<!-- Start of picture text --> Policy, Research, andExternalAffairs<br>Trade Policy;<br><!-- End of picture text --> WPS 643

- - This paper a product of the Trade Policy Divisica, Country Economics Department is part of a larger efforL in PRE to study new developments in regional integration and their relation to trade straw -gies. Copies are available frec from the World Bank, 1818 H Street NW, Washington, DC 20433. Plcasecontact Dawn Ballantyne, room N 10-001, extension 37947 (51 pages).

Economic integration among developing countries became an important policy issue in the 1960s and early 1970s. But although intraregional trade increased in some trading groups, it remained a modest share of total trade, tended to decline in the 1970s, and stagnated during most of the 1980s. In addition, ambitious plans for joint industrialization could not be implemented.

This failure could be attributed partly to tL smallness of most of the markets, different political and economic policy orientations, the low level of economic, industrial, and infrastructural development, and similar production and export patterns. Also, serious problems arose in implementing the main objectives. Trade liberalization was blocked or substantially slowed down, highly protective barriers to trade remained untouched or were harmonized regionally, and controversy about the distribution of gains and losses could nol be resolved. Dramatic changes in the world economy further affected the environment for regional integration and cooperation.

But the formation of new, powerful economic and trading blocs-such as the single market of the European Community, the U.S.-Canada free trade area, initiatives in the Pacific basin, and the transition to market economies in Central and perhaps Eastem Europe - seems to have fostered a trend toward now regionalism in the world economy. The virtual failure of the GATr negotiations may speed this up. To minimize economic losses and avoid marginalization, regional groups of developing countries must increasingly work out common positions and join one of Lhe influential groups. Both factors require the gradual yet rapid dismantling of barriers lo the free flow of production factors within regional groups.

New approaches to regional cooperation have emerged. Attempts to revitalize dormant regional groups, to form new blocs, and to set panly new priorities are on the increase. Trade is the most important element of the new initiatives, but assessments of the possibilities and limits of regional integration have changed since the 1960s.

Stabilization and adjustment policies have created more open, export-oriented, liberal, and competitive economies. Higher exports have generated more growth and regional demand. Industrial restructuring has improved competitiveness, attracted international capital and technology, and opened up areas of intra-industrial division of labor. Exportoriented economies have proved increasingly competitive in extraregional markets.

In mosL cases it was not the regional training but successful outward-looking policies that improved competitiveness within the region and resulted in higher intraregional trade volumes. The strengthening of the private sector and closer cooperation in infrastructure development (mostly the morc efficient use of human resources) support the shaping of an environment conducive to new opportunities for better regional trade.

Obviously, intraregional trade cannot become an alternative to trade flows that are basically oriented to the world market. But in the 1990s, intraregional trade and economic relations are likely to grow parallel to, or even at a higher rate than, extraregional contacts.

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