a study on regional economic integration …...chapter 5 is an initial comparative analysis to set...

明治大学大学院商学研究科

2018年度

博士学位請求論文

A STUDY ON REGIONAL ECONOMIC INTEGRATION AND

STRUCTURAL TRANSFORMATION: THE SOUTHEAST ASIAN

MODEL AND ITS IMPLICATIONS FOR THE SOUTHERN

AFRICAN REGION

地域経済統合と構造変化についての研究：

東南アジアモデルとその南部アフリカ地域に対する意義

学位請求者商学専攻

RAMIARISON HERY MAHOLISOA

ラミアリソンヘリーマホリソア

i

Table of Contents

LIST OF TABLES ..................................................................................................................... vii

LIST OF FIGURES .................................................................................................................. viii

GLOSSARY ................................................................................................................................. ix

ACKNOWLEDGEMENTS ....................................................................................................... xii

INTRODUCTION ....................................................................................................................... 1

A. The Longstanding Developmental and Industrialization Failures in the

Developing World: The Sub-Saharan African Exclusion and the Southeast Asian

Exception .................................................................................................................................. 2

B. Structural Change and South-South Integration ..................................................... 4

C. Research Approach ..................................................................................................... 6

D. Structure and Organization of the Thesis ................................................................. 7

Part 1. POLITICAL ECONOMY OF REGIONALISM IN THE 21ST CENTURY:

REVIVAL OF SOUTH-SOUTH REGIONAL INTEGRATION AND THE LIMITS OF

GLOBALIZATION .................................................................................................................. 11

Chapter 1- Literature Review: On the Trade and Economic Development Relationship

and the Case for Regionalism ................................................................................................... 12

1-1 The Dominant Neoclassical View and its Free Trade Arguments ........................ 13

1-1-1. The Law of Comparative Advantage ........................................................................ 13

1-1-2. The Heckscher-Ohlin Factor Endowment Model ..................................................... 14

1-1-3. Dynamic Gains from Trade ....................................................................................... 15

1-1-4. New Trade Theory .................................................................................................... 15

1-2. Economic Globalization a Policy Induced and Biased Phenomenon? Evidence

from the Heterodox Literature ............................................................................................ 18

1-2-1. Stiglitz: High Volatility and Uncertainty in the Financial Market ............................ 18

1-2-2. Thirlwall: Static and Dynamic Gains from Trade ..................................................... 18

1-2-3. Chang: The “Kicking Away the Ladder “Thesis” ..................................................... 19

1-2-4. Amsden and Wade: “Governing the Market” the Importance of Knowledge and

Experimentations ................................................................................................................. 20

1-2-5. Rodrik: Market Supporting Institution ...................................................................... 21

1-3. Unorthodox East Asian Development Model: The World Bank’s “East Asian

Miracle” Report .................................................................................................................... 23

ii

1-3-1. The Mechanisms of Resources Accumulation .......................................................... 23

1-3-2. Resources Allocation and Selective Interventions .................................................... 27

1-3-3. Building Institutions .................................................................................................. 28

1-4. Rush to Regionalism: An Alternative to Globalization?........................................ 30

Chapter 2- Core Conceptual Framework: Developmental Regionalism and the Southeast

Asian Model ............................................................................................................................... 33

2-1. History and Concepts of Economic Integration ..................................................... 34

2-1-1. Regionalism in History ............................................................................................. 34

2-1-2. Different RIA Schemes ............................................................................................. 36

2-2. Traditional theory of Economic Integration: A Static Analysis ........................... 36

2-2-1. Traditional Efficiency Gains and Risks of RIAs: Vinerian Analysis ........................ 37

2-2-2. Trade Creation and Trade Diversion ......................................................................... 37

2-3. New Regionalism: Dynamic Perspective on Economic Integration ...................... 38

2-3-1. Current State of the Debate and the Evolution of the Theory of Economic Integration

38

2-3-2. Growth and Developmental Effects of Regional Integration .................................... 40

2-3-3. The ASEAN and its Implication in New regionalism and for Developing Countries

42

Chapter 3- Discussing North-South and South-South Integration and Economic

Development in the 21st Century: The Southeast Asian Model Compared with the

Southern African Development Community .......................................................................... 44

3-1. Introduction ............................................................................................................... 45

3-2. Analytical Framework: Theories of New Regionalism and the Concept of

Developmental Regionalism ................................................................................................. 46

3-2-1. New Regionalism ...................................................................................................... 46

3-2-2. South-South Economic Integration ........................................................................... 47

3-3. Preliminary Study on the Keys and Obstacles to a Growth Enhancing Regionalism

– ASEAN as a Benchmark .................................................................................................... 50

3-3-1. Overview of the Background and Characteristics of the ASEAN Regional Bloc..... 50

3-3-2. Regional Diplomacy: Conflict Resolution and Peacekeeping................................... 51

3-3-3. Flawed Regional Apparatus and Unorthodox Decision-Making Process: The

“ASEAN Way” .................................................................................................................... 51

3-3-4. Trade and Economic Development ........................................................................... 53

iii

3-4. Inefficiencies and Stagnation of Regional Integration and Cooperation in

Southern Africa- The Case of the Southern African Development Community (SADC)

56

3-4-1. History and Evolution of the Southern African Development Community (SADC) 56

3-4-2. Lack of Regional Infrastructure ................................................................................ 59

3-4-3. High External Dependency ....................................................................................... 60

3-4-4. Institutional Weakness and Insufficient Cooperation at the Regional Level ............ 61

3-5. Determinants of South-eastern Asia’s Economic Growth and the Role of ASEAN:

Trends and Patterns .............................................................................................................. 62

3-5-1 Cross-border Infrastructure and Regional Connectivity ........................................... 64

3-5-2 Foreign Direct Investment: Production Networks and Industrial Upgrading ........... 66

3-5-3 Regional Institution Building .................................................................................... 67

3-6. Concluding Remarks................................................................................................. 68

Chapter 4- Institutional Capacity and Regional Development Gap in the Southern African

Development Community: An Institutional Economics Approach ...................................... 70

4-1. Introduction ............................................................................................................... 71

4-2. Theoretical Review of the Link Between Institution and Economic Performance

72

4-2-1. Transaction costs, Market Failures and Property Rights: The Genesis and Essence of

the Institutionalist Approach ............................................................................................... 72

4-2-2. Old Institutional Economics ...................................................................................... 73

4-2-3. New institutional Economics .................................................................................... 75

4-2-4. Industrialization, Innovation and the Role of Institutions: Beyond the Neoclassical

view of Institutional Forms ................................................................................................. 77

4-2-5. Institutional Changes and Economic Development .................................................. 78

4-3. Institutional Heterogeneity and Development Gaps Within the SADC: From an

Historical and Institutional Economics Perspective ........................................................... 79

4-3-1. Coordination Problem and Development Gap in the SADC: Institutional and

Economic Obstacles to Integration ...................................................................................... 80

4-3-2. Pre-Colonial Origin of Economic and Institutional Fragmentation in Sub-Saharan

Africa: Slave trade, Ethnicity and Ecology ......................................................................... 84

4-3-3. Fragility and Limited Capacity of Contemporary African States: Colonialism and

Institutional Path-Dependence ............................................................................................. 87

iv

4-4. Rethinking the Regional Cooperation and Institutional Reforms in the SADC:

Addressing the Development Gap and Institutional Fragmentation................................ 88

4-4-1. Transformative and Developmental Regional Integration ........................................ 89

4-4-2. Conceptualizing a Transformative SADC Regionalism: A Context-Specific and

Bottom-Up Policy Approach ............................................................................................... 93

4-5. Concluding Remarks................................................................................................. 95

Part. 2 EMPIRICAL ANALYSIS: DETERMINANTS OF RAPID STRUCTURAL

TRANSFORMATION OF THE ASEAN ECONOMIES AND THE POLICY

IMPLICATIONS FOR THE SOUTHERN AFRICAN REGIONALISM ........................... 97

Chapter 5- The ASEAN Model of Development-Oriented Regionalism: Benchmark for

Industrialization and Structural Change in the Developing World ..................................... 98

5-1. Introduction ............................................................................................................... 99

5-2. The Association of the Southeast Asian Nations: From Political to Developmental

Aspirations ............................................................................................................................. 99

5-2-1. Southeast Asia before the ASEAN: Post-colonial Period ....................................... 100

5-2-2. The Road to a Formal Regional Cooperation: 1960-1967 ...................................... 100

5-2-3. ASEAN and Regional Instability: 1967-1979 ......................................................... 101

5-2-4. Economic and Development Orientation: 1985 to Present ..................................... 102

5-3. Understanding the ASEAN Model through a Non-Traditional and Dynamic

Perspective ........................................................................................................................... 103

5-3-1. Comparative Regionalism ....................................................................................... 104

5-3-2. The Structuralist Approach ..................................................................................... 105

5-4. Features and Characteristics of the ASEAN Model ............................................. 106

5-4-1. Merchandise Trade .................................................................................................. 106

5-4-2. Foreign Direct Investment ....................................................................................... 108

5-4-3. Manufacturing Export ............................................................................................. 110

5-5. Concluding Remarks............................................................................................... 111

Chapter 6- Rapid Economic Growth in Southeast Asia: Empirical Analysis on Regional

Integration and Structural Transformation in the Original ASEAN MEMBERS ........... 114

6-1. Introduction ............................................................................................................. 115

6-2. Theoretical framework and Methodology: Regionalism and structural

transformation ..................................................................................................................... 116

6-2-1. The Economic Structural Transformation Perspective ........................................... 116

v

6-2-2. Regional Integration and Economic Growth: Impact and Assessment ................... 118

6-2-3. Methodology and Data Description ........................................................................ 119

6-3. Evidence of Growth-Sustaining Structural Transformation: Empirical Analysis

120

6-3-1. Rapid growth in the ASEAN-5: Evidence from the Hausmann-Prichett-Rodrik

(HPR) Growth Acceleration Filter .................................................................................... 120

6-3-2. Mechanism of The Asean-5 Rapid and Sustained Growth: The Mcmillan-Rodrik

(MR) Method of Productivity Change Analysis Between the Traditional and Modern

Sector 123

6-4. Relationship Between Regional Integration and Structural Transformation in the

ASEAN: An Ex-Post Analysis ............................................................................................ 128

6-4-1. Trade and Export-led Growth in the ASEAN-4: General Trend and Patterns ........ 128

6-4-2. Gravity Model: Ex-post Analysis of Regional Integration ..................................... 130


Chapter 7- Export Products Sophistication and Preferential Trade in the SADC: Lessons

from ASEAN Developmental Regionalism ........................................................................... 138

7-1. Introduction ............................................................................................................. 139

7-2. Defining the ASEAN Model: Developmental Regionalism and South-South

Economic Integration .......................................................................................................... 140

7-2-1. Regional Performances and Characteristics: Qualitative and Quantitative

Comparative Analysis ....................................................................................................... 141

7-2-2. Assessing the Structural Transformation Effect in a South-South Preferential Trade

Agreements: Empirical Model .......................................................................................... 148

7-3. Implication of the ASEAN Model for Long-term Growth of the SADC Regions

155

7-3-1. ASEAN Developmental Regionalism: The State-Market Nexus ............................ 156

7-3-2. Industrial Policy and Regional Integration .............................................................. 156

7-3-3. Regional Imbalances and Catching-Up Process ...................................................... 158

7-3-4. Bargaining Power with Public and Private Partners: Geopolitical Implications ..... 160


Chapter 8- Policy Recommendations and Long-Term Prospects for The SADC

Regionalism .............................................................................................................................. 164

8-1. Introduction ............................................................................................................. 165

vi

8-2. Policy Recommendations Derived from the ASEAN Developmental Regionalism

Model 166

8-2-1. Gradual and Soft Regionalism ................................................................................ 166

8-2-2. FDI and the Promotion of Manufacturing Production ............................................ 168

8-2-3. Regional Policy for Resource Accumulation and Allocation: Market Creation and

Emphasize on “Real Economy” ........................................................................................ 170

8-2-4. International and Multilateral Strategy: Standing Together as One Bloc ............... 171

8-3. Addressing Issues Specific to the SADC Regional Bloc ....................................... 172

8-3-1. Institutional Weakness: Regionalism and the African States .................................. 173

8-3-4. Managing Demographic and Geographic Risks ...................................................... 177

8-3-5. The Problem of Multiple Memberships: ................................................................. 178


CONCLUSIONS ..................................................................................................................... 182

A. Research Findings ................................................................................................... 183

B. Policy Implications .................................................................................................. 186

C. Limitations and Further Research ........................................................................ 187

APPENDIX .............................................................................................................................. 189

BIBLIOGRAPHY ................................................................................................................... 193

vii

LIST OF TABLES

Table 2.1 Example of the category of PTAs by their geographical scope

Table 2.2 Trade situation of the commodity X in country A

Table 3.1 Comparison of GDP growth rates, annual, 1980-2014 in selected regions

Table 3.2 Summary Facts and Figures about SADC

Table 4.1 Democracy index 2016, SADC countries

Table 4.2 SADC countries’ annual and per capita Gross domestic product in 2015 (2011

PPP US dollars)

Table 5.1 Globalization Score in Selected countries

Table 5.2 Foreign direct investment as a percentage of Gross capital formation (in

percent), 1970-2015

Table 5.3 Parts and Components in the Trade of Manufacturing Goods, in percent

Table 6.1 Growth episodes in ASEAN-5 from 1961-2009, in percent

Table 6.2 Major ASEAN summits

Table 6.3 Linear regression results

Table 7.1 Export Diversification, in Number of Unit, 2014

Table 7.2 Technological classification of export in ASEAN and SADC (2000 and 2015),

in percent

Table 7.3 Regression results

Table 8.1 Impacts of informal economy and corresponding policy proposals

Table 8.2 Other REC membership of the SADC countries

viii

LIST OF FIGURES

Figure A Export sophistication Index (EXPY), 1995-2015

Figure 2.1 Evolutions of Regional Trade Agreements in the World since 1948

Figure 3.1 Export Trade Value of the SADC10, in billion USD

Figure 3.2 Export Trade Value of the ASEAN6, in billion USD

Figure 3.3 SADC exports 1995-2014

Figure 3.4 Developing Asia’s total trade (in current US dollar), 1990-2015

Figure 3.5 SADC exports by products and by partner in 2015

Figure 3.6 Gross domestic product per capita, constant USD 2005 prices, annual, 1970-2014

Figure 3.7 Merchandise trade volume at current US dollar, annual, 1970-2015 (million)

Figure 4.1 Summary of the process of institutional change according to OIE

Figure 4.2 Relation between strong identification and State capacity

Figure 4.3 Intensity of ethnic identification in selected African countries

Figure 5.1 Merchandise trade share of selected regional economic cooperation to the world’s

(in percent)

Figure 5.2 Share of selected regional economic cooperation’s GDP to the world’s (in percent)

Figure 5.3 FDI inflows in the ASEAN and SADC from 1970

Figure 6.1 ASEAN-5 GDP evolution from 1960 to 2014 (in million, 2011 USD)

Figure 6.2 Average Economywide labor productivity growth rate, in percent

Figure 6.3 Average Sectoral productivity growth, in percent

Figure 6.4 Average sectoral labor share, in percent

Figure 6.5 ASEAN-4 Trade flow with China, Japan Korea and USA from 1989 to 1998 (in

billion US current dollars)

Figure 6.6 Trade growth rate

Figure 7.1 Comparison of the Preferential and Effectively Applied Tariffs in the SADC-10,

by Sector, 1995-2015

Figure 7.2 Comparison of the Preferential and Effectively Applied Tariffs in the ASEAN-6,

by Sector, 1995-2015

ix

GLOSSARY

AEC

ASEAN Economic Community

AEM

ASEAN Economic Ministers

AFC

Asian Financial Crisis

AFDB

African Development Bank

AFTA

ASEAN Free Trade Area

AIA

ASEAN Investment Area

AIC

ASEAN Industrial Complementation

AICO

ASEAN Investment Cooperation

AIJV

ASEAN Industrial Joint Ventures

AIP

ASEAN Industrial Projects

APTA

ASEAN Preferential Trade Agreement

ARF

ASEAN Regional Forum

ASA

Association of Southeast Asia

ASEAN

Association of Southeast Asian Nations

BBC

Brand-to-Brand Complementation

BWIs

Bretton Woods Institutions

C&M

Cooper and Massell

CECAS

Conference of East and Central African States

CEEAC

Communauté Économique des États de l'Afrique Centrale

CEPT

Common Effective Preferential Tariffs

CLMV

Cambodia, Laos, Myanmar, Vietnam

COMESA

Common Market for Eastern and Southern Africa

EAC

East African Community

EAS

East Asia Summit

ECDPM

European Centre for Development Policy Management

ECSC

European Steel and Coal Community

EEC

European Economic Community

ERP

Effective Rates of Protection

ESSEA

East South and Southeast Asia

EU

European Union

FDI

Foreign Direct Investment

FTA

Free Trade Agreement

x

GATT

General Agreement on Tariffs and Trade

GDP

Gross Domestic Product

GGDC

Groningen Growth Development Centre

HCI

Heavy and Chemical Industry

HPAE

High Performing Asian Economies

HPR

Hausmann-Pritchett-Rodrik

IMF

International Monetary Fund

ISI

Import Substituting Industrialization

LDCs

Least Developed Countries

MAPHILINDO

Malaysia, Philippines and Indonesia

MERCOSUR

Mercado Común del Sur

MFN

Most Favored Nations

MITI

Ministry of International Trade and Industry

MNCs

Multi-national Corporations

MNE

Multi-National Enterprises

NAFTA

North American Free Trade Agreement

NDCs

Now-developed countries

NEP

New Economic Policy

NIE

New Institutional Economics

NTBs

Non-tariffs barriers

NTT

New Trade Theory

ODA

Official Development Assistance

OECD

Organization for Economic Cooperation and Development

OIE

Old Institutional Economics

PIS

Priority Integration Sectors

PTA

Preferential Trade Agreement

PWT

Penn World Table

RCA

Revealed Comparative Advantage

RECs

Regional Economic Communities

RIA

Regional Integration Agreement

RISDP

Regional Indicative Strategic Development Plan

RTA

Regional Trade Agreement

SACU

Southern African Customs Union

SADC

Southern African Development Community

xi

SAPs

Structural Adjustment Programs

SDGs

Sustainable Development Goals

SLI

State-led Industrialization

SMEs

Small and Medium-sized Enterprises

SSA

Sub-Saharan Africa

TPP

Trans-Pacific Partnership

UNCTAD

United Nations Conference on Trade and Development

WB

World Bank

WDI

World Development Indicator

WITS

World Integrated Trade System

WTO

World Trade Organization

ZOPFAN

Zone of Peace, Freedom and Neutrality

xii

ACKNOWLEDGEMENTS

Every piece of this thesis, as for any new knowledge, is the fruit of a collaborative

intellectual exchange and supports from various people. Therefore, I would like to dedicate these

first pages to express my gratitude to all the persons and institutions that have lent me their support

in different ways.

First and foremost, I would like to thank my Professor and research supervisor, Naoaki

Kobayashi, whose guidance and advice have been the most critical during every single step of the

process leading toward the completion of this thesis. I could never expect a more encouraging,

supportive, patient and talented teacher. If it were not for our frequent meetings, discussions or

late night e-mail exchanges, I would not have been able to keep my motivation and deal with the

stresses that came along with sleepless nights and tight deadlines common to a Ph.D. student life.

However, the biggest lesson that I learned from him was primarily about my research approaches

and methodology. Not only have I learned the importance of paying attention to details but also

of reading and studying various strands of literature, particularly those of the heterodoxy.

On the one hand, the rigorous attention to detail enabled me to sharpen my intuition as a

researcher and thereby improve related skills such as observation, interpretation, pattern

recognition, etc. On the other hand, the wide range of literature study that we have done

throughout these years offered me a large panel of tools to tackle problems from different angle

and perspectives. I am also grateful that he gave me the opportunity to participate in various

seminars, research groups, and conferences during which I was able to exchange with some of

the most prominent researchers in the field of international economics and get exposure to the

latest findings. However, besides all this, I want to thank him for being always fair. Indeed, as a

human being, I grew up from the advice and the teachings he provided. And that has reinforced

my willingness to lend my voice to the vulnerable parts of the society and thereby address the

problem of economic inequality and underdevelopment in this thesis.

I would also like to thank the Japanese government for granting me a scholarship through

the Ministry of Education, Culture, Sports, Science, and Technology (MEXT) graduate study

program. This scholarship has been life-changing in various terms. Not only has it enabled a

student from a developing country like myself to fulfill the dream of studying and living in Japan

but it also allowed me to contribute in the mutual understanding and friendship between Japan

and my country Madagascar.

This thesis would not also have come to light without the expertise of Professor Kunio

FUKUDA whose seminars have shaped and influenced my understanding of the nature of the

xiii

capital and the global economic system. Indeed, his interventions have been critical in influencing

the orientation of this thesis toward the study of the effect of international trade on the global

south or the developing countries. Moreover, Professor Fukuda is among the people who made

my life as an international student in Japan as fulfilling and as exciting as it is.

This thesis has also benefited from the invaluable feed-backs and comments from my co-

supervisors Eri SHIOZAWA and Yasuhiro TOKORO. Their detailed and insightful comments

on my papers and articles have significantly improved the quality of this work. Indeed, their

suggestions on the appropriate methodology and data selection have been constructive.

Moreover, I also feel grateful to all the professors at the Graduate School of Commerce of

Meiji University. Firstly, I would like particularly to thank Professor Shigeru KAKIZAKI who

has broadened my perspective on the Japanese political economy. I also thank Professor Yoshio

WATANABE for very enriching discussions on financial markets from a Keynesian perspective.

Some parts of this thesis also benefited from several comments that I received during my

participation in conferences at the Japanese Society of International Economics (JSIE). I want to

express my gratitude particularly to Professors Yumiko OKAMOTO and Takashi KIHARA who

accepted to comment and discuss on my works. My sincere appreciation also goes to the member

of the ASIAN Consensus research group, particularly the Professor Hitoshi HIRAKAWA and

Professor Koichi ISHIKAWA, for allowing me to take part to their regular meeting during which

I could expand my knowledge and understanding of the South-East Asian countries tremendously.

Coming from Madagascar a developing country with different cultural and historical

background, my journey in Japan has not always been easy. However, I feel lucky to have been

surrounded by so many great people that made my adaptation to my new environment as smooth

and enjoyable as possible. Thus, I would like to thank all the staffs at the international student

office and the graduate school office of Meiji University. I would particularly like to mention Mr.

FUJITA, Ms. LIU and Mr. FUJII for being so supportive and patient with me throughout these

years. My highest gratitude also goes to my colleagues: TAKEUCHI, KIM-KO-KEN,

KAMIGAWARA, SOGA, YUZAWA, and TAKAHASHI at the Meiji University with whom I

could share and overcome the challenges in graduate school life. I also benefited from the support

of all the members of Professor FUKUDA’s Lab as well as Pr. KOBAYASHI’s. Thanks to

Professor Atsushi YOSHIDA, Tatsuya YAMANAKA, Kento OTSU, Mitsuki FUKASAWA

among many others.

xiv

Last but not least, this journey started in Madagascar, and I would not be here without the

precious support of my family. My warmest regards and gratitude to my lovely parents for their

unwavering support and trust, and to my brothers. Thanks also to Valerie for being the pillar on

which I could rely on during the times I thought I could not do it. Misaotra betsaka anareo.

1

INTRODUCTION

2

A. The Longstanding Developmental and Industrialization Failures in the Developing

World: The Sub-Saharan African Exclusion and the Southeast Asian Exception

By the post-World War II era, and particularly from the 1960s when European colonialism

was put to an end by widespread movements for independence, the newly independent nations of

Africa and Asia has been striving for economic development. The goal of this early period of

independence was to catch-up with the former colonialist western nations in order to achieve

political as well as economic independence. However, most of the early attempts on Import

Substitution Industrialization (ISI) did not meet the expectations, and several countries have fallen

into economic recession or were even forced to declare bankruptcy.

Therefore, by the 1980s after the so-called “second death” of Keynes, western

neoliberalism has been the dominant ideology not only among politicians but also economists and

development practitioners. Thus, a policy package prepared by the World Bank (WB) and

International Monetary Fund (IMF) called “Structural Adjustment Programmes (SAPs)” has been

prescribed to several developing countries as a solution to their poor socio-economic conditions.

The SAPs recommended the participating countries to reduce public spending and state

intervention on the economy, privatize the State Owned Enterprises, and to open their economy

to foreign goods and capitals. In other words, the poor and severely indebted developing countries

were advised to surrender their economic fate to the market mechanism which is considered the

most efficient way for resource allocation.

Unfortunately, the WB and IMF-backed economic policy not only failed but numerous

studies pointed out its negative effects particularly in the Sub-Saharan African (SSA) countries.

Indeed, the SAPs has been considered as the main cause of the so-called African “lost decades”

during which the SSA region saw low and sometimes negative economic growth rates. Moreover,

several African countries suffered from deindustrialization and increasing external dependence

during this period. Thus, the Southern African region has never been able to transform the

structure of its economy and to achieve the aspirations of economic development and

independence. This situation has been described in the literature as the African exclusion from

the global system or as a “curse” blaming on exogenous factors such as geography, culture, and

history. In both cases, the developing African countries have been seen as an anomaly rather than

as the evidence of the market’s shortcomings.

However, critics of the mainstream market fundamentalism argue that the failure of the

adjustment programme in delivering economic growth and economic development is a testimony

of the fact that the neoliberal policy prescription has been based on an incomplete or inaccurate

3

understanding of the real world. In this regard, the heterodox literature often turns to the East

Asian countries’ economic development experience. Indeed, various studies (which we will

discuss further in the next chapters) have pointed out the difference of the East Asian development

model from the western one. Moreover, data show that the great divergence between the African

and East Asian region coincided exactly to the period of implementation of the SAPs. This

phenomenon becomes even more salient when we only compare the Southern African countries

with Southeast Asia.

Figure A. Export Sophistication Index (EXPY)1, 1995-2015

Source: Author’s own calculation from WITS databank

The Southeast Asian countries had taken over and had been outperforming the SSA

countries since the late 1980s. The African countries have once again missed an opportunity for

1 Estimating the level of technological sophistication embodied in a country’s export portfolio gives an indication of

that country’s economic development. PRODY is an outcome-based measure of sophistication: if a product is mostly

produced by rich countries, then it is revealed to be a “rich,” or sophisticated, product. PRODY is calculated as a

weighted average of per capita GDP of countries producing that product, with weights derived from revealed

comparative advantage.

Mathematical definition: 𝑃𝑅𝑂𝐷𝑌𝑔 = ∑ 𝑅𝐶𝐴𝑔𝑐 𝑌𝑐

𝑔 ; 𝐸𝑋𝑃𝑌𝑐 = ∑𝑋𝑔

𝑐

𝑋 𝑐⁄ × 𝑃𝑅𝑂𝐷𝑌𝑔 (with g indicates the product

and c the reporter country). A higher PRODY indicates a more sophisticated product. A high EXPY indicates a more

sophisticated export portfolio.

8.6

8.8

9

9.2

9.4

9.6

9.8

10

10.2

1 9 9 5 2 0 0 0 2 0 0 5 2 0 1 0 2 0 1 5

SADC ASEAN Canada Germany

France Japan United States MERCOSUR

4

economic structural transformation conversely to their Southeast Asian counterparts. Although

the determinants of the spectacular transformation of the Association of Southeast Asian

(ASEAN) countries are still subject to hot debate, the important role played by regional

production networks, and manufacturing exports is widely recognized. In this regard, the ASEAN

experience of high and sustained regional growth is unique among the developing regions.

Moreover, the ASEAN model of development-oriented regionalism is contrasting with the

European model and may offer an alternative perspective on development and structural

transformation in the 21st century.

Thus, the objective of this thesis is to analyze and compare the latest case of regional

divergence in the developing world, i.e., SSA and Southeast Asia. This thesis will particularly

investigate the condition and process of structural transformation within the context of regional

economic arrangements. The main goal is to demonstrate that the ASEAN model has overcome

the limits of mainstream thinking and that it is a relevant alternative perspective regarding how

to achieve structural transformation in the developing countries. In doing so, we will address this

issue by examining the political economy of regionalism and development in the current era and

by performing some empirical analyses to see further in detail the factor of success and failure of

industrialization in a regional integration context. Our study will particularly compare the regional

performance and integration process of the Southern African Development Community (SADC)

and the ASEAN.

B. Structural Change and South-South Integration

The structural change perspective has its foundations from earlier works of scholars such

as Albert Hirschman, Arthur Lewis and Raul Prebisch in the 1950s, who viewed economic

development as a process of reallocation of labor from the “traditional” agricultural activities to

the “modern,” i.e., technology and skill-intensive economic activities. A point of view that is still

valid today argues that economic growth results from the reallocation of the factors of production

from low-productivity sector to a more dynamic and productive sector such as the industrial and

service sectors.

However, although this observation has been consistent with the pattern of development in

today’s industrialized countries, the absence of such transformation fifty years later in a majority

of developing countries is still at the center of academic debates. Indeed, the literature on

economic development has identified the existence of low- or middle-income traps from which

many countries failed to escape (Alejandro, 2015). These so-called “traps” describe a situation in

which low- and middle-income countries fail to complete their structural transformation and

5

catch-up with their high-income counterparts. In this thesis, our attention will be turned mainly

to the low-income trap and the causes of the persistence of underdevelopment and the lack of

industrialization in some regions such as SSA.

Recent findings suggest that not all structural changes lead to the path of economic

development, i.e., high and sustained economic growth (Timmer et al., 2014; Alejandro, 2015;

Rodrik et al., 2017). Indeed, scholars point out the importance of dynamic productivity gains,

which can be achieved through technology upgrading and innovation. In this regard, within the

modern sector, manufacturing activities have been found to be much more conducive to

innovation and thereby to dynamic gains than the service sector. Therefore, Rodrik et al. (2017)

suggest that despite the recent growth boom in Africa and Latin America, these two regions still

failed to transform and diversify their economy because of the low involvement of the

manufacturing sector in their structural change, conversely to what is seen in the ASEAN. This

shows the limits of the traditional convergence theory and sheds light on the adverse effect of

free-market and globalization on the industrialization process in the developing economies.

Thus, this thesis addresses this problem by acknowledging the importance of

industrialization and structural change but also by discussing the opportunity from a South-South

regional economic integration. Indeed, the main contribution of this thesis is the combination of

two areas in the literature which have respectively provided tremendous advancement in the

understanding of economic development but in separated frameworks. On the one hand, the

economic structural transformation approach enables us to understand and explain the persistence

of low-productivity activities in some developing regions and the causes of the rapid catch-up

growth in the ASEAN economies. The structural transformation approach allows us to compare

the nature and component of the economic growth in different regions and countries and thereby

determine the cause of the difference in their performances. However, this approach lacks a

deeper understanding of the role of international factors such as trade relationship and foreign

direct investment, and thereby failed to explain the longstanding African failure. Therefore, the

second approach puts particular attention on regional integration and especially South-South

regional economic integration. Not only this approach allows us to examine the impacts of

dynamic factors such as trade and investment flows but also to investigate the opportunities and

risks from economic integration. Most importantly this second approach allows us to analyze and

compare the outcome of different economic relationships existing in the real world such as North-

South (N-S), South-South, preferential or non-discriminatory economic arrangements.

6

This thesis discusses and analyses the problem of economic development and

industrialization in the 21st century by considering and combining two theoretical perspectives:

structural change and regionalism. The main argument from this work is that while

industrialization and export sophistication are crucial for long-term growth and development, the

conditions for their success would not be met only through the traditional market fundamentalism

and multilateralism. Rather, a well-devised strategy to promote the expansion of a region-wide

production network in manufactured products would not only increase the developing region’s

attractiveness to foreign capital but also allow a faster and more extensive diffusion of knowledge

and technology between participating countries. Moreover, regional arrangement between

neighboring developing countries such as in the ASEAN mitigates structural disadvantages such

as the lack of capacity both on the supply- and demand-side, access to intra-industry trade, access

to the sea for landlocked countries, high cost of cross-border transport and trade infrastructure

investment, and lack of bargaining power at the global level.

C. Research Approach

This thesis proposes a multidisciplinary framework which combines different research

approaches. This framework can be divided into two complementary parts: political economy and

empirics.

The first parts of this thesis discuss the fundamental relationship between trade and

development which has been shaping the global economic system through history. We

demonstrate through an extensive review of the literature and theoretical investigations why

mainstream economics has consistently failed to address the issue of underdevelopment or the so-

called low-income trap, in many regions particularly in Sub-Saharan Africa. Then, following the

alternative approaches proposed in the heterodox literature, we examine the relevance of regional

integration as a tool for economic development.

Historical data on regional economic performance are analyzed to show evidence of

divergence of development pattern in the SADC and ASEAN. This examination is then

complemented with a comparative analysis of the two regional schemes to show the relevance of

the ASEAN model as alternative industrialization and catch-up growth strategy. The African case

is mainly analyzed from an institutional economics perspective to highlights the long-term

consequences of past historical and policy events and the importance of structural transformation

and regional integration.

7

The empirical analysis part builds on the earlier political economy discussion and

investigation and focuses mainly on the relationship of structural transformation and regional

integration in the SADC and ASEAN. Comparative analysis of descriptive statistics is performed

in order to justify the choice of the population (SADC and ASEAN), period (1980-19982 and

2000-20143 ), and the main explanatory variables: merchandise trade, manufacturing exports, and

foreign direct investment.

One of the contributions of this thesis is the use of multilevel empirical analysis to interpret

and examine the interplay between different economic variables and their consequence on

regional growth and trade pattern. Therefore, a three-stage analysis of growth acceleration, growth

decomposition and gravity model of trade is performed for a comprehensive understanding of the

ASEAN model. The most comprehensive and recently available data from the GDC and CEPII

database are used for this purpose.

The three-stage empirical analysis is then complemented with a panel data analysis of the

determinant of trade between 5 SADC countries chosen arbitrarily under the criteria of data

availability and their comparability with the ASEAN countries with regards to their underlying

characteristics. We believe that this is the first attempt in constructing such panel data and in using

such econometric technique on the case of African regionalism.

Finally, these results are summarized, and the policy implications of our findings are

discussed. This part of the thesis highlights the multidisciplinary approach of this thesis by

drawing from different perspectives to assess the relevance and the possible applications of the

ASEAN model in the real world. Not only are the policy recommendations based on our

theoretical and empirical findings but also a recent development in the global economic and

political system.

D. Structure and Organization of the Thesis

The research approach described above is organized as follow:

In chapter 1, we review and discuss all the relevant literature which address the question of

trade and economic development. We summarize the evolution of the dominant economic

thinking on economic development which supports the superiority of an unregulated market

economy. On the other hand, we also discuss the works of some of the most prominent critics of

this dominant thinking which pointed out its shortcomings concerning the promotion of economic

2 For analysis involving only the ASEAN 5. 3 For analysis involving both ASEAN-10 and the SADC

8

catch-up and convergence between the developed and developing countries. Then, the review of

the East Asian miracle, in particular, lays the basis of our approach which focuses on structural

transformation and unorthodox policymaking which include non-market tools and preferential

trade strategies. Lastly, the proliferation of regional integration and the case of ASEAN is

discussed to justify our focus on a non-traditional and multidisciplinary theoretical framework in

the study of structural transformation in low-income countries.

In chapter 2 we introduce the core conceptual framework followed throughout this thesis

which is the Southeast Asian model of developmental regionalism. In this chapter, we provide

pieces of evidence of the existence and relevance of an ASEAN model characterized by a

structural transformation based on regionalization of investments, trade, and manufacture

production. We also discuss why the traditional theory on regional integration is not able to fully

grasp the underlying mechanism which led to the success of the ASEAN. Thus, we argue that

instead of only focusing on static welfare gains from trade, this thesis will approach the question

of structural transformation and regional integration through a new regionalism perspective. The

new regionalism framework allows for multidisciplinary and dynamic analysis of the question of

regional integration and therefore makes it possible to focus on other phenomena such as

structural transformation, regional production networks, bargaining power. Lastly, this

framework also gives the possibility of a comparative analysis of different regional schemes such

as the SADC and the ASEAN.

Based on this conceptual framework, chapter 3 discusses the dichotomy between North-

South and South-South economic integration. It is argued that the traditional North-South trade

and economic relationship can hardly foster changes in the economic dependence trajectories of

the Southern countries. Conversely, South-South regional schemes such as the ASEAN, among

others have the potential to overcome some of the major structural obstacles to structural

transformation in the developing world. Indeed, chapter 3 reports some empirical studies and

concludes that South-South economic integration could be more conducive to economic

diversification, knowledge and technology spillover, investment in manufacturing and eventually

to structural transformation because of the smaller gap in their technological capabilities which

facilitates intra-trade industry and learning by doing. In this regard, South-South regional

integration can be the first step toward long-term industrialization and global competitiveness of

exports for developing countries. Therefore, the original contribution of this thesis is the

demonstration, through a comparative analysis, that SADC’s and ASEAN’s economic

performance gap is related to their different approach to regionalism. This preliminary

comparative analysis shows that the ASEAN’s intermediary approach to regional integration has

9

been more successful regarding industrialization than the SADC’s approach based on the

European model.

Chapter 4 digs further in this line of reasoning and by following an institutional economics

approach to examine the case of the Sub-Saharan African countries and the SADC countries in

particular. The institutional concept of transaction costs and path dependence explains that the

mainstream economic model prescribed in the region ended up only to reinforce the existing

predatory and inefficient economic structure shaped by historical and other exogenous

circumstances. The Chapter discusses the importance of structural change and regional integration

as a way out from this undesirable path.

Chapter 5 is an initial comparative analysis to set the theoretical and conceptual background

of our empirical study. This chapter summarizes our approach focusing on regional integration

and structural change, the relevance of which has been discussed and demonstrated in the previous

part. Descriptive statistics and graphics analyses comparing the ASEAN with other developing

countries’ regional arrangements also complement the previous discussions on the unique

characteristics of the Southeast Asian model. These data are also used to justify the choice of

variables in the empirical studies in the next chapters.

In chapter 6 we undertake the first level empirical analysis using the most recent data and

econometric techniques. The contribution of this thesis is the combination of the growth

decomposition model with a gravity trade model analysis. This econometric technique aims at

showing evidence of structural change in the ASEAN countries during the first episode of growth

acceleration after the implementation of the AFTA. The three-stage empirical methodology

enables to observe the relationship between regional integration and structural transformation in

the ASEAN.

On the other hand, chapter 7 examines the causes of the failure of the SADC countries

which prevent them from achieving the same type of economic transformation and diversification

observed in the ASEAN. For this purpose, an innovative panel data linking trade intensity index,

preferential tariff margin, revealed comparative advantage and revealed technology content was

constructed following the methodologies presented by Moncarz et al. (2011). Following this

methodology, a panel data analysis is realized in order to identify the regional bottlenecks that

explain the difference between the ASEAN and the SADC regarding economic diversification

and technological upgrading.

10

Chapter 8 summarizes and interprets these two empirical results and draw some general

policy implications about the strategy for achieving structural transformation and breaking out of

the low-income trap. This last chapter connects the previous theoretical and empirical results with

a concrete example in the real world. Thus, the ASEAN model is clearly defined and is used as a

benchmark for other regional projects in other developing regions such as the SADC.

Finally, we summarize the major findings and contribution of this thesis in the conclusion

part. Theoretical implications and the research limitations are discussed to outline the direction

for future investigations.

11

Part 1. POLITICAL ECONOMY OF REGIONALISM IN THE 21ST

CENTURY: REVIVAL OF SOUTH-SOUTH REGIONAL

INTEGRATION AND THE LIMITS OF GLOBALIZATION

12

Chapter 1- Literature Review: On the Trade and Economic

Development Relationship and the Case for Regionalism

13

The debate concerning the real meaning and impact of globalization on economic

development is still much alive among development economists. Globalization is usually

understood as the increasing integration of countries into the world market, or in other terms the

expansion of international trade. Generally, the debate opposes two ideas, on the one hand, the

free trade and market liberalization supporters mainly represented by the neoclassical school, and

on the other hand, the “heterodox economists”, who suggest that unregulated free trade and total

economic liberalization is responsible for the increasing economic divide between the rich and

poor in the world. In this chapter, we will first introduce the dominant neoclassical trade theory

and its free market and trade liberalization advocacy. We will then expose some limitations to

these theories using arguments from the heterodoxy literature. Thirdly, we will discuss the

unorthodox development model of the High Performing East Asian Economies (HPAEs).

Moreover, lastly, we will see that in reaction to the current international trade system induced

inequality, instead of global integration the trend has turned toward regionalization of the world

economy.

1-1 The Dominant Neoclassical View and its Free Trade Arguments

Following Adam Smith’s “Wealth of Nations” (1776), trade theory and economics in general,

has been historically dominated by the ideas of the supporters of free trade. The basis of

international trade theory has been laid in Ricardo’s much-celebrated book “On the principles of

political economy and taxation” first published in the nineteenth century. Both authors pointed

out the importance of labor division and specialization to gain efficiency and become competitive

in the international market.

1-1-1. The Law of Comparative Advantage

Ricardo demonstrated that the division of labor and production specialization is defined by

the law of comparative advantage. In other terms, “on the assumptions of perfect competition and

the full employment of resources (although not made explicit), countries can reap welfare gains

by specializing in the production of these goods with the lowest opportunity cost and trading the

surplus of production over domestic” (Thirlwall, 2000). Therefore, under these assumptions,

countries would be able to make the most of these gains by engaging in free trade and removing

all barriers to trade. Ricardo’s demonstration challenged the former mercantilist ideology which

defined a country’s prosperity by its capacity to accumulate profit by expanding its market

(sometimes by using force) at the expense of other countries. Thus, the law of comparative

14

advantage was the first theory to demonstrate that a win-win trade situation is possible through

production specialization and international division of labor. However, the gains described above

are static, once-and-for-all, and can be exhausted if no further reallocation is possible4.

1-1-2. The Heckscher-Ohlin Factor Endowment Model

Although Ricardo’s merit was that he proved the universality of production-sharing and the

mutual benefit from international trade, empirical studies have proved that his model is of little

use into describing trade pattern in the real world. Indeed, the model’s one production factor

(labor) and the constant returns to scale assumptions are far from the real economy and loosening

these assumptions would make the model lose its explanatory power. Therefore, some scholars

tried to construct new models which could better explain the real pattern of international trade

and to prove the positive effect of free trade on a country’s economic growth. That marked the

birth of the neoclassical trade theory and its marginal methodology that started to dominate the

economic thinking since the 20th century. These new generations of trade theory first introduced

the role of demand and supply, which has been ignored by Ricardo, in determining the terms of

trade. Another contribution, by Alfred Marshall (Sen, 2010) was his “real costs” of production

factor5 and the diminishing returns with changing factor proportions.

These new concepts along with the Austrian school’s notion of “opportunity cost” have laid

the basis for the famous HOS (Heckscher-Ohlin-Samuelson) model that supported the case of

free trade. Contrary to the one factor Ricardian model, the HOS model introduced the capital

factor of production( K ) and assumed that prices of goods are determined by relative factor prices

w/r (with w the factor price of labor and r that of capital) (Heckscher, 1915, Ohlin, 1933;

Samuelson, 1948) . Thus, according to the model, w is lower in labor (L) abundant country and

rare lower in capital (K) abundant. Regarding demand, consumers ‘demand for K-intensive goods

would be higher in the L-intensive country and vice-versa. Similarly, for producers, it would be

cheaper and more profitable to produce and export K-intensive goods if they are from a K

abundant country. Thus, the HOS model concludes that free trade would ensure an efficient

international division of production if each trading country specializes in the production of the

good in which they have a comparative price advantage. In other words, free trade would lead to

a Pareto-optimal equilibrium thereby increasing production efficiency and consumers’ welfare.

4 Deraniyagala and Fine (2001) report that empirical studies showed that static welfare gains rarely exceed 2 or 3

percentage point of GDP. 5 “These costs, for Marshall, were measured by the subjective disutility or sacrifices of labor at the job.” (Sen, 2010,)

15

This is called the “Heckscher-Ohlin factor endowment theory.” The HOS factor endowment

theory has succeeded in overcoming the limitations of the one-factor Ricardian model and

explaining the role of demand (consumer preferences) in settlement of trade between nations.

1-1-3. Dynamic Gains from Trade

Furthermore, in order to answer the criticisms on the limits of its static equilibrium analysis,

the neoclassical school has provided some arguments on the existence of dynamic gains from free

trade.

Thus, the first argument that has been brought on the table is the “rent-seeking” behaviors

that result from state intervention. Indeed, government trade interventions (such as import quotas)

were found to generate welfare losses that are significantly increased by the existence of rent-

seeking behavior (De Melo and Robinson, 1982; Gallagher, 1991). From the neoclassical point

of view, trade liberalization will ensure export efficiency and encourages entrepreneurship by

increasing competitions. Therefore, an intervention will reduce competition and thereby

encourages entrepreneurial slack.

Another source of dynamic gains from liberalization is the IRS (increasing return to scale)

that results from the reduced production costs and higher levels of output. Free trade is also argued

to foster innovation and thus to allow firms to benefit from long-term productivity gains.

Because of the apparent inconsistency of the neoclassical arguments with empirical data,

new models and theories have emerged in order to address the problem. These new waves in the

economic literature are commonly called “new trade theory” (NTT).

1-1-4. New Trade Theory

New trade theory (or NTT) provides additional tools to explain new patterns in international

trade and overcome the limitations of the HOS model. Therefore, some of the underlying

assumptions of the traditional theory were relaxed or even abandoned in the process.

In general, scholars in NTT expand their studies by incorporating imperfect market, scale

economies and strategic behavior to their analysis of international trade. Although these new

parameters discarded some of the underlying assumptions of the traditional theories, NTT’s

general conclusion still goes in favor of trade liberalization. For instance, for NTT proponents,

the existence of scale economies and monopolistic or oligopolistic competition can justify

16

international trade. Indeed, according to Sen (2010) “scale economies, which are external to the

firm and internal to industry, production achieve a global span regarding location." In other words,

economic liberalization enables to reduce cost as well as dislocate production from

areas/countries where it is less cost-efficient on a global scale. This has been used as an argument

for free trade since trading nations can realize an increasing return to scale on a global scale.

Further, it is argued that small economies will benefit from trade liberalization by realizing

economies of scale resulting from their access to a bigger market. Concerning consumer

preferences, NTT assume that trade is still possible between two countries with similar factor

endowments because of product differentiation which allows intra-industry trade (Krugman,

1980). Thus, free trade will increase consumers’ welfare gain by broadening the variety of goods

they can consume. NTT also recognize the use of strategic trade and industrial policy in the

presence of market imperfection (e.g., asymmetry of information) and oligopolistic competition

in the global market. However, Deraniyagala and Fine (2001) report that neoliberal economists,

still consider free trade as the best strategy because “government has neither the knowledge nor

the ability to be selective in its policy interventions.”

It was on the ground of these arguments that the neo-liberal ideology has taken over the

world’s economic thinking and policymaking by the end of the cold war in the late 1980s. The

neo-liberal policy recommendations had strong influence particularly in the developing world,

given the failure of the former Import-Substituting Industrialization policy and the outstanding

economic performance of the East Asian countries. Thus, the supremacy of the neoliberal thinking

has been materialized by the so-called “Washington Consensus”6 that has been supported by the

Bretton Woods Institutions (BWIs) and the major developed countries in 1990 (Williamson,

1990). Comforted by the failure of the Keynesian model and the subsequent “stagflation” that the

world went through, the BWIs along with neoliberal policymakers advised the developing

countries to undertake several “market-friendly” policy reforms. According to Lapeyre (2004),

these reforms included: “fiscal discipline; tax reform; interest rate liberalization; a competitive

exchange rate; trade liberalization; liberalization of inflow of foreign direct investment;

privatization; deregulation; secure property rights; and, lastly, a redirection of public expenditure

priorities towards areas offering both high economic returns and a potential to improve income

distribution, such as primary health care, primary education, and infrastructure”. These set of

reforms were a part of policy package commonly known as “structural adjustment programs” that

aimed to integrate the indebted developing countries into the world market mechanisms. Thus,

6 “The expression ‘Washington Consensus’ came to stand for the stabilization, liberalization and structural adjustment

policies”. (Lapeyre, 2004; p.6)

17

the goal was to avoid state interference in the domestic economy and leave the role of resource

allocation to the market.

Several studies have been realized to assess the effect of liberalization on economic growth

especially in developing countries. The observed results were somewhat ambiguous, but in

general, the orthodoxy literature found a positive impact of free trade and economic liberalization

on export and economic growth. One of the most popular among these studies was made by Sachs

et al. in 1995 assessing the effect of liberalization in many developing countries comparing their

performance before and after they opened their economy. They defined a closed economy

according to 5 characteristics: (Sachs et al., 1995; p.22)

① Nontariff barriers (NTBs) covering 40 percent or more of trade.

② Average tariff rates of 40 percent or more.

③ A black market exchange rate that is depreciated by 20 percent or more relative to the

official exchange rate, on average, during the 1970s or 1980s.

④ A socialist economic system.

⑤ A state monopoly on major exports.

If a country shows one of these characteristics, it is considered as closed. In their study, Sachs

et al. (1995) distinguished two periods, 1950-1960s during which the world saw a temporary

liberalization, and the period between 1970-1989 when several newly independent economies

along with the Soviet Union countries have chosen to close their economy and to experiment what

is known as “state-led industrialization” (SLI). Comparing the growth performance of a sample

of countries during the two periods, the authors found that these countries grew faster during the

period of liberalization. Moreover, they also note that from 1970 to 1989 open countries

outperformed those that have closed their economy. In general, open economies did better than

the closed ones in three main dimensions: economic growth, avoidance of extreme

macroeconomic crises, and structural change (Sachs et al., 1995).

In sum, the mainstream neoclassical literature is rich in evidence and arguments in favor of

free trade. The current capitalist system is based on the neoliberal ideology and the belief that

economic growth and development will only be achieved through market mechanisms without

state interference. In the next section, we will see that the reality is far more complex than the

simplistic neoliberal model and that the heterodox literature has some arguments in their favor.

18

1-2. Economic Globalization a Policy Induced and Biased Phenomenon? Evidence from

the Heterodox Literature

This first chapter will summarize the different views of six major authors (Stiglitz, Chang,

Thirlwall, Amsden, Wade, and Rodrik) that point out the limits and the flip side of globalization.

Although each of the authors is addressing the question of globalization from a different

perspective, they all agree on the fact that strong institutions and state apparatus are determinant

to sustain economic growth in the long run.

1-2-1. Stiglitz: High Volatility and Uncertainty in the Financial Market

Stiglitz is famous for having demonstrated that a perfect information market rarely exists in

reality. Thus, we need to find the right mix of market and state intervention to ensure the

efficiency of resource allocation. He provides strong critics on globalization, particularly

concerning its financial aspects. Stiglitz argues that the financial market is highly unstable and

should not be left unregulated (Stiglitz, 2004). In his view, the financial market is characterized

by high level of transaction costs, information asymmetry and “irrational behavior.” Thus,

globalization is likely to encourage short-term capital-flow which is highly volatile and is

characterized by a pro-cyclical movement (Ibid.). This results in high consumption volatility and

high instability of the overall economy. The developing countries are the most vulnerable to these

rapid and pro-cyclical movements of short-term capital.

Stiglitz also argues that the current model based on free-market was encouraging financial

innovations that eventually led to crises such as the subprime crises in 2008. Moreover, he notes

that these crises occur more frequently than the advocates of financial liberalization would admit

it (Stiglitz, 2010). Therefore, he suggests that we need to contain the rapid expansion of the

financial market in order to reduce the frequency of cyclical crises through:

-government intervention: to protect the domestic economy from economic crises contagion

-capital gains taxes: to avoid speculations and short-term capital flow

-financial transaction tax such as the Tobin tax: to prevent the market from currency

exchange speculation.

1-2-2. Thirlwall: Static and Dynamic Gains from Trade

Thirlwall (2004) argues that although trade liberalization has a positive impact on economic

growth at least in the short-term, there is no evidence in trade theories implying that the benefits

19

from trade are shared equitably between countries. Indeed, he points out the limit of economic

liberalization in capturing trade’s static and dynamic gains.

The static gains, in other words the gains that a country draws from specializing in products

in which it has a comparative advantage, can spur economic growth under two assumptions: (1)

the preservation of full employment during the process of reallocation, and (2) that trade

liberalization does not lead to higher imports. However, the author argues that these two

conditions are rarely satisfied in reality and that the orthodox models often ignore the effect of

trade liberalization on the balance of payments 7 . It implies that the inequality in income

distribution between industrialized and developing countries increased as a result of the

deterioration of the terms of trade between manufactured and commodity goods.

The dynamic gains from trade are generated from the increase in output and efficiency

because of some externalities such as technology spillovers, scale economies, learning by doing.

In other words, the dynamic gains of trade are obtained by the shift from low to higher value

added of the production possibility frontier in a country. However, this shift rarely occurs

automatically, and Thirlwall (2000) argues that a certain amount of protection and government

intervention are necessary for the developing countries to change the structure of their economy

and capture trade’s dynamic gains.

1-2-3. Chang: The “Kicking Away the Ladder “Thesis”

Ha- Joon Chang is probably one of the most prominent critics of the neoliberal development

model. He established the so-called “kicking away the ladder” (Chang, 2002) theory arguing that

none of the today’s rich countries has developed through liberal policies and the imposition of

market liberalization to the developing countries today can be seen as an attempt to impede on

their development. Chang based his analysis on the historical evolution of economic policies and

institutions in what he calls “the now developed countries” (NDCs) such as USA, Great Britain,

France, Sweden, Switzerland, Germany, Netherland, and Japan. He found out that all of these

countries had from one way or another used protectionist and interventionist policies to

industrialize and develop their economy (Ibid.)8.

7 In this regard, Thirlwall (2012) summarizes his study on the effect of trade liberalization in 22 developing countries

as follow: “Trade liberalization itself, controlling for all other factors, has increased the growth of imports by between

5 and 6 percentage points, which represents a near doubling of the pre-liberalization import growth.” 8 Chang (2003) reported that the average tariffs on manufactured products in the nineteenth Britain and USA stood

averagely between 35 to 55 percent compared to 8-12 percent in Germany during the same period. And the USA has

even maintained this rate until the mid-20th century. (Chang, 2003; p.17)

20

Chang, argues that the neo-liberal policymakers push for free-market, foreign direct

investment and “good institutions” (that is the western model of political and economic

institutions) in the developing countries do not work (Chang, 2007). Indeed, he suggests that:

At the early stage of industrialization, developing countries need to protect their economy

against foreign competitors in order to give enough time for domestic industries to improve

their capabilities and efficiency. This is known as the “infant industry” model that has been

used by most of the NDCs.

Foreign direct investment (FDI) should be regulated in order to promote technological

spillovers and diffusion of knowledge. Indeed, Chang (2007) argues that foreign direct

investments if not regulated are most of the time delivering poor outcome in the long run.

Most of the set of “best practices and good institutions” that are recommended by the

neo-liberal policymakers to the developing countries today are the outcomes of development

rather than the opposite.

Thus, Chang suggests that the developing countries would perform better in the long run if

governments were allowed to intervene in the domestic economy and implement their industrial

and trade policies.

1-2-4. Amsden and Wade: “Governing the Market” the Importance of Knowledge and

Experimentations

Amsden argues that the manufacturing sector, more precisely the mid and high-tech sectors,

is the heart of modern economic growth. Indeed, compared to the primary commodities that often

encourage rent-seeking behaviors (Amsden, 2001) manufactured goods’ prices are more stable

and tend to be higher. The shift from commodity exports to manufacturing needs high

accumulation in skilled human capital and physical capital or of what Amsden calls “knowledge-

based assets.” She distinguishes three generic technological capabilities that nurture knowledge-

based assets: “production capabilities (the skills necessary to transform inputs into outputs);

project execution capabilities (the skills necessary to expand capacity); and innovation

capabilities” (Ibid.).

However, these knowledge-based assets are difficult to acquire since they are not fully

documented and they are usually firm specific. Besides, the current regulations on intellectual

property rights make technology transfer and diffusion of knowledge even harder. In other words,

21

the market faces a situation of imperfect knowledge which explains the difference in productivity

between firms and between the same firms in different countries.

Therefore, Amsden (2001) argues that in order to close this knowledge gap and catch-up

with the west the East Asian governments intervened actively by subsidizing their manufacturing

industries.

In this regard, Wade (1990) refers to the term “Governing the market” to describe the set of

institutions and policies implemented by the East Asians states to support some selected industries

in the mid and high-tech sectors. By governing the market, he points out the role that government

played in steering and coordinating the strategies of the private sector through different

institutions such as the MITI in Japan or the IDB in Taiwan-china (Taiwan).

The East Asian governments intervened actively in the resource allocation to infrastructural

sectors like steel and basic chemicals not mainly to promote productivity growth in those sectors

but to enhance spillover benefits on the users of steel and basic chemicals. In this regard, Wade

suggests that “the observed sequences in East Asia better fit the hypothesis that as countries grow

richer, they liberalize trade, than the hypothesis that trade liberalization propels countries to

become richer.”

The market in the real world and particularly in the mid and high-tech industries are full of

shortcomings such as a barrier to entry, investors risk aversion, oligopoly, knowledge externalities,

scale economies that justify state interventions9.

1-2-5. Rodrik: Market Supporting Institution

In General, Rodrik’s main argument is that the market is not self-adjusting, nor it is self-

regulating and that some market supporting institutions need to be created if to achieve sustainable

economic growth. Indeed, Rodrik (2005) notes that even the very liberal set of policies known as

the “Washington consensus” is recommending several political and institutional reforms that are

believed to improve the functioning of the market in the developing countries. However, he also

argues that institutional arrangements are not “one size fits all” since the condition in every

9 Wade (2014) even suggests that the developed countries such as the USA are using policies that are similar to the

industrial policies used by the East Asian countries. Indeed, the US government is promoting technological progress

through military R&D and by building and supporting networks between firms, scientists, engineers, venture capitalists

and universities.

22

country is different. Thus, this may explain the poor outcome yielded by the neoliberal reforms

regarding poverty alleviation in the developing world and particularly in SSA.

Indeed, in his famous book “The Globalization Paradox: Why global markets, States, and

Democracy cannot coexist” published in 2011 Rodrik argues that a fully Globalized economy is

neither feasible nor desirable. Firstly, he points out that a globalized economy would need to be

supervised and supported by a Global institution. However, genuinely globalized governance

faces several economic, social and political obstacles that make its implementation impossible, at

least in the foreseeable future. Rodrik refers to the European Union as the best evidence showing

the shortcomings of a single government at the global level10.

Secondly, the “Nation State” is still playing an important role and is likely to play a more

significant role in the future. Rodrik (2011) argues that the world is not as globalized as one might

think it is. Indeed, he reported the results of different studies suggesting that we are far from a

borderless world and national identity, social appurtenance, and distance still influence the

behaviors and choices of the majority of us. Therefore, what matters for economic development

is the kind of policies and institutions implemented at the domestic level. Some reasons are

suggesting that the Nation-State is preferable to a fully integrated and unregulated economy. The

most important is maybe the heterogeneity and complexity of social relations in the real world.

This implies that different societies and communities have different preferences and needs and

thereby an unregulated market would inevitably leave some individuals better off and others

worse off. Therefore, regulations and supporting institutions are necessary to correct this

redistribution failure to achieve economic development. In this regard, globalization is likely to

benefit the developed countries that have enough economic and political power to impose their

standards and rules to the others.

In short, Rodrik argues that globalization has increased the gap between the rich and

developing nations as well as rich and poor individuals within nations11. Moreover, the real world

is characterized by high diversity and complexity, and a “one size fits all” policy and regulation

are unlikely to address the situation. Instead, the author suggests that more space should be given

10 Rodrik points out the conflict concerning Turkey’s membership or the fact that during the financial crisis in 2008

there was no coordination among the EU governments and that “bailouts of Banks and other firms were carried out

separately by individual governments” (Rodrik, 2011; p.218) 11 Rodrik (2011) notes the existence of an “opportunity gap” between the elites and the majority of the population. In

other words, he argues that the well-educated and rich elites can take advantage from globalization protect themselves

from its adverse effects whereas the other part of the population would be powerless against the fluctuation and

volatility of the global economy.

23

to a democratically elected state whose policy and institutions will reflect the choices and

preferences of the majority.

1-3. Unorthodox East Asian Development Model: The World Bank’s “East Asian Miracle”

Report

The developmental state concept has been inspired by the experiences of the High

Performing Asian Economies (HPAEs) namely: Japan, South Korea, Taiwan, Hong-Kong,

Singapore, Malaysia, Indonesia, and Thailand. Therefore, an overview of the policies

implemented in the HPAEs will enable us to understand the role and the functioning of the

developmental state in practice. In general, the HPAEs’ governments are regarded as

developmental because they satisfied the conditions described earlier namely: commitment to

achieve economic development (developmentalist ideology), and a capable bureaucracy with an

“embedded autonomy” (particularly in Japan and South Korea). It is now broadly accepted that

the governments in the HPAEs of the time did intervene in various areas of the economy from

resources allocation to market-price distortion. Thus, assessing the role of the government in the

successful national planning and industrialization of the East-Asian economies requires the

understanding of their resource accumulation mechanisms, resources allocation and selective

interventions, and their process of institution building.

1-3-1. The Mechanisms of Resources Accumulation

The East-Asian developmental state performed very well in fostering capital accumulation

and directing these resources to the right public as well as private investment projects. The World

Bank, in its report on the East-Asian miracle (1993) exposed the different policies and strategies

used by the HPAEs’ governments to achieve rapid resources accumulation and correct

“coordination failures.” The East-Asian governments had intervened for the accumulation of the

three different types of capital namely: human, financial, and physical capitals. Also, the high

pace of resource accumulation had undoubtedly played a significant role in the high and

sustainable growth rate in these economies.

The promotion of universal primary and secondary education: the HPAEs expenditure as a

percentage of GNP in education was not higher than in another developing country (World Bank,

1993), but the gap in the human capital rate between the HPAEs and the other developing

countries can be explained at first by the pace of increase in enrolment rate; for example Indonesia

24

increased its enrolment rate by nearly 80 percentage points since 1950, while Pakistan managed

an increase of only 34 percentage points (Ibid.). The second reason that can explain the gap in the

human capital accumulation between the HPAEs and the other low and middle-income economies

dwells in the difference on resources allocation and target. While the HPAEs government has

allocated more resources to basic education (primary and secondary education), the other

developing countries have allocated more resources to higher education. The most striking

example is Korea and Venezuela (Ibid., p199), indeed in 1985 the percentage of expenditure on

education as a percentage of GNP in Venezuela was higher (4.3) than in Korea (3.0); however the

percentage of education budget allocated to primary and secondary education in Korea was 83.9

whereas it was only 31.0 in Venezuela. This education policy that focused on the primary

educations turned out to be efficient for the HPAEs in the formation of human capital. Indeed, by

achieving universal education and increasing enrolment in secondary level the HPAEs has

stimulated the demand for higher education, and this latter has been satisfied in large extent by

the private sector. Conversely, the government subsidies of the university in the other developing

countries only benefited families with relatively high incomes. Therefore, low-income families’

children are forced into private sector education; however, not all of them could afford for it. That

resulted in the poor qualification of the children from low-income backgrounds that consist of a

large of the labor force in developing countries. Contrarily, the HPAEs’ public funding in the

primary and secondary schools benefited both children from low and high-income families so that

every child had the same chance to reach higher education. Thus, this policy resulted in better

quality and a higher level of human capital. Regarding the active population, the government also

implemented a training system called “vocational training” that were provided both in the

educational system as well as in firm-level for more specific skills.

Financial accumulation: Savings

In response to the coordination problems related to the financial markets, the HPAEs had

used some tools to address them. They have combined both prudential regulation and direct

protection of the financial institutions in order to prevent bank default and thereby maintain

depositor’s confidence on financial institutions.

Banks solvency: in general, these regulations were prudential. Central banks and the

Ministry of finance have succeeded in supervising commercial banks. Regulators used their

control of branch licensing, rediscounts and other tools to enforce the discipline of the bankers.

Consequently, the HPAEs commercial banks have reported a low proportion of nonperforming

loans compared to those in other developing economies (World Bank 1993). Moreover, the

25

adoption of the international capital adequacy requirements set by the Bank for International

Settlements (BIS) ensured that banks do not take on inappropriate risks. The enforcement of these

rules by the supervisors was successful thanks to daily interaction between them and the bankers

that enabled a better assessment of the banks’ portfolio.

Lender of last resort: generally, in the HPAEs the government had intervened in last resort

when a financial institution faced solvency problems:

-governments have acted as an implicit insurer without excessive fiscal costs.

-the government has come to rescue banks involved in financial distress, and all the HPAEs

governments have either explicitly (such as in Taiwan) or implicitly insured deposits.

-in some cases, especially in Japan, stronger banks were pressed to take over banks in

financial trouble.

However, the costs of bank rescue in the HPAEs have been lower than in other economies

because of their stringent prudential regulation and faster economic growth.

Protection of banks from competition: this was also a tool that has been used by the HPAEs

government to ensure banks solvency and thereby depositors confidence. The HPAEs have

regulated the creation of new financial institutions in the domestic market and the entry of foreign

financial institutions. Besides, many of the East Asian governments have also protected existing

banks from domestic competitors. Most HPAEs had rigid restrictions on entry and when an

expansion was permitted it was mostly through the licensing of a new branch of existing banks.

Despite the high risk of concentration and inefficiency, HPAEs governments have used protection

policies because of its stronger influence on the behavior of banks. Indeed, the fact that

government could decide which bank could enter and expand its branches has given to banks an

incentive to comply with government’s requirements otherwise they would lose the opportunity

to expand their activities. Despite protection from competition, a well-honed combination of entry

and expansion regulation discussed above, and the regulation of spreads has limited rents capture.

Therefore, the HPAEs’ financial sector was more efficient compared with those in other low and

middle-income economies.

Creating postal banks: Postal banks have been set up to provide and encourage the poor,

rural dwellers, in other words, the small savers to put their money into the financial system. The

postal saving system offered small savers greater security and lower transaction costs than the

private sector.

26

Forced savings: According to the World Bank (1993), the HPAEs governments have

enforced household’s savings through either mandatory pension schemes or restrictions on

consumption and borrowing for consumption (although there were many other measures). These

more active interventions and especially mandatory pension plans may squeeze out a portion of

voluntary savings as what has occurred in Japan when they do not play the role of substitute for

voluntary savings. However, in the East Asian countries as incomes and demand for consumer

durables increased and because of the lack of consumer credit, household savings have increased.

However, when the excess demand for consumer durable was met, savings rates stabilized and

even declined.

These strict prudential regulations implemented by the HPAEs were efficient in ensuring

banks solvency and thereby keeping savers confidence on the financial institutions. The more

active interventions such as forced savings and entry regulation fostered savings partly because

social returns on the increased savings have somehow exceeded the private opportunity costs

determined by the rate of return on investment.

Investments: Physical Capital

Some studies suggest that the HPAEs government have made considerable efforts in

providing infrastructure. For instance, the famous report of the World Bank on the East Asian

miracle suggested that the HPAEs’ government between the mid-1960s and the 1990s have

invested in infrastructure and rural areas more than the other developing economies. These

investments contributed significantly in reducing implementation costs for private investors so

that private investment was encouraged and had increased. In general, coordination problems such

as imperfect information sharing mechanism and high investment risks (this latter concerns more

the capital-intensive investment) observed in the financial market justified the implication of the

government in several investments in infrastructure and physical capital.

Moreover, bond and equity market did not play a significant role in financing investment in

the HPAEs during the early stage of development. Indeed, the World Bank report (1993) shows

that between 1970 and 1990 bonds on average only accounted for less than 10 percent of the net

financing of corporations for the HPAEs for which data exist. However, since the HPAEs have

achieved its economic take-off some countries like Japan, Korea, and Taiwan, China have eased

laws that discriminated against corporate bonds and built a financial structure that fostered the

development of bonds equity market. Studies suggest that both for the developing countries and

the industrial economies, equity markets do not play a dominant role in capital formation.

27

Accordingly, the development Banks have also been created by the government to address

the need for long-term credit, particularly in the industrial sector. While in some East Asian

economies such as Malaysia, Thailand, and Hong-Kong development Banks did not play an

important role, if at all, in financing industry, in some others like Japan, Korea, and Taiwan, China

development banks have contributed in financing industry, even though this contribution was

small and declining. Unlike the other developing economies that have attempted to create such

development institutions, the East Asian countries have done better. Indeed, the World Bank

report (1993) considered that financial performance has been adequate to good and the capacity

to evaluate and monitor projects at least in Japan had created spillovers for the rest of the formal

financial system. The success of these development Banks in East Asia can be explained by their

mechanisms for the selection of the excellent projects; besides, development banks have often

applied commercial performance to ensure investment efficiency and repayment by the borrowers.

1-3-2. Resources Allocation and Selective Interventions

The East Asian developmental states had also played an essential role in ensuring a better

allocation of the available resources. Beyond a simple correction of the market’s imperfections,

they have actively intervened in the labor and financial market, international trade, and industrial

sector. Regarding this latter, the East Asian policymakers did very well in selecting “winners,”

i.e., in subsidizing the industries that were expected to catch-up rapidly with the international

market standards.

Regarding the allocation of labor, the East Asian developmental states intervened to improve

the flexibility of the market and avoid labor shortages. In most of the HPAEs, the government

had used labor and wage repression policies. Indeed, the HPAEs government did not allow the

price of labor in some sectors to rise above what workers could earn elsewhere in the economy,

in another term the labor market in the HPAEs was not segmented as it was in the other developing

countries. Moreover, the World Bank (1993) suggests that labor unions and wages were either

repressed or strictly regulated in some of the HPAEs such as Singapore, Taiwan, Korea, Japan,

and Malaysia. While in Singapore government strongly repressed wages, countries like China,

Korea, and Japan opted for the repression of labor unions. However, in Japan, company-based

labor unions were allowed. Wage restraint encouraged the use of more labor-intensive technology,

thereby enabled the saving of public resources by preventing the government from “Make-work”

jobs that are hiring unemployed labor in public services.

28

In financial resource allocation, the government used several instruments to direct and

allocate credit to some targeted industries. Indeed, to correct the frequently observed coordination

problems in the financial market, governments have implemented a broad range of indirect and

direct intervention policies. These policies were aimed to reduce misallocation of resources by

financial institutions (such as commercial banks) and control banking spreads to limit monopoly

rents while more specific intervention directed credit to specific sectors, industries, and even

individual firms. Thus, in 1950s Japan and during the HCI (Heavy and Chemical Industry) drive

in Korea the proportion of loans that accounted for government’s Policy Loans averaged at more

than 50 percent of total loans (World Bank 1993). Governments’ interventions such as directed

and subsidized credits have contributed to fostering investment and consequently economic

growth. Unlike in other developing countries, HPAEs attempts in correcting capital market

failures were generally successful in fostering investments and eventually the economic growth.

The selective intervention model of the East Asian policymakers is also observed in their so-

called ‘export push’ strategy that aimed at helping their nascent industries particularly in the more

skill-intensive ones to catch-up with the world’s best standards and eventually competes on the

international market. East Asian’s government intervention on exports targeted sectors that could

capture dynamic scale economies resulting from learning. Thus, while Japan and Korea had

actively favored individual industries and sectors involved in the HCI programs, Singapore and

Taiwan have provided incentives for technological upgrading. For instance, in Japan until 1968

the effective rates of protection (ERP) were quite high and had reflected the import-substituting

policy that had prevailed in most of the developing countries at that time. When we look at Japan’s

ERP patterns between 1963 and 1968 the very low ERP of raw materials concerning consumer

goods confirmed the Japanese import-substituting strategy (Ibid.). Korea has used both tariffs and

nontariff barriers as well. Consequently, between the 1970s and 1980s the share of value added

of the more capital-intensive industries (such as Metal product and machinery) has doubled in

Japan and Singapore and nearly tripled in Korea and Indonesia. The rapid growth in these

industries was the reflection of the HPAEs shift from labor-intensive to more capital-intensive

industrial structure, in other words, a rapid “industrialization” was occurring (Ibid.).

1-3-3. Building Institutions

The rapid and sustainable development achieved by the HPAEs has been backed by their

outstandingly efficient and competent institutions especially those that were in charge of

policymaking and monitoring. Not only the institutions built by the East Asian developmental

29

state were efficient, but they were characterized by their high stability and legitimacy that have

greatly facilitated policymaking and coordination between the public and private sector.

Therefore, the HPAEs’ institutions did match with the above definition of “embedded autonomy”,

which is one of the features of a `developmental state. `

The East Asian governments managed to gain legitimacy through different policy that aimed

at sharing the benefit of growth among the different segment of the population evenly. In other

words, they strived to reduce social inequity to the minimum. For instance, in 1969 Malaysian

government faced an important racial and ethnic problem that led to the coalition of three

dominant parties (each representing a major ethnic group) and other parties under a national front.

The coalition has implemented the NEP (new economic policy) in order to improve the lot of the

Bumiputera, the largest but poorest ethnic group. The NEP has aimed to achieve national unity

by eradicating poverty by raising income and increasing employment opportunities for all

Malaysians, irrespective of race, and accelerating the process of restructuring Malaysian society

to correct the economic imbalance. The measures taken by the government in all the HPAEs

countries were mostly similar such as:

-Universal education: this was the most important mechanism of giving non-elites the

opportunities to raise their social standings through the access and the achievement of a primary,

secondary, and higher educations

-equitable land holding and land reform: redistributing land property from landlords to small

and individual owners for better equity and productivity

-Subvention of Small and Medium-Size Enterprises (SMEs)

- Housing that successfully targeted low-income households

- The labor trade-off: Cooperative Unions were repressed to avoid tension between labor and

enterprises managers.

The insulation of the bureaucracy has been achieved through a broad range of indirect and

direct mechanisms. Direct insulation mechanisms suggest voluntary measures that government in

the HPAEs took in order to give more independence and more critical role to their technocracy in

implementing economic development strategies. For example, in Japan the National Personnel

Authority is an independent body that manages bureaucracy’s pay scales and promotion policies,

administers civil service exams, and makes most appointments; Japan’s prime minister names

only his ministers (World Bank 1993). On the other hand, indirect mechanisms consist of

incentives that have encouraged honesty and integrity of public service employees and

30

discouraged private and external attempt to corrupt and put pressure on the civil service for their

interests. Moreover, the HPAEs did very well in insulating their technocrats through:

- Highly competitive and merit-based recruitment and promotion

-Incentive-based compensation: such as job security or allowances and bonuses to narrow

the differences with the private sector if the salary was lower in the public sector.

- Appropriate rewards for the best servants: In Japan, for example, the former and retired

public servants will be ensured to get a lucrative job and higher position in other public or private

corporations.

However, despite this high insulation of the bureaucracy, the East Asian governments were

far from neglecting the advice and claims from the private sector and civil society. Conversely,

they encouraged the dialogues between policymakers and technocrats with representatives from

a different sector of the economy and the society. Therefore, governments in these countries

organized meetings to discuss policy, programs and share information between the private and

public sectors that were well-known as the `deliberation councils` (World Bank 1993). The

deliberation councils model has been seen for the first time Japan and has been later emulated by

the others developmental states of the HPAEs. In general, the process was that the government

organized, series of hearings during which the private sector is expressing its expectation from

government policies or sharing and receiving information from both the ministry in charge of the

sector or the other members of the sector. After these hearings, the government is preparing a

draft of its policies which are to be discussed in the so-called “deliberation councils,” where policy

negotiations may take place. Finally, the technocrats (MITI in the case of Japan) are deciding at

which policies will be undertaken, the parliament only ratifies it and does not have any influence

in the policymaking process.

1-4. Rush to Regionalism: An Alternative to Globalization?

Any “debate” on globalization and related long-term economic and political effects will be

complete if one overlooks the current trend that is the proliferation of regionalism and particularly

of the regional trade agreements (RTAs). This “rush to regionalism” as coined by experts such as

Baldwin (1997) has been observed since the so-called “second wave of regionalism” in the late

1980s and which regained momentum since the 2000s considered as the “third wave” (Pomfret,

2007). Although there is some skepticism about the real extent to which the world economies are

moving toward regionalization, a large number of observers (Baghwatti, 1996; Baldwin, 1997;

31

Brown et al., 2005) recognize the stark increasing number of RTAS since the late 1990s and the

statistics from the WTO confirm this intuition (see figure 2.1 in the next chapter). Therefore, it is

important to understand the implication of the “rush to regionalism” for the debate on

globalization.

First of all, it is important to note that by definition RTAs are different from globalization or

multilateral trade liberalization as they are usually agreement that discriminates between members

and non-members of the regional arrangement. Hence, although the principle is still to liberalize

the circulation of goods, people and capital, it is not globalization because liberalization is limited

between country members of the regional bloc. However, disagreements exist between

international experts and economists on whether regionalism foster or impede on multilateral

trade liberalization.

However, there is evidence suggesting that the current rush to regionalism is a departure

from the mainstream multilateral trade liberalization. Indeed, as suggested by Pomfret (2007), the

current wave of regionalism follows the same trend as during the second wave in the 1980s which

has been characterized by the ‘departure from the GATT non-discrimination principle in the first

half of the 1980s’. Pomfret (2007) argues that while regionalism in the 1980s was not a threat to

the global trade system supported by the WTO. The 2000s’ wave of regionalism is driven by the

sentiments of many countries that the WTO-based trade system does not work. This perception

has been the most obvious among the East Asian countries after the Asian financial crisis in 199712.

In this sense, regionalism can be perceived as an alternative to globalization especially for the

developing countries, and there is no shortage of arguments in support of this view.

Krugman (1991) one of the most prominent economists in international trade argues that

while in theory RTAs are wrong, they seem to work well in practice. Indeed, as Krugman (1991)

puts it, few economists would dispute the assumption of standard economics stating that free trade

is the best policy to maximize welfare. However, the GATT and later the WTO which is the

platform for world trade negotiations and liberalization seems to lose its position against the

proliferation of preferential arrangements. The author notes three problems that led to this

situation since the 1980s: the erosion of U.S’s “hegemonic power” which intensifies the free-rider

problem in WTO negotiations, the emergence of several complicated subtle trade issues, the

changing character of protectionism that bypass the traditional regulations, the decline legitimacy

12 Pomfret (2007) argues that: “This time it is led by East Asia, partly stimulated by a perception that the global

economic institutions let the region down in the 1997 Asian Crisis and partly by the increase of China’s economic

power”

32

of the international institutions with the emergence of new powers (Krugman, 1991; pp. 17-18).

Therefore, regional agreements emerged out to be the alternative for many countries as suggested

by the international trend since the1980s. In this regard, Brown et al. (2005) identify some factors

that have been driving the rush to regionalism. Internally, RTAs emerged as an alternative to non-

discriminatory arrangements because of geo-strategic and political interest (such as in the case of

ASEAN), also because of the growing frustration with multilateral negotiations as explained

before. RTAs also received high attention from “small” countries (such as the less-developed

countries) to counterbalance the negotiating power of powerful Nations of other regional blocs.

Among the internal factors mentioned in Brown et al. (2005) are also the prospect for building on

socio-cultural similarities and reduce illegal trade and smuggling at the borders of neighboring

countries. On the other hand, there are some external political pressures for countries to enter a

regional arrangement that comes from powerful nations such as the EU or just as a way to resolve

conflicts between rival countries.

Therefore, given the resurgence of regionalism prompted by the globalization’s

shortcomings, one may think of RTAs as a realistic and viable alternative to the current dominant

neoclassical economic and political standard. Thus, we will see from the next chapters how

regionalism can be a better alternative for the developing countries in the 21st century and what

are the evidence that enables us to think so. In this purpose, we will mainly focus on the East

Asian regionalism, more precisely on the experience of the Association of Southeast Asian

Nations (ASEAN). We will show that the ASEAN regionalism departed from the traditional

standard economics recommendation of liberalism and has been somewhat successful concerning

economic development.

33

Chapter 2- Core Conceptual Framework: Developmental Regionalism

and the Southeast Asian Model

34

2-1. History and Concepts of Economic Integration

The first attempt to formally conceptualize economic integration can be traced back to 1950

in Viner’s famous book “The Customs Union Issue.” In his work, Viner, by using static analysis,

advanced his theory of trade creation and trade diversion effect of a customs union and laid the

basis of the theory of economic integration. Viner’s main contribution to the field consists of his

demonstration of the possible trade creation and trade diversion effect of integration. Since the

1960s, studies on the subject has been flourishing and continue to draw the interest of both

scholars and policymakers. Before addressing the traditional concepts regarding economic

integration, let us first have an overview of the historical background and the progression of

Regional Integration Agreements13 (RIAs) in the world.

2-1-1. Regionalism in History

There are different definitions of the word regionalism, but we will address one of its aspects

which is the process of creating RIAs (Schiff and Winters, 2003). This practice and form of

economic arrangement has been used by nations for hundreds of years. These arrangements took

several forms, such as the union of the province of France in 1664, or the Colonial Empires which

were based on preferential trade arrangements14. However, regionalism started to develop at a

higher pace in the postwar period. This surge started after the creation of the GATT (General

Agreement on Tariffs and Trade) and its provision for Preferential Trade Agreements (PTAs) that

allowed the rebuilding of postwar Europe in the 1950s through some arrangements such as:

Benelux customs unions 1947, the European Coal and Steel Community (ECSC) in 1951 which

expanded to become the European Economic Community (EEC) in 1957.

The relative longevity and success of the European economic integration encouraged the

freshly independent developing countries to construct their own PTAs. This commonly referred

to as the “first wave of regionalism” occurred mainly between LDCs’ (Least Developed

Countries) trade blocs and was based on nationalistic and protectionist principles (Ravenhill,

2014)15. However, this import-substitution industrialization-based regionalism has not reached its

objectives for several reasons that we will see later16. From the 1990s the world is seeing an

13 This term is generally used by scholars in order to be neutral and to avoid misconception from the reader. Indeed,

Schiff and Winters (2003) argue that: “We refer to them neutrally as regional integration agreements (RIAS) to avoid

any unsubstantiated pejorative implications and to convey that arrangements can extend well beyond international

traded into areas such investment, domestic regulation, domestic policies, standards, infrastructure, and politics”. 14 Schiff and Winters (2003) also noted that the creation of countries like Germany, Italy or the United-States originated

from customs unions. 15 Therefore, the agreements that have been realized among LDCs’ trade blocs were aiming at restricting imports from

industrialized countries and promoting local industries, thereby completing a full economic and political independence. 16 Ravenhill (2014) reports that: “The landscape of inter-state relations in South America and particularly in Africa soon

became littered with the debris of failed regional arrangements.”

35

unprecedented rush to regionalism of a new kind. This second wave of regionalism is different

from the first in that most of the integration agreements are aimed at facilitating economic and

trade liberalization on the multilateral level. Scholars refer to these liberalization-friendly

agreements as an “open regionalism,”17 i.e., agreements that are discriminative but granting equal

treatment under the Most-Favored-Nation (MFN) regime to countries outside the region. The

second wave of regionalism that accompanied globalization since the 1990s is more successful

than that of the 1960s. Indeed, if we look at the data on the evolution of the notified inactive and

active RTAs (see Figure 2.1), we can observe that the number of active RTAs saw a sharp increase

since 1991. Moreover, we also can see that the number of RTAs whether inactive or active literally

Figure 2.1 Evolutions of Regional Trade Agreements in the World since 1948

Source: https://www.wto.org/english/tratop_e/region_e/regfac_e.htm (DS: 2018/10/20)

exploded during the last decades. The second wave of regionalism is also characterized by the

increasing agreements between northern (rich) and southern (developing) countries. This

relatively new pattern of PTA has been spurred by the provision of GATT 1994 Article XXIV18.

Also, regarding the north-north RIAs, the period of the second wave of regionalism saw the

development of the world’s most advanced economic integration which is the European Union

17 In this new context, the regional arrangements that developed were often designed to enhance states’

participation in the global economy, to signal their openness to foreign investment, and to seek access to the markets

of industrialized countries.” (Ravenhill, 2014) 18 The article permits three types of PTA including Agreements between developing states, and North-South agreements

under the Generalized System of Preferences (GSP) (Snorrason, 2012)

https://www.wto.org/english/tratop_e/region_e/regfac_e.htm

36

(EU)19 . Although regionalism has been thriving since the 1990s, they all took different forms, in

Baldwin’s (1997) words, there are “shallow and deep integration schemes” according to the

degree of policy harmonization and the development of supranational institutions of a given

regional arrangement.

2-1-2. Different RIA Schemes

Traditionally, we distinguish different level and degree of economic integration according

to the extent to which the participating countries are willing to open their market and accept a

common regulation at the regional level. In his book, Balassa (1961) points the existence of 6

level of economic integration namely: free trade area, a customs union, a common market, an

economic union, political union, and complete integration. In Addition to that, a more modern

categorization distinguishes economic and regional integration according to their geographical

scope (see Table 2.1). According to their scope and their form, RIAs can have a different impact

on countries' welfare. We will see the different method of analysis of the effect of regional

integration in the section that follows.

Table 2.1: Example of the category of PTAs by their geographical scope

Area scope Regional Trans-regional Inter-regional Global

Example NAFTA Trans-Pacific

Partnership (TPP)

EU+MERCOSUR

+CER+AFTA WTO/GATT

Features

Agreement

between neighboring

countries

Between two or

more countries from

different region

Between two or

more regional blocs

Multilateral

agreement

Source: adapted from Ravenhill (2014)

2-2. Traditional theory of Economic Integration: A Static Analysis

As mentioned earlier, Jacob Viner was among the first scholars to turn their interest and

attention on the study of the economic effect of economic integration. He pioneered the concept

of trade creation and trade diversion effect of a preferential cut in tariffs. Viner’s traditional

19Except the Australia-New Zealand Close Economic Relations Trade Agreements (ANZCERTA), all deep integration

schemes are in Europe.” (Baldwin, 1997). According to Baldwin’s definition, deep integration refers to the type of

economic integration that involves the creation of a supranational regulatory institution and policy harmonization such

as trade, financial or monetary policy amongst other.

37

analysis is broadly considered by experts as static that is overseeing the other dynamic factors

(such as increasing returns, external economies) that might influence the welfare effect of

economic integration on member and non-member countries. This section is divided into two

main parts, the first part addressing the efficiency effect of a PTA, and the second its distributional

effect.

2-2-1. Traditional Efficiency Gains and Risks of RIAs: Vinerian Analysis

The foundation of the Vinerian analysis on the consequences of a preferential trade

agreement is the concept of “trade creation” and “trade diversion.” However, first of all, it is

necessary to define a preferential trade agreement or economic integration. Balassa (1961)

provides a comprehensive definition both as a state of affairs and as a process. According to

Balassa (1961), as a process, economic integration encompasses measures designed to abolish

discrimination between economic units belonging to different national states; and as a state of

affairs, it is the absence of any discrimination between national economies. Therefore, the

integration or the abolition of trade restrictions between two or more national economies would

entail a shift in resource allocation and thereby affect the economic efficiency of both

participating countries and the world as a whole20. The efficiency impact of integration includes

effects on production, consumption, terms-of-trade, and administrative economies. However,

before addressing these different forms of efficiency effects a recall of the basic concept of trade

creation and trade diversion is useful.

2-2-2. Trade Creation and Trade Diversion

According to the original definition:

-Trade is created within a free-trade area if the trade between two or more partner countries shifts

from high-cost to low-cost supplier.

-Trade diversion occurred in the situation when imports shifted from a low-cost non-member

country to high-cost producer member of the union. This situation occurs when the common

external tariffs protect the high-cost producer member of the union.

Before Viner’s formulation literature on trade ignored the existence of the diverting effect

of economic integration. The following example illustrates the trade-diversion effect of a

preferential trade agreement.

20 Balassa (1961) notes that tariffs influence the allocation of resource in two ways, namely: by resulting to the shift of

production from lower-cost foreign producers to the protected home produces operating with higher cost, and by the

discrimination against foreign goods that are different in kind from domestic ones.

38

Table 2.2 Trade situation of the commodity X in country A

A B C

Price of the commodity X in free-trade situation 35 20 15

Price of commodity X after protection in country A (100%

tax rate) 35 40 30

Price of commodity X after country A form an Union with

country B 35 20 30

Source: The author, adapted from Ravenhill (2014)

We can see from the table above that under free-trade country B and C are the low-cost

producers and country would import the commodity X from them. Moreover, then if country A

levies 100% tax on commodity X trade will shift to country C (B is now selling at 40 and Cat 30).

However, if A and B are forming a customs union, the trade will be diverted to B (selling at 20)

which was higher-cost producer compare to C before the union. Thus, according to Vinerian

analysis, economic integration is beneficial only if the trade-creation effects outweigh the loss

from trade-diversion. Although Viner’s conclusion about the formation of a customs union was

to some extent negative21, many subsequent studies on this issue built upon his original work.

2-3. New Regionalism: Dynamic Perspective on Economic Integration

2-3-1. Current State of the Debate and the Evolution of the Theory of Economic

Integration

The current evolution in the field of international trade and particularly in the theory of

economic integration has been pushed by the advent of the second wave of regionalism since the

1990s. Moreover, the new regionalism has revealed the necessity for clarifying the determinants

and impacts of PTAs for developing countries. Indeed, it is of great importance not only in

explaining the failure of the developing countries’ protectionist regional arrangements in the

21 Hosny (2013) quotes Viner’s on his conclusion on custom union: “Customs union are not important, and unlikely to

yield economic benefit than harm, unless they are between sizable countries which practice substantial protection of

substantially similar industries.

39

1960s but also to point out the benefits for LDCs in establishing an FTA with rich countries22.

Therefore, in addition to the traditional analysis on economic integration, other dynamic (such as

increased competition, investment flow, economies of scale, technology transfer) and political

analyses are flourishing in the recent literature.

The driving force of RIAs changed radically since the first wave of regionalism which was

spurred by the widespread nationalist sentiment in the newly independent developing countries.

Naturally, at that time, RIAs were seen as a strategy for industrialization and domestic market

protection to gain economic independence from the former colonizers. However, these South-

South arrangements have proven to be inefficient, and most of them were abandoned a decade

after their establishment. Conversely, the second wave of regionalism is driven mainly by market

forces and the political power balance of the interest groups within each country. The new

international geopolitics has also played a role in shaping today’s world regional blocs 23 .

Regionalism is gaining momentum, and we are witnessing what may be the “third wave of

regionalism” (WTO, 2011) with an increasing role played by South America and East Asia.

Consequently, considering that non-discriminatory trade liberalization is the first-best situation,

the current debate on economic integration addresses the question of whether regionalism

hampers or supports the globalization process.

The literature can be divided into two schools of thoughts (Baldwin, 1997; Baldwin 2005).

The Larry Summers school which considers that regional blocs have negligible effects on

multilateral negotiations and that they are moving toward globalization; and the Bhagwati school

which is more skeptical arguing that regional integration are likely to hinder on the WTO-GATT

system and may lead to a trade war between “hegemonic powers” (Baldwin, 2005). The

arguments advanced by the former include the ‘natural trade partners’ (Krugman, 1991) and

Baldwin’s ‘domino regionalism’24. On the other hand, Bhagwati and Panagariya (1998) provided

a counter-proposition pointing out the limitations of the Larry Summers school’s arguments. They

demonstrated that neither the ‘natural trade partners’ nor the domino regionalism could predict

perfectly the formation of a PTAs. Moreover, Bhagwati (1996) argues that countries are forming

FTA for several reasons and trade diversion, as well as protectionism, is among them. He also

22 Ravenhill (2014) points out that the new regionalism tends to develop between industrialized countries and less

developed economies (North-South trade agreements). 23 Indeed, some regional and trade agreements were born because of security reason. For instance, the Unite-States

granted Israel a preferential access to its market as a reward for its cooperation to ensure security in the region

(Ravenhill, 2014; Schiff and Winters, 2003). 24 The ‘natural trade partners’ refers to neighboring countries that have high initial trade-volume and therefore are the

best candidates to benefit from and form a FTA. In the other hand the ‘domino theory’ of regionalism developed by

Baldwin (1997) argues that the loss of potential market share will lead non-members (the closest to the margin i.e.

worst off ones) to join the existing PTAs.

40

points the fact that the proliferation of PTAs results in the ‘spaghetti bowl’ phenomenon, referring

to the overlapping trade regulation and tariff regime which increases transaction costs and

facilitate protectionist trade policies. Therefore, the debate is far from being closed, and each

school-of-thought could provide empirical evidence to support their ideas. However, the reality

is that the number of regional trade blocs and PTAs is increasing at a high pace and we see no

sign of a reversal of this trend so far. In this regard, developing countries are likely to play a more

critical role in the formation of FTAs and the establishment of ASEAN Free Trade Area (AFTA)

and the plan for its expansion to a full-fledged ASEAN Economic Community (AEC) by 2015 is

one good example.

However, the literature on regional economic integration lack of analysis regarding the

implication and the relationship between regionalism and economic development for the

developing countries. Indeed, other than a simple tool for trade liberalization RIAs can be used

and designed to achieve development goals. In this regard, Hosny (2013) reports that developing

countries can form a regional bloc and use trade diversion in several ways such as to increase

domestic industry efficiency or to save resources for investment in capital goods and thereby

change trade pattern with the developed nations. In the political realm, developing countries’

regional bloc would decrease their dependence to the north and give them more bargaining power

in multilateral trade negotiations. Thus, in order to understand the developmental impact of

forming RIAs for the developing countries, we will focus on the case of ASEAN in the next

sections.

2-3-2. Growth and Developmental Effects of Regional Integration

As mentioned earlier, economic development is one of the numerous areas of focus in

researches on (new) regionalism. However, we have to differentiate the neoclassical welfare

economics of regional integration, which constitutes the majority of researches on regional

integration, from developmental regionalism which studies regionalism in the developing

countries from a broader perspective than as a simple economic assessment. In this regard, Bowles

and MacClean (1996) argue that the traditional welfare and trade economics framework is

insufficient to explain the formation and the development of a regional bloc, particularly in the

developing countries. Indeed, regional bloc formation, particularly under the current new

regionalism, is induced and influenced by several political factors, and thereby cannot be

understood without a political economy approach. Moreover, Söderbaum and Shaw (2003) argue

that although economic parameters are the most common way to assess the benefit of entering a

regional arrangement, dynamic gains are best captured through a political effort. Thus, a study of

41

the developmental impact of Regional Integration Agreements (RIAs) must take into account the

dynamics of power balance from outside as well as inside and within each member states of a

regional bloc. In other words, we will address the impact of regional policy initiatives on the

factors of economic growth and development in the developing regions.

However, firstly, it is essential to identify these factors of economic growth. In general, the

literature on regionalism divides the effect of RIAs in two categories, namely the traditional and

dynamic effects. Traditional effects consist of the Vinerian static effects of trade diversion, trade

creation and terms of trade used in the “old trade theory” to assess the efficiency gains resulting

from an RIA. The dynamic effects, on the other hand, are compounded by a wide range of

elements. Based on Balassa’s works (1961) and subsequent studies, the most widely recognized

dynamic effects of RIAs are as follows: economies of scale, increased factor mobility, increased

productivity and technology transfer, increased FDI, increased specialization, accumulation of

human and physical capital, dynamic comparative advantage (Söderbaum and Shaw, 2003; p.122;

Burfisher et al., 2004; Marinov, 2015). Dynamic effects are affecting the level of medium and

long-term economic growth and thereby the socio-economic and political structure of the

Regional Bloc’s members. The dynamic effects are often associated with the new regionalism

studies since they provide a wide range and more complex analytical framework in explaining the

motivation behind and consequences of the second generation regionalization process.

Long-term economic growth is often synonymous to economic development; and new

regionalism, as discussed above, may provide useful tools to study the developmental implication

of building a regional organization for the developing countries. However, not only is the field of

new regionalism lacking sound theoretical literature but as a matter of fact, its impact on

developing countries largely remains an unexplored area (Söderbaum and Shaw, 2003; Dion,

2004). Most attempts in analyzing the trade/growth effects of RIAs and the related Regional Trade

Agreements (RTAs) are inconclusive about the impact of being a member of a regional grouping

particularly in South-South arrangements25 (Madani, 2001; Berthelon, 2004; Marinov, 2015).

Some authors such as Bowles and Mclean (1996), Söderbaum and Shaw (2003) and Marinov

(2015) among others, have explored new approaches to explain the origin and consequences of

“developmental regionalism” 26 . Indeed, under the new regionalism framework, it has been

25 Regional agreements mostly between developing countries. 26 Dent and Richter (2011) defined it as follows: “We may broadly define developmental regionalism as activities that

are particularly oriented to enhancing the economic capacity and prospects of less developed countries with the view

of strengthening their incorporation into the regional economy, and thereby bringing greater coherence to regional

community building.”

42

noticed that despite the ambiguous results obtained by mainstream studies on RIAs’ growth and

developmental impact, regionalism has continued to take the lead over multilateralism despite the

latter being considered the best option. Therefore, new approaches are now emerging using

different tools, rather than only simple economic mathematical models, in explaining the birth

and dynamism of regionalism in developing countries (Bowles and Mclean, 1996; Schiff and

Winters 1998; Soderbaum and Shaw, 2003; Marinov, 2015). These new approaches incorporate

several new tools in their analyses and particularly the use of political economy. The study of

developmental regionalism has gained prominence particularly from studying the emergence

process and the outstanding performance of the Association of Southeast Asian Nations (ASEAN).

2-3-3. The ASEAN and its Implication in New regionalism and for Developing Countries

Southeast Asian regional bloc is among the best examples of new regionalism. As

mentioned earlier, the ASEAN, from its creation to its current development, showed the limits of

the traditional analytical framework in explaining the current dynamic of regionalism in the

developing countries. The ASEAN is now the most developed South-South regional arrangement

despite the widespread pessimism in traditional literature considering South-South arrangements

as insignificant and inferior to a North-South arrangement (Shams, 2003). Moreover, ASEAN’s

origin does not match the prediction of traditional regional integration theory. In this regard,

Madani (2001) argues that the Southeast Asian bloc had a “non-traditional raison d’être” based

on socio-political stability objectives rather than on strengthening economic cooperation or

integration. Shams (2003) also noted that most of the economists predicted the failure of South-

South regional arrangement because of significant reasons such as small market size, lack of

dynamism, the similarity of economic structure. The sustainability of the ASEAN and its

economic dynamism is thus inconsistent with these predictions. Therefore, studying the ASEAN

has an important implication not only in filling the gap in the literature on new regionalism theory

but also for providing a benchmark to the developing countries that are engaged in developmental

regionalism.

Conversely to the traditional analysis, suggesting that a regional integration between

developing countries is expected to yield minimal benefits, recent studies on regionalism suggest

that regional integration in developing countries is generally viewed as an instrument of long-

term economic growth and poverty reduction. Thus, experts in new trade theory and new

regionalism (Schiff and Winters, 1998; Söderbaum and Schaw, 2003; Burfisher et al., 2004) argue

that regional integration can foster economic development through dynamic effects such as

increased trade and productivity, increased investment, improved technology, increased capital

43

accumulation and non-economic effect such as strengthened bargaining power. RIA’s dynamic

effects are diverse, and the literature is still inconclusive on the mechanism through which these

effects influence the growth and development trajectory of developing member countries.

Therefore, for its longevity and sustained economic dynamism, ASEAN provides the most

intriguing case for developmental regionalism. Several studies have been carried out to examine

the determinants of economic growth in the Southeast Asian region, and a majority of them point

out the role played by the rapid surge in manufactured exports resulting mainly from high FDI

inflows into the regional bloc. The Southeast Asian region established itself as one of the favorite

destinations for foreign capital. This situation has several explanations and calls for

multidimensional analyses dealing with both the economic, political, social and historical aspect,

in other words, the dynamics, of the ASEAN regionalism. Accordingly, not only will the ASEAN

case contribute to the advancing of the new regionalism field, but it also will be important in

understanding the obstacles and opportunities of regionalism in other developing regions.

44

Chapter 3- Discussing North-South and South-South Integration and

Economic Development in the 21st Century: The Southeast Asian Model

Compared with the Southern African Development Community

45

3-1. Introduction

In an increasingly regionalized world, the concern for the economic and developmental

impact of Regional Integration Agreements (RIAs) are gaining importance both in the political

and economic spheres. The current regionalism has been prompted by the stagnation of

multilateral negotiation processes and the acceleration of globalization in other areas such as trade,

technology, investments. Thus, regionalism in the 21st century can be seen as an alternative

solution for nations, especially in the developing world, coping with the pressure from global

political, economic, technological and security issues. Therefore, conversely to previous waves

of regionalism the current trend can hardly be explained and analyzed with the traditional

neoclassical welfare analysis27. Indeed, in the traditional frameworks, a South-South regional

arrangement is considered inefficient and having no positive economic consequences. This view

is supported by the widespread failures of several regional organizations formed by the

developing countries in the late 1970s. However, despite the recent increase in North-South

arrangements, developing countries’ regionalism seems to be reinforced and is regaining

momentum as well. This chapter will focus particularly on one aspect that motivates the renewed

enthusiasm for regionalism in developing countries: economic development. In doing so, we

decided to study and compare the case of two organizations that expressed clearly their

developmental objectives as their primary drivers: The Southern African Development

Community (SADC) and the Association of Southeast Asian Nations (ASEAN). However, it is

important to note that the present chapter will mainly address the analytical framework

underpinning the study of developmental regionalism. Thus, a comprehensive empirical analysis

is beyond its scope but will be addressed in the next Chapters of the second part of this thesis.

More interestingly, the study of these two organizations which have different experiences and

achievement enables us to identify the factor of success in developmental regionalism. Study on

developmental regionalism is still in its infancy, and we hope to contribute to the literature by

using the “new regionalism” and “South-South” (S-S) integration perspectives in comparing the

regionalization process in Southeast Asia and Southern Africa.

Thus, before addressing the problem of regionalism and economic development we first

set the main analytical framework and explain the reason why the new regionalism theory

provides a better tool to analyze the current regionalism especially in the developing world.

27 Bowles and Maclean (1996) mentioned the case of AFTA for which the standard theory could not predict and explain

the creation. In this regard they also state that: “In general, there has been a tendency to deal with the ex-post welfare

evaluation of blocs rather than with analysis of the processes of trade bloc formation. That is to say, mainstream

economists have concentrated on evaluating the implications of the formation of particular regional blocs for 'welfare'.”

(p.323)

46

Secondly, we analyze the ASEAN factor of success and use it as a benchmark for the Southern

African region. Then, we explore why the Southern African regionalism is stagnating and is

failing to spur economic growth despite its long history. Lastly, we summarize and identify the

feature of the ASEAN model and the crucial role it has played in promoting cross-border

infrastructure, Foreign Direct Investment and institution building policy implementation.

3-2. Analytical Framework: Theories of New Regionalism and the Concept of

Developmental Regionalism

As the title suggests, this section will set the main analytical framework in which this paper

will address the relevance of growth enhancing, and eventually developmental, regionalism in the

developing world. We will, therefore, proceed to a quick review of the literature on new

regionalism in general and the related theory on the impacts of S-S regionalism on economic

growth and development in particular.

3-2-1. New Regionalism

Traditionally, the literature on regional integration distinguishes two different periods and

trends of regionalism. Thus, the history of the evolution of (modern) regionalism is commonly

accepted to have begun in the postwar period and formally conceptualized by Jakob Viner (1951)

in his analysis of customs union. This mode of analysis considers the process of integration as

linear, from a shallow (Free trade Area) to deep integration (Economic Union), and deals mostly

with the study of a regional bloc’s static gains. This first attempt to formally studying regional

blocs’ economic impacts emerged during the era of the “old regionalism” or the so-called “closed

regionalism” that proliferated particularly in the developing world from the late 1950s to the

1970s (Burfisher et al., 2004; WTO, 2011). However, critics point out that this static analytical

framework is unable to give a clear conclusion on whether or not a regional economic bloc will

benefit its members 28 . Moreover, the traditional static analysis has proven unsuitable and

insufficient to explain the process and the impacts of the “new regionalism” on the world economy

and politics.

The old regionalism showed its limits in the 1970s when the oil shock precipitated the

collapse of most of the protectionist regional grouping in the developing world. This marked the

end of the old era of regionalism which was characterized by the proliferation of South-South

protectionist regional arrangements. The New Regionalism started in the 1990s and has been

28 In this regard Marinov (2015; p.28) reports stated that: “Many researches add on to Viner’s static analysis by

addressing different issues of integration effects. All of them come to the conclusion that no one-sided answer could

be given to the question of whether customs unions increase global welfare or not.”

47

spurred by new dynamics in world politics, economics, cultures, and technologies. Therefore,

these new waves of regionalism emerged as a “multivariate process” influenced by “various inter-

related and multi-level economic, social political and cultural factors” (Dent and Richter, 2011;

p.31). Söderbaum (2003; p.3) suggests that this new regionalism differs from the old one in many

respects such as on its pluralism, i.e. its multidimensionality, complexity and because it involves

state and non-state actors. Söderbaum also argues that the new regionalism is more “extroverted”

(Söderbaum, 2003; p.5). Theoretically, the prefix “new” refers to the evolution of regionalism

theories from the traditional Vinerian static analysis. Indeed, specialists on regionalism such as

Söderbaum (2003), Burshifer et al. (2004) and Marinov (2015) note that the new theories on

regionalism rely on a wide range of dynamic factors such as i) competitive advantage ii) political

economy which analyses the effects of the current breakdown of bipolarity iii) increasing and

accelerating globalization, i.e. a high mobility of physical, human and financial factors iv)

economies of scale. The scope of researches and studies on new regionalism is therefore no longer

restricted to welfare economics but combines various studies on areas including politics,

international relations, history, international security, institutional economics, and development

economics. This chapter will mainly focus on what is called “developmental regionalism” (Dent

and Richter, 2011) or the growth and developmental impacts of regional integration in the

developing countries under the new regionalism framework.

3-2-2. South-South Economic Integration

If the developmental regionalism framework allows us to assess and analyze the political

forces at work, the South-South economic integration perspective enables the study of the

economic rationale behind regional economic cooperation between developing countries. In this

study, we focus mainly on the analysis of the relationship between trade, investment, and

industrialization. Indeed, economic development, in the ASEAN countries, in particular, implies

an economic diversification through the allocation of greater resources in sectors with higher

productivity and product diversity such as the manufacturing industry. In the literature, South-

South (S-S) trade and investment cooperation is found to be an effective way to foster the kind of

structural transformation necessary for long-term economic growth.

Sperlich and Sperlich (2012) studied the effect of S-S Regional Integration Areas (RIAs)

membership on convergence and growth and found that belonging to an RIA has had a significant

and positive impact on economic convergence and growth in Latin America, Southeast Asia, and

Africa. Thus, they suggest that S-S integration could be a stepping stone toward increasing

international competitiveness and access to technology transfers (Sperlich and Sperlich, 2012;

p.6). Sanguinetti and Siedschalg (2009) performed an empirical test on the impact of preferential

48

trade agreements in the MERCOSUR. Their results showed that the preferential tariffs have

weakened agglomeration forces and that economic activities were distributed along the regional

comparative advantage of the members. More interestingly, this study found on the one hand that

tariff preference margins did not have a significant effect on agricultural activities, whiles, on the

other hand, it showed that preferential agreements significantly impacted on the allocation of

labor-intensive manufacturing industries. In other words, the establishment of preferential tariffs

within the MERCOSUR countries resulted in the reallocation of labor-intensive industries in

human capital abundant countries but had no influence on sectors where they have a global

comparative advantage (i.e., agriculture and land-intensive industries). Such results suggest that

S-S integration can be an effective industrial policy tool especially for nurturing infant industries.

In this regard, Amighini and Sanfilipo’s (2014) empirical study on African countries revealed that

external flows such as FDI and imports have positive effects on the diversification of export

products and on their quality. More specifically, they observed that S-S trade has a stronger impact

on export diversification and is especially crucial for the manufacturing sectors. Indeed, the

authors argue that relative similarity in factor endowments and level of development translates in

more diversified trade flows and a higher potential of learning spillover. This latter is explained

by the similarity in product's technological level which facilitates knowledge and technology

transfer (Amighini and Sanfilipo, 2014; p.7).

With regard to product quality, Amighini and Sanfilipo (2014) concluded that imports

generally impact positively on the quality of exports. However, when the country of origin is

considered, imports from developed countries appear to have more positive effects than from

South countries. Regarding FDI, the same study showed that positive spillover effects on export

quality are stronger for S-S investment flows especially in the manufacturing sectors conversely

to North-South FDI which have a negative impact in these sectors. Overall, this rapid literature

overview suggests that S-S economic integration as a developmental and industrialization strategy

stands on robust empirical evidence.

Descriptive statistics on the ASEAN and SADC, seem to confirm the empirical results

discussed above. Figures 3.1 and 3.2 below show the evolution of export trade value (in US dollar)

in a five years interval (from 1990 to 2015), respectively for the SADC and ASEAN region. These

figures also compare the evolution of regional export in manufacture products as a share of total

export. In the two regional blocs, exports to the Low and middle-income economies grew faster

than to other regions since 2005. Moreover, the figures on manufactured exports, particularly for

the ASEAN (Figure 3.2), show that Low and middle-income economies have higher share

compared to the OECD countries, and thereby consolidating the empirical results discussed

49

earlier. Moreover, even for a region with a low level of industrialization such as the SADC, S-S

trade, that is a trade with other Low and middle-income economies, shows higher technological

sophistication and thereby higher potential for diversification. Therefore, the remainder of this

Figure 3.1 Export Trade Value of the SADC-1029, in billion USD

Source: World Integrated Trade Solution (D.S: 2018/01/05)

study will focus on comparing and explaining the patterns of external flows (trade and

investments) between the SADC and ASEAN and then exploring the possible policy implications

in terms of developmental regionalism for the Southern African economies.

Figure 3.2 Export Trade Value of the ASEAN-6, in billion USD

Source: World Integrated Trade Solution (D.S: 2018/01/05)

29 Angola, Botswana, Madagascar, Malawi, Mauritius, Mozambique, Namibia, South-Africa, Tanzania and Zambia.

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50

3-3. Preliminary Study on the Keys and Obstacles to a Growth Enhancing Regionalism –

ASEAN as a Benchmark

In this last chapter, we will see the possible determinants of a growth-enhancing

regionalism in the developing world by analyzing the dynamics within ASEAN. The ASEAN

countries are experiencing high economic growth since the 1980s, and as a regional bloc, the

Southeast Asian region is widely regarded as the most dynamic in the developing world. Several

studies suggest that regionalism may have contributed in large part to this success and therefore

it is interesting to analyze the link between regional integration and economic growth within this

region30. Thus, this chapter is divided into 5 sections. Section 1 will be a quick overview of the

background and characteristics of the ASEAN. Section 2 will study the trends and patterns of the

ASEAN’s rapid growth. Moreover, from section 3 to 5, we will analyze the mechanism through

which selected factors namely, infrastructure, foreign direct investment, human capital, and

institutions, have been improved and interplayed to enhance economic growth at the regional

level.

3-3-1. Overview of the Background and Characteristics of the ASEAN Regional Bloc

The Association of Southeast Asian Nations (ASEAN) was formed in 1967 by five

countries, Indonesia, Malaysia, Philippines, Singapore and Thailand (ASEAN 5). It was officially

established in Bangkok where the five countries committed to deepening their cooperation to

ensure political stability, economic and social development in the region. However, vast literature

widely recognizes the ASEAN’s limited success, particularly in the economic realm, during the

first two decades after its establishment (Hill and Menon, 2010; Pomfret, 2011; Sally, 2010). We

cannot overlook the association’s significant achievements in conflict resolution and thereby

keeping peace and stability in a region that was the stage of several civil wars and political turmoil.

From a superficial point of view, it may seem difficult to compare the Southern African

with the Southeast Asian regions, two regions with a very different historical path and socio-

political environment. However, with a more in-depth analysis of the dynamics at play within the

ASEAN regional bloc, we will demonstrate the presence of some common features with the

Southern African region. Indeed, the ASEAN countries faced problems similar to those

encountered by its South African counterparts; the major difference is that, despite all of this, the

30 However, this section does not aim for an exhaustive study of ASEAN regionalism and economic growth. This

section and the chapter as a whole, is rather aiming at highlighting the possibility of a growth enhancing regionalism

in Southern Africa from a political economy perspective by using ASEAN as a benchmark. Thus, this chapter is only a

preliminary study in the comparative study of the ASEAN and Southern African regionalism and to identify the

mechanism and determinants of economic growth and development in a developing world’s regional bloc.

51

former was able to achieve sustainable economic growth. It is therefore critical to understand how

ASEAN evolved and managed to overcome its political and institutional impediments.

3-3-2. Regional Diplomacy: Conflict Resolution and Peacekeeping

Like the founding members of SADC, the 5 original members of the ASEAN were mainly

concerned about ensuring peace and security in the region. Indeed, when the association was

created, escalating tension31 and leftist regimes’ resurgence in the several Southeast Asian States

were the reality of the time. Accordingly, although originally created to serve as a platform for

concerted policymaking and an instrument of development, these geopolitical conditions diverted

ASEAN’s priorities to peacebuilding and conflict resolution. This resulted in the stagnation, and

to considerably slow progress, of regional cooperation in economic affairs.

The ASEAN’s focus on regional security and political stability during the first two decades,

suggests that like its African counterparts, ASEAN was facing a problem of internal divergence

and thereby a lack of trust between its members. Indeed, Acharya (2001) notes that the ASEAN

5 was very different to one another in many ways (socio-cultural, colonial experience, physical

size, and ethnic composition…) and had no experience regarding regional and multilateral

cooperation. In other words, the initial conditions for a successful integration between the

founding members of the ASEAN were almost inexistent. Therefore, norms and repeated rule-

based interactions among members were necessary to build a common identity and political basis

for long-term cooperation (Acharya, 2001; p.47). In this regard, experts widely agree that the

association played a critical role in resolving major political and security issues such as the

Vietnamese invasion of Cambodia. Therefore, from the struggle to build a secure and peaceful

regional organization, the ASEAN leaders have learned to cooperate and have come up with

original mechanisms of decision-making and settling disputes that are commonly known as the

“ASEAN way.”

3-3-3. Flawed Regional Apparatus and Unorthodox Decision-Making Process: The

“ASEAN Way”

In terms of decision and policymaking, ASEAN was and is facing numerous leadership and

institutional obstacles. Much so that experts argue that the regional bloc is unlikely to reach the

European Union’s (EU) integration depth at least in the foreseeable future (Hill and Menon, 2010).

The ASEAN’s decision-making apparatus problem was rather serious, particularly at the

31 In this regard Acharya (2001) and Kurlantzick (2012) note that the ASEAN consisted of very divergent countries that

have been in conflicts such as Indonesia and Malaysia.

52

beginning of its establishment. For instance, in the 1970s the ASEAN countries launched different

schemes of regional economic and trade agreements such as the ASEAN Preferential Trade

Agreements (APTA) in 1977 and the ASEAN Industrial Projects (AIP) in 1976 which would later

be replaced by the ASEAN Industrial Complementation (AIC in 1981) and the ASEAN Industrial

Joint Ventures (AIJV in 1983). However, these measures, which were consistent with the

protectionist trend at the time, did not yield the expected result mainly because of poor

implementation. Indeed, in the case of APTA product coverage was too narrow and tariff cuts

were low to have any significant impact32. Similarly, the regional industrial programs had minimal

success mainly because of divergent interests and unhealthy competition between the member

countries 33 . Thus, instead of strengthening and fostering their relations, these measures

exacerbated the weakness of the ASEAN as an economic policy implementation platform.

Experts point out some reason for this very timid result of the first ASEAN-wide trade and

industrial policy measures. Firstly, ASEAN’s early cooperation schemes were very “shallow” and

lacked an enforcement mechanism and commitment from all stakeholders. Secondly, Kurlantzick

(2012) argues that most of the ASEAN members’ states in that time were less keen to hand over

a part of their sovereignty to a regional institution because these states were mostly autocratic in

nature. Accordingly, the ASEAN Secretariat suffered from a severe lack of human and financial

resources and thereby was hardly capable of handling any issue that required cooperation and

coordination at a regional level. Thirdly, despite these regional trade and industrial programs, the

ASEAN countries still put their domestic economic and trade policy as a priority. Therefore, the

regional measures were mostly not enforced, and in the case of APTA, they were insufficient in

removing Non-tariff barriers (NTBs), which constituted the main constraints to intra-ASEAN

trade.

However, from the late 1980s, the ASEAN embarked on a positive regional momentum

thanks to some internal as well as external factors. Indeed, from this period, particularly after the

Plaza Accord in 1985, the ASEAN members were more seriously committed to their economic

relationship, and particularly in trade. The most important achievement of the period from the late

1980s-2000s is the creation and reinforcement of the ASEAN Free Trade Area (AFTA), which

later was expanded to an ASEAN Economic Community in December 2015. Although the advent

of the Asian Financial Crisis (AFC) has slowed down this momentum, the ASEAN countries

recovered rather quickly and still show sound economic growth. Thus, the ASEAN countries

32 Bowles and Mclean (1996) report that by the mid-1980s the APTA only covered 5 % of intra-ASEAN trade. 33 In this regard, Bowles and Mclean (1996) also reported that: “The Philippines abandoned a number of projects and

Thailand's AlP, a rock soda-ash project, was significantly scaled back in the face of low demand.” (p.321)

53

managed to overcome their differences and deepen regional ties and thereby insured the durability

and dynamism of their organization. This situation has been influenced both by changes initiated

within the organization itself as well as by some external factors. Internally, the member countries

grew in confidence regarding the ASEAN, and most of them recognized that the 1970s measures

were too weak and not ambitious enough. Externally, the end of the Cold War and the collapse of

the Soviet Union increased the pressure for trade liberalization; moreover, the development of the

regional organization in other parts of the world, clearly set a new trend in international trade.

Heretofore, decision making and reforms within the ASEAN has been undertaken successfully

through a unique process called “The ASEAN way.” According to experts, this particular

decision-making process is based primarily on building consensus. In other words, measures and

agreements can only be implemented after the unanimous accord from all the members. Moreover,

Acharya (2001) reports that “The ASEAN way” is characterized by a high degree of informality

and frequent direct consultation between the head of states. This has been widely criticized and

thought to prevent a faster reform and decision-making process within the association. However,

the ASEAN leaders consider it as a mechanism that permitted them to get over their many

differences.

It has been under this particular organizational scheme that the ASEAN countries stand out

among the fastest growing economies in the developing world since the late 1980s despite two

major crises in 1997 (AFC) and 2008 (the Lehman shock). This leads us to another important

characteristic of the ASEAN bloc; that is, its outstanding regional trade and economic dynamism

when compared to other developing countries.

3-3-4. Trade and Economic Development

It is important to point out the high performance of the Southeast Asian economies during

these last three decades, particularly in terms of trade and economic growth. Indeed, the ASEAN

has been the only regional organization in the developing world that managed to sustain relatively

high growth over a long period. As shown in Table 3.1, which compares the average GDP growth

of selected groups of developing and developed countries with that of the Southeast Asian

countries through the period 1980-2014, on average the developing Asian countries grew largely

faster than other developing and developed countries; therefore, Southeast Asia’s growth was

higher than the Asian average except in 2005 and 2014. As a group, ASEAN has been doing

reasonably well in terms of growth while, at the same time, reforming its institutional structure

and deepening regional economic integration since the 1980s. In other words, the progress and

deepening of the ASEAN integration did not impede on the economic performance of its member

54

countries. Furthermore, as we will show later in the next sections, the ASEAN may even have

played an important role in Southeast Asia’s outstanding economic performances.

Several studies on the East Asian economies suggest that high, sustained economic growth

has been achieved mainly through a trade-oriented or export-oriented policy; and the ASEAN

countries are no exception (World Bank, 1993; Hill and Menon, 2014). Moreover, the several

economic initiatives and measures were taken since the late 1970s clearly suggest the Southeast

Asian countries’ commitment to foster trade. Thus, it is reported that in 2010, 99% of the tariffs

in the inclusion list of the ASEAN-6 are equal to zero. And with 49% of the inclusion list’s tariffs

already at 0% in the CLMV countries, overall 80.3% of ASEAN tariff barriers have been removed

(Hill and Menon, 2014). This has an important implication when we consider the Southeast Asian

economies since their economic growth has particularly been driven by trade in manufactures,

which in turn relied on well-developed region-wide production networks34. Another feature of the

ASEAN bloc is the wide development gap between member states especially between the

ASEAN-6 and the CLMV countries. However, recent trends suggest that this latter, notably

Vietnam and Myanmar, are catching-up rapidly (in terms of GDP growth) with their more

advanced partners.

ASEAN started out as a regional bloc aimed at preserving regional peace and security, and

it did well in helping to prevent the confrontation between right-wing and leftist states in the

region. However, the organization later aspired for more ambitious institutional and economic

projects overtime which led to the commission for deeper cooperation among member states. This

integration process has been strewn by obstacles, and the ASEAN is still learning to overcome

them through policy experimentation. Yet, ASEAN is, thus far, the most dynamic and relatively

successful regional bloc when it comes to the developing world. Therefore, it is interesting for

the Southern African countries to understand the determinants of the Southeast Asian growth and

the role played by the ASEAN as an organization. This will be the object of the following sections.

34 Hill and Menon (2014) report that: “Within East Asia, ASEAN members stand out for their heavy dependence on

fragmentation trade. In 2009–2010, for example, parts and components accounted for 45% of ASEAN manufactured

exports, up from 29% in 1992-1993”.

55

Table 3.1 Comparison of GDP growth rates, annual, 1980-2014 in selected regions

1980 1990 1995 2000 2005 2010 2014

Developed economies 1.106 2.629 2.605 3.759 2.517 2.634 1.686

Developing economies:

Africa 3.345 2.887 2.848 3.595 6.008 5.154 3.222


America 6.275 0.542 0.582 4.337 4.569 5.802 1.321

Developing economies: Asia 3.746 6.490 7.392 6.802 7.921 8.762 5.372


South-Eastern Asia 6.367 8.297 7.900 6.104 5.747 8.025 4.287

Source: UNCTAD database, Accessed in 2016/08/11

Figure 3.3 Developing Asia’s total trade (in current US dollar), 1990-2015

Source: UNCTAD database, Accessed in 2016/08/11

0

500000

1000000

1500000

2000000

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4000000

1990 1995 2000 2005 2010 2015

million USD

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Developing economies: Eastern

Asia

Developing economies: Southern

Asia

Developing economies: South-

Eastern Asia

Developing economies: Western

Asia

56

3-4. Inefficiencies and Stagnation of Regional Integration and Cooperation in Southern

Africa- The Case of the Southern African Development Community (SADC)

Regional integration or Regionalism, in general, has a relatively long history in the African

region. Indeed, since the colonial period, a succession of political and economic ideologies have

been continuously supporting and pushing for regional or even continental integration between

the African countries. The Pan-Africanist ideology has been a significant influence of the first

generation of African regionalism which was based on the objective of complete emancipation

from the former colonial powers. Unfortunately, many experts argue that the African regionalism

has been mostly failing to deliver the expected results in terms of cooperation, intra-regional trade,

economic growth, and economic development. Instead, the existing regional institutions are

inefficient and unable to enforce signed agreements and resolutions among members. The SADC

is no exception to the inefficient and stagnating African regionalism. Even so, regionalism is still

widely regarded as an essential tool for the development of the African countries. Gibb (2009)

noted that regionalism as a development strategy enjoys broad support from political leaders,

policymakers and even international organization and institutions in Africa. In this regard, experts

note that there are economic and geographical rationales for the African developmental

regionalism. Moreover, it is argued that the shared identity arising from the same colonial past,

the presence of many small and landlocked economies, and the pervasive conflicts between

numbers of neighboring countries have all encouraged and justified the enthusiasm about

regionalism in the African continent (Kimuyu, 1999; Gibb, 2009; ECDPM, 2016). However,

the African regionalism faces several obstacles that prevent it from fulfilling the developmental

aspiration of the population. Therefore, by focusing on SADC, one of the most important and

explicitly development-oriented regional organizations in Southern Africa, we will try to identify

the problems and explore solutions. This chapter will briefly discuss the background, foundations,

performance of the SADC regional bloc and the reason for its stagnation.

3-4-1. History and Evolution of the Southern African Development Community (SADC)

The origin of the SADC can be traced back to the mid-1970s with the commitment of five

original members, the so-called “frontline States”: Angola, Botswana, Mozambique, Tanzania,

and Zambia. These five Southern African countries cooperated mainly for political and security

reasons, particularly for “the political liberation of the region” from “racism, colonialism and

white minority-rule” (SADC, 2003). These states also came together to form a coalition to fight

against military threats from, their apartheid-ruled neighbor, South Africa. In 1980, after gaining

57

independence, the five frontline states were joined by Lesotho, Malawi, Swaziland, Mozambique,

and Zimbabwe and created the Southern African Development Coordination Conference

(SADCC) at the Lusaka summit in April 1980. Amidst widespread poverty and the political and

economic monopoly of the white minority, the SADCC participants agreed to co-operate “Toward

Economic Liberation” in the Southern region. Concretely, the main objectives were to reduce

their dependence on the former white minority-ruled South Africa and to work toward the Pan-

African ideal of African unity and the recovery of its honorable place in the global community.

By the late 1980s and early 1990s, several major events such as the end of Cold War, the

independence of Namibia, the end of apartheid in South-Africa and the acceleration of

regionalization in other parts of the world have precipitated the shift from SADCC to the current

SADC in 1992. Indeed, in the face of these events, the leaders of the SADCC felt the pressure

and the opportunity for deeper integration in the region. Accordingly, the SADC Declaration and

Treaty were signed in Windhoek the capital city of Namibia on August 17, 1992.

The 1990s, which saw the joining of Namibia (1990), South Africa (1994), Mauritius

(1995), Seychelles and Democratic Republic of Congo (DRC in 1997), marked the deepening and

widening of regional integration within the SADC35. Given the need for better infrastructure,

structural transformation, economic diversification and private investment to sustainable socio-

economic development, and recognizing that it is costly and impossible for an individual country

to achieve it alone, the SADC member states opted for a development integration approach

(SADC, 2003; p.3). Therefore, as a development-oriented regional bloc, SADC complements its

trade and economic policies with some corrective measures to protect its vulnerable members

against the shock resulting from liberalization. According to the RISDP, the main objectives of

the regional bloc include poverty eradication, regional development integration, regionally

balanced and equitable development, integration to the continental and global economies,

sustainable development and gender equality (Ibid.; p.5). The SADC treaty and its 2001 amended

version established a set of institutions that were aimed to support the deep integration implied

by the shift from a Conference to a Community. These institutions consist of a Summit of the

head of States, Organ on Politics, Defense and Security Co-operation, Council of Ministers, a

tribunal, the Troika, Standing Committee of Senior Officials and SADC national Committee

(SADC website, 2012). Moreover, the SADC also launched the RISDP in 2004 at the Arusha,

Tanzania summit that outlined the regional groupings’ development strategies and projects until

2020.

35 Madagascar is the 15th member of the SADC which joined the groupings in August 2005 but its membership had

been suspended from the political crisis of 2009 until January 2014.

58

The first goal stated in the RISDP was the realization of duty-free intra-regional trade in

two phases. By 2008 SADC members achieved over 85% of intra-regional trade under duty-free.

And by 2012 100% intra-regional trade was liberalized (SADC website, 2012). Heretofore,

twelve out of the fifteen SADC members took part in the FTA. However, this ambitious project

yielded poor results in intra-regional trade and fostering structural transformation. Indeed, as

shown in Figure 3.4 the intra-regional exports grew at a significantly slower pace than exports to

the rest of the world. Moreover, Figure 3.5 suggests that the SADC countries are still lagging

behind with respect to industrialization with a heavy reliance on primary goods exports which

results in high economic instability due to price fluctuations in the markets. All of these

demonstrate the

Table 3.2 Summary Facts and Figures about SADC

Indicator Information

Member states 15

Year Established 1992

Land Area 9 779 742 km²

Total Population (2017) 337.1 million

GDP Growth Rate (2017) 1.4%

GDP (2014) US$705.835 Billion

Total Import (2017) US$142 billion

Total Export (2017) US$143 billion

Average Gov. Debt ( % of GDP) 35.30%

Average Life Expectancy 60.5 years

Inflation (2015) 11.05%

Source: Compiled from SADC website http://www.sadc.int/about-sadc/overview/sadc-facts-figures/ with author’s

update.

inefficiency of the SADC in fostering regional economic co-operation and in achieving its broader

objective of socio-economic development within the regional bloc. Indeed, the implementation

of the RISDP encountered several problems and many objectives, such as the establishment of a

customs union, have been rescheduled which will naturally affect the timing of the different

integration phases. In other words, the SADC integration is on standby with no clear measures to

get out of the status quo. The reasons behind this stagnation are diverse, but we will address in

the next sections those that are the most critical (SADC, 2003, ECDPM, 2016): lack of regional

infrastructure, lack of resources and institutional weakness, and high external dependency.

59

Figure 3.4 SADC exports 1995-2014

Sources: UNCTAD (D.S: 2016/08/25)

Figure 3.5 SADC exports by products and by partner in 2015

Sources: UNCTAD (D.S: 2016/08/25)

3-4-2. Lack of Regional Infrastructure

In the economic literature, infrastructure usually comprises hard infrastructures (roads,

railways, ports) and soft infrastructures (Information Communication Technology, rules and

regulations). Several studies found evidence of the positive impacts of infrastructure development

on trade, investment, social welfare and on long-term aggregate growth. Good infrastructure has

even been found to be crucial in promoting regional integration by reducing transaction costs and

improving regional connectivity among others (Marinov, 2015; Jouanjean et al., 2016). Several

authors point out the importance of infrastructure development in Africa to overcome the

obstacles to growth such as high investment prices, low investment returns, geographical

constraints, small market size (Ndulu et al., 2005; Gibb, 2009). In this regard, the SADC countries

0

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Primary goods Manufacture goods

60

recognized the importance of developing regional infrastructures as a trade facilitation measure

and integration enabler. Indeed, infrastructure development stands high in the SADC’s agenda as

evidenced by its Priority Infrastructures Development Project such as the SADC Corridors

Strategies or the Southern African Power Pool plan (SAP) among others36.

However, the inadequate and unequal infrastructure development across the SADC

countries impedes severely on its regional trade integration and thereby on the progress of

regionalization in general. Indeed, the 2016 Doing Business report on the region’s quality of

business environment ranked the regional grouping relatively low (with the regional average rank

at 119 out of 189 countries) compared to other regions (World Bank, 2016). The report shows

that the SADC countries have the lowest scores in infrastructure related topics such as getting

electricity, enforcing contracts, trading across borders, getting credit (Ibid., p.8). Raganathan and

Foster (2011) also found that the central issue in the SADC regional bloc is the uneven

infrastructure development among member states. Overall, the SADC regional bloc has the best

infrastructure compared to other African RECs (Regional Economic Communities), but the

uneven quality of transport infrastructures and access to sanitation and power services across

member states hamper greatly on regional trade and connectivity efficiency (Raganathan and

Foster, 2011). In general, there is still much to do concerning cost reduction and improving access

to infrastructure (hard and soft) in the SADC regional bloc. Moreover, along with the challenge

of financing infrastructure projects, there is also an urgent need to implement comprehensive

regional infrastructure projects linked with trade and industrial policies as achieved by the fast-

growing ASEAN region.

3-4-3. High External Dependency

Although emancipation and liberation of the Southern African countries from any form of

external exploitation or dependence was one of the foundational factors of the creation of the

SADC, this goal has hardly been achieved. Indeed, the SADC as a regional bloc is dependent and

vulnerable to various sort of exogenous factors. This external dependency mainly takes the form

of financial or donor dependency, economic dependency and strong ties with former colonial

powers. These external factors affect the decision-making and policy agenda implementation

processes negatively by exacerbating divergence of interests between the different stakeholders

(extra-regional partners and member states alike) (ECDPM, 2016).

36 See also the SADC Regional Infrastructure Development Master Plan signed in August 2012.

61

Dependency on donor Aid is mostly common to African Regional Economic Communities

(RECs), and the SADC is among the most dependent with 79 percent of its total budget funded

by international donors (ECDPM, 2016). However, as argued by Aid specialists, traditional

donors tend to provide project-related and off-budget aid which reduces the management and

policymaking space of RECs such as the SADC37. On the other hand, the SADC’s economic

dependency is closely linked to its heavy reliance on commodity exports. The high fluctuation of

primary goods’ prices results in high economic instability which makes the region highly

vulnerable to external shock and thereby disrupting the regionalization process. Lastly, many of

the SADC member states still keep a strong relationship with their former colonial powers which

have different interests. Therefore, member countries usually are more involved with their

bilateral co-operation with their former colonial ruler which contributes to the stagnation of the

regional integration process (Ibid., 2016).

3-4-4. Institutional Weakness and Insufficient Cooperation at the Regional Level

A regional integration process often involved economic integration through market

liberalization and trade agreement and political integration through the creation of regional

institutions. The SADC has given particular importance to institution building and regional

governance indeed, as stated in the RISDP (SADC, 2003; p.5) and the article 5 of the SADC

treaty member states committed to “promote common political values, systems and other shared

values which are transmitted through institutions that are democratic, legitimate, and effective”.

Moreover, in the RISDP democracy and good political governance stand as among the key

integration and development enablers. Good national and regional institutions, the rule of law are

considered as prerequisites to successful integration and socio-economic development. The

SADC put a strong emphasis on political and institutional integration sometime at the expense of

other policy areas.

However, several studies point out problems about SADC’s institutional structure and

management (Shams, 2003; Gibb, 2009; ECDPM, 2016). In general, specialists on Southern

African regionalism argue that regional institutional weaknesses stem from the interplay between

two factors: the lack of financial and human resources and institutional structure heaviness

(Shams, 2003; ECDPM, 2016). The lack of resources harms the functioning and the capacity of

regional institutions such as the Secretariat in enforcing signed agreements and treaty.

Consequently, trade negotiations and policy implementation process are stagnating due to lack of

37 In other words, example of foreign aid which their utilization is decided in advance and often by the donor themselves.

62

enforcement and organizations. SADC’s institutional structure is cumbersome and complex, and

this is a well-known issue that the organization herself acknowledges (Shams, 2003; p.25). Not

only has this institutional heaviness posed resources allocation issues but also organizational ones.

For instance, Shams (2003) argues that the SADC structure impedes on the performance and

efficiency of the organization as a whole citing the case of the Secretariat’s lack of competence

in policy and project implementations. Indeed, policy and project implementation are highly

decentralized and therefore subject to serious coordination problems. The leading cause of the

SADC’s institutional problem is the lack of commitment of the member states. Indeed, whether

it is because of their patrimonial nature or the lack of trust, the African states are usually reluctant

in handing down a part of sovereignty to the regional organization. This has significantly

weakened the SADC’s capacity in advancing its agenda both at regional and international level.

3-5. Determinants of South-eastern Asia’s Economic Growth and the Role of ASEAN:

Trends and Patterns

The theoretical evidence on the link between economic development and regional

integration was addressed earlier in this paper. In this section, we will proceed to a preliminary

empirical investigation on the major determinants of the Southeast Asian economic growth and

the contribution of regional policy and cooperation. In other words, we will show the growth-

enhancing impact of the ASEAN as a regional organization by explaining its policy impact on

critical factors such as capital accumulation, technology transfer, investment, and trade.

Firstly, by observing Figure 3.6 below, we note the apparent divergence of the economic

path between the developing African countries and the Southeastern Asian economies since the

late 1980s. More interestingly, although the ASEAN economies were mostly poorer than their

African counterparts in the 1970s, these latter experienced a slow (sometimes negative) growth

from the mid-1980s to 2000. Conversely, the ASEAN grew steadily and even accelerated in the

late 1980s until the advent of the Asian Financial Crisis (AFC). For the ASEAN economies, this

acceleration coincided with the implementation of the AFTA and several other measures cited

earlier which aimed at fostering trade and deepening regional integration. This trend is consistent

with the widely accepted conclusion that in the ASEAN economies, trade, especially in labor-

intensive manufactured exports, played a crucial role in economic development (Figure 3.6). Data

63

shows that merchandise trade volume ratio between developing Africa and ASEAN countries has

reversed from the late 1980s and diverged rapidly since then38 (Figure 3.7).

Thus, let us observe in detail the elements and mechanism of the ASEAN trade-growth

nexus. First, as reported by the ASEAN Secretariat in “ASEAN Community in Figure” (ACIF)

2014, the regional bloc’s trade share to GDP was already high at 91% in 1993 which increased

slightly to 105% in 2013. Moreover, it is also noted that more than 70% of the Total ASEAN

trade is performed with countries outside the bloc, although intra-ASEAN trade has been growing

faster since 2000 (ACIF, 2014; p.8). This implies that the ASEAN bloc depends heavily on

external market for its export products and thereby, also its economic growth. Moreover, the

particularity of the Southeast Asian region is that this rapid trade growth has been accompanied

by high foreign capital inflows and relatively rapid industrial upgrading (Phung, 2014; ACIF,

2014). In other words, not only has the ASEAN economic growth been driven by trade, but its

structure also evolved gradually through significant inflows of FDI mainly in the manufacturing

and service sectors. As a result, the ASEAN bloc evolved as a parts/components production and

assembly platform for Multi-national enterprises (MNEs) of developed countries. The ASEAN

integration’s impacts to this process can be best captured through a political, economic analysis.

Indeed, the deepening and widening of the ASEAN organization brought about both positive

market as well as political signals. Moreover, the interaction of these signals resulted in the

development of the main determinants of the region’s economic development: human capital,

regional production networks, infrastructure and physical capital, institutional arrangements.

Therefore, let us observe as a preliminary investigation, the mechanism through which the

Southeast Asian organization influenced each of the factors mentioned above to sustain the

region’s growth.

38 ASEAN trade volume represented only around 30% of that of developing Africa in 1970 and the ratio has been

inverted with developing African trade volume amounting roughly to 25% of the total ASEAN trade.

64

Figure 3.6 Gross domestic product per capita, constant USD 2005 prices, annual, 1970-

2014

Source UNCTAD (D.S: 2016/08/25)

Figure 3.7 Merchandise trade volume at current US dollar, annual, 1970-2015 (million)

Source UNCTAD (D.S: 2016/08/25)

3-5-1 Cross-border Infrastructure and Regional Connectivity

The ASEAN has attracted enormous amounts of foreign investments because of its

comparative advantages reflected by low transaction costs and low uncertainties. This is the result

0

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144148 430203 1162652

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1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

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Eastern Asia

Developing

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65

of regional efforts to eliminate non-tariff barriers and reduce transaction costs within the regional

bloc through the development of regional infrastructure networks. Following a long tradition in

East Asian countries like Japan, South Korea or Taiwan, the Southeast Asian region has been

giving high importance to the implementation of cross-border infrastructure projects both to

support and to complement private investments. The ASEAN countries understood that

infrastructure is an essential element of trade facilitation; it increases productivity and thereby

accelerates economic growth. Therefore, it is no surprise that infrastructure development holds

an essential place in the AEC projects particularly in improving ASEAN connectivity both

between member states and with countries outside the bloc. Infrastructure projects are particularly

booming among the latecomers and catching-up in ASEAN member states such as Vietnam and

Myanmar.

Cross-border infrastructure usually refers mostly to physical infrastructures that enable the

exchange and the mobility of goods and production factors within a given region (Bhattacharyya,

2009). They comprise the transport infrastructure (railways, roads, and ports), communication

infrastructures, and basic energy and sanitation services. Several authors point out the importance

of cross-border infrastructure in fostering economic growth and in redistributing the fruit of this

growth evenly among the population (Bhattacharyya, 2009; Ohno, 2009; Marinov, 2015). Thus,

it is not a coincidence that the ASEAN put the development of logistics and physical infrastructure

as its top 10 priorities for achieving the ASEAN Economic Community asserted goals such as a

single market, single production base and equitable economic development (AIPS, 2004). In the

ASEAN infrastructure projects are aimed both at improving the region’s market efficiency and

closing the development gap between the ASEAN5 and the CLMV countries.39 Therefore, the

ASEAN has been developing a particular form of sub-regional cooperation mainly based on

improving cross-border development capacities which includes infrastructural capacity

development. These sub-regional cooperation links together more developed areas with less

developed ones and are known as the “growth triangles” or “growth polygons” (Dent and Richter,

2011). To date, four of such arrangements have been initiated: the Indonesia-Malaysia-Singapore

growth triangle (IMS-GT), Greater Mekong Subregion (GMS), Indonesia-Malaysia-Thailand

growth triangle (IMT-GT) and Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth

Area (BIMP-EAGA). The ASEAN is also involved in Pan-Asian initiatives such as the Asian

Highway and the Trans-Asian Railway. Moreover, Bhattacharyya (2009) reports that the ASEAN

are pursuing long-term flagship projects in transports, energy and telecommunication sectors:

39The CMLV refers to the newer members namely Cambodia, Myanmar, Lao and Vietnam.

66

i) the ASEAN Power Grid, ii) The Trans-ASEAN Gas Pipeline, iii) ASEAN Highway Network

Projects, iv) Singapore-Kunming Rail link Project and v) the e-ASEAN agreements. These

projects are financed through different channels, but investment funds mainly come from

negotiations with multilateral financial institutions such as the Asian Development Bank or from

significant donors and Japan, in particular, which has traditionally directed her support to

infrastructure development in the Southeast Asian region. According to the World Bank’s survey

on the Logistics Performance Index (LPI), the ASEAN countries are performing largely above

the average level of middle-income countries. Moreover, Vietnam, which is the most dynamic

ASEAN member state, has also seen the fastest development in logistic performance within the

region. This ASEAN proactive infrastructure development policy promoted the creation and

expansion of regional production networks through FDI.

3-5-2 Foreign Direct Investment: Production Networks and Industrial Upgrading

Numerous studies on ASEAN’s development point out the vital role played by foreign

investments in the region’s economic integration. The ASEAN has established itself as a

production and export platform for several foreign companies. FDI has been the main engine of

both manufacture exports and intra-regional trade. According to the figures presented in ACIF

(2014), electronic products and automotive dominated the ASEAN overall exports in the Priority

Integration Sectors (PIS) between 2003 and 2013. The ASEAN FDI and trade trend and patterns

are consistent with the theory on international trade and FDI suggesting that foreign firms are

investing overseas either as efficiency-seeking or market-seeking moves. Both of these factors

are highly influenced by market size, scale economies, location, and agglomeration effects which

have been promoted through regional integration policies (Cheong and Plummer, 2009; Kubny et

al., 2008; Antras, 2013). Recent studies point out various positive effects of regional integration

in fostering FDI. In the ASEAN’s case, experts widely agree that the region’s different investment

policies, such as the ASEAN Investment Cooperation Scheme (AICO) in 1996, ASEAN

Investment AREA (AIA) in 1998, and more recently the ASEAN Comprehensive Investment

Agreement (ACIA), in force since March 2012, has provided good investment conditions

conducive to the rapid increase of FDI. It also mitigated the impact of the emergence of China as

well as of the financial crisis (Dion, 2004; Kubny et al., 2008; Cheong and Plummer, 2009). Dion

(2004) also found that regional integration policies have a significant impact on trade and FDI

which in turn, benefit the region’s aggregate growth through transfer of technology and positive

knowledge spillovers. Moreover, he notes that this impact is likely to be stronger on small

economies (which tend to trade more and to be more open) than on large ones. ASEAN integration

67

policies also reinforced existing advantages such as its locational advantages and concentration

effects. According to the ASEAN investment Report (2016), the primary sources of FDI inflows

to the region are ASEAN countries and Japan which are characterized by their proximity. In this

regard, Phung et al. (2013) point out that geographic proximity with high performer countries

such as Japan and South Korea has served the Southeast Asian countries. Similarly, latecomers

such as the CLMV countries are also benefiting from their proximity to more developed ASEAN

member states.

These dynamics between FDI and regional integration are best captured by ASEAN’s

relationship with its primary partner, Japan. Japan’s status as the regional bloc’s major extra-

regional source of FDI40 is consistent with the theory which predicts distance and economic size

as the main drivers of overseas investments. Japan’s investment in the Southeast Asian has been

prompted by its loss of competitiveness resulting from the Yen’s appreciation following the Plaza

accord in 1985. The bulk of Japanese investments to ASEAN are overwhelmingly directed toward

the manufacturing sector and infrastructure. Japanese firms are one of the primary beneficiaries

of the ASEAN production networks, particularly in the electronic and automotive industries.

Therefore, Japanese FDI has been crucial in the structural transformation and industrial upgrading

of the ASEAN countries. Another recent development of the ASEAN regional integration scheme

is the increasing share of services in the total FDI. This implies that as the ASEAN countries’ per

capita income improves, the number of market-seeking investment is likely to increase; and this

is an ongoing trend since the early 2000s. While the ASEAN integration is considered to be

“institution-light” and mainly market-driven, formal regional policies and institution building also

contributed to the success of the regional bloc.

3-5-3 Regional Institution Building

When discussing Southeast Asian regionalism, the role played by the institution is often

overlooked and overshadowed by economic and market analysis. However, the economic

literature, in general, has produced a considerable amount of evidence linking the nature and

quality of institution to long-term economic growth (Bhattacharyya, 2009). Indeed, institutions

or soft infrastructures are indispensable in sustaining economic growth by protecting property

rights, ensuring fair competition, stabilizing the economy, providing a mechanism for dispute

settlement and so on. Most works on institutions and economic growth distinguish four types of

institutions that have been initially identified by Rodrik (2005): Market-creating institution,

40 Accounts for roughly 17 per cent of the ASEAN total FDI inflows (AIR, 2016)

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Market-stabilizing institution, Market- regulating institution, and Market-legitimizing institution.

Bhattacharyya (2009) found out that market creating institutions that protect property rights and

enforce contracts and market regulating institutions that prevent market failures have the most

positive impact on economic growth in the long-run. Moreover, Masron and Abdullah (2010),

analyzing data from World Bank’s Worldwide Governance Indicators (WGI), argue that the

ASEAN still have more room for institutional improvement and that its impact on economic

growth is likely to be very significant.

During its four decades of existence, the ASEAN has been very prudent regarding

institution building and formalism. Thus, it is widely agreed that the ASEAN regionalism has

been driven by the market rather than by formalism. However, the sustainability and the resilience

of the ASEAN economies suggest that institutional reforms and improvement also played critical

roles. The ASEAN regional cooperation has been achieving good progress in building and

enforcing market creating and regulating institutions among member states. The establishment of

the AEC and the rapid catching-up of the CLMV countries concerning institutional reforms

suggest that the ASEAN regionalism has taken institution building very seriously in the prospect

of deeper economic integration.

3-6. Concluding Remarks

The current trend of regionalism has spurred many studies in the economic literature of

regional integration. Consequently, several observers have formulated the limits of the traditional

welfare economics theory in explaining the formation and the development of regional bloc. The

21st-century regionalism seems to thrive on the backdrop of an acceleration of trade and

investment, globalization and the stagnation of multilateral cooperation process. This is

inconsistent with the predictions of the dominant neoclassical theory which regards

multilateralism as the best and superior option to regionalism. It also concludes that regionalism

between developing countries will not yield any significant positive outcome and is likely to

divert trade and investment to inefficient intra-regional partners. However, the relative success of

the ASEAN regional bloc in sustaining economic growth despite the financial crisis and

increasing competition, especially with China, forces us to dismiss the neoclassical assumptions.

Therefore, this paper elucidates that the new regionalism theory provides us with a better tool to

explain the creation of a regional bloc and its consequence on economic growth. We mainly chose

developmental regionalism as the framework to analyze the developmental impact of

regionalization in the Southern countries. We found that regionalism can be developmental if it

69

is used to capture dynamics gains from trade, such as scale economies, comparative advantages,

regional connectivity, institutions, and intra-regional trade. Also, by comparing the ASEAN and

SADC’s regionalization process and performance along these parameters, more precisely cross-

border infrastructure, foreign direct investment, and institution-building, we could identify the

possible mechanisms through which regionalism may enhance economic growth in the

developing world. Indeed, our analysis suggests that developmental regionalism can be successful

if it is promoting and facilitating trade and foreign investment through infrastructure development

and the creation of Market-creating and Market-regulating institutions.

However, a question emerges from these findings: how much of these are policy-induced

and how much are market-driven? Our new regionalism theory framework would suggest that

dynamic gains can only be captured through proactive policies. Therefore, further empirical

studies on how regional policies could best capture dynamic gains from trade and investment in

order to become developmental must be realized. Ultimately, this research aims at a normative

outcome that would help policymakers and leaders in the Southern African region to cooperate

more efficiently toward their economic development objectives.

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Chapter 4- Institutional Capacity and Regional Development Gap in the

Southern African Development Community: An Institutional

Economics Approach

71

4-1. Introduction

African regionalism has a relatively long history, but it began to drag considerable support,

particularly from policymakers and scholars, since the end of the colonial period. Regionalism is

seen as a relevant solution to address the political, cultural, security, ecological, and economic

issues in the marginalized and fragmented continent. It was amidst such enthusiasm that the

Southern African Development Community (SADC) was created in Windhoek, the capital of

Namibia, in 1992. SADC members are committed to achieving regional security and economic

development through regional cooperation. However, like other African regional arrangements,

the regional process in the SADC is stagnating and is still failing to bring about the changes stated

in the founding document. The dominant opinion argues that most of the sub-Saharan African

(SSA) countries are suffering from weak institutional capacity and high economic imbalances,

making the emergence of a robust regional organization like the European Union (EU) unlikely.

Moreover, mainstream economics suggests that universal free trade or a North-South (N-S)

regional arrangement is more likely to lead to economic development than a regionalization

involving only developing countries.

Therefore, the SADC regional process has taken a more neoliberal approach since the end

of the 1990s and focused on EU style of state-led market liberalization and heavy institutional

structure. This choice appears to be influenced by the willingness to comply with international

donors’ conditions and to EU market’s standards which is SADC’s largest trade partner 41

(excluding APEC countries). However, this approach based on static neoclassical analysis of

comparative advantage appeared to have reinforced and even worsened the longstanding

institutional weakness and development gap problem within the region. Recent studies point out

to institutional path dependence to explain the low-level economic equilibrium which most of the

African countries are trapped in (Acemoglu et al. 2002; Mkandawire, 2009; Lange, 2009).

Moreover, experts in the field of new regionalism argue that there is no unique model, and a

Eurocentric analytical framework is far from being sufficient to understand the current process,

particularly in the developing countries. However, disagreements still exist on the weight given

to institutions in determining economic performance compared to other policy variables such as

trade liberalization, investment in human capital, or country fixed effects such as climate and

geography.

Therefore, in this Chapter, we assume that institutional capacity matters for long-term

economic performance and that SADC’s stagnation is the result of an institutional path

41 According to UNCTAD’s statistical data in 2015.

72

dependence reinforced by different phases of the history. Therefore, to address this, we will first

recall the theoretical principles linking institutional change and economic performance. Secondly,

using the framework highlighted earlier, mixing study of history and institutional economics

approach, we will identify the socio-economic conditions and institutional process underlying the

poor performance of the SADC states. The third section will show evidence pleading for a

transformative and developmental regionalism and conceptualize a model for the SADC’s case.

4-2. Theoretical Review of the Link Between Institution and Economic Performance

This section will address the importance of institutional economics in understanding the

difference of economic performance between nations in general and the failure of development

policy in Africa in particular. We will demonstrate that the institutional economics framework

(particularly the new institutional economics) works better with development economics since it

deals with broader variables and more realistic assumptions than the mainstream neoclassical

theories. Therefore, we will discuss how institutions affect the economic outcome by mitigating

market failures and transaction costs. Then, we will explain the institutional mechanisms

underpinning the process of industrialization. Lastly, we will review the theoretical arguments on

the causes and origin of institutional changes and their long-term consequences on the

performance of a group of agents, an organization, a country or a group of countries.

4-2-1. Transaction costs, Market Failures and Property Rights: The Genesis and Essence of

the Institutionalist Approach

Although the consideration of institutions as a crucial variable in the study of economic

growth is now rarely disputed, both in the orthodox and heterodox literature, significant

differences in interpretation and methodology still exist. This is not surprising since significant

development in institutional economics theories were prompted by the weakness in the

neoclassical models, which dominated development economics since the 1950s, in explaining

performance gaps across nations. Therefore, before demonstrating the theoretical relevance of the

institutionalist approach in development economics, let us first briefly review its fundamental

concepts.

Institutions have traditionally held a prominent place in the economic analysis since Adam

Smith, but it is broadly considered that Marx’s works and his reference on the so-called

“superstructure” inspired the emergence of the institutional school and its subsequent

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ramifications (North, 1990; Lee, 2016). In general, the history of the institutionalist school can

be divided into two significant periods: the old institutional economics (OIE) and the new

institutional economics.

4-2-2. Old Institutional Economics

This period marks the first attempts in systematic studies of institutions to explain

economic performance. Despite minor differences in their definition of institutions, Thorstein

Veblen and John Commons are considered the fathers of the OIE42. The main point of departure

of the institutionalist approach is the general assumption that agents’ behavior is defining

economic outcomes and that in turn these behaviors and choices are constrained by various moral

and legal rules43. Whereas mainstream economic thoughts consider these rules as given and

having no significant influence, the institutional economists argue that they are crucial in enabling

and sustaining transactions. Thus, the form of exchange and their outcomes will vary according

to the set of rules (institutions) within which they are taking place.

From the Veblenian perspective, institutions emerge and are shaped following a social

Darwinian evolutionary process. In other words, they result from a cumulative process of

variation, inheritance, and selection (Leite et al., 2014). This evolutionary theory of institution

implies a reciprocal effect between institutions and human behaviors. Institutional structures

determine the individuals’ habits, but other forms of institutions emerge as social interactions and

technology increase in complexity with the most suitable ones being selected to cope with these

changes (Figure 4.1).

On the other hand, Commons defines institution “as collective action in control, liberation,

and expansion of individual action” (Commons, 1931; p.649). More precisely, Commons view

institution as a set of informal and legal rules designed collectively to constrain the actions and

the choices of individuals. He has a more legalistic perspective on institution. Therefore, his

approach differs from Veblen in a sense that institution is the result of collective human agency

rather than from exogenous evolutionary factors.

Most importantly, the OIE established two fundamental concepts of institutional

economics: path-dependence and transaction. Path-dependence describes the fundamental

cumulative process of institutional change, that is, an incremental evolution from pre-existing

42 “The theory of the leisure class” (Veblen, 1899) and “Institutional economics” (Commons, 1931) are considered the

seminal works which laid the basis of the institutionalist school. 43 In the classical and neoclassical framework economic outcome is the result of the aggregate actions of rational and

utility maximizing individuals.

74

institutions which explains the cross country divergence of institutional trajectory and economic

performance on the long-run. On the other hand, Commons first introduced the concept of

transactions suggesting that they are “not the exchange of

Figure 4.1 Summary of the process of institutional change according to OIE

Social order, exchange

transactions

Rules, customs,

habits

Innovation

Source: the author

commodities, but the alienation and acquisition, between individuals, of the rights of property and

liberty created by society”.

In other words, they consist of man-to-man bargaining and contract agreements without

which no real and physical activities, such as production or consumption, can take place.

However, the OIE could not impose itself as a solid school of thought due to lack of further

contributions and the emergence of more popular and relatively successful schools in the face of

the Great Depression such as Keynesian economics and the neoclassical school later on. The

institutionalist school marked its return in the forefront of economic analysis with a renewed

interest in the study of economic development and recent contributions from game theory,

evolutionary economics, and economic history which resulted in the current new institutional

economics (NIE).

Existing

institutions

individuals

Social

interactions

Institution-

al change Bargaining power

Technology

75

4-2-3. New institutional Economics

The NIE has broadened the institutional economics’ analytical reach by introducing

elements from other relevant researches in game theory, evolutionary economics or economic

history. The leaders of this school of thoughts have been two Nobel Prize winners: Douglas North

and Ronald Coase44. Their seminal works dealt with: positive transaction costs, limited rationality,

market imperfections, particularly information asymmetry, and governance. According to Menard

and Shirley (2012) three fundamental concepts, overlooked or missing in the mainstream

neoclassical theories, constitute the core of the NIE: transaction costs, property rights, and

contracts. These “new” concepts, although implicitly stated in the OIE, have been the object of

extensive researches in the field of NIE and contributed greatly to our understanding of economic

development and the importance of institutions. Therefore, a quick overview on the definition of

these concepts and their implications in understanding economic development and economic

divergence appeared to be essential before moving further in our institutionalist analysis of

industrialization and development in the Southern African region.

Positive transaction costs

The concept of positive transaction cost is arguably one of the strongest points in favor of

the institutionalist school. Originated from Coase’s works on “the nature of the firm” (1937), the

notion of positive transaction costs is used to explain the productivity, structure and the size of

firms. Moreover, it is argued that positive transaction costs justify the existence of firms which

are, from Coase’s perspective, organizational and institutional means of reducing and eliminating

these costs 45 . Thus, transaction-cost-reducing technologies (such as telecommunication or

transportation) play an essential role in determining firms’ size and performance.

For North (1990) institutional frameworks (informal or formal rules) aim at facilitating

transactions by eliminating costs resulting from incomplete information, limited rationality,

contract enforcement and so on. From this point of view, the more efficient societies are in

eliminating these transaction costs the higher their economic performance.

44 From their respective seminal works: “The nature of the firm” (Coase, 1937), “The problem of social cost” (Coase,

1960) and “Institutions, institutional change and economic performance” (North, 1990). 45 “We may sum up this section of the argument by saying that the operation of a market costs something and by

forming an organization and allowing some authority (an “entrepreneur”) to direct the resources, certain marketing

costs are saved.” (Coase, 1937, pp.388-392)

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Property rights

The concept of property rights has also been initially derived from Coase’s study of social

cost (Coase, 1937; Menard and Shirley, 2012). Formaini and Siems (2003) report that Coase

definitively imposed NIE as a relevant branch of economics after winning his case before scholars

considered as authorities in the mainstream field such as Milton Friedman, Arnold Harberger,

Gregg Lewis. In short, Coase demonstrated that in a zero transaction cost world (known as the

Coase condition) the original arrangement of property rights does not matter and will always lead

to an efficient economic outcome. This theorem implies that government intervention is likely to

harm than good when the cost of intervening exceeds that of the market price. Therefore,

government’s role should be mainly that of creating institutions to protect property rights and

reduce transaction costs. The importance of defining and protecting property rights for an efficient

and fair exchange between agents implies the necessity of establishing a legal system, etiquette,

and social customs, in other words, informal and formal institutions. The concept of property

rights leads us to the contracts and contract enforcement concept.

Contracts

Shirley (2012) reports that from the institutionalist standpoint contracts are written or

unwritten agreement between two parties that are never correctly enforced and never entirely

complete. These two assumptions led institutional research to two different directions, one that is

concerned with contract enforcement and the other with imperfect information and the problem

of governance. For instance, North (1990) argues that the more developed an economy, the more

complex becomes the mechanism of exchange between its agents (long-distance and impersonal)

and thereby a more sophisticated and efficient system of third-party contract enforcement is

necessary to support it. On the other hand, Williamson’s theory of contracts tried to identify the

trade-off between different alternative of governances (market or vertical integration) into solving

what he called the “transactional attributes” problems of uncertainty, frequency, and transaction-

specific investments. This third core concept highlights other assumptions in NIE that are in

opposition with the neoclassical school, i.e., the notion of the agent’s limited rationality (adaptive

or procedural rationality), information asymmetry, and informal constraints.

From the next sub-section, following mainly Douglas North’s historical institutionalist

approach, we will highlight the critical role played by political institutions and context-specific

policy design in bringing institutional changes. This analytical framework recognizes the

existence of imperfect competition, irrationality and agent’s preference heterogeneity. Thus, the

right institutions are those that would support competition, belief system, and agents who allow

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innovations and increasing productivity. Therefore, our primary focus will turn to the issue of

institutional arrangements and long-term economic structural transformation.

4-2-4. Industrialization, Innovation and the Role of Institutions: Beyond the Neoclassical

view of Institutional Forms

Industrialization and innovations are essential parts of the process of economic

development since they often translate into higher productivity and thereby, higher revenue which

is often the prerequisite for any welfare improvement. Thus, the difference in the level of

industrialization and technological innovation explains, for a large part, the development gap

between nations. Economists have broadly agreed on the endogenous character of

industrialization and innovation as variables explaining economic growth. The mainstream

method of analysis of the contribution of these two variables on economic growth is based on the

neoclassical assumptions of perfect competition and information. In these models, institutions to

protect property rights, for contract enforcement and public investments are given, and thereby,

innovation and industrialization can be promoted through market mechanism, i.e. investment in

R&D, human capital or in acquiring patents. However, these conclusions have been challenged

by institutional and development economists who studied the China-England or North and South

Korean economic divergence among others (Acemoglu et al., 2005; Greif et al., 2014). These

studies not only stressed the crucial role played by institutions in determining countries’ long-

term development path but also demonstrated that institutional arrangements could not be

overlooked, are context-specific and can achieve the same growth enhancing function

independent of their forms (Rodrik et al., 2004).

The critical role of institutions in enhancing and supporting industrialization and

innovations are well-documented in the theoretical as well as the empirical literature. For instance,

North (1990) notes that differences in the prevailing set of informal and formal institutions explain

the choice of technology and the different economic outcomes of organizations or countries.

Moreover, he argued that the same formal policy reforms might yield contradictory results due to

differences in agents’ perception which is influenced by informal constraints such as customs,

belief system or moral rules. In their empirical study, Rodrik et al. (2004) found that the institution

was the most significant variable in explaining the increase in income when compared to trade

and geography. Moreover, their results showed that institutions affect economic growth

particularly by promoting physical capital accumulation, a prerequisite for achieving

industrialization. In this regard, Bhattacharyya (2009) also found the same result but went further

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by identifying that Market-creating and Market-stabilizing institutions 46 were the most

significant in fostering long-term growth.

4-2-5. Institutional Changes and Economic Development

We have seen in the above section that institutions matter to economic growth by

facilitating physical capital and knowledge accumulation. Therefore, if institutional arrangements

are related to a country’s economic performance, how do institutions change or evolve in the

long-term. This question of institutional change, often overlooked in the mainstream framework,

is fundamental in development economics. The institutionalist approach gives us a better

understanding of the process of institution building and helps to explain the consequences (failure

or success) of formal policies.

In general, the institutional school argues that institutional changes are rarely revolutionary

but often incremental as a result of various alteration in agents’ informal constraints, relative

factor prices and formal institutions (North, 1990; Acemoglu et al., 2005). This relative stability

of institutions is used by institutionalists to explain the economic divergence that occurred

between the North and South which has taken different institutional path since the industrial

revolution of the 19th century. In this regard, Acemoglu et al. (2005) note that the institutionalist

literature offers four alternative explanations of institutional differences and their outcome

between nations:

The efficient institutions view: In this view, institutions are chosen efficiently by

utility maximizing agents to reduce social costs and to attain higher total surplus. Thus,

Institutions vary along the structure of agents’ needs and preferences in each country.

Although it explains the variation in institutional forms, this explanation can hardly explain

the difference in economic outcome engendered by these institutional arrangements.

The ideology view: Very close to the previous view it argues that institutions

vary across countries because of ideological differences. This view also holds that

incentives tend to promote institutions that are good for society overall. However, its limits

are shown when we try to explain the differences in the institutions implemented in the

British colonies. Ideology seems to have played little to no role in determining the type of

46 Rodrik et al. (2004) provides a taxonomy of “market-sustaining” institutions including: market-creating institutions

(property rights, contract enforcement), market-regulating (regulatory bodies and other), market-stabilizing (monetary

and fiscal institutions, institution of prudential regulation and supervision), and market-legitimizing institutions

(democracy, social protection and social insurance).

79

institution that emerged in these colonies. Instead, these colonial institutions and their

diversity resulted from the deliberate choices on the part of the colonizers (Acemoglu et al.,

2005).

The incidental institutions view: It argues that institutions are often the result of

unexpected historical events such as the emergence of common law in England which

enabled the advent of the industrial revolution. However, Acemoglu et al. (2005) note that

this explanation is flawed since it does not justify the persistence of socially inefficient

institutions. They argue that deliberate social choices, and not historical events, have often

prompted significant institutional changes such as in Japan during the Meiji era, Russia

after the Crimean war or Turkey under Mustafa Kemal in the 1920s.

The social conflict view: It argues that institutional arrangement emerges from

the “self-interested” choice of the group that controls political power. These rulers are often

those who managed to win the battle for power against other groups. Therefore, their self-

interested behavior will result in the creation of institutions that ensure their rents which

because of transactions costs47 may not always coincide with maximum social welfare.

This explanation is considered in Acemoglu et al. (2005) as the most accurate because it

can explain both the diversity, persistence and economic outcome differences of

institutions.

Therefore, institutional changes and thereby economic evolution are highly influenced by

the changes in political institutions. This implies that economic development can be achieved by

altering the structure of political institutions as a way to increase the bargaining power of agents

whose preferences and choices are likely to bring about maximum social welfare. In this regard,

we will show that this theoretical framework is relevant to analyze the long-term performance

and the development gaps between Sub-Saharan African countries. We will discuss these issues

more in detail in the next chapter using the analytical framework introduced earlier.

4-3. Institutional Heterogeneity and Development Gaps Within the SADC: From an

Historical and Institutional Economics Perspective

A large body of the literature in economic history and institutional economics argue that

historical path-dependence and the persistence of “wrong” type of institutions contributed

47 Acemoglu et al. (2005) assumes commitment problem as representing these transaction costs (p.427)

80

significantly to the instability, low productivity and income differences in SSA (Walle, 2009;

Lange, 2009; Acemoglu & Robinson., 2012; Mkandawire, 2009). These problems are also closely

related to the unsatisfactory progress of regional economic and political cooperation within the

SADC. Therefore, using an NIE approach, this chapter will investigate the origins of institutional

divergence and development gaps between the SADC countries which prevented them from

capturing the economic gains of regional integration fully. We will first show how these economic

and institutional differences have impeded on the development of the SADC. Then, we will

identify the origin and causes of these differences using a historical and institutionalist analytical

framework. To do so, we will first investigate the determinants of economic and political

institutions in pre-colonial SSA and show evidence of an institutional path-dependence. In the

last section, we will demonstrate how colonialism reinforced this institutional path-dependence

through the promotion of extractive activities which left the continent with poor and weak nations

still economically dependent on their former colonial rulers; a situation that undermined the

possibility for trade and deeper cooperation in Southern African countries because of conflictual

economic and political interests.

4-3-1. Coordination Problem and Development Gap in the SADC: Institutional and

Economic Obstacles to Integration

There are numerous factors thought to be hindering the SADC in achieving its development

and economic cooperation goals. From the mainstream economics point of view, this would be

unsurprising for a South-South regional integration scheme. Indeed, in the traditional theory,

regional economic integration between developing countries will be unsuccessful because of low

economic diversification, small-market and high similarity in their comparative advantages.

However, neither did non-discriminatory trade liberalization spur economic development in the

region. Moreover, the success of South-South integration scheme elsewhere, such as in the

Southeast Asian region, shows that regional integration can be an instrument of industrialization

and development. Therefore, using a new institutionalist and historical approach, let us first

examine the current obstacles to SADC’s development. These obstacles are entrenched in

domestic and regional level institutional and economic divergence which hamper deeper

cooperation between the member countries.

National level obstacles

On the national level, the most severe impediment to regional integration is the

incompatibility of the political system between the SADC members. Indeed, since the former

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SADCC era, political conflicts have shaped and influenced the integration process in the region.

Peter-berries (2010) notes that although animosity existed between the frontline states’48 leaders,

they came together to stand against apartheid South Africa’s military and economic abuses49.

However, scholars also argue that the high diversity in the political background of the member

countries constitutes a real problem for the advancement of regional cooperation. Indeed, the

SADC regroups former colonial countries ruled by different countries namely: Britain, Belgium,

France, Germany and Portugal, and thereby inherited very different political and economic system.

Moreover, Heinonen (2006) argues that the relative weakness of these “post-colonial states”

(p.190) led them to concentrate more on domestic power consolidation than on regional

integration. Heinonen (2006) also reports that at the domestic level the SADC countries are

divided into democratic and authoritarian regimes (see Table 4.1) which lack the shared values

necessary to carry out successful cooperation at the regional level. This lack of common political

values is exacerbated by the patrimonial nature of the African states which build their legitimacy

and strength on the personal relationship between the rulers and small groups of influent and

powerful elites. Accordingly, the patrimonial state has little interest in handing over a part of its

sovereignty and resources to a supranational organization which may weaken its position on the

domestic level.

Other obstacles at the national level include economic and geographic factors. From an

economic standpoint, it is traditionally claimed that the economies of the SADC do not have the

necessary complementarity that justifies integration in the first place (Chingono and Nakana,

2009). Indeed, several countries are competing in the same Western market with the same

products such as cotton, diamond, crude oil, copper-nickel, textiles, and tobacco. This sectoral

and extra-regional market dependency has created a disincentive for regional trade integration

because of its high economic costs, particularly for the exporters. Geographically, the SADC

countries consist of coastal, landlocked and island nations of different sizes (see below the map

of SADC region). These differences are related to specific needs and priorities which in turn,

spawned a different set of institutions and economic systems in each country. Therefore, regional

integration in the SADC has often been hindered by the difficulty to reconcile these country-

specific differences.

48 Botswana, Tanzania, Mozambique, Zambia, Angola and in 1980 Zimbabwe 49 In this regard, Peter-berries (2010) reports that “The apartheid government of South Africa under Pieter Willem

Botha (South African Prime Minister from 1978-1989) pursued an aggressive policy against its neighbours in order to

defend its minority regime and prevent the neighbouring states from providing assistance to the South African liberation

movements ANC and PAC”. (p.58)

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Map of the SADC area

Source: http://fayzeh.com/SADC.htm (D.S: 2017/03/30)

Table 4.1 Democracy index 2016, SADC countries

Rank Overall score Electoral process

and pluralism

Functioning

of

government

Political

participation

Political

culture Civil liberties

Full democracies

Mauritius 18 8.28 9.17 8.21 5.56 8.75 9.71

Flawed democracies

Botswana 27 7.87 9.17 7.14 6.11 7.50 9.41

South Africa 39 7.41 7.92 7.86 8.33 5.00 7.94

Lesotho 63 6.59 8.25 5.36 6.67 5.63 7.06

Namibia 71 6.31 5.62 5.36 6.62 5.63 8.24

Hybrid regime

Zambia 77 5.99 7.08 5.36 3.89 6.88 6.76

Tanzania 83 5.76 7.00 5.00 5.56 6.25 5.00

Malawi 91 5.55 6.58 4.29 4.44 6.25 6.18

Madagascar 96 5.02 5.92 3.52 5.56 5.63 4.76

Mozambique 115 4.02 4.42 2.14 5.00 5.00 3.53

Authoritarian

Angola 130 3.40 0.92 3.21 5.56 4.38 2.94

Zimbabwe 140 3.05 0.5 2.00 3.89 5.63 3.24

Swaziland 142 3.03 0.92 2.86 2.22 5.63 3.53

DR Congo 159 1.93 0.92 0.71 2.78 4.38 0.88

Source: The Economist Intelligence Unit (2016) URL:

https://www.eiu.com/public/topical_report.aspx?campaignid=DemocracyIndex2016

http://fayzeh.com/SADC.htm

https://www.eiu.com/public/topical_report.aspx?campaignid=DemocracyIndex2016

83

Regional level obstacles

At the regional level, the most significant obstacle is the vast economic imbalances between

the members. These imbalances make it difficult to undertake deeper regional integration

initiatives because of the high risk of unequal distribution of the gains at the expense of the poorer

and weaker states. Indeed, South Africa, which accounts for more than 60% of the region’s GDP,

is likely to benefit the most from integration, at the expense of the other smaller economies (Table

4.2). In this regard, several analyses note the high risk of polarization within the bloc. For instance,

Chingono and Nakana (2009) argue that because of the difference in economic size and level of

sophistication, more powerful countries may act selfishly and distort the integration process in

their favor. Moreover, Heinonen (2006) suggests that the fear of smaller members that the free-

flow of cheaper and better quality South African goods would destroy their domestic economy

reduces the incentives towards deeper integration. The second problem at the regional level is the

multiple memberships; i.e., each country of the SADC is participating in at least one other

regional grouping. This shows a lack of trust between the members and a nationalist and self-

interested behavior in an attempt to maximize individual gains. As a result, each SADC member

is entangled and trapped in several discordant agreements with other regional blocs. This situation

explains why the SADC members seem to have difficulties in implementing and ratifying signed

regional resolutions.

As mentioned in the previous sub-section, the lack of economic diversification and

monoculture are significant hindrances to the SADC’s progress. More precisely, the SADC’s

GDP is highly dominated by agriculture, and the share of the manufacturing sector is insignificant.

At the regional level, this means that a discriminating regional trade agreement is unlikely to gain

broad support since in the short-run there is potentially a small benefit to intra-regional trade and

in restricting trade with non-members. Beside this dependency on the extra-regional market, the

SADC, as an organization, is also financially dependent on international donors. Peter-berries

(2010) argues that including financial support from donors was necessary for the implementation

of the regional project since the beginning. However, this has led to certain aid dependency, and

participating in the SADC may be, for some countries, motivated by the possibility of accessing

additional funding and not in regional cooperation. Lastly, the high indebtedness of the SADC

members has led to the pursuit of self-interest and individualism as the dominant strategy over

collectivism and community interest.

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Table 4.2. SADC countries’ annual and per capita Gross domestic product in 2015

(2011 PPP US dollars)50

AGO BWA COD LSO MDG MWI MUS MOZ NAM SYC SA SWZ TZN ZMB ZIM

GDP

($billion) 176.6 33.7 56.9 5.3* 33.3 19.2 23.1 31.2 24.1 2.4 680.9 10.2 130.3 58.8 26.3

GDP per

capita 6,937 14,876 737 2,517 1,373 1,113 18,333 1,116 9,801 25,668 12,39 7,93 2,51 3,626 1,688

Source: UNDP ‘Human development Index 2016’

4-3-2. Pre-Colonial Origin of Economic and Institutional Fragmentation in Sub-Saharan

Africa: Slave trade, Ethnicity and Ecology

As we have seen in the previous section, most of the institutional and economic issues

affecting the well-functioning of the SADC are deep-rooted in the region’s historical evolution

that can be traced back to the pre-colonial era. This is common to most of the regions and countries

in SSA. Indeed, Hopkins (2009) notes that addressing African development requires a careful

study of history and institutions. Thus, in his opinion, the field of “new institutional history”

initiated by institutionalist economists is highly promising in this regard (Hopkins, 2009). Unlike

the mainstream view on African history, the new institutionalists go further back before the

independence or the colonial period in their inquiries because current institutions (formal and

informal) are believed to be the consequences of past evolution through history. Therefore, we

will examine briefly the significance of the most studied pre-colonial factors and initial conditions

in the African economic history, namely: ethnicity, the slave trade, and ecology.

The question of ethnicity is unavoidable when discussing African institutions. Indeed,

ethnic fractionalization and the concomitant institutional duality (i.e. the cohabitation of modern

centralized formal government with traditional customary institutions) are particularly

pronounced in the region and impact greatly on the state’s capacity to produce public goods and

ensure economically important role such as the protection of property rights (Hopkins, 2009;

Michalopoulos and Papaioannou; 2015). For instance, Michalopoulos and Papaioannou (2015)

observed that not only is ethnic identification strong among the African population but it is also

highly correlated to state capacity. Indeed, using the data from afrobarometer (2005 and 2008)

featuring 20 countries51 (10 of which are SADC countries), they found that roughly 40% of their

50 Country name use the United Nation’s ISO 3166-1 alpha-3 country code (seen Annex 1) 51 The survey included: Benin, Botswana, Burkina Faso, Cape Verde, Ghana, Kenya, Lesotho, Liberia, Madagascar,

Malawi, Mali, Mozambique, Namibia, Nigeria, Senegal, South Africa, Tanzania, Uganda, Zambia, and Zimbabwe.

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sample considered their ethnicity as equally important as their national identity, and when cross-

country comparison of state capacity52 is performed their results show that countries with higher

ethnic identification than national identity have weaker state capacity (Figure 4.2 and 4.3). In

general, their study points out the limited capacity of formal states to govern in ethnically

fractionalized African countries. Rather, in most rural area’s traditional chiefs and customary

rules still determine the property rights and distribution of public goods. The lack of political

centralization hindered any initiative of regional development in Africa in general and the SADC

in particular. This high fractionalization and duality of the African states have its origin in the

pre-colonial era. Indeed, Michalopoulos and Papaioannou (2015) argue that compared to other

regions such as Asia or Europe in the pre-industrial era, Africa had very few politically centralized

societies (p.14). The main reason they suggest is that: i) the low population density ii) and the low

prevalence of inter-state conflicts in the pre-industrial era.

Another important pre-colonial factor of the contemporary African socio-economic

development is the transatlantic slave trade that took place between the 15th to the 19th century.

A dark page in the African history which has been the focus of several studies but the most notable,

with their analysis of the contemporary impact of the slave trade is probably the work of Nathan

Nunn and Leonard Wantchekon (2011). Nunn and Wantchekon (2011) investigated the

relationship between the level of social mistrust and slave trade in SSA. Using the afrobarometer

data on the level of trust in relatives, neighbors, coethnics and local government today, they

observed that countries that were most exposed to slave trade53 exhibited the lowest level of trust

and weaker political centralization. Controlling with other variables such as ecology, colonial rule

or ethnicity, the significance of the transatlantic slave trade in undermining social trust is still

strong. The authors explain that because of its violent and ubiquitous nature, slave raid turned

individuals against their neighbors, families, and people in their ethnic groups. Thus, a climate of

extreme uncertainty and imperfect information reigned making opportunistic behaviors such as

kidnapping, trickery and small-scale violence the most viable and profitable strategy. Accordingly,

these behaviors installed an environment of social mistrust and have weakened the capacity of

formal and centralized institutions to rule within their frontier, a situation which persisted until

the 21st century.

52 “Index of government’s anti-diversion policies, measured over the period 1986 – 95. It is an equally-weighted

average of these five categories: i) law and order, ii) bureaucratic quality, iii) corruption, iv) risk of expropriation and

v) government repudiation of contracts” (Michalopoulos and Papaioannou, 2016; p.35) 53 Nunn and Wantchekon (2011) used data from port shipments and data on slaves’ ethnic identities, these data are

relevant only for the transatlantic and Indian Ocean slave trade, but which are also the largest and thereby the most

impactful slave trade.

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Ecology has also been subject to numerous investigations from African development

scholars. It is a useful variable in the study of pre-colonial Africa since it is time-invariant.

According to some historical and empirical studies, ecology has been important factors of trade,

state centralization, population growth or disease incidences (Acemoglu et al., 2002; Sachs, 2005;

Fenske, 2014). For instance, Fenske (2014) demonstrated that ecologically diverse areas benefited

Figure 4.2 Relation between strong identification and State capacity

Source: Michalopoulos and Papaioannou, 2015, p.4 and p.10

Figure 4.3 Intensity of ethnic identification in selected African countries

Source: Michalopoulos and Papaioannou, 2015, p.4 and p.10

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from higher gains from trade which led to the emergence of more centralized states to secure these

gains. Thus, this study implies that the contemporary level of development and capacity of

African states are, for the most part, explained by their ecological condition which predates the

colonial era. Other influential ideas on the role of ecology in African development have been

developed by Acemoglu et al. (2002) and Sachs (2005). These authors argue that the tropical

climate of the African countries facilitated the incidence of diseases such as Malaria which

resulted in: i) compressed population density and thereby made difficult the emergence of large

centralized states ii) discouraged the settling of European colonizers and thereby hindered the

transfer of modern industrial institutions to their African colonies.

4-3-3. Fragility and Limited Capacity of Contemporary African States: Colonialism and

Institutional Path-Dependence

It was stated earlier that the current coordination and development gap problem within the

SADC is rooted in the fragility and the weak capacity of its members. We demonstrated, by

examining various factors in pre-colonial Africa, that these problems concern all Sub-Saharan

African states and may have persisted through institutional path-dependence. Therefore, we will

show in this section how the European colonialism contributed to worsen and reinforce these pre-

colonial institutional inefficiencies. The consequences of which are still felt today through the

instability and low level of sophistication of most African economies.

Regarding African colonialism, scholars distinguish between direct and indirect rules or

settler and non-settler colonies. It is broadly accepted that post-colonial economic performance

differences among present-day African countries are related to the type of colonial administration

they had and to a lesser extent the identity of their metropolitan rulers (Bertocchi and Canova,

2002; Acemoglu et al., 2005; Lange, 2009). One of the reinforcing effects of colonialism on the

African pre-colonial conditions operated through the diverse identity of metropolitan rulers and

the degree of economic penetration. In other words, colonialism has deepened the African ethnic

and political fractionalization. Indeed, most of the European colonies in Africa were administered

through a close tie with local chiefs and certain ethnic groups with strategic influence and access

to resources. Thus, the authoritarian and predatory nature of today’s African states originated

from the system of power monopoly by a minority group (local rulers or colonial administration)

during the colonial period54. Economically, African colonies were strongly oriented to extractive

54 In this regard Walle (2009) states that: “Combined with the subaltern status and lack of political power of African

populations, this state of affairs further undermined the responsiveness of states and contributed to a state culture of

imperiousness and self-regard. Colonial states were more corrupt (…)” (p.19)

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activities because of the high costs induced by labor scarcity and the harsh climate which deterred

European settling. Therefore, in most of the African colonies, forced labor, high taxes,

proliferation of small-scale cash crop agriculture, underdeveloped infrastructure, low level of

physical and human capital accumulation, were the norms. Not only did this reinforce the pre-

colonial situation of institutional weakness and low social capital, but economically it also

worsened the situation by installing a long-term structure based on monoculture, labor-intensive,

low productivity, and rent-seeking activity. Overall, after their independence, the former

European colonies were left with autocratic and illegitimate political system, low-quality

institutions, undiversified and extractive economic structure, uneven infrastructure development,

high educational gap and low level of physical and social capital (Walle, 2009).

Although studies assessing the impacts of colonization in Africa enjoyed a considerable

literature coverage, more dynamic historical analyses that examine evolution from the pre-

colonial era until today is somewhat recent. As a result, ignoring the implication of historical

path-dependence, post-colonial policymakers failed to address problems such as predatory states,

corruption, rent-seeking activities in African countries. These issues were thought as simple

distortions resulting from the exploitative nature of colonialism or post-independence

protectionism which could be overcome by economic liberalization and institutional capacity

building through adjustment policies and foreign aid. However, these models, often designed after

Western standards, failed to yield the expected economic development and poverty reduction.

Therefore, we argue in the next chapter that although institutional and socio-economic

fragmentation constitutes an obstacle to economic and development cooperation in Africa,

context-specific and gradual institution building under a developmental regionalism framework

is a promising policy alternative for the SADC countries.

4-4. Rethinking the Regional Cooperation and Institutional Reforms in the SADC:

Addressing the Development Gap and Institutional Fragmentation

We demonstrated that the institutional weakness and socio-economic fragmentation

problems of the SADC countries are common to all SSA countries and resulted from a long

process of institutional path dependence. Therefore, the African countries saw themselves trapped

in a vicious circle of institutional weakness, resource allocation inefficiency, low economic

growth, and regional instability. The international community, particularly the Bretton Woods’

Institutions (BWIs) namely the World Bank and the International Monetary Fund, came up in the

late 1990s with the concepts of “good governance” and “capacity building” as part of their

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adjustment programs for the developing countries including SSA. However, it is known broadly

agreed that these top-down and “one-size-fits-all” policies have been disappointing regarding

their development outcomes. Accordingly, it is no surprise that the European style SADC

regionalism failed to overcome the region’s longstanding obstacles to trade and cooperation.

Therefore, in this last section, we argue that the SADC’s developmental regionalism is still

relevant but needs to reconsider its policy approach. In light of our previous analysis from an NIE

perspective, we will explain how regional integration can be a transformative and developmental

tool for the SADC members. Moreover, lastly, we will identify the critical policy approaches for

a more inclusive and broad-based regionalism which will lead the SADC countries on a new

institutional and development path.

4-4-1. Transformative and Developmental Regional Integration

It is important to recall the rationale for regional integration and developmental regionalism

in the southern countries and the SADC in particular. First of all, the arguments for African

regionalism are based on the limits and failures of decades of neoliberal policies in the region.

Therefore, after recalling the limits of the mainstream approach to development in Africa, we will

describe the concept of transformative regionalism and its relevance in addressing SADC’s

longstanding institutional and economic fragmentation.

Limits of the mainstream static analysis approach

The dominant thinking about regionalism in general, and in the southern regions in

particular, is dominated by neoclassical economic principles. In this regard, the European and its

western-style regionalization is frequently taken as a point of reference by scholars, regional

leaders or policymakers (Söderbaum, 2009; Zajontz, 2013). These principles embedded in the

policy recommendations of the “Washington consensus” were the basis of the structural

adjustment programs (SAPs) destined to help the economic recovery of the developing countries

in the 1990s. With some minor revision, such as the new concepts of good governance and human

development, current development policies in Africa follow the same approach based on trade

liberalization, market deregulation, and non-interventionism. Accordingly, while the SADC

treaty (signed in 1992) emphasized equitable economic growth and poverty alleviation among its

priorities, open regionalism giving primacy to progressive liberalization of trade and factor

movement has been the strategy toward these goals (Zajontz, 2013). However, the result still

appears to be disappointing regarding economic development and regional cooperation.

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The focus on trade and market liberalization is based on the static comparative advantage

analysis which upholds that countries are better off if they promote trade with countries with a

complementary and different structure of factor distribution. From this point of view, a South-

South (S-S) regional trade agreements are irrelevant and economic growth will only occur in

North-South (N-S) trade. This may explain the lack of dynamism of the SADC members in

promoting regional cooperation. However, this static approach is misleading since it ignores the

dynamic factors that justify S-S regionalism (Shafaeddin, 2008). Besides, N-S trade tends to

reinforce the state of dependency and division of labor inherited from colonization. Shafaeddin

(2008) suggests that trade liberalization is among the tools for achieving development but not a

prerequisite. Indeed, the East South and Southeast Asian (ESSEA) region’s rapid growth has been

driven by regional trade induced by the implementation of regional industrial cooperation and

production sharing (Ibid., 2008). Moreover, the world trade statistical review (WTO, 2016; p.56)

reports that S-S trade is proliferating and overtook N-S trade since 2010. These pieces of evidence

dismiss the neoliberal idea that S-S trade is harmful especially when figures from WTO (2016)

report that the growth in global trade volume is primarily driven by developing countries.

Therefore, southern regionalism should be analyzed through a dynamic and developmental

perspective rather than the traditional efficiency maximization (Heinonen, 2006; Shafaeddin,

2008; Söderbaum, 2009). Indeed, Southern regionalism such as the Southeast Asian regionalism

has a rationale that goes beyond static trade gains maximization. Regionalism in the developing

countries and SSA, in particular, should be regarded as an instrument of structural transformation

and economic development. Scholars refer to it as “transformative or developmental regionalism”

(Shafaeddin, 2008; Söderbaum, 2009; Zajontz, 2013). In principle, regionalism can be

transformative because it gives the possibility to member states to cooperate in regional security,

industrial production sharing, institutional and infrastructure building, bargaining better terms for

foreign investments and trade of strategic raw materials.

Ensuring regional security and stability

Most of the existing regional organizations emerged primarily from security concerns. For

instance, the European Union (EU), which is the most advanced regional bloc in the post-cold

war era, was formed with the purpose of ending the long history of conflicts between nations of

the region. It is broadly accepted that the EU was crucial in the pacification of Europe. Moreover,

regionalism turns out to be relevant also in bringing peace and security in developing regions such

as Southeast Asia or Southern Africa (Söderbaum, 2009; Peter-berries, 2010). Thus, preserving

regional security and stability justifies regional cooperation and the choice to form a regional bloc.

In theory, Verdier (2010) argues that increasing economic and political interdependence between

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nations may reduce the occurrence of conflicts and wars by increasing the cost of confrontation.

Regional integration will also intensify the interaction between people and therefore raise the

level of mutual trust over time. Moreover, in the context of fragile countries55, such as the African

countries, regional integration can solve the resource allocation problem related to defense and

control of the territory. However, ensuring regional peace and security required the mobilization

of physical as well as financial resources which lead us to the economic implication of

transformative regionalism.

Building a productive and supply capacity: industrial production sharing

The main objective in developmental and transformative regionalism is to address the lack

of supply capacity and diversity which characterizes the developing economies. Indeed, as

mentioned earlier universal free trade and globalization tend to reinforce the existing international

division of labor maintaining the developing countries in the role of suppliers of low value added

and labor intensive primary products. Therefore, transformative regionalism which focuses on

regional production sharing and industrial cooperation is an alternative instrument for economic

diversification and industrial structure upgrading. According to Shafaeddin (2008), developing

economies typically have a significant reserve of unemployed labor that can be directed toward

new industrial production for export without distorting the extent of domestic

production/consumption structure 56 . Furthermore, the regional network of manufacturing

production will expand intra-regional trade and provide the participating countries with the

necessary experience and learning-by-doing skills that will increase their competitiveness to enter

the global market ultimately. However, building a regional network of production requires the

provision of complementary resources and backup services to reduce transaction costs

particularly on the supply side.

Reducing Transaction costs: Institution and infrastructure building

Transaction costs are among the most binding obstacles to economic growth and

development in SSA countries. Moreover, as we have seen in the first chapter, institutional

settings (informal and formal) are the most effective way to deal with these costs in the long term.

We also concluded from Acemoglu et al. (2005) that institutional change is obtained through

55 According to Verdier, Fragile countries are “Characterised by the presence of weak institutions and governance

structures, and a fundamental lack of state capacity and/or political willingness to fulfil core state functions. These

include security and protection, taxes and the provision of public goods, and the building up of legitimacy and a resilient

relationship with civil society”. (Verdier, 2010; p.1) 56 “In other words, a developing country possesses some potential surplus productive capacity, which can be mobilized

for producing additional goods for export without shifting resources away from production for the domestic market.”

(Shafaeddin, 2008; p.9)

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political and social struggles and the political choices of the groups in power. The transaction

costs that prevent structural transformation and industrialization in the developing countries, and

in SSA in particular, require concerted actions of neighboring countries. Indeed, access to the

seaport for land-locked countries, cross-border transportation cost, small-sized market, public

resource scarcity or policy uncertainties all require regional cooperation to be addressed

effectively, particularly in the developing countries’ context. Therefore, regional integration must

create institutional incentives that will empower stakeholders whose choice and interest will likely

to meet general welfare. In that sense, transformative regionalism implies the involvement of a

broad range of actors from the public sector, civil society, academia, and business. Since such

wide-ranging regionalization process would increase the cost of non-compliance and isolation,

regional institutional and policy reforms will also accelerate institutional changes at the domestic

level. According to Verdier (2010), among the main factors increasing the value of belonging to

the bloc, and thereby strengthening commitment between members is the stronger bargaining

power with third parties.

Bargaining power with Third Parties: FDI and international Trade

As highlighted in previous chapters, SSA countries suffer from a weak bargaining power

in the international market. Indeed, the lack of capacity and legitimacy of the African states lead

them to unequal foreign investments and trade agreements, often at the expense of the domestic

economy, to consolidate their power. Moreover, weak bargaining power also contributes to

external dependency and reduced policy ownership resulting from a high reliance on tied Official

Development Assistance (ODA). Strong bargaining power is a function of the size of the domestic

market (both in population and economic size), military force, geopolitical significance, and level

of expertise. In this regard, most of the developing countries, and particularly in SSA, taken

individually, hardly possess any of these characteristics. Therefore, regional integration appears

to be the most accessible strategy to increase bargaining power with more developed and powerful

counterparts. Verdier (2010) suggests that “pooling sovereignty” is signaling stronger economic

lever; age, political forces or cultural identity toward the rest of the world. Moreover, regional

co-operation will reduce negotiation costs by the pooling of financial resources and technical

skills. Strong bargaining power is crucial for a successful transformative and developmental

regionalism because it will enable the negotiation of better terms of trade and regulation of foreign

investments to foster technology transfer and learning, linkages with domestic.

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4-4-2. Conceptualizing a Transformative SADC Regionalism: A Context-Specific and

Bottom-Up Policy Approach

As we have developed earlier, a transformative regionalism is one that is concerned with

dynamic comparative advantage, industrial upgrading and improving terms of trade with partners.

Moreover, as suggested by the ASEAN experience, regionalism is a relevant solution for small

and fragile neighboring economies like those in the SADC to address the institutional and

structural impediments to economic development. Indeed, the ASEAN transformative

regionalism model has the potential of tackling problems of high transactions costs, insecure

propriety rights, and weak contract enforcement. However, our institutionalist approach also

suggests that institutional changes are constrained by path dependence. Therefore, we should

prioritize a context-specific approach to reform and policy implementation. In this last section,

we will attempt to conceptualize the transformative regionalism in the context of the SADC.

Creating and supporting a regional market for high value-added goods: tapping on the

unemployed resources surplus

As demonstrated throughout this paper, SADC’s most binding obstacle is the lack of

economic diversification and the dependence on natural resources exports. Therefore, it is crucial

for the SADC countries to cooperate for the creation of a regional market for higher-value-added

and manufactured goods. In the SADC’s case, in the short-term agri-business and food processing

sector is a potential driver of the regional industrial collaboration. Indeed, not only do the SADC

countries have a large comparative advantage in the agricultural sector, but also demand on

regional as well as global is likely to grow faster as the population is expected to expand faster in

the coming years in several emerging regions. On the supply-side, Brookings’ “Foresight for

Africa” (Amadou, 2017) reports that SSA’s working-age population is expected to increase by 70

per cent, i.e. from 466 million in 2013 to 793 million in 2030. The potential human capital for

economic diversification and industrialization is non-negligible. Therefore, it is imperative for

the SADC countries to identify each members’ comparative advantage in manufacturing and

establish an ASEAN-like integrated production network. However, to have a sustainable and

wide-ranging impact, policymakers should adopt a bottom-up approach by expanding the

participation of civil society (non-state actors) and private sectors in the regional process.

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Enhancing legitimacy for a sustainable structural transformation: Capacity building and

broad participation of the civil society and private sectors

The fragility and weakness of the SADC states stem from the lack of legitimacy and the

patrimonial nature of their governments. Therefore, directing regional resources in investment on

public goods such as in education, health, regional security, capacity building, access to credit

and economic corridors, not only will be market-legitimizing but also will ensure the

sustainability of regional industrial upgrading. Indeed, these measures are crucial in

complementing the more top-down regional production sharing policy. Moreover, from an

institutional economics perspective, such a wide-ranging welfare policy is likely to break the low-

level equilibrium trap and drive institutional change toward a path of lower transaction costs,

lower uncertainty, higher level of trust and justice. Regional allocation of public goods should

also help the reinsertion of the informal activities in the market and thereby increase the benefit

from scale economies. Lastly, the inclusion of the private sector in the regional process means

more job creation opportunity and stronger linkage between local, regional and international firms.

Regional investment in hard infrastructure and energy

The SADC countries should also improve and accelerate their cooperation in infrastructure

and energy sharing. Although investment in infrastructure and energy is mentioned in the SADC

development strategy, priority should be given to the productive sector. Indeed, one of the crucial

strategies that contributed to the success of the ASEAN in attracting investment in the

manufacturing sector was the development of economic corridors which fostered the emergence

of industrial clusters. Moreover, pooling the energy market at the regional level is relevant to

SADC since some countries have a surplus in energy production while others suffer from a

shortage. Not only will a well-developed infrastructure and energy supply facilitate the creation

of a regional production network, but it will also enhance regional connectivity which in turn

strengthen socio-cultural ties, hence regional identity.

Soft-Regionalism

This term is associated with the Southeast Asian model of regionalism. It describes a

regional process which does not emphasize on European-like heavy institutionalization.

Moreover, soft-regionalism is less state-centric and allows for more informal negotiation between

members. For instance, Tuluy (2016) suggests that African regionalism should be more flexible

and adopt a variable geometry approach in which countries are allowed to operate at different

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speeds. Soft-regionalism is also gradual in the sense that it enables forerunners and like-minded

countries to reach deeper agreements on an important issue such as trade liberalization or

infrastructure investment that others can join afterward. This model is also characterized by the

focus on selected sectors rather than a comprehensive agreement and thereby reduce the risk of

disagreement and conflicts.

Adjustment mechanisms: compensating the losers

An essential element of a developmental regionalism is the mechanism of compensation

for lower-income economies. Indeed, some countries may lose a significant part of their tax

revenues during the regionalization process and thereby need some compensation during their

period of adjustment. This is particularly relevant for the SADC since higher performance

countries like South-Africa and Mauritius may attract the bulk of investments and benefits from

the bigger market at the expense of other weaker economies.


Our analysis of the Southern African regionalism through the NIE approach revealed that

institutions matter. Indeed, the theory of institutional economics and empirical studies discussed

in this paper provide convincing evidence that institutional efficiency in reducing transaction

costs determine the performance of an economy in the long-run. Moreover, the institution is

particularly important in the process of accumulation of physical capital and thereby

industrialization. However, the “African states” are notable for their incapacity to address the high

transaction costs harming their economic performance. SSA states’ weakness and fragility are

reflected in insecurity, social fragmentation, low protection of property rights, low capacity of

contract enforcement, lack of supply in public goods and patrimonialism that characterize their

economic and political environment. Using a historical and institutionalist approach, we observed

that the African states’ institutional weakness is the result of a long process of path dependence

throughout history. The persistence of weak and inefficient formal and informal institutions in

Africa has been facilitated by mutually reinforcing historical and natural conditions such as the

slave trade, ethnic fragmentation, ecological diversity or colonialism.

Since the late 1990s, scholars, and policymakers attempted to tackle the problem with

neoclassical economics principles implying a small-sized state and laissez-faire economy.

Therefore, institutional reforms in the SSA countries were implemented following the Anglo-

Saxon standards regarded as the highest in the world. However, these reforms including market

96

liberalization and privatization failed to break the path dependence and seem instead to be

reinforcing the longstanding economic hierarchy, keeping the SSA countries in the role of natural

resources exporters with a small to non-existent manufacturing sector. Therefore, studying the

case of the SADC regional bloc, we found that institutional and economic fragmentation can be

potentially addressed through regional cooperation. Moreover, from an observation of the

ASEAN experience, we argue that institutional change leading to structural transformation can

be achieved through transformative or developmental regionalism. In other words, regional

cooperation that aims at increasing member countries’ supply-side and productive capacity. Thus,

we suggest that the SADC should focus on regional production sharing of higher value-added

goods such as in food-processing or other labor-intensive manufactured goods. Building a

regional market for manufactured products requires the inclusion of the civil society, informal

sector, academia and above all the business sector in the regional process. Such a broad-based

and bottom-up process will have a stronger and broader impact in breaking the existing

institutional trap and provide the members higher leverage on FDI and trade negotiations with

third parties. Lastly, the SADC countries should opt for a soft-regionalism, i.e. a flexible and

multi-speed approach avoiding heavy institutional structure and measures should also be taken to

compensate the losers during the process.

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Part. 2 EMPIRICAL ANALYSIS: DETERMINANTS OF RAPID

STRUCTURAL TRANSFORMATION OF THE ASEAN

ECONOMIES AND THE POLICY IMPLICATIONS FOR THE

SOUTHERN AFRICAN REGIONALISM

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Chapter 5- The ASEAN Model of Development-Oriented Regionalism:

Benchmark for Industrialization and Structural Change in the

Developing World

99

5-1. Introduction

In the first part of this dissertation, we have analyzed in detail the process that led to the

current state of regionalism in the world and particularly in the developing regions. We showed

that the failure of the western multilateral model in delivering economic transformation and

development in most parts of the Southern regions resulted in the emergence of a new wave of

regionalism in the late 1980s and early 1990s. This new wave of regionalism has been led by the

developing regions, and successfully in terms of economic performance by the Southeast Asian

countries. This regionalism has emerged as a departure from the previously failed model of

“closed regionalism” but was at the same time a response to the shortcomings of globalization. In

short, the new wave of regionalism lies in between the resistance to globalization model and the

mainstream multilateralism. Experts on the ASEAN regionalism have described it as a

“developmental regionalism” or a regional agreement between developing countries which aims

at promoting the industrialization and economic transformation of the participating countries. The

objective in this second part of our dissertation is, therefore, to perform an empirical assessment

of the relevance of the ASEAN model and eventually draw some policy implications for other

regional projects in the developing world such as the SADC.

Thus, this first chapter discusses and provides an overview of the ASEAN model of

regionalism. In doing so, we will highlight, through historical and stylized facts, the evidence

supporting our core hypothesis which is the relevance of the ASEAN regionalism as a successful

model of economic transformation and diversification in the developing regions. Moreover, we

will address the theoretical debate underpinning the empirical frameworks and methodologies

through which we will assess and analyze, in the subsequent chapters, the implications of the

ASEAN model. In other words, this first chapter is an introductory analysis to set the stage for

our empirical studies in the following chapters.

5-2. The Association of the Southeast Asian Nations: From Political to Developmental

Aspirations

As indicated above, this section will review the process that led the ASEAN organization to

its current model of regionalism, which is considered the most successful in the developing world.

Initially, the ASEAN’s regionalization process has been driven by political and security concerns,

but gradually shifted its focus on industrialization and economic development. Let us thus analyze

and discuss the different phases that the regional bloc went through in the following sections.

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5-2-1. Southeast Asia before the ASEAN: Post-colonial Period

Before, the creation of the ASEAN regional grouping the Southeast Asian region consisted

essentially of newly independent States57 that were facing various political and social struggles

both domestically and at the regional level. These struggles which were the results of the post-

colonial demands for nation building and war reconstruction were intensified by communist

insurgencies (in Indochina, Malaysia, Philippines, and Indonesia) border disputes (including the

Cambodian claim to parts of Vietnam and the confrontation between Indonesia and Malaysia in

the 1960s) and interference of great powers (the United States and the Soviet Union). Moreover,

most of these newly independent countries, particularly those that achieved independence through

wars and confrontations such as Burma, Indonesia, and Vietnam, were led by authoritarian

governments.

Other historical events that have shaped the geopolitical environment in the Southeast Asian

region were the cold-war and its resulting regional conflicts. The competition between the United

States and the Soviet Union in the Indochina region culminated with the Vietnam War during

which the country was the stage of a devastating war between the US’s troops, and the Soviet

Union supported North Vietnamese. Consequently, the security and stability of the neighboring

countries were in danger and called for regional actions and solution. Given their still recent

colonial experiences and the threat represented by the ideological war between the great powers

of the time, the Southeast Asian nations have found non-alignment as an attractive solution and

alternative. This was the first display of solidarity between the Southeast Asian countries.

5-2-2. The Road to a Formal Regional Cooperation: 1960-1967

As seen in the previous section, the early attempts for concerted regional actions and

cooperation were motivated by the need for independence from foreign powers and for regional

stability. Therefore, before the establishment of the ASEAN in its current form and structure,

there were several attempts to regional cooperation. For instance, in 1961 the Association of

Southeast Asia (ASA) has been created under the initiative of Tunku Abdul Rahman prime

minister of Malaysia (formerly Malaya). Although the association was concerned with the

dangers of foreign powers’ interference in the region, its implicit anti-communist leaning has

refrained the more non-aligned countries such as Indonesia and Burma from participating. Thus,

57 Apart from Thailand which has never fallen under the control of a foreign country, Burma gained independence in

1948, Vietnam in 1954, Philippines in 1946, Malaysia 1957, Singapore was separated from the Malay federation in

1965 and Brunei was granted independence in 1985.

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the ASA consisted only of Thailand, Malaysia (Malaya) and the Philippines. Despite its

organizational structure which included a Standing Committee composed by host foreign minister

and the ambassadors from the other ASA members, the ASA’s achievement was not significant.

In 1963, the MAPHILINDO which was formed by Malaysia, Philippines, and Indonesia had

been created. Moreover, conversely to the ASA, this organization was less structured and more

neutral. The organization helped to normalize the relations between Malaysia and the Philippines

and to reinforce the Indonesian initiative of a neutral and non-aligned region. In 1967,

subsequently to the change of government in Indonesia and the end of the Konfrontasi, the

Indonesian and Thailand foreign ministers, Adam Malik and Thanat Khoman initiated the

discussion for the enlargement of the Southeast Asian organization. Therefore, in August 1967,

the ASA joined the regional association which was called the Association of the Southeast Asian

Nations or ASEAN. The ASEAN 5 founding members Indonesia, Malaysia, Philippines,

Singapore, and Thailand thus signed the Bangkok declaration on 8 August 1967.

5-2-3. ASEAN and Regional Instability: 1967-1979

In its early days, the expansion and development of the ASEAN have been driven mainly

by regional security concerns. In this regard, the Bangkok declaration put emphasize on terms

such as: strengthening regional bonds, solidarity, cooperation, peace, progress, prosperity. It was

clear that the ASEAN was aimed to be a regional platform that enables the members to cooperate

in resisting to hostile foreign interferences. It is thus not surprising that the first major initiative

taken by the organization was its Zone of Peace, Freedom, and Neutrality (ZOPFAN) declaration

in 1971. The objective was to assert the region’s neutrality and commitment to peace and security,

as well as its reluctance to any foreign military presence and interventions. Five years later and

precipitated by the oil shock in 1973 and the end of the Vietnam War, the ASEAN countries have

deepened their regional commitment by the signing of the Treaty of Amity at the Bali Summit in

1976.

Not only has the treaty consolidated the original commitment to regional peace and security,

but it has also extended the area of cooperation to the economic and development spheres. The

binding nature of the treaty accelerated the formalization of the regional structures and resulted

in the first meeting of the ASEAN Heads of Government (1976) and the creation of the ASEAN

Secretariat among others. The first major step demonstrating the legitimacy of the ASEAN was

the resolution of the Cambodian-Vietnamese conflict in 1978. It was the first of a series of

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initiatives to boost the organization’s political and economic visibility at the international level

that would subsequently establish the ASEAN as a viable and prosperous regional bloc.

5-2-4. Economic and Development Orientation: 1985 to Present

From the first Head of Government meeting and the signing of the treaty of amity, the

ASEAN countries multiplied their attempts to economic cooperation. Ishikawa et al. (2013) report

that this first period of economic cooperation was characterized by limitations put on foreign

capital. Indeed, from 1976 to 1985 the ASEAN countries have been opting for a region-wide

Import Substitution Industrialization strategy (Ishikawa et al., 2013). Throughout this period,

several regional projects took place such as the ASEAN Industrial Project (AIP), the ASEAN

Industrial Cooperation (AIC) or Preferential Trade Agreements (PTA). However, it is widely

recognized that this protectionist phase of the ASEAN regionalism did not yield any significant

positive outcome particularly regarding the intended goals of industrialization.

In 1987, with the backdrop of a global economic change prompted by the Plaza accord in

1985 and the resulting Yen appreciation, the ASEAN shifted to a more open regional strategy.

Thus, according to Ishikawa et al. (2013), it was during the third Heads of States meeting that the

ASEAN members decided to follow a region-wide strategy of Export-oriented industrialization

based on foreign investment. As a result, the inflow of Japanese direct investment has increased

considerably, and the region has been integrated to the Multinational Enterprises-led division of

labor process. The most important industrial policy implemented at the regional level was the

Brand-to-Brand Complementation Scheme (BBC scheme) in partnership with the Japanese

automobile constructor Mitsubishi.

The end of the Cold War and the fall of the Berlin wall resulted in significant changes in

the international system and particularly in the developing countries since the 1990s. This period

saw the emergence of the new wave of open regionalism with a rapid expansion among the

developing countries including the ASEAN. Therefore, the ASEAN Free Trade Area (AFTA)

was created at the fourth meeting of Head of States in 1992. It has marked the beginning of a

rapid structural transformation and the deepening of the integration process within the ASEAN

regional bloc. The objective was to achieve under the Common Effective Preferential Tariffs

(CEPT) a 5%, or less, tariff rates by 2008. The period after the creation of the AFTA also saw

several countries joining the ASEAN namely: Vietnam (1995), Laos and Myanmar (1997), and

Cambodia (1999). Moreover, several events including the Asian Financial crisis (1997), the rapid

103

emergence of China as a major destination for foreign investments, the stagnation of the WTO-

led international trade system and increasing interdependence between the East Asian economies,

have encouraged the ASEAN countries to deepen their relationship through the establishment of

the ASEAN Economic Community (AEC) in 2015 (Ishikawa et al., 2013).

The AEC blueprint was adopted in 2007, and the plan of actions was divided into four pillars:

i) the single market production base, ii) the Competitive Economic Region, iii) Equitable

Economic Development, iv) and ASEAN’s Integration to the Global Economy (ASEAN

Secretariat, 2015). These four pillars of the AEC blueprint are showing ASEAN’s strong

commitment to economic development; a tremendous shift, considering its original geopolitical

purposes. Moreover, the AEC also embodies the uniqueness of the Southeast Asian integration

model which focuses on economic development and structural transformation as its driving forces.

However, much is still to be done both in overcoming the middle-income trap for the original

members (except Singapore) on the one hand, and in closing the development gap between the

ASEAN-6 and the CLMV countries on the other. The ongoing success story among latecomers

such as Vietnam and Lao PDR not only holds hope for the future of the association but also for

developing countries in other regions.

5-3. Understanding the ASEAN Model through a Non-Traditional and Dynamic

Perspective

The above historical review of the ASEAN integration process gave us a glimpse of the

unusual path taken by the Southeast Asian countries particularly compared to the mainstream

western model of regionalism. Therefore, further analysis of the Southeast Asian experience is

necessary to understand how it differs from the mainstream model and how it outperformed the

other regional projects in the developing world. In doing so, we will first discuss the theoretical

frameworks in which we will assess the nature and performance of the ASEAN model. Then, we

will compare its structural evolution and economic performances with other regional blocs in the

developed as well as the developing world. This will eventually enable us to identify the critical

factors and parameters of the success of the ASEAN on which we will focus our empirical

analyses in the subsequent chapters.

104

5-3-1. Comparative Regionalism

As discussed in the first part of this thesis, the analysis, and study of the new regionalism

call for a multidisciplinary approach to understanding the complex political, social and economic

interactions involved in the process. This applies particularly to the ASEAN countries for their

unique regionalization process that showed complex interactions of geopolitical, social and

developmental motives. Indeed, it is widely recognized that the “ASEAN way” is different from

the traditional regional integration process that is based on Balassa’s six steps of linear integration

(Shimizu, 1998; Söderbaum, 2012; Ichikawa, 2017). Recent studies on the ASEAN regional

model point out its differences with the European model (Söderbaum, 2012; Ichikawa, 2017).

More precisely, these studies shed light on the flexibility, informality, and pragmatism observed

during the development of the ASEAN bloc. Therefore, a comparative analysis of regionalism

offers an interesting framework for the understanding of the differences of outcome and

performances between different regional groupings. Such analytical framework has been coined

in the literature as Comparative regionalism.

The traditional approach to analyzing the effect of regional blocs are based on European

and western-style integration theory and practices (Söderbaum, 2009). However, as we have

demonstrated throughout this study, the current wave of regionalism cannot be understood only

through a static and unidimensional framework. The new regionalism is driven by several state

and non-state actors whose cooperation was extended to non-traditional areas such as

development, industrial production sharing, environment, culture or research and development.

Therefore, a comparison of the characteristics and processes of regionalization in different regions

is essential for a more accurate assessment. Thus, by studying the Southeast Asian integration

model and comparing it with the Southern African case, we aim to elucidate the dynamics of

regionalism in developing countries’ context.

The ASEAN experience provides practical and real-world evidence of the transformative

and developmental role of regionalism. The particularity of the ASEAN regionalization process

is that it has been simultaneously driven by foreign investment flow and regional fragmentation

of manufacturing productions. The European style of formal regionalism did not play a significant

role in the growth of the regional bloc (Shafaeddin, 2008; Söderbaum, 2009). Indeed, the intra-

ASEAN trade and the expansion of regional production networks were led by informal and off-

market interactions of state actors, the business sector and the civil society. In this regard,

Shafaeddin (2008) stressed that the industrialization and the rapid growth or intra-regional trade

in the Southeast Asian region were not solely market-driven; government intervention also played

105

a significant part. Indeed, trade within the ASEAN bloc was dominated by off-market intra-firm

trade. Moreover, regional production sharing has been fostered by the joint effect of FDI policies

and internationalization strategies implemented by the ASEAN countries along with the

government of Japan58.

5-3-2. The Structuralist Approach

Therefore, in order to isolate and compare the effect of regional arrangements on

developing countries’ industrialization, we will complement our comparative analysis of the

ASEAN and SADC with a structural transformation approach. As discussed in Part 1, the most

distinct feature of the Southeast Asian regionalism is the rapid growth of the production and

exports of manufacturing products. Thus, this approach will allow us to focus on the factors that

determine the performance gap in manufacturing export between the ASEAN and SADC

countries. Moreover, numerous empirical studies have found that structural transformation and

economic diversification (through the expansion of the manufacturing sector) is linked with

sustained and rapid growth in low-income countries (Lavopa, 2015; IMF, 2017).

Our empirical assessment will be performed from a regional perspective in order to capture

various dynamic factors, including regional externalities, which affect neighboring countries’

economic performance simultaneously. In this regard, the case of the ASEAN countries is

particularly interesting for their success in creating positive regional externalities related to

investment and trade in the manufacturing sector. For instance, convinced by the important

opportunity offered by the internationalization of the Japanese and Western firms, the ASEAN

countries decided to support what Shafaeddin (2008) refers to as fragmented vertical production

chain through intra-regional specialization, local content requirements, joint ventures, and

government investment in education, training and technological infrastructure. The ASEAN also

facilitated the entry and implementation of foreign firms within the regional production networks

through complementary investment in cross-border infrastructure, trade liberalization policies,

the creation of economic corridors, and the liberalization of factors of production in chosen sectors.

The considerable growth of exports of manufactured products contributed significantly in the

gradual upgrading of the industrial capabilities of the ASEAN countries. Moreover, as intra-

regional trade intensifies and linkages between local suppliers and foreign affiliates are

strengthened, the ASEAN countries are gradually moving up higher in the Global value chains.

58 The appreciation of the Yen after the Plaza accord in 1985 prompted the Japanese firms to move their labor-intensive

production to the labor abundant East and Southeast Asian countries.

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The ASEAN’s regional approach is particularly relevant to the SADC countries since it

demonstrates how regional cooperation could help to spur a structural transformation dynamic

which will benefit all the members of a developing countries’ regional bloc.

5-4. Features and Characteristics of the ASEAN Model

This section will discuss briefly the aspects which distinguish the ASEAN with other

regional projects particularly those involving developing countries. The different points discussed

here will provide an empirical basis justifying the variables and empirical strategies selected later

in Chapter 6 and Chapter 7. In general, historical data on ASEAN’s integration shows the critical

role played by merchandise trade, manufacturing export, and foreign direct investments in

promoting rapid and sustained growth within the regional bloc.

5-4-1. Merchandise Trade

As discussed in Chapter 3, the Southeast Asian countries distinguish themselves by a rapid

and sustained trade growth both at regional and international level. This is reflected both in terms

of volume and world trade share. Moreover, we also observed that the economic divergence

between the ASEAN and the SADC occurred simultaneously with a reversal in their trade

performances. Accordingly, empirical analyses in this second part of the thesis will focus mainly

on this period of divergence which starts from the 1980s (after the Plaza accord) to 1998 the year

of the Asian Financial crisis.

Comparatively, the ASEAN has been outperforming its counterparts in the developing world

since the 1990s. Figure 5.1 below, which reports the merchandise trade share to the world59 since

1970, shows that Southeast Asia has been leading the developing regions since the 1990s both in

export and import share. This implies that the ASEAN is an outward-oriented regional

arrangement and that tariff preferences did not have a negative impact on members’ trade

relationship with non-members. Therefore, an empirical examination of the mechanism linking

regional integration and trade performances is critical in understanding the ASEAN development

process. Moreover, data on globalization in Table 5.1 Shows that most of the ASEAN countries’

score was not high compared to world standard, particularly during their period of rapid growth

(1985-1998). These figures on the ASEAN’s globalization may suggest that overall economic

openness is not necessarily a prerequisite for rapid economic growth. In fact, economic

59 Namely: the Latin American Integration Association (LAIA), Southern Common Market (Mercosur), South Asian

Association for Regional Cooperation (SAARC), and Southern African Development Community (SADC).

107

liberalization might have been the result of economic growth and that this latter has been in turn

driven by more specific factors such as FDI particularly in the industrial sector. This market-

driven instead of institution-driven economic liberalization is another characteristic of the

ASEAN. Among the key players in this market-driven regional integration are foreign investors

particularly in the manufacturing sector.

Figure 5.1 Merchandise trade share of selected regional economic cooperation to the world’s

(in percent)

Sources: ERIA, 2017, p.3

Table 5.1 Globalization Score in Selected countries


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5-4-2. Foreign Direct Investment

Foreign investment is one source of capital for the capital-scarce developing countries. In

this category too, the ASEAN has been doing relatively better than other developing countries.

The ASEAN model of rapid export growth and structural transformation has been widely

supported by significant and sustained inflow of foreign investments particularly during the

period from the late 1980s until the financial crisis (Figure 5.2). Indeed, as showed in Figure 5.2

below, the ASEAN regional bloc has received the highest flow of FDI between the late 1980s to

mid-1990s the period of their rapid growth. This impressive performance of the ASEAN in

attracting FDI has been the result of the interaction between the market and regional level policies.

Therefore, the particularity of this interaction in the ASEAN compared with other regional

arrangements in the developing world such as the SADC will be empirically examined and

discussed in the next chapters.

The role of FDI in the development of the ASEAN countries has been widely debated in

the literature, but there seems to be a consensus on its positive impact (Abe, 1998; Magashazi,

2015; Chen and Intal, 2017). However, the condition of the successful and rapid structural

transformation in the ASEAN and the role played by FDI is an opened debate and experts are still

searching for convincing explanations. Therefore, we hope that the comparative and structuralist

approach discussed earlier in this thesis will bring a new perspective and thereby contribute in to

further advancing knowledge on this issue. In this regard, several theories have been created to

explain the market mechanism behind the relocation process of MNCs particularly in the East

Asian region. These models, including the flying geese model, “bamboo capitalism” or the Water

Lily model (Magashazi, 2015), all aim to explain how firms respond to changing market

conditions within the East Asian region especially in the ASEAN. Thus, the empirical analyses

in the remaining chapters of this thesis will complete these models by studying the particular

process that had taken place within the ASEAN region which provided the conditions for the

expansion of a manufacturing production network. Moreover, the comparative approach will

allow us to observe the reason for the non-occurrence of such process in other developing regions

such as the SADC.

Furthermore, in the case of the ASEAN discussing the role of regional investment policies

and other policy measures for FDI promotion is critical. Indeed, studies show that the rapid surge

in FDI flow since the late 1980s resulted from the trade facilitation and liberalization measures at

the regional level such as the AFTA (Chen and Intal, 2017). Much of the manufacturing activities

and trade within the ASEAN regional bloc involved mainly auto parts and components. Indeed,

109

as seen in the previous sections, from the late 1980s until the financial crisis most of the

investment policies in the ASEAN has been influenced mainly by Japanese automobile producers.

Therefore, this is the period when the first stage of structural transformation must have taken

place in the ASEAN countries. This interaction between regional trade, industrial upgrading, and

structural transformation will be examined further in detail in the next chapters.

Figure 5.2 Share of selected regional economic cooperation’s GDP to the world’s (in percent)


Figure 5.3 FDI inflows in the ASEAN and SADC from 1970

Sources: UNCTAD (D.S: July 2018)

-20000

0

20000

40000

60000

80000

100000

120000

140000

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

Mill

ion

USD FDI inflows

ASEAN (Association of Southeast Asian Nations)

SADC (Southern African Development Community)

110

5-4-3. Manufacturing Export

The third characteristic which distinguishes the ASEAN model is the rapid growth of

manufacturing products’ share in total trade and the economy in general. In other words, the

ASEAN regional integration expanded along with a rapid structural transformation driven by the

manufacturing sector. While this export-oriented industrialization is similar to the development

pattern observed in an earlier period in Northeast Asian countries such as Japan and Korea, it is

also unique because it has been organized in a regional production and supply network within the

Southeast Asian regional bloc. Therefore, our empirical analysis will also focus on the process of

structural transformation through the expansion of regional manufacturing production within the

ASEAN bloc.

More precisely, we will examine the regional economic and market conditions that promote

the rapid growth and concentration of foreign investments in the industrial and technology-

intensive sector. Indeed, as shown in Table 5.2 below the type of FDI received by the ASEAN

countries during the rapid growth and transformation period had contributed significantly to their

capital formation. From the 1980s to the late 1990s the ASEAN showed the highest percentage

share of FDI in Gross capital formation compare to other regional blocs. Therefore, understanding

the economic and regional process behind this FDI-driven industrialization is crucial in order to

elucidate the ASEAN model and its implication for other regional arrangements in the developing

world.

Table 5.2 Foreign direct investment as a percentage of Gross capital formation (in percent),

1970-2015

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

ASEAN 7.1 10.7 5.3 4.1 11.5 12.6 15.5 18.9 20.8 18.6

EU25 2.4 2.1 2.3 2.4 5.4 6.5 35.0 15.2 10.6 15.2

LAIA 2.8 2.9 3.0 4.2 3.6 7.7 17.9 14.6 16.2 14.6

NAFTA 1.3 1.5 3.1 2.1 4.0 4.4 14.9 4.6 7.7 10.1

SAARC - 0.5 0.4 0.3 0.6 2.2 3.3 3.6 4.7 6.3

SADC 4.8 1.5 1.1 0.3 0.2 6.7 13.3 22.6 20.0 22.0

Sources: UNCTAD (D.S: July 2018)

111

Lastly, as discussed in previous subsections, our study of the ASEAN rapid transformation

will focus mainly on the role played by regional production fragmentation initiated by Japanese

automobile producers. This is justified by the data in Table 5.3 below which shows that share of

parts and components in intra-regional as well as total trade of manufacturing goods has been the

highest within the ASEAN regional bloc with a peak in the 1990s and 2000s. The high

involvement of production fragmentation in the ASEAN region implies that a process of

knowledge and technology transfer is taking place at a regional level and has promoted structural

transformation and industrialization in the member countries. This feature of the ASEAN

industrialization is unique among the developing regions. Thus, the last but not least variable that

will be studied in our empirical analysis is the industrial and technology-upgrading of export in

the ASEAN and the SADC.

Table 5.3 Parts and Components in the Trade of Manufacturing Goods, in percent



This chapter discussed and summarized the historical and theoretical background by

distinguishing the ASEAN regional model from other models in the developing world. It has also

laid the general framework for the empirical analyses in the next chapters. As such, this chapter

is an introduction to this second part of the thesis. By and large, the relevance of the ASEAN

model as the subject of our empirical study and the methodologies has been the main point of

focus here. It has been shown that historically the ASEAN project has been initiated by former

colonies and developing countries which aspired for peace and economic prosperity. Moreover,

112

these objectives have been successfully achieved through an unusual path relatively different to

the mainstream European model.

The ASEAN regional project went through different phases which have shaped its current

institutional and economic direction. Before the AEC project, ASEAN has been historically

driven by informal cooperation between the developing Southeast Asian countries. It originated

from the willingness of these former colonies to ensure regional stability and independence from

foreign. As the tie between these Southeast Asian countries became stronger, their regional

cooperation has deepened and incorporated several other areas such as economic development,

industrial cooperation, trade, culture. Eventually, this cooperation ended up with the creation of

the AFTA in 1992 which marked the formal commitment of the ASEAN members to deepen their

economic and development cooperation. However, the ASEAN model of regional cooperation

seems to have been driven by non-political actors. Indeed, contrarily to the European model,

regionalization in the ASEAN has been mainly driven by state-market negotiations and

interactions. Therefore, it has been argued that in order to study the ASEAN model and its policy

implication for other developing regions’ projects, our empirical analysis will include two

analytical frameworks namely: comparative regionalism and structural transformation approach.

While comparative regionalism allows us to benchmark and differentiates the ASEAN economic

performances with other regional blocs particularly in the Southern African region, the

structuralist approach allows us to understand the condition of the successful economic

transformation and industrialization of the ASEAN member states.

By examining the historical data, we found that the ASEAN has been outperforming the

other developing regions’ arrangement in terms of merchandise trade, foreign direct investment

and manufactured exports. Therefore, these three indicators will constitute the variables of our

empirical study in the remaining chapters of our thesis. Indeed, the first feature of the ASEAN

rapid economic growth is that it has been supported by high performance in merchandise trade

since the late 1980s. Furthermore, this model of open regionalism has also been successful in

attracting foreign investment particularly those who have fostered the industrial sector through

significant participation in the region’s capital formation. In this regard, merchandise trade and

foreign investment concerned mostly the manufacturing sector which production has been

organized and fragmented within the ASEAN member states' production network.

In general, it has been shown the ASEAN intermediary model involved the participation of

both governmental and market forces. This unique interaction between the market and the

regional framework resulted in the development of a particular regional network of manufacturing

113

production which has been fostering the production of high value-added products within the

regional bloc. Thus, the object of our empirical study in the remaining chapters will be to

understand the process and conditions that enabled the Southeast Asian countries to achieve such

impressive economic transformation in a developing world standard.

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Chapter 6- Rapid Economic Growth in Southeast Asia: Empirical

Analysis on Regional Integration and Structural Transformation in the

Original ASEAN MEMBERS

115

6-1. Introduction

East Asia and more particularly the Southeast Asian region is the home of the most dynamic

and fastest growing economies in the world (World Bank, 2017). These economies retained the

attention of development scholars, not only for their level of economic growth but also for the

nature of it. Indeed, in contrast with other developing countries, namely Latin America or Sub-

Saharan Africa, rapid economic growth has been accompanied by rapid and extensive structural

transformations for the Southeast Asian economies (UNCTAD, 2014; Diao et al., 2017).

Structural transformation, defined as the increasing share of labor allocated to more productive

and sophisticated activities in the economy, is the primary condition for economic development

in the long run. Moreover, the East Asian countries including the ASEAN-4 (ASEAN-5 excluding

the Phillippines) have been the champions of industrialization since the early 1990s (World Bank,

1993). The East Asian economic “miracle,” a term popularized by the World Bank report in 1993,

was mainly driven by growth in the exports of industrial and manufactured goods. The high export

performance has been the result of the particular implementation of well-honed policies that

promoted domestic and foreign investments in the manufacturing sector. Concerning the ASEAN

countries, the FDI-trade nexus played a significant role in this process. Heretofore, the ASEAN

regional bloc is one of the last and only examples of such transformation among the developing

regions in the 21st century. Thus, the question on whether belonging to the same regional bloc

and regional trade integration matters in explaining the rapid structural transformation in the

ASEAN countries is an intriguing one that we would like to explore in this paper.

Therefore, this Chapter aims at empirically investigating the process of rapid economic

transformation of the ASEAN’s founding members. We expect to confirm our assumptions that

regional integration has been playing a key role, through the promotion of intra-regional trade and

FDI (as discussed in CHAPTER 3). In doing so, we will divide our work as follows: the first

section will set the main theoretical framework and describe briefly our methodology and the type

of dataset that we used; then in the second section, we will show evidence of structural

transformation occurring along with rapid economic growth. In doing so, we will first identify the

timing of growth acceleration using criteria established by the Hausman-Prichett-Rodrik (HPR)

filter (Hausmann et al., 2005). Also, we will demonstrate that rapid growth was accompanied by

structural transformation, using the decomposition model of labor productivity growth developed

in Diao et al. (2017). Section 3 will be an empirical analysis of the indirect role played by regional

integration in the above-mentioned structural transformation through the promotion of trade and

private investments in the modern sectors. Hence, we will proceed to a descriptive statistic as well

as an empirical estimation of a gravity model to test the significance of regional integration in

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promoting trade which has been the primary driver of economic growth in the region. Lastly, we

conclude by discussing and summarizing the main results and draw some policy implications. We

will also discuss briefly on the limits of our work as well as the prospect for further researches.

Figure 6.1 ASEAN-5 GDP evolution from 1960 to 2014 (in million, 2011 USD)

Source: Penn World Table http://www.rug.nl/ggdc/ (accessed in 2017/07/30)

6-2. Theoretical framework and Methodology: Regionalism and structural

transformation

6-2-1. The Economic Structural Transformation Perspective

Growing number of scholars now agree with the importance of structural transformation in

sustaining economic growth and improving the population’s standard of living in the long-run

(UNCTAD, 2016). The structural transformation perspective on economic development is said to

have been pioneered by scholars such as Lewis (1954) and Kuznets (1966). The concept describes

and studies the economic process during which an economy is seeing the reallocation of its labor

from low-productivity activities (in the traditional sectors such as agriculture) to more productive

and innovative economic activities (the modern sector such as industry and services). Moreover,

the concept points out the structural dualism in the developing countries, i.e., the coexistence of

a dominant traditional sector with an under-developed manufacturing and service sector.

Therefore, the structuralist approach suggests that modern economic growth, especially in the

early stages, is mainly driven by the expansion of modern activities (Duarte and Restuccia, 2010;

UNCTAD, 2016).

0

1000000

2000000

3000000

4000000

5000000

6000000

1950 1960 1970 1980 1990 2000 2010 2020

million

Year

ASEAN-5 economic growth

http://www.rug.nl/ggdc/

117

The relevance of the structural approach in the study of economic development is supported

by recent researches which observed that the occurrence of structural transformation explains the

economic performance gap across countries. Moreover, Duarte and Restuccia (2010) found that

productivity catch-up and growth in the manufacturing sector explains half of the growth at the

aggregate level, and conversely, a slowdown in the same sector is mainly responsible for

economic stagnation or decline. Moreover, with the new Sustainable Development Goals (SDGs),

the United Nations give more emphasize on the promotion of the productive and real sector. The

SDGs recognize the need for industrial upgrading and the production of higher value-added

products in the developing countries, in other words, the need for a structural transformation. In

this regard, the structural perspective is also insightful in explaining the economic divergence

between East Asia and other developing countries since the 1970s. Indeed, according to the

UNCTAD report (2016), the East Asian region is the only region that observed high and sustained

growth in the modern sector. Conversely, in the Sub-Saharan African countries structural

transformation benefited mainly to the service sector which mainly produces non-tradable goods.

The income effect from the recent boom in commodity prices, which in turn boosted domestic

demands for non-tradable goods, explains this situation in SSA. However, the service sector is

characterized by a stagnating and low productivity growth and thereby has little to no impact on

aggregate economic growth (Duarte and Restuccia, 2010).

Thus, although structural transformation is a necessary condition for economic

development, it is not a sufficient one. Indeed, the relationship between structural transformation

and economic development is neither automatic nor straightforward. Firstly, specific parameters

must be considered when we look at the transformation process itself. The literature usually

distinguishes two sources of productivity gains namely: the within-sector effect resulting from

increasing productivity without a change in labor share, and the between-sector effect which are

gains from labor reallocation effect (Duarte and Restuccia, 2010; Timmer et al., 2015; Diao et al.

2017). This growth decomposition model is the basis of any structural analysis although it can be

modified according to the research objectives. The between effect is referred to as the productivity

growth explained by structural change. Besides, in some studies, the between effect is also divided

into static reallocation effect which is positive when labor is moving to above-average

productivity level sectors and the dynamic reallocation effect which is positive when labor is

shifting to above-average productivity growth sectors (Timmer et al., 2015). This technique is

useful for explaining the divergence between the East Asian and SSA countries. Indeed, Timmer

et al. (2015) found that the African countries have been experiencing stagnating static gains and

dynamic loss, whereas in East Asia static and dynamic gains were significant and positive overall.

118

In other words, the African countries have seen labors shifting away from manufacturing to

services, whereas East Asian economies reinforced and diversified their industrial basis. Indeed,

in their study, Duarte and Restuccia (2010) found that the service sector has less potential for

productivity catch-up. Therefore, the early expansion of the service sector in the African countries

has reinforced its deindustrialization and thereby its divergence with the East Asian countries.

Secondly, structural transformation requires some supporting policies to enable the

efficient allocation of resources to the most productive activities through the promotion of

education, innovation, and investment. Indeed, one of the important implications of structural

change is the necessary contribution from a proactive State in correcting market failures,

institution-building and providing public goods. In this regard, the primary cause of the

divergence between the East Asian and SSA countries is the ability of their government in

implementing the necessary policies and reforms to achieve a growth-enhancing structural

transformation. Rodrik (2003) argues that the over-emphasis of the neoclassical adjustment

programs on the market economy and free competition in SSA reduced the policy space of the

governments in the promotion of more context-specific investments and activities. On the other

hand, the East Asian countries outperformed the other developing countries through proactive

trade and industrial policies (UNCTAD, 2014). However, it is important to note that the

international environment in the time of the East-Asian miracle was somewhat different from

today. Therefore, for a comparison purpose, we will turn our attention to the more recent case of

the high-performing ASEAN-4 countries. We will investigate how regional integration can help

the structural transformation of developing countries in the current context of stagnating and

uncertain multilateral economic system.

6-2-2. Regional Integration and Economic Growth: Impact and Assessment

In the current global environment, one cannot ignore the central place held by regionalism

in the international trade system. It is needless to be reminded of the proliferation of regional

arrangements since the 1990s. More interestingly, most of the recent rapid economic development

experiences involved many members of the Association of Southeast Asian Nation or ASEAN

(World bank, 1993; World bank 2017). Thus, naturally, the first question that comes to mind

would be whether there is a relationship between rapid growth and regional integration and if so,

what is the nature of this relationship. In general, the literature considers regional integration as

the second-best alternative to multilateral trade liberalization (Burfisher et al., 2004, Taylor, 2008).

Traditional arguments state that there is no rationale for developing countries to enter a Regional

119

Trade Agreements and that conversely, unilateral liberalization is the most efficient policy option

(Puga and Venables, 1998; Sindzingre, 2013). However, this is in contrast with the fact that

ASEAN a South-South arrangement was developing faster compared to other regions in the world.

Recent trends are showing a rapid shift in the global economic and political power balance.

Moreover, regional integration, particularly in the Southern regions, are among the processes

shaping this new global order. Thus, regional integration is one way for developing countries to

cope with the uncertainties and economic shocks entailed by these changes (UNCTAD, 2014).

The impact of regional integration in ASEAN has been strongest in promoting trade and foreign

direct investment (Kimura, 2014). More particularly, the emergence of new Global Value Chains

(GVCs) and international production networks in the regional bloc is closely related to the

deepening of the integration process (Kimura, 2014; UNCTAD, 2015). Lastly, the role of regional

integration in enabling rapid structural transformation cannot be ignored merely because of the

current global economic slowdown. Indeed, the hope for the recovery of economic growth at the

global level will depend more on the dynamism of regional and domestic economy (UNCTAD,

2014; UNCTAD, 2016). Thus, to understand the ASEAN countries’ rapid development process

in the current global environment, not only it is important to identify the impact of structural

change, but it is also crucial to assess the contribution of regional integration in this process.

6-2-3. Methodology and Data Description

This chapter will proceed to a two-step statistical analysis; the first step will be the detection

of the timing of growth acceleration and the analysis of the mechanism of structural change before

and during the identified period. The objective of this first step is to show evidence of growth

acceleration among the original members of the ASEAN regional bloc. In doing so, we will follow

the criteria established by the Hausmann-Pritchett-Rodrik (HPR) filter. Then, after confirming

the existence of growth acceleration, we will undertake an empirical analysis of the mechanisms

behind it. This analysis will demonstrate the significant role played by structural change among

the ASEAN countries during their period of rapid growth. For this analysis, two sets of data will

be used. The first dataset for the growth acceleration test will be the real GDP figures from the

last update of the Penn World Table 9.0 (PWT). The dataset contains information on the levels of

income, output, input, and productivity, covering 182 countries between 1950 and 2014. The data

for the structural analysis is taken from the Groningen growth and development center (GGDC)

10-sector database. This database provides an annual time-series relative to the productivity

performance in Africa, Asia, and Latin America in ten broad sectors.

120

The second step of our analysis will focus on the assessment of the impact of regional

integration on the member countries’ trade performance. This second step is important to confirm

the positive role played by regional integration along with the structural change. As mentioned

earlier, the link between structural change and economic growth is complex and not

straightforward, it hides a complex institutional and policy framework. About the ASEAN

countries, in the light of many reports and studies mentioned in previous sections, we have a solid

reason to believe that regional integration is the key to understand their higher performance

compared to other developing countries. Thus, not only do we use descriptive statistics to

demonstrate the positive correlation between regional integration and export-led growth, but we

also perform a gravity model estimation to empirically verify the significance of these regional

initiatives when controlled with other country-specific and dummy variables. Regarding the data

sources, data on bilateral trade are from the United Nations Comtrade database. Following the

methodology widely used in the literature, with complete our gravity equations with data relative

to GDP (in current dollars) from the World Development Indicators (WDI) and the other dummy

and control variables from the CEPII databanks.

6-3. Evidence of Growth-Sustaining Structural Transformation: Empirical Analysis

6-3-1. Rapid growth in the ASEAN-5: Evidence from the Hausmann-Prichett-Rodrik

(HPR) Growth Acceleration Filter

In this section, we first investigate on evidence of growth acceleration among the ASEAN-5

countries. Then we identify the period in which these accelerations took place. In doing so, we

will rely on the growth acceleration filter elaborated by Hausmann et al. (2005) and use the same

dataset which has been taken from the latest version of the Penn World table 9.0. Thus, we used

the PWT’s real GDP figures to compute the growth rate of each of the ASEAN5 from 1961 to

2014 the last year available in the dataset.

First of all, as in Hausmann et al. (2005), after obtaining the annualized growth rate of each

country in the period 1961-2014, we divided each country’s time-series into episodes of 7 years

(i.e. n=6). We then calculated gt,t+n for each country which is the average growth rate from period

t to t+n. Growth acceleration episodes are defined through three criteria (Hausmann et al., 2005;

Diao et al., 2017):

(1) gt,t+n ≥ 3.5 ppa ; growth is rapid

121

(2) ∆gt = gt,t+n – gt-n,t ≥ 2.00 ; growth accelerates

(3) yt+n ≥ max {yi}, i ≤ t ; post-growth output exceeds pre-episode peak;

Table 6.1 Growth episodes in ASEAN-5 from 1961-2009, in percent

Episodes (n=6) Indonesia Malaysia Philippines Singapore Thailand

1961-67 2.024 6.150 5.139 7.360 8.025

1968-74 8.079 10.069 5.244 12.008 6.680

1975-81 7.505 7.215 5.623 8.338 7.223

1982-88 5.290 4.881 0.764 6.718 7.097

1989-95 8.178 9.365 2.883 9.070 9.408

1996-2002 1.892 4.410 3.498 4.550 2.018

2003-2009 5.427 4.729 4.801 5.804 4.151

Year of accel. 68 89 68 89 no acc. 68 89 89

Growth Year

before 1.357 5.780 3.447 8.8 12.224 11.115 13.3

Growth Year

After 6.8 9.009 5.04 9.009 13.580 10.04 11.142

Source: Author’s own calculation from the PWT 9.0 accessed in 2017/07/30

(http://www.rug.nl/ggdc/productivity/pwt/)

Table 6.1 above is a summary statistic showing the average growth episodes of the ASEAN-

5 from 1961-2014. The colored numbers correspond to the episodes when the criteria of growth

acceleration mentioned above are satisfied. We found that except for the Philippines, the other

ASEAN-4 countries experienced one or two growth episodes, and more surprisingly, roughly in

the same periods. Indonesia, Malaysia, and Singapore all experienced growth acceleration twice,

in 1968 and again in 1989. Thailand’s economic growth only accelerated, in the HPR sense, from

1989. These results are particularly interesting since they confirm most of our intuitive

assumptions. Indeed, as shown in the table below, 1968-74 and 1989-95 coincide precisely to the

period of significant changes in the region namely: the creation of the ASEAN in August 196760,

the Manila agreement on the promotion and protection of investment in 1987, and the launch of

the ASEAN Free Trade Area (AFTA) in 1992. The absence of growth acceleration in the

60 It implies that the original ASEAN countries benefited mutually from the political and economic stability brought

about by the early regional arrangement. This may have contributed to improve their attractiveness toward foreign

investors.

http://www.rug.nl/ggdc/productivity/pwt/

122

Philippines until 2009 also reflect the country’s slow progress, particularly in the manufacturing

sector. Finally, Thailand’s late acceleration in the 1990s also corresponds to its period of high

FDI inflows and rapid manufacturing development. Therefore, we can safely consider this growth

acceleration identification protocol as robust and that the results can be used for our structural

transformation analysis in the next section.

Table 6.2: Major ASEAN summits

Year Place Resolution

1976 Bali Treaty of Amity and cooperation

1977 Kuala

Lumpur

Establishment of the dialogue partners framework

1987 Manila Agreement on Promotion and Protection of Investments

1992 Singapore Launch of ASEAN FTA project

1998 Hanoi Hanoi Plan of Action

2003 Bali Agreement for an ASEAN Economic Community by 202061

and declaration of ASEAN Concord II

Source: Adapted from Pomfret 2011 with some modifications by the author

After showing the existence of growth acceleration and before investigating the possible

relationship of these changes with regional reforms and initiatives, let us first analyze the nature

and the consequences of this rapid growth. In the next section, we will analyze the structural

mechanism that triggered the rapid and sustained economic growth in the ASEAN-5. Following

the growth decomposition methodology in Diao et al. (2017), we will test whether these rapid

changes were accompanied by structural transformation, i.e. an expansion of non-agricultural

sectors such as the manufacturing sector in particular.

61 The deadline for the creation of AEC has been further advanced to 2015 in 2007.

123

6-3-2. Mechanism of The Asean-5 Rapid and Sustained Growth: The Mcmillan-Rodrik

(MR) Method of Productivity Change Analysis Between the Traditional and Modern

Sector

In this section, we will analyze the process behind the rapid and sustained growth in the

ASEAN-5 countries by using the MR methodology of labor productivity growth decomposition

(Diao et al., 2017). This method will enable us to identify the structural change effect of economic

growth acceleration in these countries. We will first describe the data, introduce our model and

methodology and then discuss the results and its implication.

Data description

As in Diao et al. (2017), we use the GGDC (the latest version) dataset to calculate

economywide and sectoral labor productivity in each country from 1980 to 199862 . Labour

productivity is obtained by dividing the value added by the number of employees. Our dataset

consists of value added and employment level both in sectoral and aggregate terms. The GGDC

dataset divides economic activities into ten sectors: agriculture, mining, manufacturing, utility

construction, trade services, transport services, business services, government services, personal

services. Since our study focuses on the structural effect of growth acceleration in the ASEAN-5,

we will divide the economy into two sectors, i.e. agriculture and modern sector; the latter consists

of the nine sectors excluding agriculture. This choice is also justified in Diao et al. (2017) which

demonstrates that economic dualism (the division of the economy along with the dominant

traditional and underdeveloped modern sectors) is the reality in the low-income and transitioning

economies. Lastly, all value-added and productivity figures are expressed in 2005 purchasing

power parity dollars63, and the ratios are expressed in percentage point.

Methodology

We base our analysis on the DMR growth decomposition technique (equation 4). This

growth model enables us to distinguish the contribution to economic growth of the within-sector

productivity (increase in capital and knowledge resources) and structural change (i.e., the labor

shift from lower productivity sector (agriculture) to higher productivity modern sectors). To

capture the structural effect of growth acceleration, Diao et al. (2017) studied the labor

productivity between the ten years leading up to growth acceleration and the ten years after

acceleration (k=9). In this regard, our study of the ASEAN-5 will focus on the most recent episode

62 We will explain the reason we chose this time span later in the next subsection. 63 Data can be found in the World Bank’s databank, ICP 2005.

124

of growth acceleration, identified earlier, that has been in initiated in 198964. Consequently, we

will analyze and compare the nature of labor productivity of the ASEAN-5 in the period 1980-

1989 (pre-acceleration period) and 1989-1998 (post-acceleration period).

The equation (4) below represents the expression of economywide productivity change at a

period t. The equation expresses the aggregate labour productivity as the sum of the total of within

(first terms) and the between (second terms) sectoral labour productivity. The within term is the

labour share in the beginning of the period multiplied by the productivity change (∆yit= yi

t – yit-k)

in the end of the period; the between or structural change terms is the productivity at the end of

the period multiplied by change in labour share (∆θit = θi

t – θit-k).

(4) ∆𝑦𝑡 = ∑ 𝜃𝑖𝑡−𝑘

𝑖 ∆𝑦𝑖𝑡 + ∑ 𝑦𝑖

𝑡𝑖 ∆𝜃𝑖

𝑡

yt: is the total labour productivity; yit: is sectoral labour productivity; θi

t: is sectoral labour share.

However, in this paper we have chosen to follow the method used in Diao et al. (2017) and

computed the annualized growth rate of the within and between terms. Firstly, for each country

we divided the data in two period of ten years: pre-acceleration (1980-1989) and post-acceleration

(1989-1998) growth rates. Then, we compute the average annual growth in both periods for each

country (equation 6 and 7). Thus, our analysis will focus on the comparison of the average annual

growth rate of labour productivity between the pre- and post-acceleration periods in the ASEAN-

5 (equation 8).

(5) 𝑔𝑦𝑡 = ∑ 𝜃𝑖

𝑡−1𝜋𝑖𝑡−1𝑔𝑦𝑖

𝑡𝑖 + ∑ ∆𝜃𝑖

𝑡𝜋𝑖𝑡−1(1 + 𝑔𝑦𝑖

𝑡 )𝑖

(6) �̅�𝑖𝑤𝑖𝑡ℎ𝑖𝑛 =

1

10∑ 𝜃𝑖

𝑡−1𝜋𝑖𝑡−1𝑔𝑦𝑖

𝑡10𝑡=1

(7) �̅�𝑖𝑏𝑒𝑡𝑤𝑒𝑒𝑛 =

1

10∑ ∆10

𝑡=1 𝜃𝑖𝑡𝜋𝑖

𝑡−1(1 + 𝑔𝑦𝑖𝑡 )

(8) �̅� = ∑ �̅�𝑖𝑤𝑖𝑡ℎ𝑖𝑛

𝑖 + ∑ �̅�𝑖𝑏𝑒𝑡𝑤𝑒𝑒𝑛

𝑖

64 Since our dataset only cover statistics until 2014, it was not enough to verify the occurrence of a growth acceleration

in the 2010s.

125

With 𝑔𝑦𝑡 = ∆𝑦𝑡

𝑦𝑡−1 ; 𝑔𝑦𝑖𝑡 =

∆𝑦𝑖𝑡

𝑦𝑖𝑡−1 and 𝜋𝑖

𝑡 =𝑦𝑖

𝑡

𝑦𝑡 is the relative labour productivity for sector i.

Results and discussion

In general, our results are consistent with our original assumptions that the ASEAN

countries experienced a structural transformation along with their rapid economic growth in the

decade following the implementation of the AFTA. This may suggest the positive impact of

regional integration on the export of these countries, particularly in manufactured products. Figure

6.2 summarizes for each ASEAN-5 country, the average economy-wide labor productivity growth

in the pre-acceleration (1980-1989) and the post-acceleration (1989-1998) periods. For all the

countries which experienced growth acceleration, labor productivity has been higher in the post-

acceleration decade except for the Philippines where no growth acceleration was identified in the

period in consideration. The most significant change in productivity has been seen in Indonesia,

from roughly 0.21% average in the pre-acceleration to 3.21 % in the post-acceleration years. This

can be explained by the fact that in the 1980s the Indonesian government undertook several

reforms aimed at promoting the development of manufacturing sectors and economic

diversification. Thus, the Indonesian economy was more than ready to absorb the increasing FDI

and manufacturing exports entailed by the opening of the AFTA.

Moreover, when we look at the structural composition of the labor productivity growth, the

results are also consistent with the theory in development economics stipulating that high

economic growth is usually accompanied by an increasing share of labor in the modern sectors

(Rodrik, 2003; Duarte and Restuccia, 2010). Therefore, as shown in Figure 6.2 the post-

acceleration productivity growth has been accompanied by structural transformation for the

ASEAN-5. Indeed, the between sector part of the productivity growth has been positive for all

the countries. Thailand deserves particular attention for its post-acceleration growth that shows

quite a significant contribution of the between sector growth (3.02%) which accounts for more

than half of the economywide productivity growth during the period (3.88%). This is explained

by the rapid change in labor distribution in Thailand in the post-acceleration period where the

share of total labor in the modern sector increased roughly by ten percentage point from 1989 to

199865 (see Figure 6.4). More interestingly, considering that Thailand’s first acceleration was

identified only later in 1989, it would suggest that the contribution of structural change would be

65 Which is about 1% increase per year.

126

more significant than for the other ASEAN countries.66 This assumption is perfectly proven in

our model’s results.

Figure 6.2 Average Economywide labor productivity growth rate, in percent

Source: Author’s own calculation

Lastly, when we look at the evolution of average sectoral productivity and labor share for

the two pre and post-acceleration periods (Figure 6.3 and 6.4), we note that the economic

transition for most of the ASEAN-5 coincided roughly with the signature of the AFTA in 1992.

Indeed, except for the Philippines which did not realize its growth acceleration yet, and Singapore

which initially has very few natural resources and relied heavily on manufactured exports;

Indonesia, Malaysia, and Thailand saw a rapid productivity growth in the modern sectors. The

decline of productivity in agriculture during the transitional period is the immediate effect of labor

migration to the modern sector of the economy with higher relative productivity. It should be

noted, however, that the rapid decline in Thailand’s modern sector productivity (see Figure 6.4)

from 1989 has to do partly with the fact that the increase in labor share has been faster than the

growth in the sector’s relative productivity.

Overall, the growth acceleration in the ASEAN countries was accompanied by a greater

structural transformation of their economies. The modern sector’s expansion has been faster in

most of the countries suggesting that industrial and service sectors have mainly driven the

ASEAN economic growth. Moreover, the timing of this rapid structural transformation

corresponded precisely to the period of the creation of the regional free trade area. Therefore, it

66 In our growth acceleration analysis, we saw that Indonesia, Malaysia and Singapore both experienced growth

acceleration in the period between 1968 and 1974.

-3 -2 -1 0 1 2 3 4 5

1980-1989

1989-1998

1980-1989

1989-1998

1980-1989

1989-1998

1980-1989

1989-1998

1980-1989

1989-1998ID

NM

YSP

HL

SGP

THA

%

Within sector Between sector

127

will be interesting to investigate the role played by regional reforms on the performance of the

member countries. In other words, we will explore in the following section, the effect of regional

integration on the ASEAN-5’s trade and in the manufacturing exports in particular. We will use

a gravity model for this third part of our empirical analysis.

Figure 6.3 Average Sectoral productivity growth, in percent

Source: Author’s own calculations

Figure 6.4 Average sectoral labor share, in percent

Source: Author’s own calculations

-3

-2

-1

0

1

2

3

4

5

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-19

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-19

98

IDN MYS PHL SGP THA

%

Agriculture Modern

0

20

40

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80

100

120

19

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-19

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-19

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IDN MYS PHL SGP THA

%

Agriculture Modern

128

6-4. Relationship Between Regional Integration and Structural Transformation in the

ASEAN: An Ex-Post Analysis

After showing the evidence of structural transformation among the ASEAN-4, we will now

analyze the role played by regional integration during the acceleration period. Firstly, we will

proceed to a full descriptive statistic pointing the trends and patterns of bilateral trade flow and

growth from 1989-1998. Secondly, we will estimate a gravity model which is taking into account

the impact of belonging to ASEAN and the creation of the AFTA. In this regard, we would like

to note that the bilateral trade flows considered here are imports figures of each of the ASEAN-4

with only their major partners of the time namely: China, Japan, South Korea, and the USA, and

vice versa67.

6-4-1. Trade and Export-led Growth in the ASEAN-4: General Trend and Patterns

Experts on Southeast Asia widely agree that economic growth, especially during the period

of growth acceleration that we have identified earlier (1989-1995), has been driven by trade and

manufacturing exports in particular (ASEAN, 2014; UNCTAD, 2016). Indeed, when we look at

Figure 6.5 below, we can observe that trade flows between the ASEAN-4 and their major trade

partners, nearly tripled during this period, from $79 to $263 billion and $17 to $50 billion for the

extra-ASEAN and intra-ASEAN trade respectively. More interestingly, when growth has

declined in the years after 1995, it corresponded to the period of decreasing trade flow in the

ASEAN-4 (Figure 6.5). These observations already hint a positive correlation between economic

growth and trade in the ASEAN case. Hence, regional integration and the creation of the AFTA

has likely further boosted economic growth indirectly through the promotion of trade, foreign

investment and production networks in the region. Indeed, according to the ACIF report (ASEAN,

2014), the ASEAN trade-to-GDP ratio was up to 91 percent in 1993 and now represents 103

percent. The same document reports that the bulk share of the ASEAN trade is in primary

commodities (mainly Petroleum oil) and manufacturing products (mainly electronic integrated

circuits). It is worth noting that, the ASEAN-4 countries did not initially have a comparative

advantage in manufacturing products (see Figure 6.3 and 6.4) such as electronic parts and

components and automotive. However, the proactive regional policies and the progressive

67 EU has been purposefully excluded to facilitate the analysis and because of difficulty to find consistent bilateral data.

This with the exclusion of other considered “minor” partners will undermine the quality of our gravity estimation

because of the small-size of our sample. However, as we will see later on, the results are still quite consistent with

general observations.

129

improvement of regional investment environment enabled these countries to build sound

production networks and improve their capability in the sector.

FDI has also played a vital role in the economic growth and structural transformation of

the region. The region has become more attractive to foreign investors, particularly from Japan,

since the implementation of the AFTA. Much of the FDI has been directed in the modern sectors

of services and manufacturing. Here too, the positive spillover effect from being a member of the

regional bloc has been crucial. Indeed, the high-share of electronic parts and components in intra-

regional trade is evidence of the enabling role played by the regional arrangement.

Thus, it will be interesting to have a more accurate and precise picture on these broad patterns

and thereby assessing and confirming the significance of the ASEAN, as a regional economic

arrangement, in the rapid development of its members. For this purpose, we will perform a gravity

model estimation incorporating the AFTA and ASEAN-4 as dummy variables and thus assessing

empirically the impact of this regional organization with respect to other control variables such

as distance, country size.

Figure 6.5 ASEAN-4 Trade flow with China, Japan Korea and USA from 1989 to 1998 (in

billion US current dollars)

Source: United Nation COMTRADE database (https://comtrade.un.org/db/dqBasicQuery.aspx), accessed in

2017/08/15

17 21 26 29 34 42 50 55 5442

79

95

135154

177

211

263 268 264

215

0

50

100

150

200

250

300

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

billion

intra-asean extra-asean

https://comtrade.un.org/db/dqBasicQuery.aspx

130

Figure 6.6 Trade growth rate68

Source: Author’s own calculation from United Nation COMTRADE database

(https://comtrade.un.org/db/dqBasicQuery.aspx), accessed in 2017/08/15

6-4-2. Gravity Model: Ex-post Analysis of Regional Integration

The gravity model is among the most powerful and popular tool in economics (WTO, 2016).

Indeed, since the late 1990s and early 2000s the gravity model estimation has been systematically

used in most of the studies on international trade and trade policy. According to the WTO (Ibid.

p.5), the popularity of the model stems for its highly predictive power and its sound theoretical

basis. The gravity model, although originally used a-theoretically69, have been found to be very

flexible and with strong theoretical foundations that work very well with a wide range of

specifications such as the Armington-CES 70 or the Hecksher-Ohlin factor-proportions, etc.

Therefore, it is a common practice to assess the impact (particularly for ex-post analysis) of trade

policies such as Regional trade integration by using the gravity model.

The model

The gravity model was named after the Newton’s Law of universal gravitation. Indeed, as in

the Newtonian principles, the gravity equation implies that countries are attracted to each other,

or in more economic term, are likely to trade with each other depending on their size and the

distance between them. In short, bilateral trade flow is proportional to the sizes of the two

68 Intra-ASEAN trade flows are between the ASEAN-4 countries, and extra-ASEAN trade flow are between the

ASEAN countries with China, Japan, Korea and USA. 69 Among the well-known pioneers are Ravensteein in 1885 and Tinbergen in 1962 who used the gravity model to study

immigration and trade flows respectively (WTO, 2016; p.12). 70 Armington Constant Elasticity of Substitution

-0.30

-0.20

-0.10

0.00

0.10

0.20

0.30

0.40

0.50

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

intra-asean extra-asean

https://comtrade.un.org/db/dqBasicQuery.aspx

131

countries and inversely proportional to trade frictions such as distance between them. Therefore,

in its traditional form the gravity equation is written as follow:

(9) Mij=GYi Yj

Dij

Where Mij represents the imports of country i from country j; Yi and Yj are respectively the

GDP of the importing and exporting country; Dij the distance between the importing and exporting

country and G is a constant71.

In this paper, we are interested in analysing the bilateral trade flows from 1989 to 1998

between the ASEAN-4 countries and their major trade partners namely Japan, USA, China and

Korea. Therefore, in order to perform a proper estimation of the model, the multiplicative basic

equation (9) is usually transformed into a logarithmic form in order to obtain a linear function. In

doing so, we express the main variables (bilateral trade flows, GDP and distance) into their natural

logarithm. Thus, the log-linear expression of the gravity model with an error term (uij) is:

(10) Logimports= G + β1 LogGDpimporter+ β2 LogGDPexporter + β3 Logdistance+ uij

This logarithmic equation can then be estimated through and ordinary least squares

regression. The coefficients of variables estimated in logarithms are interpreted as elasticities.

However, in order to obtain unbiased results as possible and to isolate the effects of trade policies

such as regional integration, we add other specifications that capture some country-specific

characteristics that impact on international trade. These additional specifications are mostly

dummy variables that capture trade costs. In this paper, we chose to add specifications such as:

- The contiguous borders dummy variable, noted as contig, as a proxy for transportation

costs

- Common official language (comlang_off) and colonial ties (comcol and colony) as proxies

for information and search costs

- And the regional integration dummies to capture the effect of the regional policies on the

ASEAN-4’s bilateral trade with their major partners. Thus, we created the AFTA variable which

is a dummy variable taking the value of 1 if both of the importer and exporter are members of the

AFTA (created in 1992) and zero otherwise. The ASEAN-4 dummy is broader than the AFTA

dummy since it includes the period before 1992.

71 The constant absorb all the parameters that are out of the control of the two countries such as the level of globalization

(WTO, 2012)

132

Therefore, the final form of our gravity equation with the dummy variables is written as:

(11) Logimports= G + β1 LogGDpimporter+ β2 LogGDPexporter + β3 Logdistance+ β4

contig + β5 comlang_off + β6 colony + β7 comcol + β8 AFTA + β9 ASEAN4 + uij

Data description

As we can see from equation (3), our model relates the dependent variable imports

expressed in natural logarithm of its monetary value (in dollar) with the three independent

variables also transformed in logarithmic form and six dummy variables. The variables in

logarithm are those related to country sizes (GDP of the importer and exporter countries) and to

the distance between the two capitals of the trading countries (in kilometers). Following the

recommendation from WTO (2012), we chose to use imports statistics expressed in bilateral trade

flow in current dollars. In this paper, each economic variable are time-series statistics from 1989

to 1998. The data was obtained from the COMTRADE online database. In this regard, we must

note some missing data on some countries’ imports statistics. Thus, data on Singapore’s imports

from Indonesia are missing for the whole period. Also, data for China and USA’s imports are not

reported before 1992 and 1991 respectively. These issues although undermining the quality of

our dataset did not impact greatly on the overall quality of the model itself. Then, data related to

real GDP are from World Development Indicators (World Bank’s database) and expressed in

current dollars. Moreover, those about distance are found in the CEPII’ GeoDist database.

The dummy variables supposed to capture the trade frictions are also found in the CEPII’s

GeoDist database. The regional integration dummies have been generated by the author. The

economic time-series data were merged with the distance and dummy variables to obtain a panel

data with 515 observations that cover ten years period from 1989 to 1998. Each data in the panel

represent a relationship between a pair of countries divided into two categories: importer and

exporter, at a point in time (year). Following the recommendation in WTO (2016, p.19) and

Plummer (2011, p.88) in order to increase the accuracy of our result, we added a set of fixed

importer and fixed exporter effects also known as the Multilateral Trade Resistance72 variables in

our model.

72 Recent theoretical work on the gravity equation has emphasized that bilateral trade is not only a function of distance

between the two countries, but also the distance of the pair from other countries. Anderson and van Wincoop (2003)

have coined the term “multilateral trade resistance” to denote the distance between the pair vis-à-vis the rest of the

world: the higher the multilateral resistance, the more the pair of countries should trade with each other and vice versa.

(Plummer, 2011; p.88)

133

Results and interpretation

We estimated our gravity model using an OLS regression method and the results are given

in Table (6.3). Although we incorporated Multilateral Trade Resistance effect through the

importer and exporter fixed effects in the model, we only discuss and present the results on the

size, distance, trade frictions dummies and policy variables (i.e., AFTA and ASEAN-4). With an

R-squared value of 0.930, we can safely say that the model represents a relevant relationship

between the chosen variables. The R-squared value remained unchanged with the three different

regressions that we ran. Indeed, since the regional integration variables AFTA and ASEAN-4 are

competing variables, we decided to estimate our model separately with each of the variables at a

time. Thus, in total, we ran three different regressions, one without ASEAN-4, the second with

ASEAN-4 but without AFTA, and the third includes both of them. In all the three regression, the

estimates for the GDP and distance are statistically significant and of the expected signs. The

GDP coefficients which represent country size effects are positive with a value of about 0.54 for

LogGDPimporter and 0.4 LogGDPexporter. As mentioned earlier, the coefficients of log

variables can be interpreted as elasticities; thus, these coefficients imply that an increase 1.0%

increase in the importer or the exporter’s GDP is likely to increase bilateral flows at 0.54% in the

first case and 0.4% in the latter. Similarly, the coefficient of distance is negative as expected and

statistically significant. It also can be interpreted directly as elasticities that is a 1.0% increase in

the distance between the two countries cuts their trade at about 0.4%.

Regarding the dummy variables, some results are surprising such as the negative signs of

the coefficients for contiguous border, colony, and common language. However, in the case of

the ASEAN-4 particularly between 1989 and 1998, these results imply that most of their trade

took place with larger and relatively distant countries, i.e., outside of the regional bloc. However,

in our sample, the fact of having the same colonizer seem to have a significant and positive impact

on bilateral trade. This can be explained by the fact that countries with the same colonizers have

inherited the same economic and judicial institutions, thereby reducing transactions and

informational costs. Lastly, in our sample, common language has a non-significant and somehow

negative effect which can be good news for culturally diverse regional blocs such as in Sub-

Saharan Africa. However, this result is likely caused by the small size of our sample which

excludes a large part of the world.

With regards to the regional policy variables, the estimates are statistically not significant

in all the three regressions. However, both the AFTA and ASEAN-4 have had a positive impact

134

on the ASEAN-4’ trade during the period of acceleration. Overall, the fact of belonging to the

ASEAN regional integration has been more critical with coefficients (0.123 and 0.114) higher

than those of the AFTA (0.0633 and 0.0107). These coefficients can be transformed to elasticities

using the formula exp(a)-1 (where a represents the coefficients). Thus, our results in Table 6.3

below show that AFTA increased bilateral trade at about 6% and the ASEAN at about 13%. The

small size of our sample and the short period considered here cannot fully capture the long-term

effects of the ASEAN regional integration and the AFTA in particular. Moreover, the gravity

model alone is not enough to understand the real impact of regional integration on trade and

economic growth. Indeed, in the ASEAN case, the regional arrangement has played an indirect a

supporting role throughout some regional policies and cross-regional investment projects.

135

Table 6.3 Linear regression results

(1) (2) (3)

VARIABLES Logimports Logimports Logimports

LogGDPimporter 0.544*** 0.541*** 0.541***

(0.112) (0.111) (0.112)

LogGDPexporter 0.318*** 0.512*** 0.322*

(0.0940) (0.0511) (0.165)

Logdistance -0.454*** -0.423*** -0.423***

(0.0723) (0.0931) (0.0931)

Contiguous_border -0.335** -0.335** -0.335**

(0.132) (0.133) (0.133)

comlang_off -0.0497 -0.0491 -0.0489

(0.0732) (0.0737) (0.0737)

colony -0.645*** -0.632*** -0.632***

(0.104) (0.108) (0.109)

comcol 0.939*** 0.977*** 0.976***

(0.136) (0.159) (0.159)

afta 0.0633 0.0107

(0.158) (0.198)

ASEAN4 0.123 0.114

(0.218) (0.273)

Constant 3.826

(3.855)

-2.605

(3.756)

3.447

(5.168)

Observations 515 515 515

R-squared 0.930 0.930 0.930

Robust standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

136


The current international economic environment has nearly nothing to do with what it was

in the past century. Indeed, not only the fast technological progress but also the rapid and

continuous change in international economic and political power balance have drawn a new

picture of international political and economic relations. Economically, the new century has been

so far characterized by the succession of financial crises that led to the current recession. Although

most of the developing economies are recovering faster, it is on the backdrop of decreasing global

trade, slower pace of industrialization and an increasing income gap between the very poor and

the prosperous countries. However, amidst these murky global economic prospects, the East

Asian regions show a surprising contrast. Indeed, the developing countries of Southeast and South

Asia are exhibiting a robust and sustained economic growth. Therefore, this part of the world has

grabbed much of the attention of experts in recent years. In this paper, we have chosen to analyze

the Southeast Asian structural transformation process. Indeed, not only has the countries of the

ASEAN been growing at a fast and sustained pace but they also distinguish themselves from the

other developing countries with the particularity that they belong to the same regional bloc. Thus,

we tried in this paper to bring our contribution to comprehending the mechanism behind regional

integration, rapid economic growth, and structural transformation.

Our analysis was divided into three steps; the first was to find the evidence of growth

acceleration among the ASEAN countries and identify its timing. Not only had we found that

growth acceleration occurred after the creation of the ASEAN, but it happened at the same period

(1989-1995) for the ASEAN’s founding members except for the Philippines (ASEAN-4). This

period also coincided with when the AFTA has been created. The second step was to confirm the

occurrence of a structural transformation that boosted economic growth. Following the labor

productivity growth decomposition model in Diao et al. (2017), we have identified two main

patterns. First, productivity gains from structural change have been more important during the

acceleration period than before. Second, this structural change has been accompanied by

increasing productivity in the modern sector compared to the period before acceleration. These

two findings are consistent with the general observation that the ASEAN countries’ rapid

development is the result of the rapid expansion of the manufacturing sector. Consequently, the

third and last step in our analysis of the ASEAN rapid development aimed at explaining how

important regional integration in this transformation process was. Our findings suggest, by

looking at the figures of trade flows during the post-acceleration period 1989-1998 between the

ASEAN-4 and their major partners China, Japan, Korea and the USA, a positive correlation

between the creation of AFTA and trade growth. Indeed, figure 3.1 shows that intra-ASEAN and

137

extra-ASEAN trade flows have almost tripled in the period after the launch of the AFTA.

Moreover, our estimation of a gravity equation model revealed that although statistically not

significant the AFTA and ASEAN-4 policy variables have contributed positively to trade growth

at an average proportion of 6 and 13% respectively.

In light of these findings, we can safely state that regional integration did not have an

adverse impact on the economic performance of these countries, both in their extra-regional and

intra-regional trade performances. However, asserting the positive impact of the AFTA or the

ASEAN as regional arrangement on its member countries is difficult. Indeed, the gravity model

estimation and quantitative statistics alone are insufficient to explain the positive effect of the

ASEAN integration particularly in boosting extra-regional trade. Firstly, because, the mechanism

through which regional integration and regional policies impact on economic growth is not

straightforward and is more complex. Secondly, regional integration in the case of the ASEAN

may have played a more significant role in areas such as institution and capacity building,

infrastructure and human capital accumulation which are not fully captured in the gravity model

analysis. However, our findings reinforce the increasing idea that structural transforming

economic growth is crucial if developing countries want to catch-up with their advanced

counterparts. Besides, our results also consolidate some findings suggesting that developing

countries can pool their resources and their market to increase their capacity and their chance to

implement trade and industrialization policies which are the backbone of sustained economic

growth. Thus, we development opportunity from a dynamic and well-honed South-South regional

integration.

As mentioned earlier, this chapter has shown some limits regarding country and period

coverage as well as the gravity model explanatory scope. Indeed, further empirical research is

necessary to have stronger and more detailed evidence on the structural transforming effect of

regional integration. In this regard, as suggested by Plummer et al. (2011), assessing the impact

of regional integration in the developing countries also necessitates a qualitative analysis of

policies, institutions and other more dynamic and non-traditional variables.

138

Chapter 7- Export Products Sophistication and Preferential Trade in the

SADC: Lessons from ASEAN Developmental Regionalism

139

7-1. Introduction

The Association of Southeast Asian Nation (ASEAN) is a group of developing countries

that have managed (or in the process) to escape from the ‘development trap.’ Indeed, the ASEAN

is now widely considered as the most successful project of regionalism in the developing world.

Since the late 1960s, these countries (particularly the ASEAN-5) have been able to sustain high

economic growth and transformed from an agriculture-based to a more diversified manufacturing-

based economy. This rapid growth and structural transformation have been achieved through the

combined process of regional integration and industrialization (CHAPTER 6). In this regard,

several studies confirmed that the ASEAN developmental model relied heavily on the

development and expansion of regional production networks. The regional production networks

expansion in the ASEAN has mainly been fostered by regional initiatives on trade facilitation and

foreign direct investment (FDI) promotion. Moreover, these regional policies focused primarily

on the modern part of the economy such as the agro-industry or manufacturing sector, i.e. the

industrial sector in general. Thus, some scholars refer to the ASEAN model as a “developmental

regionalism,” that is an effort of implementation of development-oriented institutions and policies

at the regional level (Nesadurai, 2003; Soderbaum and Shaw, 2003; Elumbre, 2014). This model

emphasizes the role played by regional initiatives and incentives in the upgrading and

improvement of the sophistication (or technology content) of the export products from the

ASEAN countries.

As discussed in Chapter 2 and 3 this ASEAN model can be analyzed under two theoretical

frameworks: structuralism and industrial policy on the one hand and the South-South integration

perspective on the other. More precisely, the structuralist and industrial policy framework study

the policies and processes of resource reallocation while the South-South integration framework

tries to assess the effectiveness and relevance of such reallocation at a regional level in the

developing countries. Therefore, the ASEAN model can be a benchmark for studying other

regional blocs’ performance and thereby identifying their strengths and the obstacles that they are

facing. In this chapter, we are particularly interested in the comparison between the ASEAN and

the Southern African Development Community (SADC). Similarly to the ASEAN, the SADC

claims to be a development-oriented regional initiative. However, in this regard, the Southern

African countries have been so far outperformed by their Asian counterparts. Thus, the objective

of this study is to empirically investigate the relevance of the ASEAN developmental regionalism

and draw its implications for sustainable growth and structural transformation in the SADC

countries. The question to be addressed is thus, how can the SADC countries achieve structural

140

transformation and industrial upgrading by learning from the ASEAN model of regional trade and

investment policies?

In order to answer this question, our analysis will be divided into two parts; an empirical

assessment and then a policy analysis. The empirics part will first compare and assess the

performance of the ASEAN and SADC using the concepts of trade intensity, export

diversification, and sophistication. We will also perform a comparison of qualitative statistics

between the two regional blocs. Secondly, we will identify the impact of regional policies in the

manufacturing trade patterns of the SADC countries. More precisely, we will assess the impact

of preferential tariffs in fostering export upgrading as suggested by the literature and the ASEAN

experience. Lastly, the policy analysis part will address the main constraints for the SADC

countries in achieving ASEAN-like industrialization and sustainable growth. We will show that

the main difference between the ASEAN and the SADC is the ability to tackle non-tariff barriers

to trade and other market imperfections. Moreover, we will argue that the ASEAN model of

developmental regionalism implies for the SADC group, stronger efforts and more attention paid

to the implementation of regional non-tariff measures and industrial cooperation.

7-2. Defining the ASEAN Model: Developmental Regionalism and South-South Economic

Integration

The term “developmental regionalism” can be simply interpreted as the application, to

broader geographic scope, the region, of Johnson’s (1999) concept of “developmental state.” The

developmental state has been originally used to describe the nature of the political and economic

institution which enabled the East Asian countries, and Japan, in particular, to achieve rapid

industrialization and economic development. The East Asian model has been widely studied by

scholars (Amsden, 1992; Chang and Grabel, 2014; Williams et al. 2014), in order to understand

how industrialization and modern economic growth occur in non-western nations. In short, the

developmental state describes a country where the government is committed to achieving

economic development and thereby intervenes actively in the process of factor accumulation and

resource allocation. Thus, developmental regionalism can be understood as a regional project in

which member states are committed to cooperate for the development of the regional bloc as a

whole. Similarly to the developmental state, developmental regionalism allows proactive

interventions and economic initiatives for accumulation and resource allocation at the regional

level.

141

Nesadurai (2003) conceptualized developmental regionalism by making a distinction

between foreign and domestic owned capital. Indeed, Nesadurai (2003) argues that contrarily to

the traditional open regionalism or resistance to globalization model, developmental regionalism

lies in between by treating foreign and domestic owned capital differently. In the context of

developing countries and more particularly the ASEAN countries, although less developed,

domestic capital plays a greater political role. Thus, for several socio-political reasons, economic

policies have to ensure not to harm the domestic elites’ interest. In the case of the ASEAN, this

distinction has been salient through the regionalization process. According to Nesadurai (2003),

the ASEAN developmental regionalism model nurtured domestic firms through two main

instruments: the expanded regional market generated through inter-state competition, and

temporary protection or privileges for domestic capital in this expanded market. We will analyze

this in detail in a later section but first, let us see the economic rationale behind such development

strategy.

7-2-1. Regional Performances and Characteristics: Qualitative and Quantitative

Comparative Analysis

As both the SADC and the ASEAN are claiming to be development-oriented regional

projects, a comparison of their performances and characteristics is a necessary step to assess and

observe the extent of failure or success of the two regional blocs. Moreover, since we are

specifically interested in structural transformation, our comparison will mainly focus on the index

of diversification and industrialization of the economy. Besides, since this study is about

regionalism, some qualitative comparison of the two regional processes is also inevitable such as

the level of liberalization and the preferential tariffs schemes.

Quantitative analysis

By definition, structural transformation is the process in which production factors are

reallocated from traditional low-productivity (agriculture and primary sector) to modern high-

productivity activities (such as manufacturing and the industrial sector in general). Hence,

structural transformation implies an economic diversification, i.e., an expansion of non-traditional

activities, and technological progress, i.e., an increase in the sophistication of production.

Assessing the structural transformation performances of RIAs will thus lead us to look at different

trade performances indexes such as the export diversification index, export sophistication index

and the technological classification of exported goods.

142

In general, the most commonly used diversification index in the literature is the inverse of

the Herfindahl concentration index (WTO, 2012; Amighini and Sanfilipo, 2014). Thus, indexing

countries by i and sectors by k the Herfindahl index is equal to ℎ𝑖 = ∑ (𝑠𝑘𝑖 )2

𝑘 , where 𝑠𝑘𝑖 is the

share of sector k in country i’s exports or imports. This index measures the extensive margin of

an economy’s exports or in other terms the number of products that it exports. Other variants of

the index combine both the measure of the extensive and intensive73 margins (WTO, 2012; IMF,

2017). However, since we are more interested in a cross-country and inter-regional comparison,

simply comparing the SADC and ASEAN countries’ number of export products and markets is

sufficient and more relevant (see Table 7.1). Thus, Table 7.1 shows for each country of SADC10

and ASEAN, the number of exported products and their destination markets in 2014. The figures

show a huge gap between the two regional blocs. Indeed, as predicted by economic theory and

demonstrated by existing empirical studies, the Southern African economies, which are less

developed on average, are far less diversified compared to their Southeast Asian counterparts. In

total, the ASEAN regional bloc exported 14605 products which are roughly three times as high

as that of the SADC countries which exported only 4485 products in 2014 (Table 7.1). The gap

in the number of destination markets is, however, less pronounced, standing at 553 and 400

respectively for the ASEAN and SADC in 2014. Thus, the level product diversification seems to

be more critical for structural transformation than the number of trade partners.

Beside the diversification index, structural change is also assessed by looking at the quality

of exports in a given country or region (or degree of sophistication of export products). Indeed,

Hausmann et al. (2007) argue that “countries become what they produce” (p.2) and that

specializing in some goods are more conducive to faster economic growth than others. In other

words, there is a strong correlation between an economy’s income level and the unit value of its

export base. More precisely, rich countries are those that produce relatively higher priced products,

that is, products with higher quality and embodying more sophisticated production process

(Hausmann et al., 2007; Amighini and Sanfilipo, 2014; IMF, 2017). Therefore, fast-growing

economies are mostly those that are exporting manufactured goods which tend to have higher unit

value than say primary or resource-based products. Therefore, we expect that the less advanced

SADC regional bloc would specialize in cheaper and less sophisticated exports than the ASEAN

(see also Annex 1 which show our results from previous research). Indeed, Table 7.2 shows the

evolution of the SADC and ASEAN countries’ exports’ technological level by comparing figures

73 The intensive export margin measures the level of concentration or diversification of a country’s export base (IMF,

2017; p.58)

143

from 2000 and 2015 74 . The technological classification considered here follows the most

commonly used OECD’s methodology which consists of 5 categories: high technology, medium

technology, low technology, primary products, and resource-based products. Also, the period

2000 and 2015 were chosen in order to observe the long-term effect of the launching of the SADC

Table 7.1. Export Diversification, in Number of Unit, 2014

Number of Products Number of Markets

Angola 99 25

Botswana 205 21

Madagascar 292 38

Malawi 99 41

Mauritius 415 44

Mozambique 190 40

Namibia 265 40

South Africa 2508 70

Tanzania 218 50

Zambia 194 31

SADC 4485 400

Indonesia 2364 71

Cambodia 422 55

Lao PDR 208 33

Myanmar 335 49

Malaysia 2542 70

Philippines 1384 65

Singapore 2440 69

Thailand 2752 71

Vietnam 2158 70

ASEAN 14605 553

Source: Constructed from World Integrated Trade Solution database (D.S: 2018/01/05)

Here are the observations:

The SADC countries are on average specializing in primary products

(unprocessed goods) and natural resources which represent respectively 57 and 30 percent

of their export in 2015; compared to the ASEAN who has a more balanced distribution

although the high-tech sector seems to dominate with a 30 percent share in 2015 followed

by low-tech manufactures with an average of 23 percent of its members’ exports.

In each regional bloc the most advanced members, South Africa, and Mauritius

in the SADC and Singapore and Malaysia in the ASEAN, are specializing in more

74 The data were obtained from the World Integrated Trade Solution databank

144

sophisticated products. This is consistent with what has been observed in the theoretical

and empirical literature (Amsden, 2001, Hausmann et al., 2007; Salazar-Xirinachs et al.

2014).

On average, the level of export quality and sophistication remained relatively the

same during the period 2000-2015 in both regions; however, we observe a moderate

increase in the high and medium-tech share for the ASEAN and in primary and resource-

based products for the SADC.

Except for Myanmar, the CLMV countries or ASEAN’s least developed

members saw a rapid growth in the share of their manufacture exports since 2000 that is

roughly the period when they join the regional association. This may imply the positive

effect and the effectiveness of the Southeast Asian developmental regionalism model

Table 7.2 Technological classification of export in ASEAN and SADC (2000 and 2015), in

percent

HighTech LowTech MediumTech Primary Resource

Based

2000 2015 2000 2015 2000 2015 2000 2015 2000 2015

Angola 0

0

0

0

0

0

.9

96

10

4

Botswana 1

1

7

2

5

4

1

4

78

9

Namibia 1

6

3

3

1

1

71

69

24

22

Tanzania 1

0

4

4

1

1

69

54

25

40

South Africa 3

2

12

4

21

25

28

25

37

43

Madagascar 0

0

38

23

1

2

49

6

11

15

Mozambique 1

0

2

2

7

1

69

67

2

29

Mauritius 2

3

61

36

5

11

9

7

24

44

Malawi 0

0

4

3

0

1

88

86

7

9

Zambia 1

0

6

1

3

3

7

88

21

8

SADC 1

1

13

7

4

5

56

57

26

30

Cambodia 0

4

9

84

1

5

2

6

7

2

Indonesia 13

1

27

25

13

2

21

20

26

25

Lao PDR 0

11

3

7

2

5

11

51

38

26

Malaysia 63

59

9

9

14

13

5

7

9

13

Myanmar 1

1

42

19

1

5

27

30

3

44

Philippines 74

65

1

8

7

12

4

6

5

10

Singapore 62

44

6

6

13

17

2

2

18

31

Thailand 37

33

2

13

17

3

1

7

16

17

Vietnam 3

4

39

35

6

9

47

12

6

5

ASEAN 28

30

30

23

10

13

14

16

17

19

Source: Constructed from World Integrated Trade Solution (D.S: 2018/01/05)

145

Qualitative analysis

The most common qualitative assessment of RIAs is the analysis of the evolution of

different tariff rates. Therefore, since we are interested in the structural change effect of S-S trade

agreements, we will focus on preferential and effectively applied tariffs on two group of products:

agriculture (traditional sector) and manufactures (modern sector)75. Focusing on agricultural and

manufactured products allows us to observe a possible link between tariff schemes, i.e., the level

of liberalization, and the diversification and sophistication of the economy. The orthodox

economic literature, following Ricardian principles, argues that complete trade liberalization is

the most effective way to achieve high economic growth and a win-win relationship between

nations. Indeed, the traditional economic thinking suggests that free-trade would foster

international division of labor so that countries would export goods that they are producing the

most efficient and imports the other. However, historical data and dynamic analyses have shown

that these assumptions were very simplistic at best. The existence of market imperfections and

non-tariff barriers had among others impeded on the equal distribution of labor and exacerbated

the economic gap between developed and developing countries (Chang, 2002). Moreover,

increasing returns to scale enjoyed by manufactured goods producers and industrialized countries

as opposed to the commodity-based developing countries, has been reinforcing the development

trap in which many Southern countries have yet to escape.

Therefore, it is interesting to compare the trade liberalization process of the SADC and

ASEAN while looking at their economic performances. In doing so, we will compare the tariff

rates on agriculture and manufacture products in the two regional blocs from 1995 to 2015. The

figures represent the weighted average of preferential tariffs and effectively applied tariff (AHS)

reported by the regional bloc members (Figure 7.1 and 7.2). Preferential tariffs are those that are

reported for imports from regional bloc members, and AHS are for imports from the World in

general. Overall, the ASEAN-6 is on average slightly more open than the SADC-10 in 2015. The

average AHS rates for agricultural and manufactured products are respectively 4.81 and 1.94

percent (Figure 7.2) in the ASEAN-6 against 3.4 and 4.7 percent in the SADC-10 (Figure 7.1).

These numbers are consistent with each bloc’s overall export patterns as observed in the previous

section. Indeed, in the ASEAN-6, the manufacturing sector has a lower tariff rate compared to

that of agriculture; whereas in SADC, trade in primary products is relatively more open than in

manufactures.

75 Products were grouped according to the ISIC revisions 3 nomenclature and data were sourced from the Word

integrated trade solution (WITS) website.

146

However, when we look at the preferential rates, the SADC-10 show higher level of

liberalization in both sectors than the ASEAN-6. Indeed, on average, tariffs were removed (Figure

7.1) within the Southern African bloc, whereas some level of protection is still allowed in the

ASEAN-6 (figure 7.2). More interestingly, average preferential rates for manufactured products

is more important in the ASEAN-6. Thus, these figures seem to confirm the view that the

Southeast Asian countries are allowing the use of protectionist measures for industrialization and

developmental objectives. Moreover, given that the ASEAN (created in 1967) is older compared

to the SADC (established in 1992), the pace of liberalization appears to be relatively faster for the

Southern African group. Therefore, the comparison of the evolution of the tariff schemes in the

ASEAN-6 and SADC-10 from 1995 to 2015 suggests that the difference in growth and

industrialization performance is not correlated with the level and pace of trade liberalization. On

the contrary, and as suggested in the literature discussed previously, the Southeast Asian

economies seem to have used instruments of industrial policy such as selective protectionism and

gradual tariff reduction along with other non-tariff policy tools.

These comparative analyses not only showed that the ASEAN-6 have been performing better

than the SADC-10 regarding economic diversification and industrialization but also that they have

done so through an unorthodox path. Indeed, as suggested by the evolution of import tariff

schemes (Figure 7.1 and 7.2), the ASEAN countries liberalized at a slower pace than those of the

SADC and did not entirely open their economy, particularly the manufacturing sector. This may

infer that the Southeast Asian countries are still following the developmental model which led to

the success of their predecessors in the Asian region such as Japan, Taiwan, and South Korea.

Thus, an empirical study on how the SADC preferential agreements have impacted on its

members’ trade and economic structure is a necessary step to identify the shortcomings and to

draw lessons from the ASEAN model.

147

Figure 7.1 Comparison of the Preferential and Effectively Applied Tariffs in the

SADC-10, by Sector, 1995-2015

Source: Calculated from data extracted from the World Integrated Trade System (DS: 2018/01/22)

Figure 7.2 Comparison of the Preferential and Effectively Applied Tariffs in the ASEAN-

6, by Sector, 1995-2015

Source: Calculated from data extracted from the World Integrated Trade System (DS: 2018/01/22)

Agriculture Manufacture Agriculture Manufacture

Pref. SADC-10 AHS: World

1995 1.7 16.38 5.67 20.25

2000 8.4 7.15

2005 0.19 0.63 2.5 6.24

2010 1.06 0.83 6.78 4.94

2015 0 0 3.4 4.7

0

5

10

15

20

25 %Tariffs SADC-10

Agriculture Manufacture Agriculture Manufacture

Pref. ASEAN6 AHS: World

1995 2.28 4.14 8.29 8.45

2000 38.54 11.28 8.32 4.04

2005 0.61 1.32 3.79 3.71

2010 0.09 0.23 4.28 2.88

2015 0.92 1.05 4.81 1.94

05

1015202530354045

%

Tariffs ASEAN-6

148

7-2-2. Assessing the Structural Transformation Effect in a South-South Preferential Trade

Agreements: Empirical Model

Our precedent analyses suggested that what matters for structural transformation or

industrialization in S-S economic relationship is not simply trade expansion but its preferential

treatment in favor of the participants. This is particularly relevant when we compare the economic

performance of the Southeast Asian and the Southern African countries. In this regard, Okabe

and Urata (2013) observed that the creation of the AFTA and the implementation of the Common

Effective Preferential Tariffs (CEPT) have resulted in the rapid growth of intra-ASEAN imports

in electrical machinery and automobile parts (p.23). They found that the AFTA have promoted

the creation of regional production networks in capital goods (such as equipment and machinery)

and intermediate goods (such as auto parts and components). Moreover, Urata (2011) reports that

preferential tariff reductions on transportation machinery have had the largest trade creation effect

because these latter76 are subject to high effective tariff rates in general.

These findings are consistent with an earlier conclusion reached by Klinger (2009) arguing

that S-S trade can be the testing ground for structural transformation. In his study, Klinger (2009)

found that although the “Northbound” exports (exports to the developed countries) played a

significant role in driving structural transformation in fast-growing economies, they have

reinforced the status quo in the low-performing countries in Africa and Latin America. Indeed,

for this latter, Northbound export baskets, which includes mainly raw material and unprocessed

products, show a lower level of sophistication and connectedness77 compared to Southbound

exports. However, Klinger (2009) pointed that although exporting to the developed countries is

what drives economic transformation in the long-run, S-S trade can be a stepping stone through

which developing countries would build their manufacturing capabilities and eventually upgrade

their Northbound exports (Klinger, 2009). In other words, these findings suggest that S-S trade

can be strategically used as an industrialization platform.

As discussed and demonstrated previously, the ASEAN, as a regional bloc, contributed to

the structural transformation of its original members, and more recently of the Philippines and

Vietnam, through the expansion of regional imports and production networks in machinery,

electronic goods, and auto parts. The ASEAN experience is, therefore, evidence of the

76 Transportation machinery 77The learning potential to enable economic diversification. Connectedness refers to the fact that some products have

relatively similar inputs and factor of productions so that they have high learning spillover which will facilitate

production upgrading and the reallocation of resources. An example of highly connected industries is computer monitor

and flat-screen TVs. (Klinger, 2009; p.4)

149

industrialization effect of well-oriented S-S regional cooperation. In this regard, two studies were

undertaken by Sanguinetti and Siedschlag (2010), and Moncarz et al. (2011) explored the effect

of preferential tariff reduction or elimination between developing countries on industrial

development. Their analysis focused on the MERCOSUR and generally found that S-S PTAs can

promote labor-intensive manufacturing activities in countries with intermediate revealed

comparative advantage 78 (such as Brazil) but at the expense of smaller and less efficient

participants. However, the significance of the cost of industrialization depends on several

parameters such as country-size differences, agglomeration forces intensity and the existence or

not of a compensation mechanism. In other words, costs can be reduced with the right regional

policy of redistribution, infrastructure investments or capacity building.

Thus, it would be interesting to apply a similar analysis to the SADC countries and assess

the effect of PTA on their manufacturing activities. The result of such analysis will enable us to

identify the main obstacles which may prevent the Southern African countries from achieving the

same level of economic growth and industrialization as the ASEAN. In doing so, we will follow

the empirical model developed by Moncarz et al. (2011) who observed the effects of preferential

trade agreement on the industrialization of the MERCOSUR members. We believe that this is the

first attempt in applying such an empirical method for analyzing the industrialization impact of

regional integration in the SADC. This model will assess the contribution of revealed comparative

advantage (RCA), country size (GDP), product sophistication (PRODY) and preferential tariffs

on intra-regional trade intensity (ti).

The Model: Theoretical Framework

According to the literature on trade, a country’s export structure can be analyzed and assessed

with two main indicators: the revealed comparative advantage (RCA) and the product

sophistication (PRODY) from which we can calculate the overall export sophistication (EXPY).

For instance, the traditional trade theory suggests that economies should specialize in products in

which they enjoy high RCA, that is technology-intensive products (high PRODY) for the

developed countries, and less sophisticated (low PRODY) products for the developing countries.

Thus, these two indicators are useful tools not only to determine the economic structure but also

to understand the mechanism behind the transformation or stagnation of a country or group of

countries.

78 A revealed comparative advantage that is inferior to the rest of the world but superior to other members of the RIA.

150

Since we are particularly interested in studying the impact of preferential trade agreement on

the participating countries, we will follow the empirical strategy proposed in Moncarz et al.

(2011) in which they assessed the influence of three explanatory variables: preferential margin,

revealed comparative advantage and revealed technology content, on trade intensity (ti)

(11) The trade intensity index which represents the importance of intra-regional export in

each country’s export bundles is written as:

𝑡𝑖 =𝑥𝑔,𝑐,,𝑝,𝑡

𝑥𝑐,𝑝,𝑡−

𝑥𝑔,𝑐,≠𝑝,𝑡

𝑥𝑐,≠𝑝,𝑡

Which is the export share of good g by country c to the preferential partners minus the export

share of good g to the non-preferential partners or the rest of the world (ROW). A positive number

would mean that the preferential market is more important than the rest of the world for country

c’s export of good g while a negative sign would mean the opposite.

(12) Preferential margin 𝑃𝑟𝑒𝑓𝑔,𝑝,𝑡 =𝑡𝑔,𝑝,𝑡𝐴𝐻𝑆 − 𝑡𝑔,𝑝,𝑡

𝑝 which is the preference margin received

from country of the SADC-10 on exports of good g measured as the difference between the two

tariffs, MFN and PTA. Note that the tariff figures here are the average import tariffs reported for

all the SADC-10 rather than for individual partners as in Moncarz et al.(2011).

(13) Revealed Comparative advantage 𝑅𝐶𝐴𝑔𝑐 =

𝑋𝑔𝑐/𝑋𝑐

𝑋𝑔 /𝑋 where 𝑋𝑔

𝑐 is country c’s export of

good g, 𝑋𝑐 = ∑ 𝑋𝑔𝑐

𝑔 its total exports, 𝑋𝑔 = ∑ 𝑋𝑔𝑐

𝑐 world export of good g and 𝑋 = ∑ ∑ 𝑋𝑔𝑐

𝑔𝑖

total world exports.

(14) Revealed technology content 𝑃𝑅𝑂𝐷𝑌𝑔 = ∑ 𝑅𝐶𝐴𝑔𝑐 𝑌𝑐

𝑔 (WTO, 2012), where 𝑌𝑐 is the

GDP per capita of country c.

The objective here is to analyze the role played by preferential tariffs on the export and

production patterns of the SADC members. Therefore, the equation of the model is written as

follow:

151

𝑡𝑖𝑔,𝑝,𝑡 = 𝛽1𝑅𝐶𝐴𝑔,𝑡 + 𝛽2𝑃𝑅𝑂𝐷𝑌𝑔,𝑡 + 𝛽3𝑃𝑟𝑒𝑓𝑔,𝑝,𝑡 + 𝛽1,3𝑅𝐶𝐴𝑔,𝑡 × 𝑃𝑟𝑒𝑓𝑔,𝑝,𝑡 + β2,3𝑃𝑅𝑂𝐷𝑌𝑔,𝑡

× 𝑃𝑟𝑒𝑓𝑔,𝑝,𝑡 + 𝛼𝑔 + 𝛼𝑡 + 𝜇𝑔,𝑝,𝑡

In this model, the signs of the coefficients of the interaction variables, i.e. 𝛽1,3 𝑎𝑛𝑑 β2,3

allow us to determine whether preferential tariffs promoted the exports of goods with high RCA

(β1,3>0), or the exports of more sophisticated goods (β2,3>0), or both. According to Moncarz et al.

(2011), three theoretical hypotheses may explain the outcome of the estimation of this model. The

first hypothesis is drawn from Cooper and Massell’s (1965) theory of regional integration as an

industrial policy instrument. The C&M effect is observed if preferential tariffs have fostered the

export of highly sophisticated goods over time. In other words, the industrialization effect of an

RTA is observed in our model if β2,3>0.

The second interpretation that can be made from the model is on the distance of each member

from international technology frontier. Indeed, Moncarz et al. (2011) report that Venables (2003)

suggests that S-S preferential treatment would benefit more to the members which are

technologically closer to the ROW’s standard at the expense of those countries that are at the

extreme of the distribution. More precisely, preferences will enable the country with intermediate

comparative advantage to export in the regional marker more sophisticated goods in which it has

a low RCA (β1,3<0 and β2,3>0). On the other hand, not only will preference reinforce the status

quo in the export of the countries with extreme RCA but it will divert their imports of high

PRODY goods to the less efficient members at a higher cost (β1,3>0 and β2,3<0).

The third and last interpretation refers to Grossman and Helpman (1995) who argue that free

trade area is only viable by excluding products on which trade creation are expected. Therefore,

on overall, members of an FTA tend to exchange trade diverting goods (β1<0 and β1,3<0). In this

scenario, members of FTA will trade goods in which they do not have strong RCA.

Data Description

For a better comparative analysis concern, we chose to restrict our study on only five SADC

countries rather than the ten countries considered so far. The reason is that we wanted our

observations to be as relevant as possible for comparison with the ASEAN countries. Therefore,

we chose Botswana, Mauritius, Namibia, South Africa and Tanzania for the data availability,

152

their membership longevity79 , relative economic importance in the regional bloc, and most

importantly for the dynamism of their economy reflected by the level of diversification (see Table

7.3). The period considered here spans from 2005 to 2015, where the SADC FTA has been in

force since 18th August 2008 with a phased programme of tariff reduction starting from 2001

(Sandrey, 2013). Furthermore, rather than calculating bilateral data between the five countries

cited above, all data on preferential tariffs and intra-regional exports were pooled by considering

the SADC-10 as the preferential partner. Non-preferential partner is the rest of the world (ROW).

Data for trade intensity (ti) was obtained from the COMTRADE database through the world

integrated trade system (WITS). We chose to limit our analysis on seven range of products under

the ISIC revision 3 nomenclature system 80 (see Appendix A.5), namely: Agriculture, food

products, other mineral and quarrying, textiles, electrical machinery, equipment, and vehicles.

These seven products encompass most of the exports of the SADC countries while allowing an

overview of the long-term impact of RTA on the traditional and modern sectors. We voluntarily

excluded the petroleum products to eliminate problems of overrepresentation (in the South

African case) and facilitate our cross-country observation of structural changes.

Data on comparative advantage RCA as well as the GDP per capita figures used to calculate

the PRODY index were sourced from the World Bank database.

Lastly, data on preferential and Most-favored nation (MFN) tariffs were obtained on

TRAINS through the WITS platform.

Results and Discussion

As discussed earlier the main objective of our test is to verify whether preferential tariffs

that is a membership to FTA has been a significant factor in promoting industrialization and

structural transformation in the SADC countries. As demonstrated previously, FTA and regional

integration have played a crucial role in the economic growth and development of the ASEAN

members (mainly Indonesia, Malaysia, Singapore, and Thailand but Philippines and Vietnam

joined the trend since the mid-2000s). Therefore, in order to make a comparison and draw some

policy implications on S-S regionalism, the empirical test is important for identifying the factor

79 This is because some countries joined the SADC only recently and therefore do not allow sufficient time span to

appreciate the long-term impact preferential tariffs. 80 Namely: Agriculture (1), other mining and quarrying (14), Manufacture of food and beverages (15), Manufacture of

textiles (17), Manufacture of machinery and equipment (29), Manufacture of electrical machinery and apparatus (31),

and Manufacture of motor vehicles (35).

153

of differences between the two regional blocs regarding the long-term impact of regional trade

integration. In principle, we expect our result to confirm our preliminary observations that

conversely to AFTA, the SADC FTA performed poorly in the promotion of industrialization and

structural change among the participating countries.

Overall, with an R-squared superior to 0.5 for each of our five regressions, we can say that

the model represents a relevant relationship between the dependent variables ti and the other

explanatory variables. Moreover, the marginal effect of preferential tariffs on trade intensity (See

appendix, A.2) 𝜕𝑡𝑖𝑔,𝑝,𝑡

𝜕𝑃𝑟𝑒𝑓𝑔,𝑝,𝑡 appears to be positive although not significantly81 for the entire dataset.

In other words, preferential tariffs seem to have a moderately promoted intra-regional trade. This

is consistent with what has been observed in the descriptive statistics in previous sections.

However, for South Africa, preferential tariffs seem to impact negatively on its export to the

SADC trade bloc with a negative and significant coefficient β3<0 as shown in the table below.

Regarding the effect of PTA on industrialization and export patterns, our results show that,

except for South Africa, preferential tariffs had a negative but not significant impact on the other

countries (i.e. β2,3<0 except for SA82). This observation is similar to Moncarz et al.’s (2011) results

which showed that the MERCOSUR benefited to Brazil’s manufacturing export at the expense of

other members. Therefore, although not statistically significant, following the C&M theory, our

result implies that South Africa may use regionalism as an industrial policy tool.

Interestingly, our coefficient on RCA (β1) shows negative signs for Botswana and

Mauritius which means that they are facing high non-tariff barriers from other SADC countries

on products in which they have a strong comparative advantage. For instance, Botswana’s exports

consist predominantly of minerals and quarrying products including diamonds which compete

with the exports from other members such as South Africa and Namibia (AFDB, 2016). For

Mauritius, its low tech manufacture exports such as textiles and processed food products compete

with exports from Madagascar or Swaziland among other (AFDB, 2016). Furthermore, with a

negative β1 and β2,3, Mauritius tends to suffer from trade diversion in non-sophisticated exports

within the trade bloc.

Regarding Venables’ arguments on factor endowment distribution, our test shows that

while Botswana and Namibia’s exports are non-sophisticated products (β2,3<0) with strong

comparative advantage (β1,3>0), preferential tariffs encourage, South Africa’s exports in high

81 The information and data on this matter are available on demand. 82 South Africa

154

PRODY products. In other words, Botswana and Namibia are standing farther from the

technology frontier compared to South Africa. Also, preferential tariffs reinforce the status quo

for the formers. For Mauritius and Tanzania, the SADC regional bloc seems to apply strong non-

tariff barriers on their export of manufacturing products and on the product they have a strong

comparative advantage.

Therefore, these results suggest that except for South Africa and to a lesser extent Namibia,

the SADC integration reinforces trade diversion effect particularly in non-sophisticated products

such as agricultural and resource-based products. Moreover, since most of the SADC countries

exhibit a relatively similar comparative advantage, preferential tariffs tend to result in higher non-

tariffs barriers to trade. Consequently, although the marginal effect of PTA among the SADC

countries has not been negative, the SADC FTA did not lead to more diversified and more

sophisticated exports within the region compared to what has occurred within the ASEAN

regional bloc.

Table 7.3 Regression results

(Botswana) (Mauritius) (Namibia) (South Africa) (Tanzania)

VARIABLES ti83 ti ti ti ti

lnRCA(β1) -0.00351 -0.000414 0.0117 0.00937 0.00782

(0.0308) (0.0279) (0.0303) (0.0321) (0.0344)

lnPRODY(β2) 1.515 -0.456 0.744 0.0713 -0.802**

(1.154) (0.301) (0.885) (0.210) (0.366)

Pref(β3) 0.140 0.162 0.184 -0.125* 0.0451

(0.302) (0.117) (0.224) (0.0730) (0.154)

ln(RCA)*Pref(β1,3) 0.000180 -4.52e-05 0.000372 0.000778 -0.000152

(0.00198) (0.00128) (0.00293) (0.000785) (0.000892)

ln(PRODY)*Pref(β2,3) -0.0146 -0.0155 -0.0209 0.0120 -0.00467

(0.0296) (0.0120) (0.0238) (0.00759) (0.0157)

Constant -15.40 4.619 -6.662 -0.621 8.397**

(11.85) (3.057) (8.100) (2.152) (3.783)

Observations 75 75 75 75 75

R-squared 0.845 0.892 0.547 0.886 0.876

Robust standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

83 ti is the dependent variable Trade intensity which measure the level of intra-regional trade compared to the ROW.

Mathematically, it is the difference between intra-regional export and export to the ROW.

155

However, it is important to note that this does not suggest that the SADC FTA has been a

failure and should be abandoned. The positive effect on South Africa’s industrial exports

demonstrates that there are possibilities for industrial learning and expansion within the regional

bloc. The main issues to be addressed, such as infrastructure investments to enhance regional

connectivity, education and capacity building, removal of non-tariff barriers, industrial

cooperation, are political. This leads us to the next section to discuss the implications of the

ASEAN developmental regionalism in addressing the obstacles on structural change within the

SADC regional bloc.

7-3. Implication of the ASEAN Model for Long-term Growth of the SADC Regions

As discussed in previous sections, there are economic arguments in favor of S-S regionalism

as an instrument of structural change and economic development in developing countries.

Empirical studies performed on ASEAN countries revealed the positive role played by RTAs in

poverty reduction and economic diversification (Chapter 6; Amelia, 2017). In this regard, the

ASEAN model provides the missing empirical evidence to support the economic rationale for S-

S economic integration. Moreover, comparative analysis between ASEAN and SADC

regionalism stressed that the Southeast Asian initiative differed from its Southern African

counterparts in two main points. First, the pace of economic liberalization has been gradual and

slower compared to the SADC given their year of establishment. The second point, which is

related to the first, is that the ASEAN regionalism goes beyond the traditional static and short-

term economic debates and address more dynamic issues related to long-term growth and

industrial upgrading. Indeed, as we have observed for the SADC countries, the main constraints

to economic diversification and industrialization in a South-South trade setting are non-economic.

For instance, they include constraints such as non-tariff barriers and other market shortcomings

that can only be addressed through proactive policymaking. This is where the ASEAN model,

which embodies a 21st-century version of the so-called East Asian model, can provide interesting

lessons for the development of the SADC countries. Therefore, let us highlight some of the

characteristics and achievements of the ASEAN concerning developmental regionalism.

156

7-3-1. ASEAN Developmental Regionalism: The State-Market Nexus

Comparatively, the ASEAN benefited from more experiences than its Southern African

counterpart since it has been established earlier (August 1967). Accordingly, it went through long

processes of trials and errors regarding policymaking and institution building. However, as shown

in previous sections, SADC’s economic integration process has been faster or at least at the same

pace as the ASEAN. For instance, despite being launched in 1992 the AFTA only achieved to

reduce tariffs to between 0–5% among the original members by 2008 (Okabe and Urata, 2013),

while the SADC FTA 84 achieved the maximum requirement of zero tariff duty among the

participating countries85 by 2007 for the SACU86 countries and by 2012 for the others. Moreover,

the regional institution of the ASEAN is much less bureaucratic than the SADC which has several

hierarchical ramifications and subdivisions.

However, the determining characteristics which set the ASEAN apart are related to the

particular dynamics existing between the domestic-oriented States and the Multinational

corporations MNCs (Yoshimatsu, 2002). Indeed, Yoshimatsu (2002) argues that it was this

particular interplay between seemingly diverging interests that shaped the regional development

of the ASEAN (particularly the ASEAN-5). In other words, while “authoritarian” Southeast Asian

governments prioritized national interests, they had to acknowledge the importance of the MNCs

as essential resources to promote industrial development and economic diversification. Hence,

the ASEAN regionalism has been primarily an instrument to reconcile the economic development

priorities of the Southeast Asian nation-states with the efficiency and profit-seeking goals of

foreign investors. The ASEAN regional initiatives were principally aimed at providing an ideal

environment for the expansion of industrial activities across the region. In other words, the

ASEAN developmental regionalism consisted primarily of industrial policy initiatives. In doing

so, the ASEAN states did not hesitate to intervene in order to correct the failure of the market in

allocating the resources necessary for industrialization and structural transformation (Jomo, 2002;

Ohno, 2003).

7-3-2. Industrial Policy and Regional Integration

It is widely recognized that the East Asian countries’ economic dynamism has been

sustained by trade and investment in the manufacturing sectors. However, while the first tiers East

Asian countries (e.g., Japan, South Korea, and Taiwan) relied heavily on domestic capitals, FDI

84 The SADC protocol on trade was passed in 24th of August 1996 (SADC website, 2012) 85 According to the last update on the SADC website, Angola and the Democratic Republic of Congo are still outside

the FTA and 13 out of the 15 SADC countries are inside (SADC, 2012) 86 Southern African Customs Union

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played a crucial role in leading the industrialization in the ASEAN regional bloc. Therefore,

various initiatives have been implemented in the ASEAN to attract FDI and enable technology

and knowledge transfer in the process. In this regard, unlike the SADC, the ASEAN regional

integration process mobilized numerous political and institutional resources than simple tariff

liberalization. Indeed, regional initiatives in the Southeast Asian regional bloc aimed particularly

at correcting market failures associated with scale economies and technological dynamism

through tariff sequencing, technology transfer requirement, public research and development,

joint ventures.

Notable examples demonstrating the policymaking role of the ASEAN were the

implementation of the Brand-to-Brand complementation BBC scheme (October 1988) and the

ASEAN Industrial Cooperation AICO (September 1995). Although these two policy measures

were the result of MNCs lobbying for deeper economic integration to benefit from lower

production costs and larger market size, they still had to comply with sets of rules imposed by the

ASEAN states. Thus, in order to benefit from the 50 percent tariff margin and local content

accreditation under the BBC scheme, companies were required to locate their production plants

in ASEAN countries. This scheme, although still modest, was the first successful industrial

cooperation within the regional bloc. According to Yoshimatsu (2002), the BBC scheme resulted

in substantial increases in the activities of Japanese automakers such as Toyota which increased

its transaction value of parts and components within the ASEAN from 1.6 billion yen in 1992 to

15.5 billion yen in 1995 (p.131). This period corresponds to the period of the second wave of

economic growth acceleration in the original ASEAN members except for the Philippines where

steady growth acceleration occurred in a later period in the 2010s.

However, with increasing criticisms and demand for reforms of the BBC scheme from both

local and other foreign companies, particularly in the manufacturing sector, the ASEAN came up

with a new proposal of industrial cooperation, the AICO, in 1995. This new regime of industrial

cooperation integrated more activities in the manufacturing sector in addition to the existing

automobile assembly. In this regard, auto parts manufacturers such as Japan’s largest auto parts

manufacturer Denso strongly lobbied for the opening of the BBC scheme to other manufacturers.

Consequently, the AICO scheme replaced the BBC scheme after the ASEAN Economic Ministers

(AEM) meeting in Singapore in April 1996 (Yoshimatsu, 2002). The AICO initially granted the

participants a tariff preference between 0-5 percent, local content accreditation, and other non-

tariff incentives. However, the beneficiaries had to agree to some requirements such as a

minimum 30 percent ASEAN national equity, and willing to undertake resource pooling,

industrial complementation, industrial cooperation activities, and the participation of at least two

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companies in two different ASEAN countries. Initially, the new scheme faced some problems

caused by administrative issues and investors’ skepticism about the requirements, particularly the

30 percent national equity clause. However, in the aftermath of the Asian financial crisis, under

the pressure of the MNCs, the ASEAN countries accepted to relax several of original criterions.

Thus, the 30 percent national equity condition was suspended during the period 1999-2000, and

AICO application was opened to foreign companies that are not registered in any ASEAN

countries. Moreover, administratively, the ASEAN plays the role of a one-stop-shop where

companies submitted their application documents instead of to each ASEAN state authority as

previously. As a result, the number of applications to AICO increased from 17 in 1997 to 89 in

2000 (Yoshimatsu, 2002; p.138).

These examples show that not only has the ASEAN countries been using the regional

platform to promote industrialization but also to negotiate and share information with the private

sector. Besides the neutral macroeconomic measures such as tariff elimination, the ASEAN

countries have been proactive in monitoring, correcting, and orienting the market to serve their

ultimate objective of industrialization and economic diversification. Therefore, conversely to the

SADC, the ASEAN policies allowed its members to upgrade their export product sophistication

without sacrificing their competitiveness on traditional products in which they have strong

comparative advantages. The cooperation scheme gave enough room to the countries to pursue

their national goals as well as to remain attractive and integrated to the world market.

7-3-3. Regional Imbalances and Catching-Up Process

While the economic diversity and imbalances between the SADC members impacted the

regionalization process by reinforcing the status quo, the ASEAN regionalism has been promoting

the catching-up process of its less developed members namely the CLMV countries. In this regard,

Amelia (2017) reports that poverty rates are now lower than the LDCs average in Laos and

Cambodia. According to Amelia (2017), notable examples are Vietnam moving from low-income

to lower-middle income in 2008 and Lao PDR in 2010. Therefore, although regional imbalances

between the advanced and less-advanced ASEAN members are still significant, the progress from

the latter is observable. Experts attribute this progress to the deepening of regional integration

which has been driven by the expansion of production networks (Kuroiwa, 2008; Ohno, 2010;

Amelia 2017).

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Kuroiwa (2008) notes that as with the situation in latecomer countries of the 21st century,

the CLMV countries are facing dual obstacles to industrial policy implementation: the shrinking

policy space due to the strengthening globalization and the weak institutional capability of the

state. Indeed, while the progress of globalization results in more restriction on the prerogative of

the state in intervening on the market, weak institutional capabilities are increasing the risk of

failure and thereby the costs of state intervention. This explains why selective industrial policies

such as in the 20th century Northeast Asian countries are rare if not absent among today’s

developing countries. However, this is where the ASEAN regional bloc played a pivotal role in

the development of the CLMV countries.

As demonstrated previously, while the SADC regional economic integration process

directly focused on trade liberalization, the ASEAN has addressed other non-tariff and non-

economic obstacles to trade and industrial development. Numerous regional and sub-regional

development programs were implemented in order to reduce costs of production fragmentation

and vertical integration. On the one hand, the integration of the CLMV countries into the ASEAN

and the elimination of tariff and cross-border barriers fostered the relocation of some labor-

intensive industries such as in textile and clothing. These firms could benefit from efficiency gains

by moving their labor-intensive production process in the low wage CLMV countries. This type

of production fragmentation has been facilitated by the integration of geographically close

countries (e.g., Laos and Thailand) and the development of regional core infrastructures such as

the Eastern Seaboard Development Program or the Hanoi-Haiphong transport corridor among

others.

On the other hand, more sophisticated industries which are characterized by increasing

returns to scale (IRS) and are prone to agglomeration effects require more proactive policies.

These industries include medium-technology products such as automobile and electronics which

constitute the bulk of the ASEAN production networks. According to Kuroiwa (2008), these types

of industries are attracted to (1) home market-size; (2) vertical (backward or forward linkages);

(3) hub formation; (4) formation of a specific input market; (5) spillover of technical/information

market. Therefore, among the measures to promote the expansion of the industries mentioned

above are the implementation of economic corridors (e.g. North-South and the Southern economic

corridor), creations of special economic zones (SEZs) in metropolitan areas, border areas and

transport hub such as in Phnom Penh (18 SEZs) or Bavet (Vietnam-Cambodia border area). These

measures have been reinforced by broader regional frameworks under the ASEAN economic

community. Heretofore, the results were that skill-intensive exports have more than doubled in

the Philippines and Vietnam. In Cambodia, manufactures exports increased from 3 to 8 percent.

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7-3-4. Bargaining Power with Public and Private Partners: Geopolitical Implications

Although it is not directly related to economic growth and structural transformation,

another implication of the ASEAN developmental regionalism model is the importance of

bargaining power when negotiating trade and investment deals or cooperation and assistance with

third parties such as MNCs and governments of the OECD countries. Indeed, ASEAN as a S-S

cooperation scheme has understood the benefit of pooling not only productive resources but also

diplomatic capabilities in order to obtain the best outcomes in multilateral negotiations. The

SADC has also been outperformed by the ASEAN in this regard.

Throughout its fifty years of existence, the ASEAN has established itself as an essential

player in the Asia and Pacific regions. The ASEAN managed to cooperate with and bring together

non-member countries that often have competing interests and delicate diplomatic relationships

such as China and Japan. Unlike the SADC, the ASEAN is also very active in seeking trade and

investment partnership with different partners under the ASEAN+ scheme. The ASEAN has

established FTA deals with different dialogue partners such as Australia, China, India, Japan,

South Korea or New Zealand (ASEAN, 2015). Not only does this reflect the increasing regional

weight gained by the Southeast Asian bloc but also results in a better position when it comes to

trade and investment negotiations at the multilateral level.

For instance, this increasing bargaining power enabled the ASEAN countries to sit on the

same table and discuss with rich donor countries such as Japan and obtain her assistance in various

areas such as infrastructure development, capacity building, and public-private partnership among

others. Accordingly, the ASEAN countries have been the largest recipients of Japanese ODA.

Moreover, the ASEAN regional bloc also managed to become the top destination of Japanese FDI

compared to other developing regions in the world; financial flows from other emerging countries

such as China and South Korea are also expanding. The importance of bargaining power has also

been demonstrated by the ability of the ASEAN to negotiate and revise different investment

schemes directly related to specific industries such as the BBC and the AICO for the automobile

sector.

Although regional economic integration often focuses on trade and investment performances,

our comparative analysis of the ASEAN and the SADC showed that trade and investment are not

the only factors at play when it comes to long-term growth and structural transformation. Indeed,

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non-economic factors such as the shift in bargaining power should also be taken into account.


Throughout this study, we have demonstrated the relevance of the ASEAN developmental

model by contrasting its regional integration process with that of the SADC. More precisely, we

compared and analyzed these two regional economic integration projects under the prism of two

complementary theoretical frameworks, namely: the concept of developmental regionalism, and

the South-South economic integration. By combining these two conceptual frameworks, we

aimed to reconcile the political economy with the purely economic perspective in the analysis of

the ASEAN in particular and regional integration in developing countries in general. This strategy

allowed us, on the one hand, to empirically test the structural effects of economic factors such as

preferential tariffs or regional exports; while understanding the final economic outcomes by

analyzing the political and social forces which shaped the resource allocation process on the other.

Therefore, our comparative analysis showed that although South-South trade exhibits the

highest growth rate and higher export sophistication than with the North for both regional blocs,

the overall economic performance of the ASEAN and the SADC has been highly divergent.

Indeed, since the early 1990s (the period of establishment of FTA in both regional bloc) while the

ASEAN countries have seen a consistent increase in the sophistication of their export products,

the SADC countries (except South Africa) have been trapped in their status of resource-based

economies. Indeed, for most of ASEAN members, including the CLMV countries, an

improvement in the share of export of manufactured goods are observed since the 1990s.

Moreover, regarding product and market diversification, the ASEAN is outperforming their

Southern African counterparts. However, while mainstream trade theory would suggest that the

ASEAN has been liberalizing tariffs faster and reduced state intervention to the minimum

compared to the SADC, our study showed a slightly nuanced picture. Indeed, for instance, a close

observation in the evolution of tariff liberalization showed that the SADC economic liberalization

was at a higher pace than the ASEAN, particularly when the year of establishment of both regional

blocs is taken into account.

Thus, in section 4 we performed an empirical test in order to assess the impact of

preferential tariffs on the regional trade patterns of the SADC countries. The objective was to

investigate whether regional economic liberalization promoted export diversification and

improved product sophistication as observed in the ASEAN regional bloc. In doing so, we

adopted a model constructed in Moncarz et al. (2011) which enable the observation of the impact

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of revealed comparative advantages, product sophistication and preferential tariffs in 5 SADC

member countries (Botswana, Mauritius, Namibia, South Africa, and Tanzania) from 2005 to

2015. The main feature of this model is the interaction variables which assess the consequence of

preferential tariffs on regional export patterns. After running the regression on the 75 observations

for each country, the results87, have confirmed our original assumptions. Indeed, the results show

that in general tariff liberalization has had a positive impact on regional trade intensity; however,

a detailed observation of the coefficients shows rather contrasted outcomes between the five

countries. Hence, our regression result shows that the industrialization effect is only valid for

South Africa where regional tariff reduction increased exports of more sophisticated goods. For

Botswana and Namibia, the regional market liberalization only reinforces the status quo, i.e., the

export of non-sophisticated products in which they enjoy a strong comparative advantage. Also,

lastly, for Mauritius and Tanzania, the SADC preferential market result in higher export of low-

tech product and in which they have weaker comparative advantage. In general, these results

imply that SADC exporters are facing high non-tariff barriers to trade, particularly in the

manufacturing products. These non-tariffs trade restrictions not only include quotas on

competitive products but also geographical, political or infrastructural obstacles.

The last section addressed the political economy behind the success of the ASEAN and

drew implications for the SADC countries. Therefore, we argued that the main difference between

the ASEAN and SADC regionalism is the capacity and willingness of the former into tackling

different non-tariff barriers at the regional level. Moreover, governmental entities in the ASEAN

participated actively in shaping the conditions and outcomes of resource allocation. For instance,

the concept of developmental regionalism highlights that the ASEAN states worked actively on

reconciling their national development objectives with the requirements of the markets (e.g.,

foreign companies). We also suggested that the regional production networks in manufacturing

industries were the result of the active involvement of regional resources in the negotiations and

regulations of the terms of trade and investments with the MNCs. Thus, industrial policies were

implemented at the regional level within the ASEAN regional bloc. Concerning economic

development, the ASEAN has put in place different regional programs and initiatives to help the

catching-up process of least developed members. Also, lastly, ASEAN has used its increased

bargaining power to negotiate and implement favorable trade and investment deals with dominant

third parties such as MNCs and countries of the OECD.

87 Although due sample size and data quality the results are not always statistically significant.

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In light of these analyses, we conclude that regional economic integration, particularly in the

developing regions, calls for the consideration of more dynamic and complex processes than

simple market liberalization. Therefore, our comparative study of the ASEAN and the SADC

showed that empirical models should be complemented with deeper political, economic analysis

to understand the difference in economic and developmental performances. In this regard, we

demonstrated that long-term growth and structural transformation in a given regional bloc are not

only explained by market forces but also by other non-market actors and variables. The specificity

of the ASEAN model in particular and the East Asian one, in general, is the acknowledgment of

the importance of the interactions between market and non-market forces to achieve long-term

objectives of growth and structural transformation. Therefore, we argue that the ASEAN

specificity may inform us in the measure to be taken to correct the current failures in the SADC

regional economic integration process. However, this paper shows some limits concerning data

quality and sample size. There is a need to improve data collection in future research, and more

detailed export data would be more informative and solve the sample size problem. Moreover, a

more in-depth analysis of the shortcomings and limits from the ASEAN model is also crucial to

draw as much objective and exhaustive policy implications as possible. The next step in this study

will be the identification and determination of specific regional measures and policies in the

context of the Southern African region.

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Chapter 8- Policy Recommendations and Long-Term Prospects for The

SADC Regionalism

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8-1. Introduction

As discussed and highlighted in the previous chapters, despite recent rapid growth, the SSA

countries and the SADC countries, in particular, have difficulty in translating it into long-term

structural transformation. Indeed, growth acceleration episodes in this region have been short

and did not result in economic diversification compared to other regions (IMF, 2017). The

ASEAN, which is the benchmark region in our study, has been experiencing sustained and rapid

growth accompanied by structural transformation and export diversification. As discussed and

demonstrated throughout this study, long-term economic growth and economic development are

intimately linked with the processes of structural transformation and export diversification.

Moreover, it has been suggested that South-South regional economic integration may play a

significant role not only in breaking the development trap but also embarking the participating

countries on a path of sustained economic transformation. In this regard, the analysis of the

ASEAN regionalism suggests the existence and relevance of a Southeast Asian developmental

regionalism model. This model, deriving from the so-called East Asian developmental State

tradition, consists of policies that promote export diversification and industrialization at a

regional scale.

Therefore, the ASEAN model studied throughout the previous chapters will be the basis of

our policy recommendations for Southern regional bloc in general and the SADC in particular.

As demonstrated, the main obstacles to the economic development of the Southern African

region, include institutional weakness, regional conflicts, predatory states, and extraction-based

economy among others. These are the results of historical path dependences and provide a

rationale for regional cooperation as a strategy to break the vicious circle of underdevelopment.

However, although the first incentive for forming the Southern African regional bloc was

legitimate, there have been issues in achieving the stated goal of inclusive economic

development. From the sole perspective of market integration, the SADC has been doing

comparatively well in tariff liberalization since the 1990s. However, contrarily to the ASEAN

free trade area, tariff liberalization and preferential trade agreement did not translate into rapid

growth and diversification of both intra- and extra-regional exports. Our analysis suggests that

this is in large part because of the difference in the approach to regionalism between the two

regions. Moreover, Zajontz (2013) argues that the neoliberal approach of the SADC mainly

focused on open and market-oriented regionalism, and the synchronization of the regional

market to economic globalization. With the influence of the neoliberal-dominated International

Financial Institutions (IFIs) of the time, namely the World Bank and International Monetary

Fund, the SADC strived for macroeconomic stability, economic liberalization and privatization,

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which resulted in de-industrialization and the deterioration of states’ welfare role (Zajtontz,

2013; p.63).

As shown from our previous analyses, this neoliberal approach to regionalism is rather

simplistic and antagonistic to the ASEAN developmental regionalism model. Although the

ASEAN structural transformation and export diversification has also been market-led, through

the expansion of regional production networks, evidence showed that several regional policies

were implemented to foster market creation and ensure a positive welfare effect of preferential

tariffs. These policies were a mix of horizontal policies such as trade liberalization and vertical

ones which focused on non-tariff obstacles to trade and investments. Therefore, this last chapter

aims at providing some policy recommendations based both on our understanding of the

ASEAN experience and the specific context of the SADC regional bloc. The questions to be

addressed in this final Chapter will be: how can the SADC countries harness their growth and

development potential through an ASEAN-like developmental regionalism? What policy

implication can be drawn from this study for the structural transformation and economic

diversification of the region?

8-2. Policy Recommendations Derived from the ASEAN Developmental Regionalism

Model

As argued throughout this study, the success of the ASEAN regional integration model

comes initially from a complex process of trial and errors in the correction of market failures

and industrial cooperation. Indeed, the Southeast Asian regionalism has given priority to

policies that promoted structural transformation and economic development rather than focusing

only on trade and market liberalization. The ASEAN regional process is characterized by its

policy pragmatism which in many cases did not hesitate to turn away from market

fundamentalism when necessary. These policies include a gradual approach to economic and

market liberalization, the promotion of investments in the manufacturing sector with emphasize

on local linkages, cooperation in physical and human capital accumulation, and resource pooling

in multilateral and international level negotiations.

8-2-1. Gradual and Soft Regionalism

Similarly to the SADC, regional cooperation has been laborious for the ASEAN regional

bloc because of some differences in the socio-economic characteristics of its member states.

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However, this problem has been overcome in the Southeast Asian organization through a unique

process known as the “ASEAN way.” In general, this decision-making system is based on an

informal form of consultation seeking unanimous consensus between all members before taking

any resolution. The ASEAN approach is also regarded as a “soft regionalism” because supra-

national structures and burdensome bureaucracy did not drive it. Comparatively, the SADC

regional organization have been following the European model by creating different formal

supra-national institutions namely: The Summit of Heads of State or Government, Summit

Troika of the Organ, SADC tribunal, SADC Council of Ministers, Sectoral and Cluster

Ministerial Committees, Standing Committee of Senior Officials, SADC Secretariat, SADC

National Committees and SADC Parliamentary Forum (SADC secretariat website). However,

this ambitious institutionalization only exacerbated the lack of resources and capabilities of the

SADC organization leading to the current status quo.

The ASEAN informal and soft regionalism is argued to have been a strategical choice to

cope with the historical, cultural and political diversity of the countries of the region that caused

the failure of previous regional initiatives (Soderbaum, 2012; Zhao, 2013). This practice, which

is a common feature in the East Asian model of cooperation, although often criticized for its

lack of authority and slow pace, presents some advantages:

①. The informal and consensus-based decision-making system requires repeated and

personal negotiations at the highest level which can ensure that resolutions are agreed and

enforced by significant authorities from each member states.

②. The consensus-building process keeps the balance of power between nations of

different sizes and strengths and thereby prevent conflicts that may occur from the

emergence of a hegemonic state.

③ . “Pragmatism and non-interference” which are features of the East Asian

policymaking in general of the ASEAN integration model in particular, gives enough

flexibility for a multi-speed process. Indeed, a multi-speed regionalism gives the

opportunity to member states to appreciate their readiness and benefits before joining any

agreement. It will reduce the possibility of confrontations and dissatisfaction that often

arise among the losers and winners in the case of a supra-national decision-making system.

④. Flexibility, which allows the ASEAN’s “formula X” system which consists of

one or more members choosing to enter into an agreement bi-laterally through an

“ASEAN minus X” or “2 plus X” scheme (South center, 2007). It is a middle-ground

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between bi-lateral and ASEAN-wide agreements, which gives national leaders the policy

space to assess the opportunity or loss from a given agreement.

⑤. The light and soft structure of the ASEAN organization allows for partial agreements

between states and thereby avoid the stalling of the regional process

In general, the ASEAN decision-making system may address the status quo in the SADC

organization by concentrating resources and capabilities into more beneficial and achievable

projects and thereby reduce waste. Moreover, flexibility would allow partial and gradual

advancing of the regional process through the agreements between countries with converging

interests. The other members can choose the timing in which they will join the agreement and

thereby deepening the overall level of integration of the regional bloc. This multi-speed

integration process can speed up the SADC regional process by allowing a demonstration effect

from more advanced and integrated members. The ASEAN model can also improve policy

efficiency by directing resources towards consensual and mutually beneficial projects that

would impact directly on the welfare of member states. Therefore, this implies for the SADC,

rather than focusing on region-wide market liberalization agreements, to cooperate on regional

projects with clear benefits for the members. It is related to the next feature of the ASEAN

regionalism, which consists of industrial cooperation that promotes FDI with high potential for

local linkages in the manufacturing sector.

8-2-2. FDI and the Promotion of Manufacturing Production

Another policy implication of the ASEAN model for the SADC countries pertains to the

promotion of FDI which put emphasize on production sharing and local linkages, particularly

in the manufacturing sector. Indeed, among the significant issues in the Southern African region

is the lack of economic diversification and the high dependence on resource-based products for

their exports. The SADC organization failed to address this issue, and our empirical analysis

demonstrated that, at best, the neoliberal regional policies implemented so far contributed to

reinforcing the status quo. Accordingly, it is critical to identify the lessons and policy

implications that can be drawn, regarding industrialization strategy, from the success of the

ASEAN countries.

The first and most important feature of the ASEAN regionalism is the considerable efforts

put on attracting foreign investors mainly in the manufacturing sector. Indeed, despite a

significant decline from $29.1 billion in 2015 to $8 billion in 2016 (ASEAN, 2017), the

manufacturing sector still rank in the top 3 of the sectors receiving the largest share of the FDI.

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Interestingly, according to the ASEAN Investment Report 2017 (AIR), FDI in manufacturing

activities come mostly from major Asian countries such as Japan and the ASEAN member states

(ASEAN, 2017). These recent trends support our hypotheses that there is an East Asian and

ASEAN industrialization model and that South-South cooperation in manufacturing

development has a higher impact on economic development and therefore is more relevant for

latecomer countries. Thus, these hypotheses imply that:

①. Regional integration and cooperation should be open in the sense that it should seek

the integration of the regional market into the global value chains. Indeed, although the

SADC regional bloc has committed to tariff liberalization, it has not been sufficient to

foster economic diversification among the member States. Moreover, it also fails to

increase FDI inflow and the SADC’s presence in the global value chains particularly in

high value-added outputs. Therefore, openness here refers to regional investment policies

that promote actively foreign investments in more sophisticated industries and the transfer

of these technologies in order to improve the position of the SADC producers in the

global value chains. The ASEAN bloc achieved this through the promotion of FDI in the

manufacturing activities (e.g., automotive industry) and the implementation of policies

aiming to increase MNEs’ linkage with local suppliers.

②. Regional investment should target efficiency-seeking foreign companies operating in

labor-intensive industrial activities such as agro-industry, textile, clothing, and assembly

plants, given the abundance of low-wage labor in developing regions such as the SADC.

The availability of a cheap and nearby source of raw materials within the SADC regional

bloc would further make the investment in these activities attractive.

③. The ASEAN model also showed that a regional bloc grows faster if a significant share

of extra-regional export consists of medium or high-tech products such as automobile and

electronics in the Southeast Asian case. Although the market mechanism should determine

the category and type of the products, regional policies’ role is to attract producers and

investors by providing viable investment and production environment. Therefore, not only

should the SADC member States implement horizontal policy measures such as

infrastructure development and capacity building, but they also must cooperate in the

implementation of selective policies targeting some high-tech and high-value-added

products with high local linkage and production fragmentation potential. As in the ASEAN

model, these selective regional policies are expected to provide financial incentives, create

and sustain regional market with IRS, and promote the formation of a critical mass of

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industrial agglomeration. While the ASEAN countries found opportunities in the

automotive industries and electronics, the SADC countries may strive in the promotion of

a regional market in the information technology industries such as the assembly or

production of smartphones and laptops among others. Indeed, it is relevant given the rapid

growth of the internet and mobile penetration in the SSA countries in particular and the

rapid development of the internet-based economy in the world in general.

④. Lastly, South-South regional integration should foster production sharing and thereby

the formation of regional production networks because early-industrializing countries can

hardly bear the full cost of production and commercialization of medium and high-tech

products. Moreover, the time consumed in learning the full process of production rather

than a gradual upgrading is considerable and may postpone the industrial take-off.

Therefore, production sharing is a middle ground alternative policy allowing cost reduction

as well as a rapid industrial learning process. Moreover, production networks make sense

given the diversity in the level of development and technological capabilities among the

SADC’s member States. Thus, the SADC organization should implement policies that

encourage collaborations with private investors in developing regional production

networks. As an example, the ASEAN countries came up with regulation and tax incentives

tailored according to the exigence and the needs of the market (producers, investors,

consumers…) in the automotive industry. They also established several economic zones in

a different location across the regional bloc.

8-2-3. Regional Policy for Resource Accumulation and Allocation: Market Creation and

Emphasize on “Real Economy”

Other characteristics of the East Asian developmentalism, which has influenced the

ASEAN model, is the political activism in the accumulation of manufacturing capabilities and

the creation of a market economy through state intervention and regional cooperation (Ohno,

2002). Indeed, the ASEAN economic development process showed that trade and investment

promotion require more concrete policy contents with direct impact on productive sectors than

mere generic recommendations such as deregulation or good governance. Besides, because of

the reduced policy space resulting from the expansion of neoliberalism since the 1980s,

countries in Southeast Asia have used regional cooperation for gradual market integration and

the allocation of public goods such as institutional and human capacity buildings, infrastructure

development or technical cooperation.

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The ASEAN model of regional development informs that:

- Regional cooperation allows the internalization of externalities through the pooling of

investment resources in infrastructures (hard and soft) and security

- Regional production networks can be a platform outside of formal markets for

knowledge sharing and skills transfer between participating countries.

- Regional cooperation in capacity building and market regulation entails positive

spillover such as the creation and gradual improvement of a regional market, attraction of

investors seeking for scale economies, or the improvement of the region’s overall

attractiveness for more sophisticated investments

- That proactive regional policies are crucial in complementing private investments and

even to attract them. The most notable examples from the ASEAN regions are the

construction of economic corridors and economic zones.

Overall, the ASEAN model showed that similarly to the early industrializing East Asian

countries, mere economic liberalization is not sufficient to sustain long-term growth and to

escape from the development trap. Instead, the ASEAN organization complemented the market

mechanism with proactive industrial and social policy packages that fostered the improvement

and accumulation of factor of productions. Indeed, as demonstrated by our empirical studies,

despite the rapid achievement of tariff elimination within the SADC countries regional trade

failed to bring about structural transformation and export diversification. Indeed, simple tariff

liberalization is not sufficient to address other non-tariff barriers and the obstacle to trade and

FDI. It is crucial for the SADC regional bloc to improve its overall trade environment and

investment attractiveness.

8-2-4. International and Multilateral Strategy: Standing Together as One Bloc

From a geopolitical perspective, the ASEAN countries have also succeeded where other

developing countries’ regional bloc has failed, that is, to stand together as one entity at the

international and multilateral level. Indeed, although each ASEAN member state may still

maintain bilateral relationships with non-members, they managed to unite their voices and act

as one group to become the leading regional bloc in the East Asian integration process. Thus,

conversely to the SADC, the ASEAN established itself as the leading actor in different

multilateral negotiation platforms and processes with third parties, such as the:

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ASEAN Regional Forum (ARF), initiated in 1994 and is an ASEAN sponsored dialogue

on security including the ASEAN-10, United-States of America, China, Japan, South Korea,

Australia, and New Zealand.

ASEAN Plus Three (APT), started in Kuala Lumpur in 1997 and included the ASEAN-

10, China, Japan, and South Korea

East Asia Summit (EAS), held first in December 2005 which consist of the APT joined

by Australia, India, and New Zealand

These examples demonstrate that the ASEAN regional integration has also achieved a

certain level of influence at the international level. Accordingly, this has given the ASEAN

countries the necessary bargaining power which allowed for greater policy ownership and

greater policy space that are crucial elements for the success of trade and industrial policies.

Therefore, it implies for the SADC efforts in finding a collective identity and in holding a unified

stance when dealing with extra-regional third parties such as multinational companies,

governments or international institutions. This sort of solidarity is essential not only to create a

sense of belonging and reinforce the commitment of the members but also to affirm the presence

and the importance of the regional bloc among investors and other potential partners.

8-3. Addressing Issues Specific to the SADC Regional Bloc

Let us now see the policy implications of our study in addressing issues specific to the

SADC regional bloc. Indeed, although benchmarking with the ASEAN model has helped us

identify the bottlenecks in the SADC regional process, we need also to address issues specific

only to the SADC. Therefore, this part will discuss the context in which the policy implications

drawn from precedent analyses should be readjusted to match the situation on the ground in the

SADC region. Following the discussions in previous chapters, developing SSA countries in

general and the SADC members, in particular, are facing several challenges which are keeping

them in the development trap. These challenges are diverse including institutional weakness,

poor infrastructures, informal economies, demographic and geographic risks, multiple

memberships to other agreements. Therefore, it leads us to the question: how should the SADC

integration process be adjusted to achieve an ASEAN-like economic development process

effectively?

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8-3-1. Institutional Weakness: Regionalism and the African States

Much has been said about the nature and causes of the failure of most of the Southern

African states. In general, Southern African countries are described as ones with weak states but

with strong regimes which are the result of their states’ lack of legitimacy and consent at the

domestic level (Zajtontz, 2013). Therefore, neo-patrimonialism, defined by Kelsall (2011) as a

“system of personal rule held together by the distribution of economic rents to clients and

cronies,” has been widespread among the countries in the region. In this regard, Zajtontz (2013)

argues that the combination of neo-patrimonialism with regional and global neoliberal norms

resulted in two conflicting phenomena namely: a “sovereignty-boosting” regional governance

and the reluctance to comply with some regional resolutions. Zajtontz (2013) explains that while

the former results from the fact that neo-patrimonial states seek legitimacy at the regional and

domestic level by committing to over ambitious and multiple regional agreements; the latter

simply stems from the fact that given their limited sovereignty these states often refuse to give

up on the little control in their hands. Thus, the consequence for the SADC regionalism is the

stagnation of the regional process caused by:

- Multiple memberships to other regional agreements

- Over-ambitious regional objectives which result in a gap between the rhetoric

commitment at the regional level and the states’ actual capacity to implement policies

toward the stated goals.

- The incompetence of regional institutions not only because of the lack of human and

financial resources but also because of the lack of compliance from member states to

regional resolutions that may threaten their domestic power.

- The proliferation of “Shadow regionalism,” or the involvement of political elites in

often illicit regional activities such as weapon smuggling among others (Zajontz, 2013).

In sum, the SADC development integration has to address the issue of dysfunctional states

among the members. The first and foremost step is to rethink the neoliberal ideology which has

aggravated the situation by promoting small-sized state and thereby severely reducing states’

capacity to provide social and public goods which are sources of legitimacy at the national level.

Secondly, the SADC organization should review its objectives to be more pragmatic and

achievable. The ASEAN model of soft regionalism focused on FDI attraction, and economic

diversification should be emulated to replace the actual stagnating SADC regional scheme.

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Thus, in order to address the impediments mentioned above to the SADC integration, our

study implies:

①. Regional initiatives to restore the African welfare state and mitigate the social

effects of the past neoliberal reforms. These policies aim at reinforcing the legitimacy and

sovereignty of each state, especially the fragile ones. The broad-based legitimacy would

facilitate the eradication of patronage and promote better coordination between the private

sector and the government with the inclusion of broader stakeholders.

②. A revision of overambitious and excessively broad regional objectives to focus

on specific projects with the highest impact on the economic growth of the member state.

As shown in previous sections, the ASEAN developmental integration model would

suggest a targeted reallocation of regional resources in FDI attraction, reducing the cost

of intra-regional trade, and promotion linkage between foreign investors with local

suppliers for instance.

③. ASEAN soft regionalism and the multi-speed regional scheme would enable

enough flexibility and policy space to mitigate the problem of lack of compliance from

some members which penalizes others and the progress at the regional level.

④. Commitment to the promotion of industrialization which is the primary driver

of structural transformation. The expansion of the industrial sector would create more

employment and reduce the opportunity cost of engaging in illegal activities.

⑤. Lastly, the SADC member states should not commit to multiple agreements

individually. Instead, the ASEAN plus scheme, that is, negotiating as a unified entity with

other partners would solve the current problem of conflicting and complex multiple

memberships.

8-3-2. Regional Integration and Infrastructure Development

Among the fundamental obstacles to African industrialization is the longstanding lack of

soft and physical infrastructures. Notably, according to the Africa Regional Integration index

2018, the SADC is still lagging behind other African regional blocs regarding infrastructure

development (including transport electricity, ICT, water and sanitation). Moreover, an

individual country break-down of the indicator shows a great disparity among the SADC

members which reinforces our earlier observations suggesting that the SADC region is not well-

connected, with high non-tariff regional barriers. Accordingly, these high non-tariff barriers

have minimized the potential positive impacts from trade liberalization and tariff removal. The

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situation is similar with regards to soft infrastructures such as market regulation and investment

protection. Therefore, because any industrialization project is hard to succeed without an

extensive and good quality infrastructure basis, the SADC integration process must consider

regional cooperation for infrastructure development as a priority.

Although the need for regional cooperation for infrastructure development has long been

recognized by the SADC members (such as in the “Protocol on energy” passed in 1996), as with

the overall integration process, there has been a gap between aspiration and implementation.

Indeed, there seem to be various organizational and functional problems to overcome. In this

regard, drawing from our overall analysis of developmental regionalism we would suggest that:

①. Regional connectivity should be regarded at least as equally urgent as tariff

liberalization

②. Regional infrastructure development should be market-driven, i.e., following

the ASEAN model of regional production networks. For instance, numerous ASEAN

transport, energy, and industrial investment projects have been developed as joint ventures

with Japanese firms and government agencies.

③. Regional infrastructure project should, therefore, be designed and implemented

in parallel with industrial projects in order to gain support from both member states, private

investors and civil society. Moreover, this also implies that objectives and policies should

target and focus on priority sectors that exhibit the highest potential for regional production

networks promotion

④. Infrastructure development projects should be an opportunity for technology

and knowledge transfer and capacity building for local companies and workers.

⑤. Non-traditional investors from the developing countries that are interested in

infrastructure investments such as China and AIIB should be considered as an alternative

to the traditional western donors.

Overall, infrastructure development within the SADC regional bloc should be considered

as a top priority and requires a careful and pragmatic policy design and implementation. Indeed,

the ASEAN integration model suggests that infrastructure development was crucial in

promoting and supporting the FDI-driven regional production networks. In other words, a

transformative regionalism must complement its industrial promotion policies with well-honed

infrastructure investment projects.

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8-3-3. Informal Economies

Another aspect of the Sub-Saharan region is the proliferation of the informal sectors.

Although, in theory, economic growth in developing countries would absorb the excess of

unskilled labor into labor-intensive industrial activities which will result in the expansion of the

wage-economy; this has not occurred in many SSA countries (Verick, 2006). Indeed, most of

the unskilled African labors were instead drawn into the informal economy. Mills et al. (2017)

report that conversely to the theory and compared to other fast-growing developing regions, the

African informal sector has been expanding and consists mostly of non-tradable service

activities. This situation also raises several issues in the case of the SADC regional integration.

The table below summarize these issues and our policy proposals to address them.

Table 8.1 Impacts of informal economy and corresponding policy proposals

Negative impacts of informal economy Regional policy proposals

Proliferation of low-wage and low-

productivity employments

Regional cooperation in skill upgrading and

information sharing in order to increase the

number of high-productivity and formal

activities

Impediments to regional trade since most of

the activities in the informal sector consist of non-

tradable services (e.g. street vendors)

Formalize and promote cross-border trade.

Development of economic corridors

shortfalls in tax revenues Knowledge and information sharing in tax

collection strategies between member states

Lower the attractiveness to foreign investors

and companies because it may inform about the low-

quality of the market and the regulation system.

Promoting investment projects with high

potential for job creation

Regional commitment in investment

protection and enforcement of employment

and property rights

Agents in the informal sector have a low

sense of belonging to the regional project

Promote intra-regional cultural exchanges

Implement social policies at the regional

level to draw support from low-income

citizens who constitute the majority of the

population

Source: The author

Thus, regional integration projects in the SADC and in the developing world in general

should not minimize the negative impacts of the informal economies. Indeed, the unregulated

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and uncoordinated nature of informal activities would hamper the advancement of the process

of integration. Therefore, every regional project should include strategies to facilitate the

absorption and transition of the informal agents into a more formal market- and wage-economy.

8-3-4. Managing Demographic and Geographic Risks

Many experts are drawing attention to the alarming demographic and environmental risks

threatening not only the African countries but also developed countries in the North (Brookings,

2016; Mills, 2017). These risks include a population growing faster than the economy, pandemic

diseases outbreak, a climatic disaster such as droughts, and refugee crisis because of conflicts

and regional instability. All of these events are threatening the lives and well-being not only the

African citizens but also those of the developed countries which will see increasing pressure

from a growing number of African immigrants and refugees. Therefore, economic development

and poverty alleviation in the SADC and Africa in general, must take these dangers into account

and devise some countermeasures ahead to avoid or mitigate the impact of the coming

cataclysms. Besides, since demographic and geopolitical risk management involves high costs

and many externalities, regional cooperation is necessary to cope with these difficulties.

Consequently, the SADC countries should reinforce their cooperation and take initiatives in:

In regional security and conflicts resolution. Notably, the SADC members

should reinforce their cooperation in electoral observation and military peacekeeping

cooperation

Establishing regional task forces aimed at controlling and preventing the

spread of pandemic diseases within the regional bloc. Regional cooperation is particularly

relevant here because of the high costs and externalities involved.

Job creation particularly by facilitating capital and labor movement through

infrastructure investments and improved protection of investment and property rights.

Regional actors should also harmonize their actions by targeting some selected sectors

with high potential for job creation (e.g., footwear and garment industries, agro-

processing, electronic parts, and component)

Preparation for times of droughts and possible food shortage; In this case,

regional cooperation is also crucial here mainly because of the existence of small and

landlocked countries. In this regard, regional measures may consist of the creation of a

regional insurance company specializing in natural disasters, the establishment of a

regional food reserve, or agreements in human and environmental protection

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Developing the financial sector by facilitating access to credit especially for

local informal companies; priority should be given to companies with high potential for

regional or extra-regional exports.

In general, regional integration offers an excellent opportunity for preparing for a future

demographic crisis and natural disasters and reduce the burden on individual SADC member

state. Indeed, unlike other regional projects in the world, the African regionalism will have to

face the reality of a rapidly growing population and an increased frequency of extreme weathers

resulting from global warming. These will pose severe challenges to economic development and

poverty reduction if the SADC countries do not plan and address them before their occurrence.

Hence, as already discussed, a transformative or developmental regional integration does not

consist only of tariff and trade liberalization, it must deal with other non-economic and non-

market forces as well.

8-3-5. The Problem of Multiple Memberships:

Lastly, another particular challenge of the SADC regional process is the overlapping and

concurrent memberships of the members to other Regional Economic Communities (RECs) (see

Table 8.2). Overlapping memberships are problematic since the conflicting agendas of the

different RECs make negotiation and policy harmonization within the SADC bloc even more

difficult. Concretely, Peters-berries (2010) argues for instance that Tanzania’s membership to

EAC customs union is violating the interests of the other SADC member states since it can be a

gate for duty-free exports of the EAC countries. Consequently, such conflict interests are

seriously threatening the sustainability and viability of the SADC regional project. Moreover,

multiple memberships are only viable if it only involves shallow integration, and thereby, the

SADC integration process will be stalled and struggle to progress any further. Concerning

industrialization and structural transformation, the problem of multiple memberships makes it

impossible the implementation of vertical industrial policy measures. Moreover, the resulting

lack of coherence in regulations and tariff system will significantly impede on the creation of

regional production networks. Indeed, these inconsistencies will discourage foreign investors

that are attracted by bigger markets and better production efficiency within regional blocs.

Therefore, there is an urgent need to solve the multiplicity of concurrent memberships

among the SADC countries. The simplest solution is requiring the SADC member states to

either withdraw from other RECs or the SADC. This solution is consistent with the SADC

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Treaty which insists on the commitment of all members in coordinating and harmonizing their

activities (Mapuva and Muyengwa-Mapuva, 2014). Therefore, the SADC member states may

decide on the future of the regional project through a voting process in which they will choose

to either to abandon their other REC memberships or to withdraw from the SADC process.

Besides, along with this solution and as discussed in previous sections, the SADC members

should stand as one bloc and show their unity in multilateral and international level negotiations

and cooperation. In this regard, the tripartite FTA project involving the SADC, COMESA, and

EAC is an opportunity for the SADC members to show their solidarity and take advantage of

the bargaining power conferred by belonging to the regional bloc. Indeed, a more coherent and

harmonized regional cooperation will constitute an advantage for the SADC members both

economically through trade and foreign investments, but also politically particularly on the

global stage.

Table 8.2 Other REC membership of the SADC countries

SADC Member State Membership in other RECs

Angola CEEAC

Botswana SACU

DR Congo CEEAC, CECAS

Lesotho SACU

Madagascar COMESA

Malawi COMESA

Mauritius COMESA

Mozambique None

Namibia SACU

Seychelles COMESA

South Africa SACU

Swaziland

COMESA,

SACU

Tanzania EAC, CECAS

Zambia COMESA

Zimbabwe COMESA

Source: the author. Constructed from various sources

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This last chapter compiled, based on our empirical and comparative analyses in the

previous chapters, our policy recommendations for a transformative and developmental SADC

integration. It highlights real-world implications, particularly in the SADC context, of our study

on South-South regionalism. In doing so, we divided our proposals into two main parts; the first

part provides policies that derived directly from our understanding of the ASEAN model of

developmental integration, while the second proposed some adjustment to deal with specific

issues in the SADC context. In general, our recommendations suggest that the most critical

feature of the ASEAN regionalism and South-South cooperation, in general, is the potential for

structural transformation and industrialization. Indeed, we demonstrated that despite the

implementation of neoliberal economic policies and the promotion of North-South economic

integration, most of the developing countries especially in the Southern African region failed to

diversify and transform the structure of their economy. The traditional North-South scheme has

reinforced the status quo such as the weak natural resource-based and extractive African

economies.

Therefore, among the relevant policies that can be drawn directly from the results of our

study of the ASEAN model includes a soft and gradual regionalism. This approach to

regionalism is different from the EU-inspired regional process mainly for its goal-oriented

process. Indeed, while the EU has been an institution-driven regional process, the ASEAN has

been shaped toward the achievement of economic and social objectives such as the promotion

of manufacture exports and regional production networks. Accordingly, the other policy

recommendations reflect this goal-oriented and market-driven feature of the ASEAN model.

These recommendations include: FDI and promotion of manufacturing production through

horizontal and vertical regional policies, and market creation and emphasize on productive

sectors of the economy. Lastly, from a geopolitical perspective, the ASEAN model also suggests

that South-South regional cooperation can be a source of significant bargaining power to ensure

as beneficial multilateral and international partnerships as possible.

However, as with any economic model, the ASEAN integration model should not be

followed blindly and necessitate some adjustments to cope with specific challenges in the SADC.

Thus, we pointed out the significant challenges in the SADC regional bloc and showed the

relevance of regional integration to address them. The first and most significant challenge to

tackle in the Southern African context is the institutional weakness that resulted from historical

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path dependence and reinforced by the current global system. Therefore, we noted that the

SADC regionalism should foster the legitimacy of the weak African states by promoting social

welfare policies and focus on tackling specific and urgent issues such as unemployment. In this

regard, the SADC members must rethink their broad and over-ambitious regional goals that have

shown poor outcomes. Other challenges for the SADC regionalism include infrastructure

development, informal economies, preventing demographic and geographic catastrophes, and

the multiple and overlapping memberships to other RECs. All of these challenges not only

require regional cooperation and cohesion but as suggested by our overall analysis, they are

unlikely to be addressed through the mere market mechanism and economic liberalization.

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CONCLUSIONS

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A. Research Findings

The primary objective of this thesis was to examine the structural and developmental

impacts of regional economic integration in developing countries. Notably, we based our

investigation on the assumptions that: the lack of structural transformation causes

underdevelopment in general and especially in Africa through industrialization; and that the

ASEAN regional network-based development model can be a relevant alternative strategy for

structural transformation in the developing world. The lack of research in these two areas has

contributed to the status quo both concerning economic performance and economic policy in

many developing countries including those in SSA. Consequently, several countries have been

left behind and the gap between high-income and low-income countries has been consistently

growing in the globalization era.

These assumptions are supported by numerous studies discussed in the literature review

part of this thesis. These literatures have been divided into two categories. The first category

includes those who argue that the mainstream advocacy for market fundamentalism and

globalization has missed the real issue in the developing countries and sometimes even

worsened their situations; the second one discusses the relevance of South-South economic

cooperation as a first step toward structural transformation and to lay the ground for global

competitiveness and catch-up growth. This categorization led us to build a new framework

which merged the structural change approach and the study of regional integration. Therefore,

the whole thesis has been based on this framework which enables us to focus on the dynamic

and multivariate nature of the process of structural transformation and economic diversification.

The relevance of this framework has been confirmed by the comparative study on the

regional performance of the SADC and ASEAN both regarding regional integration and

economic development. It has been demonstrated that the economic divergence between the two

regions coincided precisely to the period when they have seen shifts in their development

strategy. Indeed, in the late 1980s while the Southeast Asian countries have deepened their

regional integration and concentrated their efforts on the supply-side of the economy, the SADC

countries, on the other hand, were among the countries that underwent a one-size-fits-all reform

based on market fundamentalism pushed by the WB and the IMF. Data showed a reversal in the

economic performance between the two regions, and that difference in merchandise trade

pattern was determinant in this. Indeed, although extra-regional trade has been critical in both

regional bloc, the ASEAN countries’ exports exhibited a considerable share of manufactured

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and technology-intensive products while those of the SADC countries were concentrated in low

value-added and unprocessed products.

Further examination of the ASEAN and SADC case showed that the difference in the

process of regional integration has also been a determining factor. Indeed, we found that the

ASEAN countries focused primarily on building their capacity for manufacturing production

and exports. Therefore, regional institutions and regional cooperation were aimed at improving

the condition for the emergence of a regional production network. The ASEAN model of

regional integration has been enabling the market and particularly foreign investors to organize

their production regionally and take advantage of the economic heterogeneity between the

ASEAN member states. This process has resulted in a rapid learning process and technology

upgrading at the regional level and thereby increasing the region’s competitiveness in the global

market.

Conversely, the SADC regional process has followed the European blueprint and model

which has perpetuated the longstanding situation of dependence on natural resources exports to

the industrialized countries. Indeed, while the SADC regionalism has been heavily formalized

and institutionalized it failed to impact the real economy, unlike the ASEAN. The lack of

supply-side strategy and the market fundamentalism has trapped the SADC countries in their

role of natural resource suppliers which has been defined by their comparative advantage.

Moreover, an analysis on the Sub-Saharan African case in particular in chapter 4, not only

questions the relevance of the traditional policy which focused on market fundamentalism and

economic liberalization but also showed the importance of regional cooperation and integration.

Indeed, from the institutional economics perspective, the development pattern of the African

countries has been following a path shaped by natural, historical and past economic policy

events. More precisely, we demonstrated that the African economy has always been structured

to prioritize foreign and external industrial markets. Besides, the domestic economy is

characterized by the dominance of small, extractive and patrimonial central governments. We

concluded that the SAPs and other neoliberal prescription to the SSA countries and the SADC

countries, in particular, have contributed to the persistence of this situation. Therefore, it has

been argued that ASEAN-like regional integration has the potential to break this path by

fostering structural transformation and economic diversification. Regional economic integration

is an intermediary strategy between protectionism and global integration which both have been

proven destructive for the African economies.

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In part 2 we provided some empirical evidence of what has been claimed in the previous

chapters. Thus, we first highlighted the statistical evidence showing the particularity of the

ASEAN model compared to the other regional integration in the developing world. Then, we

demonstrated the relevance of our analytical framework and the chosen variables from a

statistical standpoint. In this regard, we observed that merchandise trade, manufacturing exports,

and foreign investments are the main factors of the ASEAN structural transformation. Also,

these constituted the main variables in our empirical analyses.

The timing and evidence of structural transformation and the role played by regional

integration has been verified through a three-stage econometric exercise — these procedures

aimed at showing evidence of network-based industrialization at the regional level within the

ASEAN during the period mentioned earlier. Our results have confirmed the importance and

role played by regional integration and structural transformation (or the dynamic expansion of

the modern sector) during the ASEAN countries’ period of rapid growth. The growth

decomposition model confirmed that, apart from the Philippines, a significant shift of labor from

the agricultural to the manufacturing sector has been driving growth in the fast-growing ASEAN

countries. Moreover, the gravity model analysis demonstrated that regional integration did not

have a negative impact on their trade performances both with ASEAN members and non-

members. Therefore, we argued that the ASEAN model of regional integration is inscribed in

the new regionalism and is highly oriented to extra-regional market, particularly in the Asian

region.

We solidify these results with another empirical study on the relationship of manufacturing

export and preferential trade. We found some interesting trends and results that we believe are

critical for the primary objective of this thesis. We first observed that compared to the ASEAN,

the SADC countries have less diversified exports which consist mostly of low-value-added

products. Secondly, the analysis of the tariff schemes in the SADC and ASEAN from the 1990s

shows that the pace of trade liberalization has been faster in the SADC than in the ASEAN in

general both for intra-regional and extra-regional trade. However, the ASEAN shows more

openness toward the rest of the world than the SADC in the manufacturing sector. These trends

imply that faster trade liberalization is not necessarily correlated to faster trade growth and that

within the ASEAN a certain amount of protectionism is allowed in the manufacturing sector.

Thus, a regional trend of infant industry strategy seems to be confirmed by the data and which

supports our earlier claim that the ASEAN regional arrangement is an intermediary model which

promotes the development of regional manufacturing production networks. Lastly, an

innovative panel data analysis on the relationship between preferential trade and the

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sophistication of export in the SADC countries demonstrated that the regional arrangement does

not affect the trade structure of member states. Indeed, the results although non-significant

shows that in some cases the SADC’s regional scheme can be harmful to the modern and

manufacturing sector.

As discussed in part 1 and as suggested by the above empirical results, the difference in

outcome and performances between the ASEAN’s and SADC’s regional arrangements cannot

be explained only through the traditional approach. Indeed, the informal nature of the ASEAN

scheme and the possibility of a mild infant industry strategy within the regional bloc suggests

the critical role played by other non-market forces and factors. Therefore, in chapter 8 we

complete this study with a detailed policy analysis of the two regional blocs. As expected,

political and non-market variables seem to be the missing part in understanding the difference

between structural transformation and economic diversification between the ASEAN and other

developing countries such as the SADC members. The ASEAN regional bloc distinguished

itself for its “ASEAN way” characterized by an informal interaction between state actors and a

soft regionalism. Both characteristics enabled the ASEAN to be both very flexible and proactive

in its relationship with the market and foreign investors. These characteristics make the ASEAN

market attractive to foreign investors both on the demand and supply-side. Moreover, the high

flexibility has enabled investors and the market, in general, to advance in countries where gains

can be readily captured while not impeding on the catching-up process of the other members. In

other words, regional integration and the expansion of regional production networks occurred

in a gradual and multispeed fashion allowing for a process of learning and technology spillover.

In turn, this situation created a virtuous circle between FDI and regional industrial upgrading.

In sum, the implication of the ASEAN model for the SADC is about the importance of structural

change and the importance of a flexible and export-oriented regional arrangement. Our study on

the ASEAN model has shown the potential for network-based manufacturing export in the

SADC and the developing regions in general.

B. Policy Implications

As discussed in chapter 8, various policy implications can be drawn from the study of the

ASEAN model of regional integration and structural transformation. However, we will highlight

those that are universal with broader scope both in space and time.

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First of all, this thesis demonstrated that structural transformation through industrialization

is crucial for breaking the low-income trap and involve both market and non-market forces. Our

political economy analysis showed that market fundamentalism reflected by total economic

liberalization or “economic globalization” did not lead to structural transformation and

economic diversification in most of the developing countries. However, the study on the

ASEAN model suggests that structural transformation is possible and less costly if developing

countries cooperate in order to establish an industrial production network destined for export

markets. Therefore, South-South economic cooperation should consist of neighboring and

natural trade partner countries aiming at developing manufacturing export capability. Since this

type of economic cooperation involves mainly intra-industry and off-market transactions,

member states should be allowed to intervene in areas such as cross-border infrastructure,

technology transfer, skill upgrading. Moreover, conversely, to total liberalization, the regional

framework should allow for a multispeed integration which gives time to less advanced

countries to build their capacity and to accumulate skills and competencies before exposure to

the international market.

Secondly, in the specific case of export upgrading and diversification, our empirical

analysis demonstrated the importance of the manufacturing sector and industrial policy. Indeed,

catch-up growth policy in the developing countries should combine strategy, both on the demand

and supply-side. Our study demonstrated that to kick-start a process of structural transformation

low-income countries should concentrate on building capability for manufacturing production

and thereby should be allowed to use some industrial policy such as infant industry protection

among others. In the early period of structural transformation and export upgrading, the

Southern countries’ market offers enough size and ground for learning and skill upgrading.

Precipitated economic liberalization and integration to the global market have been

demonstrated to be at best neutral in this regard. Lastly, developing countries should seek to

attract foreign investments in the manufacturing and production sector with linkage with the

domestic supply market and high potential for technology spillover.

C. Limitations and Further Research

The findings and policy implications discussed above also open some new theoretical and

empirical discussion on the question of economic development.

At the theoretical level, although this thesis has explored and has shown the relevance of a

new framework, the next step is to develop a formal model that can be used to improve the

existing mainstream models. In this regard, a possible extension of this research in this direction

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is a further exploration of the relationship between export product sophistication and preferential

trade arrangements such as in Moncarz et al. (2011). Moreover, a growth model adapted to a

South-South economic integration context will be an interesting area to explore given the

increasing dynamism in these group of countries both regarding capital formation and trade. For

instance, as discussed above, the role of non-market forces should be taken into account and

clearly defined. In general, this thesis, we believe, laid the ground for a more multidisciplinary

approach to the problem of structural transformation and development in the literature.

From an empirical standpoint, this thesis shows some limitations and thereby leaves the

door open for further improvements and exploration. First of all, a drastic improvement of data

collection is necessary. For instance, collected data should be much more oriented to the study

of structural change and regional integration. Thus, both the construction and improvement of

our panel data in chapter 7 are the next step. Since this thesis pointed out the limits of

quantitative and performance variables in assessing the structural effect of regional

arrangements and production networks, we need to find a way to improve the existing empirical

techniques by introducing some policy and non-market variables. The improvement of both the

data and empirical model would help policymakers to assess the effectiveness as well as to

follow the progress of the implemented policies.

Lastly, from the political and institutional perspective, this thesis has opened the

discussion for a reform of the international economic system. Indeed, although the limit of the

current system has been highlighted, there is a need to provide a relevant and valid alternative.

In this regard, although crucial, one issue, not addressed in this thesis is the dichotomy between

the Western and East Asian perspectives about trade and market. The ASEAN countries have

benefited from its closeness to other catch-up growth pioneer countries such as Japan and South

Korea. Therefore, the East Asian model of economic cooperation and development should be

considered and studied further within the current context of the reform of the international

economic system. Indeed, East Asia is the leading and most dynamic region in the modern

economic growth era of the twenty-first century.

189

APPENDIX

A.1. Country Code ISO 3166-1 alpha-3

AGO Angola

BWA Botswana

COD Congo, the Democratic Republic of the

IDN Indonesia

KHM Cambodia

LSO Lesotho

MDG Madagascar

MMR Myanmar

MOZ Mozambique

MUS Mauritius

MWI Malawi

MYS Malaysia

NAM Namibia

PHL Philippines

SGP Singapore

SYC Seychelles

THA Thailand

TZA Tanzania, United Republic of

VNM Viet Nam

ZAF South Africa

ZMB Zambia

ZWE Zimbabwe Sources: United Nations Trade Statistics, URL: https://unstats.un.org/unsd/tradekb/knowledgebase/country-code

190

A.2. Average Sectoral productivity growth, in percent

Source: Author’s own calculations (Ramiarison, 2018)

A.3. Data Description

Variables Obs Mean Std. Dev. Min Max

Country (name)

year 440 2010 3.165877 2005 2015

Product (name)

trade intensity (ti) 422 0.000138 0.213339 -0.94297 0.617627

Preferential margin (prefmar) 430 9.401093 5.531303 -6.12 23.96

Revealed comparative advantage (rca) 430 1.967581 2.963637 0.01 12.29

Product sophistication Index (prody) 440 20406.82 6752.401 8534.958 33609.59

-3

-2

-1

0

1

2

3

4

5

6

71

98

0-1

98

9

19

89

-19

98

19

80

-19

89

19

89

-19

98

19

80

-19

89

19

89

-19

98

19

80

-19

89

19

89

-19

98

19

80

-19

89

19

89

-19

98

IDN MYS PHL SGP THA

%

Agriculture Modern

191

A.4. Graphic Showing the Overall Impact of Tariff Preferences in the SADC

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0 50 100 150 200 250 300 350 400 450

Marginal Effect of Preferential tariffs in the SADC

192

A.5. ISIC revision 3 Product Nomenclature

ISIC

Revision

3

ISIC Revision 3 Product Description

1 AGRICULTURE, HUNTING AND RELATED SERVICE ACTIVITIES

2 FORESTRY, LOGGING AND RELATED SERVICE ACTIVITIES

5 FISHING, OPERATION OF FISH HATCHERIES AND FISH FARMS; SERVICE ACTIVITIES INCIDENTAL TO

FISHING

10 MINING OF COAL AND LIGNITE; EXTRACTION OF PEAT

11 EXTRACTION OF CRUDE PETROLEUM AND NATURAL GAS; SERVICE ACTIVITIES INCIDENTAL TO OIL AND

GAS EXTRACTI

12 MINING OF URANIUM AND THORIUM ORES

13 MINING OF METAL ORES

14 OTHER MINING AND QUARRYING

15 MANUFACTURE OF FOOD PRODUCTS AND BEVERAGES

16 MANUFACTURE OF TOBACCO PRODUCTS

17 MANUFACTURE OF TEXTILES

18 MANUFACTURE OF WEARING APPAREL; DRESSING AND DYEING OF FUR

19 TANNING AND DRESSING OF LEATHER; MANUFACTURE OF LUGGAGE, HANDBAGS, SADDLERY, HARNESS

AND FOOTWEAR

20 MANUFACTURE OF WOOD AND OF PRODUCTS OF WOOD AND CORK, EXCEPT FURNITURE; MANUFACTURE

OF ARTICLES OF S

21 MANUFACTURE OF PAPER AND PAPER PRODUCTS

22 PUBLISHING, PRINTING AND REPRODUCTION OF RECORDED MEDIA

23 MANUFACTURE OF COKE, REFINED PETROLEUM PRODUCTS AND NUCLEAR FUEL

24 MANUFACTURE OF CHEMICALS AND CHEMICAL PRODUCTS

25 MANUFACTURE OF RUBBER AND PLASTICS PRODUCTS

26 MANUFACTURE OF OTHER NON-METALLIC MINERAL PRODUCTS

27 MANUFACTURE OF BASIC METALS

28 MANUFACTURE OF FABRICATED METAL PRODUCTS, EXCEPT MACHINERY AND EQUIPMENT

29 MANUFACTURE OF MACHINERY AND EQUIPMENT N.E.C.

30 MANUFACTURE OF OFFICE, ACCOUNTING AND COMPUTING MACHINERY

31 MANUFACTURE OF ELECTRICAL MACHINERY AND APPARATUS N.E.C.

32 MANUFACTURE OF RADIO, TELEVISION AND COMMUNICATION EQUIPMENT AND APPARATUS

33 MANUFACTURE OF MEDICAL, PRECISION AND OPTICAL INSTRUMENTS, WATCHES AND CLOCKS

34 MANUFACTURE OF MOTOR VEHICLES, TRAILERS AND SEMI-TRAILERS

35 MANUFACTURE OF OTHER TRANSPORT EQUIPMENT

36 MANUFACTURE OF FURNITURE; MANUFACTURING N.E.C.

37 RECYCLING

40 ELECTRICITY, GAS, STEAM AND HOT WATER SUPPLY

193

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CEPII: http://www.cepii.fr/CEPII/en/bdd_modele/bdd.asp

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http://www.asean.org/resources/2012-02-10-08-47-55/statistical-publications

http://www.cepii.fr/CEPII/en/bdd_modele/bdd.asp

http://www.rug.nl/ggdc/

http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators

http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators

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