Regional Cooperation and the EU Enlargement

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ReviewInternational Political Science

DOI: 10.1177/01925121020230030062002; 23; 319International Political Science Review

Milica UvalicLearned?

Regional Cooperation and the Enlargement of the European Union: Lessons

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Regional Cooperation and the Enlargement of theEuropean Union: Lessons Learned?

MILICA U VALIC

A BSTRACT. The article evaluates and attempts to draw some lessons fromthe recent initiatives aimed at stimulating regional cooperation amongtransition economies in Northern, Central, and South-Eastern Europe. Although these initiatives varied significantly in their scope, objectives,and domain of activity, the author highlights the common elements anddiscusses both their major achievements and greatest weaknesses. Theauthor then relates these initiatives to the recent theoretical debate onregionalism, the main conclusions in the empirical literature, and themost important policy issues concerning current integration processesand EU enlargement. The role of subregional economic cooperationamong transition economies is examined within the context of theproblems posed by the variable speed integration policies of theEuropean Union. The general conclusion is that the overall experienceof regional cooperation among European transition economies has, onbalance, been positive, though clear limitations and many unresolvedquestions remain. (For acronyms see page 323.)

Keywords : • Cooperation • EU enlargement • Integration • Regionalism• Transition

The New Regionalism of the 1990s

The former socialist countries’ transitions to market economies and multiparty democratic systems opened up a new era of political and economic cooperationamong European countries that fundamentally differs from that prior to 1989.Initiatives on regional cooperation among transition countries in Northern,Central, and South-Eastern Europe, as well as among the successor states of theformer Soviet Union proliferated during the last decade. A number of important factors encouraged these cooperative initiatives, including the dissolution of COMECON; the disintegration of the Soviet Union, Czechoslovakia, and Yugoslavia;

International Political Science Review (2002), Vol 23, No. 3, 319–333

0192-5121 (2002/07) 23:3, 319–333; 023901 © 2002 International Political Science AssociationS AGE Publications (London, Thousand Oaks, CA and New Delhi)


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German unification; and European Union policies promoting regional integra-tion. The dissolution of old trading blocks and the creation of new regional oneshave brought about substantial changes in the regional economic subgroupings of

Europe. Consequently, in the 1990s individual countries have experiencedimportant changes in their own systems of trade and position as trading partners.The recent initiatives on regional cooperation among transition countries are

part of what is known as the “new regionalism.” This contrasts with the oldregionalism, or the regional agreements of the 1950s and the 1960s which, withthe exception of the European Economic Community, are generally considered asfailures (see Bhagwati, Greenaway, and Panagariya, 1998). The renewed interest inregionalism reflects the general global trend toward regional agreements.1 It islikewise enmeshed in the whole range of new policy questions that have emergedfrom the very different context of today’s international economic order. While oldregionalism was set in the context of a relatively infant international trading

system, today the World Trade Organisation ( WTO) enjoys established and wide-ranging powers. This simultaneous existence of regionalism and multilateralismhas given a fresh impetus to a controversy about regional trading blocks that hadremained latent for several decades (Lahiri, 1998: 1126).

Apart from theoretical controversies, important policy issues about subregionalpolitical cooperation have also been raised within debates on current integrationprocesses in Europe. Regional cooperation has been actively promoted by majorpan-European organizations and institutions, including the Organisation forSecurity and Cooperation in Europe (OSCE), the UN Economic Commission forEurope (UNECE), the Council of Europe, and the European Union (EU). The“Europe of subregional cooperation processes” has acquired a particularly

important role after the Monaco Declaration adopted in 1997 by the OSCEParliamentary Assembly. This declaration clearly defined the role, spheres of intervention, and means of achieving subregional cooperative agreements, andtheir relations with European institutions (OSCE, 1997). The European Commis-sion has also promoted and strongly recommended regional economic coopera-tion to candidate and non-candidate countries in the transition economies as a

way to accelerate their integration into greater Europe.The next section provides an evaluation of the main achievements and failures of

recent initiatives aimed at stimulating regional cooperation among Europeantransition countries. In the following sections I present the main conclusions of the recent theoretical debate and the principal findings of the empirical literature

on regionalism. Then, I address some questions regarding regional cooperationand EU enlargement. Finally, in the last section, I draw some principal lessons fromthe topics covered.

Regional Cooperation among Transition Economies: Has It Worked?

The regional cooperation initiatives among European countries in transition havebeen characterized by rather great variation, mostly because of the highly divergent political and economic conditions found in the various Europeansubregions and individual countries. From the beginning of the 1990s, many former socialist countries succeeded, in a remarkably short period of time, in

reorienting their trade from traditional partners within COMECON to partners within the European Union. This process of trade reorientation towards westernmarkets ran parallel with various initiatives of stimulating regional cooperation

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among former socialist countries. These initiatives can be divided into two broadgroups.

The first group of initiatives, most of which were launched between 1989 and

1992, was the result of the dissolution of the socialist block. These initiatives wereaddressed to a wide group of countries located in various parts of Northern,Central, and South-Eastern Europe, and the former Soviet Union. Among the most important were the Central European Initiative (CEI, 1989), the Commonwealth of Independent States (CIS, 1991), the Council of the Baltic Sea States (CBSS, 1992),the Baltic Free Trade Area (BFTA , 1994), the Black Sea Economic Cooperation(BSEC, 1992), and the Central European Free Trade Agreement (CEFTA , 1992). Thesecond group of initiatives was, on the contrary, directed primarily towards South-Eastern Europe (SEE), and was launched in 1995–96 after the end of the war inBosnia-Herzegovina. Among the most important of these were the Conference onGood Neighbourliness, Stability, Security and Cooperation in SEE (CSEE, 1996), the

Royaumont Process (RP, 1995), the Regional Approach of the EU (RA -EU, 1996),and the Southeast European Cooperation Initiative (SECI, 1996). Finally, the most recent of these initiatives, the Stability Pact for SEE adopted in Cologne in June1999, also establishes, through its specific mechanism (the three Working Tables),concrete forms of regional cooperation in various fields among the participatingcountries. These most important initiatives on regional cooperation amongtransition countries are presented in Table 1.

The initiatives stimulating regional cooperation can be significantly different interms of their scope, objectives, and domain of activity. Still, given that the mainobjective behind most of them is to promote various forms of cooperation amongneighbouring countries, they tend to include peace, stability, development, and

integration. While some envisage the creation of a free trade area (such as theCentral European and the Baltic Free Trade Agreements), others are limited tocooperation in specific fields (such as the CEI, SECI, or RP), or may be of a muchmore general and political nature (such as the CSEE). They usually involvecountries which are geographically located in the same region. As seen in Table 1,most countries are members of several subregional agreements. There is great economic diversity among countries participating in the different initiatives onregional cooperation: this is a reflection of the different characteristics of themain subregions. As shown in Table 2, some subregional economies (like theBaltics) share more major similarities than do others (like SEE or the CIS).

How can these various initiatives be evaluated and which criteria are appro-

priate for assessing their effectiveness? The answer to this question revolves on thereal objectives these initiatives aim to achieve (not only those declared in constituent documents), which in many cases are themselves quite vague and undefined. Not surprisingly, questioning whether there is a rationale for regional groupingsamong former socialist countries, a well-known expert concludes that “history,economic theory, and politics all provide ambiguous answers” (Lavigne, 1999: 206).

Objectively speaking, however, we can identify a number of important andpositive outcomes from processes of regional cooperation. For instance, most of these initiatives have facilitated communication between participating countries,stimulating political dialogues and promoting the resolution of political andeconomic differences. They have contributed to cooperation in a number of

areas, helping countries develop trust and confidence with other participatingmembers. Finally, regional cooperation agreements have provided a frameworkfor launching cross-border regional projects in important sectors such as

U VALIC: Regional Cooperation & EU Enlargement 321




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T ABLE 1. Participation of Transition Countries in Multilateral Initiatives of Regional Cooperati

CEI CIS CBSS BFTA BSEC CEFTA CSEE RP RBaltics, CEE & SEE 1989 1991 1992 1994 1992 1992 1996 1995

Albania + + + +Bosnia & Herz. + + +Bulgaria + + + + +Croatia + Obs +Czech Republic + +Estonia + +Hungary + + +Latvia + +Lithuania + +Macedonia FYR + + +Poland + + +Romania + + + + +

SlovakRepublic + +Slovenia + + + Yugoslavia FR + + +CIS Armenia + + Azerbaijan + +Belarus + +Georgia + +Kazakhstan +Kyrgyzstan +Moldova + + +Russia + + + +

Tajikistan +Turkmenistan +Ukraine + + +Uzbekistan +Total transition 15 12 5 3 9 7 6+1 10countries Obs

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Western participants Italy & Austria Denmark Greece Greece TurkeyIceland & Turkey & Turkey EUFinland USA

GermanyNorwaySweden

Eur. Commission

CEI: Central European Initiative CSEE: Conference on Good Neighbourliness, Stability, SecurityCIS: Commonwealth of Independent States RP: Royaumont ProcessCBSS: Council of the Baltic Sea States RA-EU: Regional Approach of the EUBFTA: Baltic Free Trade Area SECI: Southeast European Cooperation InitiativeBSEC: Black Sea Economic Cooperation SP: Stability Pact for SEECEFTA: Central European Free Trade Agreement Source : Compiled by the author using various sources, in particular Lavigne (1999) and Lopandic (1999).

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infrastructure, transport, energy, and the environment. There are certainly anumber of successful cooperation initiatives, as evident in the activity of majorsubregional organisations, which frequently work in close collaboration with theUN Economic Commission for Europe.

Despite the types of success mentioned above, regional cooperation initiativesare frequently criticized either because they have had little impact in key areassuch as regional stability and intra-regional trade growth, or because,

notwithstanding ambitious plans and declarations, concrete forms of cooperationfail to be implemented. The most obvious example of limited achievement isSouth-Eastern Europe, which, despite numerous cooperation initiatives, has


T ABLE 2. Transition Economies by Subregions in 1998—Basic Data *

GDP per head ($)

Population PPP rates Market Exports Imports

(million) exch rates ($bn) ($bn)

Central East Europe 66.4 7,870 4,551 97.08 118.90Czech Republic 10.3 10,284 5,484 26.39 29.02Hungary 10.1 7,925 4,709 20.75 23.10Poland 38.7 6,930 4,088 30.12 43.84Slovakia 5.4 8,147 3,860 10.72 13.07Slovenia 2.0 12,632 9,831 9.10 9.87

South East Europe 51.7 3,962 1,813 21.60 31.81 Albania 3.8 2,078 801 0.21 0.79Bulgaria 8.2 4,438 1,486 4.30 4.76Croatia 4.5 6,542 4,833 4.61 8.77

Macedonia, FYR 2.0 2,904 1,745 1.32 1.71Romania 22.5 4,167 1,842 8.30 10.93 Yugoslavia, FR 10.6 3,160 1,298 2.86 4.85Baltics 7.6 4,569 2,934 8.66 12.43Estonia 1.4 5,381 3,589 2.69 3.80Latvia 2.5 4,167 2,613 2.01 3.14Lithuania 3.7 4,517 2,890 3.96 5.48

CIS 283.3 3,211 1,364 108.26 99.57Russia 146.5 4,172 1,888 74.75 57.39Ukraine 50.4 2,144 848 13.70 16.28Belarus 10.2 4,623 1,396 7.12 8.48Moldova 4.3 1,533 380 0.64 1.04

Armenia 3.9 2,493 483 0.23 0.81 Azerbaijan 7.7 1,184 537 0.68 1.72Georgia 5.4 1,332 953 0.30 1.16Kazakhstan 15.5 2,629 1,434 5.84 6.59Kyrgyz Republic 4.7 1,603 349 0.54 0.76Tajikistan 6.1 706 216 0.64 0.77Turkmenistan 4.7 1,495 582 0.61 1.14Uzbekistan 23.9 2,134 510 3.22 3.44

CEE, SEE & Baltics 122.0 5,968 3,282 118.68 150.71CEE, SEE, Baltics, & CIS 409.4 4,050 1,959 235.60 262.71

* The region in April 2000 comprised 27 countries. Bosnia/Herzegovina is not included in the table

because of lack of data.Source : Economist Intelligence Unit (2000), Economies in Transition: Regional Overview, Country Forecast,1st quarter, London, p. 3.




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suffered five military conflicts. Many initiatives on regional cooperation did not really get off the ground, while others were accepted only with scepticism. Forexample, in the CEFTA case, the CEE countries feared that regional arrangements

would postpone their accession demands. TheSECI

or theEU

Regional Approachmet difficulty with the successor states of the former Yugoslavia, that rejectedanything that could imply the revival of old links existing in their former country.The CIS was resisted because many countries (with a few exceptions) were not ready to accept the economic dominance of Russia.

One of the major points of criticism regards the marginal impact of theseinitiatives on intra-regional trade. If we look at trade flows among the Baltic statesduring 1993–98, we see that despite the signing of a free trade agreement amongthem in 1993 (which came into force in 1994), intra-Baltic trade has remained at a

very low percentage—usually below 10 percent—of overall trade in both importsand exports, and in several cases even declined over time (Pautola, 1999: 13–14).

Similarly, though the share of trade within CEFTA in central and eastern Europeslightly increased after 1993, by 1997 it had dropped back to its 1994 level of 14percent and 10.5 percent for exports and imports, respectively (see Lavigne, 1999:209). The present level of trade activity between first-wave CEFTA countries comprisesa very small share of each country’s total trade activity, at the level of 8 percent (Inotai, 2000: 38). In the CIS, trade among the successor states to the USSR fell evenmore steeply than among CEE countries. Intra-CIS trade remained largely centredon Russia, which accounts for about half of mutual trade flows, and retained its old-fashioned “star-shaped” trade relations patterns within COMECON, with the Soviet Union in the middle and the other members trading with it rather than amongthemselves. Despite numerous attempts to strengthen the CIS, many initiatives are

considered to have been purely declarative and largely redundant (ibid. 210–211). As for the SEE region, the situation is rather peculiar.2 The disintegration of former Yugoslavia in 1991–92 into five new independent states led to theintroduction of various restrictions on trade with countries that had formerly beentrading partners. These restrictions, quite contrary to the general trend of tradeliberalization elsewhere, contributed, along with the regional military conflicts, toa drastic decline in trade levels.3 Nevertheless, trade links have been renewed ormaintained among some successor states of the former Yugoslavia, and despite thedrastic reduction in the volume of trade, the share of intra-regional trade isimportant for several countries (see Uvalic, 2000). According to preliminary datafor 1998, around 65 percent of Bosnian exports—(33 percent to the Federal

Republic (FR ) of Yugoslavia, 25 percent to Croatia, 6 percent to Slovenia, 1 percent to Macedonia)—and 52 percent of its imports—(27 percent from Croatia, 12percent from FR Yugoslavia, 12 percent from Slovenia, and less than 1 percent from Macedonia)—went to or came from countries of the former Yugoslavia.Similarly for FR Yugoslavia, 31 percent of its exports in 1998 went to countries of the former Yugoslavia (22 percent to Bosnia and another 9 percent toMacedonia), though much less of its imports. Paradoxically, trade links amongsome SEE countries have not only been maintained but are rather significant,suggesting that economic links inherited from the past, re-established for politicalreasons4 or simply accepted out of necessity, are a second-best solution in theabsence of alternatives such as preferential access to EU markets. These have been

more important for stimulating trade in this region than the barriers created by disintegration, military conflicts, and the non-existence of a regional free tradeagreement. Apart from this very specific case, however, the general picture is that





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initiatives on regional cooperation, including those which have created free tradeareas, have not really had a significant impact on intra-regional trade over the past decade. In fact, intra-regional trade in most cases has either remained constant or

has even declined. Why have many of these initiatives not led to more substantial and far-reachingresults? There are a number of very different reasons.5 Political hostilities and thusresistance to implementing regional cooperation is one of the most important,since nothing can substitute for the political will of countries to cooperate. Thedisintegration of countries can also block many possible forms of cooperation, ashas been the case with the former Yugoslavia and the former Soviet Union.

Another important reason is the exclusion, until very recently, of some key actorsfrom such initiatives, primarily FR Yugoslavia. (FR Yugoslavia has been included inthe stability pact for SEE since 26 October 2000, following the September elections

which brought political change and the coming to power of a democratic

government.) Several of these initiatives have been imposed from outside,encouraged by western countries and institutions, and therefore were not theproduct of “autochthonous” processes. In other cases, there was absence of direct support from important institutions (EU) or developed (friendly) neighbours, andmany agreements are simply “small”’ preferential trade agreements without theinvolvement of any of the larger economies. Most initiatives had little or nofinancial backing and had to be financed by participating members (such as SECI).Some lacked technical expertise and support, while others lacked the innovativeleadership needed to launch specific projects. Some scholars have also criticizedthe limited scope of regional cooperation programmes.

Does this mean that these initiatives were launched and promoted without any

real justification? In my view, there are still important economic and politicalreasons to support efforts at regional cooperation. Some scholars have argued that the dynamic effects of regional cooperation agreements are yet to be felt; forexample, according to recent estimates for CEFTA countries, EU membership isexpected to significantly stimulate trade among present CEFTA members, raisingthe share of intra-regional trade from the present 8 percent to 11–12 percent (Inotai, 2000: 38). Furthermore, although the trade of most transition economiesis mainly oriented towards the European Union, having preferential access toalternative markets in transition economies—whether within a free trade area orthrough bilateral free trade agreements with neighbouring countries—could beimportant, as poor export performance on EU markets could be compensated for

by increasing exports to these alternative markets (as has indeed been the case with several SEE transition economies in 1995–97). In addition, considering that the previous nine socialist countries in Europe now make up as many as 27countries,6 with proportionally smaller economies, there seems to be a clear needto establish broader regional linkages and agreements. In addition, both thetheoretical literature and the empirical evidence suggest a number of moregeneral arguments which point to the beneficial effects of regional cooperation.These arguments are addressed in the next two sections.

Theoretical Controversies over Regionalism

Regionalism can be broadly defined as a tendency towards some form of preferential trading arrangement between a group of countries belonging possibly to a particular region (see Lahiri, 1998).7 However, regionalism obviously also has





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a much broader meaning, since economic cooperation and trade agreements areusually backed by important political motives and objectives.

Economic theory has offered many hypotheses regarding the most important

factors facilitating regional agreements, and the controversy about the desirability of regionalism is not new. Whereas conventional economic theory suggested that preferential regional agreements are necessarily welfare improving, Jacob Viner(1950) has pointed out that this need not always be the case. He cautions that inaddition to trade creation, regional agreements also create the possibility of significant trade diversion. As trade creation occurs within a preferential tradearea, the raising of protectionist measures against non-members can convert it into trade diversion. In this way, trade volumes among member countries increaseat the expense of trade between member and non-member countries. Otherhypotheses, such as the “natural trading partners” hypothesis, emphasize theimportance of the initial volume of trade among countries and of the distance

between them. The gravity model predicts that the volume of trade between twocountries will be related both to the economic distance between them and to theirGDP.8

Whereas earlier debates reflected mainly “static” questions concerning the welfare effects of preferential trade agreements, the more recent debates focus on what Bhagwati (1991) has described as the “dynamic” time-path questions. Theseask whether such agreements will be “stumbling blocks” or “building blocks” tomultilateral free trade, and whether they will facilitate or hinder the worldwideprocess of trade liberalization (Bhagwati, Greenaway, and Panagariya, 1998:1128–1129). Will the spread of regionalism undermine the progress of themultilateral trading system? Does regionalism affect the enforcement provisions

built into the articles of WTO? These questions have been at the centre of thedebate on regionalism versus multilateralism, and there is a range of economic views on the desirability of regionalism.

On the one side of the debate are those who see such agreements as a threat tothe multilateral system. A number of systemic issues have recently been raised by the proliferation of preferential trade agreements, including what Bhagwati hascalled the “spaghetti bowl” phenomenon. It refers to the numerous and criss-crossing preferential trade agreements and even more numerous tariff rates,frequently arbitrarily determined, which are today applied among countries. Theirsystemic effect is that they have generated a world of preferences which increasestransaction costs and facilitates protectionism. “In the guise of freeing trade,

preferential trade agreements have managed to recreate the preferences-ridden world of the 1930s as surely as protectionism did at the time. Irony, indeed!” (ibid.:1139).

On the other side of the debate are those who argue that preferentialagreements can complement existing multilateral efforts to foster greatereconomic integration among countries and should therefore be encouraged(Bagwell and Staiger, 1998). These economists have argued for a more positiveapproach to regional integration, which can also explain why the new regionalismhas come about (Ethier, 1998). This approach suggests that the new regionalismis, in good part, a direct result of the success of multilateral liberalization.Regionalism is the means by which new countries try to enter the multilateral

system, competing among themselves for the direct investment necessary for theirsuccessful participation in that system. Regionalism, by internalizing an important externality, plays a key role in expanding and preserving the liberal trade order.





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Therefore, there are no reasons for special concern or conflict between regional-ism and multilateralism. There are assumptions which render trade diversioninnocuous, and a huge volume of trade diversion could well imply little effect on

welfare. Thus regionalism is seen as playing a transitory role, while the new regionalism reflects the success of multilateralism, not its failure (ibid.: 1161). Thisliterature therefore suggests that preferential agreements can facilitate multi-lateral liberalization, and that they have their most desirable effects on themultilateral system precisely when multilateral enforcement mechanisms areineffective and the multilateral system is working poorly (Bagwell and Staiger,1998). Another important contribution is Baldwin’s (1993) analysis of theincentives of non-members to join a preferential trade agreement. His model hasdemonstrated that the incentives will be positive, and that such an agreement willcreate a domino effect, with outsiders wanting to become insiders. This is becausesuch an agreement implies a loss of cost-competitiveness by non-members, whose

profits in the free trade area will decline because they must face the trade barriersthat member countries themselves do not have to face. The firms in non-memberstates then lobby for entry, and the countries will then enter the bloc assumingthere is open entry, thus enlarging the market and increasing the cost of non-membership, pulling in other countries as well.

The policy debate on preferential trade agreements has also been moreoptimistic than some of the academic debates. Although many sustain that it isnecessary to reform the WTO so as to minimize the damage such agreements cancreate, others see the fears about preferential trade agreements as exaggerated.The European Council of Ministers has recently resolved, in light of concernsexpressed by the anti-regionalism economists, that the current architecture of the

EU’s trading system will be frozen. This implies a standstill on new preferentialtrade agreements unless a strong case can be made and certain criteria are met.The WTO is also addressing the problem of reform of Article 24 which permits suchagreements through its Committee on Regional Trade Agreements (see Bhagwati,Greenaway, and Panagariya, 1998: 1145).

Regionalism: Some Conditions for Success

There is a fairly large body of empirical research on the effects of regionalintegration, mainly based on the experiences of developing countries. Thefollowing conclusions were reached at a recent World Bank symposium on

regionalism regarding its impact in two main areas: growth and policy credibility (World Bank, 2000: 17–18).9

Growth . The main findings are the following. Open economies grow faster,economies that have open and large neighbours grow faster, but the size of closedneighbouring economies is of no account. Economies that have open anddeveloped neighbours also grow faster, but again the level of development of closed neighbouring economies is not important. There are two main conclusions.First, while regional integration arrangements may boost the industrializationefforts of a developing country, they could also retard those of an excludeddeveloping country. Second, countries may derive growth benefits from being a

neighbour to a large, developed, open economy, while agreements between small,closed, developing economies are unlikely to result in faster growth. These resultstherefore suggest the advantages of agreements between developed and developing





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countries, rather than among countries at a similar level of development. Smalleconomies can obtain significant growth and investment benefits from regionalintegration agreements they make with large, developed, open economies.

Policy Credibility . Research on this topic has focused on the regional mechanismsthrough which a developing country may gain policy credibility that is not obtainable unilaterally. The results show that regional trade agreements can servea useful purpose above and beyond the direct gains from trade liberalization by reducing uncertainties about national policies or political developments andenhancing credibility. This increased credibility in turn reduces risk, making it easier for the private sector to plan and invest and allowing for a major inflow of foreign direct investment. Given that attempts at reform are often undermined by expectations of reversal, a regional agreement can provide a commitment mechanism for trade and other policy reforms, thus raising the cost, and thereby

reducing the likelihood, of policy reversal in both political and economic reforms.

Combining these different findings suggests the possibility of virtuous and viciouscircles in the formation of regional integration arrangements (see World Bank,2000: 17). A strong, liberalizing arrangement with the right partner—preferably rich, open, and large—may lead to a virtuous circle of increased credibility, higherinvestment and growth, and more political stability. By contrast, a more closedagreement or a wrong choice of partner could lead in the opposite direction,reducing credibility and lowering investment and growth, resulting in even lesscredibility and more political instability over time.

These findings help us understand better why some of the initiatives aimed at

stimulating regional cooperation among transition economies have not been very successful. The key factors which seem important for the success of regionalcooperation seem to be the size of a country, its degree of openness, its level of development, and who its neighbours are (that is, which are the countries with

which it enters into regional arrangements). Whereas the “ideal” solutionsuggested by the reviewed literature seems to be a trade liberalization agreement

with a developed, open, and large economy, the main problem is that transitioneconomies obviously cannot choose their neighbours, nor can they do much toaccelerate the EU pre-accession strategy and obtain membership earlier thanenvisaged. While the most advanced transition countries will at least soon be ableto benefit from EU accession (the Baltics, CEE), this is only a distant goal for the

large majority of countries located in the other subregions (SEE, CIS).

Regional Cooperation and Union Enlargement

The issues surrounding regionalism are also highly relevant for the current process of EU enlargement. Will regional agreements among transition countriesbe a “stumbling block” or a “building block” for integration with the EuropeanUnion? Is regionalism an impediment, or a facilitating factor for successful EUenlargement? Will existing trading blocks among transition economies accelerateor delay entry into the Union?

Judging from EU policies towards various groups of transition economies over

the past decade, they seem to have been based on the conviction that regionalagreements can indeed be beneficial. The European Union has strongly promoted regional cooperation in CEE, which resulted in the creation of CEFTA . It





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has also been active in SEE through its Regional Approach, the Royaumont Process, and today through the Stability Pact for SEE and the Stabilisation and

Association Process. The benefits of intensifying economic and other links among

transition countries have frequently been emphasized inEU

official policy documents on the assumption that the consequences would be largely beneficialfor these countries and would later facilitate their integration into EU structures.

There are several problems which need to be stressed here, all related to the variable speed integration policies of the European Union. The first is that theunique contractual relationship the Union has with each individual transitioncountry has been a determining factor in the success or failure of varioussubregional initiatives. The CEE countries, having been offered early on theimportant incentive of EU membership, collaborated in creating CEFTA . Similarattempts in SEE have so far failed, partly because no such incentive had beenoffered (until 1999). The situation between the Union and the CIS is not very

different. The incentive to integrate with European structures has been indicatedas one of the key factors contributing to the success of regional cooperationamong transition economies because of its encouragement of reform programmesand better social and political dynamics (see World Bank, 2000). However, sincesome countries will inevitably join the Union much sooner than others, many transition economies will remain de facto excluded from current integrationprocesses, at least for a decade or even longer. The time-path of EU accession isalso of concern: if the prospects for joining are too distant or only vaguely specified, there will be no incentive to implement regional cooperation (as untilrecently was the case with the western Balkans). Therefore, there is probably reason to more actively encourage further regional cooperation processes among

those transition economies likely to join the European Union in the second, third,or further rounds of enlargement.Second, the question of the conflicting nature of bilateralism and regionalism

needs to be addressed. To what extent have EU policies actually stimulated regionalcooperation among transition economies? Variable speed integration policies,based on strict conditionality and bilateralism have been the main features of EUpolicies towards transition countries throughout the 1990s. However, by de factoimposing competition—not cooperation—among these countries (for example,through the Copenhagen criteria), the attainment of some key objectives of regional cooperation have been frequently undermined.

The third problem concerns the effects of the fragmentation of some existing

regional groupings once accession takes place. Given the variable speedintegration policies of the European Union, the division of the applicants intodifferent groups will also split existing regional groupings such as CEFTA andBFTA .The first group of transition economies entering the Union will have torenounce their free trade agreements with the other countries once they join (forexample, Estonia with the two Baltic states; Slovenia with Croatia, Bosnia, andMacedonia; the Czech Republic to the customs union it has had with Slovakia). Inthis way, external barriers on trade will be introduced among countries which havehad free trade agreements throughout the 1990s. The variable EU enlargement process will therefore imply the introduction of various trade restrictions, whichmight have adverse effects, at least in the short run. As noted by M. Lavigne, “It is

thus ironical that the European Commission sought to promote regionalarrangements in the early 1990s only to destroy them through the enlargement process itself” (Lavigne, 1999: 210).





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Lessons Learned?

The ongoing analysis does point to some lessons that can be drawn from recent regional cooperation initiatives among European transition economies. First, any

integration process among countries has to be based on a shared political will tocooperate towards implementing certain objectives of common interest. Second,external support and the promotion of regional cooperation, not only from the EUbut also from neighbouring countries, can be fundamental.10 In addition, anumber of hypotheses based on the experience of developing countries (Ethier,1998: 1152–1153) are applicable to transition economies, where it is also the casethat trade liberalization promotes regionalism, or that the fewer the number of participants in a regional arrangement, the easier it should be to reach a concreteagreement. There are other hypotheses, however, where the experience of transition economies does not always conform to the features typical of the new regionalism. For example, in these areas it is not always the case that regional

agreements usually involve one or more small countries linking up with a largecountry, or that trade liberalization among members in a regional tradeagreement is only modest at best.

In addition to these general lessons, there also remain a number of openquestions for reflection and further research.

• Is economic diversity a stimulus or a barrier to regional cooperation amongcountries? Economies having similar features will more easily find economicinterests in common, but economies having very similar economic structuresare unlikely to develop substantially intra-regional trade. The maincharacteristics of transition economies located in the four European subregions

clearly illustrate the enormous economic differences both among thesubregions and within them, among the individual countries—regarding theirsize, level of development, importance of trade (see Table 2, above).

• What shapes economic regions? Geography is obviously only one of the factors,and the observed overlapping—the fact that most countries are at the sametime members of several regional initiatives—clearly shows the flexible natureof the European subregions. Is membership in several regional cooperationinitiatives primarily an advantage, or could it also be a barrier for integrationprocesses?

• How can we measure the effectiveness of regional cooperation? How can the work of regional initiatives within the ECE region be further developed and

cooperation intensified among the different subgroups? What role does outsidesupport—for example, by the EU or the UNECE—play in promoting regionalcooperation? How can efficient networks based on the collaboration of interested governments and the private sector in implementing pan-regionalprojects be further promoted? Is there a problem of flow of information on theopportunities offered through these initiatives, or a lack of transparency of some of these initiatives?

• Does the creation of subregional trading blocs raise or lower welfare? Willregionalism help or hinder multilateral trade liberalization in Europe? Are the WTO principles of non-discrimination and reciprocity in conflict withpreferential agreements among transition economies promoted today by the

European Union?• Why has the new regionalism among transition economies emerged? Is it only

and primarily because of pressure from outside (EU), or because of the





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transition economies’ own interests and EU protectionism? Are there strongeconomic interests at the basis of the regional cooperation initiativesundertaken, or should we consider them as primarily politically motivated?

• How can we promote further regional cooperation inSEE

, a region that hasconstantly been politically unstable, characterized by hostility, ethnic strife andmilitary conflicts?

There are no simple answers to most of these questions. However, the potential forincreasing regional and subregional cooperation is nevertheless there, not only between the more advanced transition economies and the European Union, but also among those countries which will join the Union later.

Notes

1. According to some estimates, currently there are nearly 100 regional arrangements

worldwide. See Lahiri (1998: 1126).2. Here I exclude Bulgaria and Romania, which now are members of CEFTA , as well as Albania, since 80 percent of its trade is with the EU.

3. In the theoretical literature, this has been called “inverse regionalism,” but in referenceto the case of India and Pakistan, which today have a number of quantitative andadministrative restrictions on trade. See Lahiri (1998: 1127).

4. In fact, a large part of trade is along ethnic lines, between Republika Srpska and FR Yugoslavia, and between the Bosnian Federation and Croatia.

5. For an excellent overview of the main reasons impeding successful regional cooperationin SEE, see Lopandic (1999).

6. In fact, only five of the present 27 transition countries have not been affected by thedisintegration processes in Europe occurring at the beginning of the 1990s: Albania,

Bulgaria, Hungary, Poland, and Romania.7. Sometimes regionalism is used interchangeably with Preferential Trade Agreements

(PTA s) or Free Trade Agreements (FTA s), but this is not desirable since PTA s are some-times formed with countries which do not meet any reasonable definition of a region(for example, USA and Israel); see also Bhagwati, Greenaway, and Panagariya (1998).

8. For an excellent overview of these theories, see Bhagwati, Greenaway, and Panagariya(1998) and the other articles mentioned in the references which have been publishedin the special issue of the Economic Journal dedicated to regionalism (1998:108, July).

9. These findings are reported in World Bank (2000: 17–19), but are based on an earlierresearch by Maurice Schiff and Alan Winters (1998).

10. This has been the case with the Baltic states and the Visegrad countries, but much less with countries in the other subregions.

References

Bagwell, K. and R.W. Staiger (1998). “Will Preferential Agreements Undermine theMultilateral Trading System?” The Economic Journal , 108: 1162–1182.

Baldwin, R. (1993). “A Domino Theory of Regionalism.” CEPR Working Paper No. 857.Bhagwati, J. (1991). The World Trading System at Risk . Princeton: Princeton University Press.Bhagwati, J., D. Greenaway, and A. Panagariya (1998). “Trading Preferentially: Theory and

Policy.” The Economic Journal , 108: 1128–1148.Ethier, W.J. (1998). “The New Regionalism.” The Economic Journal , 108: 1149–1161.Inotai, A. (2000). “The Czech Republic, Hungary, Poland, the Slovak Republic and

Slovenia.” In Winners and Losers of EU Integration: Policy Issues for Central and Eastern Europe

(Helena Tang, ed.), 17–51. Washington, DC: World Bank.Lahiri, S. (1998). “Controversy: Regionalism versus Multilateralism.” The Economic Journal ,

108: 1126–1127.





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Lavigne, M. (1999). The Economics of Transition: From Socialist Economy to Market Economy . (2ndedn). Basingstoke: Macmillan.

Lopandic, D. (1999). “Multilateral Cooperation in South Eastern Europe.” In South Eastern Europe 2000: A View from Serbia (J. Minic, ed.), 67–84. Belgrade: Stubovi kulture.

OSCE Parliamentary Assembly (1997). Subregional Economic Cooperation Processes in Europe— Monaco Conference , Monaco, 8–10 October.

Pautola, N. (1999). “Preferential Trade Agreements: The Specific Aspects of the Integrationof the Baltic States into the EU.” Paper presented at the Robert Schuman Centre,European University Institute, Florence, Italy (June).

Schiff, M. and A. Winters (1998). “Dynamics and Politics in Regional Integration Arrangements: An Introduction.” The World Bank Economic Review , 23(2): 177–196.

Uvalic, M. (2000). “Regional Cooperation in South-Eastern Europe.” Southeast Europe & Black Sea Studies , 1(1). London: Frank Cass.

Viner, J. (1950). The Customs Union Issue . New York: Carnegie Endowment for InternationalPeace.

World Bank (2000). “The Road to Stability and Prosperity in South Eastern Europe: A

Regional Strategy Paper.” Washington, DC, World Bank (March).

Biographical Note

MILICA U VALIC is Professor of Economics at the Faculty of Political Sciences,University of Perugia. She is the author of Investment and Property Rights in Yugoslavia: The Long Transition to a Market Economy ; co-editor of Privatization Surprises in Transition Economics; The Balkans and the Challenge of Economic Integration ;and co-editor of Advances in the Economic Analysis of Participatory and Labor Managed

Firms , vol. 6. Together with Will Bartlett, she edited the journal Economic Analysis: The Journal of Enterprise and Participation . In January 2001 she became Vice-Ministerof Foreign Economic Relations in the new Federal Republic of Yugoslavia.

A DDRESS: Borgo Pinti 87, I-50121 Firenze, Italy. [e-mail: [email protected]]

Acknowledgements . An earlier version of this article was prepared for the Annual Conferenceof the UNECE held in Geneva in May 2000. I would like to thank Susan Senior Nello andMario Nuti for their helpful discussion and comments.


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Regional Cooperation and the EU Enlargement