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Commerce and institutions: Trade, scope, and the design of regional economic organizations

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Abstract

The design of current regional economic organizations (REOs) is remarkably diverse. Some REOs address numerous economic issues, while others have only limited mandates. Some REOs have an independent bureaucracy and a legalized dispute settlement mechanism (DSM), while others do not. What determines this institutional variation? Thinking about these institutions as devices that generate credible commitment to a rule-based regional cooperation, institutionalists maintain that the intensity of commercial ties determine regional institutionalization and institutional independence. A number of studies question this logic and argue that it is “naïve.” Empirical evidence on the links between commerce, economic scope, and regional institutions is scant, however. Using an original data set that contains detailed information on the economic activities and institutional structure of twenty-eight REOs over three decades, this paper presents one of the first systematic analyses of these relationships. The empirical analysis indicates that the institutionalist wisdom is right after all. It shows that higher levels of regional trade are associated with greater institutionalization and economic scope, but only if implementation of signed agreements is accounted for, and that regional commerce and greater economic scope are associated with more independent bureaucracies and more legalized DSMs.

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Notes

  1. See the Online Appendix at this Journal’s webpage for the full name of these organizations.

  2. This criterion results in the exclusion of bilateral preferential trade agreements (PTAs), which almost always lack a continuous institutional framework, as well as economic agreements between REOs and individual states or other REOs (such as agreements between the EU and third countries).

  3. Implementation is related to but distinct from compliance. The former is usually a key step towards, but it is neither a necessary nor a sufficient condition for the latter (Raustiala and Slaughter 2002: 539). Implementation is also different from effectiveness, which refers to the relative success of an institution in obtaining its stated goals (Acharya and Johnston 2007: 24–25; Gray and Slapin 2012; Raustiala and Slaughter 2002; Victor et al. 1998).

  4. In some cases, members agreed to form a tribunal but its establishment was postponed for several years or indefinitely. Establishment is different from utilization, DSMs may be operational but underutilized. The design of DSMs may affect their utilization and effectiveness (Gray and Slapin 2012; Kono 2007; Posner and Yoo 2005).

  5. REOs that were formed after 1982 include fewer observations.

  6. I offer a detailed description of this process elsewhere (Haftel 2012).

  7. For each REO, the value represents the average across the different time points. Even though the level of institutionalization changes over time, most REOs remain in the same category.

  8. Newly formed REOs have low levels of regional institutionalization that may lead to an artificially low average. It is thus more informative to compare the same group of organizations across time.

  9. Most, but not all, REOs have experienced increasing institutionalization. Some organizations, such as APTA and LAIA, showed little dynamism and others, such as MRU and CEPGL, have experienced declining levels of institutionalization over time.

  10. This is sometimes dubbed as the “new” or “open” regionalism.

  11. Nonetheless, the EU has much in common with other REOs and serves a useful yardstick (Acharya and Johnston 2007; Kahler 1995).

  12. Many REOs have a non-binding DSM, see Smith (2000).

  13. In particular, the analysis conducted here does not explain why states form or join REOs in the first place. Instead, given their existence, it makes inferences about the sources of variation across REOs. For a recent and illuminating study that accounts for the growing number of trade agreements, see Baccini and Dür (2012).

  14. A Hausman test indicates that the random effects model is consistent and therefore preferable to the fixed effects model. Given Baier and Bergstrand’s (2007) recommendation to use the fixed effects specification, four such models are reported in Table A3 of the Online Appendix. The analysis indicates that the results for implemented scope are robust to this specification, but the results for regional institutionalization are not. It is also noteworthy that all the year dummies except 1987 are positive and highly significant, reflecting the growing institutionalization of REOs in the post Cold War era.

  15. The full models that pertain to regional bureaucracy did not converge. A reduced model is therefore presented. In addition, none of the year dummies is statistically significant in all models related to bureaucracy and DSM.

  16. Trade data for SACU is not available, and most likely does not exist (Page 2000a, 117).

  17. I tested for two alternative specifications of this variable: the actual Polity average and the score of the least democratic member. I also tested for the effect of the standard deviation on the regional Polity score. These three variables were not statistically significant and did not change the results.

  18. Dropping the most institutionalized, and arguably unique, REO – the EU – from the sample does not change these results (not reported here).

  19. These results are robust to various model specifications and remain intact when the EU is dropped from the analysis.

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Authors and Affiliations

  1. Department of International Relations, The Hebrew University of Jerusalem, Mount Scopus, Jerusalem, 91905, Israel

    Yoram Z. Haftel

  2. Department of Political Science, University of Illinois-Chicago, Chicago, IL, USA

    Yoram Z. Haftel

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Author’s note

Earlier drafts of this paper were presented at the Workshop on the Politics of Trade Agreements: Theory, Measurement, and Empirical Applications, April 30-May 1, 2010, Princeton University as well as the 2011 ISA Annual Convention and the 2011 APSA Annual Meeting. For helpful comments, I would like to thank Vinod Aggarwal, Mark Copelovitch, Soo Yeon Kim, Peter Rosendorff, and the anonymous reviewers.

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Haftel, Y.Z. Commerce and institutions: Trade, scope, and the design of regional economic organizations. Rev Int Organ 8, 389–414 (2013). https://doi.org/10.1007/s11558-012-9162-9

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