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?

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. • 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
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2014 © Christian Ketels

3. • The two different faces of regional integration
• A European Experience: Collaboration across the Baltic Sea Region
• Implications for Asia
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2014 © Christian Ketels

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
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2014 © Christian Ketels

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
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2014 © Christian Ketels

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”
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2014 © Christian Ketels

7. • The two different faces of regional integration
• A European Experience:
Collaboration across the Baltic Sea Region
• Implications for Asia
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2014 © Christian Ketels

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
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2014 © Christian Ketels

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
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2014 © Christian Ketels

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
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FDI
2014 © Christian Ketels

11. Institutional Architecture
• CBSS
• BDF
• NIB
• Nordic Council
• Baltic Council of Ministers/
Baltic Assembly
• Bilateral programs
• EU InterReg
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2014 © Christian Ketels

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
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2014 © Christian Ketels

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
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2014 © Christian Ketels

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
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2014 © Christian Ketels

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
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2014 © Christian Ketels

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. 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. 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
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2014 © Christian Ketels

19. • The two different faces of regional integration
• A European Experience:
Collaboration across the Baltic Sea Region
• Implications for Asia
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2014 © Christian Ketels

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
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2014 © Christian Ketels

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
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2014 © Christian Ketels

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
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2014 © Christian Ketels

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
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2014 © Christian Ketels

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
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2014 © Christian Ketels

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
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2014 © Christian Ketels

26. Back-Up
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2014 © Christian Ketels

27. State Of the Region Report: 2004 – 2013
www.bdforum.org
• Convergence
• Competitiveness
• Collaboration

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
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2014 © Christian Ketels

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
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2014 © Christian Ketels