Regional Integration: European Lessons for Asia?

New Approaches to Regional Integration:Lessons for Asia from Europe’s Baltic Sea Region?

Dr Christian H. M. KetelsInstitute for Strategy and Competitiveness

Harvard Business School

ADB Workshop on Regional Integration3-5 March 2014

Manila, Philippines

2 2014 © Christian Ketels

• Proximity still a key factor in driving trade and investment relations

• However, strong ties with neighbors are not automatic; policy matters

• Asian countries traditionally more focused on global markets than on regional integration


• The two different faces of regional integration

• A European Experience: Collaboration across the Baltic Sea Region

• Implications for Asia


Trade Liberalization

Competitiveness

Different Modes of Regional Integration

• Focus on the removal of tariff barriers

• Logic of tit-for-tat agreements; liberalization as concession

• Regional approach as second best to global liberalization

Tipping Point

• Potential for ‘easy’ tariff reductions exploited

• Balance between economic gain and political pain increasingly unfavorable

• Focus on activities where regional collaboration can enhance national competitiveness

• Logic of win-win participation

Retardation

• Lack of progress in ‘sensitive’ areas

• Rising complexity of tariff rules

• “Dual economy” for exports vs domestic market


Different Modes of Regional Integration:Taking A Closer Look

Trade Liberalization

• Focused on barriers to trade (and investment) at the border

• Aims to achieve better exploitation of gains-from-trade; largely one-off

• Clear winners (consumers, exporters) and losers (import competing sectors)

Competitiveness

• Broad set of trade-related and other joint measures to upgrade competitiveness

• Aims to achieve business environment improvements; potentially on-going benefits to innovative capacity

• All can be winners, but only if they leverage the opportunities through internal changes

Different economic mechanisms, policy tools, and political economy


Upgrading Competitiveness via Regional CollaborationTypes of Collaboration

Coordinated National Policy Reforms• Limited independence

• Includes negotiated policy packages that tie participation in joint regional programs and access to funds to domestic policy reform

Cross-Border Activities

• Medium level of independence• Includes joint efforts to upgrade border procedures, improve infrastructure, and develop

cluster linkages

Learning and benchmarking

• Leaves national autonomy fully intact• Includes networks covering all areas of policy in an “open model of cooperation”

Joint action• No independence

• Includes common standards and policies as well as joint positioning of the region abroad, including towards investors and in international/supranational bodies






Profile of the Baltic Sea Region

• Countries bordering the Baltic Sea, i.e. the Nordics, Baltics, and relevant coastal regions of Germany, Poland, and Russia

• Modest overall size (roughly 55% of German GDP, 10% of EU GDP)• Small Open Economies• Huge heterogeneity in terms of economic development• Some overlap in sectorial specialization patterns

• Close historical connections, but disrupted during the Cold War• All core countries EU members; Russia connected through joint

institutions • Most core countries entirely within the geographic boundaries of the

region


Context for Regional Integration

• EU Membership sets the key context for regional integration– Four freedoms across the region (free movement of goods, services,

capital, and people)– acquis communautaire (overall set of EU legislation, legal acts, and judicial

decisions) that set standards for the regulatory context– Limits to state aid and any government action discriminating between firms

based on their nationality

• Strong political support for regional collaboration, especially in the core countries

– Baltic countries view tight economic integration with European partners as guarantee against Russian pressure

– Scandinavian countries see the Baltic Sea Region as their home turf in which they can play a dominant role; their small size often makes them marginal players in the broader context of the EU’s political system

– There are a number of specific regional issues, especially the environmental state of the Baltic Sea and sea transport


Baltic Sea Region: Signs of Economic Integration

0%

5%

10%

15%

20%

25%

30%

Export Migration FDI

East-EastEast-WestWest-EastWest-West

Share of flow to other parts of the BSR

Source: WTO, UNCTAD, national agencies, author’s calculations


Institutional Architecture

• CBSS

• BDF

• NIB

• Nordic Council

• Baltic Council of Ministers/Baltic Assembly

• Bilateral programs

• EU InterReg


EU Strategy for the Baltic Sea Region

Key characteristics• Initiative by Nordic countries and group

of EU parliamentarians• Approved in 2009 by the European

Council• Core objective to better prioritize and

coordinate collaborative actions across the region

• Action agenda based on priorities set by the region

• No new institutions; High-Level coordination group

• No new budget lines; national and InterReg funds

Action Priorities


Cluster-Based Programs with a Regional ScopeBaltic Sea Region

ScanBalt• Bottom-up coalition of local clusters, companies, research

institutions, and others active in Life Sciences• Attempt to overcome lack of critical mass in individual clusters

trough closer linkages between them• Focus on pre-market activities like joint academic training

programs, research collaborations, marketing, etc.• www.scanbalt.org

BSR STARS• Top-down effort as part of EU BSR strategy to create networks of

regional clusters in five areas of regional economic strength• Attempt to create stronger regional value chains and enhance

innovation in markets with perceived global potential• Focus on developing linkages and collaborate on selected pilot

initiatives• www.bsrstars.se


Creating Corridors in the Baltic Sea Region

• A number of cross-border projects to enhance collaboration along physical corridors

– Oresundbridge– Rail Baltica– Femern Sund Tunnel– Motorways

• Effective to enhance common planning across public administrations

• Challenges are financing and company engagement


Baltic Sea Region Integration: A Preliminary Assessment

• Solid economic performance– Economic performance is solid– Catch-up of the Baltics is happening– Crisis in the Baltics was severe, but regional linkages were critical buffers

both during the crisis and the post-crisis recovery– Cross-regional linkages are well-developed, and in parts slowly rising

GDP per Capita (PPP)

Productivity-Factor (PPP)

OceaniaNAFTA

British IslesCore Euro-zone

Asian tigersEU-15EU-27

Baltic Sea RegionPIGS

Iberian PeninsulaDanube Region

EU-8

Asian tigersOceania

EU-8Baltic Sea Region

NAFTABritish Isles

Danube RegionEU-27EU-15PIGS

Core Euro-zoneIberian Peninsula

Core Euro-zoneOceaniaEU-15

British IslesNAFTAEU-27

Iberian PeninsulaPIGS

Baltic Sea RegionAsian tigers

Danube RegionEU-8

Employment-Factor

= x

Baltic Sea Region

State of the Region-Report 2013

Prosperity DecompositionSelected Cross-national Regions in 2012

Note: Working hours for Russia are estimatedSource: Groningen Growth and Development Centre and The Conference Board (2013), authors’ calculations

Baltic Sea Region

Baltic Sea Region

Prosperity Dispersion Within Cross-National Regions1995 - 2012

1

2

3

4

5

6

State of the Region-Report 2013

Ratio of GDP (PPP adjusted) per Capita, Richest to Poorest Country per Region

Baltic Sea Region

EU-27*

Note: Norway and Russia levels adjusted for natural resource sector; Luxembourg excludedSource: Conference Board (2013)

EU-15*


Baltic Sea Region Integration: A Preliminary Assessment

• Solid economic performance– Economic performance is solid– Catch-up of the Baltics is happening– Crisis in the Baltics was severe, but regional linkages were critical buffers

both during the crisis and the post-crisis recovery– Cross-regional linkages are well-developed, and in parts slowly rising

• EU context has been critical– Provided the necessary stability and drove key changes at the national

level across the entire region• Impact of regional efforts more limited

– Political role important, and critical during the crisis– EU Baltic Sea Region strategy has led to better alignment of cross-regional

projects and initiatives– But actual on-the-ground activities are time-consuming and their impact

has often been relatively limited – Lack of organization, budget, and clear linkage to national policies has

been an issue






Integration in Europe’s Baltic Sea Region:Emerging Lessons for Asia

• Be conscious about the political context

• The political motivation has been critical for launching and sustaining the regional integration efforts in the Baltic Sea Region

• If the motivation is primarily economic, the ability to make long-term investments in institutional architecture and capacity is severely limited

• In this case, more narrow efforts in specific cross-border projects or specific clusters with clear win-win outcomes already in the short- to medium-term are more likely to succeed



• Be conscious about the political context• Set the right level of geography for regional efforts

• Infrastructure• Administrative practices and cluster-

specific regulations• Cluster linkages

Global / Large Geographies

Neighborhoods

Nations

Sub-national Regions

• Macroeconomic coordination• Tariffs • Economy-wide regulations

• Strengthen the context for competitiveness• Business environment upgrading• Cluster development• Company sophistication




• Be conscious about the broader economic policy context within countries

– Directly competing national industrial policy efforts in specific industries make collaboration in these areas very hard

• Integrate regional efforts into broader economic strategies pursued at the national level

– Benefits of creating stronger regional ties depends largely on overall improvements in competitiveness within countries

– Regional efforts can easily become ‘islands’ in the public sector system, and then lack the resources and power to have impact




• Be conscious about the broader economic policy context within countries

– Directly competing national industrial policy efforts in specific industries make collaboration in these areas very hard

• Integrate regional efforts into the broader competitiveness strategies at national level

– Benefits depend largely on overall improvements in competitiveness– Regional efforts can easily become ‘islands’ in the public sector systems,

and then lack the resources and power to have impact

• Look for pilot areas – networks of clusters are a strong candidate– Easier to increase value added shares in export-oriented GVCs than

upgrade import-competing activities directly


Elements of a Regional Cluster Action Plan

• Identify existing clusters with regional presence and willingness to upgrade and collaborate

• Create cluster-oriented institutional architecture, involving the private sector, especially foreign investors

• Strengthen economic linkages between regional clusters

• Connect cross-border and national policy programs, including infrastructure investments and the creation of ‘corridors’, to clusters

• Identify issues and solutions for general business environment upgrading

• ADB can provide intelligence, a neutral platform for mobilization/ collaboration, and seed capital

• Other partners (e.g., ASEAN, chambers, foreign investor councils, etc.) should be mobilized as well



• Clear potential

• But not an easy or quick fix

• A way to make competitiveness upgrading more likely and more beneficial


Back-Up

State Of the Region Report: 2004 – 2013www.bdforum.org

• Convergence

• Competitiveness

• Collaboration


The Role of Within-Region Trade

10%

12%

14%

16%

18%

20%

22%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Share of Intra-BSR Exports in total BSR Exports

0%

10%

20%

30%

40%

50%

60%

Share of 2010 Exports to Other BSR Countries

Source: UNCTAD (2012) State of the Region-Report 2012


IntegrationForeign Direct Investment Flows

0%

10%

20%

30%

40%

50%

60%

70%

80%

Lithu

ania

Finlan

dEsto

niaNorw

ayDen

markSwed

enN P

oland

NW R

ussia

Icelan

dN G

erman

ySwedenFinlandDenmarkEstoniaN GermanyNorwayLatviaIcelandLithuaniaNW RussiaN Poland

Share of inward FDI from other BSR countries, 1999 - 2004

Source country

Source: UNCTAD, national statistical offices, author’s calculations

BSR average

Education

Regional Integration: European Lessons for Asia?