Regional Integration and Economic Growth

Abstract

The rapid economic growth of developing countries that opened their markets to free international trade during the past two decades has stimulated a large empirical and theoretical literature on the impact of trade on growth. This literature concludes that free trade and growth were positively correlated during the 1970s and 1980s. However, most studies focus on nondiscriminatory openness. Does regional integration matter for economic growth? Do regional trade agreements have any impact on growth? This article presents empirical evidence that countries with open, large, and more developed neighboring economies grow faster than those with closed, smaller, and less developed neighboring economies. The results are robust to different specifications of the empirical model and different definitions of openness, suggesting that small economies should grow faster when they form regional trade agreements with large and more developed economies. However, testing for the impact of five regional trade agreements during the 1970s and 1980s finds that none led to faster growth. The main reason seems to be that most of these agreements were among small, closed, and developing economies.

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