PIGS Baltic Sea Region Asian tigers Danube Region EU-8 = x Note: Working hours for Russia are estimated Source: Groningen Growth and Development Centre and The Conference Board (2013), authors’ calculations State of the Region-Report 2013
  17. 17. Prosperity Dispersion Within Cross-National Regions 1995 - 2012 Ratio of GDP (PPP adjusted) per Capita, Richest to Poorest Country per Region 6 5 EU-27* 4 Baltic Sea Region 3 2 EU-15* 1 Note: Norway and Russia levels adjusted for natural resource sector; Luxembourg excluded Source: Conference Board (2013) State of the Region-Report 2013
  18. 18. Baltic Sea Region Integration: A Preliminary Assessment • Solid economic performance – Economic performance is solid – Catch-up of the Baltics is happening – Crisis in the Baltics was severe, but regional linkages were critical buffers both during the crisis and the post-crisis recovery – Cross-regional linkages are well-developed, and in parts slowly rising • EU context has been critical – Provided the necessary stability and drove key changes at the national level across the entire region • Impact of regional efforts more limited – Political role important, and critical during the crisis – EU Baltic Sea Region strategy has led to better alignment of cross-regional projects and initiatives – But actual on-the-ground activities are time-consuming and their impact has often been relatively limited – Lack of organization, budget, and clear linkage to national policies has been an issue 18 2014 © Christian Ketels
  19. 19. • The two different faces of regional integration • A European Experience: Collaboration across the Baltic Sea Region • Implications for Asia 19 2014 © Christian Ketels
  20. 20. Integration in Europe’s Baltic Sea Region: Emerging Lessons for Asia • Be conscious about the political context • The political motivation has been critical for launching and sustaining the regional integration efforts in the Baltic Sea Region • If the motivation is primarily economic, the ability to make long-term investments in institutional architecture and capacity is severely limited • In this case, more narrow efforts in specific cross-border projects or specific clusters with clear win-win outcomes already in the short- to medium-term are more likely to succeed 20 2014 © Christian Ketels
  21. 21. Integration in Europe’s Baltic Sea Region: Emerging Lessons for Asia • Be conscious about the political context • Set the right level of geography for regional efforts Neighborhoods Nations Sub-national Regions Macroeconomic coordination Tariffs Economy-wide regulations • • • Global / Large Geographies • • • Infrastructure Administrative practices and clusterspecific regulations Cluster linkages • • • • Strengthen the context for competitiveness Business environment upgrading Cluster development Company sophistication 21 2014 © Christian Ketels
  22. 22. Integration in Europe’s Baltic Sea Region: Emerging Lessons for Asia • Be conscious about the political context • Set the right level of geography for regional efforts • Be conscious about the broader economic policy context within countries – Directly competing national industrial policy efforts in specific industries make collaboration in these areas very hard • Integrate regional efforts into broader economic strategies pursued at the national level – Benefits of creating stronger regional ties depends largely on overall improvements in competitiveness within countries – Regional efforts can easily become ‘islands’ in the public sector system, and then lack the resources and power to have impact 22 2014 © Christian Ketels
  23. 23. Integration in Europe’s Baltic Sea Region: Emerging Lessons for Asia • Be conscious about the political context • Set the right level of geography for regional efforts • Be conscious about the broader economic policy context within countries – Directly competing national industrial policy efforts in specific industries make collaboration in these areas very hard • Integrate regional efforts into the broader competitiveness strategies at national level – Benefits depend largely on overall improvements in competitiveness – Regional efforts can easily become ‘islands’ in the public sector systems, and then lack the resources and power to have impact • Look for pilot areas – networks of clusters are a strong candidate – Easier to increase value added shares in export-oriented GVCs than upgrade import-competing activities directly 23 2014 © Christian Ketels
  24. 24. Elements of a Regional Cluster Action Plan • Identify existing clusters with regional presence and willingness to upgrade and collaborate • Create cluster-oriented institutional architecture, involving the private sector, especially foreign investors • Strengthen economic linkages between regional clusters • Connect cross-border and national policy programs, including infrastructure investments and the creation of ‘corridors’, to clusters • Identify issues and solutions for general business environment upgrading • ADB can provide intelligence, a neutral platform for mobilization/ collaboration, and seed capital • Other partners (e.g., ASEAN, chambers, foreign investor councils, etc.) should be mobilized as well 24 2014 © Christian Ketels
  25. 25. Integration in Europe’s Baltic Sea Region: Emerging Lessons for Asia • Clear potential • But not an easy or quick fix • A way to make competitiveness upgrading more likely and more beneficial 25 2014 © Christian Ketels
  26. 26. Back-Up 26 2014 © Christian Ketels
  27. 27. State Of the Region Report: 2004 – 2013 www.bdforum.org • Convergence • Competitiveness • Collaboration
  28. 28. The Role of Within-Region Trade Share of Intra-BSR Exports in total BSR Exports Share of 2010 Exports to Other BSR Countries 14% 20% 12% 10% 10% 0% 2010 30% 2009 16% 2007 2008 40% 2006 18% 2004 2005 50% 2003 20% 2001 2002 60% 2000 22% Source: UNCTAD (2012) State of the Region-Report 2012 28 2014 © Christian Ketels
  29. 29. Integration Foreign Direct Investment Flows Share of inward FDI from other BSR countries, 1999 - 2004 80% 70% Source country 60% 50% 40% 30% BSR average 20% Sweden Finland Denmark Estonia N Germany Norway Latvia Iceland Lithuania NW Russia N Poland 10% y er m an G us si a R Ic el an d N N W Po la nd N en Sw ed ar k en m D or wa y N ia Es to n Fi nl an d Li th ua ni a 0% Source: UNCTAD, national statistical offices, author’s calculations 29 2014 © Christian Ketels

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