South-South Regional Integration and Industrial Growth : The Case of the Andean Pact

Results from this study of three Andean countries cast doubt on the argument that countries may benefit from regional integration arrangements because of industry and cross-industry effects of scale. Unilateral liberalization might have a more positive impact on output growth, through the channel of greater imports of intermediate inputs. Has the revival of the Andean Pact affected the industrial growth of Bolivia, Colombia, and Ecuador? Has this regional agreement had greater effects than unilateral liberalization?Madani explores two potential channels for industrial growth: Scale effects and variety of imported intermediate inputs. She analyzes data from 22 industries (classified at the three-digit level of ISIC) across three countries. The results show that:The variety of intermediate inputs originating from nonregional partners has a significant positive impact on growth in a handful of industries.The effect of regional variety is at best mixed. This lends preliminary support to the argument that unilateral liberalization will have a positive impact on output growth through the channel of imported intermediate inputs.There is significant heterogeneity in industry-level returns to scale. Moreover, in the three Andean countries studied, cross-industry scale effects were small and negative. Therefore, the three countries should not expect large or across-the-board gains through scale effects from their regional arrangement.This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to understand the effects of regional integration. The study was funded by the Bank's Research Support Budget under the research project The Impact of the Revival of the Andean Pact and the ASEAN Group on Their Member Countries' Industrial Growth