Political economy of regional economic integration: Comparison of EU and NAFTA

Regional economic integration is taking place in Europe and in North America, driven both by the “silent integration” brought about by market forces and also by policy measures and the establishment of regional institutions.  The economic integration process has been much more formal and policy-driven in Europe than in North America. This paper will compare and contrast the different experiences of regional economic integration in Europe and North America in the light of theories of regional integration and institutional development.  Economic interdependence increases the need for cooperation in order to provide public goods that are beyond the scope of one country, and to internalize positive and negative externalities.  In the case of heterogeneous populations preferences for policies and institutions will likely differ across groups, necessitating a weighing of the costs and benefits of specific integration policies.  Through participation in regional institutions, countries develop a more accurate picture of what is important to the partner countries, what they can expect from each other, and can develop a higher level of mutual trust.  Transactions costs among nations can be reduced as countries agree ahead of time on what types of bargains are desirable, and build mechanisms for challenging forbidden types.  Establishment of rules at the regional level, and monitoring of compliance with them, can provide for a more favorable business climate by reducing uncertainty.  However, compliance is costly, and formulation of rules can beyond a point become counterproductive.   Institutional arrangements can also help to alleviate time inconsistency problems by allowing politicians to shift to the regional level actions that have short-term costs but long-term benefits, and can also perform a valuable signaling function that policies are stable.  This paper will assess the degree to which the economic integration and institutional development that has occurred in the EU and NAFTA can be reasonably explained in each case by existing theories of regional economic integration.  Given that the regional economic integration process is more highly developed in the EU than in North America, an assessment will be made of lessons that might be derived from the European experience—both positive and negative—for the North American case.