Why regionalism? : discussion of political and economic benefits of regional integration arrangements

Abstract

This thesis, by examining the economic and political benefits of regional integration arrangements, aims to discuss whether regionalism is only harmful to world economy as argued by many economists. The thesis analyzes the benefits of the regional integration arrangements by examining its impacts on FDI inflows in developing countries and by examining political benefits of the arrangements. This thesis concludes that positive impacts of regional integration on FDI inflows into the member countries do exist. However, regional integration is neither necessary nor sufficient condition to attract industry. However, North-South integration can improve the local attractiveness of the Southern partners and the developing countries are more likely to achieve industrialization. South-South integration does not help much to attract FDI into the member countries nor raise the credibility of the economic reforms undertaken. The study also argues that a regional integration arrangement can be a useful instrument to reduce tensions among the neighboring countries. In addition to increase in security, a regional integration arrangement can reduce defense expenditures. North-South regional integration arrangements are likely to be more effective in imposing the club rules than the South-South integration. In addition to that, the study argued that regionalism can strengthen small developing nation states by making their voices heard in international negotiation tables by reducing negotiation costs and increasing their market and negotiation power. It has been also argued that economic integration is not necessary for political integration. However, customs unions tend to lead to deeper types of integration, including political integration. Finally, the study suggests that regional integration arrangements can promote democratization of developing countries with the "club rules".