The benefits of international integration:

Is a global approach superior?

Three criteria to assess the benefits of integration:

1. Similarity of structural factors (HO, Ricardo)

2. Learning (Coe & Helpman 1995; Lumenga-Neso, Olarreaga, Schiff 2005; Keller 2004; Rivera-Batiz & Romer 1991)

3. Diversification of risks (Caselli et al. 2015)

LAC neighbors are structurally similar, invest Little in R&D, are less integrated in global markets.

Then, why pursue regional integration?

Then, why pursue regional economic

integration?

Because our neighborhood cannot be ignored

• Geography shapes trade in goods and services, migration decisions, and, to a lesser extent, capital flows

• It also affects knowledge diffusion (Keller 2002)

• And economic performance is geographically clustered (even after controlling for terms of trade fluctuations)

This implies that the benefits of global and

regional integration are intertwined

A country’s neighborhood affects its global competitiveness

• Example: Regionally traded goods and services, such as land transport and electricity

And global integration affects the potential benefits from regional economic ties (e.g., learning about our neighbors’ export markets)

How? An agenda for the renewal of integration in LAC…

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Pacific Alliance CAFTA-DR Mercosur G-7 Selected Asianeconomies

In p

erce

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Applied MFN tariffs, 2014 Applied MFN tariffs, 1995

1. Renew MFN tariff liberalization to enhance efficiency

Evolution of applied MFN tariffs

LAC countries Other countries

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15

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45

Pacific Alliance CAFTA-DR Mercosur G-7 Selected Asianeconomies

In p

erce

nt

Applied MFN tariffs, 2014 Overhang

1. Renew MFN tariff liberalization to boost investment

Applied MFN tariffs and WTO binding commitments

LAC countries Other countries

0.000.050.100.150.200.250.300.350.400.450.50

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South America Central America + MEX Caribbean

Average Median

2. Deepen integration between LAC sub-regions

Trade similarity with regional and extra-regional partners (rank correlations)

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South America Central America + MEX Caribbean

Average Median

Trade similarity with regional and extra-regional

partners

2. Deepen integration between LAC sub-regions

3. Harmonize rules to enhance global competitiveness

Non-tariff barriers affect trade flows and efficiency

Two examples:

1. Rules of Origin (RoO)

Non-tariff barriers affect trade flows and efficiency

Two examples:

1. Rules of Origin (RoO)

2. Regulatory frameworks: Critical for RTGs• Example: transmission of electricity

3. Harmonize rules to enhance global competitiveness

SSAMENA

LACEUR

ECA

EAP

LAC

ECA

SSA MENA

EAPEUR

-1.6

-1.4

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

Rest of the world Regional partners

Not significant Significant

4. Reduce LAC’s trade costs

Elasticities of trade flows with respect to distance by region and partner type

Note: SSA=Sub-saharan Africa, MENA= Middle East and North Africa, EUR=Europe, ECA=Eastern Europe and Central Asia, EAP=East Asia and the Pacific

5. Deepen labor market integration

Three indicators of labor-market integration:

Short-term comovement of wages of similar workers (synthetic cohorts) across countries

Long-term wage differentials across countries

Speed of adjustment to equilibrium wage gaps

• All these compared with what is observed within countries (Mexico and the U.S.)

Short-term co-movement of wages: Across

LAC vs. Mexico and the U.S.

50%

27%

0.3

0.31

0.32

0.33

0.34

0.35

0.36

0.37

0.38

0.39

0.4

Latin America Mexico United States

Elasticity of wages in one country (region) with respect to changes in wages in other countries (regions)

Wage differentials and speed of adjustment:

Across LAC vs. Mexico and the U.S.

50%

27%-0.35

-0.3

-0.25

-0.2

-0.15

-0.1

-0.05

0

Latin America Mexico United States

Speed of adjustment toward equilibrium gaps

0%

10%

20%

30%

40%

50%

60%

LAC Mexico United States

Average wage gaps

5. Deepen labor market integration to enhance efficiency

Interpretation of the evidence: potential efficiency gains from deeper labor-market integration

But, two challenges ahead [graphs]

5. Deepen capital market integration to improve the

regional investment climate

Evidence suggests that geography exerts a weaker pull on capital flows

Nevertheless, concerted regional efforts can foster capital inflows into the region

Example: The Pacific Alliance’s MILA

If the regional investment climate improves, the region as a whole becomes more efficient

Link to the report: bit.ly/mejores-vecinos

Thanks!

Learning about your neighbors’ export markets

Determinants of entry and survival in new export markets [back]

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0.001

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0.005

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0.009

0.01

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0.01

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Determinants of Entry Determinants of Survival

Esta

blis

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Par

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s' G

DP

per

cap

ita

Elas

tici

ty

Net

wo

rk E

ffec

t El

asti

city

Network Effect Established Partners' GDP per capita

Regional trade integration and diversification

of risks

Effects of changes on intra-LAC and global trade on export volatility [back]

Economic performance and geographic

distance

Structural breaks and distance Short-run economic cycles and distance [back]

-0.02

-0.015

-0.01

-0.005

0

All Contractions Recoveries Expansions

Dis

tan

ce E

last

icit

ies

Distance elasticity 5th-95th percentile

-0.03

-0.025

-0.02

-0.015

-0.01

-0.005

0

All phases High-growth phase Low-growth phase

Dis

tan

ce E

last

icit

ies

Distance elasticity 5th-95th percentile

Challenges to labor market integration in LAC:

Actual vs intended intra-regional emigration rates

Actual Intended

Challenges to labor market integration in LAC:

More immigration, more resistance

Immigration rates and anti-immigration views [back]

Brazil Chile

Dominican Republic

Guatemala

MexicoPeru

Trinidad and Tobago

Uruguay

Venezuela, RB

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0.6

0 0.01 0.02 0.03 0.04 0.05

An

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mm

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iew

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Immigration rate

Note: Immigration rates are calculated as the stock of immigrants over total population. Immigration views come from the World Value Surveys