Regionalism as Industrial Policy: Evidence from MERCOSUR

• Date: 01 February 2016
• Author: Marcel Vaillant,Pedro Moncarz,Marcelo Olarreaga
• DOI: http://doi.org/10.1111/rode.12224
• Published date: 01 February 2016

Regionalism as Industrial Policy: Evidence from

MERCOSUR

Pedro Moncarz, Marcelo Olarreaga, and Marcel Vaillant*

Abstract

This paper empirically explores whether trade preferences can be used as a substitute for industrial

policy and help countries achieve their industrialization objectives at the expense of other regional

members. Results show that Mercado Com

un del Sur (MERCOSUR) preferences obtained by Brazilian

exporters have led to an increase in exports of relatively sophisticated products in which Brazil does not

enjoy a global comparative advantage. On the contrary, smaller members of MERCOSUR export to the

region products in which they have strong comparative advantages and with relatively low levels of

sophistication. This suggests that MERCOSUR has helped Brazil achieve its industrialization objectives,

but has not contributed to the industrialization of its smaller members.

1. Introduction

The early economic literature on regionalism worried very little about its impact on

the multilateral system [perhaps because of the relative weakness of the General

Agreement on Trades and Tariffs–World Trade Organization (GATT–WTO)

system at the time] and focused rather on the conditions under which regional

blocks are likely to enhance world and the block’s welfare (Viner, 1950; Kemp and

Wan, 1976; Panagariya and Krishna, 2002; Ohyama, 2007). A small part of this

literature looked at the distribution of gains within regional blocks.

1

An example of

this approach is Cooper and Massell (1965) where they argue that regional

integration schemes among developing countries could be used to achieve

industrialization objectives in the spirit of Prebisch (1959) at a smaller economic or

efficiency cost for their members. The idea is simple: facing a larger regional

demand through regional preferences, member countries can specialize their

industrial production in a smaller range of industrial products in which they are

relatively more competitive. Thus, the exogenous or politically determined level of

industrial production can be reached at a lower cost thanks to the creation of a

larger regional market.

2

One problem recognized by Cooper and Massell (1965) is that depending on the

cost structure of block members and the external protection structure chosen by

members of the regional block this may lead to the reallocation of industries within

*Olarreaga: University of Geneva, 40 Bd du Pont d’Arve, 1211, Geneva 4, Switzerland. Tel: +41-22-379-

8286; Fax: +41-22-379-8293; E-mail: marcelo.olarreaga@unige.ch. Moncarz: Facultad de Ciencias

Econ

omicas of Universidad Nacional de C

ordoba and CONICET, C

ordoba, Argentina. Vaillant:

Universidad de la Rep

ublica, Montevideo, Uruguay. The authors are grateful to participants of seminars

at the World Bank and Murphy Institute conference on the BRICs in New Orleans, the European Trade

Study Group meetings in Rome, the Fourth UNCTAD Virtual Institute Meeting in Geneva, the

Jornadas de Econom

ıa of the Central Bank of Uruguay, the IX Arnoldshain Seminar in Punta del Este,

and an anonymous referee for their constructive comments. We would also like to thank the UNCTAD

Virtual Institute’s joint research project on regional integration and cooperation in Latin America for

their support.

Review of Development Economics, 20(1), 359–373, 2016

DOI:10.1111/rode.12224

©2016 John Wiley & Sons Ltd