Regional Integration: What Is in It for CARICOM?
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Economía 8.1 (2007) 97-131

Regional Integration:
What Is in It for CARICOM?
[Comments]

Economic and political integration has long been a painful issue on the Caribbean agenda. As one analyst states, "The recognition of the seminal truth that only a unified Caribbean, politically and economically, can save the region from its fatal particularism is at least a century old."1 Despite this early awareness, the first ambitious and wide-reaching policy initiative was only implemented in 1958, with the short-lived West Indian Federation. The collapse of this initiative in 1962 did not mean, however, the end of the integrationist ideal, which flared up again six years later in the form of the less ambitious Caribbean Free Trade Association (CARIFTA). Countries in the region have since raised the stakes, aiming at deeper, broader, and more complex forms of integration. In 1973, they established the Caribbean Community and Common Market (CARICOM), which sought to establish a customs union and policy and functional cooperation. In the 1990s, a number of culturally and economically diverse nations joined the agreement, and ambitious targets were set to create a single market and economy with full factor mobility and harmonization of economic policies (namely, the CARICOM Single Market and Economy, or CSME).

All this integrationist zeal begs the question of whether politics or economics (or both) is the driving force behind the movement. Exploring the underlying forces may provide clues to the rationality of the process and, therefore, its chances of success. Politicians and economists alike have already made numerous efforts to clarify these issues and to draw lessons from the region's experience with over three decades of integration. Even so, some gaps of [End Page 97] understanding remain about motivation, rationality, and results. Given that politicians in the region are building in the midst of what may arguably be the deepest and most comprehensive process of integration in the western hemisphere, the time could not be more opportune for a concerted effort to fill these gaps.

The rest of the paper is divided into three sections. the next section draws on the literature on trade, growth, and regional agreements to discuss the motivation behind the Caribbean drive for integration. We argue, with the help of an empirical growth model, that the traditional gains from regional integration are bound to be limited for three reasons: the Caribbean economies' openness, the relatively small common market, and the countries' similar factor endowments. We also argue, however, that integration may produce substantial gains in the area of nontradables.

The subsequent section uses descriptive data and a gravity model to discuss the results of integration over the last three decades in the light of the issues raised earlier. The analysis of descriptive data indicates that regional preferences have had a positive, though modest, impact on intraregional trade, with most of the gains happening before CARICOM was signed. The gravity model confirms the trade-creating nature of the preferences, but suggests that the gains have been declining since the 1970s, despite (or because of) the trade-creating reforms of the 1990s.

The final section summarizes the main findings and conclusions, with a focus on what is arguably the main message of this paper. Specifically, integration can generate significant benefits in nontradables as a result of regional cooperation in the countries' social and physical infrastructure, and these gains are likely to dwarf the traditional gains from trade.

Motivation

The literature on regional agreements suggests that such pacts are inspired by the interplay of political and economic arguments.2 The political motivations range from regional security to bargaining power. That is, countries sign regional agreements because they believe integration will reduce political and military rivalry among member countries (as in the case of the European Union and the Southern Common Market, or MERCOSUR), reduce the political and military threat of countries outside the agreement (for example, the Association [End Page 98] of Southeast Asian Nations, or ASEAN), and increase their bargaining power in international negotiations...


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