Choosing the best partners for risk-sharing integration

Abstract

Initiatives towards regional integration have traditionally been based on political definitions of national and regional boundaries. Even if the move to integration is primarily trade driven, as it is in East Asia, rather than politically motivated, as it has arguably been in Europe, the definition of the region and the identity of the nation-states within the region are the result of political history. The choice of partners within an integrating region can therefore be somewhat arbitrary. When there are conditions on entry - for example, the Maastricht conditions in Europe - existing members of a region have some control over who joins. But it is rare that these conditions are set on the basis of which countries will contribute most to the economic welfare of the integrated group. Nor do individual countries usually pick their partners on the basis of welfaremaximizing conditions. Outcomes might be better if they did. The economic conditions for optimal currency unions are now well documented in the literature, and it is clear that currency unions that are very far from those conditions can face convulsions and disintegration. Show more