1. 4/2/2015 INTR 6113
REGIONAL
INTEGRATION &
DEVELOPMENT
1. Regional integration is a
necessary imperative for
development. Critique this statement
utilizing relevant theories and
examples from the developing world
(50 marks).
410001462
SHRIDATH RAMPHAL CENTRE
UNIVERSITY OF THE WEST INDIES

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PAPER
Regional integration is a necessary imperative for development. The face value of this statement
automatically seems true for instance two heads must be better than one is a logical assumption
to make. However upon further scrutiny this may not be the case. Regional integration is a
necessary imperative for development under the conditions of North-South integration and far
less so with South-South integration. Furthermore studies suggest that economic growth is more
positive with non-discriminatory trade liberalisation that can be achieved at the multilateral level.
In other words if a country simply made itself open without any regional trade agreements
(RTAs), growth will occur faster than a country with an RTA. Also another angle to consider is
can a country grow endogenously, meaning can the import substitution model as a trade policy
spur development? Another issue to consider with the opening statement is what exactly is
development? Is it development in an economic sense alone or are there social and political
aspects to development as well.
According to Sen (1999, p.3), development can be defined, “as a process of expanding the real
freedoms that people enjoy.” This is to say that there are variables whether social, economic,
political and so forth which have an effect on the levels of development that people and a society
by extension benefit. Sen also posits the construct of unfreedoms, and this can be compared to
any variable whether social, economic, political and the like that hinders development such as
crime, poverty, corruption and other negative variables.
With the definition of development being established and the issues surrounding the opening
statement being articulated, the task of scrutinizing whether or not regional integration is a
necessary imperative for development can proceed. The first issue that may provide some

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clarification lies in the theory of customs unions. According to Viner (as cited in Gandolfo,
1998), customs unions have trade creating and trade diverting effects. Trade creation simply
occurs when economic integration leads to a shift in production origin from a domestic producer
whose resource costs are higher to a member producer whose resource costs are lower. However
trade diversion occurs when lower-cost imports from non-members are replaced by higher cost
imports from members. These effects occur due to the removal of tariffs within the union and the
implementation of a common external tariff for members outside the union. The salient point
being made is that with regional integration there are gains and losses and within the grouping
some gain whilst others lose especially in the case of South-South integration. This is buttressed
by Axline’s work on regionalism in the Third World. According to Axline (1977 p.83), “The
literature on economic integration and development has pointed out that underdeveloped
countries do not satisfy the criteria of neo-classical customs union theory and that they will not
reap the traditional welfare gains from integration.” Axline (1977) dubs this phenomenon as the
development of “poles of growth” and “poles of stagnation.” In a regional group with very
economically dispersed countries, development tends to take place in the most developed
countries in the region whilst unfortunately the lesser developed countries tend to stagnate and
do not realize the immediate benefits of integration. However Axline (1977) notes that whilst
there may be no traditional welfare gains from integration, there are gains of development and
more independence from external countries to the members who form the union. Axline (1977)
articulates that trade diversion usually occurs in integration schemes of under-developed
countries. However he equates the effects of trade diversion to import substitution on a regional
scale; which he notes as an imperative strategy for development which possibly may have been
confined to the national level of the members within the grouping. This effect allows for

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expansion of production as firms are now producing for the regional market as well as saving
precious foreign exchange on the importation on non-input goods and channelling those funds to
crucial input imports. Axline (1977) further notes that a region as opposed to an individual
country increase their chances of being recipients of foreign aid. This foreign aid can now be
dispersed throughout the region and engender development once implemented properly. Also
investment via private foreign capital should increase as now there is a larger market which
means a higher profit margin. This is especially the case with small developing countries
grouping together.
Krause and Mathis (1970) in their study of Latin America and its economic integration discusses
ideas espoused by the Economic Commission for Latin America (ECLA) just after World War
II. The ideas of ECLA at the time shared some similarities with Axline. The belief was that for
development of Latin America, there must be a significant amount of production which will in
turn spur higher income and increased employment. To do this regional integration was seen as
the most significant lever to advance the region’s development objectives.
Hall and Chuck-A-Sang (2007) on their work concerning the Caribbean Single Market and
Economy (CSME) details the benefits to the Caribbean region with the implementation of a
customs union. There are benefits relating to trade in goods such as the removal of tariffs and
reduction on non-tariff barriers. Countries with a deficit in intra-regional trade would benefit
from such measures as they would now be able to tap into markets within the region. Also the
adoption of common standards will have to occur, this will be beneficial to the region as it would
help avoid the fragmentation of a small market vis a vis if varying standards were applied. The
adoption of standards also allows for producers in the different territories to be internationally
competitive. CARICOM has set up the Caribbean Regional Organization for Standards and

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Quality (CROSQ) and they are tasked with the role for providing assistance to help regional
producers and exporters to meet international standards therefore by preparing producers to be
export ready for international markets further development will occur through greater market
presence.
Hall and Chuck-A-Sang (2007) also realizes the benefits related to the free movement of persons
with the implementation of the CSME. The CSME allows for certain categories of persons such
as university graduates, media workers, sportspersons, musicians, artistes, managers and
supervisors to freely seek and gain employment within the region. This contributes to the
development agenda and process of CARICOM because where there are shortages of skilled
labour for example perhaps in a lesser developed country in the region, persons with the required
level of skill from another country can go and fill that gap in that particular country thus
increasing the skill set in that country as well as the gains. Another scenario is that someone
whose skills may not be in demand in their home country can now easily gain employment in
another country who requires those skills and the income that the individual makes can now be
remitted home, enhancing the economic freedom of that family. Therefore the free movement of
people can boost development once the necessary mechanisms are in place to monitor the policy.
Central American regionalism according to Bulmer-Thomas et al (1992) insists that the members
of the grouping of the Central American Common Market (CACM) believe that regional
integration is necessary and ineluctable for the development of the region. At the formation of
the CACM in 1960, “intra-regional trade grew rapidly, reaching over 25% of total trade by the
end of the decade.” (Bulmer-Thomas et al, 1992). Concomitant with this development, transport
links throughout the region began to improve including air travel which stimulated the level of
communication required to maintain an integration project of such stature. With the debt crisis in

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the early 1980s the integration scheme suffered, the value of trade declined by $470 million in
1986 vis a vis 1980’s figures. This situation shows that regional integration cannot insulate the
economic effects from exogenous forces. Therefore one of the principal aims for regional
integration for developing countries which is to reduce dependence on external countries is
negligible. Also even as late as 1991 intraregional trade as a percentage of total trade was less
than 15%. Therefore even when countries do come together and implement an import
substitution model, intra-regional trade does increase however as compared to total trade the
resultant effects are still not impactful therefore bringing into question the general notion of
regionalism and is it necessary for a small to medium country’s development.
According to World Bank (1992), in describing South-South integration in Africa and Latin
America, it gave evidence that suggests that this type of integration could actually do more harm
than good and that it should not be pursued. In concord with Axline, the publication notes that
the traditional welfare gains from entering into regional agreements does not apply to South-
South agreements. The report further goes on to state that, “the effects of interest group politics
on efficiency are almost certain to get worse if an FTA is concluded with another developing
country.” (World Bank, 1992). Therefore with this observation the overall development of the
region and the individual countries within the region will not take place. Development will
centre around the various interest groups within the region, usually the upper class and political
class leaving the lower and middle classes to receive “the crumbs” of their pursuits.
The report also states that in the arrangement industries tend to cohort with themselves in order
to extend protection on a regional scale in order to block out competition from an industrial or
developed country. Also it is highly, “unlikely that integration with another developing country
will bring a growth-stimulating environment and institutions.” (World Bank, 1992, p.15).

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Hard-core statistics provided by the World Bank buttresses the observations made above. For
example in Africa and Latin America, “only five of more than a dozen regional groupings pass
the test of a share of intraregional exports in total exports above 4 percent,” (World Bank, 1992,
p.15) for the reported years of the study. In regions such as Africa, none of the regional
arrangements accounts for even a meagre 10% of total exports. This signals that grouping
together had no significant impact on countries within the regional arrangement to boost exports.
As a matter of fact when looking at the RTA of the Economic Community of West African
States which was formed in 1975, entering into a regional arrangement was more inimical than
beneficial. In the year of 1975 the region’s exports as a percentage of total world exports was
1.4% by 1980 it increased marginally to 1.7% by 1985 it dipped to 1.1% and by 1990 the figure
was a woeful 0.6%. (World Bank, 1992). This may have been a result of the debt crisis in the
1980s however as with the CACM case it proves that regional integration does not buffer against
external effects in international political economy.
The major impediment to successful regional integration amongst developing countries resides in
the fact that most developing countries produce primary commodities as well as homogenous
goods which limits the potential for intraregional trade; and internal structural deficits that
become intraregional barriers.
In the case of Africa, the nature of the political economy in the region is the root of its troubles
and the root of its difficulty for the countries to integrate and have a successful ethos of
regionalism (World Bank, 1992). The World Bank report in agreement with Axline illustrates
that a crucial condition for a unified and long lasting integration scheme, member countries must
be at a similar stage of development. If this is not the case, poles of growth and poles of
stagnation will occur. For example in Sub-Saharan Africa the regional groupings there displayed

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a highly divergent pattern of industrialization. This had the effect of having a highly asymmetric
pattern of intraregional trade. For instance in 1990 Cameroon accounted for 90% of intra-
UDEAC (Union des Etats d’Afrique Centrale) exports however only accounted for 4% of
imports (World Bank, 1992). In similar fashion for the same year Ivory Coast accounted for 75%
of intra-CEAO (Communaute des Etats de l’Afrique de l’Ouest) exports however only accounted
for 13% of imports. This situation clearly demonstrates winners and losers of regional integration
therefore the lesser developed countries in the regional agreement does not realize any benefits
towards their development agenda. They may even be in fact worse off because usually the most
efficient producer in the grouping can be inefficient on a global scale therefore the common
external tariffs placed on extra-regional countries can make goods more expensive than the
inefficiently produced goods in the region. Whereas with multilateral trade those specific
countries could have gotten the good at the most optimal price, cheaper than being in a regional
trade agreement, those countries now have to pay a higher price for a more inefficiently
produced good. Such a situation can only have a negative impact on a country’s development
especially net-importing countries like most developing countries especially those in the
CARICOM region. Even when there is a mechanism such as compensation to balance out the
distortionary effects of regional integration with members that are economically dispersed in
their stages of development, it has proven to be futile in accomplishing its agenda in the African
case.
There are many theories to describe regionalism such as intergovernmentalism and
neofunctionalism. These theories explain the perspective of regional integration that a grouping
would undertake, whether a more co-operational perspective of integration or a deeper form of
integration encompassing common institutions, currencies inter alia. The different perspectives

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of regionalism then can have an impact on whether regional integration is necessary for
development because the deeper the integration the more countries within the grouping are more
dependent on one another and therefore this has the effect of giving stimulus to regional
institutions to exercise their regional powers, this then forces individual countries within the
grouping to develop their economic, social and political apparatus to meet the goals and
objectives concomitant with such deep regional integration. Intergovernmentalism can be
defined as, “a series of bargains among the political leaders of the major states in a region.”
(Hoffman, 1966). Whereas neofunctionalism can be defined as, “the process whereby political
actors in several distinct national settings are persuaded to shift their loyalties, expectations and
political activities to a new centre whose institutions possess or demand jurisdiction over the pre-
existing national states.” (Haas, 1958).
The intergovernmental nature of MERCOSUR in practice has many political observers
concluding that the regional scheme is a failure especially regarding its developmental
objectives. According to Mecham (2003) the underlying motive for the establishment of
Mercosur was Brazil finally seeing the benefits of integration although for their own interest.
Phillips (2003) also concurs in that Brazil being the economic hegemon of the region had no real
incentive to join as its trade portfolio was more extra regional compared to the other members of
MERCOSUR, however with the development of a potential EU/Latin American RTA and the
growing influence at the hemispheric and multilateral level by the USA, Brazil decided to enter
into an RTA with its partners purely on strategic and political factors; whilst the other members
saw the RTA as more of a developmental tool to eradicate the unfreedoms in their respective
economies. This situation slightly resembles the problems faced by African countries however
different results emerged. At the onset of MERCOSUR trade amongst the members expanded.

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From 1990 to 1998 trade expanded fivefold from US$8 billion to US$41 billion. This increase
coincided with an increase in the share of Mercosur’s total world trade from 11% to 23% for the
same period. What was interesting to note is that trade diversion did not seem to occur in this
scenario. For example in the year 2000 Brazil as the economic hegemon only accounted for 14%
of intra-regional trade as a percentage of its total trade as opposed to 26% with the EU as a
percentage of its total trade. This was quite different with the other members. For example
Paraguay’s trade in the year 2000 with MERCOSUR accounted for 54% of its total trade
whereas it was 30% for Argentina. (Mecham, 2003).
The big questions then are why have many political observers cast MERCOSUR as a failure?
Also with intraregional trade increasing fivefold between 1990 to 1998 how can MERCOSUR be
seen as a failure? The answer lies in the level of regional integration within MERCOSUR. The
intergovernmental nature of MERCOSUR did not breed life into institutions that can flex their
power over national states within the grouping. In other words the absence of a neofunctionalist
approach to regionalism undermined the development of MERCOSUR and can be seen as a
cause for its failure or irrelevance in promoting the developmental objectives in the region. There
are serious lessons that can be learned from the approach the members of MERCOSUR took
towards regionalism and why not just any type of regional integration will lead to development.
Mecham (2003) makes the point that in pursuit of the early stages of regional economic
integration, this action can have negative effects on the social aspect of society. For example
unemployment in the urban increased between 1990 and 1999. In Brazil the rate increased from
4.3% to 7.6%, in Argentina it increased from 7.4% to 14.5%, in Uruguay it increased from 8.5%
to 11.3% and in Paraguay from 6.6% to 9.4%. This observation is in convergence with Krugman
and Elizondo’s work on economic geography in the Third World. According to Krugman and

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Elizondo (1996) there is a positive relationship between a country’s trade policy and its urban
development. They assert that once a country favours import substitution industrialization as a
trade policy developing countries tend to see growth and development in the urban areas. They
have statistically proven this by using a model which tested the “centripetal” forces which, “tend
to pull population and production into agglomerations” and the “centrifugal” forces which, “tend
to break such agglomerations up.” This is so because with the import substitution, manufacturers
chose to setup in urban areas due to high backward and forward linkages although labour costs
and rent were high. The main takeaway from their research was that the more open or liberalized
a country becomes the less there will be growth in urban areas, in other words urban
degeneration would occur. This links directly with Mecham’s observation in that as there was the
implementation of MERCOSUR, which involved countries in the grouping being more open to
trade with one another, each country saw an increase in urban unemployment. This is due to the
centrifugal forces articulated by Krugman and Elizondo (1996) which could be cost advantages
in more rural areas for example, this could be quite likely because a producer before the
formation of MERCOSUR would have been competing within the national confines. However
after the formation of MERCOSUR that same producer would be competing on a regional level
therefore to mitigate the high costs associated with urban areas that producer will relocate to an
area where cost savings would accrue. Mecham (2003) further goes on to state that the formation
of MERCOSUR had done little to address the social imbalances in the region, which was one of
the principle objectives of the regional scheme in the first place. This failure can be squarely laid
on the institutional deficit that plagued the region which for a relative part had to do with the
intergovernmentalism practiced in the regional scheme. According to INTAL, (2001, p.5)
“MERCOSUR suffers from a juridical and institutional deficit.” This is an issue because for

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regional integration to work and to reap the maximum benefits from it the institutions at the
national level must be in place and must be functioning properly. The inefficiencies that plague
the judicial system, the public service and so on breeds a relaxed culture of sorts and nothing is
taken as serious as it should be. According to Mecham (2003) the fact that Latin America has a
system of codified law and not common law, this system gives a minute amount of room for
precedent or judicial reinterpretation. In turn this tends to make the legal system bureaucratic
thus making an independent judiciary hard to come by. Phillips (2003) also accounts for other
reasons why MERCOSUR is being seeing as a failure. This is important to highlight because it is
a lesson for regional integration on a whole and answers the question whether regional
integration is a necessary imperative for development especially in the developing country case.
She notes that domestic political economy structures within MERCOSUR, “have been
constitutive of sharply contrasting visions of regionalism between the member countries of the
MERCOSUR, to the extent that there has not been a solid ideational or normative foundation for
the regional governance project.” (Phillips, 2003, p.220). Phillips (2003) also cites that a lack of
a regional identity is part of the problem within MERCOSUR. However despite the challenges
that the regional block faces there has been some good out of it. As written earlier there
intraregional trade has increased; and according to Phillips (2003) the common market of
MERCOSUR is being used as a building block for small and medium enterprises to advance on
the world stage whilst at the same time act as an incubator for industrial competitiveness for
these firms.
The issues of South-South integration has been sufficiently articulated. The task now is to
analyse North- South integration. This form of integration has proven to generate better results
than South-South integration. One such scheme that can be scrutinized is that of the

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EC/CARIFORUM Economic Partnership Agreement (EPA). The EPA is a regional trade
agreement between the European Communities and CARIFORUM states signed in 2008. It is a
WTO plus agreement meaning that the provisions went beyond the scope of the WTO such as
provisions dealing with government procurement, electronic commerce inter alia. The driving
force of this agreement which is very important to the increase in North-South trade globally lies
at the multilateral level. The WTO around the time the EPA was signed had on its agenda, and
which is its principal agenda is to liberalize trade by removing trade barriers and reducing tariffs
under the condition of a non-preferential basis. Therefore returning to the time period in 2008
that was the time when the WTO was going to outlaw waivers. Waivers were used as an
exception to non-discriminatory trade. At the time the Caribbean and other developing countries
in the African Cariforum Pacific (ACP) group were enjoying preferential treatment under the
Lome Convention which was allowed through the waiver. This expiration of the waiver would
have an obvious and a detrimental impact on ACP exports to Europe. For many ACP countries,
Europe is their biggest market for their exports. The expiration of the waiver would eliminate the
duty free quota free access goods from these countries enjoyed making their goods highly
uncompetitive in the European market. This would have negative implications because when it is
all said and done exporters/producers’ freedoms will be diminished. No longer would rum, sugar
and bananas in the case of Cariforum countries be competitive in those markets. This would have
the impact of those goods not being able to sell and ultimate losses to exporters as the cost to
produce and export to those markets would not be recuperated. This situation being elucidated,
the Caribbean region had no other alternative for its contemporary development hence the
signing of the North-South EPA with the European Communities.

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Bishop, Heron and Payne (2012) articulates the above view on the EPA from the Caribbean
Regional Negotiating Machinery’s (CRNM) standpoint. The CRNM’s motivation for signing the
EPA were as follows to lock in prevailing levels of EU preferences and make sure that they were
protected against the expiration of the WTO waiver, to bolster market access in the EU, to
stimulate diversification away from the export of agriculture which was beginning to and more
so being subject towards the elimination of preferences and steering the Caribbean towards the
production of higher value added products, to bolster the regional integration scheme, to improve
issues of regulatory harmonization and to improve export capacity so that exporters can fully
reap the benefits of European market access and to send a strong message to regional and foreign
stakeholders of the seriousness of the Caribbean’s planned economic reform. The motivation
behind the signing of the EPA suggests a strong sense to advance the Caribbean’s development
in this dynamic multilateral trading environment.
According to Bernal (2008, p.91) trade agreements, “involve liberalization, which does not
automatically generate growth but can do so if properly designed and accompanied by
appropriate national and regional economic policies.” Bernal further goes on to make a valid
point in that for developing countries trade agreements are the tools in which these countries can
navigate the forces of globalization and ensure that developed countries don’t take advantage of
the multilateral trading system by legally ensuring fair play in the international trading system.
Bernal sums up the objectives of the EPA nicely by saying that, “The objectives of the EPA go
beyond the expansion of trade to stimulate sustainable economic development to encompassing
the progressive integration of the CARIFORUM countries into the world economy, the
elimination of poverty and the strengthening of regional integration.” (Bernal, 2008, p.92)

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This is so due to the special and differential treatment that is espoused in the EPA. As a matter of
fact Bernal notes that, “The EPA seeks to promote economic development through the expansion
of trade based on special and differential treatment for the CARIFORUM countries.” (Bernal,
2008, p.56). The level of special and differential treatment includes differences in obligations,
different implementation schedules based on the nature of the party that is developed or
developing country status, official development assistance from the EU to CARIFORUM states
to effectively implement the EPA and the realisation of commitments which are provisional once
technical assistance is provided. Such provisions are Article 1 of the EPA which talks about the
ambition to reduce poverty, sustainable development and furthering the Millennium
Development Goals inter alia. Article 7 espouses development cooperation through the European
Development Fund (EDF). Article 51 of the EPA describes the EC’s cooperation towards
CARIFORUM countries with respect to Technical Barriers to Trade. The article for the most part
espouses EC’s commitment to provide technical assistance to remove barriers to trade. There are
other articles which espouses special and differential treatment regarding customs duties, dispute
settlement, and regional preference inter alia.
Bernal (2008) also makes the claim that growth and development is not automatic with trade
agreements. The trade agreement can be seen as a foundation however he insists that the
institutional capacity in the region needs to be enhanced in order to reap the full benefits of the
agreement. This is to say that the EPA then engenders capacity building within the region. The
mere fact of reducing institutional deficits, boosting human capital for example the Shridath
Ramphal Centre at the University of the West Indies leads to development. This is so because it
is necessary for the EPA to work in the Caribbean’s favour. Even agencies such as Caribbean
Export whose mandate generally speaking is to boost export competitiveness in the region so as

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to exploit the market access provided by the EPA which is funded by the EU ineluctably leads to
some level of development.
From a general standpoint North-South regional integration is seen as more beneficial to
developing countries. According to Schiff and Winters, (2003, p.15) “One of the main themes of
this book is our preference for North-South over South-South for developing countries.” The
general notion is that a small developing country would gain more with a rich developed country
as oppose to South-South integration. This is so because there is a greater likelihood that a
developed country is more likely to be a better producer of most goods and a source of better
competition for local producers. Also North-South integration as articulated earlier by
scrutinizing the EPA demands that the institutions in the developing country be up to
international standards. These standards could be respect for human rights, an example of this
could be the death penalty in the Caribbean. Many developed countries have banned the death
penalty and in a hypothetical scenario if a Caribbean country wants to do an RTA with a
developed trading partner, that country may have to adjust its laws to suit. Such procedure are
often termed “club rules”. That is rules that must be met to become a member of a particular
regional integration scheme. North-South integration can also be a stimulus to attracting more
foreign direct investment (Schiff & Winters, 2003). Figures show that between 1946 and 1970
there was a more than six fold increase of EC-member manufacturing multinational subsidiaries
located in other EC countries. The number jumped from 68 to 434. Also those located in non-EC
European countries increased only from 95 to 311. (Schiff & Winters, 2003). Also the others
note that the European Commission also found that intra-EU foreign direct investment increased
more quickly than extra-EU foreign direct investment after the introduction of the Single Market

17. 16
Programme (SMP). Schiff and Winters (2003) note that European integration has also enticed
third member countries such as the United States, Japan and others to invest in that regional bloc.
Although the EU is a North-North integration scheme, it is highlighted to illustrate that there is
positive correlation between integration and foreign direct investment for most types of
integration. Looking at the North-South RTA of NAFTA, foreign direct investment into Mexico
increased from $4.3 billion in 1993 to $11 billion in 1994 the same year NAFTA came into
being. (Schiff & Winters, 2003). Schiff and Winters further states, “The experience of TIAs
between middle-income countries is similar: for example, following the signature in 1991 of the
Treaty of Asunción that established MERCOSUR, FDI in member countries increased from $3.5
billion in 1991 to $18 billion in 1996 and to $38 billion in 1998.” (Schiff and Winters, 2003,
p.120). Therefore the case for North-South integration has been proven. The task now is to
investigate whether a country can grow endogenously without any regional integration.
According to Bruton, (1970, p.127) “import substitution refers to a policy that reduces or
eliminates entirely the importation of the commodity and, hence, leaves the domestic market
exclusively for domestic producers.” One of the major rationale for import substitution is to
reduce reliance on foreign imports and boost domestic production. This is because with the
existing structure in the economy there is little to no control of what happens in external
economies. For instance many Caribbean countries are net food importers. If a shortage were to
occur in a specific commodity that is consumed by these countries then the Caribbean will be at
the mercy of the resultant high prices that would stem from this shortage, especially if it’s a
staple like wheat that would mean no flour in the food baskets of consumers. Therefore an
import substitution strategy would be favourable in this case. When imports are reduced, this has
the effect of creating shortages or gaps in the economy where now domestic producers can seek

18. 17
to exploit. The general thesis is that with imports being cut there would now be more foreign
exchange available however this would be directed to the purchase of capital goods to produce
goods that were being imported previously. This must have an impact on development as
domestic producers under the import substitution scenario can now enhance their economic
freedoms and even the country benefits because capitalists are seen as high savers and also high
investors. (Bruton, 1970). Bruton argues that producing consumer goods is the best way to go as
opposed to capital and intermediate goods as this would be more expensive to produce for a
small developing country with little capacity. Therefore import substitution can lead to
development however the type of good chosen to produce is a critical factor to achieve such.
However there are critics of import substitution. For example Krueger (1997) points out that
import substitution leads to protectionism, this can be so because the policy makers may want to
protect infant industries and this can be a bad scenario as consumers may be purchasing goods
that are inefficiently produced that they can get cheaper in the multilateral trading system. Also
Krueger (1997) also posits that developing countries tend to want to develop too quickly and this
can lead to high levels of inflation, this is not a good scenario for consumers as their economic
freedoms will be reduced. If it is consumer goods that is the subject of the import substitution
policy there will be obvious problems. Also Krueger notes that by increasing import substitution
there would be an increased demand for foreign exchange and depending on the rate of import
substitution and consumer demand foreign exchange shortages can actually occur. Krueger
(1997) also makes an exceptional point in that in East Asia, the countries there employed an
import substitution strategy however it was more outward looking meaning that there was a
focus for exports however there was still a high focus for endogenous markets. Krueger (1997)
writes that this had a positive effect on economic growth and development. For example Taiwan

19. 18
reduced its inflation levels and reduced economic dependence on foreign states as the country
was heavily dependent on foreign aid before they implemented their import substitution
programme.
There are also gains that can be found at the multilateral level opposed to regional blocs.
However for a developing country it should not be one or the other that is to say regionalism
versus multilateralism. A developing country should articulate its goals on both platforms.
Looking at Willem te Velde and Nair (2005) on their work on how developing countries can use
multilateral means to boost foreign direct investment with a focus on the tourism sector, It is
empirically proven that this is possible. Willem te Velde and Nair (2005, p.1) state that,
“Investment is critical for further development of the tourism sector.” That being said the authors
note that the majority of studies that look at the impact commitments in international trade
negotiations, assume that it raises foreign direct investment. Developing countries can use the
WTO GATS to boost foreign direct investment the authors note because its signals certain
effects. The most important effect is that it gives investors an indication that the country is
serious in the development of services. What the evidence shows based on a number of
Caribbean and some Central American countries is that with the higher amount of commitments
in the GATS, the more foreign direct investment that country tends to see. For example the
Dominican Republic has taken four commitments to liberalize their service sector and their FDI
average for the five years done in the study was US$165 million however Belize with one
commitment showed US$19 million. Jamaica with two commitments had US$37 million in FDI.
The authors conducted a regression analysis which confirmed their convictions that there is a
correlation between GATS commitments at the multilateral level and foreign direct investment
with the aim to develop the tourism sector.

20. 19
In conclusion regional integration is a necessary imperative for development however the type of
integration meaning whether North-South or South-South is the issue at hand. It has been proven
that North-South integration is the better form of integration for developing countries as more
benefits would accrue if this type of integration is chosen. Also the perspectives of
regionalization also has significance in the study. The deeper the integration studies suggest the
more likely development would occur. Neofunctionalist regional schemes seemed to provide
more benefits such as high standards of institutions, a common regional identity and more
purpose to develop each member within the regional grouping. However with an
intergovernmentalist approach to regional integration, decision making in the grouping was ad-
hoc, dispute settlement was ad-hoc and there was a reluctance for institutionalization and lack of
harmonization of domestic and regional policies. This creates all sorts of problems and actually
undermines the regional regime. The paper has also proven that regional integration is not the
only path to development, there can be a trade policy of import substitution as well as taking part
in the multilateral forum and both also lead to development and both also have their challenges
just as much as regional integration has its own challenges. The fact of the matter is that one
trade policy cannot be chosen over the other, if there is a way to pursue all that is the best policy
as all three have their benefits and drawbacks.

21. 20
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