On the Paradox of Global Economic Integration

1 november 2017

Yaroslav Lissovolik - Programme Director of the Foundation for Development and Support of the Valdai Discussion Club, Chief Economist of the Eurasian Development Bank.

Resume: Concerns over the global economic slowdown appear to be gradually receding this year as the global economy is set to muster an acceleration in growth on the back of a strong showing by the Eurozone, the US and China.

Concerns over the global economic slowdown appear to be gradually receding this year as the global economy is set to muster an acceleration in growth on the back of a strong showing by the Eurozone, the US and China. Nonetheless many observers rightly point to the persistence of the global economy’s fundamental ills that accounted for the slowdown of the past decade, most notably the high levels of inequality within and across countries. 

The important point to be made is that this inequality is further compounded by a widening gap across countries in terms of their involvement in economic integration through free trade agreements as well as other types of regional trade and investment alliances. The ones that are most isolated in the process of frenetic creation of a cob-web of economic alliances are the least developed economies as well as developing nations without access to ports and seashore. Hence the paradox, with which the global economy continues to grapple – the economies most in need of economic integration are the ones that are the most left out from regional and global economic alliances and “clubs”.

The way to gauge the “inequality in integration” is to compare the average number of integration agreements per country for the disadvantaged (landlocked economies and those with low levels of income per capita) with the developed economies rest or the rest of the world. So let’s look at the figures – within the category of landlocked economies that does not include the 7 European countries that are members of either EU or EFTA, the average number of Free Trade Agreements (FTAs) reaches just 2,5 (on the basis of the WTO dataset on integration arrangements), while for the rest of the world economy the average is 7,5 (i.e. a 3-fold differential). If other types of economic alliances are counted, then the difference remains sizeable – 4 agreements on average per country for landlocked developing countries and 9 for the rest of the world.

The difference is even more staggering when least developed nations are compared with the advanced economies (according to World bank definition) – the average number of FTAs for the least developed is 0,3 agreements per country, while for the most advanced economies this measure reaches 14,7 (a difference of more than 40 times). If other types of integration arrangements are included into the calculation, then the corresponding figures are 1,6 and 16,8 respectively, leaving a more than 10-fold differential between the two groups of countries.

Another way to assess the problem of inequality in economic integration is to look at the WTO membership – of the 21 observers that are still outside the organization, a third is accounted for by landlocked countries, including the likes of Serbia, Belarus in Europe (the latter of the two is the largest landlocked economy in Europe), Uzbekistan in Asia (the only country separated from the seashore by more than one country), and Ethiopia in Africa (the largest landlocked economy in terms of population). Five years ago the presence of landlocked economies was even less significant – their share in the number of WTO observers reached nearly 40% of the total, which compares with a roughly 20% share of the number of landlocked countries in the global economy.

This paradox of global economic integration may be added to a number of anomalies and paradoxes in the global economy along the North-South divide, such as the Lucas paradox, which points to the prevalence of outward investment from developing economies into the developed world contrary to the theoretical constructs that suggest that the direction of the net outward investment flow should be the reverse. To reverse the widening gap between the well-off and the less fortunate economies a different approach to economic integration is needed that is predicated on considerations of sustainability and greater balance across countries. The new paradigm needs to be based on new types of integration arrangements that focus more on issues of connectivity that in turn are paramount for landlocked developing countries.

One such project is the Belt and Road initiative (BRI), which includes more than 30% of all landlocked economies in the world and 75% of landlocked economies in Eurasia. Another such regional integration grouping is the Eurasian Economic Union, in which 4 out of 5 members are landlocked (Kazakhstan being the largest landlocked economy in the world by territory), with Russia having the longest land border in the world. Going forward, one way to add to the economic connectivity of the developing countries is to replicate China’s Eurasian BRI project in other continents via similar infrastructural efforts in Africa and Latin America, with all such continental connectivity projects pursued through the extended BRICS+ framework.    

Valdai International Discussion Club

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