Regional groupings among microstates

Abstract

Forming a regional grouping with neighboring nations may be one way for microstates to overcome a major problem: Because of their weak bargaining power and high fixed costs of negotiation, microstates are at a severe disadvantage in dealing with the rest of the world. They don't have the human and physical resources to unilaterally conduct the various bilateral and multilateral negotiations a developing nation typically conducts. The authors present a model in which the decision to form, expand, or join a regional club is based on reduced negotiating costs and increased bargaining power, rather than on the traditional costs and benefits of trade integration (which might be miniscule for a microstate and might even generate welfare losses). Under various conditions for entry, the model is used to determine the equilibrium group size, which is shown to be positively correlated with the number of issues to be tackled, the degree of similarity among countries, and the per-issue costs of international negotiation. They use the case of the Caribbean Community (CARICOM) to show the model's relevance in the real world. The countries that belong to CARICOM pooled their negotiating resources and formulated common policy stances. Despite its relatively limited impact on trade and investments, CARICOM served as a political instrument in joint negotiations on trade and investment with larger countries and regional trade blocs. By establishing a union, the CARICOM countries succeeded in making their voices heard on a variety of issues in a way none of them could have done alone.Economic Theory&Research,Health Systems Development&Reform,Environmental Economics&Policies,Decentralization,Scientific Research&Science Parks,Economic Theory&Research,Trade and Regional Integration,Environmental Economics&Policies,Scientific Research&Science Parks,Science Education