Lombaerde

United Nations University Series on Regionalism 13
Philippe De Lombaerde
Edgar J. Saucedo Acosta Editors
Indicator-Based
Monitoring of
Regional Economic
Integration
Fourth World Report on Regional
Integration
United Nations University Series on Regionalism
Volume 13
Series Editors
Philippe De Lombaerde, NEOMA Business School, Rouen (France) and UNU-CRIS,
Bruges (Belgium)
Luk Van Langenhove, Grootseminarie, United Nations University CRIS,
Bruges, Belgium
International Editorial Board members include

Louise Fawcett, Oxford University, UK
Sieglinde Gst€
ohl, College of Europe, Bruges, Belgium
Henryk Kierzkowski, Graduate Institute of International and Development Studies,
Geneva, Switzerland
Fukunari Kimura, Keio University, Tokyo, Japan
Edward D. Mansfield, University of Pennsylvania, Philadelphia, PA, US
T. Ademola Oyejide, University of Ibadan, Nigeria
Jacques Pelkmans, College of Europe, Bruges, Belgium
Joaquin Roy, University of Miami, FL, US
Ramón Torrent, University of Barcelona, Spain
The United Nations University Series on Regionalism, launched by UNU-CRIS and
Springer, offers a platform for innovative work on (supra-national) regionalism
from a global and inter-disciplinary perspective. It includes the World Reports on
Regional Integration, published in collaboration with other UN agencies, but it is
also open for theoretical, methodological and empirical contributions from
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Book proposals will be reviewed by an International Editorial Board.
The series editors are particularly interested in book proposals dealing with:
– comparative regionalism;
– comparative work on regional organizations;
– inter-regionalism;
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Please send book proposals to: pdelombaerde@cris.unu.edu and lvanlangenhove@
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More information about this series at http://www.springer.com/series/7716

Philippe De Lombaerde • Edgar J. Saucedo Acosta
Editors
Indicator-Based Monitoring
of Regional Economic
Integration
Fourth World Report on Regional Integration
Editors
Philippe De Lombaerde Edgar J. Saucedo Acosta
NEOMA Business School Universidad Veracruzana
Rouen, France Xalapa, Veracruz, Mexico
UNU-CRIS
Bruges, Belgium
ISSN 2214-9848 ISSN 2214-9856 (electronic)

United Nations University Series on Regionalism
ISBN 978-3-319-50858-0 ISBN 978-3-319-50860-3 (eBook)
DOI 10.1007/978-3-319-50860-3
Library of Congress Control Number: 2017934079
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Volumes in This Series
12 – Impact of Circular Migration on Human, Political and Civil Rights. A

Global Perspective
Solé, C., Parella, S., Sordé, T., Nita, S. (Eds.), 2016
11 – Global and Regional Leadership of BRICS Countries.
Kingah, Stephen, Quiliconi, Cintia (Eds.), 2016
10 – State Fragility and State Building in Africa: Cases from Eastern and
Southern Africa.
Olowu, Dele, Chanie, Paulos (Eds.), 2016
9 – The Effects of Europeanization on the Integration Process in the Upper
Adriatic Region.
Nadalutti, Elisabetta, 2015.
8 – Importing EU Norms: Conceptual Framework and Empirical Findings.
Bj€
orkdahl, A., Chaban, N., Leslie, J., Masselot, A. (Eds.), 2015
7 – Intersecting Interregionalism.
Regions, Global Governance and the EU.
Baert, Francis, Scaramagli, Tiziana, S€oderbaum, Fredrik (Eds.), 2014
6 – Regionalizing Oman: Political, Economic and Social Dynamics.
Wippel, Steffen (Ed.), 2013
5 – State, Globalization and Multilateralism: The challenges of institutional-
izing regionalism.
Telò, Mario (Ed.), 2012
4 – The Rise of Post-Hegemonic Regionalism: The Case of Latin America.
Riggirozzi, Pı́a, Tussie, Diana (Eds.), 2012
v
vi Volumes in This Series
3 – The United Nations and the Regions. Third World Report on Regional
Integration
Lombaerde, Philippe, Baert, Francis, Felı́cio, Tânia (Eds.), 2012
2 – Aid for Trade: Global and Regional Perspectives. 2nd World Report on
Regional Integration
Lombaerde, Philippe, Lakshmi, Puri (Eds.), 2009
1 – Multilateralism, Regionalism and Bilateralism in Trade and Investment.
2006 World Report on Regional Integration
De Lombaerde, Philippe (Ed.), 2007
Acknowledgments
The editors wish to thank the United Nations University Institute on Comparative
Regional Integration Studies (UNU-CRIS) for its institutional support; the FWO
Research Network (WOG) on Globalisation, Regionalisation and Economic and
Social Inequality (GRESI) for financially supporting an author’s workshop; the
Institute for European Studies (IES) of the Free University of Brussels (Vrije
Universiteit Brussel or VUB) for hosting an author’s workshop; Lien Jaques
(UNU-CRIS) for her help with formatting the manuscript; and Esther Otten and
Hendrikje Tuerlings at Springer.
Rouen Philippe De Lombaerde

Xalapa Edgar J. Saucedo Acosta
vii
Contents
Part I Europe and Eurasia

1 The European Commission Single Market Scoreboard . . . . . . . . . . 3
Vanessa Fernández Moriana, Alexandra Melissa Vida,
and Philippe De Lombaerde
2 Scoreboard for the Surveillance of Macroeconomic
Imbalances in the European Union . . . . . . . . . . . . . . . . . . . . . . . . . 27
Carlos Cuerpo and Jonas Fischer
3 The EU Index of Integration Effort . . . . . . . . . . . . . . . . . . . . . . . . . 73
J€
org K€
onig
4 Integration Profiles for Central Europe and Hungary . . . . . . . . . . 95
Tibor Palankai and Gabor Miklos
5 The EDB System of Indicators of Eurasian Integration:
Eurasian Integration’s Trends from 1999 to 2012 . . . . . . . . . . . . . . 135
Evgeny Vinokurov, Alexander Libman, and Vladimir Pereboyev
Part II The Americas and the Caribbean

6 Measuring Integration Achievement in the Americas . . . . . . . . . . . 159
Gaspare M. Genna
7 Monitoring Regional Integration in Practice: Reflections from
the EU-CARIFORUM Economic Partnership Agreement . . . . . . . 183
Bruce Byiers and Quentin de Roquefeuil
8 Comparing Integration in Europe and Latin America: Wishful
Thinking, Self-Perception and Reality – A Comment . . . . . . . . . . . 201
Joaquı́n Roy
ix
x Contents
Part III Africa

9 Assessing Regional Integration in Africa (ARIA): Indicators
of Integration Effort in Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
Daniel Tanoe
10 Monitoring Regional Integration in the African, Caribbean
and Pacific (ACP) Regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
Jean-Michel Salmon
11 The East African Community Common Market Scorecard . . . . . . 239
Alfred Ombudo K’Ombudo, Philippe De Lombaerde, and Maria Borda
12 Assessing Regional Integration at the Country Level: A Possible
Framework as Illustrated for the COMESA Region . . . . . . . . . . . . 261
Rattan J. Bhatia
Part IV Asia
13 Monitoring the ASEAN Economic Community . . . . . . . . . . . . . . . . 287
Aladdin D. Rillo
Part V Methodology
14 Opening the Black Box of Trade Agreements . . . . . . . . . . . . . . . . . 301
Tristan Kohl
15 Assessing Globalization and Regionalization Through
Network Indices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317
P. Lelio Iapadre and Lucia Tajoli
16 Measuring Actual Economic Integration: A Bayesian
State-Space Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341
Glenn Rayp and Samuel Standaert
About the Authors
Rattan J. Bhatia is a former Deputy Director of the African Department of the IMF
and Special Representative and Director of the IMF Office at the United Nations,
New York (USA). He is currently a Senior Consultant to African governments, the
IMF, World Bank, UNDP, and the African Development Bank (AfDB).
Maria Borda is Research Intern at the United Nations University Institute on

Comparative Regional Integration Studies (UNU-CRIS), Bruges (Belgium).
Bruce Byiers is Senior Policy Officer at the European Centre for Development
Policy Management (ECDPM), Maastricht (the Netherlands).
Carlos Cuerpo Spanish Fiscal Council, Madrid (Spain), was formerly with the
European Commission, Directorate General for Economic and Financial Affairs,
Brussels (Belgium).
Philippe De Lombaerde is Associate Professor at NEOMA Business School,

Rouen (France), and Associate Senior Research Fellow, UNU-CRIS, Bruges
(Belgium). He is the former Associate Director of UNU-CRIS.
Quentin de Roquefeuil is Senior Consultant at Saana Consulting, London (UK); at

the moment of writing, he was a Policy Officer at the European Centre for
Development Policy Management (ECDPM), Maastricht (the Netherlands).
Vanessa Fernández Moriana is Lecturer at the Toulouse Business School,

Barcelona (Spain), and former Intern at UNU-CRIS, Bruges (Belgium).
Jonas Fischer is Deputy Head of Unit, Directorate General for Economic and
Financial Affairs, European Commission, Brussels (Belgium).
Gaspare M. Genna is Associate Professor at the Department of Political Science,

the University of Texas at El Paso (USA).
xi
xii About the Authors
P. Lelio Iapadre is Associate Professor at the Dipartimento di Ingegneria

Industriale e dell’Informazione e di Economia, Universita dell’Aquila (Italy), and
Associate Research Fellow at UNU-CRIS, Bruges (Belgium).
Tristan Kohl is Assistant Professor, Faculty of Economics and Business,

University of Groningen (The Netherlands).
J€
org K€ onig is Researcher at the Market Economy Foundation (Stiftung
Marktwirtschaft), Berlin, and former Researcher at the Georg-August University
of G€
ottingen (Germany).
Alexander Libman is Researcher at the German Institute for International and

Security Affairs (SWP), Berlin (Germany).
Gabor Miklos is Assistant Professor at Corvinus University, Budapest (Hungary).
Alfred Ombudo K’Ombudo is Lead Author and Project Manager, EAC Common
Market Scorecard 2014, Advocate of the High Court of Kenya, and Lecturer at US
International University, Nairobi (Kenya).
Tibor Palankai is Professor Emeritus at Corvinus University, Budapest (Hungary).
Vladimir Pereboyev is Head of Projects, Centre for Integration Studies, Eurasian

Development Bank (EDB), Saint Petersburg (Russian Federation).
Glenn Rayp is Professor at the Faculty of Economics, University of Ghent

(Belgium).
Aladdin D. Rillo is Senior Economist, Capacity Building and Training, Asian

Development Bank (ADB) Institute, Tokyo (Japan).
Joaquı́n Roy is Jean Monnet Professor and Director of the University of Miami
European Union Center of Excellence, University of Miami (USA).
Jean-Michel Salmon is Associate Professor, CEREGMIA, Faculty of Law and

Economics, Université des Antilles et de la Guyane, Martinique, and Managing
Director, STRADEVCO, Paris (France).
Edgar J. Saucedo Acosta is Professor of Economics, IIESES, Universidad

Veracruzana, Xalapa (Mexico). He is also a former Visiting Researcher at
UNU-CRIS, Bruges (Belgium).
Samuel Standaert is Researcher at the Department of Economics, Ghent University

(Belgium).
About the Authors xiii
Lucia Tajoli is Professor of Economics at the Dipartimento di Ingegneria

Gestionale, Politecnico di Milano, Milan (Italy).
Daniel Tanoe is the Chief of the Investment Policy Section in the Regional
Integration and Trade Division of the Economic Commission for Africa
(UNECA), Addis Ababa (Ethiopia). He was formerly the Chief of the Regional
Integration Section in the same division, in charge of the ARIA publication series.
Alexandra Melissa Vida is Policy Officer at the American Chamber of Commerce

(AmCham), Brussels (Belgium). She was, at the moment of writing, Intern at
UNU-CRIS, Bruges (Belgium).
Evgeny Vinokurov is Director, Centre for Integration Studies, Eurasian Development

Bank (EDB), Saint Petersburg (Russian Federation).
Introduction: Indicator-Based Monitoring
of Regional Economic Integration
Over the last decades, economic integration processes have proliferated in various
regions of the world, in search of appropriate conditions and institutional contexts
within which goods, services, capital and people can circulate more freely and con-
tribute to reaching higher growth. In addition, regional economic cooperation has been
organized in various policy areas, going from cooperation in building large-scale
infrastructures, over the design of regional socio-economic policies, to cooperation to
stabilize financial markets. Whether these regional policy packages are effective or not
is a matter of public, political and academic debates. It is in this context that monitoring
tools have been developed. Monitoring can be understood here as referring to:
The processes carried out by national and regional public and private sector institutions –
rules, roles, and actual physical organizations – to ensure and/or scrutinize the implemen-
tation of the regional integration process. Monitoring takes place in the ‘monitoring
system’, or the framework of national and regional public and private sector institutions
that are involved and/or employed in monitoring. [. . .] the purpose of monitoring is to
ensure that the contractual obligations assumed by all parties will be implemented. How-
ever, over time, monitoring can also come to include activities aimed at propelling the
development of new strategies and initiatives that guide regional integration project in the
right directions. And it may imply attending to the intended or unintended effects of
regional integration policies and their contribution to overall developmental goals.
[It] thus touches on various policy levels, and can take place in different stages of
integration and with various degrees of institutionalization. (De Lombaerde et al. 2008a)
In the same context, monitoring has also been defined as covering “all relevant
processes of information gathering, processing and dissemination concerning the
[. . .] integration process, performed by different kinds of actors in different moments
and lapses of time, in order to control, evaluate, correct and/or influence the integra-
tion policies and the functioning of the regional institutions” (Costea et al. 2008).
In addition, the relationship between monitoring and planning is relevant:
[. . .] monitoring provides information on achievements and/or shortfalls against planned
and agreed targets and/or indicators. Information from monitoring (and evaluation) on
implementation, outcomes (and impact) is vital to gain insight into the progress made in
implementing the REC and the status and depth of the regional (economic) integration
xv
xvi Introduction: Indicator-Based Monitoring of Regional Economic Integration
realised. Both monitoring and evaluation are important to identify necessary corrective
actions - but cover different levels and criteria. (Zelenka 2015)
In addition to being an element of “good practice” for policymaking in general,

in the context of regional integration, the need for monitoring is particularly felt
because it has been observed by many that although regional integration has an
important potential in terms of the development of both intra- and extra-regional
trade and the promotion of economic growth in the integrating region, its actual
contribution to growth and trade is not necessarily easily demonstrable, often
because of implementation problems (Schiff and Winters 2003; World Bank
2005). Indeed, slow and incomplete implementation of agreed measures has been
pointed at as the Achilles heel of regional economic integration in a developing
country context (De Lombaerde et al. 2008a). This, in turn, is related to domestic
political factors, technical capacities in government agencies, the multiplication of
parallel and overlapping trade negotiation scenarios and the multiplication of the
number of players and stakeholders, among other factors.
According to Zelenka (2015), monitoring systems can either focus on results or
on implementation. The former is related to impacts and outcomes, while the latter
is related to inputs, activities and outputs.
Little systematic comparative empirical work has been done on monitoring of
regional integration processes so far. This is not only due to the perceived lack of
relevant cases but also to the fact that monitoring methods are not standardized and
that monitoring often serves mainly internal organizational purposes about which
little is being communicated externally. In a joint IDB1/UNU-CRIS project, stock
was taken of the quality and effectiveness of monitoring economic integration
around the world with the purpose to map and compare existing practices, extract
lessons and identify best practices.2 Although one should be aware of the specific
contexts and social construction of the different regional integration schemes
around the world and of the dangers of comparison and exporting models, it is
1
Inter-American Development Bank.
2
The case studies that were undertaken in this project analysed the following: (i) the actors
involved (regional organizations, international/multilateral organizations, national authorities,
academics, civil society, etc.), instruments used (review processes, indicators, questionnaires,
etc.) and outputs generated (internal circulars, external reports, yearbooks, etc.) in the monitoring
processes in the respective regions; (ii) the specific institutional and/or legal structures and
instruments built-in in the agreements (or institutions) for monitoring purposes; (iii) the underlying
conceptual and methodological frameworks; (iv) the policy relevance and effectiveness of mon-
itoring; (v) specific technical issues (problems and solutions) that are of relevance to other regions;
(vi) the factors underlying the lack or deficiencies in monitoring; (vii) and the monitoring needs
that can be identified for the future. The case studies and general conclusions of the project were
published in De Lombaerde at al. (2008a). The case studies included the Andean region, Carib-
bean, Central America, Southern Cone (Mercosur), Southeast Asia, Pacific Islands, South Asia,
Gulf region, Maghreb, Eastern and Southern Africa, Europe (European Union) and North Amer-
ica. The case study on Eastern and Southern Africa was published as Hahnsohm and Adongo
(2008).
Introduction: Indicator-Based Monitoring of Regional Economic Integration xvii
worth to recall some of the main conclusions of this study (De Lombaerde
et al. 2008a):
1. Monitoring has grown more challenging with the increased complexity and
broadening of economic integration agreements.
2. The scope of monitoring has expanded well beyond coordinating the implemen-
tation of the integration commitments, it includes an important external com-
munication component with different types of stakeholders and the monitoring
tasks start before the to-be-monitored agreements are signed and extend beyond
the formally established implementation periods.
3. The odds of successful monitoring are vastly improved when the integration
agreement carries a clear, built-in agenda and processes for its administration
and implementation, and when it mandates the establishment of monitoring units
in each of the member states to interact with each other.
4. Monitoring – particularly of new regional schemes – starts at the national level.
5. Effective monitoring carried by a regional organization reduces coordination
and communication costs among member states and alleviates the workloads of
the individual member governments, although coordination costs and informa-
tional demands can be relatively high for the regional organization.
6. When the regional integration process is deepened and accompanied by the
building of relatively autonomous supranational institutions, new regional mon-
itoring mechanisms are put in place that not only perform technically sophisti-
cated monitoring tasks but that also start playing a more independent and
political role.
7. In deeper integration schemes not only are regional monitoring mechanisms put
in place, but the regional institutions themselves tend to develop and take new
monitoring initiatives, start to monitor member states’ compliance with the
regional rules and start to take overall control over the monitoring process,
resulting in a vertical two-way interaction.
8. In a developing country context, the role of external donors can be crucial
because of the public good characteristics of monitoring; they can raise the
technical capacity of the poorly performing member states, pressure reluctant
states not to oppose the development of monitoring instruments and reinforce the
impartiality of monitoring agencies; at the same time it is also a fact that when
monitoring processes are driven by external actors, the sustainability and rele-
vance of the whole effort is not guaranteed.
When looking at the monitoring systems that are in place in various institution-
alized world regions, in only a limited number of cases they involve systematic
indicator-based monitoring, and most of these cases are one-shot efforts which are
not sustained over time.
In these cases, attempts have been made to monitor the de facto and/or de jure
integration process with the help of a series of indicators.3 As with monitoring
3
On the de facto and de jure categories in regionalism studies, e.g. see Higgott (1997).
xviii Introduction: Indicator-Based Monitoring of Regional Economic Integration
regional integration in general, the experiences have been quite diverse and, so far,
their results have been mixed.4 Considerable human and financial resources have
been invested in these attempts (by both intra- and extra-regional actors) but few
have been sustained. The EU Internal Market Scoreboard, the ASEAN Economic
Community Scorecard and the EDB System of Indicators of Economic Integration
are some of the few exceptions that confirm the rule.
The variety of the experiences reflects, in the first place but not exclusively, the
observed variety in terms of complexity, depth and institutionalization of the
respective regionalization processes worldwide. Cases of regionalism vary from
simple “projects” of regional cooperation, of limited scale and importance, to large-
scale regional processes of societal transformation such as in the case of the
European Union. This obviously poses a problem of comparability, both from an
academic and from a policy perspective.5 It also explains why monitoring in some
cases can be understood in terms of a project management logic6, while in other
cases monitoring refers to an open-ended, complex and multilevel combination of
various (connected or disconnected) monitoring tools and practices in a multi-
stakeholder environment, mirroring the complexity of the process of regional
integration.7
Different cases of monitoring cannot only be distinguished by their complexity,
but specific tools can also be distinguished by their focus, scope and ambition. A
monitoring system can first of all be designed to monitor the implementation of
regionally agreed commitments (i.e. compliance) in one or more policy areas, in
principle by national authorities.8 It has been observed that in many regional
cooperation or integration schemes, this is exactly the crucial success factor for
the respective process (De Lombaerde et al.2008a). Other monitoring systems
(also) focus on aspects of the de facto regionalization process, the behaviour of
regional actors, the institutionalization process, regional policymaking and/or –
which is more complicated and ambitious – the effects of regional policies.9
Whether to include the latter category (policy effects) in a monitoring system is
directly related to the discussion on the limits of monitoring and on how far a
monitor should/could go into the analysis of the collected data.
4
For an overview of general (i.e. qualitative and quantitative) monitoring experiences in various
world regions, see De Lombaerde et al. (2008a).
5
Whether the EU is a sui generis case or not is an old debate in regionalism studies. See, for
example, Sbragia (1992), Hix (1994), Caporaso (1997), Marks (1997), Moravcsik (1997), Pollack
(1997), Checkel (2007), Warleigh-Lack and Rosamond (2010), among many others. On the issue
of comparison and comparability, more in general, see De Lombaerde and S€ oderbaum et al.
(2010).
6
For an overview of applicable tools, see, for example, World Bank (2004).
7
See, for example, De Lombaerde et al. (2008a).
8
In some cases, subnational authorities can directly engage in cross-border agreements; in other
cases, hybrid actors are involved.
9
For a further discussion of these categories, see De Lombaerde and Van Langenhove (2006).
Introduction: Indicator-Based Monitoring of Regional Economic Integration xix
The European Commission’s Internal Market Scoreboard, published twice a

year since 1997, is the prime example of this kind of monitoring (see Chap. 1 in
this volume). According to the Council, the scoreboard was motivated by “the
crucial importance of timely and correct transposition of all agreed legislation into
national law; the need to fully inform citizens and business about the Single Market
and the need for active enforcement of Single Market rules in the Member States”
(European Commission 1997:1). With a combination of quantitative and qualitative
methodologies, DG Internal Market and Services assesses the transposition of
Internal Market directives into national law10 and the number of infringement
proceedings initiated by the Commission against the member states (European
Commission 2005a).11 It should be stressed that this is only one monitoring tool
that is being used in the case of the EU. Other tools include the indicators published
by EUROSTAT by policy area, the Scoreboard for the Surveillance of Macroeco-
nomic Imbalances of the European Commission (DG-ECFIN) (see Chap. 2 in this
volume), the Eurobarometer and the reports by the European Court of Auditors,
next to several other more qualitative monitoring instruments, both internal and
external to the European institutions (Costea et al. 2008, European Commission
2011; Cuerpo et al. 2012).
Recently, ASEAN and the East African Community (EAC) have started to
develop tools to monitor the implementation of regionally agreed commitments
with a similar focus and scope (see Chaps. 11 and 13 in this volume).
The EU has also tried to export this model of “implementation-biased” moni-
toring in the context of its inter-regional negotiations and agreements, which have
historically included an important component of “region-building” (De Lombaerde
and Schulz 2009; Lenz 2009, 2012). Indeed, in most designs of tools supported (and
financed) by the EU, to be applied to other regions, the policy implementation
dimension is typically the most important category of variables covered by the
indicator system (De Lombaerde et al. 2008b; De Lombaerde et al. 2010a).12 This
contrasts with the structure of monitoring systems elsewhere. In some cases,
monitoring tools were suggested by the EU, and agreed upon during the negotiation
phase, in order to assess the state of the regional integration process of the EU’s
counterpart ex ante, in order to establish the conditions for a region-to-region
negotiation and agreement. These included, for example, the so-called
EU-MERCOSUR Joint Photography (European Commission 1998), developed in
the context of the Framework Co-operation Agreement signed in 1995. Other
examples included the EU-CAN and EU-Central America Joint Evaluations in
the context of the negotiation of political dialogue and cooperation agreements
10
Indicators that are used for this purpose include transposition deficits, changes in backlogs of
directives not communicated, fragmentation factor and long-overdue directives.
11
Indicators that are used for this purpose include absolute figures and changes of the number of
infringement proceedings initiated by the European Commission against member states.
12
The same is true for the exercise performed by the ECB on Mercosur (as compared to the EU)
(Dorrucci et al. 2002).
xx Introduction: Indicator-Based Monitoring of Regional Economic Integration
with CAN and Central America, based on the Madrid Declaration of 2002 (Grupo
de Trabajo Conjunto CA-UE 2005a,b,c; Joint Working Group EU-CAN 2006).
Contrary to its negotiations with the Latin American subregions, the negotiations
with the ACP subregions usually involve ex post monitoring. The so-called
EU-ACP Reviews reflect the EU’s integration-promotion strategy as it was incor-
porated in the Cotonou Agreement (European Commission 2002; European Com-
mission 2005b; Pietrangeli 2010).13 In addition, feedback mechanisms were
explicitly foreseen from the (mid-term and end-term) reviews on the (re-)
formulation of the regional indicative programmes (RIPs) and the (re-)allocation
of financial resources.14
This policy has been continued when negotiating Economic Partnership Agree-
ments (EPAs) with the various ACP subregions. The CARIFORUM-EU Economic
Partnership Agreement, signed in 2007 as the first region-to-region EPA, also
included monitoring provisions, not only referring to implementation stricto
sensu but also referring to impact on the broader development goals of the agree-
ment (see Chap. 7).15 In addition, according to the text of the Joint Declaration
annexed to the EPA, monitoring could in principle lead to adjustments in the
agreement. As the promotion of regional integration is one of the general objectives
of EU-ACP cooperation (see above) and of this specific EPA, monitoring the
Caribbean regional integration process is a logical component of the monitoring
exercise.16 However, as implementation of the EPA has been slow, setting up a
monitoring system is also not a reality yet.
Standing a bit apart in this context is the EU-funded ACP Monitoring Regional
Integration (ACP-MRI) project (Chap. 10). The ACP-MRI project was a two-year
ACP Secretariat project funded by the EU. Launched in November 2008, it aimed at
designing an information system for the measurement and monitoring of regional
integration in the ACP subregions.17 The project was conceived as a two-stage
project in which, in a first stage, a system of core indicators would be developed,
common to all the ACP regional integration organizations. In a second stage, the
system would be expanded with other indicators specific to each regional organi-
zation on the basis of their own agendas. The ACP-MRI is an interesting project,
not only from a technical point of view but also from a governance point of view.
13
See articles 28–30 of the Cotonou Agreement and articles 6–14 of Annex IV.
14
Although the Cotonou agreement did not explicitly require annual operational reviews, such
reviews were organized since 2003 for each of the programming regions in accordance with the
principle of rolling programming and by analogy with the country strategy paper review process.
15
On the role and methodology of monitoring in a context of EPAs, see Brüntrup et al. (2008).
16
Institutionalized regional integration in the Caribbean mainly involves the Caribbean Commu-
nity (CARICOM) and the Organization of Eastern Caribbean States (OECS).
17
These subregions were the 12 regional integration organizations recognized by the ACP Group
and benefiting from EDF funds. They included regional organizations in Sahel-Saharan Africa
(CEN-SAD), Southern Africa (SADC), Central Africa (CEMAC, CEEAC), Western Africa
(CEDEAO, UEMOA), Eastern and Southern Africa (COMESA, COI, EAC, IGAD), the Caribbean
(CARICOM) and the Pacific (Pacific Islands Forum). See: http://mri.acp.int/.
Introduction: Indicator-Based Monitoring of Regional Economic Integration xxi
The project cycle involved a lot of multilevel consultations, but, apparently, due to
a lack of ownership at the level of the regional organizations, the project was not
continued after the first phase and the elaborated indicator system was not adopted
by the regional organizations.
The EU-ACP cases, in contrast with the Single Market Scoreboard, are cases
where other dimensions than implementation acquire importance. Other regional
organizations involved in monitoring their regional integration processes focus
even less on implementation, to the benefit of other dimensions such as the
institutionalization of the process or de facto regionalization. Examples include
the indicator system developed by Dennis and Yusof for ASEAN and the UNECA
proposal for the African subregions (Chap. 9).
An ambitious proposal of an indicator-based monitoring system was the one
proposed by Dennis and Yusof for the ASEAN Secretariat and funded by the
Australian Regional Economic Policy Support Facility (REPSF) (Dennis and
Yusof 2003). Its objective was to measure “the progress towards economic inte-
gration of the ten ASEAN nations in the context of the aim to move towards an
ASEAN Economic Community” (Dennis and Yusof 2003:1). The proposal incor-
porated a comprehensive set of indicators, focusing on the following areas: trade in
goods, investment, trade in financial and other services, infrastructure, customs,
standards, mutual recognition agreements and conformity assessment, small and
medium enterprises, e-ASEAN and intellectual property.18 Although this report can
be considered as an important contribution to the development of indicator systems,
this monitoring system has not been implemented. However, in the report, one finds
already a suggestion to adapt the EU Single Market Scoreboard (see above) to the
ASEAN context, i.e. taking into account the intergovernmental structure of ASEAN
and avoiding the public and “confrontational” aspects of the scoreboard (Dennis
and Yusof 2003: 33). More recently the ASEAN Secretariat has built up its own
monitoring capacity, which has led, among other things, to the development of an
“ASEAN Economic Community Scorecard” (ASEAN 2012). This scorecard has
been published yet and plans exist to strengthen the capacity of the monitoring
office (with the support of the EU). However, according to Rillo and De la Cruz
(2016), monitoring in Asia is limited due to “the lack of a systematic approach to
measure its progress. This is unfortunate because integration has now become an
important policy tool in many Asian countries”.
Another proposal was the one launched by UNECA in 2001, with the aim to
assess overall regional integration in the regional economic communities (RECs) in
Africa and to analyse the performance of each country in the region (individually
and relative to other member countries) in achieving the specific objectives set by
the treaties (UNECA 2001, 2002, 2004; see also Chap. 9). Monitoring focused on
the progress made after the African Economic Community was established by the
Abuja Treaty (signed in 1991). The indicators were based on eight sectors: trade,
money and finance, transport, communications, energy, agriculture, manufacturing
18
A smaller set of “key integration indicators” was also identified.
xxii Introduction: Indicator-Based Monitoring of Regional Economic Integration
and human development and labour markets. Based on eight sectoral indices, a
composite integration index was calculated which assessed the relative perfor-
mance of a regional economic community.19
Another interesting proposal is the SADC monitoring reporting and evaluation
systems (Zelenka 2015). These systems are focused on finance and investment
(Protocol on Finance and Investment) and trade (Trade Protocol). The monitoring
systems have been financed by the GIZ Promotion of Economic Integration and
Trade programme.
There are some other cases to be mentioned that are broader in scope than the
indicator systems focusing on the implementation dimension. One is Hufbauer and
Schott’s proposal to assess regional integration in the Americas (Hufbauer and
Schott 1994). Two sets of indicators were developed by these authors: one assessing
the level of economic integration achieved by each subregional grouping and the
other examining the level of “readiness” of these groupings in order to increase the
degree of hemispheric integration. Another case is the indicator system proposed by
Feng and Genna (2003, 2004, 2005) and which is directly based on Hufbauer and
Schott’s (see Chap. 6 in this volume). The authors use “integration achievement
scores” and applied them to African, Asian and Latin American regional integration
processes. A third case is Ruı́z Estrada’s Global Dimension of Regional Integration
model which analyses the process of regional integration from a global perspective
using a multidimensional framework covering social, political, economic and
technological dimensions (Ruı́z Estrada 2004).20
A fourth case is UN-ESCWA’s regional integration index for the Arab world,
which was published for the first time in its 2006 Annual Review of Developments
in Globalization and Regional Integration in the Arab Countries (UN-ESCWA
2007). The index seeks to measure the degree of de facto integration of individual
Arab countries in the region.21 A fifth case is the ADB proposal. The indicator
system proposed by Capannelli, Lee and Petri (2009, 2010) at the ADB seeks to
19
The main objectives of the indices were (i) “ [t]o assess each country’s performance and relate it
to the goals and objectives of each regional economic community and that of Africa as a whole, as
well as to assess the performance of each economic community to that of Africa; (ii) to compare
the contributions of each member country in a regional economic community towards the
realization of such goals and objectives, in addition to the contributions that each regional
economic community has made towards the realization of goals and objectives of the continent
at large; (iii) to monitor the performance of each country, regional economic community, and the
continent as a whole for regional integration efforts over time; (iv) to enhance the quality of the
analysis by providing indices for scores and rankings at country, regional economic community
and continent levels” (UNECA 2004: 244).
20
The model also involves the calculation of the “regional integration stage index” (Ruı́z Estrada
2004:15).
21
In its current version, only four variables are used, mainly because of severe data constraints in
the region. These variables (or sub-indicators) are openness to Arab intra-regional trade, openness
to Arab intra-regional investment, openness to Arab intra-regional workers’ remittances and
openness to Arab intra-regional tourism. Country rankings are aggregated using a statistical
weighting procedure (principal component analysis).
Introduction: Indicator-Based Monitoring of Regional Economic Integration xxiii
measure regional integration in a reflexive and comparative way with the help of
quantitative indicators of market integration and policy cooperation.22 Quantitative
input indicators of political and cultural similarity are calculated to explain the
disequilibrium between institutional and economic integration in East Asia. Since
2012, the ADB also publishes an Asian Economic Integration Monitor (ADB
2012).23
Finally, also the EDB proposal falls in this category of broader indicator-based
monitoring systems (Vinokurov et al. 2010; Libman and Vinokurov 2010; EDB
2012; Chap. 5 in this volume).24
Some other initiatives are in the pipeline. They include a new attempt by
UNECA to revive its indicator system in support of the Abuja Treaty process, the
plan for an East African Community Common Market Scorecard supported by the
World Bank in collaboration with the EAC Secretariat (in order to monitor the
implementation of the Common Market Protocol) (Chap. 11), UN-ECLAC’s plans
to monitor Central American economic integration and monitoring plans at
COMESA.
A systematic review of the relevant indicator systems that have been designed so
far (see above) has been undertaken at UNU-CRIS.25 The objective of the review
was to map and compare the indicator systems, to study their technical features and
to identify best practices but also to look at the political-economy aspects of the
systems (by whom, for whom, for what purpose). The conclusions of the reviews
can be summarized as follows (De Lombaerde et al. 2008b; De Lombaerde et al.,
2010, 2011):
22
See also Capannelli (2012).
23
This new semi-annual publication evolved from the Asia Economic Monitor, which was
published since 2001.
24
See also Libman and Vinokurov (2012a) and Libman and Vinokurov (2012b: 72-85).
25
The review was quite exhaustive and included both institutional systems and purely academic
proposals. The former included systems developed by the European Central Bank (ECB)
(Dorrucci et al., 2002), various schemes proposed and/or implemented by the European Commis-
sion and its regional partners in the framework of interregional relations; UNECA’s proposal to
monitor regional integration in Africa (UNECA, 2001, 2002, 2004); the indicator system proposed
for ASEAN (Dennis and Yusof, 2003); and the Eurasian Development Bank (EDB, 2009). The
schemes proposed by the European Commission include the EU-MERCOSUR “Joint Photogra-
phy” (European Commission, 1998), the EU-CAN Joint Evaluation (Grupo de Trabajo UE-CAN,
2005a,b), the EU-Central America Joint Evaluation (Grupo de Trabajo Conjunto CA-UE, 2005a,b,
c) and the EU-ACP Reviews (European Commission, 2002; European Commission, 2005b; World
Bank, 2002; COMESA, 2002). In addition, some “academic” proposals were included in the
sample: Hufbauer and Schott’s proposal to assess regional integration in the Americas (Hufbauer
and Schott, 1994); its modified version by Feng and Genna (2003, 2004, 2005); Ruiz’ GDRI model
(2004a); and the proposal by Capannelli, Lee and Petri (2009) to measure economic integration
and cooperation in East Asia. The results of this review were published in De Lombaerde et al.
(2008b); De Lombaerde et al. (2010); De Lombaerde et al. (2011); and De Lombaerde and Salmon
(2011).
xxiv Introduction: Indicator-Based Monitoring of Regional Economic Integration
1. Only few actors seem to be involved in the monitoring exercises; participation of

stakeholders other than the designers of the system is very scarce, if not
inexistent.
2. The objectives of indicator systems are diverse (they include the following: to
measure the level of integration of a given regional grouping, to measure the
preconditions for further integration, to assess the performance and contribution
of individual countries in regional groupings, to evaluate regional integration
policies; to compare regional integration in different regions, to evaluate donor-
financed support programmes for regional integration, to assess needs and merits
of regional organizations upon which to base future aid decisions, to be strate-
gically used in the context of a negotiation process).
3. Only a few proposals deal with conceptual issues, leading in many cases to a lack
of clarity related to the selection of variables (illustrated by the fact that grosso
modo one third of the variables included in the indicator systems do not directly
provide information about the regional integration process).
4. Technical choices are often linked to political choices to be made by the builders
of the indicator systems (these include choices related to cross-regional com-
parisons, choices between absolute and relative comparisons, choices about
weights, the inclusion of policy implementation variables, the combination of
quantitative measurements with qualitative assessments and the interpretation of
results).
The size of the reviewed indicator systems ranges from less to ten to more than
50 variables. The most common variables belong to the following categories:
institutionalization and policies, implementation, interdependence and national
macroeconomic indicators. Some monitoring systems included an “overall/aggre-
gate index”, and very few monitoring systems have been implemented continu-
ously, most of them are implemented for a fixed period.
Figure 1 gives an overview of a selection of the most relevant indicator systems.
As can easily be seen, most of the efforts have not been sustained. This reinforces
our message that designing indicator-based monitoring systems is as much a
technical challenge as a governance challenge.
The contents of this volume reflect the variety of experiences with indicator-
based monitoring of regional economic integration so far. It is organized in five
parts: (i) European and Eurasian experiences, (ii) experiences with monitoring in
Latin America and the Caribbean, (iii) African experiences, (iv) Asian experiences
and (v) methodological contributions.
Europe and Eurasia
In Chap. 1 (“The European Commission Internal Market Scoreboard”), Fernández,

Vida and De Lombaerde offer a comprehensive picture of the European Commis-
sion’s Internal Market Scoreboard. The Scoreboard is used to monitor the
Introduction: Indicator-Based Monitoring of Regional Economic Integration xxv
1990
1995
2000
2005
2010
2015
Hufbauer
and
Schott
SADC-
UNDP
EU-IMS
EU-M
ECB
Feng
and
Genna
UN
ECA
ASEAN
GDRI
EU-
CAN
EU-CA
UN
ESCW
A
ADB
EDB
ACP
MRI
WB
EAC
= sustained = not sustained
.
Fig. 1 Lifetime of selected indicator systems (Sources: see text and footnotes)
performance of member states with regard to the transposition of Internal Market

law. The Scoreboard and its indicators have been adapted throughout the years, and
today it is one of the many soft power tools that the Commission uses to promote
compliance and avoid lengthy infringement proceedings. Fernández et al. analyse
the impact of the Scoreboard on member state compliance. They find that while the
scores for transposition of EU law have been at record high, other indicators’ results
remain stagnant. The authors also discuss the usefulness of the Scoreboard for
academic research.
xxvi Introduction: Indicator-Based Monitoring of Regional Economic Integration
Chapter 2 (“Scoreboard for the Surveillance of Macroeconomic Imbalances”)

focuses on tools to counter macroeconomic imbalances in the EU. The economic
and financial crises have revealed the limits of the original EMU surveillance tools.
To prevent and correct macroeconomic balances, the Macroeconomic Imbalance
Procedure (MIP) was adopted. In this chapter, Cuerpo and Fischer present an
overview of the MIP, its Alert Mechanism and the rationale behind the indicators.
The scoreboard is included in the yearly Alert Mechanism Report (AMR), which
serves, inter alia, as a basis for the Commission to draw a list of member states that
are subject for an in-depth review. Cuerpo and Fischer notice that the number of
countries that are in the list has not decreased over the years because of external
sustainability issues, export performance and competitiveness, private sector
indebtedness and housing and asset markets issues. Yet, there have been improve-
ments in terms of deficits, gains of price and non-price competitiveness, and the
export performance is more homogeneous. Private debt stocks persist and unem-
ployment seem to have increased.
In Chap. 3 (“The EU Index of Integration Effort”), K€onig presents the Index of
Integration Efforts for the EU member states. Diverging integration efforts or
capacities for further economic integration may lead to more heterogeneity
among countries. This is why K€onig measures the general integration efforts of a
country by elaborating composite indicators. There are four dimensions to the
indicators: acquis communautaire (“EU Compliance”), Single Market integration
(“EU Openness and EU Importance”), Economic and Monetary Union (EMU,
measured by “EU Symmetry”) and, finally, economic convergence (“EU Homoge-
neity”). The results of the index (based on data for the post-2000 period) indicate an
improvement in the EMU and acquis communautaire dimensions, whereas eco-
nomic convergence has slightly decreased. This leads to a multi-speed Europe,
where there are three homogenous groups of countries (the core group and EMU
opt-outs, EU periphery and GIIPs) within a heterogeneous setting.
In the fourth chapter (“Integration Profiles for Hungary and Central Europe”),
Palankai and Miklos perform an analysis of the degree of economic integration of
Hungary and Central Europe in order to compare their position with the rest of
Europe. The analysis of economic integration is based on six indicators: integrated
trade intensity, structure of trade and competitiveness, balance of trade, intensity of
factor market and trans-nationalization of the company sector, subregional con-
nectedness and convergence. The authors found that Hungary and the Central
European countries are highly integrated with the rest of Europe in the area of
trade. They have reduced the productivity gap between 1998 and 2008, and they
gained trade surpluses with the rest of Europe and the world. In addition, Hungary is
characterized by very high capital integration, and most of its foreign direct
investment (FDI) comes from Germany, the Netherlands and Austria. It is gradually
entering the EMU and is fully part of the Single Market. Therefore, due to this high
level of connectedness, the authors believe that Hungary and the Central European
periphery has become part of the centre.
The fifth chapter, by Vinokurov and Libman, presents the Eurasian Development
Bank System of Indicators of Eurasian Integration (SIEI). The SIEI was created to
Introduction: Indicator-Based Monitoring of Regional Economic Integration xxvii
monitor the economic integration of countries and groups of countries in the post-
Soviet space. The system is built around indicators of regional integration in trade,
labour migration, electricity (electric power), agriculture and education to assess
the level and dynamics of market integration. Vinokurov and Libman also offer a
summary of the outcomes of the two SIEI published so far (2009 and 2014). After
presenting a consolidated index for 12 countries of the Commonwealth of Inde-
pendent States, it seems on the one hand that the level of integration has decreased.
On the other hand, EurAsEC-5 has become more integrated in the last decade.
However, from 2009 to 2012 the trends have inversed. In terms of countries,
Kyrgyzstan, Armenia and Tajikistan have taken the lead of integration, strongly
contrasting with Russia and Moldova.
The Americas and the Caribbean
In Genna’s Chap. 6 (“Measuring Integration Achievement in the Americas”), an

updated version is presented of the Integration Achievement Score (IAS) that was
initially designed by Hufbauer and Schott (1994). Genna expanded the scope of the
original IAS in both time and space and has systematically applied it to regional
integration schemes in the Americas with data from the 2000s. Because of its
systematic nature of coding integration achievements, it allows for comparisons
between the regional schemes; it is also well suited for further econometric anal-
ysis. It contains six categories with six levels each. The categories are trade in goods
and services, free movement of capital, labour mobility, decision-making of supra-
national institutions, monetary coordination and fiscal coordination. Moreover, the
levels for each regional scheme are calculated with a set of values that range from
0 to 5. Results are presented for five schemes in the Americas (CAN, CACM,
CARICOM, MERCOSUR, NAFTA) which allow for a comparison of economic
integration levels.
In Chap. 6 (“The Challenge of Monitoring Regional Integration: Lessons from
the CARIFORUM-EU EPA”), Byiers and De Roquefeuil present a study of the
problems faced by monitoring the EU-CARIFORUM Economic Partnership Agree-
ment (EPA), an agreement that was signed between the EU and the CARICOM in
2007. By showing current monitoring efforts in the Caribbean region, the authors
explain the challenges that must be addressed, such as monitoring compliance or
development impacts. From their analysis, Byiers and De Roquefeuil extract the
following lessons:
First, analysing the political, historical and economic contexts is key to determine
the state of regional integration.
Second, regional monitoring systems can be seen as a useful tool for national
governments.
Third, the monitoring exercise should be flexible enough in regard to countries with
different characteristics.
xxviii Introduction: Indicator-Based Monitoring of Regional Economic Integration
Fourth, the monitoring system must begin with a modest ambition.

Finally, the authors emphasize that the design of an EPA monitoring systems
requires consideration of objectives, scope, actors and institutions, as well as
methodology.
In the eighth chapter (“Comparing Integration in Europe and Latin America:
Wishful Thinking, Self-Perception and Reality – A comment”), Roy compares the
European integration process and the ambivalent integration dynamics in Latin
America and ponders on whether the EU can still be considered as a model for Latin
American integration. The author notes that differences in the two regions in terms
of geography, history and political regimes – presidentialism prevails in Latin
America – are all reasons why it is inherently difficult to compare them. However,
Roy argues that despite these inter-regional differences and the EU’s own internal
challenges, the European model still has value for Latin America.
Africa
In Chap. 9 (“Assessing Regional Integration in Africa: Indicators of Integration

Effort in Africa”), Tanoe presents the indicators developed in the context of the
“Assessing Regional Integration in Africa” (ARIA) project, conducted by the
Economic Commission for Africa (UNECA). ARIA’s goal, and therefore the
indicators’ objective, is to assess the progress of regional integration over time
across the continent, countries and regional economic communities (RECs). The
indicators are grouped in eight clusters: human development and labour market
integration, trade and market integration, monetary, fiscal and financial integration,
energy, food security, transport and communications infrastructure, industrial pro-
duction and consumption and regional commons. Then, a weighted composite
integration index is calculated that measures relative performance of the RECs
within the continent. Tanoe finds that the progress of regional integration in Africa
is differentiated between RECs and sectors. On the one hand, success in the RECs is
observed in the member states that have implemented effective integration
programmes. On the other hand, the sectors of trade and communications have
had most advances.
In the tenth chapter (“Monitoring Regional Integration in the ACP Regions”),
Salmon assesses the Monitoring Regional Integration (MRI) project in ACP sub-
regions. The aim of the EU-funded monitoring project was to increase collaboration
among regional integration organizations of the ACP countries in order to build a
common system of indicators of regional integration. The system includes the
following dimensions: regional governance, economic integration, functional coop-
eration and social integration. For each of the dimensions, a composite index is
constructed for monitoring progress in regional integration, which subsequently
allows for the calculation of an overall composite index of regional integration.
However, Salmon points to the difficulties of developing the latter index because of
Introduction: Indicator-Based Monitoring of Regional Economic Integration xxix
technical difficulties and the complexity (and multidimensionality) of the regional

integration processes. The author concludes that key factors for the sustainability of
a monitoring system include its size, cost, objective and user ownership.
In Chap. 11 (“The East African Community Common Market Scorecard”),
Ombudo K’Ombudo, De Lombaerde and Borda present and assess the EAC
Common Market Scorecard (CMS) which was published in 2014 for the first time
by the World Bank Group in collaboration with the EAC Secretariat. The
EAC-CMS is part of the implementation process of the EAC Common Market
Protocol, which came into force in 2010, and seeks to monitor how EAC member
states have been undertaking measures to review their domestic regulatory envi-
ronments to ensure compliance with the protocol and bring the resulting business
environment towards a common (and upgraded) regional standard. The authors
present a preliminary assessment of the scorecard. They look at its purpose and
scope, methodological framework (including data collection and validation), gov-
ernance and stakeholder structure, communication and reporting aspects and per-
spectives for the future.
In Chap. 12 (“Assessing Regional Integration at Country Level: A Possible
Framework as Illustrated for the COMESA Region”), Bhatia develops a Perfor-
mance Assessment Framework (PAF), comprising a set of indicators and bench-
marks with regard to the Common Market for Eastern and Southern Africa
(COMESA). The goal is to assess the performance of individual member countries
in trade integration over time. Moreover, the emphasis is on the process of imple-
mentation of regionally agreed actions. Indicators form part of eight intervention
areas, such as, but not limited to, the consolidation of the internal market, the
operationalization of the Customs Union, trade in services and competition policy.
Furthermore, other than a number of mandatory indicators that would apply to
every country, the member states would have the opportunity to choose from the
regionally agreed actions, instruments and indicators through the Regional Integra-
tion Implementation Programs in order to ensure country ownership. Finally, the
average of the overall performances can be the basis for fund expenditure and can
be used by national authorities in monitoring their integration policies.
In Chap. 13 (“Indicator-Based Monitoring of Regional Economic Integration in
Southeast Asia”), Rillo offers a study on existing ASEAN monitoring systems, the
ASEAN Economic Community (AEC) Scorecard and the ASEAN Community
Progress Monitoring System (ACPMS). Rillo analyses the compliance monitoring
system, based on the information of the AEC Scorecard, and the outcome-based
monitoring system, established from ACPMS. Monitoring compliance comes from
collecting information on the ratification, adoption and implementation of regional
legislation and administrative acts. According to Rillo, the AEC Scorecard pro-
motes compliance in itself; it can only assess the process of integration. However,
the ACPMS measures the outcomes through a set of indicators that are adapted
throughout the years and releases a statistical report, the ASEAN Community
Progress Monitoring System. Rillo finds that, despite advances in the realm of
AEC, many challenges persist. The author concludes with several proposals for
improvement.
xxx Introduction: Indicator-Based Monitoring of Regional Economic Integration
Methodology
The final three chapters discuss methodological issues that are of relevance across
regional systems. In Chap. 14 (“Opening the Black Box of Trade Agreements”),
Kohl presents a coding methodology to capture the heterogeneity of trade agree-
ments and to facilitate quantitative analysis departing from qualitative legal differ-
ences in trade agreements. The coding is based on whether the provisions of the
World Trade Organization (WTO) are covered by free trade agreements, as well as
whether they are legally enforceable. Then, the author offers a heterogeneity index
that is used to analyse the content of a trade agreement. The index can be used in
gravity models to estimate the effect of FTAs on trade.
In Chap. 15 (“Assessing Globalization and Regionalization Through Network
Indices”), Iapadre and Tajoli use network analysis (NA) in order to study the impact
of globalization and regionalization on the entire structure of trade flows. NA
focuses on trade flows as a network, therefore emphasizing the relationship between
countries – the nodes – and the network structure itself. According to Iapadre and
Tajoli, this approach is particularly fit to offer a unified view of the system’s
properties, help develop trade policies and analyse changes in the world trading
system. This is why the authors present the changes in the trade networks by
studying indices that describe the network’s characteristics: density, closeness,
betweenness and degree distribution. The authors conclude that network complete-
ness is indeed achieved in some subregional components; however, the level of
heterogeneity between countries has increased.
Finally, in Chap. 16 (“Measuring Actual Economic Integration: An Outline of a
Bayesian State-Space Approach”), Rayp and Standaert construct an indicator of
regional integration based on a Bayesian state-space approach. The state-space
model is helpful in estimating the overall level of regional integration by using all
information contained in a set of indicators. The authors apply this model to the
level of regional integration between members of the OECD. The variables of the
level of regional integration – i.e. the Current Economic Integration (AEI)
(Mongelli et al. 2005) – are standardized and organized in four groups: flows of
goods, flows of services, foreign direct investment (FDI) and other financial flows
and migration. The AEI can also be used to construct a weighted directed network.
By observing the weighted directed network, the authors found that the core players
in the OECD are the United States, Germany and the United Kingdom and in
second place, France, Italy and Japan. Finally, they conclude that the level of
economic integration among OECD members has increased over the last 20 years
and that the European integration agreements and the NAFTA have had positive
effects on economic integration.
Introduction: Indicator-Based Monitoring of Regional Economic Integration xxxi
Conclusion
Whereas most analysts and policymakers will probably not question the potential of
indicator-based monitoring systems for supporting regional economic integration
processes, the current landscape is patchy and the experiences so far have not
always been successful. The monitoring efforts have very often not been sustained
over time, and it has proven difficult to secure the involvement of the relevant
stakeholders and generate visible impact in policymaking. However, cases like the
Internal Market Scoreboard in the EU show that sustained efforts in combination
with sound methodologies and clear communication clearly have an important
potential. Especially the regularly published transposition deficits have become
often cited figures in national parliaments and the mass media. The IMS is appar-
ently contributing to pressuring member states to implement timely and correctly
the regionally decided rules.
At the same time, when thinking about designing “better” indicator systems, one
should be very much aware of the distinctive features of each individual case of
regional integration. The mentioned IMS responds to a very specific monitoring
mandate, whereas the mandates can greatly vary from one situation (region) to
another and they can involve very different sets of actors and stakeholders. This
reflects in part the fact that the world of regionalism is very heterogeneous.
One-size-fits-all monitoring tools are therefore not recommended.
In addition, one should realize that designing an indicator system is not only
about making technical choices and solving data constraint problems but also about
carefully dealing with political-economy and governance aspects.
We hope that this book contributes to building the collective memory of
indicator-system builders, to exchanging experiences among them and to preparing
the ground for building more effective systems in the future.
Rouen, France Philippe De Lombaerde

Bruges, Belgium
Xalapa, Mexico Edgar J. Saucedo Acosta
Bruges, Belgium Alexandra Melissa Vida
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Part I
Europe and Eurasia
Chapter 1
The European Commission Single Market
Scoreboard
Vanessa Fernández Moriana, Alexandra Melissa Vida,

and Philippe De Lombaerde
1.1 Introduction
The Single Market of the European Union (EU), previously known as the Internal
Market, is a foundational backbone of the European integration project. It is
associated with the Single European Act, which was signed in 1986, and should
be understood as a process rather than a state. It consists of the formation of a
transnational market in which four freedoms are pursued: the free movement of
goods, services, capital and persons. The Single Market represents a core concept of
European integration as it enables European citizens to freely live, study, work and
carry out their businesses in the EU. Being a process, the EU continues to dismantle
remaining barriers between Member States and to harmonize legislation that may
hinder the performance of the integrated market and hamper the related benefits for
citizens and consumers. The Single Market, as defined in Articles 26 and
114 TFEU, consists of a large body of EU law that encompasses all measures
considered as having an effect on the market, whether it is about the four freedoms
or other supporting policies. The transposition of EU directives and regulations in
Member States’ national setting is therefore a crucial way to achieve a harmonized
set of rules for the Single Market. However, since directives ought to be transposed
V. Fernández Moriana
Toulouse Business School, Barcelona, Spain
A.M. Vida
American Chambre of Commerce (AmCham), Brussels, Belgium
Former intern, UNU-CRIS, Bruges, Belgium
P. De Lombaerde (*)
NEOMA Business School, Rouen, France
UNU-CRIS, Bruges, Belgium
e-mail: philippe.de-lombaerde@neoma-bs.fr
© Springer International Publishing AG 2017 3

P. De Lombaerde, E.J. Saucedo Acosta (eds.), Indicator-Based Monitoring
of Regional Economic Integration, United Nations University Series
on Regionalism 13, DOI 10.1007/978-3-319-50860-3_1
4 V. Fernández Moriana et al.
into national legislation by Member States following form and method consistent
with their respective constitutional settings, and taking into account national polit-
ical context and sensibilities, problems may arise with the transposition within the
established time limit. This situation may ultimately negatively affect the Single
Market’s efficiency.
As part of the general objective of enhancing the Single Market across the
Union, the European Commission has initiated the Internal Market Scoreboard
(IMS) in 1997. The Scoreboard is as such only one component of the complex
and sophisticated monitoring instrumentarium that has gradually been put in place
in the EU (Costea et al. 2008). It is essentially a monitoring record released twice
per year that synthetizes key information on the transposition of the Single Market
legislation, or lack thereof. The Scoreboard is an interesting record of data and an
instrument for public peer-pressuring and naming and shaming, sharing best prac-
tices, harmonization, and overall a system of soft power and monitoring. The initial
mandate of the Scoreboard was to depict the state of the Internal Market and to
gauge the degree to which Member States, the Council and the Commission meet
the Action Plan targets.1 Subsequently, the Scoreboard focused on tracking the
evolution of market integration by monitoring practices that (possibly) threaten its
functioning. Today, the IMS is an online platform on which the performance of
Member States regarding their timely transposition of recent directives, transposi-
tion backlog, average delays, and governance tools, are published.
This chapter offers an up-to-date description of the IMS and its evolution
throughout the years and assesses its relevance and impact on the implementation
of EU legislation. The chapter also gauges the importance of the Scoreboard as a
locus of production of public information and a basis for further analysis by
academics, governmental agencies, think tanks, etc.
1.2 Historical Development
The first Internal Market Scoreboard was published by the European Commission
in November 1997 and has since then been issued with a frequency of twice per
year. The Scoreboard is currently known under the name of ‘Single Market
Scoreboard’. In order to have a comprehensive view of the IMS and what it may
offer to practitioners and scholars, this first section traces the Scoreboard’s devel-
opments since its origin.
The official purpose of the IMS was to “first, offer a picture of the current state
of the Single Market and secondly to gauge the degree to which Member States, the
Council and the Commission are meeting the targets laid down in the Action
1
The Single Market Action Plan (SMAP) was endorsed by the Amsterdam European Council in
1997 which aimed at improving the Single Market by launching the IMS.
1 The European Commission Single Market Scoreboard 5
Plan”.2 The complementary underlying goal of the Scoreboard was to promote

compliance, as a Commission official stated in 1996:
“The purpose is to put greater pressure on states by way of transparency, which is one of the
keys to getting member states to implement directives. It means that a member state not
only sees its own position, but also that of other member states, and obviously member
states do not like to see themselves at the bottom of the list” (Tallberg 2002).
Although the initial objective only concerned a depiction of Member States’

progress regarding EU Single Market Directives, ranking Member States and
publishing success stories signifies that the Commission tacitly expected to deter
future non-compliance. The Scoreboard – or “scareboard” as it is sometimes called
– may then be considered as a complementary, alternative and preventive tool for
harder measures, such as lengthy infringement procedures (Koops 2011).
The Scoreboard has been chiefly used to monitor Member States’ transposition
of Internal Market law since its inception. The difference between transposition,
implementation and enforcement lies in the stages of legislation. Transposition
refers to the legal incorporation of European Directives into national law so that
their components are directly applicable in Member States. Implementation touches
upon the next step; it relates to the stage where EU law is applied in national and
subnational levels. Finally, enforcement means that Member State compliance with
EU law is monitored on a national level.3
The Scoreboard mainly preoccupied itself with transposition and implementa-
tion, and has constantly emphasized the importance of accessible information on
the realization of EU law for citizens. Today, it includes additional areas of analysis
that complement the evaluation of the Single Market’s efficiency. Indeed, the
measurements that assess transposition performance have been continuously
refined along with the other areas of analysis that have been adapted over the
years to emerging economic scenarios and needs. For instance, the November
1997 Scoreboard was focused on three main areas4: the implementation of Single
Market directives, problem-solving and enforcement, and the application of the
Action Plan. However, the next edition, released 6 months later, offered an increas-
ingly deep analysis of transposition and infringement measurements and a compre-
hensive evaluation on legislation enforcement by Member States. In addition, a new
section analyzing the evolution of the Single Market Economic Integration through
trade, investment and price convergence indicators has been incorporated, as well
as feedback from EU citizens and business surveys.5
2
As stated in the first European Commission Internal Market Scoreboard, 1997, (1), Nov.
3
European Parliament, Transposition, implementation and enforcement of Consumer Law, 2009,
(IP/A/IMCO/NT/2009–02). http://www.europarl.europa.eu/RegData/etudes/etudes/join/2009/
416221/IPOL-IMCO_ET(2009)416221_EN.pdf
4
European Commission Single Market Scoreboard, 1997, (1), Nov. http://ec.europa.eu/internal_
market/score/docs/score01/score_en.pdf
5
European Commission Press Release, IP/98/441 (18/05/1998). http://europa.eu/rapid/press-
release_IP-98-441_en.htm?locale¼en
The November 1999 Scoreboard introduced an entire section focused on price

monitoring.6 Further editions extended the evaluation on information and coordination
centers in an effort to continuously remove barriers impeding optimal market integra-
tion. Specific sectorial focus is another characteristic of the Internal Market Scoreboard.
Some editions have paid special attention to critical issues, offering a deeper assess-
ment regarding transposition delays and infringements in a given sector. For example,
the May 2001 Scoreboard included a section dedicated to ‘Implementation of Envi-
ronmental Directives’,7 in which transposition deficits were much higher than average.
The November 2001 edition launched a section on the Internal Market Strategy,
including an Internal Market Index. The Strategy aimed at benefiting citizens and
companies by improving social cohesion, promoting higher incomes and lower prices,
advocating for a cleaner environment, increasing possibilities to live and work abroad
and finally, bolstering easier access to capital. The Internal Market Index measured the
impact of Internal Market policies contributing to the four freedoms. The index has
synthetized twenty variables that include growth per-capita income, long-term unem-
ployment, price dispersion, growth in intra-EU trade, prices of utilities services,
availability of venture capital, energy intensity and greenhouse gas emissions.8
EU enlargement has also been analyzed by the Scoreboard. In May 2003, the
Scoreboard included a prospective analysis of the effect of new members’ lower
prices on price convergence within the EU.9 In June 2004, the Scoreboard increased
its emphasis on the misapplication of Internal Market rules. SOLVIT, a European
online network, was created for this purpose. Since then, SOLVIT aims at offering
solutions for issues emerging between citizens or companies and public adminis-
trations due to inaccurate or incorrect application of Internal Market legislation.
The online network has continuously gained importance since its inception (Koops
2011). In sum, between 2004 and 2008, the Internal Market Scoreboard focused
entirely on transposition, infringements, case resolutions, and refined its measure-
ment tools and indicators.
The EU had to wait until December 2008 for a renewed overview of the state of
integration of the Internal Market. The IMS then focused on trade and foreign direct
investment flows.10 In 2009, it also reintroduced a sectoral supplement that exam-
ined the state of public procurement transparency.11 Moreover, the Internal Market
Enforcement Table (IMET), today known as the “traffic light chart”, was included
6
European Commission Single Market Scoreboard, 1999, (5), Nov. http://ec.europa.eu/internal_
market/score/docs/score05/score5_en.pdf
7
European Commission Internal Market Scoreboard, 2001, (8), May. http://ec.europa.eu/internal_
8
European Commission Internal Market Scoreboard, 2001, (9), Nov. http://ec.europa.eu/internal_
9
European Commission Internal Market Scoreboard, 2003, (12), May. http://ec.europa.eu/inter
nal_market/score/docs/score12/score12-text_en.pdf
10
European Commission Internal Market Scoreboard, 2008, (18), Dec. http://ec.europa.eu/inter
nal_market/score/docs/score18_en.pdf
11
European Commission Internal Market Scoreboard, 2009, (19), July. http://ec.europa.eu/inter
in the 2010 Scoreboard for the first time. It was designed to provide an uncompli-
cated visualization of the overall performance of Member States regarding imple-
mentation and application of Internal Market rules by aggregating essential
indicators in multicolored tables. The IMET allows to graphically compare relative
performances of Member States and associating various transposition indicators.
The year 2010 was also the period in which the Scoreboard introduced a new
section baptized Member States’ Best Practices. It calls upon Member States to
share their methods of resolving domestic issues and therefore presents the coun-
tries with the best performance on the indicators for the given period.12 This new
section of the Scoreboard represents an additional peer-pressure tool aiming at
achieving better transposition and enforcement score.
In 2012, the Internal Market Scoreboard started to be included in the Annual
Governance Check-up report, in which progress of the integration of the Single
Market is assessed by adopting a cyclical approach.13 The Governance Cycle
consists thereby of the seven stages of EU law-making: adopt, transpose, inform,
enable, connect, solve, and evaluate. Therefore, this report goes beyond monitoring
the transposition delays. It analyzes the entire functioning of the Single Market
from the adoption of legislation to the general evaluation of the performance of
Member States in its application. Since 2013, the IMS is exclusively online and was
converted to a website platform incorporating the Governance Cycle approach,14
and a new Single Market Strategy was released in 2015 aiming, inter-alia, at adding
new indicators in the Scoreboard on public procurement efficiency.
1.3 The Single Market Scoreboard Today
Today, the Scoreboard gathers information from Member States and the EU, and
incorporates governance tools (such as SOLVIT, and others). It organizes the data
in four sections. The first section offers a precise overview of the performance of
each Member State, and the second monitors the functioning of various multilevel
governance instruments. The third section reviews the performance by policy area.
Moreover, the ‘traffic light chart’ offers a rapid and general overview of Member
States’ performance according to transposition, infringements, EU Pilot, IMI,
Eures, Your Europe, Solvit and Points of Single Contact. The fourth section
organizes information regarding each of the seven stages of the Governance
Cycle (Fig. 1.1). The seven stages are described below.
12
European Commission Internal Market Scoreboard, 2009, (20), Dec. http://ec.europa.eu/inter
nal_market/score/docs/score22en.pdf, and European Commission (May 2010), The Internal Mar-
ket Scoreboard No.21. and http://ec.europa.eu/internal_market/score/docs/score21_en.pdf
13
European Commission, Making the Single Market Deliver, 2011, (24). http://ec.europa.eu/
internal_market/score/docs/relateddocs/single_market_governance_report_2011_en.pdf
14
European Commission Press Release (04/07/2013), IP/13/651. http://europa.eu/rapid/press-
release_IP-13-651_en.htm
Fig. 1.1 The single market

governance cycle (Source:
European Commission
(2015), Online Scoreboard)
1.3.1 Adopt
The Single Market is an example of EU’s regulatory power. In this sense, enabling
the four freedoms and their outcomes relies on a vast body of EU legislation mainly
adopted through the ordinary legislative procedure. After collecting the conclusions
of policy evaluations, the Commission decides whether to delete rules, simplify
them or adopt new legislation. Information on the Commission’s planned and
prospective initiatives for future action (Commission Work Programme), a moni-
toring system of decision-making in the EU as well as legislation proposals
(Pre-Lex) and a Eur-Lex component are available under this category. Moreover,
Single Market initiatives (Single Market Act I and II) and recent governance
initiatives are also published, indicating a will to store relevant information
conjointly.15
1.3.2 Transpose
In this stage of the governance cycle, the Scoreboard offers statistics on transposi-
tion performances and number of infringement proceedings throughout Member
States. It is the section that is discussed most.
15
European Commission, Adoption, simplification or deletion of Single Market rules, 2015, Oct.
http://ec.europa.eu/internal_market/scoreboard/governance_cycle/adopt/index_en.htm. Accessed
14 Dec 2015.
The first step is to evaluate how well Member States incorporate EU directives
into national law. The main key points consist of the respect of the transposition
deadline and the correctness of transposition according to the meaning and objec-
tives of the EU directive. Therefore, the Commission calculates transposition
deficits by aggregating Member States’ notifications on their progress. Indeed,
Member States are expected to notify the Commission once the new directive has
been transposed into national law. Therefore, the basic rationale for the indicators
regarding transposition performance rests on respect of the deadline of the legisla-
tion. However, cases occur where the transposition has only been partially com-
municated or where the transposition is completed but not communicated to the
Commission.
Five indicators are used to assess transposition performance: transposition
deficit, progress over the last 6 months, long-term delay, total transposition delays,
and compliance deficit. The ‘traffic light chart’ in Fig. 1.2 shows results for the five
indicators in the 28 Member States.
The first indicator measures the transposition deficit, which is the average
percentage of Single Market legislation not yet transposed in national law. This
percentage is calculated by including transpositions that have not been communi-
cated to the Commission, directives that are considered only partially transposed,
and infringement procedures for non-notification. The objective was to maintain the
transposition deficit under 1%, as depicted in Fig. 1.3. More recently, the require-
ment has become stricter as the new goal is to reach 0.5% of delayed transpositions
(Pelkmans and Correia de Brito 2012). It is relevant to appreciate the Scoreboard’s
method of data collection for this indicator as it is exclusively based on Member
States’ capacity or will to notify the Commission of its transposition progress. It is
why it constitutes one of the main concerns among scholars when using official data
and indicators for their research in this field. This subject is further discussed in the
fourth section.
The second indicator measures the progress over the last 6 months. By measur-
ing the amount and decrease of backlog, this indicator assesses the reduction of
accumulated uncompleted transpositions and notifications over the last semester.
The goal of this indicator is to showcase Member States that are making consider-
able efforts to reduce their transposition deficit for delays surpassing 2 years
(“outstanding directives”). Figure 1.4 illustrates the existing backlog reduction
progress for the April 2015 edition. We can see that Austria has taken the lead in
curtailing the bulk of non-transposed directives while Italy had most accumulated
delay.
The third indicator gauges the directives that have been overdue for two or more
years. For example, for the October 2015 Scoreboard, this indicator of “old
directives” takes into account legislation whose transposition was due before May
2013. Because of poor records on this indicator, the Council set a “zero tolerance”
target in 2002 for these directives that have not been transposed in the long-term,
since 2002 (Pelkmans and Correia de Brito 2012). This indicator is closely related
Fig. 1.2 Indicators of transposition performance (Source: European Commission Online Score-
board. Period: 11/2014–05/2015, European Commission Single Market Scoreboard, Transposi-
tion, 2015, May. http://ec.europa.eu/internal_market/scoreboard/performance_by_governance_
tool/transposition/index_en.htm. Accessed 14 Dec 2015)
Fig. 1.3 Transposition deficits (Source: European Commission Online Scoreboard. Period
04/2014–05/2015, Ibidem)
Fig. 1.4 Transposition progress over the last 6 months (Source: European Commission Online
Scoreboard. Period 04/2014–05/2015, Ibidem)
to the fourth challenge, aiming at trimming total transposition delays. It monitors

the percentage of ‘outstanding directives’ by calculating the average of delays in
months. This objective is crucial for the efficiency of the Single Market, since a
long transposition delay represents a void in the legal system, and undermines
citizens and business rights and opportunities.
Finally, the end goal of the Scoreboard is to enhance Member State confor-
mity. This goal is assessed by the compliance deficit indicator, which measures
timely and correct legal transposition. It focuses on the average of incorrectly
transposed directives. The concept of compliance is based on the number of
infringement proceedings for non-conformity that have been launched by the
Commission in proportion to the number of directives that are positively notified.
As for the transposition deficit indicator, the compliance target is set at 0.5%.
Although national performances vary greatly, it is alarming when one contrasts
transposition and compliance deficit data and observes countries that rank poorly
on both indicators (Pelkmans and Correia de Brito 2012). Nevertheless, only the
Court may officially decide whether a directive has been transposed accurately,
and not the Commission. That is why the official information on correct trans-
position is not available in the Scoreboard.16 Additionally, the Court may be
involved in infringement proceedings, and these indicators are found in the
Scoreboard. Infringement proceeding indicators constitute the second aspect of
this policy cycle stage. Reducing transposition deficit, i.e. the incorporation of EU
directives in national law, is imperative. However, the process is not complete
unless the legislation is also correctly applied within Member States. If imple-
mentation of EU law fails, the country might be led to court. Infringement is
therefore defined as a violation of EU law and the infringement procedure refers
to the set of actions taken by the Commission to pressure the country in
complying with supranational law.
By measuring infringement proceedings, the Scoreboard appraises the rate
at which the Commission judges that a EU directive has not been transposed
timely and appropriately into domestic law or that Single Market legislation
(either in primary or secondary law) has been incorrectly applied. Therefore,
the infringement indicator monitors a country’s performance beyond the trans-
position of the directive. This action is only activated once a letter of
formal notice from the Commission is sent to a Member State. As shown in
the comparative Fig. 1.5, infringement proceedings data can depict a very
distinct picture from the overall transposition scores. This can be interpreted
as showing the relative facility to notify transposition versus a lengthier
process linked to infringements and troubled areas of transposition and
implementation.
16
European Commission Single Market Scoreboard, Transposition, 2015, May. http://ec.europa.
eu/internal_market/scoreboard/performance_by_governance_tool/transposition/index_en.htm.
Accessed 14 Dec 2014.
Fig. 1.5 Overall transposition performance (left) and Overall Infringement Performance (right)
(Source: European Commission Online Scoreboard. Period 04/2014–05/2015, European Commis-
sion Single Market Scoreboard, Transposition, 2015, May. http://ec.europa.eu/internal_market/
scoreboard/performance_by_governance_tool/transposition/index_en.htm. Accessed 14 Dec
2014, and European Commission Single Market Scoreboard, Infringements, 2015, May http://
ec.europa.eu/internal_market/scoreboard/performance_by_governance_tool/infringements/
index_en.htm. Accessed 14 Dec 2015)
The Overall Infringement Performance map takes into account three different
indicators: the number of pending infringement proceedings, the duration of
infringement proceedings (in months) and the duration since Court’s ruling
(in months). The number of pending infringement proceedings represents the
total of pending infringement proceedings per country and also compares the rate
to the last reporting period. For example, for the April 2015 Scoreboard there were
749 pending cases overall, which represents a reduction of 77 cases from November
2014 and has attained a record low. However, it could also signify that the
Commission is simply introducing less infringement proceedings. Indeed, the
data depends on whether the Commission has observed an irregularity and whether
it has decided to launch an action.
Furthermore, it is interesting to note that 95% of all infringement cases are
solved in the pre-judicial stage. Once the case on the Single Market enters the
official infringement phase, it is probable that it will remain there for a minimum
duration of 2 years (Koops 2011). It is why the duration of infringement pro-
ceedings indicator calculates the number of months that have passed since the
dispatch of a letter of formal notice; it does not include infringement proceedings
that have reached the Court of Justice. Finally, the last indicator depicts the
duration since Court’s ruling. It is the most far-reaching infringement procedure
stage. This indicator adds the cases made against a Member State and the number of
months it has taken for the Member State to comply with the Court’s judgement.
Fig. 1.6 Average duration of pending infringement cases by sector (Source: European Commis-
sion Online Scoreboard. Period 04/2014–05/2015, Ibidem)
In addition to the above-mentioned indicators, and in order to offer a deeper

analysis of the entire picture, the Scoreboard also displays infringement data in a
series of tables. These comprise the number of pending cases, aggregated by
Member State, by sector and by type of infringement (Fig. 1.6). These supplemen-
tary tables facilitate the clear visualization of the most conflictive sectors in each
country and which sector of legislation takes longest to be correctly applied.17 It
therefore serves the Commission and Member States to focus their efforts on
critical points.
1.3.3 Inform and Enable
These two stages of the governance cycle comprise a set of tools and assistance
services for citizens and businesses. The Scoreboard assesses yearly these tools that
are alternatives to infringement procedures. On the one hand, the stage relating to
inform operates websites and services such as Your Europe portal, EURES network
and European Consumer Center Network (ECC-Net). Their purpose is to inform
citizens and businesses about their rights in the Single Market, propose opportuni-
ties and give them specific advice. On the other hand, the Services Directive (2006/
123/EC) set up Points of Single Contact (PSCs) which constitute the enabling phase
of the governance cycle. PSCs embody e-governance technology aiming at
17
European Commission Single Market Scoreboard, Infringements, 2015, May. http://ec.europa.
eu/internal_market/scoreboard/performance_by_governance_tool/infringements/index_en.htm.
simplifying and accelerating administrative procedures for service providers

throughout the Union. It serves as a unique point for information and formalities
at the national and cross-border level. For this service, the Scoreboard has assem-
bled four indicators to assess its efficiency. These are: quality and availability of
information, online completion procedures, accessibility for users from other coun-
tries, and usability.
In these cases, the Scoreboard therefore not only monitors Member States’
performance on transposition of Single Market legislation, but also oversees service
performance on informing and solving citizens’ doubts and questions as well as the
performance of EU tools. According to official data, it seems that EU citizens
increasingly use these platforms and services, demonstrating a new way to handle
cross-border mobility in trade, services, persons and capital.18
1.3.4 Connect
The tools presented in this stage (the Internal Market Information System (IMI) and
Consumer Protection Cooperation network (CPC)) work to boost administrative
cooperation between national authorities. This initiative was put in place to offset
the vertical approach placing the EU above Member States. Competent bodies in a
Member State can conveniently contact their counterparts for cooperation and
assistance. To measure performance in this stage, the Scoreboard uses indicators
which essentially monitor the speed of communication between different adminis-
trations and the efforts made to improve the IMI system. For the CPC Network,
responsible for enforcing EU consumer protection laws, the indicator consists of the
number of CPC cases.19
1.3.5 Solve
The Single Market Scoreboard also monitors EU-Pilot and SOLVIT performance.
Indeed, although these two tools and the Scoreboard differ in their stated purposes,
the expected medium to long term objective is similar: to improve Member State
compliance with EU law and prevent costly infringement procedures (Koops 2011).
18
European Commission Single Market Scoreboard, Your Europe, 2015, May;. European Com-
mission Single Market Scoreboard, EURES, 2015, May; European Commission Single Market
Scoreboard, European Consumer Centre Network, 2015, May; European Commission Single
Market Scoreboard, Points of Single Contact, 2015, May. http://ec.europa.eu/internal_market/
scoreboard/governance_cycle/index_en.htm#gov_cycle
19
European Commission Single Market Scoreboard, Internal Market Information (IMI) system,
2015, May; European Commission Single Market Scoreboard, CPC Network, 2015, May. http://
ec.europa.eu/internal_market/scoreboard/governance_cycle/index_en.htm#gov_cycle
They are online tools used to solve Single Market issues between EU citizens and
businesses and a Member State (SOLVIT), or between the Commission and a
Member State if a European law has been inappropriately applied by the country
(EU-Pilot). The Scoreboard therefore assesses the performance of these practical
tools in order to ensure their relevance. The effectiveness of EU-Pilot is predom-
inantly based on the Member States’ average response time. SOLVIT is measured
by the efficiency of the office in terms of service and resolution of issues.20
ECC-Net and CPC Network are also included in this section.
1.3.6 Evaluate
Roadmaps, Citizen’s Consultations, Impact Assessments, fitness checks as well as

feedbacks for the governance tools are all instruments that help evaluate the Single
Market as a whole. This last stage closes the governance cycle and continuously
feeds the decision-making process in order to ameliorate the functioning of the
Single Market.21
1.4 Impact and Achievements
By measuring and publishing Single Market legislation transposition, implementa-

tion and infringement performance, the Scoreboard may have made a contribution
to achieving today’s relatively low transposition deficit. The European Commission
and the European Court of Justice are the bodies responsible to monitor and enforce
the correct transposition of EU legislation within Member States, and the IMS was
created with the purpose to inform and complement these organizations’ efforts.
The rationale follows the notorious “naming and shaming” logic, a maturing
strategy within the European Union. It adheres to the assumption that depicting a
‘ranking’ would pressure Member States to perform better in order to avoid
criticism or receive praise. Indeed, although Member States do not formally meet
to discuss results such as in the Open Method of Coordination, peer-pressure in
Community Law on the Single Market may yield results.
20
European Commission Single Market Scoreboard, SOLVIT, 2015, May; European Commission
Single Market Scoreboard, EU PILOT, 2015, May. http://ec.europa.eu/internal_market/score
board/governance_cycle/index_en.htm#gov_cycle. Accessed 14 Dec 2015.
21
European Commission Single Market Scoreboard, Evaluation and Assessment of Feedback,
2015, May. http://ec.europa.eu/internal_market/scoreboard/governance_cycle/evaluate/index_en.
htm. Accessed 14 Dec 2015.
Fig. 1.7 Evolution of average transposition deficit (Source: European Commission Online Score-
board. Period 04/2014–05/2015, European Commission Single Market Scoreboard, Transposition,
2015, May. http://ec.europa.eu/internal_market/scoreboard/performance_by_governance_tool/
transposition/index_en.htm. Accessed 14 Dec 2015)
1.4.1 Achievements
Out of wariness of the relevance of soft power measures and data reliability, the
Scoreboard has been developing its methods of data collection and issue coverage
since its creation in 1997. One can observe that the rate of transposition deficit has
decreased in the past 16 years, as illustrated in Fig. 1.7, although a direct causality
can obviously not be asserted. There is an inherent difficulty in assessing the impact
of soft power policy, consisting of pressuring Member States or simply publishing
data for improved future policy decisions.
As depicted in Fig. 1.7, the EU average transposition deficit has been progres-
sively curbing to reach stability. Since November 2011, the percentages of directives
that have not been notified as transposed, or perceived as incorrectly transposed,
oscillate between 0.5% and 0.7%. The Single Market Act’s proposal (2011) for an
average of 0.5% is therefore reached as a whole and attained by half of the Member
States. The first challenge of the Single Market - keeping the transposition deficit
under 1% - has been attained by the total of the Member States for 3 years in a row
since 2012. Nevertheless, other related outcomes are contrasting. For example, the
rate of incomplete implementation of directives in countries remained at 5% in 2013.
Therefore, seventy-three directives do not produce their full effect in the Union and
the Single Market is limited in its opportunities. This situation mostly concerns three
sectors: financial services, environment, and transport.
However, results are more positive in what concerns the number of infringement
proceedings. As seen in Fig. 1.8, the number of infringement proceedings, whether
it concerns non-timely or incorrect transposition of a directive, is at a record low in
Fig. 1.8 Number of pending infringement cases (Source: European Commission Online Score-
board. Period 04/2014–05/2015, Ibidem)
2015 and concerns 749 cases. All Member States have reduced or maintained their
number of pending cases, except new Member State Croatia.22
It is interesting to note that Member States’ performance regarding infringement
varies greatly depending on the indicator employed (Number of pending infringe-
ment proceedings, Duration of infringement proceedings and Duration since court’s
ruling). For example, Malta is the best performer for the indicator relating to the
total number of pending infringement proceedings, yet it is last in regard to the
duration of the proceeding. Italy and Greece spend most time between the Court’s
ruling and achieving conformity to the Court and the directive itself. Yet, the
overall number of pending cases has been steadily decreasing since November
2008 (see Fig. 1.8). It is believed that the implementation of early problem-solving
systems, such as SOLVIT (2002), EU-Pilot (2008), and IMI have addressed the
issue reasonably effectively. Indeed, these compliance mechanisms aim at
curtailing the number of Court cases by encouraging the search for informal and
administrative solutions beforehand. They are means for Member States’ adminis-
trations to better understand the provisions to be implemented by dialoguing with
the Commission and by contacting fellow national, regional and local administra-
tions from other Member States. The use of IMI and EU-Pilot helped to alleviate
complications between Member States, such as health systems coordination,
licenses wrongly issued to sell in other EU markets, cross-country verification of
professional qualifications and business licenses or residence permits issues. In
addition, Member States may simply not be aware of a flawed situation; the
22
Data is accessible in: European Commission Single Market Scoreboard, Transposition, 2015,
May. http://ec.europa.eu/internal_market/scoreboard/performance_by_governance_tool/transposi
tion/index_en.htm. Accessed 14 Dec 2015.
Scoreboard and other mechanisms may help in annunciate the situation (Koops
2011).
Nonetheless, some sectors are more subject to struggle in implementation than
others, regardless of compliance mechanisms. Transport, environment, and taxa-
tion, and more precisely, air transport, atmospheric pollution and indirect taxation
constitute the majority of infringement proceedings and are most time-consuming
in solving. These three sub-sectors alone account for almost a quarter of all
infringement proceedings.23
When analyzing infringement procedures, it is key to distinguish between the
distinct cases leading to infringement (Fig. 1.9). Late transposition of directives
accounts for the largest part of the number of pending infringement cases. These
“non-communication cases”, borrowed from the transposition tool, indicate a lack
of notification on the Member States’ part of a transposed directive. Wrong
application of Treaty articles, regulations and decisions come second in this pie
chart, which suggests a poor implementation of primary law. Thirdly, bad applica-
tion of directives constitutes 22.2% of total infringement proceeding cases. They
indicate a deficient application and implementation of the transposed provisions of
a directive, whereas non-conformity of transposition refers to the incomplete legal
transposition of the directive itself.
Regarding the impact of the Scoreboard on infringement for non-notification
cases, the results are mitigated but can be explained. As expressed in Fig. 1.10, the
number of infringements for late transposition dwindled until 2002, and reached
two peaks: in 2004 and in 2007. This can be interpreted in various ways. The two
EU enlargements represent the first distortion: new Member States had a limited
time to absorb the acquis communautaire. Second, the deadlines of the directives
themselves have a role to play. Indeed, an unusual number of directives included a
transposition deadline near the end of the year 2002. This fact led to a bump in late
transpositions notifications in 2003 instead of 2002 (Koops 2011).
It is important to keep in mind that data can be influenced by a number of
reasons. For example, the number of new or revised Single Market legislation that
has been adopted can influence the information. Indeed, if lesser directives are
endorsed, there will be less pressure for transposition. This can be illustrated in light
of the data of the second indicator relating to outstanding directives. The rate of
directives that have not been transposed in several years is far from its 0% target.
The percentage of directives overdue for two or more years, whilst lesser than
before, wavers at 4%, which represents 46 directives that have not been transposed
on time. The EU aims at eliminating this legislative loophole that makes some
sectors of the Single Market intangible in daily life. Moreover, compliance moni-
toring is a newer task for the Scoreboard and it is unknown if the Commission has
sufficient resources to oversee Member States’ correct transposition performance. It
23
European Commission Single Market Scoreboard, Infringements, 2015, May. http://ec.europa.
eu/internal_market/scoreboard/performance_by_governance_tool/infringements/index_en.htm.
Fig. 1.9 Number of pending infringement cases by type (Source: European Commission Online
Scoreboard – May 2015, Ibidem)
Fig. 1.10 EU Compliance 1995–2009: number of infringement procedures (Source: Koops 2011:
27)
is why the principal long-term indicator only concerns the timeliness of transposi-
tion. Nevertheless, it is believed that the possibility of new financial sanctions
launched by the Lisbon Treaty has played a role in this configuration. Since 2011,
financial sanctions could be imposed in the wake of the first referral to the Court by
reason of failing to notify a transposition.
The ratio of directives to regulations also proves the lesser relative importance of
directives. On the one hand, there have been more regulations in the last years, and
therefore fewer transpositions. On the other hand, the number of EU directives is
steady. “[. . .] [T]herefore, a given transposition deficit is relatively less problematic
in 2012 than it was 10 years ago” (Pelkmans and Correia de Brito 2012:49), since
the weight of directives is lesser in comparison to regulations. Indeed, directives
have been consolidated, reviewed, deleted; or transformed into regulations
(Pelkmans and Correia de Brito 2012).
Nonetheless, the Scoreboard may influence national strategies for compliance by

positively and negatively publicizing Member States’ performance. Negative pub-
licity can hinder national business as well, since criticism comes from consumers,
investors and businesses that are circumspect of expanding their networks under a
particular national framework (Pelkmans and Correia de Brito 2012). Moreover, the
Scoreboard influences the Commission’s new plans. It offered data for the Single
Market Strategy, adopted in October 2015. The Strategy incorporates data from the
Scoreboard in order to set new goals for the Single Market, and also includes new
features to the Scoreboard. For example, a “performance” scoreboard has been
added; it is destined to evaluate the performance of public procurement systems and
other “national remedy systems”.
1.4.2 Best Practices
In addition to all the indicators used to show Member States’ performance, the
Single Market Scoreboard may have also influenced its own results by sharing the
different practices and initiatives that countries have implemented to improve
transposition and reduce infringements. Sharing “success stories” was a strategy
first used by businesses. It has since been applied in international organizations and
particularly in the EU in order to “inspire and instruct Member States as to how one
can most effectively tackle a certain problem” (Koops 2011:13). By exchanging
these specific practices, all Member States have the possibility to learn from one
another and benefit from a set of available policy ideas. A reform of an Italian law to
help transposition of EU law into domestic legislation and the creation of an Inter-
departmental Committee in Ireland,24 a centralized database for directives in
Greece,25 a network of “Euro-Coordinators” throughout governments and contact
points in Belgium26 are just some examples of Best Practices being shared in the
Single Market Scoreboard.
24
European Commission Internal Market Scoreboard, 2013, Feb. http://ec.europa.eu/internal_
market/score/docs/score26_en.pdf
25
European Commission Internal Market Scoreboard, 2012, Sep. http://ec.europa.eu/internal_
market/score/docs/score25_en.pdf
26
European Commission (September 2011), Internal Market Scoreboard. http://ec.europa.eu/inter
1.5 The Single Market Scoreboard as an Analytical Tool

Beyond the Commission
The Single Market Scoreboard has not only been, and is not only, a useful tool to
record Member States’ performance on transposing European law regarding the
Single Market; it has also developed into an instrument for scholars and researchers
interested in analyzing the Single Market and compliance from various angles. As
explained above, the Scoreboard has been gradually refined since 1997. Today, it
communicates indicators by sector, Member State and stage in the governance
cycle as well as “governance tools”. The indicators used in the Scoreboard offer a
descriptive picture of the current situation regarding transposition, infringement
and general Single Market street-level reality and provide scholars with a signifi-
cant amount of disaggregated information, packaged in relatively long time series.
These data may inspire new problematics, offer a basis for explanatory and analyt-
ical theorization, and enable researchers to go beyond the descriptive platform.
Many questions may arise from a simple observation of Scoreboard data. Why do
particular sectors have a tendency to show higher transposition deficits? Why do
specific countries have recurrent transposition delays for more than 2 years while
others comply within 6 months? What group of countries are faster on solving
infringements, and why? Searching for the underlying reasons for these questions is
crucial. After identifying and confirming explanatory hypotheses, the Commission
and Member States may find the correct measures to address these issues. The
Scoreboard thus represents an easy and practical way to visualize differences
between countries and policy areas, offering academics a clue for the direction of
the necessary research, as well as providing data to test hypotheses presented
elsewhere.
The scientific literature on Member States’ compliance and transposition per-
formances is very diverse and touches upon a variety of disciplines, methodologies,
theoretical premises, and conclusions. The principal common characteristic among
the array of scholars is their interest in having access to an “excellent laboratory to
study (non-)compliance across policy fields and countries” (Angelova et al. 2012:
1270). A review of the literature enables to perceive the diversity of proposed
research questions and explanatory hypotheses. For example, does a preference-
based approach, focused on the Member State’s political preferences (Versluis
2005; Thomson 2009) explain non-compliance better than national administrative
capacity? Moreover, several approaches such as the management approach
(Haverland et al. 2011), the perception of national inclusion in the EU decision-
making procedures (Mastenbroek 2005), and the focus on national decision-making
structures (K€onig and Luetgert 2009) might shed light on compliance issues and
provide insights for the EU to further develop its monitoring mechanisms and
infringement tools tailored to address non-compliance. In a more specific way,
other works have tested the legislative and institutional misfit hypothesis (Thomson
2009) and domestic veto-player theory (Tsebelis 2002) as well as the more recent
“worlds of compliance” model (Falkner et al. 2007a).
Apart from sundry dissensions on theoretical assumptions, scholars also disagree

on methodology and sources. Case in point, opinions are at odds concerning the use
of the Scoreboard and other official data from the European Commission to study
compliance dynamics, while other authors disregard discussing it. We observe two
principal critiques to the IMS. First, unreliability of data because of the Member
State notification process; second, the limited scope of the Scoreboard, seen as
merely focusing on delayed transposition notification. Open criticism of the use of
EU official data emerged in a study questioning the reliability of EU statistics on
infringement cases (B€orzel 2001). In the beginning of the 2000s, most studies used
Annual Reports,27 which focus much less on Member States’ ranking per se. The
conclusion B€ orzel reported is that the high numbers of infringement cases have to
be considered cautiously due to incomplete and inconsistent data in the Annual
Reports. Official EU information is dependent on Member States’ data availability
and management: it therefore cannot be fully reliable. In the same vein, Falkner
et al. (2007a, b) and Falkner and Hartlapp (2008), are also weary of notification-
based data. In the 2007 article “In search of the Worlds of Compliance: Promises
and Pitfalls of Quantitative Testing”, Falkner et al. called into question Toshkov’s
(2007) methodology. Falkner et al.’s principal critique pertained to the dataset
which was based on the Annual Reports. Allegations for very biased data have
also been put forth. Falkner et al. claim that data can be falsified as it had already
occurred in the case of budget data in the EMU. Moreover, some Member States
may show more self-criticism than others and therefore downplay their relative
performance. Thomson (2009) agrees with Falkner et al. (2007b) and prefers
independent academic data, even though this means there will be much less
information to analyze. Mastenbroek (2005) goes further in these assumptions by
stating that Member States have “incentives to report less than honestly”, implicitly
stating that there are reasons to believe data is consciously and fallaciously
reported.
Moreover, Falkner et al. (2007b) asserted another recurrent critique on official
data that has been reiterated by others and that also aims at the Scoreboard. The
argument enunciates that at best, there is data on transposition; however, the EU
data do not allow tracing concrete implementation of the directive, nor its correct
transposition in national legislation. As seen above, the Scoreboard mainly collects
data on timely and non-timely notification of transposition into nation law. The
effort to study the correct legal transposition of every EU Directive, as well as its
concrete implementation, may be out of reach for the Commission’s resources. This
is why Ziller (2006) has been very vocal on the superficiality of the Scoreboard.
Strongly censuring the uncritical use of scoreboards for research, which are only
“formalistic inventories of the transposition work” (Ziller 2006:26), Ziller believes
scoreboards are too concerned with speed of transposition and do not allow for
deeper questioning of the Single Market’s challenges. Furthermore, there seems to
be a great confusion in the Scoreboard in what regards completeness of
27
The Annual Report is similar to the IMS but it concerns all EU legislation.
transposition. In some cases, only the first few provisions of the directive are
transposed and the country notifies it as complete. In other cases, only an insignif-
icant fraction is left and the Commission launches an infringement procedure
(Falkner et al. 2007b). This is why there might be a great difference between
these quantitative results and independent qualitative research. According to
Falkner et al. (2007b) there would be an average difference of 28 months between
quantitative data and independent qualitative data. More recently, Zhelyazkova
(2013) has criticized the reliability of EU data regarding the number of infringe-
ment proceedings and, again, transposition rates. Indeed, the first indicator depends
on whether the Commission detects the non-compliant case and on whether it
moves to act upon it and launches an infringement procedure. Therefore, the two
main focal points of the Scoreboard, infringement and transposition rates, would
not be formal indicators of compliance. Overall, these authors highly favor
collecting and re-using independent academic data rather than relying on the EU
Scoreboard and other official points of information. Importantly, their subjects of
study revolve around implementation and enforcement of EU directives and not on
their delay of transposition.
Scholars using the data from the Scoreboard attempt to control them and use
them as a starting point for their research. The use of the Scoreboards received a
push by the work of Kaeding and others who studied the factors influencing delay in
transposition. Data from the Scoreboard are taken as a starting point for the analysis
and are then combined with data from Communitatis Europeae Lex (CELEX or
Eur-Lex today) for collecting additional information on infringements. Sprungk
(2013) also starts her analysis with the help of information retrieved from the
Scoreboard. Analyzing the role of national parliaments in the transposition process,
Sprungk is of the opinion that the EU data is more relevant for studying delays in
transposition rather than for studying their legislative correctness. Kaeding and
Voskamp (2010) also use Scoreboard data on delayed transpositions, and use
distinct sources when analyzing incorrect transposition. Thomas (2013) has studied
the impact of national elections on timely transposition of EU directives. She argues
that “timely transposition sends a signal of reliability, respect, and support for EU
initiatives. At a practical level, it increases efficiency and allows the optimal policy
goal to be realized”. K€onig and Luetgert (2009) examine transposition failure and
delay of directives by way of separating domestic and EU-related variables. They
use data from the Scoreboard and compare them with other sources, such as
CELEX. Finally, these two authors concede that their logic follows the Commis-
sion’s positivist and legalistic approach, that mainly focuses on what is reported and
therefore, on timeliness of transposition.
Several authors thus use official EU data (Scoreboard and CELEX/Eur Lex) to
analyze the reasons of transposition delays. Their focus is therefore not on the
correctness and completeness of transposition, nor on their substantial implemen-
tation and enforcement. The transposition of directives is taken as their dependent
variable. This might give a hint on the usefulness of the Scoreboard from particular
angles of analysis, as every source of information has its benefits and drawbacks.
Nonetheless, some studies have used the Scoreboard for data on late and incorrect
transposition as well as infringement numbers. This is the case of Howarth and

Sadeh’s (2010) study on the concept of differentiated integration and its impact on
the Single Market, in which the authors use data on the average transposition
deficits, the percentage of outstanding directives, the reach rate of 1% and infringe-
ment cases. However, they acknowledge that there are limitations to the data
source, particularly, again, in what regards incomplete transpositions.
Other study topics may arise with the help of Scoreboard data. For example,
some authors focus on the issue of soft power on the part of the Commission. As
Koops (2011) mentions, the Scoreboard is an essentially descriptive tool, yet its
underlying goal is to promote compliance through soft pressure techniques.
Steunenberg (2010) studies the Scoreboard and other instruments in the Commis-
sion’s toolkit from this particular angle. Naming and shaming, visual ranking, peer-
pressure and sharing good practices are strategies that, according to Steunenberg,
constitute the secondary tactic of the Commission after “traditional” measures such
as infringement. The mentioned studies refer to the origins, consequences and
strategies of peer-pressure and benchmarking (Huggins 2009) and the link between
soft and hard measures.
1.6 Conclusions
The Single Market Scoreboard is one of the monitoring instruments that the
European Commission has in its toolbox to assess national compliance with EU
Directives in the Single Market. The essential goal of the Scoreboard is to improve
the functioning of the transnational market by showcasing the progress made by
Member States in the transposition of EU Directives relating to the Single Market.
Since 1997, the content of the Scoreboard has evolved, and today it comprises a
variety of dimensions. These are, for example, the Governance Cycle, the traffic
light chart, indicators on supranational governance tools, and public procurement
performance indicators. In all of these features however, the main focus of the
Scoreboard has dwelled on indicators measuring the timely and correct transposi-
tion of directives as well as data on the status of infringement procedures. Through
trial and error, the Scoreboard has taken, forgotten and created new indicators and
sections for the past 18 years.
The impact of the Scoreboard on its two goals is difficult to measure because of
the importance of external factors. The first and official objective, which is show-
casing the performance of Member States’ transposition of EU directives, is mainly
based on notification from the Member States. Although assessing timely notifica-
tions is feasible for an institution as the Commission, assessing the correct trans-
position of a directive is arduous. Indeed, one must take into consideration the
different national legislative structures and content, all the provisions of the direc-
tive as well as its general meaning. Concerning the underlying goal of the Score-
board, which is to improve Member State compliance, results are varied.
Implementation deficit and infringement proceedings have altogether decreased
in the past years, although some countries still have more trouble than others. Yet,
lengthy infringement proceedings are still a problem for the implementation of
some directives. EU directives on air transport, atmospheric pollution and indirect
taxation do not legally exist in some countries. Moreover, positive results can be
skewed by the fewer number of adopted directives in the past 10 years and the
relative higher number of regulations. Nonetheless, inter-state peer-pressure, Lis-
bon Treaty dispositions, governance tools (such as SOLVIT), and fear of criticism
emanating from consumers and businesses, may all have had an impact in improv-
ing compliance, although it is inherently difficult to assess.
Scholars are divided regarding the academic use of the Scoreboard. Whereas
some (B€ orzel 2001, Mastenbroek 2005, Falkner et al. 2007b, Thomson 2009)
explicitly dismiss its relevance, others (Kaeding 2013, Kaeding and Voskamp
2010, Steunenberg 2010, Sprungk 2013, Howarth and Sadeh 2010) endorse its
information, and yet others do not make mention of the European monitoring tool.
The main criticism of the Scoreboard lies in its incomplete nature in terms of
Member State implementation of EU law - and therefore, its street-level visibility.
However, scholars that use the Scoreboard principally capture its data as a starting
point in their research problem and study the question of timeliness of transposition
of EU Directives into national legislative frameworks. It seems that for many, the
Scoreboard is indeed a useful tool and data source for exploratory research. The
second criticism is the question of Member States’ accuracy regarding their noti-
fications to the Commission; yet the availability of quantitative information on
Member States’ compliance as well as on the performance of governance tools may
be worth investigating further. Finally, the Scoreboard may be a promising subject
of study in what regards the efforts of the Commission to harmonize and integrate
the Single Market, as well as for studies on soft power and peer-pressure. It is a tool
that is in constant evolution within a legislative European framework that also
renovates itself; therefore it needs constant reevaluation of its performance and
relevance.
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Chapter 2
Scoreboard for the Surveillance
of Macroeconomic Imbalances
in the European Union
Carlos Cuerpo and Jonas Fischer
2.1 Introduction
The build-up of external and internal macroeconomic imbalances in the pre-crisis

years contributed to the depth of the crisis and their necessary unwinding has
proven very costly, contributing to high sovereign debt and deleveraging pressures
in the private sector. As a side product, the unraveling of the economic and financial
crisis exposed early on the weaknesses in the existing EU and EMU economic
surveillance arrangements where the potential implications of the accumulation of
macroeconomic imbalances were not fully reflected. The necessary toolbox and the
analytical basis for efficient surveillance on imbalances were not initially fully in
place. The new procedure for the prevention and correction of macroeconomic
imbalances—the Macroeconomic Imbalance Procedure (MIP)—responded to this
gap and was one of the key building blocks of the legislative package, called the
‘six-pack’, to enhance the governance structures in EMU adopted in late 2011.1
While an individual process, clearly, the MIP should not be seen as a surveillance
tool in isolation from the other EU surveillance processes, such as the Excessive
Deficit Procedure, but as complementary in a general move towards more inte-
grated and encompassing surveillance.
1
To this can be added the recent “two-pack” which aims to further strengthen surveillance
mechanisms for euro area Member States, including budgetary surveillance and stronger moni-
toring of countries with financial stability issues or countries requiring financial assistance.
C. Cuerpo (*)
Spanish Independent Authority for Fiscal Responsibility, Madrid, Spain
e-mail: carlos.cuerpo@airef.es
J. Fischer
European Commission, Directorate General for Economic and Financial Affairs, Brussels,
Belgium

28 C. Cuerpo and J. Fischer
The key aspect of the MIP presented in this chapter is the alert mechanism
scoreboard of indicators used to single out countries for which a more in-depth
study of risks is needed to identify whether imbalances exists or not. Section 2.2
describes first the rationale of the MIP, how it works, the role of the alert mecha-
nism, guiding principles for the selection of the indicators and also the overall
economic rationale in which they should be read. Section 2.3 then comments on the
outcome of the reading of the scoreboard in the first three Alert Mechanism
Reports. Section 2.4 concludes. Further details on the indicators in the alert
mechanism are provided in the Annexes.
2.2 The Scoreboard Indicators, Their Role in the MIP

and Their Economic Rationale
This section first describes the role of the scoreboard in the overall MIP. Then the
chosen indicators are described ahead of a presentation of the guiding principles
used for their selection and a discussion of their basic economic rationale.
2.2.1 The Basic Steps of the MIP
The overall design of the Macroeconomic Imbalance Procedure follows the implicit
logic of the Stability and Growth Pact, with a ‘preventive’ arm and a stronger
‘corrective’ arm for more serious cases. For euro-area countries, the corrective arm
is supplemented by an enforcement mechanism including the possibility of finan-
cial sanctions2. To detect macroeconomic imbalances, the procedure relies on a
two-step approach (Fig. 2.1). The first step consists of an alert mechanism aiming to
identify Member States where there are signs of a potentially building up boom-
bust cycle or in which the adjustment to busts requires more in-depth examination.
In the second step, for the identified Member States, the in-depth reviews (IDR)
assess whether there are imbalances and, if so, their nature and extent.
The aim of the alert mechanism is to identify countries and issues for which
more in-depth analysis is required. More specifically, the alert mechanism consists
of an indicator-based scoreboard complemented by an economic reading thereof
presented in an annual Alert Mechanism Report (AMR). The conclusions of the
AMR are discussed in the Council and the Eurogroup to enable the Commission to
obtain feedback from Member States. The Commission then decides on the final list
2
The Macroeconomic Imbalance Procedure rests on two pieces of legislation. The first Regulation
(EU 1176/2011) sets out the details of the new surveillance procedure and covers all the Member
States. The second Regulation (EU 1174/2011) establishes the enforcement mechanism, including
the potential use of sanctions, and only applies to the euro-area Member States.
2 Scoreboard for the Surveillance of Macroeconomic Imbalances in the. . . 29
Fig. 2.1 The steps of the preventive arm of the MIP
of countries for which it will prepare country-specific in-depth reviews. It should be

stressed that the scoreboard is just one component of the alert mechanism, and
additional relevant indicators, economic circumstances and country-specific situa-
tions are taken into account. The economic reading of the scoreboard indicators
implies that there is no automaticity involved (i.e. a “flash” for an indicator does not
lead to an automatic conclusion that an IDR is required or that there is an imbal-
ance) and that any other relevant information can also be taken into account (which
is explicitly said in the regulation).
It is only on the basis of the in-depth reviews that an imbalance is identified and
policy guidance may be issued to Member States. The reviews imply a thorough
analysis of the macroeconomic imbalances, particularly as regards their nature and
extent, taking into account the economic and structural specificities of the Member
State considered. If, on the basis of this analysis, the Commission considers the
situation unproblematic it will conclude that no further steps are needed. If,
however, the Commission considers that macroeconomic imbalances exist, it may
come forward with proposals for policy recommendations for the Member State
(s) concerned. In the preventive arm, these will be part of the integrated package of
recommendations under the European Semester. This is particularly important
since policy remedies to address imbalances cover to a very large extent policies
(e.g. labor market, product market and fiscal policies) that may also be subject to
other surveillance processes. If the Commission instead considers that there are
severe imbalances, it may recommend that the Council opens an excessive imbal-
ance procedure, which constitutes the corrective arm of the new procedure. Overall,
a main take away is that the scoreboard is a tool with the aim to function as a filter,
not a tool to identify policy conclusions or policy recommendations.
2.2.2 Scoreboard Composition and Guiding Principles
As of 2014, after 3 years of implementation of the MIP, the scoreboard consists of

eleven headline indicators covering the major sources of macroeconomic
imbalances:3
• 3 year backward moving average of the current account (CA) balance in % of
GDP;
• net international investment position (NIIP) in % of GDP;
• 3 years percentage change of the real effective exchange rate (RRER) (42 indus-
trial countries) based on HICP/CPI deflators;
• 5 years percentage change of export market share (EMS) (share of world
exports);
• 3 years percentage change in nominal unit labor cost (ULC);
• year-on-year change in deflated house prices (HP);4
• private sector credit flow in % of GDP (PC);
• private sector debt in % of GDP (PD);
• general government sector debt in % of GDP (GD);
• 3 year backward moving average of unemployment rate (UR);
• year-on-year change of total financial sector liabilities (FSL);
Supplementing the headline indicators, auxiliary indicators provide additional
information on aspects linked to the general macroeconomic situation, nominal and
real convergence inside and outside the EU and the euro area, and detailed data on
the external liabilities, including foreign direct investment and net external debt.
They also enhance the information base for understanding potential imbalances, as
well as the adjustment capacity of the economy (see Annex A.2.1 for the indicators
included in the most recent Alert Mechanism Report).5 The work to identify which
headline indicators should be included in the scoreboard and in which form took
place against a background of four guiding principles. According to the first
principle, the choice of indicators focuses on the most relevant dimensions of
macroeconomic imbalances and competitiveness losses, with a particular emphasis
on the smooth functioning of the euro area. For this reason, the scoreboard consists
of indicators which can monitor external imbalances, competitiveness positions and
3
The initial proposal contained ten indicators and envisaged an additional indicator of the banking/
financial sector vulnerabilities, which was finally agreed upon in the spring of 2013.
4
Final consumption expenditure of households and non-profit institutions serving households
deflator.
5
An overview of precise formulas used in the computation of the transformations for each headline
indicator is presented in Annex A.2.2, together with their corresponding thresholds, the indicator
tables from the most recent AMR including the reading indicators. It can be noted that this year
eight additional indicators on social issues have been added to the list of auxiliary indicators used
for the economic reading. Annex A.2.1 offers additional information on every indicator: data
sources, indicative thresholds and additional indicators used for economic interpretation.
internal imbalances, and encompasses variables where both the economic literature
and recent experiences suggest associations with economic crises.
Secondly, the scoreboard (indicators and thresholds) are chosen as to provide a
reliable signaling device for potentially harmful imbalances and competitiveness
losses at an early stage of their emergence. This has led to a combination of stock
and flow indicators which can capture both shorter-term rapid deteriorations as well
as the longer term gradual accumulation of imbalances. Moreover, it has led the
Commission to set indicative thresholds at prudent levels, which on the one hand
avoid excessive numbers of ‘false alarms’ but which on the other hand are not set so
stringently that they only identify problems once they are entrenched. To this end,
thresholds have generally been established via a statistical approach based on the
distributions of the indicators’ values, by identifying the thresholds as the lower
and/or upper quartiles of the distributions: such thresholds are generally consistent
with the values found in the empirical literature.
Thirdly, the scoreboard has an important communication role. For this purpose,
the scoreboard consists of a limited number of indicators. Moreover, the choice of
indicators and transformations is kept as simple and straightforward as possible.
Data transformations are transparent and tractable so that they can be replicated by
third parties. The choice of indicators complements indicators/targets used in other
EU surveillance exercises. For transparency reasons, the Commission will make the
scoreboard indicators publicly available on its website.6
The fourth principle requires indicators to be of high statistical quality in terms
of timeliness and comparability across countries. To this end, they are derived from
data compiled according to the principles of the European Statistics Code of
Practice of the European Statistical System (ESS). Where available, Eurostat
sources are used so that the data comparability and statistical quality can be
ensured. Otherwise, when Eurostat data are not available, the highest quality
alternative data sources are chosen (e.g. the ECB).
2.2.3 The Economic Rationale Behind the Selected

Indicators
The criteria described above illustrate how the selection of indicators has taken into
account a number of practical concerns such as availability of data or simplicity for
better communication. However, the reliability of their economic signaling is the
fundamental guiding principle for macroeconomic surveillance. To this end it is
important to have a consistent analytical framework in mind. First the headline
indicators are conceptually divided into two main areas; internal and external
imbalances. While discussed in more detail in Box 2.1 below, internal imbalances
6
http://ec.europa.eu/economy_finance/economic_governance/macroeconomic_imbalance_proce
dure/mip_scoreboard/index_en.htm
are traditionally defined in the economic literature along the two dimensions
covered by the Phillips Curve, unemployment and inflation. An economy is con-
sidered domestically balanced or in a sustainable capacity utilization position
whenever its rate of unemployment does not translate into inflationary pressures;
i.e. it has reached its NAIRU or non-accelerating inflation rate of unemployment.
When extending the analysis to an open economy context, the external balance
must be factored in. In the long-run, current account positions must be compatible
with economic fundamentals as countries cannot maintain an under or overvalued
currency ad infinitum. External balance does not necessarily imply zero current
account levels, as deficits/surpluses may result as natural responses to changes in
underlying structural characteristics and the related adjustment in saving and
investment decisions of economic agents. For instance, countries in a catching-up
phase often run current account deficits as investing in productive activities
increases the prospects of future income. Borrowing from abroad allows them to
smooth the inter-temporal profile of consumption. Similarly, countries with ageing
population may find it opportune to save today, i.e. run current account surpluses, to
avoid a drop in consumption in the future. Against this background the rationale for
each of the indicators can be discussed within the two dimensions.
2.2.3.1 Rationale for Indicators Related to the External Dimension:

CA, NIIP, REER, ULC, EMS
The current account balance (or the current external balance)7 is the major driver of
net lending/borrowing of the economy as a whole and thereby provides important
information about the economic relations of the country with the rest of the world.8
Moreover, current account imbalances often reflect other types of disequilibria,
e.g. excessive credit expansions in some countries led to rapid asset price increases
and fed back into large external imbalances. The current account balance is
therefore an important indicator which provides information about the potential
existence of macroeconomic imbalances.
Based on an extensive literature review of 83 papers, Frankel and Saravelos
(2010) point out that the current account balance is one of the most frequent
statistically significant indicators in explaining crisis incidence. Current account
deficits can be a sign of an imbalance, if, for instance, the volume of borrowing is
such that it leads to an unsustainable external debt position. In turn, a high current
account surplus may be considered worrisome when it reflects weaknesses in
domestic demand. Surveillance under the MIP covers both current account
7
These terms reflect the same economic concept but are usually associated with different data
sources for this indicator (current external balance refers to National Accounts while current
account balance refers to Balance of Payments data).
8
Net lending/borrowing versus the rest of the world comprises both the current and the capital
account (the latter recording mainly capital transfers, which in the case of EU Member States may
be relatively sizeable due to transfers under EU structural funds).
surpluses and deficits which, from an economic point of view, pose different types
of policy challenges. In particular, unlike current account deficits, large and
sustained current account surpluses do not raise the same concerns about the
sustainability of external debt and financing capacities, concerns that can affect
the smooth functioning of the euro area (which is a key criterion for triggering the
corrective arm of the MIP). This means that surveillance under the MIP encom-
passes all Member States, but that a greater degree of urgency is required in
countries with large current account deficits and competitiveness losses.
In order to allow for a stock-flow analysis of external positions, the MIP
scoreboard looks into the Net International Investment Position (NIIP) as the
stock counterpart to the current balance.9 Typically, highly negative NIIPs result
from persistently high current account deficits. In this respect, a number of the
conceptual issues discussed in the section on the current account balances apply to
NIIP as well. The net international investment position (NIIP) records the net
financial position (assets minus liabilities) of the domestic sectors of the economy
versus the rest of the world. It provides an aggregate view of the net external
position of a country and it is also frequently used in economic analysis and
research, focusing on external vulnerability of countries and the risk of crises (see
for example Frankel and Saravelos 2010; or Furceri et al. 2011a, b).
Persistent shifts in price and non-price competitiveness of each Member State
relative to its major trading partners are also captured in the scoreboard via the
inclusion of the real effective exchange rate based on consumer prices, export
market shares and nominal Unit Labor Costs (ULC). First, the real effective
exchange rate based on consumer prices casts a comprehensive picture of global
‘price’ pressure on domestic producers in a medium-term perspective.10 Since it is
closely related to the terms-of-trade concept, this indicator also exemplifies the
attractiveness of imports over domestic production11. In the economic literature, the
REER has often been found to be a statistically significant predictor of the inci-
dence of economic crises: it is thus frequently considered among early warning
indicators (Reinhart et al. 1998). In particular, Frankel and Saravelos (2010)
identify the REER as a very important leading indicator in 48 out of 83 studies
on crises occurring before 2008.
9
Plus the capital account balance. However the current account balance represents in most cases
the bulk of the net lending and borrowing position.
10
Given that this indicator is meant to monitor the global competitiveness of each member state, it
is very relevant not to exclude the influence played by the exchange rate developments so to assess
the relative price developments conditional on exchange rates. This indicator will not be used as a
trigger to discuss exchange rate policy that is outside the scope of the entire exercise.
11
Terms of trade are country-specific and defined as the ratio of export to import prices, which in
principle can be understood as a REER for a particular choice of deflators. In contrast to pure
external competitiveness indicators such as export market shares, the REER thus not only
embodies price features of exported goods and services to external markets, but also the attrac-
tiveness of imports versus domestically produced goods. As a two-sided indicator, it is therefore
frequently related to current account developments (cf. Salto and Turrini 2010, for an overview).
An important strand of literature also asserts that REER appreciations do not

need to be considered as harmful in all cases. For instance, a catching-up Member
State might experience price level convergence (Balassa-Samuelson effect). An
important caveat is that the REER focuses on exchange rates and prices, hardly
accounting for several aspects of competitiveness like product quality, overhead
costs, or marketing efficiency. Overall, relative prices only partly explain export
performance, while other factors such as product quality and market structure can
play an important role (Carlin et al. 2001). Therefore, the REER needs to be
complemented by other indicators.
Second, the indicator on export market shares aims at capturing structural losses
in competitiveness. A country might lose shares of export market not only if exports
decline (numerator effect) but most importantly if its exports do not grow at the
same rate of world exports and its relative position at the global level deteriorates
(denominator effect). Hence, the reasons why countries might not have exploited
new market opportunities or sharpened comparative advantages in newly traded
products warrant investigation. Disparities in export market share dynamics
amongst EU countries also reflect differences in geographical specialization, with
Member States better positioned in fast growing export destinations such as East
Asia and Eastern Europe faring better than the rest. The causes of this divergence in
export market shares can be related to both differences in trade openness and in
product composition of exports. Small open economies that concentrate on few
closely related trade partners tend to be more exposed to external demand shock
risks than countries with a variety of export destinations or less trade openness.
Similar arguments extend to the concentration in the sectoral composition of
exports. In addition, technology-intensive products and services are found to be
much less sensitive to changes in relative costs than low-technology sectors.
Third, the nominal Unit Labor Costs (ULC) indicator measures persistent com-
petitiveness divergences across Member States that are strongly related to the
responses of countries in terms of productivity and labor market policies. A rise
in an economy’s nominal unit labor costs (average cost of labor per unit of output)
corresponds to a rise in labor costs that exceeds the increase in labor productivity.
This can potentially be a threat to an economy’s cost competitiveness, if other costs
(e.g. cost of capital) are not adjusted in compensation.
2.2.3.2 Rationale for Indicators Related to the Internal Dimension:

HP, PC, PD, GD, UR, FSL
The financial crisis has highlighted the dire implications of excessively high debt
stocks and rapid credit expansion on financial stability and economic growth.
Moreover, there is a potentially important link between credit growth and external
imbalances. Stronger relative demand pressures in some Member States fuelled
import demand, triggered capital inflows and contributed to the widening of current
accounts deficits. Excessive credit dynamics matched these domestic demand
pressures, leading to the rise in household and corporate debt (European
Commission 2010). Looking at catching up economies, Coricelli et al. (2006) find

that a credit boom seems to be associated with the deterioration of the trade balance
via the import channel. Furthermore, Duenwald et al. (2005) argue that credit
booms have contributed to the widening of macroeconomic imbalances and height-
ened external vulnerability. Some non-euro-area Member States experienced sig-
nificant rises in credit flows denominated in foreign currencies, contributing to a
build-up of balance sheet vulnerabilities. Commission Services also point to the fact
that credit growth to the non-tradable, in particular housing, sector crowded out
resources from the tradable sector.
The scoreboard indicators on private debt stocks and flows allow for an assess-
ment of the private sector vulnerability to changes in the business cycle, inflation
and the interest rate. While there is no firm evidence from the literature on an
optimal level of debt in the economy, high debt levels represent a vulnerability per
se. Countries with high private sector debt overhang are more prone to strong
deleveraging forces. Empirically, high credit growth is found to be associated
with higher crisis incidence (Frankel and Saravelos 2010). A wide body of eco-
nomic literature identifies quickly expanding credit as one of the best predictors of
financial or banking crises, both in emerging and advanced economies. Among the
first contributions, Sachs et al. (1996) argue that credit growth12 is a good proxy of
banking system vulnerability, as rapid credit expansion is likely associated with a
decline in lending standards. Similarly, Jordá et al. (2011) and Gourinchas and
Obstfeld (2011) find a significant and economically large impact of credit booms on
the probability of banking crises, currency crises and sovereign defaults.
Large movements in monetary and credit aggregates are generally correlated
with real asset prices with possible implications on macroeconomic imbalances and
financial stability (Adalid and Detken 2007). The link between money and credit
growth, on the one hand, and asset prices, on the other hand, goes in both directions
(Setzer et al. 2010 and Gerdesmeier et al. 2009). Accordingly, some empirical
analyses suggest that the impact of a significant fall in real estate prices may be even
more important than an equivalent decline in stock prices (Case et al. 2001), though
this finding is not unchallenged (Buiter 2010). Monitoring real asset prices is
important as booms and busts in housing markets affect the real economy through
a variety of channels and can be an important source of macroeconomic imbal-
ances. Higher house prices (and therefore higher valued household collateral)
reduce the influence of asymmetric information between borrower and lender and
improve lending conditions. As lenders’ willingness to supply credit increases, so
do investment and consumer durable expenditure, often reinforcing the cycle of
further rising house prices and stronger credit growth. Moreover, rising real asset
prices can affect household consumption spending through a wealth effect in the
form of real estate valuations. Finally, rising real estate prices relative to
12
Credit growth in the quoted literature refers to outstanding credit growth, i.e. at the growth in the
stock variable which represents the flow plus valuation effects.
construction costs can stimulate housing construction through higher profitability.

The reverse is true for falling house prices.
This process is also often associated with an inter-sectorial substitution effect
which leads to a reallocation of resources between the tradable and the non-tradable
construction sector (European Commission 2009). In this line, an indicator cover-
ing the unemployment was added to the scoreboard, in order to cater for the
potential misallocation of resources (mismatch) and general lack of adjustment
capacity in the economy via the monitoring of high and persistent unemployment
rates.
At the same time, the health and robustness of the financial system are key for
ensuring financial stability and achieving balanced economic growth. Financial
intermediation supports the investment process by, inter alia, mobilizing domestic
and foreign savings to meet investment opportunities and by providing idiosyn-
cratic risk sharing. Long-term sustainable economic growth depends on the ability
to increase the accumulation of physical and human capital, how efficiently these
factors and the resulting productive assets are used, and the access of economic
agents to these assets. Over the past decade in the EU, financial deepening clearly
contributed to the increase in the level of private sector debt, exacerbating the
feedback loops between economic activity and credit growth; price of assets,
non-performing loans and banking profitability.13 In this line, Berkmen et al.
(2009) conclude that countries with a more leveraged financial system and higher
credit growth suffered more during the crisis. The scoreboard indicator on the
growth rate of total liabilities of the financial sector aims at capturing whether the
financial sector may amplify, rather than absorb economic fluctuations and at
revealing pockets of vulnerability within financial corporates balance sheets14,
capturing risks before they materialize with often devastating consequences for
the whole economy and across borders (via spillover effects).15
Beyond private sector developments, recent market tensions have shown that the
overall indebtedness of a Member State is very important and that there are
important linkages between private sector and general government debt. Perceived
sovereign and financial sector risks are closely tight together. In the course of the
financial crisis, governments have taken on large contingent liabilities that, even if
they do not immediately impact on debt levels, affect their perceived
13
For an extensive discussion on the channels through which banks affect the sovereign and vice
versa see BIS (2011).
14
Acknowledging that no indicator can capture all potential risks stemming from the financial
sector, like the vulnerabilities that are related to the size of the financial sector, its expansion, risks
of liquidity and risks that are related to the funding structure. The ESRB will look at the financial
system from the perspective of systemic risk. The scoreboard will however approach it from the
point of view of resource misallocation and macroeconomic imbalances at country level, which are
essentially sources of risk to sustainable economic growth but can, if left unchecked, evolve also
into sources of systemic risk.
15
With respect to risks stemming from cross-border exposures, they are difficult to grasp with
domestic-oriented indicators. For deeper analyses, a breakdown of cross-border exposures by
counterpart country and sector can be a useful tool in depicting concentrations of risks and over-
exposures as stated in Borio and Drehmann (2009).
creditworthiness16. There are also feedback effects from banks to the government
as banks are large creditors to sovereigns, making them vulnerable to fiscal woes.
Moreover, a high level of general government debt increases the vulnerability of a
Member State and weakens its room of manoeuvre to deal with crisis situations. An
indicator for general government debt is therefore included in the scoreboard not to
monitor risks of unsustainable public finances, which are covered by the Stability
and Growth Pact, but to be considered together with the indicator on private debt
and thereby to offer a broader picture of Member States’ indebtedness.
Box 2.1: Internal and External Imbalances: A Conceptual Framework

This three-dimensional trade-off between unemployment (or output), infla-
tion and the current account, covering both internal and external imbalances,
can be formalized in an imperfect competition set-up for price-setting and
wage negotiations. At a given level of labor productivity, firms and workers
claim a certain amount of the output via their mark-up pricing decisions and
wage bargaining power, respectively. If these claims overrun the existent
level of output per worker, inflation raises as both sides use their market
power to ensure their claim. The competing claims are reconciled at the
NAIRU level of unemployment, leaving inflation constant. In an open frame-
work, however, the output per head is split in 3, including profits, wages and
also import costs. Real wages are set after deducting real profits and real
import costs from labor productivity. The domestic profit/wage claims can
therefore be consistent at any rate of unemployment as firms can opt to
squeeze their real cost of imports. As a consequence, higher levels of output
(equivalently lower levels of unemployment) can only be made compatible
with a stable internal inflation at the expense of squeezing real import prices,
therefore loosing competitiveness and pushing the current account into def-
icit, which ultimately constrains the ability of the economy to reduce unem-
ployment without inflation costs for long periods of time.
The sustainable rate of unemployment (or level of capacity utilization)
will thus be determined by two conditions that are represented in Fig. 2.2:
• On the one hand, by the internal equilibrium (IE) curve, which can be
represented by different combinations of output (or employment) and real
exchange rate (y-θ space) that make the claims from the domestic agents
-workers, firms- consistent with the real cost of imports (i.e. the claims
from the foreign agent). The IE locus will have a negative slope in the y-θ
(continued)
16
The most prominent example is Ireland where the banking support induced a sharp deterioration
in public finances with a fiscal deficit exceeding 30% of GDP in 2010 (nearly two thirds of it
related to banking support) and a public debt level rising from 25% in 2007 to close to 100%
in 2010.
Box 2.1 (continued)

Fig. 2.2 Internal θ
vs. External balance Current account surplus
Domestic overheating
Current Current
account surplus account deficit
θ* Domestic Domestic
underutilisation overheating
Current account deficit

Domestic underutilisation
Y* Y
space as a high level of employment and output will generate wage

demand pressures that firms will meet by squeezing real import costs
and thus detracting competitiveness.
• On the other hand, by the external equilibrium (EE) curve that represents
the current account balance (determined as the difference between exports
and imports), which will be upward-sloping in the y-θ space as long as the
Marshall-Lerner condition holds. Higher output levels imply higher inter-
nal demand and thus higher imports, which will be made consistent with a
balanced external situation by means of competitiveness gains.
The various combinations of external and internal imbalances are
represented in Fig. 2.2 on the basis of two variables; domestic output and
external competitiveness, which are determined by underlying structural and
institutional factors, economic shocks and policy measures. For a given level
of competitiveness, the area to the left of the EE locus implies an external
surplus (lower levels of output than consistent with external balance) and
deficits are represented to the right. Equivalently, for a given level of output,
domestic overheating situations are represented above the EI curve as the real
exchange is undervalued and inconsistent agent demands will lead to infla-
tionary pressures in an overheated environment (domestic productive under-
utilization is represented below the EI locus).
2.3 The Reading of the Scoreboard in the AMRs of 2012,

2013, 2014: Some Observations
2.3.1 Selected Countries and Highlighted Issues in the First

Three Reading Exercises
The first AMR, published in February 2012, identified 12 Member States as

warranting in-depth reviews on different aspects related to risks of imbalances17.
Seven of them were euro-area members: Belgium, Spain, France, Italy, Cyprus,
Slovenia and Finland. The remaining five were Bulgaria, Hungary, Denmark,
Sweden and the UK. This was a rather large number of countries, which reflected
the fact that this was the first application of the MIP. Given the economic circum-
stance in which the MIP was launched, it had to cater also for the adjustment to
previously accumulated imbalances and not only the prevention of newly emerging
imbalances.
• Against this background, the first generation of in-depth reviews were published
on 29 May 2012 (together with the rest of the 2012 European semester package).
The analysis in the IDRs broadly confirmed and nuanced the risks for the twelve
selected countries. In all 12 cases an imbalance under the preventive arm of the
MIP was established.
• On 28 November 2012, the Commission published the second AMR in which
fourteen Member States were selected for an IDR. These were the twelve
Member States for which an imbalance was identified earlier in the year, plus
the Netherlands (mainly due to high private sector indebtedness and housing)
and Malta (mainly with reference to the very large banking sector). The second
generation of IDRs were published in April 2013 and for all countries imbal-
ances were identified and for Spain and Slovenia “excessive imbalances”.18
• On 13 November 2013 the third AMR was published on the basis of which three
additional countries were added to the list, namely Germany (mainly due to its
very high external surplus), Luxembourg (also due to surplus and a need to study
more closely risks from its very large financial sector) and Ireland (which has
exited its financial assistance program). The IDRs were published in spring 2014
and implied quite some innovations in terms of dynamics in the sense that three
countries were found not to have an imbalance (DK, MT, LU), Spain was
de-escalated to imbalance from excessive the year before and Italy, Croatia
17
The four program countries (Greece, Portugal, Ireland and Romania) were not covered in the
assessment as they are already under an enhanced program-based surveillance regime.
18
It should however be noted that while the Commission identified excessive imbalances the
corrective arm of the MIP was not initiated (which is a choice at discretion and not automatic). The
Commission gave the benefit of the doubt given the ambitious National Reform Programs
presented in the context of the European semester.
found to have excessive imbalance together with Slovenia. Germany was found
to have an imbalance.
• The 4th AMR published in November 2014 and identified 16 countries for an
IDR, adding to the list of the 14 countries with an imbalance from the previous
cycle also Portugal and Romania (both leaving program status entering the
standard EU surveillance frameworks).
It can be noted that the number of countries selected for an IDR have not been
decreasing so far. The basic rationale for this is that since imbalances are identified
after the detailed analyses in the previous IDRs, the conclusion that an imbalance
has been overcome should also take place only after duly considering all relevant
factors in another in-depth review, which then could potentially lead to the closure
of the MIP for some Member States.
The issues for which countries have been selected for an IDR over the four
published AMRs mirrors the broad scope of the procedure as reflected in the
scoreboard:
• External sustainability. In some countries, the external position has been in
focus due to large negative net international investment positions (NIIP) despite
in some cases rapid adjustments in the current account in recent years
(eg. Hungary, Bulgaria, Spain). A key mitigating factor in this context is the
role of Foreign Direct Investment (FDI) in catching up economies.
• Export performance and competitiveness. For several other countries, focus is
more on the weak export performance (eg. Italy, Belgium, France, Finland)
visible both in large losses of global export market shares as well as a trend wise
deterioration in current account positions seen over a longer period (even if
external sustainability as such may not be a key concern). Indeed, several euro-
area countries lost export market shares well beyond what would be explained
by the rapidly increasing competition from emerging economies. The drivers
behind this are discussed in the IDRs and are in some cases the losses in cost
competitiveness, both due to high wage increases but even more low productiv-
ity growth, while in other cases issues linked to non-cost competitiveness issues
dominates.
• Private sector indebtedness. Potential risk from high levels of private sector
indebtedness has been a key factor for a number of countries (for example
Denmark, Spain, the Netherlands, Sweden, UK). While credit flows have been
rapidly adjusting in recent years, many Member States are left with high levels
of private sector indebtedness and are in a likely prolonged process of
deleveraging and adjustment of sectorial balance sheets. In a number of cases,
the deleveraging challenge for households and/or businesses is compounded by
the high levels of public debt. It was highlighted that the impact of deleveraging
in the private sector could be magnified by the fiscal pressures.
• Housing and asset markets. Linked to the continuous build-up of indebtedness
in the private sector, several countries have displayed developments in asset
markets, in particular housing, that warrants further analysis (for example Spain,
Netherlands, Denmark, Sweden, UK) where very high increases in house prices
together with a rapid build-up of household debt has been a concern, even if in
recent years house prices have been adjusting.
In other words, the reading of the scoreboard and the identification of imbalances
is not an automatic exercise and there are large differences across countries, both in
terms of scope of the problems and the severity of the risks involved. While some
countries need correcting internal and external imbalances accumulated in the past
others with an overall better performance still have risks in specific parts of the
economy with a macroeconomic dimension.
2.3.2 The Scoreboard Indicators and “Flashes” Over Time
The discussion above already points to changes in the economic conditions over the
last 4 years and how these are visible in the scoreboard. Indeed, the four consecutive
readings of the scoreboard allow looking at how the different indicators have
performed in terms of “flashes” (that is where the indicator value exceeds the
scoreboard value). It should be noted that in the 2014 AMR indicators were
reported on the basis of the new statistical standards (BPM6 and ESA2010). This
of course had an impact on individual values, in some cases significant, but did
overall only have a very marginal impact in terms of flashes and did not have any
impact of the overall reading of the scoreboard.19
Some of the trends are noteworthy and reflect economic developments over the
last few years and the characteristics of the progress with euro area rebalancing and
recovery process from the crises well (Table 2.1). For example:
• There has been a remarkable improvement in the current account positions of the
Member States which used to have large deficits which shows in the number and
composition of flashes. Many Member States that, until a few years ago,
registered the largest current account deficits and were experiencing
unsustainable developments. However, the external sustainability of the most
vulnerable economies has not yet been firmly re-established and most Member
States register large negative NIIP. At the same time current account surpluses
have increased in several cases and are now very high, and well above the
indicative threshold.
• There have been gains in price and non-price competitiveness in several coun-
tries, in particular the most vulnerable. In the latest updates of the MIP score-
board, there has been quite some volatility with strong depreciation recorded in
the AMR-2014 then being neutralized in the AMR-2015.
• Export performance has improved for several countries, but most Member States
keep losing market shares globally. However, over the latest years, the export
19
For details on the impact and implications of this changeover of statistical standards see the
statistical annex of the AMR-2015.
Table 2.1 Number of “flashes” in the scoreboard in AMR 2012, 2013, 2014, 2015.
AMR 2012 2013 2014 2015 Comment
CA 11 10 9 5 Declining, now surplus flashes dominates
NIIP 15 15 16 16 Steady (stocks take time)
REER 4 1 9 0 Volatile (appreciation early on vs. depreciation later)
EMS 15 17 19 17 Increasing (and less differentiated across)
NULC 8 4 1 5 Adjustment, cyclical
HP 2 0 1 2 Correction cycle
CF 1 1 0 1 Credit in correction cycle
PSD 15 15 14 15 Steady (stocks take time)
GGD 14 14 14 16 Steady (stocks take time)
U 7 9 11* 14 Increasing reflecting crises
TFSL – 1 0 0 Correction cycle
performance has become less heterogeneous among the EU countries, and there
has been an improvement in the export performance in some countries. The
assessment of developments in export market share should take into account that
the relative losses are related to the expansion of big emerging economies, like
China, Brazil, Russia, India, among other.
• Balance sheet adjustments continue in many Member States but the private debt
stocks remain high. Despite ongoing deleveraging efforts, the private sector debt
still exceeds the indicative threshold in most Member States.20 The pace and
extent of the ongoing adjustment varies, however, across countries. The
deleveraging dynamics is influenced by the underlying credit market conditions
and access to finance. Credit growth is now generally below the threshold.
Reduction in house prices became widespread and gained pace. Real house
prices further adjusted in recent years and has now bottomed out.
• The employment and social situation deteriorated in a number of countries
during the rebalancing process. In particular, unemployment has grown very
substantially in several Member States. Very few Member States have recorded
contained increases in joblessness in the latest number of years.
2.4 Concluding Remarks
In the 2014 European semester the MIP has been applied for three full cycles. While
the procedure is still relatively new and continues to be shaped in a context of
“learning by doing”, valid experience has been gained. As regards the scoreboard
and its role in the alert mechanism stage of the procedure, it has in many aspects
performed its role as planned.
20
Cf. ‘Refining the MIP Scoreboard – Technical Changes to the Scoreboard and Auxiliary
Indicators,’ op. cit., on changes in the definition of private sector debt in the scoreboard.
It should be recalled that the scoreboard is not an instrument for policy conclu-
sions and advice, it is a tool to filter out and signal different key issues related to
macroeconomic imbalances. It must of course also be kept in mind that while the
scoreboard in some sense is designed as a preventive tool, aiming for the MIP to be
applied early on in a process of building up imbalances, it has effectively first been
applied in a phase after the bust where economies have been in an adjustment phase.
This explains why stock indicators currently show more warning signals than flow
indicators. Moreover, despite being limited in scope, the indicators in the score-
board have allowed to make an economic reading with qualified argumentation
looking at interlinkages between stocks and flows, internal imbalances and external
performance and competitiveness. Clearly, there is no automaticity in the reading of
the scoreboard, and the selection of countries for an IDR. That there is a role for
judgment is not only well recognized but also intended.
How the scoreboard will develop in the future is not set in stone. There is a
continuous work on development every year where advances in statistics and
availability of data are taken into account. Such ongoing work is discussed with
legislators (Council and Parliament) and communicated in the annual Alert Mech-
anism Reports. For example, recently, there has been an agreement to include a
number of social indicators as auxiliary indicators and the indications that the role
of social indicators may increase even further.
The legislation calls for a general review of the MIP legislation end of 2014 and
the discussion will develop over 2015 Looking even further out, how the MIP and
its scoreboard will develop also depends on the work to develop the general
surveillance framework and the deepening of EMU.
Annexes
Annex A.2.1: The Scoreboard Indicators in More Detail
This annex looks more in detail at the scoreboard indicators, their defnitions and
also reports some of the concerns at the time they were selected, including alter-
native indicators considered. In several instances, a number of indicators/trans-
formations were considered, each having particular strengths and weaknesses. After
careful consideration of the pros and cons of these alternative options, the most
appropriate indicator was chosen. Nevertheless, recognizing the critical importance
of taking due account of country-specific circumstances and institutions, the eco-
nomic reading of the scoreboard is complemented by additional information and
indicators. This inter alia includes the general macroeconomic situation, such as
growth and employment developments, nominal and real convergence inside and
outside the euro area and specificities of catching-up economies. Additional indi-
cators are considered that reflect the potential for the emergence of imbalances as
well as the adjustment capacity of an economy, including its potential to sustain
sound and balanced growth, such as different measures of productivity, inflows of

FDI, capacity to innovate and energy dependence. The state of financial markets,
which played an important role in the current crisis, will also be covered.
The Current Account Balance Indicator
Definition and Data Sources
The scoreboard indicator is the 3-year backward moving average of the current
account balance expressed in percent of GDP, based on Eurostat data from Balance
of Payments statistics, with the indicative thresholds of +6% and 4%. The average
over 3 years is used so as to control for short-term fluctuations of the annual figures
and to provide indications of the persistence of a potential imbalance.
Data on the current account balance21 are derived from the Balance of Payments
(BoP) statistics reported by Eurostat. This source is widely used by other interna-
tional institutions as well as academics. BoP (and International Investment Posi-
tion) statistics are the statistical tools expressly built to monitor the relations of a
country with the rest of the world. An important advantage of this data source is also
its quick availability and high frequency. BoP data also allow decomposing external
imbalances by counterpart area, hence giving an idea of a possible spill-over of a
crisis from a given country to another.
An alternative data source on current transactions balances is the Rest-of-the-
World Accounts (RoW) in the National Accounts (NA). This data is consistent with
other indicators derived within the NA framework and also with the Commission
forecast for the current account balances. However, there are discrepancies between
the data derived from the NA and the BoP data. These differences occur despite the
fact that “current external balances” from the NA and “current account balances”
from the BoP describe the same economic concept. The issue has been closely
monitored by Eurostat together with ECB and national statistical institutes and it
appeared that the differences stem from compilation practices, methodological
reasons, different data vintages and revisions, errors and omissions22. BoP data
are compiled first, and subsequently incorporated in relevant external account
components of NAs. When compiling NAs, data related to the RoW sector have
to be reconciled with those related to the domestic economy (the focus for NAs).
21
The current account covers all transactions occurring between resident and non-resident entities,
and refers to international trade in goods and services, income and current transfers.
22
In 2011, the fourth survey on the discrepancies between the BoP/RoW data will be conducted.
The past surveys (2009) analysed in detail the reasons for existing discrepancies and formulated
recommendations. Some Member States already implemented some of Eurostat’s recommenda-
tions. The methodological differences will hopefully disappear after 2014, but some discrepancies,
due to the different compilation practices, will remain.
Indicative Threshold
A simple statistical distribution analysis provides an indicative threshold for current

account deficits of 4%. This indicative threshold was derived from the data
sample starting in 1970 for most of the old Member States and in early/mid
1990s for the new Member States, and ending in 2007. It appears reasonable to
compute the value of the threshold on the basis of a long period which extends
beyond the last decade characterized by increasing divergences in the euro area.
The increase in the divergence of external positions in the EU over the past decade
together with the inclusion of new Member States with typically high current
account deficits would introduce a downward bias in the sample.
This threshold value is also broadly in line with the evidence from the empirical
literature on balance of payment crises and sustainability of current account imbal-
ances. There are broadly three strands of this literature, which are relevant for the
determination of the threshold23: Firstly, a number of research papers investigate
past episodes of significant current account adjustments and attempt to identify
some regularities, including the levels of current account deficits at which the
adjustment starts. Examinations of past episodes of current account adjustments
show that a typical current account reversal starts at around 5% of GDP (Summers
1996). Freund (2005) found on a sample of industrialized countries that the mean
for the current account to GDP ratio at the beginning of large current account
adjustments was around 6.3% (median was 4.9%). Similarly, IMF (2007) found
on average that past current account reversals in advanced countries started when
the current account deficit stood at about 4.1% of GDP. Reversals of persistent
current account surpluses typically started at the level of 2.4% of GDP. The
corresponding values for an EU sub-sample would be 4.3% and 2.5%, respec-
tively24. The results of all these studies, nevertheless, show that there is a very
significant variance across countries and the thresholds should be interpreted with
caution. Using an alternative approach to examining the determinants of past
recessions (binary recursive trees), Ghosh and Ghosh (2003) find that countries
with current account deficits above 2.5% of GDP have a sevenfold greater proba-
bility of a crisis than countries with smaller deficits;
Secondly, current account norms, i.e. current account to GDP ratios as justified
by fundamentals are usually computed based on a reduced form of a panel econo-
metric model in the spirit of Chinn and Prasad (2003). The results have to be
interpreted with utmost caution as they are subject to numerous conceptual and
methodological caveats. Tentative estimations of current account norms for the EU
indicate that the average current account deficit should be around 4.7% of GDP
23
It should nevertheless be noted that attempts to identify thresholds beyond which current account
imbalances pose a problem are mired with conceptual and methodological difficulties.
24
On the basis of the AMECO data, the average current account deficit at the onset of a reversal
(as defined by the IMF) would be 3.2% for the EU countries.
(median 3.4% of GDP) and the average “justified” surplus around 3.7% of GDP
(median 3.1% of GDP).
Finally, much research has focused on assessing the sustainability of current
account imbalances. This strand of literature typically attempts to estimate values
of current accounts which would stabilize the external position of a country at the
current or a predetermined level (e.g. Milesi-Ferretti and Razin 1996; Edwards
2001). These results are typically country-specific and do not deliver a general
benchmark.
The upper value of the threshold is set at +6%. The upper quartile of the
distribution of the 3-year backward average of current account balances corre-
sponds to +2%. To this an additional 4% margin has been added in line with the
“intelligent symmetry” approach to current account balances. This allows tackling
both current account surpluses and deficits but recognizes that the urgency for
policy intervention is clearly greater in the case of current account deficits. It also
reflects the fact that the risk of negative spillover effects of current account deficits
is more prevalent than for current account surpluses due to sustainability
considerations.
Complementary Indicators
In the discussions it was also agreed that it is important that the economic inter-
pretation will take due account of additional relevant information, in particular the
specificities of catching up economies. The potential risks from external deficits
need to be qualified by taking into account capital transfers in the form of EU
structural funds, as they can finance in part current account deficits. Similarly, the
destination of the capital flows is relevant as strong FDI inflows help to provide a
relatively safe financing of current account deficits in many of these Member States.
To account for the inflows of EU structural funds, the sum of current account and
capital account will be considered for Member States for which this information is
relevant. Conceptually, the sum of current account and capital account determines
the net lending/borrowing of a country and is thus the flow counterpart of the net
foreign financial asset position/net international investment position. The capital
account comprises (a) capital transfers receivable and payable between residents
and non-residents (e.g. debt forgiveness), and (b) the acquisition and disposal of
non-produced, nonfinancial assets between residents and non-residents (e.g. natural
resources, licenses, contracts, leases or marketing assets). The net size of the capital
account is typically rather small. However, in a number of catching up Member
States, capital account can be non-negligible as a part of structural/cohesion funds
is recorded here.
The Net International Investment Position
The scoreboard indicator is the net international investment position expressed in

percent of GDP based on Eurostat data from Balance of Payments statistics, with
the indicative threshold of 35%. This indicator is calculated as a share of GDP to
allow for cross-country comparability. As this is a stock indicator, the value for the
last available year is used.
For consistency reasons, data on the NIIP25 are derived from the Balance of
Payments statistics reported by Eurostat, i.e. the same data source used for the
current account balance. Like in the case of current account balance, there is an
alternative data source – the Rest-of-the-World Accounts (RoW) in the National
Accounts (NA). The general considerations entering the selection of the data source
are essentially identical to those concerning the indicator on current account
balance. In this case, the differences between the two data sources are considerably
larger than for current account data. In addition, while Eurostat has extensively
analysed the discrepancies between BoP and RoW (NAs) in the current and capital
account, little is known about the discrepancies observed between national IIP and
NFAs (RoW) data.
The statistical analysis of the NIIP distribution yields 35% of GDP as an indic-
ative threshold. It is difficult to establish a level of net external assets which can be
considered as risky and economic literature attempting to do this is rather scarce.
This is due to the fact that next to the absolute level of net foreign liabilities, it is in
particular the composition of both gross assets and liabilities in terms of types or
maturities, which determine the overall vulnerability of the external position of a
country.
Unlike large negative NIIP positions, large positive external asset positions are
not a priori considered to be problematic for a Member State or the functioning of
EMU. Therefore, the scoreboard contains an indicative threshold for negative
NIIP only.
NIIP is a good starting point in the assessment of external positions of Member

States. However, the composition of NIIP is important for a deeper understanding
25
Data on the NIIP cover stocks of direct and portfolio investments, financial derivatives and other
investment and reserve assets.
of the degree of vulnerability of a country. Therefore, also in this case, the

economic reading of the scoreboard will take account of additional relevant
information.
In this sense, it is useful to focus specifically on liabilities that require repayment
of principal or interest, separately from non-debt generating liabilities. This pro-
vides useful additional information to interpret the overall NIIP as these compo-
nents have an impact on external solvency of an economy. This distinction is
important especially for the specificities of external positions of catching up
Member States, which experience strong Foreign Direct Investment (FDI) inflows.
It can be argued that FDI constitutes a relatively less risky and more stable form of
financing than other alternatives and thus these inflows do not increase country’s
vulnerability to the same extent26.
In this respect, the economic interpretation will consider the indicator on Net
External Debt (NED), which, compared to the NIIP, does not contain portfolio
FDI27, portfolio equity and financial derivatives. By focusing on external debt
liabilities, i.e. those that require payments of principal and/or interest, NED further
qualifies the assessment of the riskiness of a country’s external asset position28.
The Real Effective Exchange Rate
The scoreboard indicator on REER is calculated as the 3-year percentage change of

the nominal effective exchange rate (NEER) deflated by the consumer price index
deflators, relative to a set of 41 industrial countries, with DG ECFIN as the data
source and with the indicative thresholds of +/5% and +/11% for euro-area and
non-euro-area countries, respectively29,30.
26
FDI is indeed a less risky source of external financing, although it can be argued that high inflows
of FDI increase the vulnerability of an economy as FDI can flow out of the country too. This is
particularly the case of undistributed profits which are considered as FDI inflows. FDI also
generates dividend flows which are reflected in the external position of a country.
27
It should also be noted that NED only excludes the equity part of FDI but still includes “other
capital” FDI which covers borrowing and lending of funds (loans, debt securities) between the
direct investor and its subsidiaries abroad.
28
Nevertheless, the components of NIIP that are not considered in NED also carry potential risks.
The non-debt components of NIIP excluded from NED essentially consist of equity and financial
derivatives. While the investments underlying these flows do not generally need to be repaid at a
certain point in time, such investments can be rather volatile and generate sudden capital outflows
which can complicate macroeconomic management. Furthermore, some of these components can
also partially reflect the existing external as well as internal imbalances and ignoring them would
mean missing part of the overall picture.
29
REER are based on the harmonized index of consumer prices (HICP) where available. For
(non-EU) trade partners without HICP methodology, the respective headline Consumer Price
Index (CPI) is used.
In order to derive the REER from the NEER, several options were discussed
during the design of the scoreboard. The competitiveness of each supplier relative
to its trading partners can be measured by the REER expressed either in terms of
production costs (ULC), export prices or economy-wide prices (HICP or GDP
deflators).
First, the REER based on broad measures of prices or costs, such as HICP or
GDP deflators, provides the most comprehensive picture of price competitiveness
of domestic producers in a medium-term perspective. The basket of goods on which
these price indexes are calculated includes both tradable and non-tradable goods
(excluding capital goods). Additionally, given that price indexes also include the
price of imported goods, countries with different import-dependency will have
different relative price effects of nominal exchange rates changes. Such effects
need to be accounted for when interpreting the REERs. Second, the ULC-based
REER shifts the focus of the assessment of relative competitiveness in terms of
consumer prices to relative production costs. This important notion is also picked
up by the ULC scoreboard indicator (see below). For tightly integrated economies
in a monetary union, a ULC-based REER would capture a similar notion as the
headline ULC indicator. Third, the REER based on relative export prices, while
being a rather intuitive measure of market competitiveness, suffers from a number
of weaknesses; (i) the calculation of export prices is strongly influenced by the
composition of exports and by the price dynamics of exported goods; (ii) REERs
based on export prices convey information on how producers set prices in order to
maintain market shares in case of nominal exchange rate variation (pricing to
market) even at the expense of profits, providing a short-term picture that might
be out of line with the dynamics of REERs calculated with different deflators.31
Concerning the indicative thresholds, symmetric thresholds are considered for the
REER indicator. The focus is put on detecting harmful imbalances, which may be
captured by an unsustainable appreciation meaning a loss of competitiveness, or
depreciation signaling potential problems related to domestic demand or the poten-
tial of harmful future price convergence. Furthermore, a differentiation of thresh-
olds between euro-area and non-euro-area countries is adopted in line with the
30
In the case of the scoreboard, the NEER is obtained from a weighted average (by double export
weights) of the exchange rate versus a panel of the most important trading partners of the euro-area
(EU-28 plus Australia, Canada, United States, Japan, Norway, New Zealand, Mexico, Switzer-
land, Turkey, China, Brazil, Russia, South Korea and Hong-Kong). The indicator takes into
account about 76% of the world exports instead of only 58% with the current panel.
31
High productivity in ICT for example has been reflected in falling prices of ICT goods relative to
others. For countries heavily specialized in those goods (see Japan) this kind of price dynamics
will tend to limit the increase of REER based on export deflators with respect to the REER based
on other deflators.
Herman Van Rompuy Task Force (Task Force 2010). Differentiated thresholds
reflect nominal exchange rate variability, catering thus for that countries with
flexible exchange rates may be subject to non-persistent swings in the REER due
to nominal exchange rate fluctuations with their most important trading partners.
The differentiation between euro-area and non-euro-area Member States also
reflects the trend real appreciation in catching-up countries. This can be explained
by increases in wages in the tradable sector due to productivity growth that are
transferred to the wages and prices of the non-tradable sector (Balassa-Samuelson
effect) where productivity does not increase commensurately. Countries that have
undergone economic transitions (e.g. liberalized trade and capital flows), and have
been catching-up to the levels of development of the EU-15 countries, typically
have experienced a trend appreciation in terms of the REER indicator. If REER
appreciation is due to the Balassa-Samuelson effect, with productivity improve-
ments in tradable goods, this should not threaten international competitiveness. The
most recent empirical studies find a Balassa-Samuelson effect for new Member
States of only 1% per year, on average (Égert et al. 2005). This is a rather modest
contribution that is not sufficient to explain the observed REER appreciations in
catching-up countries.
Overall, with a REER indicator calculated as a 3-year percentage change, the
transformation looks at medium-term developments in relative prices. To also cater
for exchange rate flexibility, one standard deviation is added to the value of the
thresholds derived from the distribution in the sample of euro-area countries. The
standard deviation is larger than the value on the Balassa-Samuelson effect esti-
mated in the literature, i.e. 1% change per year as signaled above. The thresholds
corresponding to the lower and upper quartiles of the distribution are /+5% for the
3-year percentage change. These thresholds would apply to euro-area countries32.
For the non-euro area countries, the standard deviation of the distribution is
subtracted from the lower quartile and added to the upper quartile. The resulting
thresholds for non-euro-area countries are therefore /+11%.
The REER indicator captures persistent price changes in a common reference unit
(HICP/CPI) relative to major trading partners and thus illustrates the magnitude of
developments in price and cost competitiveness. Significant deviations of the
REER based on HICP/CPI from the benchmark indicate that prices have grown
out of line with productivity for some time without compensation via the nominal
32
The thresholds for non-euro area countries cannot be derived from the distributions of the
percentage deviations from the three-year percentage changes for non-EA member states because
these distributions are heavily influenced by the strong appreciations occurred in the past 15 years
in many transition economies.
exchange rate, i.e. the country has lost or gained labor cost competitiveness with
respect to its trading partners.
In particular for euro-area Member States, persistent divergence in price and cost
competitiveness versus their EMU peers is a concern as this may hamper the
smooth functioning of the monetary union. In order to monitor such structural
losses or gains in competitiveness and trade, the additional indicators complement
the economic reading with a REER indicator that focuses on euro area trading
partners instead of the broader set of 36 countries in the headline REER indicator.
Moreover, REER developments are analyzed in conjunction with other scoreboard
indicators on competitiveness (in particular the development of ULC and export
market shares) to gain insight on the cost, price and non-price competitiveness
performance of Member States.
Export Market Shares
The scoreboard indicator is the percentage change of export market shares over
5 years, based on Balance of Payments Eurostat data, with a lower indicative
threshold of 6%. For each country, the export market shares are computed as
the share of the country’s export revenues in total world export revenues, in current
prices. The indicator thus adds many aspects of competitiveness to the scoreboard
that are not captured by price and cost competitiveness alone (that is monitored with
the real effective exchange rate based on HICP/CPI and the nominal ULC).
There are a number of options available as regards the definition of the indicator.
Firstly, one aspect to take into account is the time variation to apply: changes over
one, 3 or 5 years. Given the high volatility of year-on-year changes in view of
idiosyncratic trade shocks, this option was excluded in favor of a longer assessment
period which would better reflect structural losses/gains in export performance. The
percentage change over 5 years of the value of goods and services exports for each
country as share of the world exports of goods and services appears to be the most
opportune data transformation to measure long-term competitiveness development.
There is an important caveat, though: the short time series available permits to
calculate 5-year export market shares changes only from 1999 onwards.
The indicative threshold of the export market share indicator has been obtained
from the lower quartile of the data series distribution. This threshold corresponds to
cumulative losses of 6% over a period of 5 years. For this indicator, no upper
threshold has been considered because in the context of the MIP, since the focus is
on the detection of the harmful imbalances that may jeopardize the healthy func-
tioning of the EMU. In that context, the key concern is the detection of Member
States with deteriorating competiveness positions given by unsustainable losses in

export market shares.
The economic interpretation of the export market shares indicator is performed in

conjunction with other long-run scoreboard indicators. In fact, most of the fluctu-
ations and country differences in current accounts are driven by developments in
the balance of goods and services, which is usually the largest component of the
current account. Losses in competitiveness, the build-up of large current account
deficits and the deterioration of the net international position in some Member
States can be related to a range of underlying domestic macroeconomic imbalances.
Export market shares could also be computed with trade data in volumes
(at constant prices) rather than with data at current prices (using Balance of
Payments data on exports) so to avoid biases deriving from relative price develop-
ments. Such an indicator has the advantage to exclude variations that are due to
relative export price developments. While the indicator calculated at current prices
covers data on goods and services, the variation of export market shares in volumes
only covers exports of goods, given the lack of reliable deflators for trade in
services. The current price data series for goods and services has therefore been
chosen as indicator in the scoreboard for coverage reasons, while export market
shares (for goods) in volumes will complement its reading among the additional
indicators.33
Furthermore, with respect to ‘non-price’ competitiveness, the scoreboard
already includes several indicators that are directly or indirectly related to compet-
itiveness at large, i.e. the change of the REER based on the HICP/CPI deflators, the
change in export market shares and the change of ULC. Hence, the dynamics of
‘price’ and ‘cost’ competitiveness together with the variation of export market
shares offer an indication of ‘non-price’ competitiveness which in turn can be
defined as the “export performance that cannot be explained by price develop-
ments”.34 In order to gain more precise insight into such developments, the reading
of the scoreboard also relies on value-added decompositions and analysis according
to sectoral export market shares.
33
The volume indicator has therefore been calculated by using for each country export of goods
volumes indexes derived from EUROSTAT and for the world export of goods volume indexes
derived from UN-Comtrade. Cf. UN, 2010 International Trade Statistics Yearbook, Volume II-
Trade by Commodity world trade tables covering trade values and indices up to the year 2010
(December 2011) and UN, 2009 International Trade Statistics Yearbook, Volume II- Trade by
Commodity world trade tables covering trade values and indices up to the year 2009 (December
2010). See, http://comtrade.un.org/pb/
34
With respect to non-price competitiveness, the quality differentiation and the characteristics of
exported products are often mentioned; however no aggregate and widely-used measure is
available to quantify the concept.
In addition, and as highlighted by the so called “new-new trade theory”, in the

long run the driver of exports is productivity (Melitz 2003). Only the most produc-
tive firms in each country export, and countries’ export performance is closely
related to changes in average productivity.35 Therefore by including export market
shares, the scoreboard includes not only ‘non-price’ competitiveness elements but
also, indirectly, productivity. In order to disentangle this feature, the scoreboard
includes a productivity indicator among the additional indicators used for the
economic reading. This indicator is measured as the year-on-year growth of labor
productivity expressed as GDP per person employed (at constant prices, 2000).
Taking account of productivity developments, in particular during protracted
periods of low growth, is relevant as macroeconomic imbalances are often symp-
tomatic for a lack of productive investments. Indicators of productivity growth are
thus not read as a direct early warning indicator for emerging imbalances, but used
in conjunction with forward-looking scoreboard indicators in order to obtain a
better understanding of the potential severity of macroeconomic imbalances
(in terms of their likely persistence and the capacity of the economy to adjust).
Finally, the rise of emergent countries in the world trade impacts all EU
members and all advanced economies suffer losses as the world trade structure is
changing. The indicator of world market shares does not disentangle losses in
market shares that are specific to each country and those that concern all advanced
economies. To better understand the causes behind the losses in export market
shares, an auxiliary indicator compares the export performance of each country
with the export performance of the OECD economies.
Unit Labor Costs
The scoreboard indicator is the percentage change over 3 years of nominal unit
labor cost based on Eurostat data, with the indicative thresholds of +9% and +12%
for euro-area and non-euro-area countries, respectively.
The ULC index used in the scoreboard corresponds to the ratio of compensation
per employee to real GDP per person employed (labor productivity). The original
data on nominal compensation per employee, GDP and employment stem from
Eurostat and the index is calculated by DG ECFIN (AMECO database).36 In order
to capture the medium/long term developments of labor costs, the scoreboard
indicator for the ULC is calculated as the 3-year percentage change, as it dampens
35
This does not rule out cost competitiveness because the higher the productivity, the more output
will be produced for the same amount of inputs, which corresponds to lower marginal costs of
production.
36
The series used are: compensation of employees (total economy), employees (total economy),
gross domestic product at constant market prices, employment (total economy that also includes
self-employed). When available, full-time equivalents of employees and employment are used.
cyclical impacts on this indicator and keeps memory of built-up competitiveness

losses. Besides the percentage change over 3 years, the year-on-year percentage
change of the ULC index and the deviation from the long term average were also
computed. Nonetheless, these latter transformations are either too volatile or
heavily influenced by the average trend in ULC in each country.
The threshold corresponding to the upper quartile of the statistical distribution over
the sample of euro-area countries is 9%.37 For non-euro-area countries 3 percentage
points have been added to obtain a 12% threshold. This differentiation is not based
on the statistical distribution over the non-euro area sample, but was made since
historical data reflect the fact that the majority of non-euro area countries have
experienced a major trade liberalization in the period covered by our data (since
1995), which entails a natural process of factor price equalization towards the levels
of the trade partners. These strong adjustment processes due to trade liberalization
should however be considered to weaken over time and in the future. In that respect,
catching up transition economies are of particular concern as they can experience a
trend increase in ULC because the increases in wages in the tradable sector linked
to productivity growth are transferred to the wages and prices of the non-tradable
sector (Balassa-Samuelson effect), where productivity does not necessarily
increase. However, recent empirical studies gauge this effect to be limited (Égert
et al. 2005; European Commission 2008; and Peters 2010). No upper threshold has
been considered, because in the context of the MIP, the focus is on the detection of
the harmful imbalances that may jeopardize the smooth functioning of the EMU,
such as unsustainable increases in the cost of labor.
The interpretation of the medium/long-run ULC indicator will be complemented

with the scoreboard indicators on competitiveness and trade. The ULC indicator
together with the (HICP-based) REER indicator allows a comprehensive assess-
ment of the cost/price competitiveness developments in each Member State. Large
and sustained increases in ULCs may lead to the erosion of competitiveness,
especially if combined with a widening current account deficit and declining market
shares for exports. For instance, in the years preceding the present crisis, wage
growth outstripped productivity improvements in many Member States, inducing
37
Following suggestions by the ECB, thresholds were also calculated with a convergence approach
methodology (i.e. for each year the average of the three best performers plus a fixed percentage)
however such year-specific thresholds resulted to be very cyclical and heavily influenced by
outliers.
sharp increases in ULC. Similarly, the developments in REER, which show price
and cost competitiveness relative to the main trading partners, point to increased
divergence.38 This may signal potential structural rigidities in product and labor
markets but partly reflects the catching-up process in several Member States. To
account for the longer-term losses in cost competitiveness, percent variations over
longer time periods (up to 10 years) are also considered in the economic reading of
the scoreboard.
Moreover, scoreboard indicators on competitiveness and trade are
complemented by a set of additional indicators. Persistent divergence in price and
cost competitiveness among euro-area countries is of particular concern, provided
that ensuing external debt problems may hamper the smooth functioning of EMU.
For this reason, an effective ULC deflator39 indicator versus the rest of the euro-
area countries is included among the additional indicators. The importance of
monitoring effective ULC deflators as an indicator of competitiveness develop-
ments was recognized by the Heads of State or Government of the euro area in their
Council Conclusions of 11 March 2011. As part of efforts to assess whether wages
are evolving in line with productivity developments, the Pact for the Euro Area
calls for ULCs to be monitored over a period of time, by comparing developments
in other euro-area countries and their main trading partners.
House Price Index
The scoreboard indicator is the year-on-year growth rate of the deflated house price
index (HPI)40, data source Eurostat, with an indicative threshold of 6%. The
consumption deflator is used to reflect the value of house prices relative to the
whole consumption basket. This way of computing real house prices is widely used
in the literature and by other international organizations (e.g. OECD).
Data on house price indices are provided by various institutions. The only
harmonized index is, however, the Eurostat experimental house price index
38
In a number of Member States with high external deficits, the increases in labor costs and REER
appreciations were concentrated, although not exclusively, in the non-tradable sectors. This, in
turn, induced a reallocation of resources towards these sectors, exerting further pressure on
external positions.
39
The effective ULC deflator relative to 35 trading partners is calculated by DG ECFIN. Reference
countries were selected on the basis of their importance for euro area exports. The effective ULC
Q Dj wi
deflator relative to partners i is computed as Di where wi are the trade weights (double export
i
weights, 1999¼100) and Dj, Di are deflators for home country j and partner country i. The effective
ULC deflator uses “double-export-weighting” The general idea of using the “double-export-
weighting” procedure is to reflect (i) competitors’ shares in export markets; and (ii) the relative
importance of a particular market for the country and industry under consideration.
40
Household and NPISH final consumption expenditure (P31_S14_S15).
(HPI).41 It aims at measuring price developments of all residential properties

purchased by households (flats, detached houses, terraced houses, etc.), both new
and existing, independently of their final use and their previous owners. Only
market prices are considered (mirroring the practice of the HICP), self-built dwell-
ings are therefore excluded. The land component is included in the HPI.
Since 2005, Eurostat has been collecting HPI data from several Member States
in the framework of the Owner Occupied Housing project. When the process of
selecting the scoreboard indicators started, HPI data were available for 17 Member
States for the period 2005-Q1 to 2010-Q1. As of the data extraction date for the
Alert Mechanism Report42, important progress has been made and data have been
collected for all 27 Member States, at least for 2010 and 2011. The publication of
HPI quarterly data as from 2005 started in December 2010 and the most recent
release was in January 2012. As of 2013, Eurostat officially launched its Property
Price Index, derived from its initial experimental indicator (see Eurostat 2013 for
more details). In the medium-run, Eurostat will work on providing longer time
series for the HPI, starting possibly in the mid-1990s.
For time series analyses, a longer time sample is needed. To this end, other data
sources such as the ECB and the OECD could be used, given that, for the period
2005–2010, the correlation between the growth rates of Eurostat HPI and of the
ECB and OECD house price indicators is very high for a large majority of Member
States. However, for some new EU non-euro-area Member States, only the data
from the Bank for International Settlements database (BIS) are available. BIS data
are the least harmonized, as they use a variety of prices, such as price per square
meter, per standard flat, etc.
Given the scarcity of time series data, it is difficult to derive a threshold based on the
statistical distribution. Using the OECD dataset of 19 OECD countries on a long
series of historical data (1970–2007) gives a lower upper quartile of the distribution
of 6%. This compares with the threshold derived from the information provided by
the house price cycle. For instance, a recent study by Agnello and Schuknecht
(2009) looks into house price cycles and identifies phases of booms and busts in
18 industrialized countries. The 25 most severe booms are characterized by an
average expansion of real house prices of 40% over an average period of 7 years.
(The severity is judged based on an index which gives an equal weight to the
magnitude and the duration of the house price in the boom phase.) This translates
into an annual increase of close to 6%. Given that only the top 25 most severe
41
At the same time, Eurostat is also working on the Owner Occupied Housing (OOH) index.
Unlike the HPI, it measures the cost of owner occupiers in a HICP framework. For details on the
differences between the two, see Eurostat (2010a) and Eurostat (2010b).
42
30 January 2012.
booms over the period 1970–2007 are selected amongst the total of 100 identified
booms, the associated 6% threshold could be seen to be at the high end.
As part of the economic reading of this scoreboard indicator, real house price
growth over longer time periods will also be considered, as a complement to the
short-run indicator. To this end, 3-year average price growth rates are used as an
additional indicator. Moreover, the analysis of the house price cycle proves to be
very informative. The cumulated house price growth from the latest through to peak
and the average annual pace of growth can illustrate the scale of house price
developments. Coupled with information on house price determinants, such as
credit growth, cost of credit and demographic factors, these could provide indica-
tions of future house price developments.
During the process of designing the scoreboard, the nominal house price index
was also discussed; this indicator is likewise used in the economic reading. For
instance, if nominal house price inflation occurs at the time of final consumption
inflation, and thereby the real house price growth does not pick up the acceleration
in nominal house price inflation, potential risks of a house price bubble will be
grasped through economic judgment. In order to put house prices into perspective,
it is useful to assess them against households’ capacity to repay and alternative
options such as rental markets. In this vein, affordability (price-to-per capita
disposable income) and dividend (price-to-rent) ratios will also be assessed.
Although their findings have to be considered with caution due to their simplifying
assumptions and their crude approach, they provide a useful qualifier.
Volume indicators, in particular residential construction and value-added in
construction (as percent of GDP), are a useful complement to assess house prices.
The responsiveness of supply to changes in prices plays an important role in
shaping housing markets. A responsive housing supply reduces house price vola-
tility but at the potential cost of greater fluctuations in residential investment, with
the net impact on overall economic activity being unclear (Andrews et al. 2011).
Thus, it seems that during boom periods, inelastic housing supply reinforces house
price overvaluation while high supply elasticity coupled with expectations of future
housing price rises may lead to overshooting in construction activity.
Private Sector Debt
The scoreboard indicator is the stock of private sector43 debt in% of GDP, defined
as the sum of loans and securities other than shares, consolidated. The threshold of
private sector debt is 133%.
Private sector debt is a stock variable defined as the sum of loans and securities
other than shares (excluding financial derivatives)44 and is expressed in percentage
of GDP. The data stem from the annual financial accounts and balance sheets
(AFA) collected by Eurostat and the quarterly financial accounts (QFA) collected
by the ECB.45
The envisaged indicator is currently based on consolidated data, i.e. excluding
intra-sector liabilities such as intra-enterprise loans. When the scoreboard was
initially designed (European Commission 2012), however, it was decided to use
non-consolidated data mainly because of lack of consolidated data for all Member
States. One drawback of non-consolidated data is that it is not known to which
extent intra-sector liabilities are dominated by intra-group transactions. If intra-
group loans form the bulk of intra-sector credit, non-consolidated data may be
biased due to national and multinational (non-financial) corporate accounting
practices. For example, in Member States where each unit/branch of an
enterprise-group reports on its credit/debt, the non-consolidated data would prob-
ably show higher figures than in Member States where the headquarter reports on
total group consolidated credit/debt. Thanks to the technical work by Eurostat and
the Member States’ statistical institutes, consolidated data are now available for all
Member States and used as sources for the headline scoreboard indicator.
The threshold of private sector debt is 133% of GDP, as derived from the upper
quartile of the statistical distribution of the indicator. Annual data for the period
1995–2007 were used to establish the threshold.
Economic Interpretation
The selection process of the indicator dismisses the category “other accounts:
payable”. Although it is a non-negligible subcategory for several Member States,
it exhibits high volatility and may therefore introduce noise in the data that is
difficult to justify. The item reflects valuation effects as well as volume effects
43
Private sector is defined as non-financial corporations, households, and non-profit institutions
serving households. The non-financial corporations sector includes both private and public
corporations. Referring to the proposed indicator as private sector debt may, therefore, be partly
misleading as it also includes public non-financial corporations (which are market producers).
However, in the absence of a more refined indicator, the current definition will have to be used.
44
In order to get a clearer economic interpretation of the indicator, financial derivatives were
excluded from the definition as of 2013, after consultation with Member States and the European
Parliament.
45
Both data sets deliver fairly consistent data, as QFA is broadly the quarterly equivalent of the
AFA data series.
(mainly reclassifications), but the two are difficult to disentangle. Consideration is

to be given in the economic reading to the third subcategory mentioned above:
“other accounts: payable”. Other payable includes: “trade credits” and “other
payable excluding trade credits and advances”. The latter consists of financial
claims which arise from timing differences between distributive transactions or
financial transactions on the secondary market and the corresponding payment, for
example: (a) taxes; (b) social contributions; (c) wages and salaries; (d) rents on land
and subsoil assets; (e) dividends; (f) interest; (g) transactions in financial assets on
the secondary market.
In order to assess how consolidation practices compare across Member States.
Meanwhile, non-consolidated data will be used as an additional reading indicator.46
By including intra-sector debt, the use of non-consolidated data acknowledges that
apart from bank loans, an increasingly important source of financing may be intra-
sector. When large differences between consolidated and non-consolidated data
exist, the Commission services will examine the reasons behind. The Commission
will examine, jointly with Eurostat, whether intra-enterprise loans dominate intra-
group liabilities for non-financial corporations or whether there are other reasons in
order to shed more light on the consolidation practices across Member States.
Moreover, Monetary and Financial Institutions (MFI) data on loans, collected by
the ECB, will also be considered as part of the subsequent economic analysis. The
advantage of using MFI loans consists in their widely spread use, both by aca-
demics and international organizations. As a disadvantage, securities which are also
a source of financing for non-financial corporations, are not included, overlooking
thus country heterogeneity with respect to firm liabilities’ structure. Also intra-
sector credit, which may be an increasingly important source of financing, is not
captured when using MFI loans data.
Private Sector Credit Flow
The scoreboard indicator is private sector credit flows (transactions) expressed in%
of GDP, and it includes loans and securities other than shares (excluding financial
derivatives), consolidated data. It is the flow counterpart of private sector debt
(which is a stock indicator). The indicative threshold of private sector credit is 14%.
The sources of data are the annual financial accounts and balance sheets (AFA)
collected by Eurostat and the quarterly financial accounts (QFA) collected by the
ECB. The source data used for debt and credit flows is the same. Therefore, data,
methodological and technical issues pertaining to these two indicators largely
overlap.
46
Please note that the debt remains unconsolidated within the household sector, and between the
non-financial corporation sector and the household sectors.
Two other indicators were considered and discarded. Firstly, initial consider-
ations aimed at an indicator measuring the year-on-year percentage change in credit
flow. The rationale behind this choice of data transformation was that it can detect
rapid increases in credit flows that could be associated with credit bubbles, which in
turn may contribute to crisis situations. However, interpretation difficulties arise
since credit flows typically evolve in a cycle. This induces a risk that by using this
indicator the gradual build-up of a credit bubble is concealed when credit flows
remain high but steady (“high speed but no acceleration”) and thus its early-
warning properties are jeopardized. Secondly, the year-on-year change in private
sector debt as percent of GDP was considered, as it represents the most straight-
forward flow counterpart of the indicator on private sector debt. Notwithstanding its
consistency with the stock variable, this indicator is heavily influenced by Other
Economic Flows (OEF), which is a non-directly interpretable residual. OEF con-
sists of nominal holding gains and losses (changes in prices) and other changes in
volume (mainly reclassifications). However, distinguishing between changes in
prices and changes in volumes is difficult, and it seems that OEF is heavily
influenced by reclassifications.
The indicative threshold of private sector credit is 15% of GDP, as derived from the
upper quartile of its historical distribution. Annual data for the period 1995–2007
are used to establish the value of the threshold.
As in the case of private sector debt, the subcategory “other accounts: payable” is
not included, although this item is potentially interesting to be considered as an
additional indicator to qualify debt developments. Moreover, as discussed for the
private debt indicator, an important issue is the choice between consolidated or
non-consolidated data for the scoreboard indicator. In order to ensure consistency
with the stock counterpart of credit flows, the latter is also based on consolidated
data, i.e. excluding intra-sector liabilities. Non-consolidated data will be used as an
additional reading indicator.
General Government Debt
The scoreboard indicator is general government debt in percent of GDP, defined

under the Excessive Deficit Procedure (EDP) as the total gross debt at nominal
value outstanding at the end of the year and consolidated between and within the
sectors of general government. The threshold is 60%.
The definition of general government consolidated gross debt is the one used for
the purpose of the Excessive Deficit Procedure (EDP) as well as for the Stability
and Growth and Stability Pact (SGP). The Maastricht Treaty, together with Council
Regulation (EC) No 3605/93 define the general government debt as the total gross
debt at nominal value outstanding at the end of the year and consolidated between
and within the sectors of general government. Other accounts payable and financial
derivatives are not included in the definition, mainly for measurement reasons.
As regards the threshold for the general government’s indebtedness, the Treaty
reference value of 60% of GDP will be used (as a separate indicative threshold for
public debt under the MIP would be confusing).
General government debt is assessed for its contribution to the general indebtedness
of a Member State, being thus looked at together with private sector debt. A high
level of general government debt is more worrying when it accompanies large
private sector debt. Nevertheless, high general government debt represents a vul-
nerability per se. A high level of government sector debt cannot in any way
compensate for a low level of the non-financial private sector debt (and vice versa).
Unemployment Rate
Definition and Data
The scoreboard indicator is the 3-year backward moving average of the unemploy-
ment rate, based on Labor Force Survey from Eurostat47, with an indicative
threshold of 10%.
Given the focus on the adjustment capacity of the economy and the ability of
labor markets to reallocate labor resources, the average over the last 3 years is
preferred to yearly figures which are strongly influenced by short term volatility. In
this sense, the selected indicator can be seen as a proxy of the structural
47
The unemployment rate is expressed conforming to International Labor Office definitions: the
labor force is the total number of people employed and unemployed. Unemployed persons
comprise persons aged 15 to 74 who are without work during the reference week, are available
to start work within the next 2 weeks, and have been actively seeking work in the past 4 weeks or
had already found a job to start within the next 3 months.
unemployment rate, which is, however, an unobservable variable and the estimates
of which are subject to numerous caveats. Similarly, the indicator considers levels
of unemployment rather than changes, as increases/drops in unemployment tend to
be highly correlated with GDP growth.
The statistical approach delivers an indicative upper threshold of 10% based on the
upper quartile of the historical distribution. Due to the focus on adjustment in labor
markets and not on cyclical fluctuations, only an upper threshold was considered in
the scoreboard.
This indicator should be read in conjunction with forward-looking scoreboard

indicators, as its purpose is not to make unemployment as such an objective for
MIP surveillance. It helps to better understand the potential severity of macroeco-
nomic imbalances in terms of their likely persistence and the capacity of the
economy to adjust.
Financial Sector Liabilities
Definition and Data
The scoreboard indicator is the growth rate of total financial liabilities of financial
corporations, non-consolidated data, with an indicative threshold of 16.5%.48
This indicator has the advantage of being the simplest to grasp and thus easy to
communicate. The indicator is not covered explicitly by existing financial regula-
tion and therefore there is no risk of overlap. Given that it does not require
instrument disaggregation which is more prone to disentangling difficulties and
reclassifications, the indicator provides also a fairly reliable basis for comparison.
Moreover, it does not discriminate against different funding specificities of Member
States. And last but not least, it is not specific to the business model of a specific
subsector. In principle, the size of the financial sector can be measured on the asset
or the liability side of financial sectors’ balance sheet. The correlation between
financial assets and liabilities’ growth rates is very high (above 0.9), and thus it does
not make a large difference whether financial assets or liabilities are considered.
48
Liabilities include: Currency and deposits, Securities other than shares, Loans, Shares and other
equity, Insurance technical reserves and other accounts payable. The coverage of institutional
sectors includes central banks and other institutions, MFIs, insurance companies and hedge funds.
Turning to data availability, restrictions imply that the indicator is based on

nonconsolidated data (not all Member States report consolidated data) and on the
annual financial accounts and balance sheets (AFA) collected by Eurostat.
The indicative threshold of growth in financial sector liabilities is 16.5%, as derived

from the upper quartile of its historical distribution. Annual data for the period
1995–2007 are used to establish the value of the threshold.
Existent scoreboard indicators, such as credit transactions and housing price devel-
opments, already provide information on the financial sector’s efficiency of allo-
cating resources and potential imbalances. For example, strong credit growth
coupled with excessive increases of housing prices indicate a possible misallocation
of credit and the build-up of an asset bubble. However, indicators capturing the
change in size of financial sectors’ balance sheets, leverage indicators or soundness
indicators also provide meaningful information.
Signals given by the growth rate of financial liabilities would be interpreted in
the economic reading in line with developments in the real sector. For instance, if
the headline indicator credit flow in the non-financial private sector (non-financial
corporations and households) develops at a slower pace, one should look at what
else drives growth in financial sector’s liabilities. Is this growth backed by a
balanced development across liabilities’ categories, in other words, is equity grow-
ing at a similar pace with debt or is the maturity structure biased against short-term
liabilities?
The debt-to-equity ratio is therefore a natural complement to be included within
the list of auxiliary indicators, as the ratio indicating the relative proportion of
shareholders’ equity and debt used to finance assets. The ratio provides information
on the excessive leverage building up within the financial sector which can have an
amplifying impact on the economic cycle (Kollmann and Zeugner 2012). A highly
leveraged financial system may amplify unfavorable economic developments, like
a recession, or doubts on the solvency of the sovereign. Excessive leverage by
banks is widely believed to have contributed to the global financial crisis. While
leverage is key for growth, excessive leverage carries the threat of the amplification
effect of the volatility of returns: since the absolute increase in value of returns is
accelerated when leverage is employed, so are the losses. As long as the money is
optimally allocated in economic terms, high leverage levels do not necessarily
imply high risk. It is only when the credibility of the borrower or the return of the
underlying instrument is more uncertain that high leverage will increase the
intermediary’s risk profile (European Banking Federation 2010).
Annex A.2.2 Scoreboard indicators and their indicative thresholds
External imbalances and competitiveness Internal imbalances

Indicator 3-year aver- Net interna- % change % change % change y-o-y % Private sector Unemployment Private sector General y-o-y % change,
age of cur- tional invest- (3 years) of real (5 years) in (3 years) in change in credit flow rate – 3-year debt (consoli- government total financial
rent account ment position effective export mar- nominal unit deflated (consolidated) average dated) as %of sector debt sector liabili-
balance as a as a % of GDP exchange rate, ket shares labor costb house pricesc as %of GDPd,e GDPd,e as %of GDP ties,
% of GDP HICP deflators non-consolidated
relative to
41 industrial
countriesa
Data EUROSTAT EUROSTAT ( DG ECFIN EUROSTAT EUROSTAT EUROSTAT EUROSTAT EUROSTAT EUROSTAT EUROSTAT EUROSTAT
source (BoP BoP statistics) (Price and Cost ( BoP (Nat. (Nat. (Labor Force (Nat. Accounts) (EDP). (Nat. Accounts)
statistics) competitiveness). statistics) Accounts) Accounts) Survey)
Indicative 4/+6% 35% Lower +/5% for €A +/ 6% Lower +9% €A +6% Upper +15% Upper +10% 133% Upper +60% 16.5%
thresholds Lower quar- quartile 11% non-€A quartile +12% quartile Quartile Quartile
tile (also used Lower, Upper non-€A
for upper Quartiles of EA Upper Quar-
threshold) /+ s.d. of EA tile €A +3%
Additional Net lending/ Net External Real effective Relative Nominal ulc Real house Change in pri- Participation Private sector Debt over equity
indicators borrowing Debt as % exchange rate export mar- (changes price changes vate debt rate, long-term debt based on ratio
for eco- vis-a-vis GDP; nward vis-a-vis rest of ket shares over 1, 5, (over and youth unem- non-consolidated
nomic ROW as % of FDI flows and the euro area relative to 10 years); 3 years); ployment pov- data
reading GDP stocks as % of advanced Effective ulc Nominal erty indicators
GDP economies; relative to the house price
Labor pro- rest of EA index Value-
ductivity; added in res-
Trend TFP idential
growth construction
a
Notes: For EU trading partners HICP is used while for non-EU trading partners, the deflator is based on a CPI
b
Index providing ratio of nominal compensation per employee to real GDP per person employed
c
Changes in house prices relative to the consumption deflator
d
Private sector is defined as non-financial corporations; households and non-profit institutions serving households
e
Sum of loans, and securities other than shares
Annex A.2.3 MIP Scoreboard in AMR-2015 (Published End 2014 with Values Up to 2013)

% y-o-y
change in
total
Current account Real effective financial
balance as % of Net exchange rate (42 IC % y-o-y Private Private General Unemployment sector
GDP international – HICP deflator) Export market shares Nominal ULC change in sector credit sector debt government rate liabilities
p.m.: investment % p.m.: % p.m.: % p.m: deflated flow as % of as % of sector debt p.m:
3 year level position as % change % y-o-y change % y-o-y change % y-o-y house GDP, GDP, as % of 3 year level
Year 2013 average year of GDP (3 years) change (5 years) change (3 years) change prices consolidated consolidated GDP average year
5% & 9% &
Thresholds 4/6% – 35% 11% – 6% – 12% – 6% 14% 133% 60% 10% – 16.5%
BE 1.6 0.1 45.8 0.3 1.5 9.1 3.6 8.6 2.0 0.0 1.1 163.0 104.5 7.7 8.4 2.4
BG 0.4 2.6 76.2 1.0 0.1 5.7 6.3 14.8p 7.2p 0.1 6.7 134.8 18.3 12.2 13.0 3.3
CZ 1.7 1.4 40.1 3.1 2.3 7.7 0.8 3.7 0.5 1.2 3.1p 73.7p 45.7 6.9 7.0 9.8p
DK 6.1 7.1 39.7 2.6 1.0 17.9 2.3 3.4 1.4 2.8 1.4 222.6 45.0 7.4 7.0 0.1
DE 6.7 6.8 42.9 1.9 2.2 10.7 2.4 6.4 2.4 1.8p 1.2p 103.5p 76.9 5.6 5.3 6.3p
EE 1.2 1.4 47.1 3.1 2.9 14.0 3.4 9.6 6.8 7.3 5.4 119.4 10.1 10.3 8.6 8.9
IE 1.1 4.4 104.9 3.9 1.6 4.9 1.7 1.3 4.2 0.3 5.7 266.3 123.3 14.2 13.1 1.0
EL 3.9 0.6 121.1 4.4 0.6 27.3 2.9 10.3p 7.0p 9.3e 1.1p 135.6p 174.9 23.3 27.5 16.3
ES 0.7 1.4 92.6 0.4 1.9 7.1 4.4 4.6p 0.6p 9.9 10.7p 172.2p 92.1 24.1 26.1 10.2
FR 1.3 1.4 15.6 2.3 1.6 13.0 2.4 3.9 1.1 2.6 1.8e 137.3e 92.2 9.8 10.3 0.6
HR 0.1 0.8 88.7 4.0 1.2 20.9 3.5 0.9 1.4 18.1p 0.2 121.4 75.7 15.8 17.3 3.4
IT 0.9 1.0 30.7 0.0 1.9 18.4 1.3 4.1 1.3 6.9p 3.0 118.8 127.9 10.4 12.2 0.7
CY 4.0 3.1 156.8 0.8 1.1 27.2 3.9 5.9p 5.9p 5.5 11.2p 344.8p 102.2 11.9 15.9 19.5
LV 2.8 2.3 65.1 1.7 0.9 8.4 3.1 10.5 7.3 6.6 0.8 90.9 38.2 14.4 11.9 5.2
LT 1.2 1.6 46.4 0.6 0.9 22.1 8.9 6.0 3.0 0.2 0.2 56.4 39.0 13.5 11.8 1.8
LU 5.5 4.9 216.4 0.7 1.5 2.2 9.9 10.5 3.6 4.9 27.7 356.2 23.6 5.3 5.9 8.8
HU 2.2 4.1 84.4 4.0 1.4 19.2 4.1 5.9 0.8 5.0 1.0 95.5 77.3 10.7 10.2 0.3
MT 4.0 3.2 49.2 1.3 1.4 4.0 0.2 9.5 0.9 2.1 0.4p 137.1 69.8 6.4 6.4 0.7
NL 9.8 9.9 31.3 0.4 2.7 9.2 2.1 6.3p 1.6p 7.8 2.1p 229.7p 68.6 5.5 6.7 3.2
(continued)
% y-o-y
change in
total
Current account Real effective financial
balance as % of Net exchange rate (42 IC % y-o-y Private Private General Unemployment sector
GDP international – HICP deflator) Export market shares Nominal ULC change in sector credit sector debt government rate liabilities
p.m.: investment % p.m.: % p.m.: % p.m: deflated flow as % of as % of sector debt p.m:
3 year level position as % change % y-o-y change % y-o-y change % y-o-y house GDP, GDP, as % of 3 year level
Year 2013 average year of GDP (3 years) change (5 years) change (3 years) change prices consolidated consolidated GDP average year
5% & 9% &
Thresholds 4/6% – 35% 11% – 6% – 12% – 6% 14% 133% 60% 10% – 16.5%
AT 1.4 1.0 0.2 0.7 2.1 17.0 1.8 6.4 2.6 2.5e 0.2 125.5 81.2 4.5 4.9 3.6
PL 3.3 1.3 68.0 4.3 0.2 0.4 6.6 3.9p 0.9p 4.4e 2.9 74.9 55.7 10.0 10.3 7.6
PT 2.5 0.7 116.2 0.6 0.3 5.3 7.7 3.0e 1.9e 2.5 2.4e 202.8e 128.0 15.0 16.4 5.3
RO 3.3 0.8 62.4 0.3 3.9 16.4 16.3 0.7p 4.2p 4.6p 1.5p 66.4p 37.9 7.0 7.1 3.1
SI 2.8 5.6 38.2 0.7 1.3 16.6 3.3 1.3 1.4 5.8 4.0 101.9 70.4 9.1 10.1 10.5
SK 0.2 2.1 65.1 2.1 0.9 2.2 3.9 2.5 0.3 0.5 5.4 74.8 54.6 14.0i 14.2 0.3
FI 1.7 1.4 8.8 0.1 2.9 32.2 2.8 9.5 1.7 1.3 0.7 146.6 56.0 7.9 8.2 11.8
SE 6.1 6.6 10.8 5.1 1.7 15.0 0.1 8.1 1.1 4.7 3.7 201.1 38.6 7.9 8.0 9.1
UK 3.2 4.2 15.6 3.4 1.5 11.7 1.7 3.8 1.5 1.6 3.4p 164.5p 87.2 7.9 7.6 7.4p
Flags: e estimated, p provisional

Note: Figures in bold are the ones falling outside the threshold established by AMR. For REER and ULC, the first threshold concerns EA and the second one non-EA.
(1) Figures in italic are according to ESA 95/BPM5 standards. (2) IE Current Account Balance has been revised downwards following methodological changes in the
treatment of FDI investment income. (3) MT Current Account Balance has been revised upward following the incorporation of SPEs data extracted from administrative
records and national account estimates. (4) CY International Investment Position has been revised downwards following the incorporation of ship-owning SPEs. (5) LU
International Investment Position has been revised upwards following methodological changes in the treatment of intragroup loans of SPEs and information from a new
collection survey in the financial sector. (6) MT International Investment Position has been revised upwards following the incorporation of SPEs data from administrative
records and audited financial statements. (7) Total world export is based on BPM5. (8) Due to derogations for employment series according to ESA 2010, HR ULC is based
on ESA 95. (9) House Price only: e ¼ NSI estimates for PL; source NCB for EL, AT. (10) FR Unemployment Rate has been revised downwards. The revision is mainly due
to methodological changes to the LFS.
Source: European Commission, Eurostat and DG ECFIN (for the indicators on the REER)
Annex A.2.4 Auxiliary Indicators in the MIP Scoreboard in AMR-2015 (Published End 2014 with Values Up
to 2013)
% y-o-y Gross Fixed Gross Domestic Net Lending / Net External Inward FDI Inward FDI Net Trade Balance % Change % Change (5 years)
Year Change in Capital Formation Expenditure on R&D Borrowing Debt as Flows as Stocks as of Energy Products (3 years) in Export Performance
2013 Real GDP as % of GDP as % of GDP as % of GDP % of GDP % of GDP % of GDP as % of GDP in REER vs. EA vs. Advanced Economies
BE 0.3 22.3 na 0.1 86.8 11.1 191.2 4.4 0.6 2.6
BG 1.1 21.3 na 3.7 25.5 3.3 95.9 6.4 0.4 13.2
CZ 0.7 24.9 na 0.1 3.8 3.9 77.9 4.9 2.4 1.1
DK 0.1 18.4 na 7.1 9.8 0.2 29.5 0.1 1.3 12.1
DE 0.1 19.7 na 6.9 12.2 1.4 40.2 3.5 0.7 4.3
EE 1.6 27.3 na 1.4 6.4 3.6 95.4 2.4 5.5 22.1
IE 0.2 15.2 na 4.4 425.3 16.0 166.9 3.3 3.1 1.9
EL 3.9p 11.2p na 2.3 130.9 1.2 11.1 3.4p 3.4 22.1
ES 1.2p 18.5p na 2.1 91.2 3.0 54.8 3.3p 0.4 0.4
FR 0.3 22.1 na 1.3 32.4 0.2 40.8 3.1 1.3 6.8
HR 0.9 19.3 na 0.9 60.3 1.7 55.1 5.0 2.9 15.3
IT 1.9 17.8 na 1.0 59.2 0.9 23.8 3.3 1.0 12.6
CY 5.4p 13.4p na 1.7 115.4 15.6 275.5 6.3p 1.0 22.0
LV 4.2 23.3 na 0.1 35.8 3.2 53.0 5.4 0.3 16.1
LT 3.3 18.2 na 4.6 28.4 1.5 37.7 7.3 1.3 30.8
LU 2.0 17.1 na 3.8 2072.9 724.1 5206.0 5.6 1.7 9.5
HU 1.5 19.9 na 7.8 58.6 3.2 215.9 6.4 3.2 13.4
MT 2.5 17.5 na 4.9 115.5 5.7 132.4 9.6 0.1 2.8
NL 0.7p 18.2p na 8.6 41.5 37.1 537.7 1.4p 1.4 2.7
AT 0.2 22.2 na 0.9 20.2 3.6 77.0 3.5 1.6 11.0
PL 1.7 18.8 na 1.0 35.7 0.0 49.0 2.7 3.3 6.7
PT 1.4e 15.1e na 2.3 102.3 3.9 69.2 3.6e 0.1 1.5
RO 3.5p 24.7p na 1.3 34.6 2.0 42.8 1.9p 0.7 24.8
SI 1.0 19.7 na 5.9 34.9 0.2 29.2 5.5 0.0 10.6
SK 1.4 20.4 na 3.6 23.1 0.6 59.1 5.9 2.5 4.8
(continued)
% y-o-y Gross Fixed Gross Domestic Net Lending / Net External Inward FDI Inward FDI Net Trade Balance % Change % Change (5 years)
Year Change in Capital Formation Expenditure on R&D Borrowing Debt as Flows as Stocks as of Energy Products (3 years) in Export Performance
2013 Real GDP as % of GDP as % of GDP as % of GDP % of GDP % of GDP % of GDP as % of GDP in REER vs. EA vs. Advanced Economies
FI 1.2 21.2 na 1.3 35.1 4.5 46.8 2.6 1.9 27.3
SE 1.5 22.1 na 6.4 63.3 1.2 86.9 1.5 6.0 8.9
UK 1.7 16.4 na 4.2 26.0 1.6 73.6 0.9 4.3 5.4
Flags: b break in time series, e estimated, p provisional, na not available

Note: Figures in italic are according to ESA95/BPM5 standards. (1) Export performance vs. advanced economies (5 years % change) – total OECD export is based on the 5th edition of the Balance of Payments Manual (BPM 5).(2) For
House Price only: e ¼ source National Central Bank for EL, AT; e ¼ NSI estimates for PL. (3) Nominal ULC and Labour productivity data for HR are based on ESA 95 methodology, due to derogations for employment series according
to ESA 2010. (4) R&D expenditure data were extracted on 1/11/2014 using ESA-2010 GDP as denominator, 2013 data will be released in the second half of November 2014
Note: Figures in bold are according to ESA 95 standard. (1) Employment series for HR are based on ESA 95 methodology, due to derogations according to ESA 2010. (2) Activity rate and Young people not in employment, education or
training: break in time series for AT and HR due to the use of the Population Census 2011 results. (3) People at-risk of poverty or social exclusion data for IE na: the release date for 2013 data is 30/11/2014, while the data were extracted
on 01/11/2014
Sources: Eurostat, DG ECFIN (for the indicators on the REER vis-a-vis EA and Effective ULC vis-a-vis EA) and ECFIN calculation on IMF data, WEO (for the indicator on export market share in volume), European Commission,
Eurostat
Long Term Youth
Activity unemployment Unemployment
% y-o-y % Change % Change Financial Rate Rate (% of Rate (% of active
% Change Change in % y-o-y % Change (10 years) (3 years) Private sector Sector (15–64 active population in the
(5 years) Export Change in (10 years) in ULC in Nominal Residential Debt as % Leverage % y-o-y years) population) same age group)
Year in Terms Market Share, Labour in Nominal Performance House Construction of GDP, non- (debt to Change in % point change
2013 of Trade in volume Productivity ULC relative to EA Prices as % of GDP consolidated equity) Employment Level (3 years) Level
BE 0.5 0.8 0.6 23.1 5.7 7.6 5.9 190.6 166.3 0.3 67.5 0.2 3.9
BG 4.5 9.2 1.5p 85.1p 57.4 9.3 na 145.7 384.6 0.4p 68.4 1.9 7.4
CZ 1.0 3.0 1.1 16.0 0.1 1.6 3.3 82.4p 536.8p 0.4 72.9 2.7 3.0
DK 1.9 1.0 0.3 25.3 7.1 0.6 3.8 222.7 193.2 0.1 78.1 1.3 1.8
DE 0.6 2.2 0.5 10.4 8.4 10.4p 5.9 110.0p 422.3p 0.6 77.5 0.9 2.4
EE 1.8 0.6 0.4 71.5 45.1 28.8 3.3 126.9 288.3 1.2 75.1 1.2 3.8
IE 2.3 2.0 2.1 16.6 0.3 22.2 2.0 292.6 99.6 2.4 69.8 0.4 7.9
EL 0.7p 0.6 0.1p 14.1p 2.9 25.5e 2.2p 135.6p 792.7 3.8p 67.5 0.3 18.5
ES 1.2p 1.7 1.4p 15.4p 0.5 28.5 4.4 187.2p 544.9 2.6p 74.3 0.8 13.0
FR 0.3 0.8 0.5 18.9 1.6 3.2 6.1 175.2 373.4 0.2 71.2b 0.7b 4.1
HR 1.5 0.7 0.1 23.9 4.4 18.8p na 130.2 425.5 1.0 63.7b 2.3b 11.0
IT 0.3 3.0 0.0 23.6 7.6 7.7p 4.8 120.8 951.7 2.0 63.5 1.3 6.9
CY 0.9p 7.3 0.1p 6.3p 7.7 11.0 3.9p 347.4p 253.1 5.2 73.6 0.0 6.1
LV 1.1 2.1 1.9 89.3 57.6 20.5 2.0 108.4 609.8 2.3 74.0 1.0 5.8
LT 5.3 6.4 1.9 38.6 15.0 7.7 2.2 60.5 576.8 1.3 72.4 2.2 5.1
LU 2.9 0.6 0.0 38.6 18.3 13.6 3.1 421.8 63.2 2.0 69.9 1.7 1.8
HU 0.2 2.1 0.7 30.6 12.5 9.4 1.4 118.3 120.6 0.8 65.1 2.7 5.0
MT 1.0 6.2 1.3 29.1 11.8 1.9 2.9 182.4 15.5 3.8 65.0 4.6 2.9
NL 1.6p 1.4 0.6p 15.4p 0.5 14.0 3.3p 246.3p 136.6p 1.3p 79.7b 1.5b 2.4
AT 1.7 0.5 0.5 20.7 1.9 22.6e 4.3 140.8 209.4 0.7 76.1b 1.0b 1.2
PL 0.3 1.4 1.7p 16.4p 0.9 6.7e 2.5 78.1 274.1 0.1p 67.0 1.7 4.4
PT 3.2 7.8 1.6e 6.5e 8.7 13.3 2.3e 218e 365.2 2.9 73.0 0.7 9.3
RO 2.2p 10.4 4.8p 86.5p 58.4 19.9p na 67.5p 470.7 1.2p 64.6 1.0 3.3
SI 2.1 0.5 0.5 28.3 9.6 9.4 2.5 113.1 591.8 1.5 70.5 1.0 5.2
SK 4.7 1.3 2.2 22.3 5.5 3.3 2.4 77.8 844.1 0.8 69.9 1.2 10.0
FI 3.4 4.9 0.3 28.9 10.0 6.8 6.1 169.8 371.2 1.5 75.2 0.7 1.7
SE 0.0 1.5 0.5 21.8 3.5 9.4 3.6 244.7 237.0 1.0 81.1 2.0 1.5
UK 2.6 2.6 0.4 27.7 8.7 4.3 3.4 169.4p 790.5p 1.3 76.6 1.1 2.7
Persons Persons
Living in Living in
Young People Households Youth Young People Households
not in People at-risk Severe with Very Unemployment not in People at-risk Severe with Very
Employment, of Poverty or At-risk Material Low Work Long Term Rate (% of Employment, of Poverty or At-risk Material Low Work
Education or Social Poverty Deprivation Intensity Activity unemployment active Education or Social Poverty Deprivation Intensity
Training Exclusion (% Rate Rate (% of (% of Rate Rate population in Training Exclusion (% Rate Rate (% of
(% of total of total (% of total total population (15–64 (% of active the same age (% of total of total (% of total (% of total population
population) population) population) population) aged 0–59) years) population) group) population) population) population) population) aged 0–59)
% point % point % point % point % point % point
Year change change change % point change change change change
2013 (3 years) Level (3 years) Level (3 years) Level (3 years) Level (3 years) Level (3 years) Level (3 years)
BE 0.2 23.7 1.3 12.7 1.8 20.8 0.0 15.1 0.5 5.1 0.8 14.0 1.3
BG 2.6 28.4 6.6 21.6 0.2 48.0 1.2 21.0 0.3 43.0 2.7 13.0 5.0
CZ 0.0 18.9 0.6 9.1 0.3 14.6 0.2 8.6 0.4 6.6 0.4 6.9 0.5
DK 0.3 13.0 0.9 6.0 0.0 18.9 0.6 12.3 1.0 3.8 1.1 12.9 2.3
DE 1.0 7.9 2.0 6.3 2.0 20.3 0.6 16.1 0.5 5.4 0.9 9.9 1.3
EE 3.8 18.7 14.2 11.3 2.7 23.5 1.8 18.6 2.8 7.6 1.4 8.4 0.6
IE 1.1 26.8 0.8 16.1 3.1 na na na na na na na na
EL 12.8 58.3 25.3 20.4 5.6 35.7 8.0 23.1 3.0 20.3 8.7 18.2 10.6
ES 5.7 55.5 14.0 18.6 0.8 27.3b 0.6b 20.4b 1.0b 6.2 1.3 15.7 4.9
FR 0.4 24.8 1.5 11.2b 1.1b 18.1 1.1 13.7 0.4 5.1 0.7 7.9 2.0
HR 4.0 50.0 17.4 19.6b 4.7b 29.9 1.2 19.5 1.1 14.7 0.4 14.8 0.9
IT 2.8 40.0 12.2 22.2 3.1 28.4 3.9 19.1 0.9 12.4 5.5 11.0 0.8
CY 4.8 38.9 22.3 18.7 7.0 27.8 3.2 15.3 0.3 16.1 4.9 7.9 3.0
LV 3.0 23.2 13.0 13.0 4.8 35.1 3.1 19.4 1.5 24.0 3.6 10.0 2.6
LT 2.3 21.9 13.8 11.1 2.1 30.8 3.2 20.6 0.1 16.0 3.9 11.0 1.5
LU 0.5 16.8 1.0 5.0 0.1 19.0 1.9 15.9 1.4 1.8 1.3 6.6 1.1
HU 0.5 27.2 0.6 15.4 3.0 33.5 3.6 14.3 2.0 26.8 5.2 12.6 0.7
MT 0.2 13.0 0.2 10.0 0.5 24.0 2.8 15.7 0.2 9.5 3.0 9.0 0.2
NL 1.2 11.0 2.3 5.1 0.8 15.9 0.8 10.4 0.1 2.5 0.3 9.4 1.0
AT 0.1 9.2 0.4 7.1b 0.0b 18.8 0.1 14.4 0.3 4.2 0.1 7.8 0.0
PL 1.4 27.3 3.6 12.2 1.4 25.8 2.0 17.3 0.3 11.9 2.3 7.2 0.1
PT 3.0 38.1 9.9 14.1 2.7 27.4 2.1 18.7 0.8 10.9 1.9 12.2 3.6
RO 0.9 23.7 1.6 17.2 0.8 40.4 1.0 22.4 1.3 28.5 2.5 6.4 0.5
SI 2.0 21.6 6.9 9.2 2.1 20.4 2.1 14.5 1.8 6.7 0.8 8.0 1.0
SK 0.7 33.7 0.2 13.7 0.4 19.8 0.8 12.8 0.8 10.2 1.2 7.6 0.3
FI 0.3 19.9 1.5 9.3 0.3 16.0 0.9 11.8 1.3 2.5 0.3 9.0 0.3
SE 0.1 23.6 1.2 7.5 0.2 16.4 1.4 14.8 1.9 1.4 0.1 7.1 1.1
UK 0.2 20.7 0.9 13.3 0.4 24.8 1.6 15.9 1.2 8.3 3.5 13.2 0.0
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first. American Economic Journal: Macroeconomics, American Economic Association, 4(1),
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World economic outlook. Washington, DC: IMF.
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imbalances: 140 years of lessons. IMF Economic Review, 59, 340–378.
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Chapter 3
The EU Index of Integration Effort
J€org K€
onig
3.1 Why Measuring European Economic Integration?
The European Union (EU) is a unique economic and political integration project.
Often referred to as a system sui generis, the EU is unique in both the scope and
depth of its integration efforts. What has begun as a peacekeeping endeavor among
six European countries struggling from the aftermath of World War II has evolved
into a complex network of meanwhile 28 member states and numerous European
institutions with supranational authority.
Hereby, European integration has passed through nearly all of the so-called
stages of economic integration. According to Balassa (1961), formal
economic integration takes place in several stages that envisage successive
market liberalization between the participating economies, accompanied by
the formation of common rules and institutions. Whereas the first stages are
concerned with lowering tariffs and non-tariff barriers to trade and factor
movements to finally create a common market, the later stages are engaged in
allocating necessary policy prerogatives to the supranational level, eventually
culminating in the creation of a single economic and political entity. Beginning
with the lowest stage, these are a preferential trade agreement (PTA), a free trade
area (FTA), a customs union (CU), a common market (CM), an economic and
fiscal union (EFU), an economic and monetary union (EMU) and a political
union (PU).
J. K€onig (*)
Market Economy Foundation (Stiftung Marktwirtschaft), Berlin, Germany
Georg-August-University of G€ottingen, G€
ottingen, Germany
e-mail: koenig@stiftung-marktwirtschaft.de; Joerg.Koenig@wiwi.uni-goettingen.de

74 J. K€
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Table 3.1 Stages of European economic integration

Stage Characteristics EU integration steps
Preferential Preferential access to certain products European Coal and Steel Commu-
trade agree- from the participating countries nity (1951)
ment (PTA)
Free trade area Reciprocal elimination of tariffs and European Economic Community
(FTA) quotas on all goods and services (1957)
Customs union Common external tariff European Customs Union (1968)
(CU)
Common mar- Free movement of goods, services, European Union (1992)
ket (CM) capital and labor
Economic and Harmonization and coordination of Partially achieved; e.g., agricul-
fiscal union relevant national policies tural policy, competition policy,
(EFU) ‘Fiscal Compact’, etc.
Economic and Single currency and monetary policy Stage three of EMU of the EU
monetary union (1999)
(EMU)
Political union Almost complete transfer of national Not (yet) achieved
(PU) sovereignty and prerogatives to a
supranational authority
Source: Own presentation
Notes: Balassa’s original five stages of economic integration have been extended to fit European
integration more closely. See Molle (2006) and Crowley (2006) for similar extensions
Table 3.1 assigns the individual stages of economic integration to the respective
steps of European integration. Since the pooling of coal and steel production in
1951, the EU and its predecessors have almost gradually developed from a mere
PTA to EMU. This development is worth mentioning as only less than 5% of all the
FTAs that have been notified to the World Trade Organization (WTO) have
succeeded in further deepening their integration process.1 The recent
implementations of the European fiscal compact and the European banking
union (as well as Britain’s vote to leave the EU) further show that the institutional
design of the EU is still developing, leaving the potential completion of PU for the
future.
Tinbergen (1954) once defined that ‘integration may be said to be the creation of
the most desirable structure of international economy, removing artificial hin-
drances to the optimal operation and introducing deliberately all desirable elements
of coordination or unification’ (p. 95). Generally speaking, the past integration
efforts of the EU have laid down the floor towards achieving this desirable structure
1
According to the WTO website, http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx, there are
currently 6 CUs (besides the EU) out of 211 FTAs notified under GATT Art. XXIV or GATS Art.
V: the Caribbean Community and Common Market (CARICOM), the Southern African Customs
Union (SACU), the Eurasian Economic Community (EAEC), the Central American Common
Market (CACM), the East African Community (EAC) and the Southern Common Market
(MERCOSUR).
3 The EU Index of Integration Effort 75
Italy
Greece
Poland
Germany
United Kingdom
Sweden
Romania
Czech Republic
Hungary
Slovakia
Denmark
Slovenia
Estonia
Lithuania
0 10 20 30 40 50 60 70
Fig. 3.1 Pending infringement cases (Source: European Commission (2013), p. 21)
of international economy: artificial hindrances to trade and factor movements are

officially abolished in the EU’s single market; the launch of EMU further reduced
transaction costs and stabilized (so far) the price level within the union; and based
on common rules and principles, the supranational institutions of the EU have the
mandate and technical requirements to coordinate many sensitive policies.
By investigating the country level, however, Tinbergen’s ideal of the interna-
tional economy is put at risk. The EU member states show different efforts and
capabilities in further deepening their individual degree of European economic
integration. For instance, despite their commitment to the same acquis
communautaire, the member states show tremendous differences in implementing
and following EU law. As presented in Fig. 3.1, the number of pending infringe-
ment cases against Italy is about ten times higher than in Lithuania. Moreover, the
combined share of the three least complying member states (Italy, Spain and
Greece) represents a quarter of the total number of cases of all member states. As
most of these infringements concern the EU’s internal trade relations, this may have
a large impact on the members’ reciprocal interactions, thereby hampering the final
completion of the EU’s single market.2
With its four fundamental freedoms – the free movement of goods, services,
capital and persons – the EU’s single market is often regarded as the core of the
European integration architecture. The economic intuition behind the single market
2
See also Fernández Moriana, Vida and De Lombaerde (this volume) on the legal compliance of
the EU member states.
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65%
55%
EU importance
45%
EU openness
35%
25%
1993 1996 1999 2002 2005 2008 2011
Fig. 3.2 Share of Intra-EU trade in goods (Source: Own calculations based on Eurostat data.
Notes: ‘EU importance’ refers to the sum of imports and exports of goods traded within the EU-15
as a share of total trade in goods. ‘EU openness’ refers to the sum of imports and exports of goods
traded within the EU-15 as a share of GDP)
is that due to expected higher marginal revenues, the free movement of capital and
labor allows for the optimal allocation of production factors, thus enhancing the
productive efficiency of the firms. The rise in product specialization through a
reduction in average costs (economies of scale), in combination with the elimina-
tion of tariffs and non-tariff barriers to trade, pave the way for larger trade flows
between the member states. In turn, increasing trade is expected to have significant
positive effects on the economic performance of the member states – such as greater
market efficiency and product innovation due to increased competition – finally
leading to a reduction in price levels, a rise in consumption and, hence, long-term
economic growth.3
However, not all the member states seem to be able to make use of such
improvement in market efficiency. Even 20 years after the launch of the EU’s
single market, immense heterogeneities between the members’ trade patterns exist.
For example, whereas both Greece and Portugal show intra-EU trade balance
deficits in relation to their gross domestic product (GDP) of 5% in 2012, Ireland
and the Netherlands have surpluses of 12 and 28%, respectively. Furthermore,
when examining only the export ratios, even larger disparities appear: Belgium
and the Netherlands possess internal export ratios of nearly 65% in 2012, while
Greece and the United Kingdom hold ratios of only 6 and 9%, respectively. As
presented in Fig. 3.2, the EU’s internal trade in goods as a percentage of GDP (‘EU
openness’) has increased by 10% since 1993. When considering the share of
European trade over the total world trade (‘EU importance’) in goods, though, the
3
See Cecchini et al. (1988) and Baldwin (1989) for rather optimistic ex ante analyses of the
potential single market effects, and Ilzkovitz et al. (2007), Boltho and Eichengreen (2008) and
Badinger and Breuss (2011) for ex post analyses of the European integration effects on trade and
growth.
0.8
0.6
0.4
0.2
-0.2
Fig. 3.3 Average levels of business cycle symmetry (1999–2012) (Source: Own calculations
based on Eurostat data. Notes: The figure presents the average correlation coefficient (and the
respective standard deviation) over 5-year moving windows between the domestic real GDP
growth rate and the average growth rates of the remaining EMU-11 countries. The growth rates
refer to quarterly data, which have been adjusted to seasonal and trend effects using the Hodrick-
Prescott filter)
ratio has steadily declined over the same period by roughly 10%. Despite offering a
large CM, the EU seems to lose attraction in comparison to markets outside the
union.4 The loss of market efficiency in some member states does not only generate
large macroeconomic imbalances within the union but also challenges the external
economic competitiveness of the EU.5
The same is true for the specific case of EMU. The national loss of autonomous
monetary and exchange rate policy demands for a certain degree of similarity in the
development of important macroeconomic variables. If large macroeconomic
imbalances appear, the member states become more prone to asymmetric shocks
and the ‘one-size-fits-all’ monetary policy becomes less effective. Figure 3.3, which
measures the symmetry of real GDP growth rates across the EMU-11 countries,
reveals large heterogeneities over the period 1999–2012. The correlation coeffi-
cients are high in some countries but very low in others, such as Greece and
Portugal. The respective standard deviations are also very different and even
point to negative correlations in some years. Hence, a well-functioning EMU
seems to be less likely if the member states do not increase their integration efforts
in that regard.
Likewise, increasing economic heterogeneities between the member states may
also pose a serious threat to the EU’s primary aim of ‘creating an ever closer union’
4
Such as the emerging markets of BRICS (Brazil, Russia, India, China and South Africa) and
MIST (Mexico, Indonesia, South Korea and Turkey).
5
See also Cuerpo and Fischer (this volume) on the measurement of macroeconomic imbalances
within the EU.
78 J. K€
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(Preamble, TEU). The results of the 2014 elections to the European Parliament
give cause for particular concern. Populists and anti-European parties have been
gaining ground in most of the European countries and the average voter turnout
was again far below 50%; in some countries even below 20%. Whereas many of
the populists in Northern Europe took advantage of the people’s fear that the EU
might be on the verge of becoming a one-sided fiscal transfer union and/or a union
of mass migration, many parties of the Southern countries blamed the EU for
imposing tough reforms and austerity policies on their economies. As a conse-
quence, the EU now has to deal with parties such as the Front National (France),
UKIP (Britain), Freedom Party (Netherlands), Lega Nord, Five Star (both Italy),
People’s Party (Denmark), Finns (Finland), Jobbik (Hungary), Golden Dawn,
Syriza (both Greece), FPÖ (Austria) and AfD (Germany) – all pursuing disinte-
gration of the EU.
These and other potential effects of the members’ different integration efforts
and capabilities underline the importance of measuring European economic inte-
gration. A separate investigation of these effects, however, does not allow for
general statements on a country’s overall level of integration efforts. Hence, the
various effects of EU integration should be merged into one statistic. Such a
composite indicator combining the most relevant aspects of European economic
integration would be able to verify the degree of a country’s overall level of
integration and to highlight those dimensions that need further integration efforts.
The countries’ overall integration levels would become numerically tangible,
making European economic integration operational for further empirical research.
This also allows the identification of member states that tend to fall behind the
general speed of European economic integration and of others that determine and
accelerate the speed of integration as a ‘core group’.
Recently, K€ onig and Ohr (2013) have developed such a composite indicator –
the ‘EU Index’.6 Their index covers various relevant aspects of EU integration
that also go beyond the Internal Market Scoreboard and the Macroeconomic
Imbalance Procedure of the European Commission. Appropriate statistical tech-
niques combine the data to manageable indices which offer both general and very
specific insights on a country’s integration efforts. In the following sections, the
composition of the EU Index is briefly presented and the statistical methods of
aggregating its indicators are discussed. As the original index covers only the
EU-15 countries until the year 2010, an extended and updated version of the EU
Index is introduced and analyzed, capturing the EU-25 countries until 2012.
Some recommendations for future integration policies are also derived from the
results.
6
For more information on the EU Index see www.eu-index.org.
3.2 Composition and Methodology of the EU Index
3.2.1 Dimensions of the EU Index
The EU Index developed by K€onig and Ohr (2013) consists of 25 indicators

measuring the extent of economic integration for each EU member state individu-
ally on a yearly basis. The indicators are mainly macroeconomic in nature and
represent the main achievements of EU integration: the acquis communautaire, the
single market, the economic and monetary union, and the level of economic
homogeneity within the union to measure the EU’s final aim of ‘creating an ever
closer union’.
The indicators measuring a country’s compliance with the acquis
communautaire are listed in the EU Index under the dimension ‘EU conformity’.
More specifically, the EU conformity dimension itself is composed of six indica-
tors: one indicator captures the infringement cases that are newly opened against
the particular country in each year; three indicators measure the cases in which
litigation in the European Court of Justice (ECJ) ensues (subdivided into the
categories ‘single market cases’, ‘environmental and consumer protection cases’
and ‘other sector cases’); and two indicators measure whether a country has signed
the Schengen Agreement and whether it is a member of EMU.
The indicators measuring a country’s integration with the EU’s single market are
analyzed in two different ways: (1) the sum of a country’s intra-European imports
and exports as a share of its total world trade (‘EU importance’); and (2) as a share
of the country’s GDP (‘EU openness’). In both ways, the four fundamental free-
doms of the EU’s single market are represented by a country’s intra-European trade
in goods, services, stocks of foreign direct investment (FDI) and migration of EU
workers, leading to a total number of eight indicators here.
The synchronization of business cycles represents the suitability of EMU and is
captured by the dimension ‘EU symmetry’. As mentioned above, the loss of
autonomy in the members’ monetary and exchange rate policy requires similarity
in the co-movement of important macroeconomic variables.7 The advocates of an
endogenous approach further believe that cyclical symmetry emerges ex post
through increased intra-industry trade (Frankel and Rose 1998). The EU Index
measures the symmetry of business cycles with the most common indicators: the
real GDP growth rate, inflation, unemployment and a country’s net borrowing.
Quarterly data over 5 year moving windows are used to calculate pairwise corre-
lations between one country and the average values of the remaining countries,
weighted by the respective population size. The data are adjusted to seasonal effects
and long-term trends.
7
Other criteria referring to the ex ante optimality of EMU include the flexibility of domestic prices
and wages, the mobility of capital and labor, and the responsiveness of fiscal transfers (Mundell
1961). For an evaluation of the EMU’s constitutional design see Ohr (2009) and De
Grauwe (2013).
80 J. K€
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The indicators measuring the degree of economic convergence between the

member states are summarized in the dimension ‘EU homogeneity’. Economic
convergence is only partly expected by economic theory8, but desired and financially
supported by the EU (e.g., through the EU’s cohesion policy). Important indicators in
that regard are a country’s real GDP per capita, purchasing power, hourly labor costs,
long-term interest rates, public debt ratios and implicit tax rates on consumption and
capital. Each indicator is compared to the average value of the remaining member
states. The average values are again weighted by the respective population size.
The data used in the EU Index mainly stem from Eurostat and InfoCuria, which
are the statistical databases of the European Commission and the European Court of
Justice. If the data shows missing values these are complemented with data from
secondary sources such as the OECD, the UNCTAD or the national statistical
offices. Missing values account for less than 1% in the EU Index. More information
on the data and its sources are illustrated in Table 3.2.
3.2.2 Normalization Method
As the EU Index consists of a large scale of different indicators, appropriate

normalization measures are needed. Panel normalization is used here to allow
the comparison of index scores over time – that is, there is only one reference
point per indicator over the entire sample and period. Additionally, the sensitivity to
extreme values and year-to-year variations are sharply reduced. In the EU Index,
panel normalization is converting the data to a scale from 0 to 100. An index score
of 0 refers to the least possible integration level per indicator of country i in year t,
whereas an index score of 100 denotes the highest level of integration.
The single market indicators belonging to ‘EU openness’ are normalized by:
V i, t
I i, t ¼ 100 ð3:1Þ
V maxðj;T Þ
where a country’s indicator value at a given year is measured in relation to the

maximum value of all the EU member states j over the entire period T. The closer
the country comes to the identified maximum value, the more successful it is in
terms of European economic integration.
Normalization of the ‘EU importance’ data is carried out by:
V i, t
I i, t ¼ 100 ð3:2Þ
V world
i, t
8
See, for instance, Romer (1986), Lucas (1990) and Krugman (1991) on divergence effects and, on
the other hand, the ‘law of one price’, the Lerner-Samuelson theorem and the traditional neoclas-
sical growth theory by Solow (1956) and Swan (1956) to explain economic convergence.
Table 3.2 Description and sources of indicators measuring a country’s European Integration
Level
Indicator Description Source
EU Single Market
EU openness
Trade in goods Intra-European imports and exports of goods Eurostat
as a percentage of GDP.
Trade in services Intra-European imports and exports of ser- Eurostat
vices as a percentage of GDP.
Capital movement Intra-European stocks (inward and outward) Eurostat,
of foreign direct investments as a percentage (UNCTAD)
of GDP.
Labor migration Amount of European employees (ILO defini- Eurostat
tion) as a percentage of the total number of
employees (foreign and national).
EU importance
Trade in goods Intra-European imports and exports of goods Eurostat
as a percentage of total trade in goods.
Trade in services Intra-European imports and exports of ser- Eurostat
vices as a percentage of total trade in services.
Capital movement Intra-European stocks of foreign direct Eurostat,
investments as a percentage of total FDI. (UNCTAD,
OECD)
Labor migration Amount of European employees (ILO defini- Eurostat
tion) as a percentage of the total number of
foreign employees.
EU Homogeneity
Per capita income Real GDP per capita at constant prices Eurostat
(2005¼100, in PPP) in relation to the
respective EU average.
Purchasing power Purchasing power standards (EU-15¼1) in Eurostat
standards relation to the respective EU average.
Labor cost Labor costs (wage costs and payroll costs) per Eurostat
hour (in PPP, for the manufacturing sector
and for companies with 10 or more
employees) in relation to the respective EU
average.
Long-term interest Long-term interest rates according to the Eurostat
rate Maastricht criteria (10-year government
bonds) in relation to the respective EU
average.
Public debt ratio Gross government debt as a percentage of Eurostat
GDP in relation to the respective EU average.
Consumer tax rate Implicit tax rate on consumption (consump- Eurostat
tion tax revenues in relation to private con-
sumption spending) in relation to the
(continued)
82 J. K€
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Table 3.2 (continued)

Capital tax rate Implicit tax rate on capital (taxes on property Eurostat
and corporate profits for private households
and companies in relation to the global profit
and investment income of the private house-
holds and companies) in relation to the
EU Symmetry
Economic growth Real GDP at current prices (2005¼100, per- Eurostat
centage change to the previous period, sea-
sonally and trend adjusted) in pairwise
correlation to the respective EU average on
the preceding 20 quarters.
Inflation Harmonized Index of Consumer Prices (per- Eurostat, (national
centage change to the previous period, sea- statistical offices)
sonally and trend adjusted) in pairwise
correlation to the respective EU average on
the preceding 20 quarters.
Change in Unemployment rate (ILO definition, percent- Eurostat, (OECD)
unemployment age change to the previous period, seasonally
and trend adjusted) in pairwise correlation to
the respective EU average on the preceding
20 quarters.
Government net Government net borrowing as a percentage of Eurostat, (national
borrowing GDP (percentage change to the previous statistical offices)
period, seasonally and trend adjusted) in
pairwise correlation to the respective EU
average on the preceding 20 quarters.
EU Conformity
EU participation
EMU membership Countries of the euro zone receive a value of ECFIN
100; countries of the Exchange Rate Mecha-
nism II receive a value of 50; and countries
with flexible exchange rates towards the EU
countries receive a value of 0.
Schengen Countries of the Schengen area receive a Ministries of For-
participation value of 100; countries outside the Schengen eign Affairs
area receive a value of 0.
EU compliance
Infringement Infringement proceedings (pre-litigation) of European Commis-
proceedings the European Commission against the EU sion (different
member states. volumes)a
ECJ verdict: single Completed EU infringement proceedings via InfoCuria
market ECJ conviction in the field of the EU single
market: free movement of services, goods,
capital and people; freedom of establishment;
state aid; state trade monopolies; market
competition; regulations for cartels, mergers
and Union citizenship.
(continued)

ECJ verdict: environ- Completed EU infringement proceedings via InfoCuria
ment and consumer ECJ conviction in the field of environment
protection and consumer protection.
ECJ verdict: other Completed EU infringement proceedings via InfoCuria
sectors ECJ conviction in the remaining sectors (e.g.,
social policy, fiscal law, company law, har-
monization of legislation, transport, industrial
policy, agriculture, fishing, energy).
Source: Own presentation
Notes:a‘Annual Report on Monitoring the Application of EU law – Annex II’. Sources in brackets
are secondary sources in case of missing data of the primary source. Missing data accounts for less
than 1% of the data
where intra-European trade and factor movements are measured as a percentage of

the country’s total trade and factor movements. The more transactions take place
with the European partners (opposed to transactions with countries outside the EU),
the greater the country’s level of European economic integration.
The indicators measuring ‘EU homogeneity’ are transformed to:
!
V i, t Vj, t
I i, t ¼ 1 100 ð3:3Þ
max V j, T Vj, T
where the difference between a country’s value and the average value of the
remaining EU countries represents the degree of heterogeneity. If the difference
between the two variables is 0, the maximum degree of homogeneity is achieved.
Absolute values are considered in this equation as for homogeneity it is irrelevant
whether a value deviates positively or negatively from the EU average.
The co-movement of business cycles between the member states in the dimen-
sion ‘EU symmetry’ is measured as:

I i, t ¼ corr V i, τ ; Vj, τ 100 ð3:4Þ
where the correlation coefficient between a country’s values and the average values
of the remaining EU countries indicates the level of integration. The correlation
takes into account period τ, covering the preceding 5 years (20 quartiles) for each
value. A positive correlation of 1 represents the highest possible level of European
economic integration in this field.9
A country’s participation in the Schengen Agreement and its EMU membership
gives the following index scores:
9
Negative correlation values are tolerated here because a value of less than zero represents an anti-
cyclical behavior of a country’s figures and should therefore be treated as disintegration.
84 J. K€
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8
< 0, if having flexible exchange rates
I i, t ¼ 50, if participating in the Exchange Rate Mechanism II ð3:5Þ
:
100, if being a member of the European Monetary Union

0, if staying out of the Schengen Agreement
I i, t ¼ ð3:6Þ
100, if participating in the Schengen Agreement
And finally, compliance with the law of the EU is rewarded by:

V i, t
I i, t ¼ 1 100 ð3:7Þ
V maxðj;T Þ
where the denominator contains the maximum amount of detected non-compliance

cases (infringements and convictions) measured in any of the countries over the
entire period and reflects the least possible level of European integration. Thus,
committing no infringements yields the highest possible level of integration.
The EU Index measures in most cases the relative performance of the member
states. The ranking order then does not only depend upon a country’s own integra-
tion efforts and capabilities but also upon the economic success (and failure) of the
other EU member states. This relative approach takes into account the EU’s specific
aim of creating an ever closer union and avoids the predetermination of external
thresholds based on a subjective rationale.
3.2.3 Weighting Procedure
Weights can have a large effect on the outcome of the overall index and country
rankings. Selecting an appropriate weighting procedure is therefore fundamental to
the successful construction of a composite indicator. The a priori weighting proce-
dure performed by some indices (e.g., the Kearney/Foreign Policy Globalization
Index or the Human Development Index of the United Nations) is not considered
accurate weighting due to the lack of objectivity in the assigned weights. Here, the
importance of one indicator over others rests solely upon the subjective belief of the
expert. This approach leads inevitably to a bias in the final results. The results of
indices using a priori weighting are further criticized in terms of sensitivity to
alternative weighting schemes (Lockwood 2004). Instead, the weights should be
generated on statistical grounds. Considering the statistical structure of the data set
used in the index ensures the calculation of objective weights that are not influenced
by the expert’s opinion. A sound statistical procedure, therefore, respects the
statistical relevance and informative value given by each indicator with regards to
the relative contribution to the overall index (OECD 2008).
The EU Index uses such a statistical weighting scheme by computing the
weights with the principal component analysis (PCA). Originally designed by
Pearson (1901), Spearman (1904) and Hotelling (1933) to analyze and reduce the
multicollinearity problem of a large set of interrelated variables, PCA has also

gained popularity in creating indices.10 Here, orthogonal transformation of the
various linear combinations between the variables produces a set of components
that maximizes the amount of variance of the observed data. In each component, the
computed factor loadings then determine the importance (i.e. the weight) of the
individual indicators to the respective component. In this case, the indicators are
weighted according to their statistical relevance with respect to overall European
economic integration and with respect to the underlying dimensions of EU integra-
tion. Ideally, the number and structure of the extracted components coincides with
the number and structure of the dimensions of the index. Prior standardization of the
data using z-scores – with mean values of 0 and standard deviations of 1 – ensures
the correct aggregation of the calculated weights.
The EU Index data is first analyzed by a number of tests confirming its eligibility
to perform PCA. In short, the data passes all tests: the large average correlation
coefficient of Cronbach’s alpha (0.82) underlines the factorability of the data set;
Bartlett’s test of sphericity (Chi2: 3525, p-value: 0.000) rejects the null hypothesis
of an identity matrix; and the Kaiser-Meyer-Olkin measure of sampling adequacy
indicates with a value greater than 0.5 (KMO: 0.62) that the variables share enough
common factors.
The screen test proposed by Cattell (1966) indicates the optimal number of
components to be extracted from PCA. The smooth decrease in the size of eigen-
values after the fourth component suggests an extraction of three components (see
Fig. 3.4).11 Although extracting three components does not perfectly match with the
number of four dimensions of the EU Index, the structure of the index is still very
well confirmed. As presented in Table 3.3, the indicators belonging to the three
dimensions single market, business cycle symmetry and institutional conformity
each have the highest explanatory power in their respective dimension. Hence,
these dimensions are not arbitrarily designed but confirmed by statistics. Only the
indicators representing the level of homogeneity do not show their highest values
jointly in one component, mainly due to the lack of a fourth component.
Prior to the calculation of the weights, the factor loadings are rotated in order to
enhance the optimal allocation of indicators to the components. Oblique rotation
hereby allows the components to correlate with each other. This accounts for the
interdependent nature of the EU Index in a more realistic manner as the dimensions of
EU integration are certainly not independent from each other. With the consideration
of all three factor loadings per indicator, the explained variance of the index is
increased. Otherwise, by relying on only one factor loading and component this
would neglect important information of the other components. This would be espe-
cially inefficient in those cases where the optimal number of components is greater
10
See, for instance, the index of Economic Freedom by the Fraser Institute, the CSGR Globaliza-
tion Index or the KOF Index of Globalization.
11
Other common measures such as the Kaiser-Guttman criterion or the Parallel Analysis do not
lead to reasonable results here as there are too many components with eigenvalues close to 1.
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4
Eigenvalues
0
1 4 7 10 13 16 19 22 25
Principal components
Fig. 3.4 Scree test of the principal component analysis (Notes: The obvious ‘kink’ at component
4 indicates that only three components should be extracted. The smooth decrease in eigenvalues
after component 4 points at random correlations and can be neglected)
than 1 and where two or more factor loadings of an indicator reach similar sizes. Thus,
the horizontal sum of all three factor loadings – each squared and multiplied by the
respective share of total variance of the component – eventually assigns the overall
weight to each indicator. These weights are presented in the last column of Table 3.3.
Multiplying the weights with the respective indicator finally leads to the indi-
vidual index scores of each country. The country rankings are calculated for each
dimension of EU integration as well as for a country’s overall level of integration
efforts. The results of the EU Index are presented in the next section. It is further
briefly analyzed whether the EU countries are on the verge to become a more
homogeneous or heterogeneous community.
3.3 Results of the EU Index
Table 3.4 presents the results of the EU Index for the EU-25 countries. As ten
countries entered the union in 2004, the EU Index presented here is calculated for
the years 2004–2012.12
Belgium is the top performing country with respect to overall European eco-
nomic integration in 2012, accomplishing 75.3 of 100 possible index scores. At
some distance, Ireland and Austria reach second and third places, followed by
Germany, France and the Netherlands. Four of the six best performing countries
12
The original EU Index developed by K€ onig and Ohr (2013) was calculated for the EU-15
countries over the period 1999–2010. As Luxembourg shows many extreme values (e.g. GDP
per capita) it is not considered in either EU Index.
Table 3.3 Rotated factor loadings and computed weights of the EU Index
Rotated factor loadinga Weight (%)b
Comp 1 Comp 2 Comp 3 Comp 1 Comp 2 Comp 3 Overall weight (%)c
Single market EU-openness to goods 0.434 0.039 0.049 7.1d 0.1 0.1 7.2
EU-openness to services 0.281 0.100 0.093 3.0d 0.4 0.2 3.6
EU-openness to capital 0.390 0.020 0.081 5.7d 0.0 0.2 5.9
3 The EU Index of Integration Effort
EU-openness to labor 0.366 0.012 0.116 5.1d 0.0 0.4 5.4

EU-importance of goods 0.262 0.035 0.310 2.6d 0.0 2.5 5.2
EU-importance of services 0.244 0.219 0.246 2.2d 1.7 1.6 5.5
EU-importance of capital 0.182 0.138 0.019 1.2d 0.7 0.0 1.9
EU-importance of labor 0.341 0.121 0.053 4.4d 0.5 0.1 5.0
Homogeneity Per capita income 0.195 0.241 0.103 1.4 2.1d 0.3 3.8
Purchasing power standards 0.072 0.332 0.165 0.2 3.9d 0.7 4.8
Labor costs 0.206 0.041 0.294 1.6 0.1 2.3d 3.9
Long-term interest rates 0.098 0.052 0.042 0.4d 0.1 0.1 0.5
Public debt ratios 0.000 0.336 0.040 0.0 4.0d 0.0 4.0
Consumer tax rate 0.124 0.335 0.008 0.6 3.9d 0.0 4.5
Capital tax rate 0.102 0.097 0.063 0.4d 0.3 0.1 0.8
Symmetry Economic growth 0.062 0.083 0.398 0.2 0.2 4.2d 4.6
Inflation 0.029 0.119 0.411 0.0 0.5 4.5d 5.0
Change in unemployment 0.083 0.036 0.252 0.3 0.1 1.7d 2.0
Government net borrowing 0.064 0.074 0.374 0.2 0.2 3.7d 4.0
(continued)
87
88
Rotated factor loadinga Weight (%)b

Comp 1 Comp 2 Comp 3 Comp 1 Comp 2 Comp 3 Overall weight (%)c
Conformity EMU membership 0.163 0.323 0.007 1.0 3.7d 0.0 4.7
Schengen participation 0.045 0.255 0.109 0.1 2.3d 0.3 2.7
Infringement proceedings 0.071 0.259 0.131 0.2 2.4d 0.5 3.0
ECJ: single market 0.015 0.326 0.269 0.0 3.7d 1.9 5.7
ECJ: environment & cons. 0.035 0.262 0.128 0.1 2.4d 0.4 2.9
ECJ: other sectors 0.037 0.260 0.196 0.1 2.4d 1.0 3.4
Explained variance 4.963 4.652 3.492
Share of total variance (%) 37.860 35.495 26.645 100
Source: PCA calculations
Notes: aRotation method: (oblique) promax-rotation with Kaiser-normalization
b
Squared factor loading multiplied by the share of total variance of the corresponding component (Comp 1 to 3)
c
Horizontal sum of the three factor weights of each indicator
d
The highest numbers of each variable across the three components indicate that the intuitively assigned dimensions single market, symmetry and conformity
can be confirmed by statistics
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Table 3.4 Results of the EU-25 Index for 2004 and 2012
EU Index 2004 EU Index 2012
Rank Country Score Rank Country Score
1 Belgium 66.3 1 Belgium 75.3
2 Netherlands 59.9 2 Ireland 70.5
3 Ireland 58.3 3 Austria 69.6
4 Finland 57.8 4 Germany 66.1
5 Cyprus 56.1 5 France 66.0
6 Germany 56.1 6 Netherlands 65.5
7 Austria 56.0 7 Slovakia 65.5
8 Spain 55.3 8 Finland 65.1
9 France 52.9 9 Spain 64.3
EU-25 51.9 10 Slovenia 63.3
10 Denmark 51.7 11 Malta 62.5
11 Portugal 51.5 EU-25 61.4
12 Sweden 50.9 12 Czech Republic 61.3
13 Italy 50.1 13 Cyprus 60.8
14 Malta 50.0 14 Italy 60.4
15 United Kingdom 48.2 15 Portugal 59.6
16 Slovenia 47.8 16 Denmark 57.3
17 Estonia 47.6 17 United Kingdom 56.8
18 Czech Republic 47.4 18 Estonia 56.3
19 Slovakia 46.9 19 Sweden 55.3
20 Greece 46.2 20 Lithuania 53.5
21 Poland 44.9 21 Hungary 51.9
22 Hungary 43.7 22 Latvia 51.7
23 Lithuania 39.9 23 Poland 50.7
24 Latvia 36.2 24 Greece 46.8
Source: Own calculations, www.eu-index.org
belong to the founding members of the European Coal and Steel Community. Only
the founding member Italy (ranked 14th in 2012) does not belong to the top group.
With Slovakia and Slovenia, also two of the Central and Eastern European Coun-
tries (CEECs) that joined the EU in 2004 are among the ten best performing
countries. Most of the CEECs, though, show very low integration efforts when
compared to the EU-25 average. Lithuania, Hungary, Latvia and Poland show
especially low levels of integration. The three EMU opt-outs (Denmark, UK and
Sweden) also show fairly low levels of integration efforts. At the very end of the
2012 ranking is Greece, achieving less than 50 index scores.
This relatively large discrepancy between the most and least integrated countries
was already present in 2004, yet at lower levels. Belgium achieved 66.3 index
scores reaching first place again, and being followed (more or less) by the same
countries as in 2012. The CEECs are skewed towards the very bottom of the index
scale – together with Greece. When compared to 2012, the lack of integration
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90
80
70
60
50
40
30
2004 2005 2006 2007 2008 2009 2010 2011 2012
Single Market Homogeneity Symmetry Conformity
Fig. 3.5 Development of EU Integration Dimensions (Notes: EU-25 average index scores on the
vertical axis)
efforts made by Greece since 2004 becomes considerably visible. More precisely,
Greece still shows very low levels of single market integration (particularly in the
goods and capital sections), high debt ratios and long-term interest rates, low
symmetry in GDP growth and unemployment rates, and too many open infringe-
ment cases. With 46.2 and 46.8 index scores in 2004 and 2012, respectively, Greece
has hardly made any additional efforts in total EU integration.
The EU-average, on the other hand, has increased by roughly 20% since 2004.
The largest boost in integration efforts was achieved in Slovakia and Slovenia,
followed by Latvia, the Czech Republic, Austria and Lithuania. Hence, it seems
that some of the CEECs are catching up to the top performing countries in terms of
EU integration, even if most of the CEECs are still below the EU-average in 2012.13
Does the increase in integration efforts of almost all member states also imply that
the EU is becoming a more homogeneous community? Figure 3.5 raises some doubts
in this regard. By illustrating the average development of each EU dimension over
time, it becomes evident that the homogeneity dimension (economic convergence) of
the EU Index has not improved over the years. Whereas the symmetry and the
conformity dimension have made substantial improvements in integration efforts,
the homogeneity dimension even sees a slight decrease in integration efforts. These
disintegration tendencies have occurred especially due to different labor costs, long-
term interest rates, public debt ratios and capital tax rates.
By performing cluster analysis it is further shown that the EU has not become
more homogeneous but rather heterogeneous with several (relatively) homoge-
neous country groups. Figure 3.6 presents the results of the cluster analysis using
the 2004 data set. Squared Euclidean distances are used to measure the relative
13
Among the CEECs, Hungary and Poland have made the lowest integration efforts since 2004.
For a more elaborate view on the integration profiles for Hungary and the CEECs see Palankai and
Miklos (this volume).
Fig. 3.6 Dendrogram for 2004 (Notes: Cluster analysis based on 25 indicators used to calculate
the EU Index in 2004 (using Ward’s clustering))
distances between the countries (and country groups): The lower the measured
distance, the more homogeneous is the country pair, respectively the country group.
It is very well shown that the EU-25 of 2004 was mainly divided into two parts: the
EU-15 countries on one side and the ten new EU member states (plus UK and
Ireland) on the other. The EU-15 group consisted of two subgroups each containing
six EU countries, one led by Austria and Germany and the other by Finland and the
Netherlands. The other (new EU member) group is also marked by two subgroups:
one of the CEECs and another consisting of the island states of Malta, Cyprus, the
UK and Ireland.
When performing cluster analysis using the 2012 data set, as presented in
Fig. 3.7, the country groups are changing in terms of size and relative distance.
The former EU-15 group has become much smaller. There is now one subgroup of
six countries, again led by Austria and Germany, and another consisting of the three
EMU opt-outs (Denmark, Sweden and the UK). The first subgroup may be regarded
as the ‘core group’ of EU integration as here the relative distances between
the countries are the lowest. Finland, the Netherlands, France and Belgium belong
to this core group, in addition to Austria and Germany. This core group seems to
be fairly homogeneous and also shows some homogeneity with the three
EMU opt-outs.
Further away from the core countries of European integration is a large (and
relatively homogeneous) country group that is dominated by the CEECs (with
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Greece
Portugal
Italy
Spain
Cyprus
Ireland
Malta
Estonia
Hungary
Slovakia
Slovenia
Lithuania
Latvia
Poland
Czech Republic
United Kingdom
Sweden
Denmark
Netherlands
Finland
Austria
Germany
France
Belgium
0 20 40 60
Squared Euclidean Distance
Fig. 3.7 Dendrogram for 2012 (Notes: Cluster analysis based on 25 indicators used to calculate
the EU Index in 2012 (using Ward’s clustering))
Malta). Among the CEECs, Lithuania and Latvia show again the most homoge-
neous integration pattern. With regards to 2004, however, the CEECs were not able
to substantially decrease their relative distance to the core group.
At even larger distances to the core group, a new formation of countries has
emerged in 2012: the GIIPS (plus Cyprus).14 This new formation (of which Greece
is the ultimate outsider) interestingly consists of exactly those EMU members that
needed financial assistance from the European Stability Mechanism (ESM) due to
the eruption of the Global Financial Crisis in 2008. Greece, Italy, Portugal and
Spain belonged to the EU-15 group in 2004, but in 2012, the distance to the core
group is very large and, especially in Greece, much integration efforts are needed to
get back on track.
The cluster analysis of the 2012 data implies that the former ‘two-speed
Europe’ – mainly characterized by the EU-15 and the new member states – has
evolved into a ‘multi-speed Europe’. This multi-speed Europe sees strong and
increasing heterogeneity between the core group of EU integration, the CEECs
and the GIIPS. This tendency is of particular concern as the rising economic
heterogeneity stokes certain fears among the EU citizens which in turn leads to
14
GIIPS (Greece, Ireland, Italy, Portugal, Spain).
more radical and nationalist attitudes. It should therefore stand at the forefront of
European policy to reduce this heterogeneity.
3.4 Conclusions
The heterogeneous integration efforts of many EU member states underline the

importance of measuring European economic integration. Despite the improvement
in overall integration levels, the EU seems to have become less homogeneous
today. In fact, the EU is characterized by a multi-speed Europe. The core group
of countries (consisting of Austria, Germany, Finland, the Netherlands, France and
Belgium) determines the pace of EU integration, whereas the other country groups
seem to fall behind the core group.
In the other country groups (the EMU opt-outs, the CEECs and especially the
GIIPS) the large and rising distance to the core group should raise specific concerns.
By showing an increasing heterogeneous tendency among the GIIPS not only the
functioning of EMU but also the EU’s aspirations to forge an ever-closer union is
put at risk. For most of these countries, especially the single market integration
needs to be improved and public debt ratios reduced in the near future. In 2012,
Greece, Italy and Spain showed the least single market activities of all EU member
states. The debt-to-GDP ratios in the GIIPS are among the highest worldwide and
can significantly hamper economic activity. Therefore, to reduce the economic
heterogeneity between the core and the periphery of European integration, the
European Commission should promote further liberalization of the EU single
market and, additionally, the European Commission should enforce that the EU
member states substantially reduce their public debt ratios. Thereby, the develop-
ment of other macroeconomic variables could be affected in a positive way, leading
to an increase in trade, a greater cross-border flow of capital and workers, and more
symmetric business cycles across the member states. This could improve the
efficient functioning of EMU and lowers the risk of having inadequate monetary
policies. The success of EU and EMU stands and falls with the economic integra-
tion of its member states – and the EU Index will further monitor its progress.
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Chapter 4
Integration Profiles for Central Europe
and Hungary
Tibor Palankai and Gabor Miklos
4.1 Theoretical Bases of the Measurement of Integration
Can integration be measured? Recent attempts seem to indicate that the

answer is “yes”. The measurement of economic processes raises several theo-
retical and methodological issues, and the results should be viewed from a
critical perspective. Nevertheless, they cannot be overlooked in a theoretical
analysis; their inclusion also serves practical purposes. GDP provides a fine
example. While its shortcomings are commonly known (most recently demon-
strated by the Stiglitz Commission), basic economic analyses and policies are
based on it. A similar critical approach can be applied to international economic
integration.
International economic integration can be defined as a new quality of interna-
tional cooperation; it creates new frameworks and structures of organization and
functioning of the economy. In the past decades a substantial number of regional
integration organizations have appeared, ranging from free trade to economic
union. The process of globalization is structured by regional integrations; levels
of global and regional integrations build upon one another and are in constant
mutual interaction, counterbalancing each other at the same time. Global and
regional integration together form international integration.
The study was carried out in the framework of TÁMOP4.2.4.A/2-11-1-2012-0001. “National

Excellence Program – Elaborating and operating an inland student and researcher personal support
system.” key project. The project was subsidized by the European Union and by The European
Social Fund.
T. Palankai (*) • G. Miklos
Corvinus University, Budapest, Hungary
e-mail: tibor.palankai@uni-corvinus.hu

96 T. Palankai and G. Miklos
Integration theories are concerned with five major issues:

• Basic forms (institutions and frameworks) of integration;
• Advantages and disadvantages (performance, costs and benefits) of integration;
• Policies, regulation, governance of integration processes;
• Integration maturities (integration capacities);
• Content (essence of integration).
4.1.1 Basic Forms of Integration
Concerning the basic forms of integration, Bela Balassa’s list still serves as a
reference point. Accordingly, he distinguishes the free trade area, the customs
union, the common market and economic and political union as the stages of
integration (though these are not necessarily hierarchical). Balassa does not men-
tion the single market, which, however, can be considered as the common market in
its full and complete implementation.
4.1.2 Advantages and Disadvantages of Integration
From a cost-benefit analysis point of view, there is no doubt that customs union
theories still form the basis. With the help of “classical” customs union theories
(trade creation and division, extension and contraction) a cost-benefit analysis can
be quantified with relatively simple equations in terms of efficiency and welfare.
The advantage of this approach is that, based on the calculation of tariff equiva-
lences, the analysis can be extended to the impacts of other trade obstacles
(non-tariff barriers).
The same applies to a monetary union, by the “tariffication” of the conversion
costs or exchange risks. Consequently, the “trade creation” impacts of a monetary
union can be calculated. The limit of the theory is that the comparative advantages
from integration are identified in a static approach, while it is clear that the gains
could be much more substantial. Nevertheless, a static comparative analysis
complemented the stage of “negative integration”.
Later, the emphasis shifted to “dynamic” customs union theories, which
extended their analysis to economies of scale and the impacts of the intensification
of competition and technical progress (innovations). It was clear that, upon this
basis, the possible gains from integration are much larger, while their calculation is
more complicated. Their macro-economic aggregation is much more difficult,
allowing for a larger margin of error. This approach raises the problem of differ-
ences in the impact of micro- and macro-level processes; it is clear that the latter
cannot be based solely on the aggregation of the former, as they are different
qualities. According to dynamic theories, the impacts of integration result in either
more rapid or slower economic growth. But growth is a complex process, and it is
4 Integration Profiles for Central Europe and Hungary 97
difficult or almost impossible to separate or filter out the impacts that integration
has on it. As we are moving towards “positive integration”, new approaches are
needed. In order to balance the advantages and disadvantages of integration, we
also have to include fields such as institutional or public service economics, and
system or growth theories.
4.1.3 Regulation and Governance
Regarding regulation and governance, the major issues constitute their scope,
competence, efficiency and democratic character. A large number of studies have
tried to analyze the extension, intensity and efficiency of regulation. There have
been efforts to quantify these, including the following: applied forms and their
extension; norms and prescriptions; their application and compliance with them;
extension of free trade; institutions and their competences; policy harmonization
and coordination and their depth; the fields of common policies and their efficiency,
etc. The state of political integration and its democratic character are particular
issues of European integration. The analysis of regulatory integration provides first-
rate possibilities for the comparison of the development of different regional
integrations and their relation to the global integration (multi-level governance).
4.1.4 Integration Maturity
As far as integration maturity is concerned, it has been analyzed in the framework

of a research program supported by the Hungarian government between 2002 and
2004. (Palankai 2005). Integration maturity was approached from four dimensions
(economic, political, social and institutional or legal ones). The study distinguished
accession or membership maturity (related to the Maastricht or Copenhagen
criteria) and, in general terms, integration maturity, which synthesizes the capacity
of a country to meet the requirements of an integration organization, and to profit
from its advantages to the fullest extent. In economic terms, integration maturity is
composed of following elements:
• Functioning market economy;
• Competitiveness;
• Macro-stability or stabilization;
• Divergence or convergence (differences in the level of development and struc-
tures and their trends);
• Financing and credit-worthiness.
In all of these respects, integration maturity can be measured by a number of
parameters. The analysis of integration maturity can serve economic policy aims
and orientate companies, governments or international institutions.
4.1.5 Content of Integration
The content of integration needs a complex analysis and can be defined in all
dimensions of the process, particularly in relation to real economy integration and
its institutional frameworks. The real economy approach is based on two schools of
theory of integration, namely international division of labor and interdependence.
Accordingly, integration can be defined as an intensive, complex, durable and
institutionalized cooperation. One of its novel features is that it brings partners
into a new type of relation, which can be referred to as interdependence. These
developments can be measured both as processes and as states of integration.
4.2 Attempts to Measure Integration
World economic processes are measured with a multitude of different types of

indices. The most popular ones include the Competitiveness, the Corruption, the
Global Confidence or the Connectedness (UNIDO) indices, just to name a few.
Among these, the globalization indices (A. T. Kearney/Foreign Policy, KOF, MGI,
Ernst & Young etc.) are of particular interest; these rank the different countries of
the world according to their progress in global integration.
Globalization indices can serve several purposes, and we fully agree with their
usefulness and merits. “Quantifying globalization is a tricky task, taking into
account its complexity and multidimensionality. It is nevertheless worth a try, as
such a measure could contribute greatly to the whole globalization debate. Not only
would an index of globalization deepen the understanding of the concept and give
an impression of its extent and relative position of countries, but also enable further
research of the links between globalization and other phenomena such as poverty,
development, economic growth, etc. ” (Vujakovic 2009: 3).
At the same time, several aspects of the indices have been criticized, such as the
selection of the parameters, the lack of important dimensions, or disputable meth-
odology. Several important parameters are neglected in them, such as a country’s
possession of natural resources, ownership of nuclear weapons, the use of interna-
tional credit cards, the population’s command of foreign languages, or the degree to
which a country’s airport is targeted by the main international airlines. While most
of the indices concentrate on the intensity of relations, their extension (geographic)
is often overlooked. In last year’s KOF Globalization Index, Hungary ranked as
the 8th most globalized country among 187 nations. But 80% of its trade relations
is with the EU, while it has practically no trade with the countries of Africa and
Latin-America.
Measurement of the intensity of cooperation is not enough in itself, because
economic relations generate prosperity or dependence as well. New relations create
new dependences, and their impacts can be far-reaching. It is a mistake to register
tourism just as a simple movement of people: the direct contact with different
cultures can influence the knowledge and views of the participants on both sides,
and can contribute to the mutual understanding of different cultures.
One of the main objections against globalization indices is that they are country-
centered, and they overvalue the role of smaller countries. Consequently, important
structural and functional features of the global economy are missed, resulting in
distorted pictures, particularly concerning the global role of larger countries.
According to the 2011 KOF Index, the US ranks in the 35th place, and in terms
of economic globalization it is listed only as 79th.
The US, however, is the number one power of the global economy. It contributes
one quarter of world production and 14% of global trade. It is the biggest global
investor, but external investments abroad are “only” about 20% of its GDP. In the
case of the Netherlands, the same proportion is 68%. In 2010, the stock of American
capital invested abroad was about five times more than that of the Netherlands.
About 40% of world trade is conducted in US dollars. In 2010, 61.5% of interna-
tional currency reserves were held in the American currency (26% in Euro). The US
has military bases in about 30 countries of the world. The role of China is similarly
under-estimated by the different indices.
4.3 Integration Profiles – A Complex Approach
Integration profiles are our attempt and provide one possibility to measure integra-
tion. It is considered neither better, nor worse than any other method, as most of its
parameters and characteristics are similar to the other ones, including its shortcom-
ings. However, some of its approaches are different.
We use several indicators to create an integration profile. They are similar to
those used, for example, by globalization indices, but the fields covered are
narrower. Mostly economic dimensions are concentrated on, and as far as the
indicators are concerned, stocks are preferred (flow indicators are used only excep-
tionally). In fact, the latter might refine, but not substantially change, the overall
picture.
The analysis is extended in certain directions by the profile. Apart from relations
and their intensity, the structural, performance, dependence, equilibrium and con-
vergence aspects are also measured. Accordingly, we try to go beyond the quanti-
tative characteristics and refer to the quality, and indirectly to the efficiency, of the
integration process.
We do not wish to establish rankings, and, therefore, there is no need for the
aggregation of parameters. Consequently, the picture can be far more telling, as
averaging tends to gloss over important details. Furthermore, by changing the
weights, the rankings can change drastically, which might reduce the value of the
analysis and its usability for economic policy decisions (problems which are
out-averaged).
The aim of the creation of an integration profile is creating a picture composed of
several mosaics. Needless to say, by putting the mosaics together, the final picture
should be complex and coherent. Therefore, we need information that makes the
picture visible and constructive. The picture should be multi-dimensional, concen-
trating on real integration processes, and should be able to measure the state of
integration (integratedness), participation in the institutional system, the regulative
processes and their quality and efficiency. The profile cannot be drawn without the
analysis of success and the balance of costs and benefits. However, we cannot
provide the detailed measurement of features that are beyond the scope and
possibilities of our work. Thus, as far as the cost-benefit analysis or integration
maturity is concerned, only references will be made to them.
The chapter focuses on the integration profile of (Eastern) Central Europe,
particularly Hungary. Nevertheless, this is not possible without a comparison
with other nations, and these comparisons are relevant only if they concern all the
28 countries of the EU.
The 28 EU members cannot be considered as a monolithic and uniform group. In
fact, based on their sub-regional characteristics (supported by a later analysis), the
28 members can be placed into different groups. First, we have to separate the “old”
and the “new” members. As far as the old members are concerned, a distinction
between Northwestern (Austria, Belgium, Netherlands, Luxemburg and Germany)
and Southwestern Europe (France, Italy, Ireland and UK) is easily justified based on
certain parameters of performance and connectedness. Under certain parameters,
the UK or Ireland can be placed into either group. The performance pattern of the
UK is more similar to South Western Europe and it has historical colonial relations
(Malta and Cyprus) with the region. Ireland has been on the Western periphery of
Europe, but at least in terms of per capita GDP it overtook several developed
partners. In a more strictly defined Northern Europe, the Scandinavian EU (Den-
mark, Sweden and Finland) should be distinguished; in terms of a number of
parameters, Norway can be considered as part of this group. These three groups
form the (“Centrum”) or Northern Centre of the Union.
Today, Northern Western Europe and the Scandinavian EU are one of the most
developed and integrated regions of the world. They mostly correspond to the
objectives of the Lisbon Program (the most competitive regions of global econ-
omy), except for dynamism, which was hoped to be achieved by the whole Union
by 2010. In some respects, they represent a certain sort of “Core” inside the
“Centre”, while Southern Western Europe distinguishes itself with poorer macro-
economic and integration performance.
In the last decades, the Southern EU members (Greece, Portugal and Spain) have
caught up with the other members, but their convergence has been contradictory.
These countries are often considered as the Southern Periphery of the European
Union. The latest crisis has been a demonstration of the North-South rift of the
Union. Lately, South-Western Europe and the Southern Periphery had to face
similar crisis phenomena (e.g. the sovereign debt crisis). Portugal, Italy, Greece
and Spain (PIGS) were in a very similar situation and were saved only by the rescue
operations of the Union.
Based on their performance and integration parameters, four groups can be
distinguished among the recent new members. There are clear differences between
Central Europe (the Czech Republic, Hungary, Poland, Slovakia and Slovenia, and
the newly joined Croatia) and the Eastern Balkans (Bulgaria and Romania). The
latter group also claims a Central European status for itself, but on the basis of
historical and cultural traditions (Catholic-Protestant and Orthodox-Islamic), the
distinction remains justifiable (although Romania is a special case). On the basis of
their very different characteristics, the Baltic EU (Estonia, Latvia and Lithuania)
clearly distinguishes itself. These three groups can be considered as the Eastern
Periphery of the Union. The two Mediterranean new members (Cyprus and Malta)
are part of the Southern EU (and periphery). When analyzing these groups, we
would like to refrain from ranking the countries within their groups, even though we
do consider these sub-regional groupings as relevant clusters of analysis.
Although the focus here is on Hungary, special attention and reference will be
paid to the other Central European new members as well. In reality, these countries
should be referred to as “East-Central Europe”, and based on historical, geograph-
ical and economic factors and ties, the Western extension of this sub-region should
not be neglected. Here, West-Central Europe is defined as being composed of
Austria, Germany and Italy, although some place Switzerland also into this group
(Switzerland is a member of the Central European Initiative). In a narrower sense,
only Southern Germany (Bavaria or Baden-Württemberg) and North Italy (Veneto
or Lombardy) belong to this region (parts of the former Habsburg Empire), but the
separation would be too complicated. Historically, Germany often defines itself as
Central Europe (Mittel-Europa).
The main parameters and dimensions of the profile analysis can be summarized
as the following:
Real-economic integration (integratedness)
• Trade integration: flows, stocks, intensities;
• Structure of trade relations;
• Sub-regional concentration and interconnectedness;
• Intra-sector trade, place in value chains;
• Factor integration: flows, stocks, intensities;
• State and characteristics of financial integration;
• Transnationalization of company sectors.
Institutional and regulatory integration:
• Participation in global institutional and policy structures, and regulatory
processes;
• Compliance with EU institutions and policies (acquis communautaire);
Comparative performances:
• Competitiveness of economy;
• State of knowledge based society;
• External economic performances, balancedness of integration (trade bal-
ances, relation of capital export and import);
• Macro-economic performances;
• Consequences of capital market integration (gains and losses);

• Main characteristics of socio-economic development (based among others on
the Lisbon Score Board);
Convergence and divergence:
• Convergence of levels of development and structures;
• Structure of dependences, interdependence;
• Regional and social divergences, polarization;
• Problem of the Centre/Core and the Periphery.
The parameters, of course can be extended or re-structured. What is important,
however, is to present a picture which gives a realistic view and relevant informa-
tion about the processes and the state of integration. The analysis can be extended
beyond countries to regional organizations (NAFTA or Mercosur) or even to the
global economy. The profile of global integration could add new dimensions
compared to the country-centered analyses of indices.
Within the limitations of this chapter, we will only focus on trade and factor
intensity, structural patterns, equilibrium (balancedness), and the sub-regional
connectedness of EU integration. We will also briefly analyze the convergence
and problems of the “Centrum-Periphery” in the present EU. The time horizons of
the analyses do differ, but we will only focus on the post-1990 period. We will try to
identify a longer-term trend, and therefore, we will end our analysis with
2008–2009. The present crisis has brought important changes in the trends, but
these would need a comprehensive analysis.
4.4 Integration Profile – Empirical Analyses
4.4.1 Trade Intensity of Integration
Trade intensity can be analyzed either as a process or as a state. We will concentrate

on the level of state, and therefore, will use stock indices. Out of many possible
combinations, we opt for the following:
• Share of export and import to the GDP, which can be related to the total or to
intra-regional trade. The former indicates the intensity of global integration
(integratedness), while the latter is an indication of the intensity of regional
trade integration.
Txt/Y100, or Tmt/Y100.
(Txt and Tmt – total export and total import).
Txi/Y100, or Tmi/Y100.
(Txi and Tmi – intra-regional export or import).
The annual data express the intensity and integratedness, the time trends and
the dynamics of the integration process. The indices, besides the intensities,
indicate openness and dependencies. The higher the indices, the higher the
country’s openness and its dependence from external factors and processes.
• Share of regional trade to the total.
Txi/Txt100, or Tmi/Tmt100.
This formula measures regional trade intensity, but at the same time conclu-
sions can be made about the role of external relations. If the regional proportions
are high, it indicates that the country is inward-looking, and the importance of
external relations is smaller, or vice versa. We already referred to the fact that
these proportions are highly dependent on the size and the level of the develop-
ment of the country. Corrections in this respect are difficult, but other parameters
of the profile can refine the picture.
• Comparison of per capita trade, either in terms of the total or regional trade.
Txt/P and Txi/P, or Tmt/P and Tmi/P.
(P ¼ population of the country).
The per capita trade brings the level of development (correlation with per
capita GDP), or to some extent, the size of the country into the picture. The
indicators refer to the depth and quality of integration.
When the intensity of cooperation is analyzed in terms of trade and GDP
relations, we propose the following five different clusters.
Scaling of level of intensity (dependence)
0 10% 30% 50% 70% 100%
I No I Low I Medium I High I Very High I
If the trade share in GDP is below 10%, it indicates no external dependence, a

structurally closed economy, and a lack of intensity. We propose to speak about low
intensity between 10–30%, medium intensity between 30–50%, high intensity
between 50–70%, and very high intensity (dependence and openness) above 70%.
This scaling can be of course disputed, but in accordance with the literature, we
accept 10% as a minimum dependency threshold, and 50% as a high dependence
threshold. The scaling is relative; in absolute terms, a 30% of share of trade in GDP
is already an indication of high openness and dependence. This analysis can be
made for goods or goods and services, for export and import, and for internal export
(Table 4.1).
In the last decades, the trade of the EC/EU (both total and internal) has expanded
rapidly, and the growth of the total export of goods and services was 1.5–2 times
more rapid than that of the GDP. In the last 50 years the economy of the member
states has become strongly internationalized, with integration playing an important
role in the process.
Consequently, the intensity of integration increased substantially (in terms of the
internal trade share in GDP, from about 8% to nearly 25%), countries have become
dependent on each other. Structural openness, particularly for smaller developed
countries, reached a high level. (Structural openness is to be distinguished from
Table 4.1 Development of external trade (in % of GDP, EU15)

1960 1970 1980 1990 2000 2004 2008
Total export 19.6 21.8 27.2 28.1 37.4 36.9 42.0
Total import 19.2 21.4 28.6 27.5 36.9 35.4 41.2
Internal export 7.7 9.9 13.2 14.4 20.3 19.8 21.5
Internal import 7.9 11.0 13.2 14.6 21.8 22.2 22.3
Sources: European Commission (2001), Eurostat (2009)
institutional openness. The latter is a function of trade and financial protectionism

or discrimination.)
The mutual trade of member countries crossed the threshold of interdependence
by the 1970s; 40 years later this level doubled. By the 2000s, the EU countries’
integratedness had increased substantially.
The intensity of the trade integration of EU members shows significant differ-
ences. In terms of goods trade (export), only Slovakia and Belgium can be consid-
ered as very high intensity countries, while, at the other extreme, Cyprus and
Greece, with around 8%, are characterized by a lack of intensity. Nearly a dozen
of countries are in the medium intensity group (Austria, Bulgaria, Denmark,
Germany, Finland, Ireland, Luxemburg, Malta, Poland and Sweden), and most of
the larger countries (France, Italy, Spain, Romania or UK) fall into the low intensity
group. (We tried to make certain corrections by taking the size of the countries into
account, but none of the methods were justifiable.) As small countries, Latvia and
Portugal seem to be special cases.
If we look at export goods and services; the picture changes somewhat. The
services trade generates around 12–15% of the GDP. The Belgian ceiling of trade
intensity in relation to goods was 73%, which increases to 91% with services.
However, Luxemburg produced the highest level, with a record 168%.
Bulgaria, Czech Republic, Estonia, Hungary, Ireland, Malta and Slovenia (with
Lithuania close behind) can also be included in the very high intensity group. A
particularly big leap (spanning two groups) is made by Luxemburg, Ireland, Malta,
Cyprus and Bulgaria. Most of the large countries have not changed categories, but
Austria, the Netherlands, Denmark, Lithuania, Latvia, Portugal and Romania got
into in a higher group. In case of import, most of the countries remain in the same
clusters; only Cyprus, Greece and Malta (thanks to services) are upgraded
substantially.
It should be noted that besides the highly developed small countries of the Core
(Belgium, the Netherlands and Ireland), the Central European countries (Czech
Republic, Hungary, Slovakia), as well as Bulgaria and Estonia, fall into the very
high intensity group, but Slovenia is not far behind.
Besides the size, the level of development is also closely related to the integra-
tion of the country, and the latter two are closely connected. Central Europe is a
special case, as they are small countries (except Poland), but their very close
integration with the Western Core has created high intensity positions. Inclusion
into the international division of labor was an important source of efficiency and
growth (Table 4.2).
Table 4.2 Share of trade of goods and services in GDP in the EU (2008, in %)
Export Export of Import Import of Internal Internal
of goods and of goods and export in export in
Country goods services goods services total GDP
Western European core countries
Belgium 73.4 91.0 76.5 92.9 75.9 69.1
Netherlands 60.7 72.7 54.3 64.8 78.9 57.3
Germany 40.7 47.4 33.6 41.4 63.3 30.0
Ireland 43.9 81.2 31.1 71.3 62.8 50.0
France 20.9 26.5 24.0 28.9 63.9 17.0
Italy 23.6 28.9 23.6 29.4 58.9 17.0
Luxemburg 39.7 167.9 51.4 126.8 88.9 147.0
Austria 45.1 60.2 45.2 55.5 67.5 40.7
U. K. 17.4 28.1 23.8 31.4 57.0 16.0
Scandinavian EU
Denmark 33.6 54.7 34.0 52.3 69.8 23.5
Finland 35.5 46.0 32.3 42.0 55.9 19.8
Sweden 38.5 53.5 34.7 46.1 60.1 23.1
Southern EU
Greece 8.2 22.2 26.3 33.3 62.5 13.9
Spain. 17.7 26.6 25.7 32.2 69.6 18.1
Cyprus 7.7 49.8 42.3 62.1 69.3 34.5
Malta 36.1 80.2 57.0 83.9 46.8 37.5
Portugal 23.0 33.8 35.8 42.6 74.4 25.1
Baltic countries
Estonia 53.8 76.1 65.7 80.4 70.1 53.3
Latvia 28.0 41.4 45.0 54.4 68.6 28.4
Lithuania 49.8 60.0 61.4 70.6 60.3 36.2
Central Europe (East)
Hungary 68.3 81.2 68.2 80.3 78.2 63.5
Czech Rep. 66.5 76.7 63.7 75.7 84.9 64.7
Slovakia 73.5 82.4 74.6 84.3 85.4 70.4
Poland 33.2 39.9 37.8 43.5 77.8 34.4
Slovenia 54.0 68.0 61.0 70.2 68.1 46.3
East Balkans
Bulgaria 44.8 70.5 70.4 83.7 60.0 42.3
Romania 24.5 30.9 37.9 43.7 70.5 21.7
EU27 67.5
Japan 38.0 48.0 18.8 28.6 - -
USA 15.3 18.4 14.5 18.0 - -
Source: Eurostat (2009)
Table 4.3 Total internal trade of the EC/EU (in %)

EC6 EC15 EU25
Proportions 1958 1972 1992 2004 2007 2004 2007
Xi/ ∑X (%) 30,2 49,8 62.2 65.0 60.0 66.4 67.0
Internal trade among the NMs EU15 in trade of the new members
(EU10) (EU10)
1999 2004 2007 1990 1999 2004 2007
Xi / ∑X (%) 13,2 15,4 19,5 25–30 68,6 65,4 57,7
Sources: European Commission (2001), Eurostat (2009)
Notes: Xi ¼ Internal export
After 1995: EU15
New members joining in 2004
In the last decades there has been a particularly rapid growth of internal trade,
which has brought substantial changes between the proportions of internal and
external trade (Table 4.3).
The share of internal trade of EC in total was about 30% in 1958, increasing to
50% by the early 1970s. This was followed by a slowing down, but by the end of
1990s it reached 62%. The 2000s saw a certain “disintegration”, particularly as far
as the old member countries were concerned. In the 1990s, trade between the
Eastern candidates and the old members was particularly rapid; it can be claimed
that these relations had a galvanizing impact on the integration process itself. In
1990, due to the former East-West division, the EC share of trade with the former
Soviet bloc countries was only around 25–30% of their total trade. Trade relations
in the 1990s increased spectacularly, due to trade liberalizations. In just 10 years,
they approached 70%. After the accession of these countries, the trend turned, and
in the past 10 years the percentage has drastically decreased (by more than 10%
points). Pre-accession trade was boosted by association agreements and by the
gradual overhaul of the regulation of the internal market. Thus, in terms of trade
conditions, the 2004 entry brought no new conditions and possibilities. The only
sphere of trade expansion that remained was the rapid increase of cooperation
among new members.
Trade with non-member countries (such as Norway, Switzerland, Mexico, Korea
or Turkey) is regulated by free trade arrangements. Their share in the EU external
trade is around 15%. The trade pattern with these countries is similar to the internal
ones. Part of the associations is also based on free trade or preferential systems.
Most of the non-European OECD countries, including China, trade on a
non-discriminatory basis (MFN).
The per capita internal export was also used to measure intensity. The population
of Belgium and Hungary are both around 10 million. The Hungarian trade intensity
in % of the GDP is only 5% points lower than that of Belgium (73–68%), but the
internal export of Belgium is almost four times higher, while the difference in per
capita GDP is twice as high as that of Hungary. The Hungarian export intensities in
relation to the GDP are a little higher than the Czech intensities, but in per capita
Table 4.4 Per capita trade of some EU members in 2009

Per capita internal export Per capita external export Total per capita export
Country (€) (€) (€)
France 3.516 2.135 5.651
Germany 6.251 3.560 9.811
Spain 2.421 1.099 3.520
Poland 2.045 756 2.801
Belgium 18.982 6.032 25.014
Portugal 2.195 737 2.932
Greece 894 281 1.285
Czech 6.658 1.165 7.823
Rep.
Hungary 4.638 1.255 5.893
Bulgaria 973 557 1.530
Sources: Eurostat (2010)
export terms the Czech data are about one third higher. The per capita GDP of
Greece and Portugal is about 40% higher than that of Hungary. The per capita
internal export of Hungary is almost twice that of Portugal and four times more than
that of Greece (Table 4.4).
All in all, Hungary is characterized by a high level of integration and intensity of
trade relations. The share of its internal trade to the total (78%) is also far above the
EU average (65%). The per capita export data also prove the relatively high
intensity of Hungarian integration, both in the global and the European contexts.
4.4.2 Structure of Trade and Competitiveness
The economic structure of the EU corresponds to that of developed countries. The

role of agriculture was marginalized (to 1–3% in GDP) in the last decades, while the
share of services reached about 3/4 in GDP. The developed countries have changed
to “post-industrial” economies and societies (with about 15–25% of share of
industry in GDP).
The structure of trade is an important indicator of integration profiles. The
changes in the overall economic structure are reflected in trade relations, though
not proportionally. Large segments of the services fall into the category of “non-
tradable”; on average, their share of export is around 10–15%.
The share of agriculture is about 6% both in external export and import in the
EU, and it is higher than the shares in GDP or employment. The EU is the number
one agricultural exporter, but in external trade the import is far above the export. In
2009, the EU had a €22.6 billion agrarian trade deficit, which primarily fell on
fisheries, vegetables and fruits, and in which certain tropical products (€7 billion)
played an important role. In internal trade, the share of agriculture is around 10%,
which reflects the high agrarian division of labor among the members, based on a
Table 4.5 Commodity structure of EU27 countries in 2009, in %

Product group External export (%) External import (%) Internal deliveries (%)
SITC 0–9 100 100 100
0–1 5.7 6.1 10.3
2–4 2.5 4.0 3.1
3 5.2 24.2 5.9
5+6+8 41.5 34.3 43.8
7 41.5 28.5 35.3
9 3.5 3.2 1.5
Sources: Eurostat (2009, 2010)
0–1 Food, drinks and tobacco
2 Raw materials
3 Energy
7 Machines and transport equipments
5–6-8 Manufactured goods
9 Others
large extent on the impact of the CAP. The other sectors correspond to the patterns
of developed countries (Tables 4.5 and 4.6).
There are substantial differences among EU member countries in terms of the
structure of their internal EU trade (export). Concerning the agrarian internal export
(dispatches), Austria, Belgium, Italy, Poland and Portugal are close to the average
(with +/2% differences), and Hungary, Germany and Romania are somewhat
below that. Some countries are far above the average level with shares of 25.6%
(Greece), 20.4% (Denmark), 16.2% (Spain), 15.8% (France) and 14.8% (Bulgaria).
It should be noted that the high proportions of Denmark, France and, to a certain
extent, Spain are different from that of Greece and Bulgaria. The former have a
highly developed agriculture and are the main beneficiaries of the CAP, while the
high Bulgarian share is an expression rather of its structural underdevelopment.
Greece is a special case, thanks to its special, beneficial CAP arrangements. The
low share countries are also quite diverse, with Scandinavian Finland or Sweden, or
the Central European Czech Republic, Slovenia or Slovakia representing different
cases.
Besides agriculture, the shares of manufacturing, and particularly that of
machines and transport equipment, tell a lot about the level of internal integration.
Needless to say, the proportions are relative, and therefore, their comparison might
be misleading. What is striking, however, is that, compared to the close to average
proportions of the Western Core (except Belgium), Central Europe is above the
average, indicating a shift of the European manufacturing bases to the region, that
happened in the last decade. In other manufacturing goods they are also somewhat
above average, with certain trade-offs between the two product groups
(i.e. Hungary).
While Spain is a little above the average in these sectors, the low level of the
Southern EU is striking. This is particularly the case with Greece, concerning
machines and transport equipment (10%). The Greek share of the total internal
Table 4.6 Commodity structure of internal export in 2010 (%)

Internal export I. II. III. IV. V. VI.
EU27 9.7 3.6 6.8 16.4 34.9 28.6
Western Europe
Austria 7.6 3.8 4.1 10.7 36.5 37.2
Belgium 10.0 3.0 8.8 30.3 21.1 26.7
France 15.8 3.5 3.8 18.7 35.5 22.6
Germany 6.9 2.7 2.8 16.6 42.4 28.6
Italy 9.2 1.7 3.7 12.4 33.4 39.6
Scandinavian EU
Denmark 20.4 3.9 12.9 13.2 21.1 28.3
Finland 2.2 6.6 11.6 9.1 23.9 46.7
Sweden 5.9 7.9 8.3 12.4 32.1 33.3
Central Europe
Czech Republic 4.0 3.4 4.3 5.8 53.9 28.6
Poland 10.6 2.7 4.5 7.6 40.8 33.8
Hungary 7.3 2.8 2.5 8.4 59.2 19.8
Slovakia 4.2 3.2 5.6 4.8 51.1 31.1
Slovenia 5.0 4.1 3.0 11.2 44.0 32.7
Eastern Balkans
Bulgaria 14.8 9.3 5.4 5.2 19.7 45.6
Romania 6.2 4.5 3.0 4.9 44.2 37.1
Southern EU
Greece 25.6 5.2 7.1 17.1 10.2 34.8
Portugal 10.4 5.9 3.8 8.5 27.9 43.5
Spain 16.2 3.5 3.5 13.5 36.1 27.3
EU total export (Mil €) 245.405 92.494 172.243 414.866 883.958 686.588
SITC: 100
I. 0–1 Food, drinks and tobacco
II. 2+4 Raw materials
III. 3 Energy
IV. 5–6-8 Chemicals and manufactured goods
V. 7 Machines and transport equipment
VI. 9 Others
manufacturing export (45%) is almost half of the Central European proportions

(Czech Republic and Slovakia: 82%; Poland, Hungary and Slovenia: 77–79%).
As indicated by the above data, the rapid trade expansion of the Central
European trade to the EC/EU after 1989 was accompanied by drastic structural
changes. In 1989, the share of agrarian products in the total export of Hungary
amounted to about 20%, which in the scope of 10 years fell by one third (i.e. 7%).
At the same time, the share of machines and transport equipment doubled, increas-
ing from 30.2% to 59.2%. (KSH 2001). Accordingly, Hungary and, with some
variations, the other Central European countries, achieved export structures similar
to that of developed countries.
Nevertheless, an important point should be stressed. The bulk of the 30% share
of machines and transport equipment of Hungary in 1989 went to the Soviet bloc
countries, and was far from competitive on the developed markets. The present 60%
goes to markets where the products have to withstand global competition. By now,
Hungary and the other Central European countries have managed to acquire that
capacity.
Hungary, both in its EU-internal and EU-external relations is a net agrarian
exporter. In 2009, the Hungarian agrarian export to the EU was €3.5 bn., while its
import was €2.6 bn., amounting to about a surplus of 25%. In 1988, the Hungarian
agrarian export to the EC was 6.8 times more than the import. Due to the negative
impacts of the CAP, the difference fell to twice as much already by 2002. Full
membership brought an improved market access, but the trends remained. The main
reason – the insufficient competitiveness of the Hungarian agriculture – has not
changed. In 2009, in its external agrarian trade to the rest of the world, Hungary
realized close to half a billion surplus in Euros (Table 4.7).
In 1989, about half of the Central European exports was comprised of “sensitive
products”. Their share (iron and steel; chemicals; textiles and footwear; food and
live animals) was the following: Hungary: 58%, Bulgaria: 50%, Czechoslovakia:
45% and Poland: 44%. (Palankai 1997:117)
In 2009, 88% of Hungarian exports included manufactured goods (SITC 6–8),
and was sold on competitive global markets. The share of the same goods was 72%
in the total import. The same proportions for EU commodity exports were 83% and
63%, respectively.
In 1989, Hungary and other Central European countries had no high-tech exports
to the developed markets. The picture has changed drastically. As early as 1999, the
share of high-tech products in the total Hungarian export reached 25%, and by
2006, it further grew to 28%. These proportions, in 2006, were 17% for old
members, while for the new ones it reached 14% (both figures are average). The
proportions were around 15–17% in case of Estonia, the Czech Republic and
Slovakia. The new members, particularly the Central European ones, in these
respects, have shown remarkable catching-up. (European Economy 1/ 2009)
Besides structural changes, catching up in terms of competitiveness was also
marked by the development of productivity (Table 4.8).
The productivity growth between 1998 and 2008 will be measured here in terms
of per capita outputs and by working hours. Due to the rapid growth over the past
10 years, the Central European countries have caught up in terms of per capita
outputs from 40–50% to 60–70% of the EU27 average.
The rise of Slovakia has been particularly spectacular, going from 56% to 79%
of the EU average, and in light of the Slovenian 84%, it marks a convergence even
among the Central European countries. By 2008, Hungary (with 74%) and the
Czech Republic (with 72%) overtook Portugal (71%), while the Portugal per capita
GDP remained above the Central European rate. It is interesting to note the
differences between the Czech and the Hungarian levels of per capita GDP, trade
Table 4.7 Commodity structure of the EU and Hungary in 2009, in %

Product External EU External EU Hungarian export Hungarian
group export (%) import (%) (%) import (%)
SITC 0–9 100 100 100 100
0–1 5.7 6.1 7.2 5.5
2–4 2.5 4.0 2.2 1.7
3 5.2 24.2 2.7 11.1
7 41.5 28.5 60.8 49.8
5–6-8 41.5 34.5 27.0 31.8
9 3.5 2.7 0.1 0.1
Sources: Eurostat (2010), Szél (2010)
SITC:
I. 0–1 Food, drinks and tobacco
II. 2+4 Raw materials
III. 3 Energy
IV. 5–6-8 Chemicals and manufactured goods
V. 7 Machines and transport equipment
VI. 9 Others
and productivity. While the Czech per capita data are one third higher, the level of
Hungarian productivity is higher than the Czech one. The picture is somewhat
tainted by the productivity data expressed in output per working hours, which
indicate the differences in activity rates and in the number of working hours.
4.4.3 Balances of Integration Trade
The balance of integration trade (balancedness) is a qualitative indicator, referring

to the structure, the level of development and the competitiveness of countries. We
do not fully accept the view that trade balances can serve as basic indicators of
competitiveness. Trade balances depend on several other factors, such as structural
shortages (oil crisis), the speculative increase of prices and demand for certain
products or extraordinary developments (drought or catastrophe), but, in the long
run, they do provide a certain indication. First of all, we need to separate trade and
payments; the latter are more influenced by external non-integration factors (such
as changes in international financial markets). For this reason we will concentrate
on trade balances here.
Imbalances are reflections of the asymmetries of trade integration. The balances
for both internal and external trade can be placed under analysis. The balances of
internal trade are one of the basic indicators of development and the state of
regional integration.
In 2009, the EU27s had an aggregate trade deficit of €105 billion. The trade
deficit of the EU with China alone was €141 billion. At the same time, the EU
produced a €45.2 billion surplus with the United States. In 2009, five Core countries
(Belgium, Denmark, Germany, Ireland and Netherlands), and three Central
Table 4.8 Labor productivity in EU between 1998 and 2009

Output per working
Per capita output Per capita output Per capita output hours 2007 EU
Country 1998 EU 27–100 2004 EU 27–100 2008 EU 27–100 15–100
Centre Countries
Belgium 134 132 125 –
Austria 111 112 115 102
Netherlands 111 112 115 121
Luxemburg 165 170 161 166
Germany 112 108 107 112
France 126 121 121 117
Italy 130 112 108 89
Ireland 125 135 134 111
U. K. 109 114 111 –
Scandinavian EU
Denmark 109 109 101 96
Finland 114 112 110 97
Sweden 112 113 112 103
Southern EU
Greece 91 101 102 –
Spain 108 102 105 94
Portugal 68 67 71 55
Cyprus 82 83 86 67
Malta – 90 88 –
Baltics
Latvia 37 46 51 –
Lithuania 41 53 61 47
Estonia 41 57 64 48
Central Europe
Hungary 63 72 74 55
Czech Rep. 60 68 72 55
Poland 51 62 63 44
Slovakia 56 66 79 63
Slovenia 75 82 84 –
East Balkans
Romania – 34 48 31
Bulgaria 27 34 36 31
EU27 100 100 100 89
European countries (Czech Republic, Hungary and Slovakia) had surplus both in
their internal and external trade. At the same time, from the Core, Austria, France,
Italy and UK, plus all the countries of the Southern EU, the Baltics and the Eastern
Balkans produced deficits in their internal and external trade as well. Naturally,
these are the results of several factors, and they go far beyond the countries’
Table 4.9 Trade balances of EU countries in 2009

Trade
Share in Internal External balance
EU Balance of trade Balance of trade with
trade internal balance in external balance in Germany
Country (%) trade €bn GDP % trade €bn GDP % €bn
Belgium 9.2 21.9 6.4 12.8 3.8 8.7
U. K. 6.4 43.7 2.8 93.2 5.9 16.7
France. 9.8 61.7 3.3 53.8 2.9 22.6
Luxemburg 0.6 0.5 1.4 2.6 7.2 1.0
Netherlands 12.6 120.4 21.0 39.2 6.8 38.7
Germany 23.2 70.5 3.0 134.8 6.0
Austria 3.2 9.3 3.4 4.1 1.5 15.8
Ireland 2.3 21.3 13.2 37.8 23.4 2.7
Italy 7.6 2.3 0.2 5.1 0.3 12.5
Scandinavian EU countries
Denmark 2.1 3.9 1.7 7.7 3.4 0.6
Finland 1.1 3.3 1.9 1.4 0.8 2.3
Sweden 2.5 3.5 1.2 8.2 2,.8 5.8
Southern EU
Spain 4.9 19.0 1.8 49.5 4.7 13.7
Greece 0.4 18.6 8.1 28.5 12.3 4.3
Portugal 1.1 15.8 9.4 19.0 11.3 2.2
Malta 0.0 1.1 18.4 1.1 18.4 0.1
Cyprus 0.0 3.5 20.8 4.7 27.9 0.4
Baltic countries
Latvia 0.2 1.6 8.6 1.5 8.1 0.3
Lithuania 0.3 0.2 0.8 1.3 4.9 0.3
Estonia 0.2 1.3 9.5 0.8 5.8 0.4
Central Europe
Hungary 2.1 8.8 9.6 4.0 4.4 1.4a
Slovakia 1.6 4.8 7.6 0.5 0.8 1.0
Czech Rep. 3.1 9.9 7.0 5.7 4.0 3.2
Poland. 3.6 0.7 0.2 8.7 2.8 4.5
Slovenia 0.6 0.5 1.4 0.2 0.6 0.5
Eastern Balkans
Bulgaria 0.3 2.5 7.2 4.9 14.0 0.7
Romania 1.0 6.9 5.8 9.8 8.3 1.3
EU27 100.0 104.8
a
The Hungarian surplus towards Germany was € 3.3 billion in 2002
competitiveness (such as energy dependence, the structural characteristics of pro-

duction and consumption, factors of conjuncture etc.). Germany also experienced a
trade deficit with China, but it was halved between 2007 and 2009 from €19.9 bil-
lion to €9.5 billion.
In internal trade, the largest surplus was produced by the Netherlands (€120 bil-
lion), followed by Germany (€70.5 billion), Belgium (€22 billion), the Czech
Republic (€10 billion), Slovakia (€5 billion), Denmark and Hungary (about €4 bil-
lion). In 2009, Poland reached a minimal surplus of €200 million.
In 2009, France had the largest internal deficit (€62 billion), followed by the UK
(€44 billion), Spain and Greece (€19 billion), Portugal (€16 billion) and Romania
(€7 billion). Most of these countries have been coping with chronic deficits with
integration partners in the last decades.
In 2009, the Netherlands (close to €40 billion) and Belgium (€9 billion) had the
largest trade surplus with Germany, followed by the Czech Republic, Ireland,
Hungary, Slovakia and Slovenia (Table 4.9).
Until 1990, the new Eastern members, as formerly centrally planned economies,
had more or less a balanced trade with the EC. After they opened their economies
and established free trade agreements with the EU, they produced a spectacular
trade expansion with their Western European partners, but this was accompanied
with the accumulation of growing trade deficits. Between 1989 and 1997, Hungar-
ian exports to the EC grew by 5.7 times and imports by 5.4 times: these movements
were twice as larger than the general growth of the country’s trade. However,
between 1990 and 1997, Hungary’s trade deficit with the EC increased from ECU
one billion to about eight billion. Between 1992 and 1997 the aggregate trade
surplus of the EC with the 10 Eastern candidates reached ECU 64 billion (Inotai
1998).
From the early 2000s, these trends have changed. The trade balances of the new
Central European members have improved and have turned to surplus. This has
been mostly due to the large inflow of FDI. Trade surpluses are produced mostly by
companies of the Western partners, as they have re-allocated large capacities
through their investments to the Central European region.
In relative terms (trade balance in % of GDP), the EU members can be grouped
into four categories:
• HS: High surplus countries with more than 3% in GDP;
• LS: Low surplus between 0 and +3%;
• LD: Low deficit between 0 and 3%;
• HD: High deficit countries with more than 3% (Table 4.10).
In terms of both internal and external trade, the high surplus countries are the
Netherlands, Ireland and Belgium (with Germany as a border case); the Central
European countries include Hungary, Slovakia and the Czech Republic.
At the other extreme, the high deficit regions are the Southern EU countries
(except Spain), the Baltic countries (except Lithuania), and the two new members
from the Eastern Balkans.
Table 4.10 Summary of trade balances of EU countries in 2009.

Balance Balance Trade
Share in of Internal trade of External balance
EU trade internal balance in external trade balance with
Country (%) trade GDP % trade in GDP % Germany
Surplus countries
Belgium 9.2 + HS + HS +
Netherlands 12.6 + HS + HS +
Ireland 2.3 + HS + HS +
Germany 23.2 + HS + HS NO
Hungary 2.1 + HS + HS +
Czech R. 3.1 + HS + HS +
Slovakia 1.6 + HS + LS +
Mixed performances
Denmark 2.1 + LS + HS
Poland 3.6 + LS LD
Slovenia 0.6 LD + LS +
Luxemburg 0.6 + LS HD
Finland 1.1 LD + LS
Sweden 2.5 LD + LS
Deficit countries
Italy 7.6 LD LD
Spain 4.9 LD HD
UK 6.4 LD HD
Lithuania 0.3 LD HD
France 9.8 HD LD
Austria 3.2 HD LD
Greece 0.4 HD HD
Portugal 1.1 HD HD
Malta 0.0 HD HD
Cyprus 0.0 HD HD
Latvia 0.2 HD HD
Estonia 0.2 HD HD
Bulgaria 0.3 HD HD
Romania 1.0 HD HD
The Western European Centre, in this respect, shows a contradictory picture. In

fact, according to this parameter, the region should be divided into two groups. One
of these is the North Western Europe group (Germany, Benelux and Ireland) with
chronic surplus positions, while the other one is the South Western Europe group
(France, Italy and the UK), which is basically a low deficit group, but these
countries cope with chronic internal deficit problems.
With regard to trade balances, the Hungarian integration profile is favourable.

Hungary is one of those few countries that had trade surpluses in all of its relations,
including with Germany.
Imbalances can be analyzed in terms of trade structures. Trade balances of
strategic products are particularly important. In this respect, high-tech, energy
and food products should be distinguished.
In general, the EU is a net energy importer. In 2009, its oil import bill was
$225 billion. There are substantial differences, however, between the energy
dependences of member countries. In 2007, the EU27s’ average energy dependence
(energy import in consumption) was 53%. The energy dependence of Belgium,
Cyprus, Ireland, Italy, Malta, Portugal and Spain was between 80–90%, while it
was between only 20–30% for the Czech Republic, Estonia, Poland, Romania and
the UK.
The Hungarian energy dependence is above the EU average (61%), with the
share of gas being particularly high (42%). Only the Netherlands has a higher fig.
(43%), while the EU average is only 24%.
One of the main problems for all the new Eastern members is the extremely
strong dependence on import supply sources, especially on Russian ones. In 2006,
the share of Russian deliveries in EU gas import was around 30%, but it reached
61% for Poland, 70% for the Czech Republic, 75% for Hungary, and practically
100% for Slovakia. (Kemény and Varga 2011).
Hungary has a favorable trade balance in high-tech products and it is a net
agricultural exporter. With regard to the latter, however, Hungary has lost its
previously good position.
4.5 Integration Profile – Factor Market Integration
Factor market integration is important from the point of view of both efficient
allocation of resources and exploitation of gains offered by integration.
Factor market integration is measured with labor and capital movements. Need-
less to say, both flows and stocks need to be examined. The export and import of
capital (Cx and Cm) indicates the dynamics of integration, and their share in GDP at
any given moment is an indicator of the intensity of integration.
Cx/Y 100 and Cm/Y 100.
The relation of capital export and capital import is also important from the
perspective of the level of development and balancedness: Cx/Cm 100.
In any given country, the high level of foreign investments can express a high
intensity of global or regional integration. However, minimal or zero capital export
implies unilateral dependence and asymmetry in the country’s integration. Gener-
ally, these indicators are balanced in highly developed countries, and this balance is
at a high level of intensity in both dimensions.
In the present world economy, the flow of labor is relatively moderate, and
migration is limited by strict legal regulations in most of the countries. This applies
to regional integration as well. The EU is in a unique position, however, as in the

framework of the single market, free movement of labor force is guaranteed.
Accordingly, the flow and stock indicators (that is, the relation of foreign labor or
immigrants to the total labor force or the population) can be calculated. Neverthe-
less, it should be taken into account that a number of factors (such as social,
political and cultural ones; personal ambitions; refugee problems; etc.) influence
these indicators (besides integration processes).
In the EC, until the 1970s, the creation of the common market had contradictory
impacts on the movement of factors. Among the countries, capital movement was
minimal, even though it was based on rapid growth. There was a high demand of
foreign workers, which was supplied mostly from non-member countries. The main
source was Southern Italy and the countries of the Mediterranean region. The
proportion of internal and external flows was one to two thirds. Until the early
1970s, foreign capital mostly came from the US. The “American challenge” meant
the fundamental restructuring of certain industries (automobile or electronics).
After the 1970s, new trends emerged. Following the crisis, the share of foreign
labor diminished, and in the long run, its role became more or less stabilized: no
dramatic changes occurred. By that time, partly under the pressure of the crisis of
reconstruction, Western European firms increasingly exploited the advantages of
the common market, which resulted in their rapid transnationalization. The inflow
of American capital slowed down, and by the end of the 1980s, Europe had become
a net capital exporter to the US (more European capital was invested in the US than
the other way around). From the 1980s, Japan became one of the main investors in
Europe (especially in the automobile or telecommunication industries). The project
of the 1992 Internal Market played an important role in this process, partly due to
fears of protectionism (which eventually proved to be unfounded), and mainly
because this allowed participation in public tenders in strategic industries.
The EU is one of the main foreign investors; the main direction of capital and
transnational relations is trans-Atlantic. Between 50–60% of the European capital
goes to America, and the EU has a similar share of total American investments.
From the 1990s onwards, Japanese investments have reduced in number, and they
also remained unilateral (there is only a limited amount of foreign investment in
Japan). In recent years, emerging countries have played an increasing role, and they
are slowly re-arranging the global landscape of foreign investments.
Developed countries are characterized by a high level of capital relations. While
they receive a substantial amount of foreign investments, they also actively invest
in other countries. Mutual investments are indicators of interdependence and of
maintaining a balance in global integration. Significant proportions of foreign
investment in GDP are indicators of the high intensity of a country’s integration.
There are large differences in this intensity, which is the function of several
factors. Besides the level of development, the size, the structure, the geographic
position of the country, as well cultural-historical characteristics all play an impor-
tant role. In any given moment these factors are influenced by political, social or
security considerations. In the case of the EU, depending on the size and level of
development of the country, the proportion of FDIs in the GDP is around 30–50%;
Table 4.11 Stock of FDI in % to the GDP in 2009, and the relation of stock of exported and
imported capital
Invested capital (stock) in Exported capital in Capital export in
Country GDP (%) GDP (%) import (%)
Germany 24.5 33.5 137
Austria 24.1 22.7 95
Netherlands 70.6 101.1 143
Ireland 68.1 53.6 82
U. K. 44.9 57.2 140
France 35.3 49.1 139
Italy 15.1 19.4 128
Scandinavian EU
Denmark 50 64 128
Finland 30.3 42.7 140
Sweden 49.4 59.8 121
Southern EU
Greece 14.7 8.0 61
Spain. 34.0 39.4 116
Portugal 37.3 25.1 67
New Members
Estonia 72.7 20.7 28
Poland. 34.7 4.5 12.9
Czech Rep. 54.2 3.0 5.5
Hungary. 98.9 40.2 41
Slovakia 60 4 6.6
Slovenia 22.2 11.4 50
Bulgaria 63.2 0.9 1.5
Romania 35.3 0.7 2
EU27 17.7 23.2 131
USA 12.9 17.2 133
Japan 2.3 9.8 470
Sources: Eurostat (2009), OECD (2012)
the EU-average is 20%. In the case of the USA, this intensity indicator is only 17%,
while in the case of Japan it is below 10% (Table 4.11).
When measuring the intensity and level of dependence, we propose using the
same scale as in the case of trade intensities:
Scale of the level of intensity (dependence)
0 10% 30% 50% 70% 100%
I No I Low I Medium I High I Very High I
In terms of capital import, the Netherlands, Estonia and Hungary are all char-
acterized by very high capital integration intensity, with Ireland close behind. In
light of actual Hungarian investment data, the Hungarian share seems a little
overestimated, but it is still close to 70% of the GDP. In order to keep the
comparisons consistent, we will rely on Eurostat data. There is no comparable
EU data for Slovakia in 2009, but the OECD data provide a good indication (the
same applies to Denmark). The Czech Republic and Bulgaria qualify for the high
intensity category, with Sweden and UK close behind. The high Central European
proportions are the result of massive investments in the region, particularly from the
middle of the 1990s onwards. The Dutch data reflect the traditional foreign
investor role.
Greece, Italy, Slovenia and Austria fall into the low intensity group. This
indicator also expresses Greece’s low intensity of integration into the global and
European economy. The lower capital import intensity of Germany should be
related to the size of the country, but in terms of capital export, the country belongs
to the medium intensity category. From this perspective, several countries have
been upgraded.
Most of the developed countries are characterized by net capital export positions
(about 30–40% over import). Besides intensity, these figures also reflect the
balancedness of their integration.
In the past decades, the process was influenced by the EU integration process. In
1998, the Spanish capital export was only 60% of its capital import. In 10 years, this
proportion has doubled, and Spain has become one of the most important investors
in South America. This also gives an indication of the country’s global orientation.
The same process can be observed in the case of Portugal, however, it remained a
net capital importer. From among the old members, Austria, Ireland and Greece are
also net importers. Although Ireland is at a high level of intensity, this intensity is
low in the case of Austria, and in case of Greece intensity is practically absent.
The last decade has witnessed the start of capital exports of the new Eastern
members. The pioneers in this process have been Slovenia, Hungary and Estonia. If
the ca. €15 billion Hungarian investments abroad are compared with the €80 billion
FDI in the country, the former amounts to only about 20%. In case of the other two
countries, these investments have just started, and they are around or below 10% in
relation to the FDI, reflecting the asymmetry of their integration. “The capital
export is closely related to level of development, and in case of expanding economy
the increase of that activity is a necessity. At the same time, there is no rule which
can predict how the level of development and the capital export should be related.
Therefore, in absolute terms, one cannot determine whether Hungary is ahead or
behind ‘normal’. This is influenced by the level of development of geographically
close countries (as they are more attractive as a terrain of potential investment), and
their capital absorption capacity.” (Világgazdaság 2004)
4.6 Transnationalization of the Company Sector
From the 1970s, the start of the capital export of European companies was accom-
panied by their growing transnationalization. From the 1980s, it was strengthened
by rapid integration and the transnationalization of international financial markets.
In this way, the economies of the Core EU countries have become highly
transnationalized, both in terms of their positions in the national economies and
in the global economy. The EU has become one of the main territories of density of
global integration, and the European TNCs play a leading role in this process.
According to estimates, about half of the TNCs have their origins in Europe.
Nevertheless, instead of TNCs, we should rather talk about transnational net-
works, which are combinations of large companies and a number of small- and
medium-sized enterprises (SMEs), covering research and development, production,
financing and various other services. SMEs, in this respect, can be placed into three
different categories. 1) Some are just subsidiaries, daughter companies or direct
suppliers of the larger partners. 2) Some are TNCs in their own right, as they have
high export shares, they export their capital abroad, they build close contractual
relations with foreign partners, and they follow transnational business strategies. A
large number of the SMEs of the core countries follow this pattern. 3) Local SMEs
fall seemingly out of this structure, as they operate on local markets, but they are
dependent on the supply of the TNCs, and most of them face direct competition
(small shops vis-a-vis big supermarket chains). Transnational networks have a
strong transatlantic character; the large European and American TNCs are closely
connected (among others with supply chains or bank backgrounds) and are placed
on each other’s markets. Recently, there has been a multiplication of TNCs of the
emerging countries.
Hungary and the new Eastern EU members, thanks to the high intensity of their
capital integration, are part of this transnationalization process. It is, however,
largely one-sided and asymmetric. This one-sidedness has started to diminish, but
the countries are still at the beginning of this process.
In the last years, several Hungarian (Central European) companies (MOL, OTP
Bank, Trigranit, Matav, Fornetti, etc.) have aspired for transnational positions and
followed transnational strategies. Their expansion, however, is limited mostly to
the neighboring countries.
From the largest 100 Hungarian companies in 2011, based on their export
involvement (i.e., more than 10% of the turnover goes to export) practically
two-thirds qualify for TNC status. Out of the other 36 companies, 19 are foreign-
owned, operating either in the energy (E-On, Shell or GDF Suez) or retail sector
(Tesco, Auchan, Lidl or Metro) and are subsidiaries, fully oriented towards local
markets. The 2011 list was led by MOL; the top ten also included AUDI, GE,
Samsung, Nokia, Philips and TESCO Global. From the first 100 companies there
are only 14 with a more than 33% Hungarian ownership, but most of them are from
the energy, transport and telecommunications sectors, and are typically large, state-
owned companies such as Magyar Posta (mail), Budapesti Gázművek (gas),
Fővárosi Elektromosművek (electricity) or Magyar Államvasútak (railways). Only

four companies are in the manufacturing sector (chemical and pharmaceutical
industries) and there is only one whose profile is real estate. (Heti Világgazdaság
2013) Therefore, the transnational sector in Hungary is dominated by foreign-
owned companies.
The asymmetries are particularly characteristic in transnational networking.
Furthermore, the absence of established “national” based TNCs implies a low
participation of local SMEs in global integration processes. This is particularly
striking in comparison with the core countries. According to a survey of German
companies (Going International), the average German medium-sized company has
business relations with 16 countries, and 72% of those surveyed have business
partners in the new Eastern member countries. (Világgazdaság 2007: 6)
In Hungary and in other CE countries, the reliance of foreign investors on local
suppliers is weak (with some exceptions), and the number of local companies which
aspire for transnational relations is low. In 2007, in Hungary, the share of local
SMEs in export revenues was less than 20%. “Most of the small Hungarian firms,
many of the so-called ‘gazelles’, do not export, while a large number of them are
confronted with a rapid shrinking of their local market due to import competition”
(Papanek 2010: 359) (In the international literature, rapidly expanding firms are
called “gazelles”.) This is even more so in terms of production cooperation and
external capital investments.
The Eastern enlargements had significant impacts on the flow of labor.
(A detailed analysis of this process is beyond our possibilities here.) The main
supplier countries were Poland, Romania and Bulgaria, and also Latvia and Lith-
uania (but the latter two, due to their small size, had no significant impact on the
process). The main receivers were the UK, Germany, Ireland, France and Italy, in
these countries, over a number of years, the net inflow amounted to hundreds of
thousands of people. In the last decade, Hungary was a net receiver country (mostly
from the neighboring countries); the annual inflow reached around 10–20 thousand
people. (Eurostat 2009) The same applied to the Czech Republic (with inflow from
Poland and Slovakia). After 2010, due to the crisis, and thanks to the full dissolution
of labor flow restrictions, new trends have emerged.
4.7 Sub-Regional Connectedness in EU Integration
The strengthening of integration relations has resulted in an increase in the share of

intra-trade among the member countries. The growth of cooperation, however, was
not proportional. The process was characterized by sub-regional concentration,
particularly among the neighboring countries. This can be considered as a general
characteristic of European integration, which was strengthened by the various
enlargements.
So far, the classification that we have used was based on the geographical
position of the countries, but we have implied that the classification is justified
Table 4.12 The relation structure of EU trade in 2009 (Percentage of internal export)a
Western-
Country Europe Germany Central Europeb Scandinavian EU Southern EU
Northwestern core countries
Belgium 84.9 25.8 4.4 (0.6) 3.7 6.2
Netherlands 81.5 33.3 5.6 (0.7) 4.8 6.7
Germany. 66.8 - 14.6 (1.7) 7.1 8.8
Ireland 86.2 11.4 2.2 (0.7) 2.6 8.4
Austria 69.4 43.1 19.9 (2.5) 2.7 4.2
Luxemburg 79.1 23.2 4.5 (0.6) 5.4 6.3
U. K. 64. 7 20.1 4.4 (0.7) 11.6
Southwestern Europe
France 71.5 25.6 5.9 (1.2) 3.7 16.2
Italy 65.1 22.0 10.6 (7.3) 3.4 16.8
U. K. 64.7 20.1 4.4 (0.7) 6.7 11.6
Scandinavian EU
Denmark 53.3 25.9 6.4 (0.8) 22.5 6.3
Finland 47.6 18.6 8.3 (0.8) 21.1 7.1
Sweden 60.8 17.4 6.7 (0.5) 23.6 6.1
Southern periphery
Greece 66.9 21.3 4.4 (4.7) 3.1 10.2
Spain 74.4 16.1 4.9 (0.9) 2.3 15.2
Cyprus 36.7 13.6 2.3 (2.9) 3.1 37.8
Malta 86.0 30.0 3.5 (0.7) 3.2 3.6
Portugal 55.4 17.4 2.8 (0.8) 3.2 35.7
Baltic countries
Estonia 23.6 8.8 3.8 (0.3) 49.6 1.5
Latvia 28.1 12.1 7.5 (0.6) 11.6 2.9
Lithuania 43.9 15.1 13.6 (3.0) 18.0 15.1
Central Europe
Hungary 66.0 32.3 16.5 (7.8) 2.8 5.8
Czech Rep. 69.3 38.3 20.7 (4.7) 3.4 3.7
Slovakia 56.4 22.6 33.3 (2.7) 3.2 3.9
Poland 69.5 32.8 14.1 (2.19) 6.7 2.2
Slovenia 73.2 28.0 18.4 (4.2) 2.5 2.7
Eastern Balkans
Bulgaria 53.2 17.4 7.3 (6.0) 1.7 21.0
Romania 60.1 23.6 22.2 (3.2) 1.7 5.6
a
In every case the regional share does not include the given country
b
Central Europe + Eastern Balkans
also on the grounds of the countries’ level of development. Now we will examine
the EU members’ sub-regional connectedness (Table 4.12).
We wish to introduce the notion of “strategic partnership”, which means that the
partner’s share of a country’s or region’s trade is more than 10%. If these
proportions are mutual, then, in spite of certain dependence asymmetries, we can

speak of a relatively balanced interdependence.
In 1989, the proportion of the future associated Eastern partners in the trade of
the EU was only around 2.7–2.8%, which implies that they were only marginal
partners. In parallel to their high individual trade shares and structural weaknesses,
they had a unilateral dependence on EU economy. Following a rapid increase of
trade shares (from one third to two thirds by the early 2000s), this dependence grew
even further, but in the process the EU has also become “dependent” on these
countries, as the share of the ten associated members in EU trade has reached about
11–13%. Consequently, from its originally marginal position, East Central Europe
has become a strategic partner of the EU, which has had an impact on the
enlargement process as well.
Sub-regionally, EU internal trade is highly concentrated. The Western European
EU members, besides the high intensity of their trade, are characterized by a high
level of connectedness (above 60%) as well. In the case of Belgium and Ireland,
about 85–86% of their intra-export goes to the sub-regional partners, but this
proportion is nearly 65% in the case of the UK. About 75% of the intra-trade
takes place among the Western European core countries.
Within the core, Germany is a central and strategic partner (with a more than
10% share in the intra-trade). On average, 23.2% of the EU total trade is provided
by Germany, but the two extremes are Ireland with 11.4% and Austria with 43.1%
of German share. In spite of the high German proportions, the countries of the
region are also strategic partners for Germany, as their share is above 10% in the
export trade of Germany. Consequently, despite German preponderance, the core
countries’ relations are characterized by a high level of balanced interdependence.
Here again, however, we have to recall the distinction between Northwestern and
Southwestern Europe, especially their different positions in terms of trade balances
(Table 4.13).
The other main region which is highly connected with the Western European
core is Central Europe (66–73%). Only Slovakia shows a different picture, but its
lower connectedness can be explained by its special relations with the Czech
Republic. The share of Germany is striking (with about one-third of the total
trade on average, except for Slovakia, where this figure is 23%). It should be
pointed out that the region, with its ca. 15% in German trade, is a strategic partner
for Germany as well. On a similar note, Central Europe counts as a strategic partner
for Austria (20%) and Italy (11%).
With regard to the Southern European EU region, the level of connectedness to
the Western European Core is high in the case of Malta (86%), Spain (74%) and
Greece (67%), but the German connection is lower (Greece: 21%; Spain: 16%).
Connectedness with the Western European Core is on a medium level (between
30–60%) in the case of the Scandinavian EU (48–61%), the Eastern Balkans
(53–60%), Portugal (55%) and Lithuania (44%). The other two Baltic countries
have a low level of connectedness to the Western core (i.e., below 30%), with
Estonia at 24% and Latvia at 28%.
Table 4.13 Sub-regional trade structure of Central Europe in 2009 (Percentage of internal
export)a
West Central East Central New Strategic
Country Europe Europe membersb Total partners
West Central Europe
Germany 19.5 14.6 16.3 35.8 E-C-E
Italy 26.1 10.6 17.9 43.0 E-C-E
Austria 54.5 19.9 24.4 78.9 E-C-E
East Central Europe
Hungary 45.4 16.5 24.3 69.7 DE
Czech R. 49.0 20.7 25.0 74.0 DE, SK
Slovakia 36.4 33.3 36.0 72.4 DE, CZ
Poland 43.8 14.1 16.2 60.0 DE
Slovenia 54.8 18.4 22.6 77.4 DE, IT, FR,
AT.
Croatia 58.7 19.8 21.9 79.6 IT, DE, SL
Eastern Balkans
Bulgaria 38.7 7.3 20.6 59.3 DE, EL, IT
Romania 46.1 22.2 25.5 71.6 DE, IT. FR
EU27
a
In every case the regional share does not include the given country
b
New Eastern Members – Eastern Central Europe and Eastern Balkans
Germany is the first partner for 21 countries. It is a second partner for Cyprus,
Lithuania, Portugal and Spain, and comes only as third for Latvia (12%) and fourth
for Estonia (8.8%).
Between some regions the connectedness is particularly intense. The high level
of connectedness of the new Central European members with the Western
European Core can be further specified. In fact, East Central Europe (which,
since 2013, also includes Croatia) is connected to the West largely through West
Central Europe (Austria, Germany and Italy), and their connectedness is close to
high (44–55%). Slovakia is at a lower level (36%), while Croatia is close to 60%.
On average, the intra-East Central European connectedness is around 20%. Poland
and Hungary are at 14–16%, while the Slovak figure of 33% reflects the intense
Czech and Slovak relations. All in all, the connectedness of Central Europe is very
high (roughly 70–80%; even the Polish level is above 60%).
Hungary is highly connected with the Western European core, with a concen-
tration on Central Europe and Germany (one third of its trade relations are with the
latter). Among its five largest export partners, France, Romania and the UK each
have a ca. 7% share. Hungarian external trade is equally concentrated. One third of
the Hungarian external export goes to Russia, the US and China, while these three
countries give 55% of its external import.
In the North, the interconnectedness of the Scandinavian EU members is

between 21–24%, and they are also each other’s strategic partners. Together with
Western Europe they exchange about 70–85% of their trade, which implies a high
level of connectedness. The North is characterized with a relatively balanced
interdependence.
The intra-trade relations among Baltic countries show a more contradictory
picture; nevertheless, they are important strategic partners for one another (Latvia:
42%, Latvia: 27%, Estonia: 21%). The Northern interconnectedness (relations
between the Scandinavian EU and the Baltics) is high in the case of Estonia
(70%) and Latvia (60%), while it is only 40% for Lithuania (the Western
European partners, representing a 30% share, are more important for the latter).
The EU South consists of five countries (Cyprus, Greece, Malta, Portugal and
Spain), and all of them joined EU from the 1980s. Except for some bilateral
relations (Cyprus-Greece or Portugal-Spain) they are very loosely connected with
each other and relations are highly fragmented.
Although connectedness to Western Europe is important for the Southern EU, it
is realized basically through Southwestern Europe (France, Italy and UK). In this
case, the inclusion of the UK in both groups (i.e., the Northwestern and the
Southwestern EU) is justified by several economic, political and historical reasons
(due to the imperial past in the case of Cyprus and Malta).
Connectedness to the West is particularly high in the case of Portugal and Spain
(63–64%), and it is realized mainly through South Western Europe. For Spain, the
main strategic partners are France, Italy, Germany and Portugal. For Portugal, the
main partners are Germany and France besides Spain. Greece’s connectedness to
Southwestern Europe is at a medium level; it is, however, at a low level with the
other countries of the Southern region.
The relations among the other sub-regions are marginal. The main reasons are
the different levels of development, the size of the countries and the geographic
distances. Central Europe has marginal relations with the Baltics, the Balkans or the
Southern EU (and this applies vice versa).
The intensity of interconnectedness can be measured by confronting the shares
of trade and the population. The sub-regions’ share in internal trade and total
population is compared accordingly:
Xia/Xt 100/Pa/Pt 100
(where “a” stands for the country or the region).
The quotient of the two indicates the interconnectedness of the region by
filtering out the differences that arise from the size of the regions. However,
differences arising from the levels of development still remain (Table 4.14).
The data reflect the slightly above average interconnectedness of East-Central
Europe. If we take into account the differences in the levels of development, this
interconnectedness is intensive as compared to Western Europe and Scandinavia.
The low interconnectedness of the Southern EU is particularly striking. This picture
does not change if only the “Latin” countries of the sub-region are considered.
Table 4.14 Intensity of interconnectedness for internal export in the main sub-regions of the EU
in 2009
Share export in total Share of population in total Interconnectedness
Region in % in % quotient
EU 27 s 100 100 1
Western 74.8 60.1 1.25
Europe
Scand. EU 6.0 5.0 1.20
East Cent. E. 10.5 10.3 1.02
Baltic c. 0.7 0.8 0.93
Southern EU 6.6 13.8 0.47
Latin EUa 23.9 36.2 0.66
a
FR, IT, ES, PT
The sub-regional trade relations indicate that distance or geographical closeness

does count. These are further strengthened by traditions, historical ties, or cultural
or linguistic similarities.
Connectedness is colored by several special bilateral relations. Those are based
on geographical or cultural closeness, or historical-political factors (the relations of
successor states of former federations after 1990). These are demonstrated by high
bilateral trade shares, which in some cases can reach 20–35%, as exemplified by the
36.5% share of Greece in the export of EU Cyprus, the 35.1% share of Spain in the
export of Portugal, the 26.3% share of the UK in the export of Ireland, the 26.7%
share of France in the export of Spain or the 15% share of the Czech Republic in the
export of Slovakia. In the Baltic region, there are especially high bilateral connec-
tions between Finland and Estonia (26.3%), Lithuania and Latvia (22.4%) or Latvia
and Estonia (20.1%), all of which have been inherited from the Soviet past.
Similar, but somewhat more moderate sub-regional and partner-country con-
nectedness characterizes the distribution of foreign investments according to the
country of origin (Table 4.15).
One-quarter of the foreign investments in Hungary come from German compa-
nies, and together with Austrian investments they account for more than one-third
of the total. The largest investors in Hungary are from German firms (Audi, Bosch,
Knorr-Bremse, Continental, Siemens, Opel or Mercedes). The first five largest
investors’ proportion is close to two-thirds, but the sub-regional concentration is
more moderate than in the case of trade. The Netherlands, France or the USA also
occupy important positions.
Hungarian investments abroad are similarly concentrated. Hungarian companies
invest mainly in Europe, but there is a strong concentration in neighboring countries
(Slovakia, Croatia or Romania). About one-third of these investments went to the
immediate neighbors. The trend shows substantial fluctuation, which means that the
investments have not reached their critical minimum. Therefore, individual deci-
sions can result in big swings. In every case, Hungary has become a foreign investor
in the past years, acquiring a leading role among the new members. In 2008,
Table 4.15 Distribution of Country of Origin Share

the stock of FDI in Hungary
Germany 24.6
according to the country of
origin (at the end of 2007, Netherlands 14.3
in %) Austria 13.0
France 5.2
USA 4.9
UK 2.6
Belgium 2.4
Italy 1.7
Spain 1.6
Norway 1.5
Switzerland 1.5
Japan 1.3
Russia 1.2
Others 24.2
Total 100.0
Source: Endrődi-Kovács et al. (2011: 3)
Hungary had €6.3 billion investments in the other 26 EU countries (the total
investments amounted to €6.8 billion). Hungarian investments were less than
€100 million in Germany and Austria, while they were over €2.5 billion in Slovakia
and €1 billion in Croatia. (Endrődi-Kovács et al. 2011: 21)
4.8 Integration and Trends of Convergence
According to integration theories, convergence is considered as an important

feature of integration processes. According to these concepts, integration means
the gradual disappearance of differences among the levels of development. The
absence or disappearance of these differences is considered partly as a criterion or
precondition, and partly as the desirable consequence of integration. Convergence
is described as a general political objective or priority in the charters of integration
organizations. In the EU treaties, cohesion and solidarity is a basic political
commitment.
The twentieth century history of Europe was marked by relatively strong con-
vergence processes. Although the process was not even and showed strong fluctu-
ations, the Northern and the Southern peripheries managed to eventually catch up
with the Western European Centre. Before the Second World War, Finland and
Norway were relatively poor countries, and they were on a similar level of devel-
opment as Central Europe. Their catching up was the result of several factors
(Norwegian oil being one of the principal ones); the integration processes also
played an important role. Norway is not an EU member, but thanks to free trade
arrangements and the European Economic Area (Single Market), it enjoys a number
Table 4.16 Per capita GDP Country 1960 1973 1990 2004 2011
of EU countries between 1960
Belgium 113 112 115 121 118
and 2009 (PPP –
EU27¼100%) Finland 111 115 118 116 116
Greece 44 71 88 94 82
Portugal 41 59 62 77 77
Ireland 63 61 74 143 127
Spain 59 77 76 101 99
Hungary 60a – 41 63 66
1990b 2000 2004 2011
Germany 115 119 117 120
Austria 117 131 127 129
Hungary 41 56 63 66
Czech Rep. 61 69 75 80
Slovenia 74c 79 85 84
Slovakia 61 50 57 73
Poland 33 43 46 65
Sources: Economy (2003), Eurostat (2009)
a
Approximation to the European average, as compared to the
developed Western European countries, and not with the then
EEC
b
The new members’ data are for 1992, which was the peak year of
the transformation crisis
c
1995
of benefits of integration processes. The situation in the South was more contra-
dictory. It should be noted, however, that in spite of the convergence of the general
levels, intra-country regional differences might have remained.
The history of the relations of the Eastern periphery to the Western Centre took a
different path. According to historic data, in 1960, the level of development of
Hungary and Spain was about the same, while the Hungarian level was about 50%
higher than that of Portugal or Greece. But for Hungary and in fact, for the whole
Central and Eastern European region, the next 30 years could be described as lost
decades. Following Soviet policies, the period saw the implementation of “peaceful
competition”, during which the Soviet leadership wished to reach the American
level by 1980. The basis of this complacent conceit was the assumed superiority of
“socialism” over capitalism. This, however, was far from reality, and, on the
contrary, from the 1970s onwards emerging globalization brought to light the
total inaptitude of the bureaucratic and closed central planning systems in face of
global challenges. The result was a humiliating defeat and further peripheria-
lization. The differences were further aggravated by the 1989–1993 transformation
crisis. By the 1990s, the proportions turned around, and Portugal and Greece were
50% above the Hungarian average, while Spain almost doubled its lead over
Hungary (Table 4.16).
Following the transformation crisis, from the middle of the 1990s onwards, new
trends have appeared, and it seems that the East has joined the development
processes of other peripheries.
Candidates’ – and later the new EU members’ – economic development was
particularly rapid. On average, these countries produced an about 2% growth
surplus, which would be sufficient for 20–30 years of convergence (depending on
the level of the individual countries). Some countries, in some periods, achieved a
spectacular growth performance (such as the 10% growth of the Baltic countries in
the early 2000s), which accelerated their convergence. As the post-2009 crisis hit
most of the new members seriously, the process of convergence was broken. This
warns us to be cautious about long-term expectations.
The convergence of new members was more marked concerning the economic
structures. Structural changes started and were provoked by the transformation
crisis, and they quickly approached the structural patterns of developed EU
countries.
In Hungary, between 1989 and 2001, the share of agriculture in the GDP fell
from 16% to 4%, while the share of services grew from 42% to 67.5%, which can be
considered as a remarkable convergence to EU averages. Similar changes happened
with the other new members. In fact, if we look at the 2009 data, certain differences
have remained, but they are not of a qualitative character, particularly as far as the
Core and the Central European members are concerned.
Structural convergences are also reflected in trade structures and the intensity of
relations. Needless to say, averages can cover large qualitative differences. The
fine-tuning of structural convergence takes a longer time.
It is generally accepted that the per capita GDP data in themselves are not
enough, and they can even distort the picture. Lately, several institutions
(or banks) have ventured to produce so-called complex convergence indicators,
which can give a little more appropriate and accurate picture about the state of
convergence. The complex approach implies that instead of the unilateral concen-
tration on per capita GDP, it also takes into account several other indicators
(Table 4.17).
Among others, we can mention the analyses of Deutsche Bank Research, World
Economy (Világgazdaság 2004) and the European Centre of ICEG (International
Centre of Economic Growth). The Deutsche Bank’s so-called convergence network
was based on five groups of indicators with 16 variables (growth dynamics, legal,
institutional and regulatory elements, financial and fiscal indicators, etc). According
to this analysis the 15 old EU members were taken as 100. The first group of
candidates was around 75% (Slovenia: 75.6; Czech Republic: 74.6; Hungary: 73.2
and Estonia: 72), the second group was around 66% (Latvia: 67.7; Slovakia: 67.5;
Lithuania and Poland: 65.2), while the Eastern Balkan countries were a little below
60 (Bulgaria: 58.7; Romania: 57.5%), as compared to the level of the old members.
(Deutsche Bank Research, 2001 data– unfortunately later dates have not been
published) (Palankai et al. 2011).
The results show quite a different picture. In the early 2000s, Hungary reached
only half of the EU15 average in terms of per capita GDP and fell more than 20%
Table 4.17 Structure of gross value added in 2009 (EU27 15%)

Countries I II III IV V VI Deva
EU27s 1.7 17.9 6.3 20.9 29.2 24.0 10.60
Western Europe
Austria 1.5 21.8 7.3 23.5 23.7 22.1 9.69
Belgium 0.7 16.3 5.4 21.7 30.5 25.4 11.62
France 1.7 12.4 6.4 19.0 33.7 26.7 12.20
Germany 1.8 22.2 4.3 17.5 31.1 24.1 11.56
Italy 1.8 18.8 6.3 22.2 28.8 22.1 10.40
Scandinavian Europe
Denmark 1.1 17.4 4.9 19.5 27.4 29.8 11.64
Finland 2.7 21.2 7.0 19.5 25.0 24.7 9.50
Sweden 1.7 19.7 5.4 20.0 25.0 28.2 10.71
Central Europe
Czech Republic 2.2 30.3 7.4 24.2 18.3 17.5 10.40
Poland 3.6 23.0 7.5 27.1 20.2 18.6 9.16
Hungary 3.0 24.9 4.8 21.2 23.6 22.5 9.98
Slovakia 2.6 25.5 8.8 24.3 21.9 16.9 9.20
Slovenia 2.4 23.2 7.9 22.0 23.3 21.2 9.12
Eastern Balkans
Bulgaria 5.6 21.4 8.9 25.4 23.0 15.7 8.03
Romania 7,0 26,4 10,9 23,6 16,8 15,4 7,36
Southern Europe
Greece 3,2 13,3 4,6 33,1 20,1 25,7 11,85
Portugal 2,3 16,8 6,1 25,7 23,6 25,5 10,25
Spain 2,6 15,3 10,8 24,6 23,6 23,0 8,78
I, Agriculture, hunting, forestry and fishing
II, Industry
III, Construction
IV, Services (trade, transport, communication
V, Business and financial services
VI, Other services
a
Standard deviation from the EU27 average
behind the Portuguese level. However, according to the complex analysis, it

reached nearly 75% of the EU average, and was in the same category as Portugal.
Naturally, it is hard to find a perfect analysis. What is rather important, is the
trend of convergence, and its continuation in the long run. However, this has
become a little more uncertain after the present crisis.
4.9 Conclusions: Integration Profile of Hungary
The relation of Hungary to the world economy, before 1990, was characterized by a
special duality. As a small country, it had a structurally open economy, and the
share of export or import reached about 40% of the national product. At the same
time, in institutional and economic policy terms, it was a closed economy. The
Soviet-type centrally planned systems, in their external relations, applied very
strong discriminatory and protectionist regulations. After World War II, these
countries were left out of the process of global opening, both in trade (elimination
of discrimination and substantial liberalization in the framework of GATT), and in
financial-monetary relations (IMF – extension of convertibility).
In some regional integrations, substantial liberalization measures were
implemented, and some of them reached the full, or almost full, liberalization of
their trade relations (EC, EFTA etc.). By the 1970s, these laid the foundations for
the emerging process of global and regional integration. The countries of the Soviet
bloc remained out of these processes, even if the CMEA declared the integration
after 1971. But the Soviet model of “socialist integration” was not able to achieve
real integration. On the contrary, it failed to exploit even the minimum advantages
of the international division of labor. This integration failure played an important
role in the collapse of the Soviet system at the end of 1980s.
As a result of the post-1968 reforms, the Hungarian economy got into a special
situation. The reforms were accompanied by cautious and contradictory opening
measures (decentralization of trade decisions to companies or partial and limited
convertibility, possibility for “joint ventures”), but under the circumstances of low
efficiency and competitiveness, they lead to catastrophic consequences. The most
serious consequence was the heavy indebtedness of the country, and Hungary
became one of the most indebted countries of the world (for example, in terms of
per capita debt). Meanwhile, at the end of the 1980s, the reforms accelerated, and
compared to other Soviet bloc countries, Hungary (and Poland) took the lead in
economic and social transformation.
After 1988, the most important elements of transformation were the liberaliza-
tion of foreign investments, the gradual reduction of the elements of discrimination
and protectionism, and the introduction of convertibility. In the space of a few
years, practically by 1992–93, the institutional and policy opening of the Hungarian
economy was implemented, and these structures became similar to those of the
OECD countries. This meant a rapid and radical “negative” integration (liberaliza-
tion) of the country.
Concerning “positive” integration, joining the EU was an organic part of the
transformation strategy. In the process of the “normalization” of relations with the
EC, Hungary signed a Trade and Cooperation Agreement in 1988, which was
followed by full association (Europe Agreement), signed in 1991. The opening
and the integration process was crowned by the Accession Treaty, followed by full
EU membership in 2004. The other countries of the region followed the same path.
More than 90% of Hungarian foreign trade is conducted on a free trade basis.
Hungary is fully exposed to the global competition, and participates practically
fully in the Single Market (it complies with its rules as most of the old members).
Hungary is gradually entering the EMU (by meeting the Maastricht criteria, the
European Semester etc.), but it has not joined the Euro-zone yet.
In the last two decades, Hungary has become highly open, integrating its
economy in global, European, structural and institutional terms. Its economy is
characterized with a very high level of integration, which follows the pattern of
highly developed (small) countries. The process was accompanied with structural
convergence and balanced trade relations (surplus with the EU, including Ger-
many). The productivity of the country has increased rapidly, which among others
(such as relatively lower wage increases) has resulted in an improved competitive-
ness. In the global competitiveness ranking, from among the higher stratum of
developing countries (70-80th place) the country managed to reach a lower group of
developed countries. In the 2011 ranking of IMD, it was in the 47th place, but its
best position was in 2001, when it was ranked 26th. Due to faulty economic policies
after 2001, Hungary has lost its advantage and its development has stopped.
Hungarian modernization was largely based on foreign direct investments,
which increased the dualistic character of the economy. Against the highly com-
petitive foreign TNCs, there is a sector of local SMEs with low or absent compet-
itiveness. The main deficit of structural integration is that competitive export
capacities are largely based on import inputs, while the domestic value-added
contains low innovation and knowledge contents. These disproportions characterize
the supply channels and the trade of components. The transnationalization of the
domestic company sector has just started. There is a relatively high sub-regional
concentration of the country’s integration relations. While the average internal and
external trade proportions for the EU are two-thirds to one-third, in the case of
Hungary this proportion is four-fifths to one-fifth. At the same time, the global
exposition of the economy is also high; small fluctuations at the New York stock
exchange are immediately felt in Budapest. These are the main distortions and
deficiencies, which degrade the quality of integration of the country. Similar
tendencies and patterns (albeit with some divergences) characterize the other
Central European countries.
With its very high intensity of relations and level of connectedness to the
Western European core, the Central European periphery has got cloeser to the
Centre. In fact, it can be claimed that the Core has internalized the Central European
periphery. This has a number of consequences, and its characteristics and problems
would need further analysis. In this perspective, Central Europe has an opportunity
to become an organic component of the Centre, but broad and far-reaching changes
are still required. The patterns of periphery in Central Europe still exist, such as
structural dualities, loss of incomes (high debt service and risk premiums, indicated
losses through transfer prices, etc.), not to mention political and cultural factors. It
is clear that the process assumes adjustments and policies, and a lot depends on
proper national programs. These are largely missing. It must be noted that the
strategic project of Europe 2020 also fails to address the convergence of the
Southern and Eastern peripheries in an appropriate way.
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Chapter 5
The EDB System of Indicators of Eurasian
Integration: Eurasian Integration’s Trends
from 1999 to 2012
Evgeny Vinokurov, Alexander Libman, and Vladimir Pereboyev
5.1 Objectives of the EDB System of Indicators of Eurasian

Integration
For almost two decades, regional cooperation and integration has remained one of
the most pertinent issues of economic policy in the post-Soviet countries.1 There
have been hundreds of initiatives and projects that aimed at deeper bilateral and
regional cooperation and integration. In many cases, these initiatives had
overlapping membership and objectives, or they ceased to exist, or were
re-established by the same actors. Agreements with similar content, such as free
trade areas or customs unions, were signed over and over again by the same
countries. This variety of outcomes needed a comprehensive system to monitor
and assess the current processes of economic, political and social interaction
between countries. The CIS region did not possess any of these comprehensive
studies and measurements. Therefore the assessments normally had to be done on
ad-hoc basis. They were limited in terms of the scope of the type of cross-border
1
Throughout the paper, “post-Soviet space” refers to twelve former Soviet Union republics
(Armenia, Azerbaijan, Belarus, Georgia, Russia, Kazakhstan, Kyrgyz Republic, Tajikistan,
Uzbekistan, Ukraine, Turkmenistan and Moldova). Until recently all these countries belonged to
the Commonwealth of Independent States, the largest regional integration organization of post-
Soviet countries in terms of its membership. Georgia left the CIS in 2009, but is considered as part
of the region in the SIEI. Latvia, Lithuania and Estonia are not included in the post-Soviet space in
the sense the word is used in this article.
E. Vinokurov (*) • V. Pereboyev
Centre for Integration Studies, Eurasian Development Bank, St. Petersburg, Russia
e-mail: Vinokurov_EY@eabr.org
A. Libman
Ludwig Maximilian University of Munich, Munich, Germany

136 E. Vinokurov et al.
interaction covered, and the time span of the analysis. For example, much more
attention is typically given to cross-border trade of post-Soviet countries than to
other aspects of their interaction, such as migration flows or mutual investments.
However, it is questionable whether it is indeed the case that trade should constitute
the area where possible progress of integration across post-Soviet countries should
be observed first (Libman and Vinokurov 2012b).
The deficit became particularly pronounced in recent years, due to the major leap
forward in the development of post-Soviet regionalism associated with the estab-
lishment of the Eurasian Economic Union (EEU) (2015)2 by Belarus, Kazakhstan
and Russia. The EEU is based on the Customs Union (CU) of the Eurasian
Economic Community (EurAsEC)3 (2010) and the Single Economic Space
(2012) of these three countries. The Customs Union, unlike preceding regional
organizations in the post-Soviet space, has a major impact on the regulation of
cross-border trade, both across its members and with third parties (see EDB 2013b;
Astrov et al. 2012; Isakova and Plekhanov 2012; Ushkalova 2012). The EEU is
being endowed with even more ambitious goals. Outside the EEU, there are areas
where post-Soviet countries could potentially exhibit a high level of integration, at
least due to the institutional and infrastructural legacy from the Soviet Union. For
example, the visa-free regime of cross-border movement could be conducive for
integration of labor markets. Available evidence suggests that cross-border migra-
tion flows intensified in the post-Soviet space over the last decade (Golovnin et al.
2013). Common infrastructure and numerous technological complementarities, as
well as cultural similarities such as the role of Russian as lingua franca, could
strengthen interaction across businesses outside the scope of formal integration
organizations created by governments. Increasing cross-border flows of invest-
ments or informal trade communities is an example, and there is some evidence
showing this (Libman and Kheyfets 2011).
The blank space was filled by the large-scale research project initiated and
implemented by the Eurasian Development Bank (EDB)4. The outcome of the
project was the System of Indicators of Eurasian Integration (SIEI). It was com-
pleted at the end of 2009; and was intended to become an instrument to monitor and
2
The Eurasian Economic Union (EEU) is an international organization, formed by the signing of
an agreement between Russia, Kazakhstan and Belarus in Astana on May, 29, 2014, to enter in
force on January 1, 2015. This is the next level of Eurasian economic integration after the Customs
Union (2010) and Single Economic Space (2012). The full text of the Agreement on the Eurasian
Economic Union is available at the website of the Eurasian Economic Commission.
3
EurAsEC as such also includes Kyrgyzstan and Tajikistan, which, as of now, do not participate in
the Customs Union or Single Economic Space. Armenia and Kyrgyzstan are officially in the
process of joining the Eurasian Economic Union, with Armenia likely to join by January 1, 2015
(information as of July 2014).
4
Eurasian Development Bank (EDB) is an intergovernmental development bank committed to the
advancement of integration in the post-Soviet space. The bank was initially established in 2006 by
Russia and Kazakhstan and currently also includes Armenia, Belarus, Kyrgyz Republic and
Tajikistan as its member states.
5 The EDB System of Indicators of Eurasian Integration: Eurasian. . . 137
assess regional integration projects in the post-Soviet space (Vinokurov 2010). In

2014, the second edition of the system of indicators (SIEI II) was published by the
EDB’s Centre for Integration Studies (Vinokurov 2014). Generally, SIEI represents
analysis of long-term integration trends in countries and groups of countries of the
post-Soviet space for the entire period 1999–2012. In parallel, SIEI II pays partic-
ular attention to mid-term integration trends within the period of 2009–2012. This
period is of particular interest because a number of key integration initiatives have
been implemented during it.
The SIEI consists of two blocks of indices corresponding to the main aspects of
regional cooperation. It is built around several sets of indicators. These include: the
integration of trade and labour markets; mutual investments5 and cooperation in the
key functional areas of agriculture, education, and energy; and convergence of the
main characteristics of the post-Soviet economies. The SIEI includes a broad range
of indices that reflect both country-to-country interaction and integration in the
post-Soviet space as a whole and in its sub-regions. It also calculates the general-
ized indices that enable the evaluation of regional integration processes in the post-
Soviet space.
As mentioned below, the data given in this second version of the SIEI show the
dynamics of integration processes in the period 1999–2012. They help determine
the “reference points” for the development of post-Soviet countries after the
collapse of the Soviet Union in the 1990s, and for the key vectors of Eurasian
integration and cooperation in the CIS region in 2000s. In the 1990s post-Soviet
countries still had to cope with the initial disintegration push associated with the
creation of independent states. At the same time they had to deal with economic
recession, which was partly caused by the fragmentation of the Soviet Union. In the
2000s the region entered a period of rapid economic growth, and most countries
managed to complete the initial tasks of state-building that provided the necessary
foundation for regional integration. Our long-term analysis shows that integration
in the post-Soviet space progresses at an uneven pace in its various domains. The
level of integration in the framework of main subregional groups in the CIS space
generally remained virtually unchanged in 2009–2012. This means that the perma-
nent disintegration trend observed over two decades might have been reversed, but
the qualitative breakthrough point has not been reached. Hence, the integration
dynamics of the post-Soviet countries since 2000 are highly relevant in terms of
understanding the regional integration perspectives of the post-Soviet space. Have
they simply followed a downward spiral of disintegration, or managed to reverse
this trend by achieving a new level of interaction? Most important in the analysis of
post-Soviet integration was to determine the potential effect of the existing institu-
tional environment on the dynamics of interaction.
The results of the SIEI, as discussed later, have been used in a number of papers,
extending and modifying the original datasets. Libman and Vinokurov (2012a) look
5
SIEI mutual investment index is based on the data from the permanent EDB “Monitoring of
Mutual Investments of the CIS countries” (EDB Centre for Integration Studies (2012, 2013a)).
at the bilateral integration across post-Soviet countries applying hierarchical cluster

analysis. Libman and Vinokurov (2011) augment the dataset to cover the informal
trade: particularly in Central Asia. They compute similar indicators for integration
between China and some of the Central Asian countries. However, SIEI should be
viewed not only as a theoretical study, but also as an applied policy-making tool. It
should be of interest to: public agencies in CIS countries; regional integration
organizations; academia; and scholars of regional integration around the world.
The comprehensive update of the SIEI is scheduled for 2017; the dataset will be
updated on regular basis. This paper presents the main elements of the SIEI dataset
as published in 2014, in terms of methodology, data sources, and results.
5.2 Conceptual Aspects
Our colleagues provide a comprehensive review of the general literature on

regional integration indicators elsewhere in this volume. There is therefore no
need for us to review it here. We shall merely state that while building the SIEI
there has been extensive use of the best world practices. In particular, we utilized
findings and logic of ARIC (2009) and COMESA (2002), as well as academic work
on measuring regional integration (De Lombaerde and Van Langenhove 2006; De
Lombaerde et al. 2008a, b, 2011; and Osterkamp 2008).
Attempts to monitor the de facto and/or de jure integration process with the help
of a series of indicators were made in various regions and integration grouping.6 As
with monitoring regional integration in general, experiences have been quite
diverse and, so far, their results have been mixed.7 Substantial resources have
been invested in these attempts by both intra- and extra-regional organizations,
but few have been sustained. The EU Internal Market Scoreboard, the ASEAN
Economic Community Scorecard, and the EDB System of Indicators of Eurasian
Integration have succeeded.
It is necessary to clarify the general logic and conceptual framework of the SIEI.
First, the goal of the SIEI is to measure the integration of markets rather than
intergovernmental cooperation. Some indicators focus on quantifying formal coop-
eration across countries (Genna and Feng 2003), or on enforcement of existing
agreements (EU Internal Market Scoreboard). The SIEI looks at the extent of
market integration of individual countries. This is the extent of interdependence
and interplay of their economies, regardless of whether it was caused by intergov-
ernmental cooperation as such, or by the interplay of businesses and migrant
networks. This approach is justified for the post-Soviet space as in 1999–2012, in
the first wave of the SIEI, implementation of the agreements signed by post-Soviet
6
On the de facto and de jure categories in regionalism studies, see e.g. Higgott (1997).
7
For an overview of general (i.e. qualitative and quantitative) monitoring experiences in various
world regions, see De Lombaerdeet al. (2008b).
countries was almost non-existent, with most of post-Soviet integration structures

being purely rhetorical. This changed after the establishment of the CU, which
needed new objectives for integration monitoring in the post-Soviet space (see
Blockmans et al. 2012). The coexistence of numerous partly contradictory agree-
ments makes the task of quantifying their content extremely hard. We should
acknowledge that some papers attempt to study this aspect by using the number
of agreements within the framework of post-Soviet regional organizations signed
by individual countries as a proxy for intergovernmental cooperation (e.g. Malfliet
et al. 2007; Hale 2008; Darden 2009; and Libman and Obydenkova 2013). This
approach also suffers from a number of problems.
Within the general focus on market integration, the SIEI uses two particular
approaches to capture the extent of integration: the magnitude of cross-border trade
and factor flows; and the convergence of key indicators. The preferable approach to
measure market integration is to look at price convergence. Unfortunately, this data
is not available in a systematic fashion for the post-Soviet countries, as it probably
is elsewhere in the world. The first approach to measure market integration is to
look at the magnitude of cross-border transactions relative to the size of the
economy. This is standard in most attempts to quantify economic integration:
here the SIEI uses the simplest possible indicators. The SIEI covers two main
areas of cross-border transactions (trade, mutual investments and labor migration),
as well as several specific markets particularly relevant for post-Soviet integration.
The second approach to measure market integration focuses on the convergence
of key economic indicators of post-Soviet countries. The SIEI investigates how far
individual countries are from each other in terms of a number of variables that
characterize their economies. It also investigates how heterogeneous groups of
post-Soviet countries are; the idea of sigma-convergence by Barro and Sala-i-
Martin (1992) is used here. The reason why the convergence of major indicators
matters is straightforward: heterogeneity of countries in terms of their key eco-
nomic characteristics could constitute an important obstacle for integration. This is
because it makes the alignment of position of each participant very difficult and
consensus-finding costs very high. It should also be acknowledged that the conver-
gence of economic indicators may also be an outcome of common internal trends in
the development of post-Soviet countries. Although it may be an outcome of market
integration leading to synchronization of business cycles (Shin and Wang 2003).
Other indicators, such as the absolute value of GDP per capita and market integra-
tion, can also lead to divergence if one takes the predictions of the new economic
geography into account. This does not diminish its importance as a prerequisite for
regional integration, but makes it less reliable as an indicator of market integration.
Specifically, the interpretation of some of the outcomes of the SIEI for 1999–2008
seems to be more in line with common dynamics of economic transition in post-
Soviet countries than with the consequences of market integration.
Most data for the SIEI is extracted from either official statistics of the post-
Soviet countries, or from the Inter-State Statistical Committee of the CIS for all
measures of cross-border flows. Key macroeconomic indicators are also partly
extracted from data of the IMF, World Bank, Asian Development Bank, UN
Comtrade, Eurasian Economic Commission and the Customs Union. The exception
is the SIEI mutual investment index. It is based on the EDB Centre for Integration
Studies’ ongoing long-term project “Monitoring of Mutual Investments in the CIS”
(EDB 2012, 2013a). This is the largest database in the CIS region of mutual
investments including offshore transactions.
A substantial advantage of the post-Soviet countries is that most of them still
maintain a relatively high quality of public statistics. They are at least superior to
that of most developing countries, though certainly less accurate in many instances.
While statistical systems of post-Soviet countries diverged substantially after the
collapse of the USSR, they are still similar to each other in many aspects. This
facilitates the comparative analysis. The Inter-State Statistical Committee was set
up in February 1992, two months after the establishment of the CIS. Since then it
has accumulated a substantial amount of information that is utilized in the SIEI.
Some data used for the computation of the SIEI should not be considered as entirely
accurate: this applies particularly to cross-border migration, which very often is
informal. The SIEI is characterized by a downward bias in estimating the cross-
border migration. This makes the main findings of the first wave of the SIEI
discussed below even more striking.
5.3 Technical Aspects
In what follows we summarize briefly the key elements for computation of the SIEI
– the System of Indicators of Eurasian Integration. As mentioned, it consists of two
sets of indices which correspond to the main aspects of regional integration (see
Fig. 5.1). The first set measures the integration of markets by looking at two general
indices (trade integration; and mutual investments and labor integration) and three
areas of functional integration (electrical power, education and agriculture). Elec-
trical power is chosen as one of the crucial elements of cross-border infrastructure.
It is where post-Soviet countries often strongly depend on each other, and where
substantial potential for cooperation exists. Education (the cross-border movement
of students) is essential in maintaining social integration of the post-Soviet space.
This includes intensive inter-personal contacts, common language and social net-
works, all of which provide background for economic integration. Agriculture, and
specifically the grain trade, represents a very recent phenomenon in the post-Soviet
space; this is unlike power utilities. Some countries have turned into major grain
exporters in the last decade. The second set of indices includes indicators measuring
the convergence of economic systems. In this case, the subject of evaluation is the
convergence of the countries’ main quantitative development characteristics in four
key areas: macroeconomics (growth dynamics), financial policy, fiscal policy, and
monetary policy. In addition, the first version of the SIEI has been accompanied by
an expert survey evaluating institutional cooperation. This is the performance of
countries in formal integration projects within the post-Soviet space, taking into
account the broad range of goals of the respective structures. The expert survey,
Indicators of regional integration in Convergence of economic systems

trade, mutual investments, labour
migration, electric power, Indicators of regional integration in
agriculture, and education macroeconomics and financial, fiscal and
Assessment of the level and dynamics monetary policy
of the integration of markets Assessment of the level and dynamics of
the convergence of economies
Consolidated index of integration of particular countries with the

CIS-12 region
Consolidated index of integration within the five regions
Fig. 5.1 Composition of SIEI (Source: based on SIEI II data (Vinokurov 2014))
however, is not part of the system of indicators and is not considered when
calculating the aggregate measures of integration. Thus, the core of the SIEI
includes ten indicators: four for economic convergence and six for cross-border
transactions.
Each of these sets is computed in the following way. First, the SIEI includes a set
of measures of integration of country pairs (dyadic indicator). It characterizes the
extent to which two particular post-Soviet countries are interconnected by means of
cross-border trade or migration, or as a result of convergence of their economic
indices. For the indicators of cross border transactions the values are computed as
the size of cross-border flows (e.g. trade, investments, migration, grain trade etc.)
relative to the size of both economies. For power utilities and agriculture the
measure of size of the economies used is GDP. For migration and movement of
students it is the size of the population of both countries. For trade we use a
somewhat more complex procedure. The final index included in the SIEI is the
average of two sub-indices: the first measures the size of trade flows within the
country pair relative to the GDP of these countries; the second measures the size of
trade flows within the country pair relative to the overall foreign trade of both
countries. The second indicator is more compatible with the standard analysis of
trade integration (although we acknowledge that it represents a rather simple
approach to its analysis, as discussed in other papers of this volume). The first
indicator is more compatible to other indicators used in the SIEI. However, both
components are strongly correlated, and using them separately from each other does
not change the results. It should also be noted that the use of GDP or of population
as a basis for comparison may affect the outcomes of analysis; this problem has
been discussed in Libman and Vinokurov (2012a). For economic convergence the
indicators are computed as the Euclidian distance between individual countries in a
space defined by the metrics used for a particular convergence indicator
(e.g. different measures of macroeconomic development or monetary policy). The
dyadic indicators are obtained for all pairs of post-Soviet countries, if the data is
available. In the final report of the SIEI the analysis includes both pairwise
integration indicators for each year and relative change of pairwise indicators over
the period of observation.
The integration of a country and a group of countries (asymmetric indicator)
characterizes the convergence within the post-Soviet region of any of the twelve
post-Soviet states and any of the five large regions. These regions may be of
particular interest from the point of view of practical integration activity, and
each region includes several countries. The reason for using this indicator is
straightforward. Consider, for instance, a case of integration between a very small
and a very large country. Then very often the large country as economic partner is
of crucial importance for the small country, but the small country is by far less
important for the large country. The indicators we have used so far cannot capture
this asymmetric nature of dependence, because the size of trade flows is computed
relatively to the size of both economies. This is a problem of extreme importance
for the post-Soviet space, where countries are characterized by a very strong
economic asymmetry. Thus, another set of indicators is needed. The asymmetric
indicators are computed as follows: for cross-border transactions we compute the
overall size of trade or factor flow between a country and a group of countries, but
compare it only with the country’s economy size or population. For example, while
the dyadic integration index between Russia and Tajikistan would compare the
cross-border trade between these countries (trade flows in both directions) to the
overall GDP of Russia and Tajikistan, the asymmetric indicator compares the trade
between these two countries only to the GDP of Tajikistan. For convergence
indicators the Euclidian distance is computed between a country and the average
for a group of countries.
At this stage it is necessary to notice that the SIEI uses several “groups of
countries” mentioned above for its analysis. This variation is determined by both
a pragmatic need to account for various possible structures of regional integration in
the post-Soviet space and the necessity to analyze the heterogeneity of post-Soviet
countries. Specifically, there are four regional groups considered by the SIEI:
• CIS-12 (post-Soviet countries excluding the Baltics but including Georgia);
• EurAsEC-5 (the five members of EurAsEC: Russia, Kazakhstan, Kyrgyzstan,
Belarus and Tajikistan);
• SES-3 (the three largest EurAsEC countries – Belarus, Kazakhstan, and Russia –
which were moving rapidly towards closer integration at the time when SIEI was
being set up; they had established a full-scale Customs Union by 2011, Single
Economic Space by 2012 and Eurasian Economic Union by 2015); and
• CA-4 (the four Central Asian states participating in integration projects in the
region: Kazakhstan, Kyrgyzstan, Uzbekistan and Tajikistan. Turkmenistan was
excluded as it virtually did not take part in the CIS and Central Asian integration
projects and did not provide any reasonable statistical information on its cross-
border transactions). Thus, for each country the SIEI computes asymmetric
integration indicators with five groups of countries.
Some aspects of integration cannot be mapped onto each other, and connections
between them are not straightforward; therefore, for the purposes of the SIEI, the
Table 5.1 The structure of the SIEI

Integration of markets Economic convergence
Functional
General indices: integration: Macroeconomic
trade, education, conversion, financial
investments and agriculture and policy, fiscal policy, and Consolidated
labor migration energy monetary policy indices
Country to X X X
country
Country to X X X (weighted and Index of a
region non-weighted indices) country’s
integration
with CIS-12
Region X X X Index of inte-
gration of
five regions
Formal
integration
projects
Source: Based on SIEI data
focus is clearly on separate indices rather than their aggregates. However, we have
developed two types of consolidated indices that give a wider picture of regional
integration in the post-Soviet space and include all the nine indices: the consoli-
dated index of a country’s integration with CIS-12, and the consolidated index of a
country’s integration within any of the four regions. The overall structure of the
SIEI is shown in Table 5.1.
The indices of cross-border transactions and economic convergence were cal-
culated for 1999–2008 (where possible as some early data is missing). The evalu-
ation of regional cooperation is provided as at the time of this report. We should
also note that higher values of indicators for cross-border transactions correspond to
higher values of integration; and lower values of convergence indicators correspond
to higher value of convergence (as one could expect given the description of
indicators provided above). For the purpose of aggregated values all indicators
have been re-calculated in a way that a higher value corresponds to a higher level of
integration.
5.4 Results: Unequal Pace of Integration

and Integration Core
In what follows we summarize briefly the main outcomes of the SIEI. To start with,
integration in the post-Soviet space progresses at an uneven pace, both geograph-
ically and structurally. Before 2008, there was a sharp upturn in legal labor
migration and student exchange, whilst integration in the trade, energy and agri-
culture sectors slowed down and the macroeconomic indices of post-Soviet
countries were becoming increasingly divergent. It should be understood, however,

that these negative trends were partially attributable to the rapid pace of growth of
the post-Soviet economies, i.e. an economy’s size grew faster than its ties with other
economies. These positive results for labor migration and student exchange were
partly due to the selected “basis for comparison”: population growth in the region
was apparently slower than GDP growth. At the same time, this situation indirectly
proves that the extensive social integration of post-Soviet countries has been
preserved or has even increased – social integration creates potential catalysts for
integration in other areas. Libman and Vinokurov (2012a) provide a more thorough
discussion of determinants of integration in different areas.
It should be noted that from 2009 until 2012 there was a more recent trend to the
reduction of integration in the area of legal labour migration: the degree of
interrelation of the CIS-12 region in the area of labour migration was reduced to
the 2006 level, which was after a sharp growth that started in 2005 and reached its
peak in 2008. Another trend is an increase in inter-country cooperation in educa-
tion: academic mobility was growing continuously in 2009–2012.
The situation in mutual trade, and trade in electrical power and agricultural
products has stabilized after the 2000–2008 recession; and for 2009–2012 has not
changed drastically. Probably, the constant disintegration trend, which had been
observed for two decades, has ended. Further observations will confirm or disprove
this conclusion. 2009–2012 was still characterized by the divergence, and not the
convergence of the macroeconomic parameters of countries of the post-Soviet
space. There was an increase in the spread of values of indicators of economic
policy of countries. A reduction of convergence levels in monetary, financial and
fiscal policies was also observed.
The consolidated integration index for CIS-12 suggests that the level of integra-
tion has decreased. At the same time, EurAsEC-5 (and especially its core, SES-3)
has become more integrated in the 2000s. Figure 5.2 shows the results of the
calculations for 2002–2008 (i.e. the period for which data is available for all aspects
of integration, except mutual investments). The index varies within a range of 1 to
+1. The scale is calibrated so that the mean value corresponds to zero: accordingly,
countries with a low level of integration have negative indices and highly integrated
countries have positive indices. We can see that there were three main trends by
2008. First, the level of integration within CIS-12 has reduced compared with the
other groups. Second, the level of integration of CA-4 remained unchanged. And,
third, SES-3 and especially EurAsEC-5 demonstrated generally positive dynamics
of regional integration and cooperation. By 2008 SES-3 surpassed all other groups,
and this group became the absolute leader in integration all over the post-Soviet
space, which is attributable to the growth of the SES-3 index. EurAsEC-5 occupied
the lowest position in the rating, although its performance improved considerably.
This seems to be in line with the development of 2010–2012, when the major
breakthrough in terms of regional integration was associated with the EurAsEC-3
countries (see also Vinokurov and Libman 2011 for discussion on the ‘integration
core’).
0.8
0.6
0.4
CIS-12
0.2
EurAsEC-5
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 SES-3
-0.2
CA-4
-0.4
-0.6
-0.8
Fig. 5.2 Consolidated indices of integration of four groups of countries within the post-Soviet
space (2002–2012) (Source: SIEI data)
If we look at the dynamics of integration of four groups of countries within the

post-Soviet space in 2009–2012, we can see some changes. In the CIS-12 there was
a predominantly positive trend of integration. SES-3 and EurAsEC-5 demonstrated
a negative trend of regional economic integration dynamics, which is connected
with the slowing down of the world economy. The generalized index of integration
in CA-4 during 2009–2012 behaved more volatile than within the other regions.
Nevertheless, in recent years there is a trend of integration increase within the CA-4
region. Perhaps it is a temporary effect that should be re-checked in the next version
of SIEI research.
In the same way, if we look at indicators for individual areas of cooperation,
integration of markets in the CIS is characterized by the existence of distinct spatial
clusters. Particularly, the level of integration in the energy, agriculture and educa-
tion sectors is higher in Central Asia than in the rest of the post-Soviet space,
although this difference shrinks over time. In terms of trade, investments and labor
migration, the most intensive interaction normally develops between neighboring
countries. Notably, Russia is not the sole “integration center” in the post-Soviet
space: for example, Kazakhstan has become a desirable destination for many
migrant workers from other countries (Libman and Vinokurov 2011). There is no
indication, however, that spatial clusters have any significance for the convergence
of post-Soviet economies whose dynamics is determined principally by the evolu-
tion of their domestic economic policies.
5.5 Results: Integration Patterns for Individual Countries
If we look at the performance of individual countries in terms of integration,

generally, the leadership in integration ratings belongs to small countries: Kyrgyz-
stan, Armenia and Tajikistan. Integration of these small countries with the post-
Soviet space was on the increase during the last 6 years and in 2012 these two
countries became the leaders in corporative integration with the CIS region. Kyr-
gyzstan is widely involved in trade and labor migration, and benefits considerably
from integration in the education and agriculture sectors. Unlike Tajikistan or
Armenia, Kyrgyzstan does not view Russia as the only principal partner, and
integration with neighboring Kazakhstan is just as beneficial to this country. Like
Tajikistan, Kyrgyzstan is an active member of all key integration groups within the
CIS. Armenia is primarily interested in trade integration, which has progressed
remarkably in recent years. Armenia’s part in formal integration projects is some-
what limited, partly due to the obligations imposed by the WTO. However, its
interest in integration with other post-Soviet countries remains strong. This is
shown by Armenia’s decision in 2013 to join the CU and the Eurasian Economic
Union.
When considering the overall level of integration of each country with all
countries of the post-Soviet space, Kyrgyzstan and Armenia were leaders in 2008
and 2012. Tajikistan had the leading position in 2002 and 2008, and it reduced
significantly its scope of integration with the CIS in 2012. Considering other
countries of the CIS region, Moldova and Ukraine reduced substantially their
integration level in 2008 and 2012 (compared with 2002). Georgia, Azerbaijan
and Ukraine substantially increased the degree of their integration with the CIS in
2009–2012. The consolidated index of integration for larger countries, especially
Russia, is much lower. Again, the reason is the larger economy size which renders
the relative role of economic ties with other post-Soviet countries less important.
Figure 5.3 shows the consolidated indices of integration of individual countries
with CIS-12. The indices are calculated for ten post-Soviet countries for 2008 and
2002 (i.e. the present time, and the first year of observation when data on all of the
ten integration aspects is available). Uzbekistan and Turkmenistan are presented
with data for 2012 to compare the dynamics. The values vary within a range of 1
to +1, with mean value corresponding to zero.
Tajikistan remains the country that was most integrated with the rest of the post-
Soviet space before 2009. This can be explained by the exceptional importance of
trade (primarily with Russia) for Tajikistan, and its active part in labor migration.
Cooperation with other post-Soviet countries in the key sectors of functional
integration, especially electrical power, is still critical to Tajikistan. However in
2012 the level of Tajikistan’s economic ties with the CIS region reduced predom-
inantly due to political reasons. Tajikistan continues to play an active role in most
integration groups in the post-Soviet space. It looks forward to the prospect of
joining the CU, which can happen after Armenia and Kyrgyzstan have joined.
Fig. 5.3 Consolidated 1

indices of integration of
0.8
post-Soviet countries with
CIS-12 (2002, 2008 and 0.6
212) (Source: SIEI data)
0.4
0.2 2002
0 2008
Tajikistan
Belarus
Uzbekistan
Georgia
Armenia
Turkmenistan
Kazakhstan
Azerbaijan
Moldova
Kyrgyzstan
Russia
Ukraine
-0.2 2012
-0.4
-0.6
-0.8
-1
Ukraine and Moldova continue being rated, and in 2012 they became more
integrated with the CIS region. The key spheres are labor migration (for both), and
trade and investments (for Ukraine). Russia is Ukraine’s main trading partner. The
2014 conflict will result in the dynamics of Ukraine’s economic ties with the CIS
region being negative. Ukraine, Azerbaijan, Moldova, Georgia and Uzbekistan are
participants of the GUUAM organization, which has become informal. They have
always taken a restrained stance towards integration projects within the CIS, and
have consented to very limited or nominal participation. For Ukraine, the limit of its
participation has been the free trade zone.
Kazakhstan, Belarus and Russia, which are the “integration core” of the CU and
the Eurasian Economic Union, complete the 2012 rating. These are large economies
with a comparatively diverse structure of foreign trade, in which economic ties with
the post-Soviet space tend to become less important. These are fairly rich countries
– Kazakhstan and Russia are exporters of fossil fuel. It should not be a surprise that
Russia occupies the last place in this rating. It is the largest post-Soviet economy, it
stands on a par with the rest of the post-Soviet space in terms of population size, and
it accounts for about 75% of GDP.
If we look at individual areas of integration and the integration performance of
various countries, it is not possible to identify any unquestionable leaders in all
aspects of integration among country pairs or groups. Moreover, the structure of
mutual links varies greatly across different CIS markets. To some extent, this is
illustrative of the diversity of interests and resources involved in integration in the
CIS. Belarus, Kyrgyzstan, Tajikistan and Turkmenistan became leaders in various
aspects of integration with CIS-12 region. This shows the large interest that Central
Asian countries have in integration processes on the territory of the CIS. However,
it is partly explained by the relatively small GDP volume and population size of
these countries. Georgia, Kyrgyzstan, Tajikistan and Ukraine are leaders in terms of
the absolute increment of integration indices with CIS-12 in 2012 rating. The
Table 5.2 The dynamics of integration of markets in the post-Soviet space

Pairs-leaders Leaders of Leaders of integration
Pairs-leaders (index integration with with CIS-12 (index
Indicator (index level) increment) CIS-12 (index level) increment)
Trade Belarus- Belarus- Belarus Kyrgyzstan
(1999–2012) Ukraine Ukraine
Labour Russia- Russia- Tajikistan Tajikistan
migration Uzbekistan Uzbekistan
(2000–2011)
Electric Belarus- Belarus- Kyrgyzstan Ukraine
power trade Ukraine Ukraine
(2002–2012)
Agriculture Azerbaijan- Georgia- Tajikistan Georgia
(2002–2012) Kazakhstan Kazakhstan
Education Belarus- Belarus- Turkmenistan Turkmenistan
(2000–2011) Turkmenistan Turkmenistan
Source: SIEI data
countries showing the biggest increase in integration levels in 2012 are Armenia,
Kyrgyzstan and Ukraine (see Table 5.2).
The main volumes of trade flows in the post-Soviet space are focused between
the major countries: Russia, Belarus and Ukraine. The maximum trade integration
level in 2012 was observed in pairs Ukraine-Belarus, Russia-Belarus and
Ukraine-Russia. Belarus is the leader of trade integration with CIS-12, EurAsEC-
5 and SES-3 regions. Kyrgyzstan is ranked second in terms of these indicators.
Kyrgyzstan also sees the maximum level of integration in mutual trade with CA-4
region. The highest increment of trade integration indices for 2009–2012 is
observed in the pair Ukraine-Belarus, and the biggest reduction is in the pair
Ukraine-Turkmenistan. Belarus had the largest increase of integration with
CIS-12, EurAsEC-5 and SES-3, and Moldova had the largest reduction. For the
remaining countries values of integration indicators with these regions have not
changed significantly. The leader in terms of increment of integration with CA-4 is
Kyrgyzstan, and the leader in terms of integration reduction is Moldova.
Tajikistan is leading in labor migration indicator concerning CIS-12 and also
with EurAsEC-5 and SES-3. This can be attributed to the large outflow of labor
resources to Russia in relation to the country’s own population. Tajikistan is
followed by Uzbekistan and Moldova. Kyrgyzstan has the largest level of integra-
tion with CA-4. The pair Russia-Uzbekistan account for the maximum level of
integration in labor migration in 2011, the second place is taken by the pair Russia-
Tajikistan, the third by Russia-Ukraine. Notably, the lowest labor migration index
belongs to Belarus, which otherwise demonstrates excellent integration perfor-
mance in the area of cross-border trade. It is important to notice that for
2009–2011 the formal index of labor migration with CIS-12, EurAsEC-5 and
SES-3 regions was reduced for all countries by over 50% on average. This was
mainly by the reduction of the number of legal workers arriving in Russia registered
by the Federal Migration Service. However, it does not mean a reduction of the
overall labor migration to the country as at the same time, according to expert
appraisals, the volume of illegal migration into Russia increased.
The dynamics of trade in electrical power in the post-Soviet space lags far
behind the growth of CIS economies. In most country pairs, this index shrank
during 2002–2008. The only exception was Ukraine whose integration with
EurAsEC-5 and EurAsEC-3 progressed slightly, whereas its integration with
CIS-12 slowed. This process is also driven by trade in electrical power with
Russia. Our analysis shows that Russia is the main electrical power supplier in
absolute terms, and Belarus is the main recipient. The pair Belarus-Ukraine has the
biggest integration index in this area due to Ukraine selling a large power volume to
Belarus. They are followed by the pairs Armenia-Georgia and Kazakhstan-
Kyrgyzstan. Trade between Kazakhstan and Russia is ranked third in absolute
terms, but it is small compared with the GDP of these countries. 2002–2012 is
characterized by a significant reduction of integration indices of electrical power
trade for all pairs of countries and regions with subsequent stabilization in
2009–2012. The reason for this is both a reduction of trade between Central
Asian countries and the outrunning growth of economies of the countries. The
reform of the electricity sector in Russia did not result in a qualitative growth of
cross-border power flows.
The leader in agriculture integration in the post-Soviet space is Kazakhstan. This
is based on data on cross-border trade in cereals. Kazakhstan is present in all three
leading country pairs: Kazakhstan-Azerbaijan, Kazakhstan-Tajikistan and
Kazakhstan-Kyrgyzstan. In this case, integration of neighboring Central Asian
and Caspian states is presumably based on the export of cereals from Kazakhstan.
Kyrgyzstan and Tajikistan are the leaders in trade integration with CIS-12,
EurAsEC-5 and SES-3, which appears to be caused by the large volume of cereals
export in relation to its economic size. The same is the case with Georgia. Russia
has the lowest levels of integration with CIS-12 and other groups; this is due to its
enormous economy and powerful agriculture sector.
With respect to investments, we can conclude that in 2012 the main “donor” of
investments was Russia, and the main recipient was Ukraine. The pair Azerbaijan-
Georgia is characterized by the largest degree of integration due to the low GDP of
both countries. A high level of investment integration may be highlighted in the
pairs Ukraine-Russia, Russia-Kazakhstan and Russia-Belarus with Russia investing
substantial funds in the economy of partner-countries. Leaders of integration with
CIS-12 region are Armenia, Kyrgyzstan and Georgia. The lowest degree of inte-
gration with CIS, EurAsEC-5 and SES-3 is observed in Turkmenistan, which is
almost not involved in the processes of inter-country capital movement. Russia, due
to its large GDP, has low values of integration indicators with these three regions.
The largest integration degree with CA-4 region is seen in Kyrgyzstan and Georgia.
Azerbaijan and Moldova have no investment cooperation with groups of CA-4
countries.
In the area of academic mobility the main recipient of foreign students in CIS-12
countries is Russia, with most students coming from the main “donors” of the
region: Kazakhstan and Belarus. The third most important “donor” of students is
Turkmenistan, with over 20,000 students going to study in Russia, Belarus and
Ukraine according to 2011 data. The academic mobility index is the maximum for
the pair Turkmenistan-Belarus due to the small population of both countries, and
5000 Turkmen students which is a large number in relative terms. Turkmenistan
also has the maximum integration index in education with CIS-12, EurAsEC-5 and
SES-3 followed by Belarus and Kazakhstan. Russia has the lowest integration index
with the regions because it has a larger population. In general, during 2000–2011 all
pair and intra-regional (except for CA-4) integration indices rose progressively. As
a result, the growth of interregional indices was 100 to 140%. There has been an
integration increase in the area of academic mobility in the post-Soviet space.
Unlike the integration of markets, the convergence of post-Soviet economies varies
greatly depending on particular country pairs or country-region pairs. As men-
tioned, convergence is generally not driven by any geographic factors. The key role
belongs to reform strategies selected by particular countries, and macroeconomic
regulation practices that make them become closer. On the whole, we can conclude
that the macroeconomic indices of post-Soviet states were diverging over the last
decade, whereas their monetary policies converged. The main results of our anal-
ysis are summarized in Table 5.3.
To assess economic convergence of individual countries with groups of coun-
tries, we also computed a set of weighted indicators. In this case the SIEI compares
the economic indicators of a particular country with the weighted average of a
country group, and not with the average of a country group, where the weight is
determined by the size of the countries. The logic of this approach is straightfor-
ward. Assume, for example, that a group consists of a set of countries, with some
being relatively large and some relatively small. Then convergence with the largest
countries of this group should matter much more than convergence with smaller
countries in terms of potential for economic integration. In fact, the results without
weighting could be distorted by some very small outliers.
By 2012 the leadership in convergence in CIS-12 belonged to Belarus (fiscal
policy), Armenia (financial policy), Georgia (macroeconomics), and Uzbekistan
(monetary policy). The most integrated pair of countries in 2012 was the pair
Kyrgyzstan-Moldova, and Georgia was the leader of convergence with the CIS
group. Recently the pair Armenia-Uzbekistan has converged, and the leader of
convergence with three groups of countries was Azerbaijan. In terms of macroeco-
nomic convergence, major changes in the level of integration of regions were not
observed for 2009–2012, despite the global economic crisis. The greatest distances
from CIS-12 (in 2009–2012) are demonstrated by Turkmenistan (macroeconom-
ics), Belarus (finance and monetary policies – due to inflation and the drop in the
rate of Belarusian ruble in 2011–2012), and Russia and Moldova (fiscal policy).
Both approaches (weighted and non-weighted indices) have their merits and
demerits. Therefore, economic convergence should be assessed by both methods,
and the results should be treated as complementary.
Table 5.3 The dynamics of convergence of post-Soviet economies (data for non-weighted indices)
Pair-leader Pair-leader Total dynamics of the
(minimum index, (index Leader of convergence with the Leader of integration with convergence index of the CIS
Indicator 2012) reduction) CIS (minimum index, 2012) the CIS (index reduction) region
Macroeconomics Kyrgyzstan – Armenia – Georgia Turkmenistan "
Moldova Turkmenistan
Monetary policy Azerbaijan – Azerbaijan – Uzbekistan Moldova #
Ukraine Moldova
Financial policy Azerbaijan – Armenia – Armenia Armenia "
Armenia Kazakhstan
Fiscal policy Armenia – Armenia – Belarus Russia #
Kazakhstan Russia
Note: increasing the distance (") means lowering the convergence level
Source: SIEI data
5 The EDB System of Indicators of Eurasian Integration: Eurasian. . .
151
5.6 Further Development of the System of Indicators

of Eurasian Integration
In accordance with EDB’s Charter (EDB 2006), its mission is to contribute to

economic growth in member states and to promote trade and economic integration
among them. The Bank serves as a catalyst to facilitate integration processes in its
member states, both in investments and research (EDB Charter, available at www.
eabr.org). It is the Bank’s aim that the SIEI becomes the Bank’s flagship research
project and an integral part of its analytical products dedicated to regional Eurasian
integration.
The Centre for Integration Studies of the EDB intends updating SIEI approxi-
mately every 3–4 years with the next update preliminarily scheduled for 2017 to
capture the impact of the Eurasian Economic Union. It will add data series for
2012–2016, an exciting period for integration watchers. The main issue is whether
the effects of crisis impede or advance integration. As the Belarus-Kazakhstan--
Russia Customs Union, and the Single Economic Space were established in 2010
and 2012 respectively, and the EurAsEC Anti-Crisis Fund (six member states) was
established in 2009, we shall start with the hypothesis that economic crisis
advanced regional integration of countries formerly belonging to a single economy
(a ‘holding-together regionalism’ hypothesis, offered in Libman and Vinokurov
2012b).
The comprehensive SIEI has been prepared based on an elaborate methodology
of regional integration measurement and assessment. We hope that it will be of
interest not only as a scientific product, but also as an applied instrument of foreign
policy fostering positive integration processes in Eurasia.
Annex: Details of Calculation of the SIEI Indicators
Annex A.5.1: Calculation of Indicators of Market Integration
Indicator Pair of countries Country-region Region

Market integration in general
Mutual trade (Share of trade of (Share of trade of the (Share of inter-trade of
countries of the pair in country with countries countries of the region
aggregate foreign trade of the region in aggre- in aggregate foreign
turnover + share of gate foreign trade turn- trade turnover of
trade of countries of over of the country + countries of the region
diad in aggregate share of trade of the + share of inter-trade
GDP of these countries) country with countries of countries of the
*100 / 2 of the region in GDP of region in aggregate
the country) *100 / 2 GDP of countries of
the region) *100 / 2
(continued)

Migration Share of labour Share of labour Share of labour
migrants of each migrants of the country migrants of all coun-
country of the pair working in countries of tries of the region
working in the other the region, in aggregate working in other
country in aggregate population of the countries of the region,
population of these country in aggregate popula-
countries tion of the region
Mutual (Share of direct (Share of mutual direct (Share of mutual direct
investments investments of coun- investments of the investments of coun-
tries of the pair in country and countries tries of the region
aggregate GDP of these of the region in GDP of between themselves in
countries) * 100 the country) * 100 aggregate GDP of
countries of the
region) * 100
Functional cooperation in key markets
Electric power Volume of trade in Volume of trade in Volume of inter-trade
trade electrical power electrical power of the in electrical power of
between countries of country and the region countries of the region
the pair (kWh) divided (kW h) divided into (kWh) divided into
into aggregate GDP of GDP of the country GDP of the region
these countries
Agriculture Volume of trade in Volume of trade in Volume of trade in
cereals between coun- cereals of the country cereals of countries of
tries of the pair (tons) and region (tons) the region between
divided into aggregate divided into GDP of the themselves (tons)
GDP of these countries country divided into GDP of
the region
Education Number of students Number of students Number of students
from countries of the from a country who from countries of the
pair who studied in studied in the region region who studied in
another country of the divided into population other countries of the
pair divided into total of the country region divided into
number of population total population of the
of the pair region
Economic convergence
Macroeconomics Distance between coor- Distance between coor- Mean value of mod-
dinates of countries dinates of the country ules of variation coef-
including GDP value and region including ficients of values of
per capita and GDP GDP value per capita GDP per capita and
growth rate and GDP growth rate. GDP growth rate in the
Coordinate of the region
region correspond to
the mean value of rele-
vant coordinates of all
countries comprising
the region
(continued)

Monetary policy Distance between coor- Distance between coor- Mean value of mod-
dinates of countries dinates of the country ules of variation coef-
including the growth and region, including ficients of the growth
rate of the rate of the growth rate of the rate of the exchange
national currency to rate of national cur- rate of national cur-
USD and average rency to USD and rency to USD and
annual inflation level average annual infla- average annual infla-
tion level. Coordinates tion level in the region
of the region corre-
spond to the mean
value of relevant coor-
dinates of all countries
comprising the region
Financial policy Distance between coor- Distance between coor- Mean value of mod-
dinates of countries, dinates of the country ules of variation coef-
including the average and region, including ficients of the average
deposit rate and aver- the average deposit rate deposit rate and aver-
age loan rate and average loan rate. age loan rate in the
Coordinates of the region
region correspond to
the mean value of rele-
vant coordinates of
countries comprising
the region
Fiscal policy Distance between coor- Distance between coor- Mean value of mod-
dinates of countries, dinates of the country ules of variation coef-
including the share of and region, including ficients of the share of
expenses of consoli- the share of expenses of expenses of consoli-
dated budget in GDP, consolidated budget in dated budget in GDP,
share of foreign debt GDP, share of consoli- share of foreign debt in
in GDP, share of con- dated budget balance in GDP, share of consol-
solidated budget bal- GDP and Frank’s idated budget balance
ance in GDP and index. Coordinates of in GDP and Frank’s
Frank’s index the region correspond index in the region
to the mean value of
relevant coordinates of
all countries compris-
ing the region
Generalized indices
Generalized Mean value of eco- Mean value of eco-
integration index nomic convergence nomic convergence
index *(1) index of indices *(1) and
market integration of indices of market inte-
the country and region gration inside a region
(except for the index of (except for the index
mutual investments) of mutual investments)
Note: The trade integration index is divided by 100 in order to make the presentation of data more
convenient, and to ensure compatibility with the standard “share in foreign trade” indices which
are expressed in percent. All variables are standardized using the standard normal distribution for
comparability
Source: Supplementary Material to Libman and Vinokurov (2012a), Vinokurov (2014)
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Part II
The Americas and the Caribbean
Chapter 6
Measuring Integration Achievement
in the Americas
Gaspare M. Genna
6.1 Introduction
Regional integration in the Americas is almost as old as the European project.

However, it was not until the early 1990s that regionalism in the Americas
progressed. Regional cooperation was part of a development strategy proposed by
the United Nations Economic Commission for Latin America (ECLA or CEPAL in
its Spanish acronym) under the directorship of Raúl Prebisch. ECLA recommended
an integration strategy that promoted greater exchange within the region while
simultaneously limiting exchange with countries outside the regions in order to
reduce a theorized deterioration of their terms of trade (Franko 1999). In addition,
the early regional integration organizations (RIOs), like the Andean pact and the
Central American Common Market, included the coordination of industrialization
policy that protected specific infant industries from completion, both inside and
outside the region. This integration strategy did not produce the sustained results
envisioned by its architects. These failures caused many decision makers at the time
to keep a distance from initiatives that either restarted old regional integration
projects or promoted the development of new partnerships. In the late 1980s and
early 1990s, leaders became open to the idea once again, but with a different
rationale. The Latin American leaders still viewed regional cooperation as a
means to national economic development, but this time it would operate under
the tenets of neoliberalism because of the belief that it would be a more efficient
means towards growth. The RIOs that stagnated during the 1980s and the new
arrangements of the 1990s and beyond adopted these notions.
G.M. Genna (*)

Department of Political Science, The University of Texas at El Paso, El Paso, TX, USA
e-mail: ggenna@utep.edu

160 G.M. Genna
This chapter will describe one method to measure the complex set of regional
integration achievements from their early beginnings. The Integration Achievement
Score (IAS) was first developed by Hufbauer and Schott (1994), but was later
refined and expanded (temporally and geographically) by Genna (2002). The
measure taps the complexity of integration by disaggregating the phenomenon
into its components, assigning values to these components, and then calculating a
final index. By systematically measuring integration, researchers can perform side-
by-side comparisons, especially large N econometric analysis. I will illustrate the
application by assessing the integration achievement in the Americas. Like any
method to measure complex phenomena, the method does have some limitations
which need to be addressed. The paramount of these is the assessment of treaty
implementation and the consistency of the implementation among the member
states of the RIO. Lastly, another issue I will address is the analytical application
of the IAS when one is faced with the problem of multiple RIO memberships.
6.2 The Integration Achievement Score
The IAS offers researchers a way to analyze regionalism by using systematic

methods of measuring economic integration within and across regions. Systematic
methods are desirable because it allows for direct comparisons of RIOs. Otherwise,
we can be left with ad hoc measures which are specific to that region and therefore
do not travel to other regions. Systematic measures that can be applied to any region
around the world also allow researchers to test generalizable hypotheses.1 The
original IAS, as first developed by Hufbauer and Schott (1994), measured integra-
tion using a small number of RIOs for a single year, 1994. I added greater precision
to their method, applied the method to a greater number of regional integration
projects, and expanded the time frame from their inception through 2009.
The IAS is an index comprising six categories that measure the level of regional
integration. Each category is further divided into six levels with values of 0 through
5 along a Guttman scale with larger values translating to higher levels in each
category (see Table 6.1). A Guttman scale measures the progressively higher levels
of intensity of an attribute since one cannot achieve a higher value until one passes
through a lower value (DeVellis 1991). I apply an equal weight to each category.
However, the researcher could wish to differentiate the weights depending on
theoretical need. This is possible since the data is provided in a disaggregated
manner. Each RIO is assessed using their ratified and implemented treaties, pro-
tocols, and other legal instruments that require a change in domestic law in order to
1
Systematic measures that can travel across all regions should not be viewed as a way to
normatively judge (praise or criticize) RIOs. Scientific analysis is not interested in promoting
integration nor is it interested in suppressing it. In other words, assessing regional integration is not
an exercise akin to judging a beauty contest. The aim is to develop techniques to compare apples
with apples so that we have generalizable findings.
6 Measuring Integration Achievement in the Americas 161
Table 6.1 Integration achievement score (coding system)

1. Trade in goods and services
0 ¼ No agreements made to lower tariffs and non-tariff barriers, 1 ¼ Preferential Trade
Agreement, 2 ¼ Partial Free Trade Area, 3 ¼ Full Free Trade Area, 4 ¼ Customs Union, 5 ¼ No
barriers among member countries
2. Degree of capital mobility
0 ¼ No agreements made to promote capital mobility, 1 ¼ Foreign Direct Investment allowed in
limited form, 2 ¼ Capital withdrawal allowed, 3 ¼ Full access for foreign investment and capital
withdrawal, except for national government procurement, 4 ¼ Full capital mobility expect for
large scale merges and acquisitions, 5 ¼ Full capital mobility without restriction
3. Degree of labor mobility
0 ¼ No agreements made to promote labor mobility, 1 ¼ Right of movement granted for select
professions, 2 ¼ Full right of movement, 3 ¼ Transferability of professional qualifications
granted, 4 ¼ Transferability of pensions and other retirement devices, 5 ¼ Full freedom of
movement
4. Level of supranational institution importance
0 ¼ No supranational institutions, 1 ¼ Establishment of nominal institutions, 2 ¼ Information
gathering and advisory role, 3 ¼ Ability for institutions to amend proposals, 4 ¼ Ability for
institutions to veto proposals, 5 ¼ Supranational institutions operate as primary decision node
5. Degree of monetary policy coordination
0 ¼ No monetary policy coordination, 1 ¼ Consultation regarding policy, 2 ¼ Commitment to
maintain parity, 3 ¼ Coordinated interventions, 4 ¼ Regional Central Bank establishment, 5 ¼
Single currency
6. Degree of fiscal policy coordination
0 ¼ No fiscal policy coordination, 1 ¼ Consultation regarding policy, 2 ¼ Commitments
regarding deficit spending and taxation, 3 ¼ Sanctions regarding breaking commitments, 4 ¼
Uniform tax code, 5 ¼ Single budget
fulfill the specific RIO obligations. I verify the implementation of RIO obligations
among member states using information contained in various years of the Europa
World Year Book (EWYB) and cross-referenced with other specialized sources.
The first category is trade in goods and services. This category is the foundation
of regional integration and was for a time the only operational definition (see
Balassa 1961). A RIO could, theoretically, have no provisions for trade so a zero
value is possible, although unlikely. The next value up is allocated if countries
develop a preferential trade agreement. Such an agreement allows for reduced
duties or regulations on trade, but does not eliminate them. A partial free trade
area is in place when some categories of goods and/or services are allowed to flow
without tariffs. A full free trade area is an agreement that allows for free trade on all
categories. A customs union is in place when countries have a uniformed tariff for
goods coming into any RIO member from a non-member. It is possible for customs
union to be in place while having a partial free trade area. In this situation, the RIO
is assigned a 3.5 in this category. The highest value is given when RIO members
remove all barriers (tariff and non-tariff) between each other.
The second category is free movement of capital. Liberalization in this category
refers to direct investment in partner countries with the associated ability to
162 G.M. Genna
withdraw investment. It is important to note that values in this category are due to
formal agreements among the RIO members and due to a country’s unilateral
liberalization of investment flows. At the first level, foreign direct investment
(FDI) allowed in limited form. FDI at this level can be restricted by being tied to
conditions of percent ownership by a citizen, partnerships with domestic firms, or
other methods that would limit the independent exercise of the investment. The next
level occurs when countries agree on a method that will allow for complete
withdrawal of investment without penalties. At the next level foreign investment
is allowed, as well as capital withdrawal, but not in areas involved in national
government procurement. Often these areas are restricted due to national security
concerns, but there are some minor exceptions to this. This next level allows for full
capital mobility except for large scale mergers and acquisitions. This subcategory
does not apply if the national government regulation requires approval for smaller
mergers and acquisitions if the investor is a citizen of a RIO member country but
not for its own citizens. Restrictions on government procurement areas must be
removed for a value of 4 to be assigned. The highest value is given when there is
full capital mobility (both in and out of the country) without restriction.
Following liberalization of capital is labor mobility. The unrestricted ability of
labor to seek higher wages or other employment opportunities in the partner
countries signifies that a single labor market is present. This single labor market
is a strong indicator of an integrated economy because an important factor of
production can be efficiently distributed. Right of movement refers to the automatic
permission of entry for employment given by one member state to a citizen of
another member state. At the first level, this right is granted for select professions,
but at the subsequent levels, it is given to all categories of workers. Having the right
of movement can be restricted by other means. Such restrictions include the
transferability of professional qualifications. Agreements that standardize or at
least recognize university degrees or other professional certifications warrant a
value of three. Individuals could also be constrained from moving if their pensions
or other retirement devices are restricted in some manner. This can include com-
plete or partial forfeiture. The highest value is assigned when countries adopt
agreements for the freedom of movement without the restrictions mentioned.
The next category is that of supranational institutions. The member states’
collective deliberations are at the core of all RIO decision making. However,
many RIOs also have regional institutions that participate in decision making at
varying degrees. At the highest level, supranational institutions are central decision
making actors in various areas. In order to score the maximum value in this
category (that of 5), the supranational institutions need not command all authority
within the RIO. For example in the case of a federal arrangement, the center does
not possess all decision making power. The individual sub-national units do hold
power and sovereignty in many areas. The values in this category assess the degree
of importance in the decision making process. At the first level, a RIO establishes
nominal institutions. These offices, often termed secretariats have no mandate other
than to prepare and perhaps host meetings. At the next level, these secretariats are
mandated to gather information and provide advice to the member states for their
collective decision making. At the next level, RIO institutions begin to have a more
direct inclusion in the decision making process by having the ability to amend
proposals. However, like reports and advice, amendments can be ignored because
the member states can veto the amendment by overriding them with their own vote.
The ability to veto proposals now aligns supranational institutions with their
intergovernmental counterpart. The highest value is assigned to those supranational
institutions that operate as primary decision node. This means that member states
legally cannot, individually or collectively, reverse or block a decision made by a
RIO institution.
The last two categories involve the monetary and fiscal policies of the RIOs. The
category of monetary coordination refers to the progress in the establishment of
common policies that adjust exchange rates among the member countries. At the
first level, member states simply consult with each other regarding policy. Although
consultation is mandatory at this level, commitments are not required. However, the
transparency involved in these consultations can assist in informal coordination of
individual policies. At the next level, member states commit to maintain parity
among their individual currencies. How they will maintain parity is up to the
individual member states. However, if they decide to coordinate interventions in
their currencies in order to maintain parity, then the RIO moves up to the next level
of this category. Next, the RIO members can become more committed to a single
monetary policy by establishing a regional central bank. This bank would oversee
all coordination by providing strategic planning, but also operates as an indepen-
dent data gatherer and monitor of member states’ activities. The highest value is
assigned to RIOs that have a single currency used for all transactions under the
governance of a regional central bank.
The final category is fiscal coordination, which refers to the establishment of
spending criteria for the member states. Integration in this area helps to maintain
stability that can be harmed should some governments develop excessive govern-
ment debt, promote subsides that could harm trade patterns, and/or develop uneven
tax codes. At a minimum, governments can officially consult each other regarding
fiscal policy in order to promote transparency and dialog. Next would be the
establishment of commitments regarding deficit spending and taxation. Commit-
ments would be strengthened at the next level when credible sanctions would be the
norm to address member states that break commitments. The addition of a uniform
tax code would provide a balanced environment for investment. The highest value
is assigned to those RIOs that have a single budget that would finance programs and
other initiatives outside RIO institutional maintenance.
6.3 Application of the IAS in Latin America
In this section, I briefly outline the integration measurement for five RIOs in the
Americas: Andean Community (CAN), Central American Common Market (also
known as the Central American Integration System; SICA), The Caribbean
164 G.M. Genna
Community and Common Market (CARICOM), The Southern Common Market

(MERCOSUR), and the North American Free Trade Agreement (NAFTA). I cannot
provide detailed progress reports on each RIO due to space limitations. Instead this
section highlights only the important actions that would influence the IAS values
for each project.
6.3.1 Andean Community
CAN was established in 1969 by Bolivia, Chile, Colombia, Ecuador, and Peru
through the Cartagena Agreement. Venezuela joined in 1973. Under the original
Cartagena Agreement, these countries were referred to as either the Andean Group
or the Andean Pact. However, since the installation of the 1996 Reform Protocol of
the Cartagena Agreement, the group adopted their current formal name and also
goes by title of the Andean Community.2 The original objectives of CAN were to
create a common market with a harmonization of social and economic policies
(Ocampo and Esguerra 1994). Chile withdrew in 1976 because of the wide diver-
gence of its domestic policies vis-a-vis the other members. Its withdrawal was a
particularly strong blow to integration given the strong complementary nature of
the Chilean economy with Colombia and Venezuela (Ocampo and Esguerra 1994).
Intra-regional political issues also hurt the Andean Group. A series of military
coups in Bolivia between 1978 and 1980 led to a test of members’ resolve to keep
the sub-region democratic. Bolivia’s military government was not recognized by
the other members and it threatened to withdraw in 1980. Similarly, the group did
not recognize President Alberto Fujimori’s suspension of the constitution and
subsequent autocratic rule. This led to the brief suspension of Peru’s membership
in 1992. The suspension was also due to Peru’s incompatible preferences regarding
the new negotiations of the common external tariff (CET). However, it is difficult to
disentangle the two seemingly interrelated reasons. Peru was readmitted in 1994,
but it did not resume full participation until 1997 (Commission Decision 414). One
final political issue was Ecuador’s border dispute with Peru in 1981 that erupted in
to a full border war in 1995 and was not resolved until 1998. Venezuela left in 2006
in part due to ideological disputes with other member governments and in part due
to Venezuela’s desire to join MERCOSUR.
Toward the end of the lost decade, the Andean Group began its efforts to revive
regional integration. One of the first actions was the Quito Modifying Protocol
(1987), which recommitted the members to a CET and began the gradual effort to
rescind Decision 24 (Bulmer-Thomas 1994). In 1988, the members established the
Andean Inter-municipal Bank in order to finance public works (EWYB 2001).
These revival efforts culminated in the 1996 Trujillo and 1997 Sucre reform
2
The Spanish name is Comunidad Andina or CAN.
protocols of the Cartagena Agreement which formally established the new Andean
Community.
The new incarnation of CAN includes a set of ambitious economic and political
objects. This is to include the realization of a CET, a common market (including
labor mobility), a common agricultural policy, a common foreign policy, macro-
economic coordination, and strengthening of regional institutions. Of these objects,
only the CET, the common market, and the strengthening of regional institutions
has seen concrete action; although some steps have been employed for the others.
Commission Decision 535 established a CET on approximately 62% of all imports
into the region.
Decision 563 officially codified the text of the Andean Sub-regional Integration
Agreement (the new Cartagena Agreement of 1997). In doing so it installed
Chapter II of the Agreement which establishes the Andean Integration System
(AIS). The AIS is simply the official institutions that operate as decision-making,
advisory, and administrative bodies. The Andean Presidential Council represents
the highest decision making body of the AIS. It is made up of all the presidents of
the member states and convenes annually. The council has a rotating chair who
holds that position for 1 year. The Commission of the Andean Community consists
of representatives from each member and is the main policy-making body. This
power is shared with the Andean Council of Foreign Ministers and begins as
initiatives from the Presidential Council, the member countries, or the General
Secretariat of the Andean Community. These policies are titled “Decisions,” such
as the one found above. It also has the responsibility to implement and evaluate
policy. The Council of Foreign Ministers is the grouping of national foreign
ministers who meet at least once a year for the purpose to develop common external
policy and to coordinate the process of integration. It meets prior to the Presidential
Council in order to also prepare for common positions and declarations that come
out of that summit. The Council of Ministers also has the power to elect, remove,
and evaluate the Secretary-General of the General Secretariat. The General Secre-
tariat implements all the decisions of the decision making bodies listed above
through functional departments. The Secretary-General is elected for a 5-year
term. The Andean Parliament is a weak deliberative body of the AIS. Currently
the members of the Parliament are representatives from the national congresses
(generally members of committees associated with ANCOM). The representatives
of Colombia, Ecuador, and Peru are now being elected directly and it is expected
that all members will eventually have direct elections in place. It deliberates over
decisions and adopts legislation than puts those decisions in forces. The final
institution is the Andean Community Court of Justice. The Court began operation
in 1984, comprising five judges one from each of the member countries for
renewable 6 year terms. The Presidency of court operates on a one year rotating
basis among the five. It has jurisdiction over legal ruling concerning CAN law and
also operates as an arbiter over disputes. The Courts’ powers have expanded in the
new modification protocol to the founding treaty. This includes new jurisdiction in
labor disputes, and appeals of inaction.
166 G.M. Genna
The CAN IAS for 2009 is 2.17. Given the establishment of a full free trade area
and a customs union, the trade in goods and services score is 4. Individuals and
firms have full access for foreign investment and withdrawal except for areas of
national government procurement. This gives it a capital mobility score of 3. The
labor mobility score is 1 since right of movement is reserved for select professions.
Supranational institutions are important since they have the ability to amend pro-
posals (a score of 3). There is some commitment to maintain currency values among
the members (a score of 2), but no fiscal policy coordination is in place.
Current difficulties may lead to a lowering of CAN’s IAS value. When Colombia
and Peru’s free trade agreement with the Unites States (US) (2006) goes into full
force, it will put into question the CAN customs union. In addition, Colombia and
Peru’s focus is increasingly drawn to the newly formed Pacific Alliance, while
Bolivia is focusing in the other direction with its MERCOSUR application. Lastly,
Ecuador’s economic foreign policy is becoming more in line with Venezuela.
Unless the traditional protectionist bent of the customs union changes, it will be
difficult for some of the member states, especially Peru, to continue to abide by
CAN’s requirements. This would mean a lack of treaty implementation and the
subsequent lowering of CAN’s institutionalized integration.
6.3.2 Central American Common Market (Central American

Integration System)
Central America was at one time united as a federation from independence through
1838 (Bulmer-Thomas 1994). So when we speak of Central American integration,
it would be more appropriate to speak of its re-integration. The effort of
re-integration began in 1951 with the establishment of the Organization of Central
American States (OCAS). On December 13, 1960, with the signing of the General
Treaty of Central American Economic Integration, the member countries
established the Central American Common Market (CACM),3 which was ratified
by all the members by the end of 1963. These agreements represent one of the
earliest cases of regional integration, one nearly as old as the European project.
However, the level of integration attained by the countries of Belize, Costa Rica, El
Salvador, Guatemala, Honduras, Nicaragua and Panama is small. In fact the CACM
functionally ceased to exist by 1969 as a result of conflict among its members.
Successful efforts to restart the project did not begin until the mid-eighties. In 1986,
the new CACM tariff and customs agreement went into effect. The agreement
developed the limited CET, eliminated intra-regional non-tariff barriers, and pro-
moted agricultural trade liberalization. Newer initiatives produced the Protocol of
Tegucigalpa to the agreement establishing the CACM and in doing so inaugurated
3
In Spanish, it is referred to as the Mercado Común Centroamericano.
the Central American Integration System or SICA, using the Spanish acronym.4
SICA formally went into effect in 1993.
The CACM is now a subcomponent of the larger SICA project, although a very
significant portion. The role of SICA is to coordinate the activities of the four
subsystems of integration: political, economic (CACM), social, and environmental.
To these ends, SICA is a network of supranational institutions and intergovern-
mental arrangements that facilitates decision making. The top of the decision
making hierarchy is the summit meetings of the presidents of the member states.
Decisions, accords, protocols, treaties, and initiatives are finalized during these
meetings by consensus. The chair of these meetings is appointed on a rotating basis,
every 6 months. Ideas, however, are first introduced into the system at lower levels
of decision making. One such intergovernmental arrangement that first discusses
ideas is the Council of Ministers. The Council is made-up of the various foreign
affairs ministers of the member states. Other sectoral and intersectoral ministers
gather in separate meetings. Decisions at the Council meetings are made by
consensus, although the majority vote is permissible under certain circumstances.
The Consultative Committee includes representatives from various social organi-
zations, such as business organizations, trade unions, and academic institutions.
The Committee provides input into the process by assisting the Secretary-General
of the SICA General Secretariat. They do not hold veto power in the process. The
General Secretariat was established as a true SICA supranational institution with
the Protocol of Tegucigalpa. Through its divisions, which are headed by the
Secretary-General, it forms the bureaucracy of SICA and coordinates the overall
integration process. The Secretary-General is appointed during the presidential
summits. Other technical and functional secretariats also exist under the General
Secretariat, but are more autonomous than the individual divisions. One specialized
secretariat of importance is the one that oversees the implementation and offers
evaluation of the CACM (namely the SICA). In 1989, a parliament was established
within the framework of the CACM. Each member country receives 22 representa-
tives through direct elections. The Court of Justice includes one magistrate from
each member and is the final authority over disputes related to the integration
system.
SICA’s IAS value for 2009 is 1.17. Given the uneven application and limited
tariff agreements, the trade in goods and services score is 2. FDI is only allowed in
limited form among individuals and firms from the member countries (capital
mobility score is 1). Labor mobility is also limited to a select set of professions
(score of 1). Supranational institutions do play some role, given their information
gathering and advisory roles (score of 2). Monetary policy coordination is limited to
consultation, although there has been some talk of establishing a common currency
(score of 1). There is currently no fiscal policy coordination.
4
SICA stands for the Sistema de la Integraci
on Centroamericana.
168 G.M. Genna
6.3.3 Caribbean Community and Common Market
CARICOM actually represents two integration efforts, the Community and the
Common Market, with a great deal of membership overlap. Like the Central
American case, the origins of CARICOM begin with the collapse of their federa-
tion. The West Indies Federation (WIF) was an initiative of the British government
and began in 1958. The WIF fell apart in 1962 as first Jamaica and Trinidad and
then the other members declared independence from Britain and did not wish to
maintain membership in the WIF. Antigua, Barbados, and Guyana formed the
Caribbean Free Trade Association (CARIFTA) on December 1, 1965, but it did
not go into effect until May 1, 1968 (Boxill 1997). The CARIFTA was delayed so as
to give opportunities to the other states of the Caribbean basin to join. While only
the country of Trinidad and Tobago was among the founding members (along with
the three just mentioned), Dominica, Grenada, St. Kitts-Nevis-Anguilla, Saint
Lucia and St. Vincent became members in July 1968; Jamaica and Montserrat in
August 1968; and British Honduras (Belize) in May 1971.
CARICOM was established in 1973 in the Treaty of Chaguaramas by Barbados,
Jamaica, Guyana and Trinidad & Tobago. The Georgetown Accord introduced
eight others, all British territories, into CARICOM: Antigua, British Honduras
(Belize), Dominica, Grenada, Saint Lucia, Montserrat, St. Kitts/Nevis/Anguilla
and St. Vincent. All eight territories signed the Accord to become full members
by May 1, 1974. The Bahamas became a member of the Community in 1983 but
never joined the Common Market; Suriname became a member in 1995; Haiti is the
latest member when it joined in 2002.
There are two areas of interest for CARICOM: political and functional aims and
economic integration. The former aims are guided by Community action. This
focuses on coordination of foreign policies and functional cooperation that includes
services that benefit the people, development of greater understanding among the
peoples, and the advancement of social, cultural, and technological development.
Of these, coordination of foreign policies among members is of great importance
because it unites small and mini-states in a coalition vis-a-vis third parties. The idea
is to unite in a regional organization so that members are able to negotiate with one
voice, especially with regard to free trade agreements. In 1997 the members
formalized joint action by establishing the Regional Negotiating Machinery
(RNM) body (EWYB 2001). The RNM consists of the Chief Negotiator, Chief
Coordinator, technical advisory groups, and negotiating working groups. The
negotiating working groups have areas of expertise that comprise of issues dealing
with the members’ association in the Lomé Convention with the European Union
and other EU related negotiations, Western Hemispheric related issues like the
impact of NAFTA, General Agreement on Tariffs and Trade (GATT) rounds and
the World Trade Organization (WTO), and other non-economic related issues in the
Americas.
The second area of interest, regional integration, which is guided by Common
Market action, focuses on trade relations, balanced economic development,
equitable distribution of benefits, and economic coordination. As it stands today, a

common market does not exist among the members, but plans are in place to
develop one although a definite date is elusive. The comprehensive agreement
towards this end was the initiation of the CARICOM Single Market and Economy
(CSME) through Protocol II amending the Treaty of Chaguaramas in 1997. How-
ever some efforts predate Protocol II. All obstacles to intra-regional trade were
removed in 1988, but a 3 year special consideration was given to members of the
OECS (see below) on 17 products (EWYB 2001). A CET has been a difficult aspect
of economic integration to achieve. The CARICOM CET, which has not yet been
fully adopted by all members, was structured to allow capital goods and raw
materials easier access while higher tariff rates would be imposed on consumer
goods and on products deemed adequately supplied regionally (El-Agraa and
Nicholls 1997). One drive to establish a CET came out of the 1984 meeting of
the members’ heads of state. The initial deadline of January 1991 was not achieved
and was pushed back to October of the same year because the LDC members feared
that the CET would promote high inflation (EWYB 2001). This deadline also failed
to produce the CET, as well as the next deadline of February 1992. The LDC may
have had cause to worry given the high level of a 45% duty. As of 1997, only a few
members had fully implemented the CET.
Other efforts to develop a single market include labor mobility. Efforts at
liberalizing the flow of people involve the free movement of skilled labor, which
includes graduates of recognized regional universities, media workers, artists,
musicians, athletes. The member countries have adopted legislation or administra-
tive changes that allow the free flow of these skills as of June 2003. The next phase
includes managerial and entrepreneurial skill holders and dependents. In 1997 the
Agreement on Transference of Social Security Benefits went into effect. Other
efforts in the planning stages are the creation of a Caribbean passport and the
elimination of passport requirements among citizens of CARICOM members.
The primary institutions include the Conference of Heads of Government,
Community Council of Ministers, Ministerial Councils, and the Secretariat. Proto-
col I of the founding Treaty amended the institutional workings of CARICOM in
1997. The following descriptions reflect the changes found in Protocol I. The
Conference is the highest decision making body for CARICOM. It is made up of
the heads of governments of member states,5 who meet annually or more frequently
as needed. They make decisions via consensus and votes are always unanimous.
Planning for the meetings, securing of the implementation of decisions, and pro-
posal initiate is the responsibility of their Bureau. The Community Council of
Ministers is the second highest organ. The Council is made up of ministers who
would be responsible for CARICOM affairs in their home countries. Which min-
ister to include or exclude into the Council depends upon the member states. Their
5
Given that many of the members are also members of the British Commonwealth or are still
territories of Britain, their head of state is the monarch. Therefore, heads of government meet
instead of heads of state.
170 G.M. Genna
main responsibility is to develop strategic planning and coordinate areas of eco-

nomic integration, functional cooperation, and external relations. The Ministerial
Councils assist the work of the Conference and the Council. They are broken down
into functional areas and include the Council of Trade and Economic Development,
the Council of Foreign and Community Relations, the Council for Human and
Social Development, and the Council for Finance and Planning. They formulate the
technical aspects of policy, promote implementation, and supervise cooperation.
The Secretariat is the administrative body of CARICOM. It is a true supranational
institution because individuals are appointed based on their reputation of fairness.
They are not appointed by the member states but are officially hired by the
Secretary-General. The Secretariat is charged with coordinating the meetings of
the other institutions, follow the actions of decisions, carry out research on regional
matters as requested, and provide advice on furthering integration.
Two other CARICOM institutions are important to note. The first is the Assem-
bly of the Caribbean Community Parliamentarians (ACCP). The ACCP is not a
Caribbean Parliament per say, but a conference of MPs from the member states.
The 1989 Conference meeting created the imitative to form the ACCP, which was
formalized by the Agreement to Establish the ACCP that went into force in 1994.
Its first meeting was 1996. Four members from each member’s parliament come
together once a year to discuss the process of integration. This is not a powerful
institution but it can promote integration or criticize its process through the adop-
tion of resolutions. There are currently no initiatives to convert the ACCP into a true
Caribbean Parliament (i.e. direct elections, greater decision making power, etc.).
In 2003, CARICOM inaugurated the Caribbean Court of Justice (CCJ), which
began with the Agreement to Establish the CCJ in 2000. The CCJ is charged with
the interpretation of the founding treaty as well as the subsequent protocols that
amend it. The creation of the CCJ is a centerpiece of the CSME because it allows
any member citizen, state, or CARICOM institution to appeal to the CCJ for a
ruling. By following CCJ decisions, the members have introduced greater certainty
and regularity to the economic component of integration and thereby making it a
more attractive area for FDI.
The IAS for CARICOM is 2.00 for 2009. It has a very high score (4) in the trade
in goods and services component due to its customs union. The degree of capital
mobility is also high (3) given that individuals and firms have full access to invest in
member countries, except in areas for national government procurement. Labor
mobility, however, is limited to selected professions (a score of 1). Supranational
institutions have some importance given their information gathering and advisory
roles (a score of 2). Monetary policy coordination is limited to a commitment to
control currency values (a score of 2) with the aim to create a single currency. There
is currently no fiscal policy coordination.
6.3.4 The Southern Common Market
MERCOSUR6 is a relatively new integration project, but one with old roots and
large implications for the South American integration. The core of MERCOSUR
has been the relationship of Argentina and Brazil which comprise the largest and
among the most developed economies in South America. Argentina and Brazil first
began the efforts towards economic cooperation under the Pinedo Plan (named after
Federico Pinedo, Argentinean Minister of Finance) in 1940, which was also wel-
comed by Osvaldo Aranha, the Brazilian Finance Minister (Bulmer-Thomas 1994).
Early efforts did not produce success due to the instability of democracy and poor
economic growth that produced rival military regimes during the 1970s.
The initial negotiations of MERCOSUR began with Brazil and Argentina. In the
midst of their consolidation efforts, Presidents Alfonsı́n of Argentina and Sarney of
Brazil signed a cooperation agreement in 1986 (Fritsch and Tombini 1994). This
cooperation agreement produced 20 protocols on such things as the elimination of
trade barriers on a common list of products, quotas on wheat exports from Argen-
tina, and energy supply cooperation (Bulmer-Thomas 1994). In November 1988
they singed the Argentina-Brazil Treaty of Integration, Development, and Cooper-
ation, which set a timetable for the elimination of all trade barriers. In July 1990,
both signed the Buenos Aires Act that puts together a commitment to a CET and an
elimination of all inter-regional trade barriers by 1995. Other than the implied
objectives of these actions, the agreements were also part of the respective admin-
istrations’ plans to modernize their economies and curb inflation. The impact of
these agreements sparked fear of trade and investment away from Paraguay and
Uruguay leading to the signing of the Treaty of Asunción in March 1991 and
formally establishing MERCOSUR among the four countries. The objectives of
the founding treaty are the liberalization of intraregional trade, a common external
tariff, harmonization of laws and regulations concerning rules of origin, and the
mutual consultation on macroeconomic policies (Pereira 1999). The original time-
table for the CET was not changed, which was met, but with exceptions: only 80%
of extra-regional imports are covered (Bulmer-Thomas 1994). The goal is to
eliminate all exceptions by 2006 (EWYB 2001). The free trade area also went
into effect in 1995, but only on 85% of intra-regional trade (EWYB 2001). The
liberalization of all intra-regional trade is effectively an open ended goal.
Other South American countries have associate membership in MERCOSUR and
others are in various stages in seeking full membership. Chile, Colombia, Ecuador,
and Peru are currently associate members. Guyana and Suriname are also on course
to become associate members as they await treaty ratification. Associate member-
ship means that states do not have full voting rights and are not members of the
customs union. They do, however, have some access to the full members’ markets
and therefore form a partial free trade area. Recognizing Chile’s geographic
6
MERCOSUR is the Spanish acronym for Mercado Común del Sur. MERCOSUR is also known in
Brazil as MERCOSUL which is the Portuguese acronym for Mercado Comum do Sul.
172 G.M. Genna
advantage7 and dynamic economy, the full members of MERCOSUR toyed with the
idea of extending full voting rights to it. However the idea died when Chile first
negotiated and then signed a free trade agreement with the US. The full members
perceived this action as having “broken ranks”. Bolivia, which has been an associate
member since 1996, is seeking full membership. In 2012, it achieved the status of
acceding member and will become a full member after it implements the common
external tariff. There has been some talk of Ecuador joining, but no definitive action
has been taken. The latest country to fully join is Venezuela, which did so in 2012.
The Brazilian move to devalue its currency in 1999 without consulting the other
members created major economic problems in the region, particularly with Argen-
tina. Coordination was not formally in place and there was no obligation to inform
any partner, let alone consult with them, regarding macroeconomic policy. The
result was retaliatory action by Argentina on Brazilian products, which in turn
prompted Brazilian action on Argentinean products. When the dust settled, the two
agreed informally not to continue their unilateral actions and Brazil agreed to
Argentinean tariffs in order to help its crippled economy.
The formal result of this episode was the agreement in Florianopolis (2000)
which made the first steps towards macroeconomic policy coordination. Targets for
inflation were chosen: no more than 5% in 2002–2005, 4% in 2006, and 3% from
2007 (EWYB 2001). The agreement also included a public debt reduction to 40% of
GDP by 2010 and fiscal deficits to no more than 3% of GDP in 2002 (EWYB 2001).
The data from members would be reported to the Macroeconomic Monitoring
Group, who would also establish harmonized methods of calculating the data. In
addition, the idea of developing a common currency was entertained. The Monetary
Institute for Mercosur was created to look into its feasibility.
MERCOSUR is unique among the integration projects in the Americas in that it has
the power to sign international agreements on behalf of its members. This status as a
legal entity was given to it by the members as a result of the Ouro Preto Protocol (1994)
to the founding treaty. As a result, MERCOSUR has tried to develop an international
presence, with some success. The successes involve the ability to negotiate a free trade
agreement with CAN (2005), Israel (2007), Egypt (2010), and the Palestinian Authority
(2011). It is also undergoing protracted talks with the EU that began in 2000.
The Ouro Preto Protocol also established the MERCOSUL institutions. The
institution with the final say in decision making is the Common Market Council.
At the top of the Council are the members’ presidents and below them are the
ministers of foreign affairs and economy. The Council’s responsible for the polit-
ical direction of the integration process. The meetings of the Council follow the
European model. The presidents meet twice a year (June and December) to discuss
and sign accords based on work of two other MERCOSUR institutions, namely the
Common Market Group and the Trade Commission. Ministerial working groups
meet 2 days prior to the Council summit in order to negotiate agenda items and the
7
Chile borders the Pacific Ocean and therefore gives MERCOSUR a key link to the markets of the
Far East.
final communiqué. The summit ends with the submission of the final communiqué,
which lists the progress and new initiatives for integration, and possibly the signing
of a new protocol to the founding treaty. The ministers also meet during the year in
order to facilitate the integration. They issue decisions that achieve the goals set out
by the treaty and its protocols.
The Common Market Group is the executive body that is responsible for the
implementation of the measures. It performs this task through specialized working
groups8 whose members are made up of representatives of public entities of the
national governments. They meet various times a year and issue resolutions on how
to best implement the decisions of the Council. The Trade Commission is also an
intergovernmental institution chiefly responsible for the monitoring compliance of
the CET. They do this by issuing directives which report on findings. They also
suggest integration initiatives to the Group.
Less powerful but significant institutions were also established by the Ouro Preto
Protocol. The Joint Parliamentary Commission (JPC) is made up of parliamentar-
ians from the member states. The JPC was established in order to coordinate the
actions of the members’ legislatures and add a democratic dimension to the
integration process. Each member country has a parliamentary committee that
votes with MERCOSUR legislation before it is voted on by the full congress. No
act, treaty, protocol, or other related MERCOSUR agreement can be acted upon
unless it is approved by the members’ legislatures using their constitutionally
mandated processes. The members of these individual committees meet as the
JPC to discuss new and old initiatives of integration. They reach decisions by
consensus. While they meet as the JPC, the only power they possess is that of
consultation. Their real power, along with their parliamentary colleagues, therefore
is in voting on MERCOSUR legislation while performing their domestic mandates.
However, this power is latent because the voting record indicates that the individual
MERCOSUR legislative committees almost always indorse legislation and the
members’ legislatures almost always approves. There are two explanations for
the very large percentage of MERCOSUR related legislation approved. First, the
Council and the Group are sensitive to the objections of a member of a country’s
legislature. If there is a considerable obstacle, the Council and the Group will
negotiate so that the legislation passes. This is done informally during the formu-
lation stage. Another reason is that legislators often do not display interest in
international affairs. They are mostly concerned with the narrow interests of their
constituents and will enter the discussion when it involves those interests. Therefore
legislators will approve the decisions of the MERCOSUR committees and any other
committee involved in the legislative process. At the June 2003 presidential sum-
mit, one of the items on the communiqué was the establishment of the true
MERCOSUR parliament that would have legislative power and be directly elected.
8
The working groups are split up into the following areas: communications, mining, technical
regulations, financial matters, transportation and infrastructure, industry, agriculture, energy, labor
relations, employment, and social security.
174 G.M. Genna
In 2006, the member states adopted the MERCOSUR Parliament Constitutive

Protocol. The JPC was replaced by the MERCOSUR Parliament, but the functional
characteristics still remain.
Another important, but not powerful, institution is the Consultative Economic
and Social Forum. This institution was also established to add greater legitimacy to
the integration process by including social actors into the decision making process.
The Forum is made up of representatives from business organizations and labor
unions of the member countries. They meet to review the new actions of integration
and produce statements. Their role is completely advisory. They do not have the
power within the formal process to stop any new initiatives. One can argue that their
position in the national setting may be of greater consequence than at the
MERCOSUR level since they have an established network of political influence
at that level. Therefore, like the JPC, they are more powerful at home operating
under their domestic structures.
MERCOSUR has a Secretariat located in Montevideo, Uruguay. It is a purely
administrative body that supports the work performed by the three main bodies. It is
headed by a director who is chosen by the Council. The work of the Secretariat is
split among three offices, technical consultation, documentation, and administrative
support. The technical consultation office was created by Council decision in 2002
for the purpose of offering guidance on technical matters for the Council, the
Group, and the Commission. The documentation office is charged with overseeing
the implementation of the agreements at the member level and to report on their
implementation to each of the three main institutions. This information, as well as
other developments, is also published by them in official bulletins, which are now
produced four times per year. They are also responsible for the maintenance and
organization of the archive of all MERCOSUR documentation. The administrative
support office is responsible for all the activities related to the financial, adminis-
trative, and human resources of the Secretariat under the supervision of the Direc-
tor. An activity that the Secretariat has not been allowed to conduct is independent
research on the development of regional integration. This may change as the
technical consultation office’s mandate becomes better defined.
MERCOSUR’s IAS is 1.33. Given that the member states created a customs
union, MERCOSUR warrants a score of 4 under the trade in goods and services
component. However, Argentina has often violated the customs union agreement
and therefore questions could arise regarding their ability and commitment to
continue the customs union. Investment among the partners is allowed, but in
limited form (a score of 1). The degree of labor mobility is also low (1) given
that only some professions are granted the right of movement. Supranational
institutions are influential, but this is limited to only information gathering and
advisory roles (a score of 2). Although there is some discussion regarding monetary
policy coordination, no formal agreements have been signed other than the estab-
lishment of a monitoring agency. There are no plans to establish fiscal policy
coordination.
The level of institutionalized integration may stagnate in the coming years as
MERCOSUR’s expands its membership. The inclusion of Venezuela, and the
likelihood of Bolivia’s membership, may increase the heterogeneity of preferences.

A contest could develop between a more liberal orientated Brazil and the more
insular newer states. The newer members’ foreign policies may also harm the bloc’s
ability to negotiate FTAs with third parties. The potential harm that a membership
expansion presents could be mitigated by Brazil’s leadership. If it is capable to
provide the appropriate side-payments, then we may see progress towards greater
integration.
6.3.5 North American Free Trade Agreement
NAFTA represents the newest and least developed integration effort. The economic
ties between the three members, Canada, Mexico, and the US, had been strong
before agreement went into effect. For example, by 1945, 83.5% of all Mexican
exports went to the US, and capital flowed south as labor moved north (Bulmer-
Thomas 1994). However, the arrangement maintains a central role for the US in the
three way relationship given the weaker ties between Canada and Mexico. Also the
linkages among the three, from the outset, were to be purely economic without any
discussion involving deepening the arrangement beyond its free trade character.
NAFTA began as a bilateral free trade agreement between Canada and the US
signed in 1988, went into effect in 1989, and was officially known as the Canada-
USA Free Trade Agreement (CUSFTA). This agreement (as well as NAFTA) was a
major departure from the US preference of exclusively negotiating trade agree-
ments multilaterally through GATT. Canada and the US originally invited Mexico
to participate, but Mexico opted not to participate. The chief US motivation to
include its southern neighbor was to improve overall US-Mexico relations. By
doing so, the US would be able to extend this relationship to other Latin American
countries in a future hemispheric-wide trade deal.
Mexico became a member of the new NAFTA after the accord went into effect
in 1994. Entering into an economic partnership with the US also marked a major
preference shift for Mexico. Having had a large portion of its territory taken from it
by the US as a result of the Mexican-American War, Mexican governments have
had an uneasy relationship with their northern neighbor. However, the new Partido
Revolucionario Institucional leadership’s abandonment of older and ineffective
economic policies for neoliberal thinking shifted the Mexican government’s view
towards its northern neighbor. The great need for capital on Mexico’s part and the
security required by Canadian and US investors prompted a stronger continuation
of the economic liberalization. Efforts begun under the de la Madrid administration
(Lustig 1993). One way that all sides could maintain liberalization in Mexico was
through NAFTA. During the negotiations, Mexico maintained a focus on capital
mobility in the form of direct investment as an imperative part of the final treaty
(Ros 1992).
The agreement was also a change in preference on behalf of Canada, but not one
that was as great as those of Mexico and the US. Instead it was part of a continuing
176 G.M. Genna
shift in preferences starting with the Tokyo Round (1973–1979) of trade talks of the
GATT. During this round Canada began to adopt a liberal trade policy. Also, it was
viewed that the existing US-Canada interdependence needed a legal framework to
improve confidence in the long-term continuation of the partnership (Weintraub
1997). This added greater certainty for capital and would encourage greater FDI
into Canada.
The provisions of NAFTA include only targets for free trade implementation and
dispute settlement. While it does have two side agreements, one for environmental,
the other for labor issues, NAFTA itself does not address notions of political
collaboration. After a 10 year phase out period, all goods and services under the
approved economic sectors are now traded tariff-free. Some economic sectors were
viewed as vital and were not touched by NAFTA. Petroleum in Mexico, culture in
Canada, and airlines and radio communications in the US are sectors that fall under
this provision (EWYB 2001). Recent unilateral legal changes in Mexico, however,
will soon liberalize the petroleum sector.
NAFTA does not have provisions to directly provide public goods such as
resource transfer from the US and Canada to Mexico. It was under the threat of
non-approval that such provisions were left out, including labor mobility (although
capital mobility was included). For example, the creation of North American
Development Bank in order to finance environmental and infrastructure projects
along the Mexico-US border required equal contributions from Mexico and the
US. We can look at the Mexican peso crisis during the 1994–1995 as an indication
of crisis management under NAFTA. In order to stabilize the falling value of the
peso, Mexico was in need of foreign reserves. Although the US Congress opposed
aid to Mexico unless onerous strings were attached, President Clinton used the
Exchange Stabilization Fund, which was under the Treasury Department and did
not require congressional approval, to provide credit to the Mexican central bank. If
a common economic resource was available through NAFTA, then domestic
politics were not to come into play under crisis situations. In its current framework,
special needs of the members will always involve domestic politics.
NAFTA also included a langue that would allow the free flow of goods across
the continent by liberalizing the transportation. According to the agreement, a cargo
truck carrying tariff-free goods from Mexico to Canada or the US should be allowed
to travel across the US. The provision, however, has not be enacted. Today, the
truck stops within a few miles inside the US and the cargo must be transferred onto
a truck that is registered in the US. The inability to enact the provision is due to
differences in Mexican and US trucking regulations that have not been homoge-
nized due to heavy lobbying by the US trucking interests.
Institutionally, NAFTA is weak because the negotiators wished to minimize its
political content. Given the asymmetrical economic power distribution among the
three and the low level of agreement the three have on international issues, the weak
NAFTA institutions safeguard against US domination over political matters. For
example, greater US dominance in a CET would mean dealing with the issue of
Cuba, a country that Canada and Mexico have normal relations with, but the US
does not.
The only two institutions mentioned in the agreement are the Commission and
the Secretariat. Both serve to implement the agreement and to settle disputes
associated with it. The Commission is made up of relevant secretaries and ministers
of the three countries. Under the agreement, the Commission is chiefly responsible
for disputes, but the Secretariat actually performs the tasks of dispute resolution.
However it may be more accurate to refer to it as “Secretariats” because no single
administration exists. Instead the Secretariat is divided into three sections, one for
each country. They do not have an integrated structure9 and are not financed by a
common NAFTA fund. Each country is responsible to maintain their own NAFTA
Secretariat office, in their own countries, using funds allocated from their individual
national budgets. The work conducted in each of these offices is to mirror one
another. This means that each country is individually responsible for administering
the NAFTA provisions.
The chief task of these offices is to administer the dispute settlement found in
Chapters 11, 14, 19, 20 of the agreement. Disputes can arise between private
individuals or firms, but all disputes are handled by the governments of the three
on their behalf. The first attempt to settle a dispute is by intergovernmental
consultation. If it cannot be settled in this manner, then the dispute is given to the
Commission which is then handed off directly to the Advisory Committee on
Private Commercial Disputes. If the Committee cannot resolve the dispute, then a
panel of experts in the relevant field is chosen from a predetermined roster. It is up
to the relevant Secretariat office(s) to administer the dispute through these panels.
This panel now has the final authority to adjudicate the dispute.
NAFTA holds an IAS value of 1.67 for 2009. It is considered a full free trade
area since all non-tariff barriers have been removed. This gives it a score of 3 under
the trade in goods and services category. Full access is provided for foreign
investment and capital withdrawal, except for national government procurement
(a score of 3). Labor mobility is restricted to only a limited set of professions
(a score of 1). Supranational institutions are limited to information gathering
(a score of 2). Monetary policy is at the consultation stage (a score of 1). The
NAFTA partners have not discussed fiscal policy coordination.
Figures 6.1 and 6.2 illustrate the IAS values for the five RIOs. Figure 6.1 plots
the values over time. The RIOs with the longest and steady increases in integration
achievement is CAN and CARICOM. The least integrated, but among the oldest, is
CACM (SICA). Figure 6.2 displays the IAS values and the individual subcompo-
nents for 2009. As one would expect, the trade in goods and services category has
the highest values among the RIOs. Those RIOs with customs unions (CAN,
CARICOM, and MERCOSUR) have the highest values. The second highest value
is the degree of capital mobility category, except for SICA and MERCOSUR. The
degree of labor mobility is identically low in each RIO. Supranational institutional
importance is also low in each of the RIOs except for CAN. CAN is also the
exception for the relatively low levels of monetary policy coordination. Last, none
9
But they do have a single website.
Fig. 6.1 Integration Achievement Score Levels Over Time among Various Latin American RIOs
(1963–2009)
Fig. 6.2 Integration Achievement Score and Subcomponents by Latin American Regional Inte-
gration Organization (2009)
of the RIOs registers any degree of fiscal policy coordination. Overall, the RIOs of
the Americas display low levels of integration achievement with an emphasis on
trade and investment. Labor mobility has not been achieved. The low level of
influence of supranational institutions, the low level of monetary policy coordina-
tion, and the lack of fiscal policy coordination indicates that decision-making
sovereignty is still firmly in the hands of the member states.
6.4 Issues in Measuring Integration in the Americas
Thus far, this chapter has focused on measuring integration using the IAS and the
application of the measurement among the RIOs of the Americas. Next, I will focus
on two problems associated with using the measurement in analyzing regional
integration and their solutions. The first problem is the issue of overlapping
memberships. Although this chapter describes the integration achievement of five
RIOs, the Americas is home to eight integration projects (or more depending on the
definition of regional integration). As Fig. 6.3 shows, many states are members of
more than one RIO. The problem of overlapping memberships arises when the unit
of analysis is the individual country. Given multiple memberships, it would be
difficult to disentangle the spaghetti bowl in order to explain which RIO impacts the
country and to what degree. For example, if we are interested in explaining RIO
impact on the economic performance of Paraguay, it would be difficult to say if
integration due to the MERCOSUR agreements had any more or less of an impact
than say trade with the associate members of MERCOSUR (through the FTA), the
Union of South American Nations (UNASUR), or the Latin American Integration
Association (ALADI). Or if there was an indirect influence coming in from
CARICOM or NAFTA.
One solution is to aggregate the data so that the unit of analysis is not a single
country but pairs of countries (country dyads). This way, one could match the RIO
membership that includes both countries. For example, a Paraguay-Brazil pairing
would include the MERCOSUR value while the Paraguay-Bolivia pairing would
include the IAS value for the MERCOSUR-FTA. The problem persists if the pairs
are members of two or more RIOs. Paraguay and Brazil are members of both
MERCOSUR and UNASUR. Another solution would be to choose the higher
IAS value. In the case of Paraguay, MERCOSUR’s IAS value would be higher
than either UNASUR or ALADI. This solution rests on the assumption that greater
integration achievement translates to a greater impact on the country. One could
conduct robustness checks by swapping out IAS values or possibly including
multiple entries. The overlapping membership problem, however, disappears
when the unit of analysis is the RIO or if one is interested in counting the number
of memberships as the variable of interest.
The second problem involves implementation, and consistency of implementa-
tion, of RIO agreements. Signing and ratifying an agreement does not necessarily
mean that agreements are implemented. When coding agreements, the researcher
180 G.M. Genna
Fig. 6.3 Overlapping Memberships in RIOs of the Americas
needs to pay particular attention to the actual implementation of obligations other-

wise the data will be inconsistent with reality and could perhaps inflate the level of
regional integration achieved by the RIOs. The timing of implementation is also
critical when conducting a time series analysis since the level of integration may not
accurately coincide with the other variables found in the model. Inaccurate coding
associated with the degree of implementation can also inflate the level of integra-
tion. We should also be concerned with consistency of implementation. There is a
possibility that only some of the member states implemented the agreement
(s) meaning that there is inconsistency within the RIO which could inflate the
actual integration achievement. Finally, one would also need to keep an eye out for
defection from agreements over time. The true value of integration should go down
if one or more member states begin to break agreements.
There are two related solutions to the problems of implementation and consis-
tency. The first is constant monitoring of RIO activities using field reports and
experts’ documentation. Field reports are often published by international organi-
zations or found in reputable yearbook entries. The reports often catalog problems
associated with implementation, including the degree of the problems. These
reports can be validated by experts who hold specific knowledge of particular
RIOs. The point is to use multiple sources in order to produce accurate measure-
ments. One can apply a conservative approach and not assume that an agreement
has been implemented (or implemented fully) until it can be validated by two or
more independent sources.
The second solution involves waiting. Since it may take some time before
information can be validated, one can institute a minimum delay period before
using the coded data. For example, the current version of the IAS only includes data
up to 2009 and therefore includes a 5 year delay. In other words, I go back through
5 years’ worth of information (field reports and experts’ documentation) to be sure
that the level of IAS in 2009 is accurate. The use of a 5 year delay is based on
personal experience. Using a longer delay may produce more accurate results but
limit number of cases in the analysis. Using a shorter delay may be less accurate but
increase the number of observations.
6.5 Conclusions
The IAS is a systematic method to measure regional integration anywhere in the

world. The index includes what many scholars view as the critical components of
integration: trade, capital and labor mobility, supranational institutions, and mon-
etary and fiscal policy coordination. The IAS expands the operational definition of
regional integration because it includes more than trade and FDI. The fact that each
RIO is assessed in the same way allows for accurate side-by-side comparisons both
spatially and temporally. The application to RIOs in the Americas demonstrates the
important similarities and differences. The comparisons demonstrate descriptively
different patterns both in absolute terms and with regards to the subcomponents.
Finally, the chapter points out that the measure, like any measurement, is not
perfect. The issue of overlapping memberships, and how to handle them, applies
to all measures. What is unique to the IAS is the issue of implementation and
consistency of implementation because the method of measurement involves cod-
ing actual achievements in the underlying structure of the RIOs. However, if special
care and patience is practiced, researchers can effectively deal with these problems
and produce accurate measurements.
182 G.M. Genna
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(Eds.), Economic integration in the western hemisphere (pp. 81–99). Notre Dame: University
of Notre Dame Press.
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Lustig, N. (1993). NAFTA: Potential impact on Mexico’s economy and beyond. In R. Bouzas &
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and challenges. In R. Roett (Ed.), MERCOSUR: Regional integration, world markets
(pp. 7–23). London: Lynne Rienner Publishers.
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Strategic and International Studies.
Chapter 7
Monitoring Regional Integration in Practice:
Reflections from the EU-CARIFORUM
Economic Partnership Agreement
Bruce Byiers and Quentin de Roquefeuil
7.1 Introduction
With burgeoning regional integration and free-trade arrangements around the

world, a key question is whether or not agreed treaties are being implemented
and if so, with what impact. This is important from a legal compliance point of
view. But it is also key for governments to determine the policies required to
maximize the benefits and minimize the negative effects of liberalizing trade.
This paper presents a case study of the issues faced in monitoring the
EU-CARIFORUM Economic Partnership Agreement (EPA). The CARIFORUM-
EU EPA, signed in 2007, provides a useful example of a trade agreement with
explicit monitoring provisions that were cast as a way of securing the agreement’s
“development friendliness”. Although the EU-CARIFORUM EPA is not a regional
integration process per se, many of the challenges faced are representative of those
faced in other regions, where the complex, often political aspect of monitoring
becomes a major hurdle to its implementation.
This chapter reflects on the monitoring efforts going on in the Caribbean region
at present and the challenges being faced. This is based on a reading of the literature
as well as interviews and analysis for five countries in the Caribbean, namely
Barbados, the Dominican Republic, Grenada, Guyana, and Trinidad and Tobago.
B. Byiers (*)
European Centre for Development Policy Management (ECDPM), Maastricht,
The Netherlands
e-mail: bby@ecdpm.org
Q. de Roquefeuil
European Centre for Development Policy Management (ECDPM), Maastricht,
The Netherlands
Saana Consulting, London, UK

184 B. Byiers and Q. de Roquefeuil
The CARIFORUM group of countries faces a number of difficulties in

establishing an EPA monitoring system. These relate to the practical difficulties
of coordinating among fifteen physically isolated states, the difficulty of
implementing a broad agenda often with limited staffing in small states, the
differences in legal and other institutional setups across many of the countries,
and the underlying ambiguity with regards to the agreement in the first place – the
EPA has never been overwhelmingly endorsed or ratified across the region (nor in
Europe it must be added) even despite the agreement being signed.
We draw the following main lessons. Firstly, the historical and contemporary
political and economic contexts of regional integration are fundamental in deter-
mining the regional integration process. This then has implications for the enthu-
siasm for establishing an effective monitoring system across a region – there may
be nothing to monitor. Secondly, the perceived purpose of the monitoring exercise
is important – while often seen as a constraint or controlling measure by govern-
ments and bureaucrats, monitoring might be used as a useful policy tool to inform
government, whether for or against the regional integration agenda being discussed.
Thirdly, particularly in regions with countries of very different sizes, income levels
and capacity constraints, any effective monitoring system must have enough flex-
ibility for countries to advance at different speeds, but enough in common for
comparability and aggregation across the region. It is important that such a mon-
itoring system starts out with modest ambitions.
In terms of proposing a monitoring system for the EU-CARIFORUM EPA, this
chapter reaches the following conclusions:
• The EPA monitoring requirements are usefully divided into four dimensions:
objectives, scope, actors & institutions, and methodology.
• Before defining what to monitor, it is important to agree on the objectives of the
policy that requires monitoring and therefore the purpose of the monitoring
exercise or system. This might feed into broader policy objectives relating to
development outcomes and economic and trade policy, but is a decision that
must be taken by stakeholders.
• The scope and focus of the monitoring must also be addressed early on, keeping
in mind that the monitoring of compliance with the agreement (on both sides),
and the monitoring of the outcomes or impacts are very different exercises.
Monitoring the use, and therefore the capacity of the private sector to use the
provisions of the agreement is also a dimension that policy-makers find relevant.
• There needs to be an early discussion of whom, in terms of institutions and
actors, will contribute to monitoring and to establishing a monitoring system,
and how these actors will interact. Across a region of 15 countries with a variety
of regional and national bodies there are clear tradeoffs to be made. Further,
monitoring must be credible, requiring some degree of independence.
• There is a range of possible methodological approaches to monitoring. These
depend on the responses to the issues raised above, as well as available data and
capacity for analysis. Potential approaches include a “Result-chain approach”
where for specific sectors one maps out the direct and indirect potential effects of
7 Monitoring Regional Integration in Practice: Reflections from the EU. . . 185
an EPA policy change, with indicators defined for each stage of the chain. Other
options range from a more descriptive and less complex approach focusing on
compliance, to more costly, analysis-intensive and in-depth impact evaluation
implement. Ideally the system should build on existing structures, linkages,
information and data-sharing systems and link to where there is an existing
demand and interest for such information.
7.2 Context
7.2.1 The EU-CARIFORUM EPA and Regional Integration
Strictly speaking, the EU-CARIFORUM EPA is not a regional integration process

per se, given that the European Union (EU) and the Caribbean countries signatory
to the agreement are not a single geographical region. The EPA is therefore closer
in nature to the other 546 Preferential Trade Agreements (PTAs) notified at the
World Trade Organization (WTO) than to the Mercado Común del Sur (Mercosur),
the Association of Southeast Asian Nations (ASEAN), or the Caribbean Commu-
nity (CARICOM), whose members share borders and close cultural affinities.
Nonetheless, the EU-CARIFORUM EPA does provide a number of interesting
parallels for the monitoring of broader regional integration efforts. First, most
efforts at regional integration have at their core provisions dealing with trade
liberalization in goods and services, competition, intellectual property, and other
such issues usually found in modern trade agreements. As such, the EPA and other
regional integration efforts arguably face many of the same monitoring challenges.
On the other hand, the EU-CARIFORUM EPA is qualitatively different from
other FTAs in as much as it takes place between two regions, the EU, and the
CARIFORUM. Indeed, the CARIFORUM grouping has been “tailor made” for
EPA negotiations, consisting of the CARICOM group with the addition of the
Dominican Republic. As detailed below, this adds some layers of complexity when
devising an institutional machinery for monitoring.
Importantly, the EU-CARIFORUM EPA refers explicitly to the monitoring of
the agreement’s effects in its text. The agreement’s Article 5 states that:
the Parties undertake to monitor continuously the operation of the Agreement through their
respective participative processes and institutions, as well as those set up under this
Agreement, in order to ensure that the objectives of the Agreement are realized, the
Agreement is properly implemented and the benefits for men, women, young people and
children deriving from their Partnership are maximized. The Parties also undertake to
consult each other promptly over any problem that may arise. (Official Journal of the
European Union, 2008, L 289/I/8)
This is further strengthened in a Joint Declaration attached to the agreement:

We understand that, in the context of our continued monitoring of the Agreement within its
institutions, as provided for under article 5 of the Agreement, a comprehensive review of
the Agreement shall be undertaken not later than five (5) years after the date of signature
and at subsequent five-yearly intervals, in order to determine the impact of the Agreement,
including the costs and consequences of implementation and we undertake to amend its
provisions and adjust their application as necessary. (Official Journal of the European
Union, 2008, L 289/II/1955)
These two paragraphs are particularly relevant to regional integration efforts in

the South that often have explicit development aims. Examples would be the
Economic Community of West African States (ECOWAS), the Southern African
Development Community (SADC), or CARICOM itself. Also of importance in the
agreement’s text is the distinction made between monitoring the aims and objective
of the agreement (in this case “development”) and monitoring its implementation.
While the two are connected, for monitoring purposes it is important to keep them
conceptually separate, a point elaborated below. Further, a distinction is made
between continuous monitoring, ostensibly requiring systematic data and informa-
tion, and a 5-year review, potentially a periodic but ad-hoc effort.
7.2.2 Context of the Agreement
The EU-CARIFORUM EPA resulted from the end of the Lomé preferences that
had granted preferential market access to some of Europe’s ex-colonies up until
2007. These preferences provided the CARIFORUM countries with quasi duty free
market access on 97% on their goods, although a preferential quota system
remained in place on some of the region’s agricultural exports to the EU. For the
Caribbean, these preferences were particularly important for a set of key agricul-
tural goods, for example sugar, rum and bananas. The Caribbean Regional Nego-
tiating Machinery (CRNM), the body in charge of negotiating the EPA at the time,
estimated that, were Caribbean exports to lose Lomé preferences and face tariff
rates provided in the EU’s Generalized Scheme of Preferences (GSP), the next best
option available to them, sugar exporters would have to pay an annual $202 million
in additional levies on sugar, $64 million for Bananas, and $11 million for
Alumina.1
While preferences for agricultural products were clearly a motivation for signing
the EPA, the CARIFORUM region also considered other issues such as Services,
Investment and Intellectual property as beneficial for its own development strategy,
something that sets it apart from other EPA negotiating groupings that have been
more reluctant to engage on service liberalization and so-called Singapore issues.
This is due, to some extent, to the importance of sectors like Tourism for the region,
and the overall higher share of services in the region’s Gross Domestic Product
(GDP). Several studies and commentaries have already analyzed the agreement in
detail (see for example Meyn et al. 2009; Sauvé and Ward 2009).
1
http://www.normangirvan.info/wp-content/uploads/2008/11/eclac-assessmenrt-of-the-cf-eu-epa.
pdf
CARIFORUM
CARICOM-DR FTA
CUBA
DOMINICAN
REPUBLIC CARICOM
BAHAMAS HAITI
TRINIDAD &
SURINAME TOBAGO CSME
BARBADOS BELIZE GUYANA
JAMAICA
ANTIGUA & BARBUDA

OECS
ST.LUCIA ST.KITTS & NEVIS
ST.VINCENT & GRENADINES
DOMINICA GRENADA
CARIFORUM-EU EPA
Fig. 7.1 Caribbean country membership of regional trade agreements (Source: ECDPM 2006)
It should also be noted that the EPA framework has been promoted with the
explicit aim of fostering regional integration. As the figure below illustrates, the
Caribbean is home to a host of regional groupings, amongst them the Organization
of Eastern Caribbean States (OECS), the Caribbean Community (CARICOM), and
the Association of Caribbean States (ACS). In order to accommodate the Domin-
ican Republic, who is not formally a member of CARICOM, but who used to
benefit from Lomé preferences, the EPA was negotiated with the Forum of the
Caribbean Group of African, Caribbean and Pacific (ACP) States (CARIFORUM).
All CARIFORUM Members are also members of CARICOM, except for the
Dominican Republic. CARIFORUM deals with EU related affairs – the EPA and
EU aid disbursed to the region – and is housed within the CARICOM secretariat
(Fig. 7.1).
At the time of writing, the implementation of the agreement was uneven across
the region. Indicatively, by late 2013 the treaty had been ratified in only 5 out of
15 CARIFORUM countries. Although in some countries, such as Barbados, the
EPA can be provisionally implemented without ratification, in others, legislation
requires an act of parliament even to lower tariffs, meaning that even this cannot
take place without ratification. Trinidad and Tobago is a case in point where the
agreement was not yet being applied even provisionally until very recently.
7.2.3 Structural Aspects of Regional Integration

in the Caribbean
Although existing regional integration efforts in the Caribbean region need not
impact on the EU- CARIFORUM EPA, in reality the history of integration in the
region plays an important role in defining relations across countries and between the
national and regional institutions.
Ever since the short-lived West Indies Federation from 1958 to 1962, and indeed
prior to this, regional integration has been seen in the region as a logical necessity
but political liability, with many practical difficulties. The statement of the Wood
Report from 1922 still rings true today:
however much it would be to the evident advantage of these colonies to secure machinery
for greater unity and cooperation, there are practical and political objections which, for the
present at any rate, make this impossible. (Payne 2008: xviii)
More recently Payne (2008) states that

the fundamental characteristics of regional history in the Caribbean have always been
fragmentation, isolation and insularity, and [. . .] bouts of integrative activity. (Payne 2008:
xxxiv)
The geographical nature of the region clearly is a part of this. The CARIFORUM
regional grouping is made up of 15 countries scattered across the Caribbean, with
Belize City in the West lying more than 3500 km from Georgetown Guyana, with
13 island state signatories in between.2 Further, they vary in size from almost
10 million inhabitants in Haiti to 67,000 in Dominica; and in incomes from GDP
per capita of PPP$1171 in Haiti to PPP$31,978 in the Bahamas in 2011 (World
Bank 2013). A historical reading shows precisely that small size and lower incomes
have been a large part of the push factor towards greater integration to survive in the
world as small island states, while resistance has largely stemmed from the unwill-
ingness of larger countries in the region to finance smaller, poorer members (see
Payne 2008, for example). The enormous geographical spread and isolation of the
region’s countries is also seen in Fig. 7.2.
7.2.4 Other Factors
In addition to these more structural aspects that impinge on the enthusiasm for
regionalism in the Caribbean and therefore on progress in monitoring agreements, a
number of more current aspects also pertain.
Slowness in establishing EPA monitoring mechanisms relates in many ways to
the slow and uneven progress in implementing the EPA agreement itself. “Why
2
Based on online “Distancefromto” tool: http://www.distancefromto.net/distance-from/Guyana/
to/Belize
Fig. 7.2 The geographical spread of the Caribbean region (Source: ESF 2009)
monitor if there is nothing to monitor”, some say. Part of the reason for this slow
implementation is the priority that has been given to other contextual factors since
the signing of the agreement. The most salient of these include the following:
The financial crisis hit several of the Caribbean economies hard, particularly
through a fall in tourism receipts but also declining Foreign Direct Investment
(FDI) inflows, remittances and worsening fiscal balances. Countries less reliant on
the tourism sector, such as Guyana and Suriname, weathered the crisis better
although even here their main export sector, mining, has also been negatively
affected.3 The Dominican Republic and Belize have been least affected by the
financial crisis. While this has potentially distracted CARIFORUM governments
from EPA concerns, the same may also be the case for the EU, currently embroiled
in its own crisis. This is not to say that both parties would not ultimately like to see
the EPA as a success.
Further, several of the Caribbean islands were hit by natural disasters during
2009 and 2010. In October 2010, Hurricane Tomas struck some of the already
weakened economies such as Dominica and St. Vincent and the Grenadines, thus
leading to further declines in output and growth, and thus also occupying political
attention.
Partly resulting from the above, there is a perception that a general slowdown of
the regional integration process in combination with changes in governments may
3
Based on figures from IMF (2010, 2011a, b, c, d, e, f, g, h, i, 2012).
have allowed regional integration and EPA implementation to slip down the agenda
in a number of countries.
On top of this, the EU is not the principal trading partner for CARIFORUM
countries, and for a number of them the importance of the EU is declining relative
to other partners.4 For most, the EU represents the third or the fourth most important
trade partner. As such, the EPA is perhaps less important economically than trade
relations with other trade partners.5
Notwithstanding the importance, the EPA negotiations were controversial in the
region. There remains some debate surrounding the worth and potential impact of
the EPA in the region that may influence some governments’ impetus to implement
the agreement (see for example Bishop et al. 2012).
As the EU has unilaterally implemented most of its commitments, delays in
implementation on the CARIFORUM side do not face risks of slow-downs on the
EU-side, perhaps again lowering the priority given to the exercise, particularly
given the current and historical background.
In several countries, particularly the smaller members, government capacity to
implement the agreement in a timely manner is a constraint, with very few qualified
staff available, for example, for legal drafting, while the EPA agreement requires
engagement and coordination across a large number of institutions6. Given this
constraint, again monitoring may not be considered a priority.
Considerable fruitless efforts have already been made to establish a monitoring
mechanism through civil society at the time the EPA was signed but petered out due
to the lack of resources for regular meetings and the lack of progress in actual
implementation of the agreement. These failures may make it harder to garner
support for renewed attempts.
As this contextual summary suggests, both historical and current conditions
hinder implementation of the CARIFORUM EPA agreement thus providing an
unfavorable context for establishing a monitoring system. This is fundamental to
keep in mind in discussing the form a monitoring system might take.
4
Average trade levels between the EU and the Caribbean ACP countries have decreased during the
period 2006–2011 with the Caribbean share of total EU exports decreasing from 14.9 to 9.2 %,
while the share of total EU imports has decreased from 20.5 to 14.5%. Based on EC figures: http://
ec.europa.eu/trade/creating-opportunities/bilateral-relations/statistics/
5
Looking at EU-Caribbean trade relations through time, trade with Haiti, St. Kitts and Nevis,
Trinidad and Tobago and Surinam (despite a temporary drop in 2010) has increased between 2006
and 2010, while flows between the EU and Antigua and Barbuda, Bahamas, Barbados, Grenada,
Jamaica, St. Lucia and St. Vincent and the Grenadines have decreased during the same period.
Particularly Jamaica, Grenada and St. Lucia have experienced a sharp decline in their trade with
the EU.
6
Humphrey and Cossy (2011) cite the case of Barbados where 27 bodies are counted as “Principal
Implementing Bodies”.
7.3 Monitoring the EPA
7.3.1 The Rationale for Monitoring
As pointed to above, two broad, overarching reasons stand out for monitoring the
EPA. One is relatively straightforward: monitoring compliance and implementation
of the agreed measures. This primary function of ensuring that both parties imple-
ment the required changes in national legislation to comply with the EPA is far
from straightforward in a regional context mired by institutional weaknesses, and in
which decisions taken at the regional level are often not applied in national
legislation (Stoneman et al. 2012).
The second, more innovative function of the monitoring mechanism proposed in
the agreement is “to determine the impact of the Agreement, including the costs and
consequences of implementation” in five year reviews. The text of the joint
declaration is quite explicit in stating that the outcome of this review, informed
by the monitoring system, could lead to “amend its provisions and adjust their
application as necessary” as cited above. In this case the monitoring provisions of
the EPA combine both the function of a compliance mechanism and a safety valve,
injecting a measure of flexibility in the agreement.
Compliance is easier to monitor than development impact, with clear require-
ments that must be enacted. Here, the act of monitoring amounts to finding out
whether or not a country is in compliance or not. This nonetheless raises some
practical considerations, such as how to confirm that measures agreed in principle
are applied in practice. This may imply a need for “proof of compliance” of specific
elements of the agreement, for example from the customs system to show that the
required tariff is indeed being applied at the border.
With regards to outcomes, given the explicit focus on development impact of the
agreement, Meyn et al. (2009) list three effects that could be monitored: the export
effect, the adjustment effect, and the revenue effect.7 The export effect articulates
the idea that in order to benefit from increased market access to the EU, Caribbean
exports might need assistance in the form of Aid for Trade or other financial flows.
The adjustment effect refers to the increased competition facing Caribbean industry
after the liberalization of EU imports. Finally, the revenue effect concerns the loss
in tax revenue resulting from the lowering of tariffs. It is important to note that in
the case of the domestic adjustment and revenue loss, the EPA already contains
significant flexibilities in the form of safeguards and provisions allowing Caribbean
countries to reinstate previous MFN tariff should they run into “serious
difficulties”.
7
http://www.odi.org.uk/sites/odi.org.uk/files/odi-assets/publications-opinion-files/4205.pdf
7.3.2 Monitoring in Practice
The general idea of combining compliance and impact monitoring is, as Brüntrup
et al. (2008) put it “to ensure that results feed back into the design and implemen-
tation of the agreement or accompanying measures”. Ideally, monitoring would be
accompanied by regular and continuous consultation with stakeholders to identify
problems with trade policy and its implementation, to identify unforeseen impacts,
and allow adaptation of policy and implementation strategies to take account of
newly uncovered issues.
Monitoring has been occurring in the Caribbean to some extent but only in an
ad-hoc manner. Some, but not all CARIFORUM governments have set up national
implementation units, and a Regional EPA Implementation Unit, housed in the
CARICOM headquarters, provides technical assistance to the national nodes.
However, the systems of coordination and communication among the national,
sub-regional, regional, and extra-regional bodies are reportedly ad-hoc, with the
division of labor unclear between the national and regional levels, and with regards
the CARIFORUM directorate mandate vis-a-vis national EPA units on a number of
issues with both parties awaiting and expecting directions or demand from the
other.
A more systematic approach to monitoring would require systematized infor-
mation and data collection and analysis, institutionalized public-private sector
dialogue to provide information on the principal problems to be addressed and to
arrive at appropriate remedies. From a policy perspective, it is useful to conceptu-
alize monitoring efforts along four lines: objectives, scope, institutional actors and
methodology.
7.3.2.1 Objectives: Why Are We Monitoring?
At the time of writing, the roles, purpose and mandate of different EPA implemen-
tation units vary across countries in the Caribbean region. This is problematic for a
regional agreement where CARIFORUM countries are expected to speak with one
voice and apply some measure of uniformity. For example, some national units
have taken an explicit export promotion role with a view to promoting the utiliza-
tion of the trade agreement, while others are focused on compliance. Some have
their mandate restricted to monitoring implementation, and not development
impact. A regional system to monitor a regional agreement such as the EPA
requires at least some level of agreement on the overall purpose of monitoring to
allow aggregation across the region and comparability, while allowing for flexibil-
ity in terms of the depth of analyses and sectors chosen at the national level.
The objectives of the EPA and what should be monitored are defined in article
1, and are as follows: (i) poverty eradication, (ii) promotion of regional integration,
(iii) integration of CARIFORUM states in the world economy, (iv) improving trade
policymaking capacity of CARIFORUM states, (v) increasing investment,
(vi) private sector initiative, supply capacity, competitiveness and economic growth
in the CARIFORUM region and finally (vii) strengthening EU-CARIFORUM
relations on the basis of solidarity and mutual interest. Article 3 further defines
sustainable development as ‘(...) the human, cultural, economic, social, health and
environmental best interests of their respective population and of future genera-
tions’, while ‘(...) decision-taking methods shall embrace the fundamental princi-
ples of ownership, participation and dialogue’.
Not all these objectives may initially be covered by a national and regional
monitoring mechanism. Given the emphasis on poverty eradication, sustainable
development and economic growth, the need to prioritize, and the somewhat more
direct impact the EPA may have on these objectives, this chapter focuses on the
necessary indicators to measure the impact the EPA might have on these
dimensions.
7.3.2.2 Scope: What Are We Monitoring?
Closely related to the question of the objectives of monitoring efforts, the focus of a
monitoring system must also be addressed early on. In the Caribbean, these
questions revolve around whether the regional and national monitoring systems
should seek to go beyond the EPA per sé to monitor broader trade policy in general,
or integrate with monitoring of the Caricom Single Market and Economy (CSME).
Beyond choosing the exact policy areas to monitor, it is also important to distin-
guish between monitoring of compliance with the agreement, and monitoring the
outcomes or impacts, as explained above.
An effective monitoring system would ideally mainstream EPA monitoring into
the trade policy cycle of the Caribbean countries. This would take EPA implemen-
tation and its effects as a subset of broader trade policy implementation and
impacts. Regular updates would then be used to consult with stakeholders on how
policies should adjust (or not) to the information that emerges. This would not
necessarily require vast financial resources, but would require political support to
ensure cooperation among Ministries and regional bodies to ensure regular and
systematic communication and information flows, overseen by a National Moni-
toring Committee or a similar such body. This option then implies the need to
embrace trade policy monitoring at a broader scale, and as a tool to improve and
inform economic policy in all the countries in the CARIFORUM region, something
that however may be over-ambitious given the constraints faced.
Based on interviews, it may also be useful to distinguish between impacts from
the agreement and actual “use” of the agreements – a form of intermediate impact,
which can then guide export promotion efforts or technical assistance to firms
struggling to meet sanitary and phytosanitary measures (SPS) or overcome Tech-
nical Barriers to Trade (TBT). This implies carefully gathering data relating to more
administrative aspects of trade. In the Caribbean issues that were mentioned
relatively often were, for example, trade with the French overseas territories,
EPA-related trade certificates emitted for trade in goods in the region, or numbers
of Schengen visas emitted for EU commitments under mode 4. Economic, social or

environmental impact is clearly more difficult to measure and establish causality
although some suggestions are made below. Given capacity constraints often
present in the Caribbean and in the South in General, it is important to have clarity
on what the priority areas for monitoring should be both in terms of objective and
scope, particularly given that priorities are likely to vary by country.
Practically speaking, once the precise policy area has been defined, the focus of
monitoring could evolve over time, starting on a limited subset of issues. At a
minimum this would involve monitoring compliance. Later on, beyond monitoring
the compliance and use of the agreement, the focusing of the monitoring apparatus
could evolve towards monitoring problems encountered by private sector operators
in the use of the agreement, and even later the development goals laid out in the
agreement.
7.3.2.3 Actors & Institutions: Who Is Monitoring
Given the need for broad discussion and ownership of any monitoring project, there
needs to be an early discussion of who will contribute to monitoring efforts and to
establishing a monitoring system, and how these actors will interact. Monitoring
and the use of monitoring is inevitably political, and there is a risk of “capture”. But
this should not be seen as a reason not to monitor, nor should it be seen as a reason
not to involve diverse segments of society in these efforts.
For the purpose of objectivity and inclusiveness, civil-society actor participation
is key in designing the system and following the process. This should include
representatives with an interest in social and environmental welfare, but also
private sector bodies and associations and other interested groups. Indeed, private
sector coalitions and chambers of commerce are key actors for the monitoring
process and are taking an increasingly active role even in engaging on issues of data
collection and monitoring.
A useful proposal might be a National Monitoring Committee. This would be
formed of representatives from government, civil society and the private sector,
including the Ministries of trade and finance, with particular directorates involved
in trade policy, and bodies outside government such as universities with a role in
gathering data on and analyzing the economy. The precise role of each of the
members of such a body or committee naturally needs to be clarified early on, but
this might be done according to what information they can offer, what constructive
inputs can be brought, or a desire simply to follow the process as an observer. The
role of such a committee would be to oversee and guide the monitoring process,
potentially overseeing other national level sector-specific monitoring committees,
but also liaise with regional structures.
Having agreed on the actors to involve, it is also important to agree on the
institutional arrangements for their engagement in terms of the organizational
structures and responsibilities. Ultimately, this must also reflect the practicalities
of different forms of interaction, particularly between the national and regional
levels. In a context like the EU-CARIFORUM EPA, where different national

monitoring and implementation structures have to interact and coordinate, the
most flexible might be to focus on national monitoring, with differing levels of
complexity, but with an agreed “minimal” framework for regional coordination.
7.3.2.4 Methodology: How Are We Monitoring?
The scope to be covered clearly determines how areas are to be monitored, with a
range of possible methodological approaches. The choice of approach depends on
the responses to the issues raised above, as well as available data and capacity for
analysis. For the monitoring system to be sustainable one would expect that it
should build as far as possible on existing structures, linkages, information and
data-sharing systems.
In relation to monitoring compliance, although potentially a technocratic exer-
cise of checking that elements of the agreement have been formally incorporated
into national legislation, some degree of systematic control is required to ensure
that practice follows form. The basics for setting up such a system exist in the
Caribbean with systematized matrices of country-level requirements requiring only
to be completed and compiled at the regional level. Nonetheless, compilation itself
apparently poses problems given the unclear mandates at different levels of the
regional machinery.
A fundamental constraint for monitoring impact is data quality and availability.
This should be kept in mind when coming up with a methodological framework. In
the Caribbean, this was cited as a major constraint to previous monitoring efforts
and was regularly cited as a constraint, although there are clearly differences across
countries.
In terms of establishing impacts, potential approaches include a “Results-chain
approach”. In this approach, for specific sectors one maps out the direct and indirect
potential effects of an EPA-induced policy change, with indicators defined for each
of the relevant stages of the chain. While not scientifically rigorous, this is seen as a
feasible option where more scientific approaches are impractical. Even so, this
approach is not feasible for all potential EPA impacts, again requiring some
answers to the above questions on scope before precise methodologies can be
defined.
Mapping out potential impacts in a result chain logic is particularly difficult for a
modern free trade agreement like the EPA. Mapping out the adjustment effects of
tariff dismantlement and revenue loss is feasible, and has been done for three
Caribbean countries in the past (see Meyn et al. 2009). For services and Singapore
issues, it is significantly harder, but not impossible. In many cases it will require
detailed information about the market structure of a given industry in a country, and
of the local regulations in place. Naturally, not all transmission channels are
relevant for all sectors, and some might be more directly affected than others for
a given policy change introduced by the EPA. The channels may also affect each
other, or run in contrary directions regarding development impact.
7.3.3 Cross-Cutting Observations for the Design

of Monitoring Systems
Two cross cutting concerns emerge from the review of the monitoring efforts of the
EPA going on in the Caribbean. These are likely to be of value for other policy
oriented attempts at monitoring regional integration, hinting as they do at tensions
between the aims and principles of a monitoring mechanism (inclusiveness, feed-
back loops, etc.).
7.3.3.1 Avoiding Capture
The first issue is the inherently political nature of monitoring, and the political
economy dynamics behind a monitoring system. This can be read as the “tradi-
tional” political economy of trade liberalization, in which groups affected by
adjustment costs are much more likely to organize and lobby against free trade. It
is important to keep in mind that to such groups, attempts at monitoring provide an
access point into policy making, bringing both benefits and risks. It is therefore
important to incorporate this sort of thinking when thinking about the actors to
involve in a monitoring system, and when devising the institutional relations
between different parts of a monitoring system, although to date this has been
raised more as a concern by the European Commission than actors in the Caribbean.
This does not mean that groups affected by economic adjustment should be
systematically kept out of a monitoring system. On the contrary, a well-designed
monitoring system should be able to identify such groups and provide them with
financial assistance that will help them to improve their competitiveness or shift
their activities to a new sector. It does mean, however, that monitoring “impact” of
the agreement is likely to arouse interest from groups who might not be represen-
tative of the rest of society, and that there is a real risk of “capture” if this is not
recognized from the outset.
Relatedly, and as mentioned, the Caribbean context is marked by a certain
degree of scepticism about the benefits of the EPA. This scepticism cannot, to a
large extent, be tied back to protectionist interests. Rather, it is often expressed in
terms of choice of development model for the Caribbean, the balance between
regional integration in CARICOM against the signing of agreements with external
partners, and the place of the EU in the group’s external ties. A monitoring system
should not seek to sidestep these broad societal debates, but, on the contrary, to
provide a platform for them.
7.3.3.2 Monitoring vs Lock In
Secondly, there is a tension between, on the one hand, a trade agreement’s purpose
of providing a stable and predictable environment for private sector operators and
investors, and, on the other, the flexibility introduced by a monitoring system that
can modify some of the agreement’s provisions. Indeed, a key function of a trade
agreement is to act as a “lock-in” instrument for trade policy and domestic regula-
tion that falls under its scope. If these can be rolled back too easily because of a
monitoring provision, or if it is perceived to be so by investors and operators, the
agreement’s worth is likely to diminish greatly.
The two are valuable objectives, but they are to some degree conflicting.
Institutional provisions can deal with these tensions. In the EU-CARIFORUM
EPA for example, there is an elaborate institutional machinery regulating the
governance of the agreement. This greatly diminishes the chances of seeing one
side coming back on its commitments unilaterally because of the monitoring
provision.
Nevertheless, introducing flexibility, combined with the capture risk highlighted
above, does raise some questions. For example, in 2012 some governments asked
that some of the tariff lines be taken out of the region’s liberalization commitments
in view of the EPA’s five year review, because the industries behind them would
face serious competition from Europe.
7.4 Conclusion
Overall, while monitoring of the EU-CARIFORUM EPA is a legal requirement,

progress in establishing such a system has been slow. This is related to a number of
factors, outlined above, from historical ambiguity about regional integration across
countries in the region to the current political, economic and financial context. This
context poses constraints to implementing the EPA agreement and as a conse-
quence to establishing an effective monitoring system.
Within that context, there are nonetheless some clear questions that can guide
discussions towards establishing a monitoring system. These relate to being clear
about the objectives that are to be monitored, the scope, the institutional setup and
the methodology to use. The context suggests that the answers to these questions
will need to strike a balance between rigor and pragmatism given the varying
degrees of capacity to monitor, regardless of the desire to do so.
But fundamentally, if mindsets could be altered, monitoring could be seen as a
cross-government tool to inform policy, whether for or against the regional inte-
gration agenda, that would provide inputs precisely to promote economic develop-
ment in the region according to national approaches. The challenge is to bring this
change in thinking.
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Meyn, M., Stevens, C., Kennan, J., Highton, N., Bilal, S., Braun-Munzinger, C., Lui, D., van
Seters, J., Campbell, C., Rapley, J. (2009). The CARIFORUM–EU Economic Partnership
Agreement (EPA): The Development Component, Study by ODI, ECDPM and CaPRI.
European Parliament, DG for External Policies of the Union.
Payne, A. J. (2008). The political history of CARICOM. Kingston: Ian Randle Publishers.
Sauvé, P., & Ward, N. (2009). The EC-CARIFORUM Economic Partnership Agreement: The
Outcome on Services and Investment. ECIPE.
Stoneman, R., Pollard, J. D., & Inniss, H. (2012). Turning around CARICOM: Proposals to
restructure the secretariat. Report prepared and submitted to the CARICOM Secretariat by
Landel Mills Consultants, UK.
World Bank. (2013). World development indicators. http://data.worldbank.org/indicator/NY.
GDP.PCAP.PP.CD. Accessed 20 May 2013.
Chapter 8
Comparing Integration in Europe and Latin
America: Wishful Thinking, Self-Perception
and Reality – A Comment
Joaquı́n Roy
8.1 Comparing Integration
During the first decade of the new century, the way in which European and Latin
American integration has evolved has produced surprising parallels and differ-
ences, depending on the prism applied. There are three different but complementary
angles of analysis, highlighting this intriguing contrast. In the first place, evidence
shows the survival of historical schemes and different frameworks, which are in the
company of more ambitious and legally documented projects, all in the company of
well recognizable frustrations in regional integration experiments.
In the second place, one can easily detect the appearance given by a considerable
degree of self-serving evaluation of governmental and institutional origins that has
persisted on both sides of the Atlantic. In the third place, there is the flat reality,
subject to more objective inspection and commentary. The result of the combina-
tion of these three dimensions does not have to be considered as negative or
positive, but only as realistic.
Latin American integration is a glass both half-full and half-empty. For example,
the ambitious integrationist would confidently state that the current balance of
accomplishments is disappointing. However, more optimistic observers might
argue that the picture could be worse, taking into account the dual problem of
high expectations combined with a lack of alternatives. But even in this case the
option of analytical silence cannot be justified regarding the limitations to Latin
American integration and its root causes.
J. Roy (*)
University of Miami European Union Center of Excellence, University of Miami,
Coral Gables, FL, USA
e-mail: jroy@miami.edu

202 J. Roy
This provisional diagnosis must be accepted as a way to have a more accurate

idea about where the concept of integration in Europe and America comes from.
How has the EU model been implemented? How has it been adapted? How has it
been rejected in Latin America? Ultimately, the question is: what could it look like
in the medium and long term?
To produce a description of the historical aspirations and self-constructed
appearances, nothing could be more effective than to examine the paraphernalia
of the summit between the Community of Latin American and Caribbean States
(CELAC) and the European Union held at the end of January of 2013 in Santiago de
Chile. This event was the successor of the biannual customary meetings of the two
regions as developed since 1999. All protocol and script that the new summit
followed to the letter contributed to reflect the portrait that the event and the
organizers tried to project.
The European Union was neatly dually represented by its President Herman Van
Rompuy, whose authority emanates from the Council’s originally intergovernmen-
tal fabric, and by the Commission, led by José Manuel Dur~ao Barroso, showing its
innate supranational nature, as guardian of the treaties. Mirroring the format of the
receipt of the Nobel Peace Prize in Oslo last December 2012, both leaders gave
public statements. The President of the Parliament was not directly present in
Santiago, as he was at the award ceremony in Oslo. However, the role of the
European legislative power featured in the parallel Parliamentary Assembly held
in conjunction with varied representations from similar Latin American entities,
although of different powers and legitimacy. It has then to be noted regarding its
fully shared sovereignty, that the Commission is the negotiating entity. This is a
crucial aspect that is absent in Latin American systems, for which they are orphan
of fully equipped common policies.
The entity composed of Latin America and the Caribbean countries, as
expressed in the shape of CELAC, was led by the Chilean President Sebastián
Pi~nera, who earlier had received the baton from Venezuela’s Chávez (the inspira-
tion for the new entity), and then gave it to Cuba, led by Raúl Castro. This detail is
at the same time symbolic and an object of questioning. It reflects the notable
ideological variety of the current Latin America and a system that uses the word
’integration’ in a very different way from the one employed by the EU. In Europe,
“integration” a la EU requires the double condition of enjoying liberal democracy
and practising an open market economy. The variety of membership of CELAC
was also replicated in their own summit (not with the EU) held just when the
EU-Latin America/Caribbean conclave was ended. The attendance of the Latin
American and Caribbean presidents and prime ministers (although with some
absences) to a dinner hosted by Pi~nera in the Palacio de la Moneda faithfully
reflected the punctilious protocol of equality.
However, Pi~ nera himself overreacted at a closing press conference of CELAC,
revealing the institutional shortcomings of the entity over which he presided. In an
exceptional statement, when he was asked about the potential competition of the
CELAC with the OAS, the Chilean President was blunt, legally appropriate and
probably a little undiplomatic, when he replied that they were two totally different
8 Comparing Integration in Europe and Latin America: Wishful Thinking. . . 203
entities. Not only did they differ in membership (CELAC has been depicted as OAS
without Canada and United States), but in essence. CELAC has no treaties, insti-
tutions, headquarters or budget. CELAC, he added, is not an “organization”, but a
“community”. In spite of that, the EU, always respectful of Latin American and
Caribbean claims of own personality, has accepted the transfer of the role previ-
ously played by the Rio Group to the new body. Meanwhile, one has to remember
that the institutional limitations of the Central American system, the winner of the
recent EU moves in signing Association agreements, are also reflected in the
identification of the signatories of the Agreement. The documents show that the
partners are the European Commission and five separate Central American states
with signing subject to individual ratification. The Central American Integration
System (SICA) does not have supranational sovereign authority.
8.2 Between Realism and Hope
Latin America has been seized between its ambivalent path towards regional
integration and the attraction of the influence of the European model. However,
the so-called “new regionalism” and the still present "third wave" of integration
have a variety of options for insertion into international markets, which can be used
simultaneously and not exclusively with mutual benefits. Dissatisfaction with the
existing blocks can lead to different scenarios. The first is to continue to be guided
by inertia; the second is the perennial temptation to opt for a tabula rasa.
There would be a third way, based on learning from the experiences to be applied
to new entities, which should not be considered as examples of strictly “integra-
tion”. This is the case, for example, of UNASUR. This entity is still undefined as a
consultation forum, security framework or entity with real integration potential. In
sum, instead of abandoning all the accumulated experience, priority should focus
on regional integration aspects such as stability and the creation of a native brand,
combined with the acceptance of the guideline which has already prevailed in
Europe itself. This is the so-called “variable geometry”. At all times, there should
be a need to accept the centrality of the agreements to be implemented and
respected, with a willingness to change and adapt them to new circumstances.
It might be wondered at this point about the causes of the slow and frustrating
regional integration path in Latin America. In that sense, it is possible to point to
some explanations. Among them, one should pay attention to the innate character-
istics of the nature of the huge Latin American territory, producing a geographical
slavery. In contrast to the easy land community of most of Europe, where in the
course of a day you can travel by rail between distant countries and where road
transport is a regular means of trade and tourism, in Latin America the distances
make these internal movements arduous if not impossible. Thus, this factor rein-
forces the nature of territoriality, imposing customs procedures and legal barriers
against the free movement of citizens.
204 J. Roy
Secondly, historical evidence reveals that war, the root of European integration,
has hardly had relevance in Latin America, with the exception of specific inter-
governmental conflicts, which are still a cause of quarrels and disputes between
states by claims of geographical limits. These, ironically, very often do not have a
natural geographical origin, but are relics of colonial administrative limits. Inter-
nally, regional integration is shown as problematic when the full national integra-
tion itself is nonexistent or very weak in many countries. The majority of the
population is not inserted, it is discriminated against and it is beaten up not only
by poverty but also by inequality, the worst on the planet. An inclusive nation made
by choice, not by inheritance, is then a chimera.
While Latin American history reveals the absence of a Jean Monnet who could
persuade the power about the benefits of integration, the strength of presidentialism
that circles as the prevailing political system since the time of the founding fathers
is an imposing obstacle for the successful implementation of integration ventures.
The successive waves and transformations of populism and caudillismo have
converted the prospect of sharing sovereignty into an unusual doubtful task.
Above all Latin American shortcomings, what stands out is the misunderstanding
of the concept of supra-nationality or its explicit rejection in terms of the establish-
ment of institutions, independent and equipped with budgets able to finance inte-
gration projects. Weakness (or simply absence) of the various general secretariats in
the mode of the EU Commission make the effective functioning of integration a
mission impossible, where any decision depends on the schemes agreed by presi-
dential summits. Hence, the rise of the convincing arguments generating an alter-
native ’integration’ model of free trade agreements modeled from the United States
and adopted as a supplementary remedy of the European Union.
Despite all the difficulties, the EU model is still valid in this context. In the last
decade, the survival of the original and essential European project has been based
on learning from the mistakes of the past and in the adaptation of new risky
frameworks to new circumstances. The most recent of these self-help corrections
has been the reform of the institutions by means of successive treaties leading to the
Lisbon compromise. In this case, Europe has not fallen in the double trap of trying
to start from scratch or leave the job in the hands of inertia. The best argument in
response to the questioning and doubt about the European integration process, both
for its justification in times of crisis as by the permanence of its role model or
universal benchmark, especially to Latin America, is the present balance, not
speculation or predictions without basis about its future.
First, the forecast (or desire expressed by some) of the death of the EU is
answered with another assertion: if it dies, it will have been of an illness called
“success”. The EU has met each and every one of the missions that were imposed
on it, from the fundamental and foundational mandate of bringing an end to
European wars. Secondly, the combination of international cooperation and internal
effort has generated the fact that never in European history have more people in
more countries lived better in nearly half a century. Three generations living today
remember intimately, or by family memories that have lived beyond their parents
and grandparents.
8 Comparing Integration in Europe and Latin America: Wishful Thinking. . . 205
Thirdly, contrary to the claims of imminent cataclysmic outcomes (disbanding

the euro, destruction and disappearance of the EU itself), evidence shows that no
Member State than the UK has abandoned the European ship, none has packed its
bags, none has signed out a lease agreement and has abandoned the condo where he
has resided for decades, sharing the obligations and benefits of the co-ownership.
There are a dozen States wishing to join the euro or the EU itself. No common
policy that has shifted from the old third pillar to the first has returned to the strict
state sovereignty. The euro remains and Schengen survives, despite the attacks
from certain quarters.
Latin America can pick up some of that experience to redirect their own path
towards true integration. But the current situation in Europe is serious. The ques-
tions that evolve from the economic crisis impacting on the institutional architec-
ture are numerous and notable. They claim to deserve considerable analysis and
answers. This is crucial for the evolution of the EU model all over the world, and
most especially in Latin America.
Part III
Africa
Chapter 9
Assessing Regional Integration in Africa
(ARIA): Indicators of Integration Effort
in Africa
Daniel Tanoe
9.1 Context
Regional integration and the creation of an African common market has been the
vision of African leaders since the early years of independence. There are several
critical reasons for this.
• First, a common market combining Africa’s 54 mostly small and fragmented
economies will lead to economies of scale that make countries competitive.
• Second, it would provide access to a wider trading and investment environment,
inducing backward and forward linkages, and promote exports to regional
markets, building experience to enter global markets.
• And third, it would provide a framework for African countries to cooperate in
developing common policies and services for trade, finance, transport and
communications and other sectors.
For one principal reason: to regain control of its own economic destiny and to
cope with a rapidly globalizing world by increasing its bargaining power and
asserting its own priorities and preferences in diversifying its production structure.
At the sub-regional levels, various integration arrangements have been launched
by the Regional Economic Communities (RECs) and other sub-regional integration
organizations. The RECs aim to create a Free Trade Area (FTA), a Customs Union
(CU) and eventually a Common Market (CM) and an Economic Union (EU)/
African Economic Community (AEC). The strategy for achieving these objectives
is to stabilize and gradually remove tariffs and non-tariff barriers (to lead to FTA),
D. Tanoe (*)
Investment Policy Section, Regional Integration and Trade Division, United Nations Economic
Commission for Africa (UNECA), Addis Ababa, Ethiopia
e-mail: dtanoe@uneca.org

210 D. Tanoe
adopt a common external tariff with respect to trade with third countries (to lead to
CU), harmonize and implement common policies (macro-economic policies and
sector policies notably in trade, money and finance, transport/communications,
agriculture and industry) and promote free circulation of all factors of production
including people (to lead to CM and EU).
In light of what is stated above, it is possible to group the integration objectives
within the sub-regions and the continent into the following three core categories:
• Short-term objectives: Achievement of FTAs and CUs
• Medium-term Objectives: Achievement of CM, including monetary union
• Long-term objective: Achievement of the EU/AEC.
The details, sequencing, modalities, and tempo for achieving the above core
categories of objectives within the sub-regions obviously vary from REC to REC.
However, differences in terms of substance, schedules and expected end-results
among the majority of the RECs/integration institutions are fairly marginal.
Assessing Regional Integration in Africa (ARIA) was initiated by the Economic
Commission for Africa (ECA) as a series beginning with a landmark report in 2004
(UNECA 2004). ARIA thoroughly assesses the status of Africa’s integration
process; the performance of Member States and RECs; and draws lessons for the
future. Although there has been an extensive array of reports, meetings and
conferences on the subject of integration in Africa, ARIA was the first coherent
and comprehensive analysis on a national, sub-regional, regional and sectoral basis.
The report makes recommendations on what needs to be done to enhance progress
and overall effectiveness and efficiency of the process.
ARIA’s primary audience comprises African Heads of State and Government.
Its main justification was to provide them with a management tool to monitor the
progress being made on integration commitments that they, and their governments/
countries, have made. Thus, African leaders and governments would systematically
know about how they had performed on their undertakings. The idea was to
evaluate progress made and things left undone on a biennial basis, and thereby
help spur African governments to revitalize their integration efforts.
The report’s secondary audiences include:
• African ministers, public and parastatal institutions across all sectors and
portfolios;
• The regional African plurilateral community: i.e. African Union; African Devel-
opment Bank; the Regional Economic Communities (RECs); other regional and
sub-regional institutions;
• The African private community that should become involved deeply in integra-
tion matters – i.e. the financial sector, the business community, the professions,
the academic community, the private voluntary and Non-Governmental Orga-
nization (NGO) sector; and
• African civil society and the public at large: i.e. those who most need to be
convinced of the need for African integration and involved in the process of
bringing it about.
9 Assessing Regional Integration in Africa (ARIA): Indicators of Integration. . . 211
In addition to its value for Africa, ECA was of the view that ARIA would have
considerable value, utility and appeal to other stakeholders outside Africa such as
institutions in the United Nations (UN) family and a variety of sector-oriented
development agencies, the international academic, research and consulting indus-
try, and the international business community with a presence in, or potential
investment interest in Africa.
It was crucial that if the ARIA assessments were to add value to previous reports
on Africa’s integration and be meaningful and relevant, key indices of integration
needed to be included, and appropriate methodology and measurement scales
developed, and continually refined. Such indices/measures needed to be based on
an as objective and hard quantitative base as possible in order to avert/avoid or at
least minimize arguments about “subjectivity” or “bias” in portraying the perfor-
mance (i.e. integration effort) of one country or another, or of one REC or another.
Performance indicators were indeed an innovation of the ARIA exercise and
were developed as a basis on which comparison of results and performance against
common denominators were analyzed in each of the following clusters. As this was
the first time ECA was embarking on this idea of constructing indicators on regional
integration to include in the ARIA report, we reasoned that any attempt to be
comprehensive, exhaustive or definitive was not only ambitious, but probably,
also unfeasible for a number of reasons including data limitations. We therefore
wanted to focus on what is affordable, doable and practicable for the first ARIA.
A number of data sources were used to build the data-base and to generate the
time series data for the various indicators of the sectors covered by the analysis in
ARIA I. The greater body of the data was collected through a structured question-
naire specifically designed to collect both quantitative and qualitative data and
information on the indicators at the country and REC levels in Africa. Responses
for the questionnaire were obtained through field missions to 51 countries and to all
14 RECs. This was supplemented by secondary but very valuable data sources from
a number of sources such as the UN organizations including United Nations
Conference on Trade and Development (UNCTAD) and United Nations Industrial
Development Organization (UNIDO), as well as from the World Bank, Interna-
tional Monetary Fund (IMF), United States of America (USA), statistical sources,
specialized sectoral institutions, research bodies, various websites and other
published and unpublished data sources.
9.2 The indicators in ARIA I
9.2.1 Quantitative Indicators
Measuring regional integration by way of indicators is not straight forward. In our

particular case, we wanted to measure the evolution of Regional Integration over-
time and across countries, RECs and at the continental level. We then fashioned out
212 D. Tanoe
how to go about this measurement on a quantitative basis, supplemented by a

qualitative analysis. The indicators took as their point of reference the stated
goals, objectives and targets that Member States have set for themselves to realize
phased and ultimately full regional integration and economic union.
Most of the RECs, which are the building blocks for achieving the objectives of
the Abuja Treaty, aim at creating a FTA, a CU and eventually a CM and an
EU. Essentially, the strategy for achieving these objectives is to stabilize and
gradually remove tariffs and non-tariff barriers, adopt a common external tariff
with respect to trade with third countries (to lead to CU), harmonize and implement
common policies (macro-economic and sector policies, notably in trade, money and
finance, transport and communications, agriculture, and industry) and promote free
mobility of factors of production including capital and people (to lead to CM and
EU).
Taking account of the stated goals of the regional economic arrangements, we
grouped the objectives and goals into eight main clusters to form the basis of our
assessment of progress. Indeed, action in each of the identified cluster areas should
aim at achieving the ultimate goal of integrating Africa’s fragmented national
markets for factors of production, as well as for goods and services, as well as
physically. We then tried to figure suitable indicators within each cluster to measure
progress in that cluster, mindful of data availability and limitations.
After a series of consultations among the team in the ECA Regional Integration,
Infrastructure and Trade Division, and other partners involved in the ARIA exer-
cise, we came up with the following list of clusters and their corresponding
indicators.
• Cluster 1 –Human development and labor market integration (Indicators:
Education expenditure as % of total government expenditure)
• Cluster 2 –Trade and market integration (Indicators: Cumulative actual tariff
reduction against agreed upon tariff reduction; value of intra-REC trade)
• Cluster 3 –Monetary, fiscal and financial integration (Indicators: Convergence
criteria: inflation, budget deficits to Gross Domestic Product (GDP), Foreign
Direct Investment (FDI) flows)
• Cluster 4 –Energy (Indicators: Value of intra-REC trade in fuels; value of
intra-REC trade in electricity)
• Cluster 5 –Food security (Indicators: Value of intra-REC trade in food; food
production index per capita; regional per capita volume of food reserves)
• Cluster 6 –Transport and communications infrastructure (Indicators: Road
network, air transport (flights and volume of passengers); telephone penetration)
• Cluster 7 –Industrial production and consumption (Indicators: Value of intra-
REC trade in manufactures)
• Cluster 8 –Regional commons (Peace and security, environment, gender, gov-
ernance and social and cultural)
In general, each cluster/sector had more than one indicator to reflect its perfor-
mance. To ease comparison of overall cluster performance, an aggregate index was
required, that combined the indicators for a cluster into a single index. As a result,
weighting became important. Weights were assigned for all indicators reflecting
each indicator’s “relative importance” in measuring performance within the cluster.
Further weights were assigned to each cluster, which reflected the relative impor-
tance of the cluster for regional integration vis-a-vis the other clusters. These
weights then allowed for the construction of an overall Integration Index for a
given country or REC. Assigning weights, however, was not a straightforward
procedure. It required knowledge and understanding of the particular indicators/
clusters and their respective importance to enhance regional integration. Thus,
weights were obtained through consultations and discussions among cluster
experts.
In a nutshell, the main objectives of constructing indices in the context of ARIA
were:
• To assess each country’s performance and relate it to the goals and objectives of
each REC and that of Africa as a whole, as well as the performance of each REC
to that of Africa;
• To compare the contributions that each member country in a REC has made
towards the realization of such goals and objectives, in addition to the contri-
butions that each REC has made to that of the continent at large;
• To monitor the performance of each country, REC and the continent as a whole
with respect to regional integration efforts over time; and
• To enhance the quality of the analysis of ARIA by providing indices upon which
scores and ranking are made at country, REC and Africa level.
9.2.2 Qualitative Indicators
Qualitative variables were also important in assessing the performance of each

country or REC. The qualitative indicators measured institutional effectiveness
(e.g. empowerment of institutions to effect programs and agreements, issues of
coordination and harmonization of sector policies, removal of non-tariff barriers,
free movement of people, existence of self-financing mechanisms to support the
integration agenda, etc.). An exhaustive questionnaire was prepared and sent to the
RECs and countries to collect information and data. Many of the questions required
responses of a qualitative nature from the respondents. In practice, responses to the
questionnaire were less than satisfactory. This created some difficulties in making
accurate qualitative assessments.
214 D. Tanoe
9.3 Constructing the Index
9.3.1 General Principle
The main objective of constructing an index of a variable was to generate a statistic,

albeit a descriptive one, and compare observed changes in the variable. For
example, the most common index used in economics is the price index (e.g. the
Consumer Price Index), which is used to measure changes in the price level for
different categories of goods, or the aggregate price level for an economy. Among
other things, index numbers have to satisfy the following characteristics:
• Since index numbers have to be aggregated, they have to be additive i.e., the
attributes must comprise an identical unit of measurement;
• When aggregation is required, weights have to be attached to individual vari-
ables to reflect their relative importance; and
• Index numbers must have a reference point with which all others are compared,
i.e., a base period. The index indicates the yearly (or whichever timeframe is
required) change relative to the base year.
An index that satisfies all three characteristics can be used to compare changes in
an attribute over time, and can be used to rank attributes of different entities at a
point in time.
Thus for the ARIA exercise, all annual indices were first calculated for each
country. The Abuja Treaty came into force in May 1994, hence 1994 was chosen as
the base year.
The indices were calculated as follows:
Let Xij,t be the actual value of an indicator i for country j at time t.
Iij,t be an index calculated for indicator I for country j at time t, and is defined as:
Value of the ith indicator at time t

I ij, t ¼ 100
Base year value of the same indicator
Xij, t
¼ 100 ð9:1Þ
Xij, 0
Where:
Xij,0 ¼ the value of Xij at time t ¼ 0 (the base year value; in this case is 1994)
i ¼ 1,2, . . .,N indicators
j ¼ 1,2, . . .,J countries
t ¼ 0,1,2,. . .,T years
The indices as defined in (9.1) were generated for all countries within a REC or
within Africa. These indices measure the relative changes, as compared to the base
year, of a particular indicator.
9.3.2 Aggregation of Indices
Aggregation is an important aspect of the indices as comparisons were also made at

REC and Africa level. For example in the case of comparing RECs the indices were
calculated using aggregated REC level data as follows.
Aggregate value of indicator i at time t

I* ir, t ¼ 100
Base year aggregated value
X*ir, t
¼ 100 ð9:2Þ
X*ir, 0
Where I*ir,t is an index for the ith indicator for the rth REC at time t. X*ir,t is the
aggregate value of the ith indicator (aggregated over all countries in a REC) for the
rth REC at time t., and X∗ ir , 0 refers to the aggregate value of the same indicator at
base year (t ¼ 0). Thus I*ir,t is used to measure changes over time at REC level.
9.3.3 Comparing Performance
In order to undertake relative comparisons of performance, either between coun-

tries or within a REC, or between countries within Africa, or between RECs within
Africa, three important elements of data are required. These are: (i) the norm or the
yardstick, (ii) method of scoring, and (iii) the ranking.
9.3.4 The Norm or the Yardstick
A norm or a yardstick is a value against which the relative performance of each

country within a REC (or a country within Africa or a REC within Africa) is
measured. Such a value plays a key role in comparing relative performance at all
levels of comparison. Since, there are no pre-determined targets for most of the
indicators (e.g. exports, imports etc.), a norm or yardstick was determined using one
of the following two approaches.
Case 1
A pre-determined target (e.g. convergence criteria such as a target budget deficit as
a % of GDP). If the indicator is target-driven, the target itself (e.g. a budget deficit
to GDP target of say 4%) is considered to be the yardstick.
216 D. Tanoe
Case 2
• The average of the best performers of the REC:
– If a REC has more than 6 members, the average of the top 4 performers of the
REC (based on indices) is taken as the yardstick
– If a REC has less than 6 members, the average of the top 2 performers of the
REC (based on indices) is taken as the yardstick
– For continental level comparisons, the average of the top 6 African per-
formers is taken as the yardstick
Case 1 is straightforward. However, most indicators (for example, exports,
imports, etc.) do not have a pre-determined target that can be used as a norm or
yardstick. In such a situation, the approaches stated under case 2 were used to
generate a yardstick for each indicator. In this case, calculating the average of the
top 4 (or top 2 or top 6) performers was done according to the following steps:
Step 1 Calculate a simple average index for each country within a REC (each
country within Africa or each REC within Africa). Let this average index be
defined by
X
T
I ij, t
I ij ¼ ð9:3Þ
t¼1
T
Where Īij is the average index for indicator i, country j over t ¼ 1,2,. . .,T time
periods. That is, a single value is calculated for each country for a particular
indicator over the time periods (years) where data has been completed.
Step 2 The second step involved ordering/sorting the average indices for all
countries within a REC in a descending or ascending order. Suppose the average
indices of countries are ordered in a descending (decreasing) order. And suppose
a REC has more than six members.
That is, let the average indices be Ī1, Ī2,. . .,Īc, where c > 6.
Given these ordered indices, calculating the average of the top performers
(in this case average of top 4 performers) depends on the particular indicator’s
contribution towards Regional Integration.
If an increase in an indicator contributes positively to Regional Integration (for
example, exports and imports), then the norm/yardstick is given by the average of
the first four indices in this particular case. That is,
X
4
Ii
b¼ ð9:4Þ
i¼1
4
Where b stands for best performance (or yardstick).

Alternatively, if a decrease in an indicator contributes positively to Regional
Integration, then b-value is taken as the average of the last four values, given the
descending order of indices above. That is,
Xc
Ij
b¼ ð9:5Þ
j¼c4
4
It should be noted that the key role of these yardsticks is to help establish
intervals around them upon which scores can be assigned to countries within a
REC to measure their relative performance. The construction of such intervals and
hence scoring and ranking performance are accomplished as follows. It should be
noted that the concept of using the average of the top (2 or 4) performers is also
important in terms of minimizing some extreme values or outliers in the table.
9.3.5 Construction of Scoring Intervals
Once the b-value is calculated, the standard deviation of the indices of countries
within a REC (or countries within Africa and RECs within Africa) is generated in
order to construct intervals or borders around the given b-value. The standard
deviation measures the spread of the performances of countries or REC around
the average performance within a given set of indices. The standard deviation,
which is the square root of variance, is defined as:
vffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
u 2
u n
uX I k I
s¼t
k¼1
n1
Where Ī is the mean of all indices within a REC (within Africa or for all RECs), Ik is
the kth index, and n represents the total number of indices within a REC.
Note that different subscripts are used to simplify the burden of having too many
subscripts.
It is important to note that, in a standard statistical sense, the standard deviation
is used to construct an interval around the mean/average. In other words,
constructing intervals around the mean, in this case, would mean comparing the
performance of countries against the average performers. This, however, is incon-
sistent with our definition of “best performance”. Thus, instead of using the mean,
this comparison employs the b-value as a point of reference for best performance,
and therefore intervals/borders are constructed around this value.
Thus, boundaries/intervals are defined around the b-value with a radius of 1/5 X
standard deviation (1/5 X s), meaning the length of the interval will be 2/5 X
standard deviation (2/5 X s). A total number of 11 distinct intervals are constructed
for each indicator within a REC for which scores are assigned depending on the
interval.
218 D. Tanoe
9.3.6 Scoring and Ranking
Scores are assigned for each index for all time periods, depending on where that
particular index lies within the given intervals. A maximum score of 10 is assigned
for the best performance and zero for the last (lowest) performer(s).
Then, these scores are averaged over the given time period (1994–1999) to
obtain an average score for each country (or for each REC). The first ARIA assessed
progress between 1994 and 1999. Subsequent ARIA editions discontinued.
Finally, a ranking is given to each country or REC based on the average scores,
where a rank of number 1 is given to the best performer(s) and the least performer
(s) become the last in the rank.
9.3.7 Computing the Composite Integration Index

Performances of RECs Over Time
On the basis of the scores obtained for each REC over time, averages of scores for
each year using the REC level indices over the number of RECs were calculated to
obtain the average score/performance of the RECs in the various years. An index of
the scores (with base year 1994 ¼ 100) is then calculated on a year-by-year basis
showing the change in performance over the given period of time for the RECs,
which is known as the Composite Integration Index (CII).
9.3.8 Weighted Composite Integration Index
The Weighted Composite Integration Index (WCII) is the total sum of the average
REC index multiplied by the corresponding GDP weight of that REC. The com-
posite integration index measures relative performance of a REC or RECs within
the continent, but does not take into account the size of that particular REC in
relation to the others. This calls for some sort of weighting procedure in order to
reflect the REC’s overall performance, in which the GDP weighted composite
integration index has been obtained.
9.4 Highlights of Main Findings1
The regional integration indicators were constructed on the basis of data collected
from member states, the secretariats of the RECs and other regional and interna-
tional organizations. Detailed questionnaires covered the eight clusters indicated
1
As revealed through the indicators at time of release of ARIA 1 in 2004.
above. The questionnaires were designed to solicit both quantitative and qualitative
information, and they were supplemented by data collection missions to the RECs
and a selected number of countries. Sectoral integration indices were calculated as
weighted composites of sectoral indicators—chosen to reflect the intensity or
impact of regional integration in each sector. The eight sectoral indices were used
to obtain composite integration indices for the regional economic communities and
for all of Africa. Progress by the RECs during the period covered (1994–1999) was
estimated as a weighted measure of performance in the eight clusters. Where a
sectoral indicator was constructed from several other indicators, the trend in that
sector was calculated as a weighted average of the subindicators. For example, the
money and finance indicator was a weighted average of inflation rate, external debt,
investment, and budget deficit. Thus, a single weighted composite index for the
RECs was developed as a single time series, with the base year value taken to be
100. The composite index for Africa was an average (weighted by GDP) of the
integration indices for the RECs. It measured the continent’s total integration effort,
assessing progress towards the integration goals of the RECs, the Abuja Treaty, and
other continental and regional integration initiatives and policies.
In some cases the base year levels and scores were low (in trade, for example),
which tended to amplify progress in the following years. Thus the indices often
showed an initial spurt in performance. Annual changes in the index measured
progress or retrogression and allowed comparison among the RECs. Tables 9.1 and
9.2 show the general trends of progress at the REC and sectoral levels respectively.
Table 9.1 Integration indices for Africa’s regional economic communities, 1995–1999 (Index
1994 ¼ 100)
Regional economic community 1995 1996 1997 1998 1999
CEMAC 129.7 135.7 136.0 134.8 128.4
CEN-SADa 122.9 130.8 133.7 121.2 121.0
CEPGL 90.6 89.5 93.7 91.2 86.6
COMESA 110.1 123.0 125.2 127.2 119.4
EAC 114.7 120.3 118.5 120.5 119.2
ECCAS 124.6 128.1 132.0 126.8 121.7
ECOWAS 117.2 130.8 130.3 136.6 133.9
IGAD 113.0 114.1 120.8 119.8 119.7
IOC 116.2 126.2 118.3 123.8 109.6
MRU 90.2 96.4 119.3 109.3 117.1
SADC 115.6 131.5 131.0 137.2 136.9
UEMOA 117.4 132.3 133.4 138.6 137.1
UMA 101.4 100.4 101.3 99.5 100.4
Simple average 112.6 119.9 122.6 122.0 119.3
Weighted average 114.9 124.7 126.1 125.5 123.6
Source: Economic Commission for Africa, from official sources
Note: Given the significant component of the trade sector in the calculation of the indices, SACU
was excluded from this table. SACU’s published trade data were usually aggregated and could not
be used for the calculations
a
CEN-SAD had recently been established, hence its results reflected primarily actions of members
participating in overlapping RECs
220 D. Tanoe
Table 9.2 Integration indices by sector, 1995–1999 (Index 1994 ¼ 100)

Sector 1995 1996 1997 1998 1999
Communications 110.9 129.9 152.9 157.2 157.2
Trade 127.9 149.0 147.1 138.2 139.6
Transport 118.7 120.1 126.6 129.9 127.3
Money and finance 104.9 115.3 118.6 116.7 124.4
Agriculture 102.3 110.4 108.2 111.3 109.9
Manufacturing 108.7 110.3 110.5 111.0 100.2
Human resources and labour markets 115.4 121.2 122.1 119.8 105.6
Energy 90.6 93.7 94.9 97.9 96.4
Source: Economic Commission for Africa, from official sources
Note: Data are weighted by GDP
In general, progress on regional integration in Africa was mixed across RECs

and across sectors. Some RECs were making good progress, while others lagged
behind. The best-performing regional economic communities had well-developed
integration programs, implemented steadily and effectively by Member States. In
addition, some of these programs mitigated financing problems by introducing self-
financing mechanisms. By contrast, performance was poor in regional economic
communities where activities were disrupted or programs failed to take off for
various reasons—including weak implementation by Member States and conflict
situations. Some regional communities exhibited very erratic performance. At the
sectoral level, integration in trade and communications showed encouraging per-
formance. Reasonable progress was also made on transport and macroeconomic
policy convergence.
The fastest average growth in integration during the period covered by ARIA I
occurred in communications and trade. More encouraging were trends in commu-
nications policies, where several countries have established independent regulatory
agencies, reflecting more liberal policy environments. Today most of the African
continent is covered by cellular service. Regional integration was also significantly
aided by a stronger effort among regional economic communities to implement
their agendas on trade and market integration, by removing barriers and promoting
trade facilitation measures. Efforts to create free trade areas and customs unions
occupied a large part of the communities’ integration endeavors and investments.
Growth was moderate in transport, money and finance. RECs and their members
have made substantial efforts to promote infrastructure links and harmonize poli-
cies to facilitate smooth cross-border transport. The continent’s road network has
been improved through efforts to strengthen road management and establish appro-
priate institutions. Several missing links of trans-African highways—designed to
connect countries within and between regional economic communities—have been
completed, though a number of gaps remain. In air transport, thanks to the 2000
Yamoussoukro decision by African heads of state to liberalize African air space,
new routes have been opened, competition has been encouraged, private participa-
tion has been promoted, and consumers have more and better choices. Railway
interconnection remains a major challenge. Performance on macro-economic con-

vergence criteria varied among the RECs, with generally positive trends for infla-
tion but less encouraging trends for budget deficits and external debt.
Sectors involving production (food, agriculture, and manufacturing) and trade in
electricity lagged behind. Industry and manufacturing remain generally weak. In
energy, the most notable developments involved establishing regional power pools
and interconnected electricity grids, formulating master plans for regional power
development, and developing environmentally benign power sources, including
hydropower and natural gas. Cross-border electricity trade and most interconnec-
tion projects have been based on the development of hydroelectric resources.
Indeed, hydroelectric dams play a key role in regional power supplies:
RECs have introduced various measures to strengthen cooperation and harmo-
nization of policies on human resources and the free movement of people, recog-
nizing the importance of these issues to socioeconomic development and regional
integration. Some RECs have made notable progress on free movement of people
across borders, and on rights of residence and establishment.
9.5 Conclusion and Current Plans
Through the first edition of ARIA published in 2004, we wanted to start a process
that would evolve over the years just as the indicators used in the United Nations
Development Programme (UNDP)’s Human Development Report (HDR) and the
World Bank’s World Development Report (WDR). The ARIA assessment of
progress in integration using both the quantitative and qualitative analysis focused
on the treaties, goals and the objectives of the RECs. Areas of particular signifi-
cance to regional integration were encapsulated in the 8 cluster areas referred to
earlier. Data to buttress the assessment both on a quantitative and qualitative basis
was fundamental. However, in the African context, some of this data is not easy to
come by, either through questionnaire or from conventional sources. Nonetheless,
these indicators provide an important basis for refinements over time. The concept
of regional integration indicators is not an easy one to grapple with. But these small
steps, we hope, will one day cumulate into an authoritative body of knowledge for
use by stakeholders in this complex field of regional integration indicators.
The 6th Joint Annual Meetings of the ECA Conference of African Ministers of
Finance, Planning and Economic Development and the African Union Conference
of Ministers of Economy and Finance, held in Abidjan, Côte d’Ivoire, in April
2013, and the 6th Conference of African Ministers in charge of Integration, held in
Port Louis, Mauritius, in May 2013, have called for enhanced monitoring and
evaluation of Africa’s integration. Consequently, ECA and the African Union
Commission are currently in the process of developing an African regional inte-
gration index, a proposal on which was presented to and endorsed by the 7th Joint
Annual Meetings of the ECA Conference of African Ministers of Finance, Planning
and Economic Development and AU Conference of Ministers of Economy and
222 D. Tanoe
Finance held in March 2014 in Abuja, Nigeria. The Conference urged the two
institutions to continue working on the project. Drawing from the ARIA experience,
work is currently underway to finalize the methodology for this renewed African
Integration Index initiative, and proceed with the collection of data. Stay tuned.
Reference
UNECA. (2004). Assessing Regional Integration in Africa: ECA Policy Research Report, Addis-
Ababa.
Chapter 10
Monitoring Regional Integration
in the African, Caribbean and Pacific (ACP)
Regions
Jean-Michel Salmon
10.1 Introduction: The ACP Monitoring Regional

Integration Project
The ACP Monitoring Regional Integration (MRI) Project, managed by the ACP
Secretariat under a European Development Fund (EDF) grant, was launched in late
2008 for a period of 20 months (November 2008–June 2010).
The main purpose of this project was to kick-start a collaborative initiative
amongst a series of ACP Regional Integration Organizations (RIOs). This initiative
aimed at developing a common system of regional integration (RI) indicators with a
view to making a common tracking of progress made against the RIOs’ objectives.
This aim should be seen in the context of the mutual accountability principle
derived from the 2005 Paris Declaration on Aid Effectiveness.
The present chapter gives an overview of the project institutional context, the
project governance, conceptual choices made, the system technical contents and,
finally, the project results.
Disclaimer: the views expressed in this chapter are those of the author and do not necessarily reflect
neither the views of the ACP Secretariat nor the views of the ACP RIOs cited in the text. The analysis
is based on the several reports from the ACP MRI downloadable from the project website (http://
mri.acp.int), inter alia the Baseline Study Report (final version), the Field Missions Overall Report
and the Second Seminar Final Report. Hence the information contained strictly relates itself to
the Project period and does not include any further development possibly made by any ACP RIO since
mid 2010.
J.-M. Salmon (*)
Faculty of Law and Economics, Université des Antilles, Schoelcher, Martinique
STRADEVCO, Fort de France, Martinique (French West Indies), France
e-mail: stradevco@wanadoo.fr

224 J.-M. Salmon
10.2 Institutional Context and Initial Informational Gap
10.2.1 The Legal and Institutional Context
The Cotonou Agreement between the ACP Countries and the EU, signed in June
2000 for a period of 20 years, emphasizes regional economic integration and
specifically the role of ACP RIOs.1
Article 9 of Annex IV reads
« At the beginning of the period covered by the Financial Protocol, each region shall
receive from the Community an indication of the volume of resources from which it may
benefit during a five-year period. The indicative resource allocation shall be based on an
estimate of need and the progress and prospects in the process of regional cooperation and
integration. »
Mid-term and end-of-term reviews of the EDF regional envelopes, namely

‘regional indicative programs’, must be undertaken to adapt the programs to
evolving circumstances and to ensure that they are correctly implemented. Follow-
ing the completion of these reviews, the EU may revise the resource allocation in
the light of current needs and performance.
Practically, first reviews undertaken during 2003 focused on a limited number of
priorities. These included the effective use of the leftovers from EDF allocation and
the elaboration of performance-based indicators to assess results. Overall, this
initial reviewing exercise proved challenging due to a lack of adequate data and
stakeholders’ limited participation (De Lombaerde and Salmon 2011).
10.2.2 ACP Integration Data Gap
In the early 2000s, data on RI in ACP countries was very limited in terms of
indicators, especially quantitative ones. A possible exception to this was trade data.
Therefore most assessment/monitoring exercises of RI processes in ACP regions
were related to case study reports, based on some rather qualitative analysis/
judgments made, together with the little quantitative data available. One could
also find synthesis papers prepared by ACP RI experts (e.g. Dinka and Kennes
2007). Within most publications, authors tracked fundamentals of RIOs such as
their membership, objectives, instruments and achievements (see for example
Lyakurwa et al. 1997). Thus, they were focusing more on the qualitative aspect
of particular RI processes, rather than on the state or degree of RI, which in any case
was never measured.
Against this backdrop, the European Commission (DG Development) resolutely
decided to support the development of systematic RI indicators for the ACP regions
1
Articles 28–30 of the Agreement and articles 6–14 of Annex IV.
10 Monitoring Regional Integration in the African, Caribbean and Pacific (ACP). . . 225
and organized an informal workshop in 2002 on the ‘regional cooperation review

process’. This aimed at identifying and discussing a set of ACP RI indicators with
regional as well as international organizations’ related experts.2 The EC suggested
to base a RI indicator system for ACP regions on four dimensions: economy and
trade; functional cooperation; governance; and EDF projects implementation.
These dimensions included at least 30 indicators (as reported in De Lombaerde
and Van Langenhove 2006).
Developed in 2002 following the EC suggestion, and also as a response to the
UNECA methodology (see previous footnote), still the COMESA Secretariat
(COMESA 2002) developed another conceptual approach, which it named
‘regional surveillance mechanism’, with a view to focusing on the assessment of
its own effective policies in relation to its own stated goals, rather than for
comparing regional experiences. Twelve clusters3 with a total of 58 indicators
were selected for a system covering dimensions such as trade, investment, macro
economy and finance, government intervention in the economy and economic
regulations. However, few years later this system had still not been implemented.
Similarly, two other ACP RIOs, namely WAEMU and ECOWAS, developed in
2003 a concept paper for a RI indicators system which lacked implementation in the
subsequent years.
Finally, most ACP RIOs proactive in the statistical field focused their initial
efforts on the development of surveillance or assessment mechanisms of Member
States’ (MS) macroeconomic and/or trade performances. This was in the search of
some ‘convergence’ process. Besides, the establishment of built-in monitoring units
was also rarely observed within the Secretariat of most if not all ACP RIOs until
much later on (not before 2008).
2
Earlier on, the UNECA (UNECA 2004) had launched a pioneering system of RI indicators in
Africa (see previous chapter of the present book). This was not without its own critics in some
ACP RIOs, notably as expressed during the above-mentioned workshop. In particular the
COMESA Secretariat regretted the lack of consideration of RI policy effort in the system proposed
by UNECA, with actually 17 selected indicators (among 19) being outcome or impact indicators
(as opposed to input or output indicators), a majority of which corresponding to purely national
data. COMESA also emphasized the need to take into account diverging RIOs agendas, and the
difficulties with the RIOs ranking process as proposed by UNECA.
3
These are trade liberalization, trade facilitation, trade in services, transit facilitation, monetary
convergence, domestic payments and settlements systems, fiscal environment, government inter-
vention in the economy, capital flows and foreign investment, governance issues, regulatory
environment, licensing requirements.
226 J.-M. Salmon
10.3 Project Governance
10.3.1 Project Mandate
During 2007 the ACP Secretariat took the initiative to restart a consultative process
amongst ACP RIOs for the building of a RI indicators system. The Secretariat
received the financial support of the EU to launch the ‘ACP Monitoring Regional
Integration’ project for that purpose, becoming the project contracting authority.
It is worth noting that under the ACP Secretariat organizational chart, the project
was reinitiated and managed not by the Sustainable Economic Development and
Trade Department, but by the Department of Political Affairs and Human Devel-
opment, in charge, inter alia, of relationships with international organizations.4 The
project was finally developed with the collaboration of a Consultancy and two
senior experts.
Twelve ACP RIOs finally involved themselves in the project (see Table 10.1).
Several international organizations (African Development Bank, African Union,
Table 10.1 Regional organizations involved and the number of related member states
ACP region Regional organizations Number of MSa
Sahel-Saharan Africa CEN-SAD 25 ACPb
Southern Africa SADC 15 (including 7 COMESA)
Central Africa CEMAC 6
ECCAS 10 (including 6 CEMAC)
Western Africa ECOWAS 15 (including 8 UEMOA)
UEMOA 8
Eastern and Southern Africa COMESA 19 (including 7 SADC)
EAC 5
IGAD 7
IOC 4 ACPc
Caribbean CARICOM 15 plus Dominican Republic
Pacific Pacific Forum 14 CPd
Source: MRI project documents (as quoted in Disclaimer), namely Baseline Study Report
a
The number of MS was calculated from a visit on the website of each of these organizations, as
from November 2008
b
Libya, Morocco and Tunisia are also MS of CEN-SAD, but we have only included the ACP MS in
the group
c
France is also a member of the IOC on behalf of Reunion Island, but again we have only counted
ACP MS in this group
d
Australia and New Zealand are also members of the Pacific Forum, but we have only included the
ACP MS, which are also part of the regional PICTA free-trade agreement
4
Therefore the project thematic scope would become relatively large and not limited to trade and
economic issues, i.e. to regional economic integration only.
European Commission, OECD, UNECA) and a few experts (ECDPM, UNU-CRIS)

were also consulted and invited to the project seminars.
10.3.2 Project Purpose and Methodological Requests
The main purpose of the ACP MRI project was to harness the recent proliferation of
approaches to RI indicators so as to develop and implement a coordinated system of
RI indicators for ACP regions.
From the project Terms of Reference (ToRs) and the inception phase, it was
indeed clear that the RI indicators system to be built should be considering RI as a
multidimensional process, so that the system would not be focused only on eco-
nomic and trade integration. The expected ACP MRI system would rather include
as many thematic domains as necessary, following a ‘holistic’ approach.
The system would also be able to measure both the degree (or state) of RI and the
RI policy effort: this led to the choice of using the results chain analysis categories.
Again as requested by the project ToRs, the system shall also allow both for
inter-regional comparisons of ACP RI experiences (comparative approach) and for
the monitoring of each individual ACP RI experience vis-a-vis its own agenda
(reflexive approach).
10.3.3 Political Relevance and System/Project Ownership
The issue of the future involvement of the ACP RIOs involved in the project and
their MS was a fundamental one: the implementation of the system would ulti-
mately have to be backed by them, both at the political and at the technical level
(including data production and collection).
Of particular importance was therefore the ongoing identification process by
these RIOs and their MS of the interests they would find and serve through the use
of this monitoring system, as well as the support they would gather in order to
supply its needs, inter alia, in terms of data requirements and data storage.5
In other words, the end-use of the project and of the monitoring system itself was
one of decisive importance. At the project inception, some ACP regions were
considering the project as a possible example of an overly ‘top down’ exercise
“coming from Brussels”, which “we did not ask for” and which will “provide a
surveillance tool for our main donors”, in particular in the context of the hotly-
negotiated EPA agreements.
5
This holds especially true in face of the existing gap between RIOs’ ambitious policy agendas and
the limited means they can access to implement these, a gap actually growing with the so-called
“deepening” of the RI process, notwithstanding the donors’ increasing will to further support this
process.
228 J.-M. Salmon
However, with some close dialogue at the field level with many RIO senior
administrators, it was then considered that, in the context where all ACP RIOs were
committed to a process of building their own monitoring tool, the project outputs
could be helping a lot, including in terms of exchanges of best practices. So the
support earned by the project kept growing from its inception phase.
Finally, it was largely understood that the end-use of the expected system was
simply to monitor RI, and not to evaluate RIOs and their projects/programs or even
less to pinpoint the least effective ACP institutions or actors. In other words, this
ACP MRI system was being regarded as an operational tool with a view to
providing for a more evidence-based decision-making process at many levels,
i.e. national, regional, continental, and even for the whole ACP, while remaining
as depoliticized as possible. With this tool made readily accessible, any stakeholder
at any level would be able to find easily the required standardized information on
any ACP RI aspect and process he/she is interested in.
10.3.4 Project Implementation
The project was implemented with two main phases:

– A baseline analysis (Phase I – November 2008–April 2009) under which the
project experts reviewed existing systems of RI indicators and monitoring
practices and subsequently prepared a fully-fledged proposal for an ACP MRI
system technical framework,
– A consultation and coordination phase (Phase II – May 2009–June 2010) during
which the proposal was introduced to stakeholders and international experts
(Project Seminar 1) and then discussed at field level with a close consultation
process within the 12 RIOs, before being fine-tuned after comments were
received. This lead to the final proposal of the technical framework being
endorsed by the representatives of all RIOs involved (Project Seminar 2).
10.4 Thematic Coverage and Conceptual Aspects
10.4.1 Thematic Coverage
Given its need for comprehensive, holistic and thematic coverage, it was further
proposed and agreed on that the ACP MRI system shall:
(a) be embedded in the Cotonou Partnership Agreement vision of RI,
(b) put into practice the recommendations of the ACP-EU Joint Parliamentary
Assembly – especially the ones included in its ‘Resolution on experiences
from the European regional integration process relevant to ACP Countries’,

dated 20 March 2008,
(c) take fully into account the approach and analysis of the European Commission
in its October 2008 Communication on ‘RI for Development in ACP Coun-
tries’ (EC 2008a), including its proposed definition of RI as “the process of
overcoming, by common accord, political, physical, economic and social
barriers that divide countries from their neighbours, and of collaborating in
the management of shared resources and regional commons” (EC 2008a, p. 3).
In terms of relevance to the ACP context, the EC in its above-mentioned
Communication indicates five issues in its section 2 on Achievements and chal-
lenges of RI in ACP countries.
These are (i1) lack of ownership and institutional capacities at regional and
national level, (i2) the need to overcome the fragmentation of regional markets,
(i3) insufficient economic diversification, (i4) insufficient infrastructure intercon-
nections, and (i5) the need for more effective regional policies to address common
challenges in support of sustainability.
The EC document (in its section 3) also distinguished three main objectives of
RI, i.e. (o1) political stability, (o2) economic development and (o3) regional public
goods, and further developed five priorities for EU support to ACP RI (in its section
4): (p1) strengthening regional institutions, (p2) building regional integrated mar-
kets, (p3) supporting business development, (p4) connecting regional infrastructure
networks and (p5) developing regional policies for sustainable development.
The ACP Joint Parliamentary Assembly, in its above-mentioned recent resolu-
tion (ACP-EU JPA 2008), while listing as preambles a series of 24 important and
relevant issues in this subject, develops six main sections on the following themes:
reconciliation and conflict prevention, institutions and integration agendas in ACP
regions, interregional cooperation, democracy and good governance, economics
and trade, functional cooperation.
10.4.2 Conceptual Aspects
The holistic ambition of achieving thematic coverage was a challenging one.

Comprehensiveness could run contrary to arriving at a system that remains light,
simple or readable, and sufficiently user-friendly.
As a matter of fact, the many administrators and experts from various institutions
consulted during the baseline phase strongly emphasized the risk of a system which
would be too complex, cumbersome or hardly manageable, despite remaining
overall very enthusiastic about the purpose of the project.
To sum up, the requested system’s conceptual needs were the following:
(a) multidimensionality,
(b) capacity to measure degree RI and RI policy effort,
230 J.-M. Salmon
(c) capacity to conduct both interregional (comparative) and intraregional (reflex-

ive) analyses,
(d) relevance to the ACP context (according to joint ACP-EU own views),
(e) comprehensiveness of relevant issues and themes,
(f) manageability and user friendliness.
As the project ToRs were also suggesting the identification of core RI indicators,
it was finally proposed and agreed on to design first a Central System of RI
Indicators (CSRI), which would be common to all ACP RIOs involved in the
project and which would allow for the comparative approach.
In the interested ACP RIOs, this CSRI would then be supplemented in a second
step with complementary RI indicators, tailor-made for the RIO policy agenda and
priorities (thus with a possible different selection from one RIO to another one), to
track its own progress with respect to its settled goals and objectives. This way
several Extended Systems of ACP RI Indicators (ESRIs) could be built.
This was leading to a framework for a two-tiered ACP MRI system.
10.5 Technical Aspects and Contents
10.5.1 The System Architecture
From the reviewing exercises as well as from the six essential methodological
principles set forth above, an initial proposal for the ACP MRI system architecture
was developed under a Three-Level Tree Structure, distinguishing the system
“dimensions” (at the upper level) from the system “domains” (at the intermediate
level) and the system “areas” (at the lower level). Individual indicators would be
positioned (clustered) in their respective area. This structure remained unchanged
throughout the large consultation process, even if its contents were fine tuned.
The dimensions finally proposed are Regional Governance, Economic Integra-
tion, Functional Cooperation and Social Integration. They were selected in accor-
dance to their relevance and the methodological principles set forth above, after
having considered the different choices made by other experts with similar objec-
tives. Also taken into account were the issues, objectives and priorities earmarked
by the European Commission in its Communication on RI for Development in ACP
Countries.
Each dimension was then disaggregated in two or three domains, according to
identified analytical needs and to official jargons, while keeping in mind the
objective of a balanced architecture. The same applies also to each domain,
which was in turn disaggregated into two or three areas.
To illustrate, the “Economic integration” dimension further disaggregates itself
into three domains, namely “Trade integration”, “Monetary and Financial integra-
tion” and “Production and economic cohesion”.
Then, the “trade integration“ domain further develops into three areas, namely
“goods trade”, “services trade” and “trade-related areas”.6
10.5.2 The Results Chain Analysis
As for evaluating both the RI degree and the RI policy effort, it was proposed and
decided to follow the categories of the results chain analysis, namely the input-
output-outcome-impact typology.7 This acknowledges that the RI policy effort is
captured by input and output indicators, while the RI degree is more related to
outcome and impact indicators.
The next step was systematically to identify individual indicators with a view,
whenever possible, to representing fully the results chain typology at each level of
the architecture. This allows for tracking the RI policy efforts undertaken by ACP
RIOs vis-a-vis their respective own policy agenda, as well as the results to which
they arrive, in a reflexive and/or a comparative manner.
10.5.3 The Individual Indicators of the Core System (CSRI)
The envisaged CSRI includes a rather limited number of core indicators, while still
allowing for a relevant representation of the different levels of the system archi-
tecture. These two opposite requests lead to a CSRI made of a range of 50 core
indicators, meaning simple averages (but not a strict constraint) of two indicators
per area and a dozen per dimension.
As for the selection of these 50 core indicators, in addition to striking a balance
in terms of both the system architecture and the results chain typology (see Annex
A.10.3), the following criteria were applied to around 200 candidate indicators:
Relevance, Quantifiability, Simplicity, Availability & Cost.
After consultation of stakeholders, the number of core indicators was raised to
75, i.e. an average of 3 per area (see Annex A.10.2 for a full list).
6
Following the official jargon of trade agreements the latter corresponds to issues such as trade
facilitation, competition, procurement, TRIPS, etc. See Annex A.10.1 for the full list of domains
and areas under each dimension.
7
Which are the key terms in evaluation and results according to the OECD/DAC (see OECD
2002).
232 J.-M. Salmon
Regional
Governance
100
80
60
40
20
Economic
Social Integration 0 Integration
Region A
Functional
Region B Cooperation
Chart 10.1 The Regional Integration “Diamond” (by RI dimensions) (Source: MRI project
documents (as quoted in Disclaimer), namely Baseline Study Report)
10.5.4 Aggregation Issues
The next conceptual and analytical steps were to develop synthesis and comparative
tools of ACP RI from the core indicators of the CSRI. This would lead to the
designing of RI composite indexes and related tables and graphs that could be later
on included in a regular report on ACP regional integration.
The envisaged composite indexes were to be elaborated at the dimension level,
i.e. representing each of the four dimensions (Regional Governance, Economic
Integration, Functional Cooperation, Social integration and regional stability),
leading to the designing of four composite indexes to be graphically represented
through a RI ‘Diamond’ following Ruiz Estrada (2004), as illustrated by Chart 10.1.
Each ‘dimensional’ composite index could be computed from a sample of core
indicators belonging to the dimension in question or alternatively from composite
indexes designed at the domain level, as an intermediary figure: the indexes at the
dimension level would then be computed from the indexes developed at the domain
level (e.g. as weighted averages). The latter approach presents the advantage of
further detailing the comparative analysis of ACP RI experiences, with some more
disaggregated representations as in the RI ‘Radar’ illustrated in Chart 10.2.
The final touch of this proposed approach based on composite indexes would be
to design an overall RI composite index from the four ‘dimensional’
composite ones.
However, making available a single RI composite index is challenging, for
several reasons.
Community
resources
100 Institutional
Regionhood coordination and
80 organisation
60
Human Collective security
Development 40 and democracy
20
Other domains of 0
Trade integration
cooperation
Financial and
Communication
Monetary
and Energy
Production and Integration
Transport economic cohesion
Region A
Region B
Chart 10.2 The Regional Integration ‘Radar’ (by RI domains) (Source: MRI project documents
(as quoted in Disclaimer), namely Baseline Study Report)
Firstly RI is a very complex process and a multidimensional one. Designing an

overall RI Index might inescapably lead to too many arbitrary choices and thus
to a biased tool.
Secondly, there is no absolute norm of RI to serve as an acknowledged benchmark,
even when it comes solely to trade integration.
Thirdly, as a result, the comparisons of integration in different ACP regions,
especially given the different RIOs’ agendas, would run the risk of being flawed,
if analyzed solely with this overall index – not to mention the RIOs related
rankings and its unavoidable contestations.
However, while RI is a complex and multidimensional reality/process, it is not
more complex and more multidimensional than say, human development, and the
international community fully welcomes the (overall) HDI, whatever its limita-
tions. Should it be elaborated, the right approach would be to use it not in isolation
from the other above-mentioned comparative tools, but rather as a complement to a
RI profile including some lines providing a qualitative description/assessment.8
8
This is the approach followed within the UN system, when it comes to the assessment of the MS
economic vulnerability, measured through the Economic Vulnerability Index (EVI), which is a
composite index used by the ECOSOC Committee of Development Policies as a criteria among
others (in relation to benchmarks) to establish every five years the proposed next list of LDCs to
the UNGA. But before a final decision is made with respect to a MS inclusion/graduation as a
result of these quantitative criteria, a qualitative profile of its vulnerability, prepared by UNCTAD,
is consulted. To illustrate the relevance of this approach, just recall that this is how the Maldives
avoided graduation in the early 2000s, not without strong criticisms by then, before having to face
the consequences of the Tsunami in 2004.
234 J.-M. Salmon
As for weighting procedures to build the composite indexes at all levels, they
were yet to be specified in the ACP MRI project.
10.6 System Implementation and Project Sustainability

Issues
The ACP MRI project in the end could not provide for the implementation of the
CSRI at field level, mainly through lack of time – i.e. too short a project duration.
While the initial project duration of 24 months had to be reduced to 20 months in
relation to EDF management constraints, it was initially considered that this
duration could provide for both the indicators system conceptualization (the base-
line phase) and its implementation (the second phase).
However the large number of ACP RIOs to coordinate in the project proved very
time-consuming, as did the close consultations at field level which nevertheless
were indispensable to ensure participation and ownership of the system by
these RIOs.
A subsequent phase would have been necessary for the system to materialize
with the related data collection, treatment and storage, but it could not yet get off
the ground.
10.7 Conclusion
Whatever the merits of the ACP MRI project, and they were many, its experience
demonstrates once again that, when it comes to monitoring indicators systems more
generally, the system size (and cost) should always be considered given owner’s
capacity, the system end-use and its ownership by main stakeholders. For only
positive answers to these crucial aspects will ensure some materialization and
above all sustainability to the desired system.
Annexes
Annex A.10.1: The System Detailed Architecture – The Three

Level Tree
Dimension Domain Area

Regional Community resources Own budget funding
governance Material and human resources
External support
Institutional coordination and Institutional organisation
organisation Legal control bodies
Collective security and Collective security
democracy Democratic governance
Economic Trade integration Goods trade
integration Services trade
Trade related areas
Financial and monetary Coordination of monetary and eco-
integration nomic policies
Financial integration
Production and economic Private sector
cohesion Economic cohesion
Functional Transport Road transport
cooperation Maritime transport
Air transport
Communication and energy Telecommunications and IT
Energy
Other domains of cooperation Water
Other natural resources and
environment
Agriculture and food security
Tourism
Social integration Human development Work, education and research
Health and poverty
Regionhood Regional citizenship and migrations
Culture and gender issues
Source: Project Second Seminar Final Report
236 J.-M. Salmon
Annex A.10.2: The List of Core Indicators
Indicators of Regional Governance (RG)

RG1: Financing mode
RG2: Community budget
RG3: Collection ratio of Community taxes and contributions
RG4: Dissemination of budgetary information to the public
RG5: External funding (projects/ programs)
RG6: Average time for external resources disbursement
RG7: Rate of financial achievement (projects/programs)
RG8: Rate of IT equipment
RG9: Human Resources
RG10: Degree of harmonization of agendas between RIO
RG11: Duration of the cycle of the community acts
RG12: Degree of transposition of community acts or protocols
RG13: Existence of courts for control
RG14: Extent of the regional court of justice jurisdiction
RG15: Existence of a regional policy for conflict prevention and management
RG16: Ratio of monitored elections in Member States
RG17: Peace global index
RG18: Existence of a regional parliamentary institution
RG19: Regional inclusion of civil society
RG20: Democracy index
Indicators of Economic Integration (EI)
EI1: Regional Trade Agreements and regulations for goods trade
EI2: Rate of transposition of community trade regulations by member states
EI3: Level of import duties
EI4: Intra-regional trade
EI5: Existence of regional services trade agreements and regulations
EI6: Intra-regional services trade
EI7: Existence of a regional trade facilitation policy
EI8: Procedures for port customs clearance
EI9: Facilitation of transport and transit along regional corridors
EI10: Existence of a macroeconomic and multilateral surveillance mechanism
EI11: Degree of harmonization of macroeconomic policy instruments
EI12: Degree of fiscal transition
EI13: Existence of an agreement on free movement of capital
EI14: Degree of regional financial integration
EI15: Transfer of intra-regional funds
EI16: Existence of a regional policy for private sector development
EI17: Intra-regional and extra-regional direct Investment
EI18: Size and polarization of the regional market
EI19: Index of region global competitiveness
EI20: Existence of a regional development/cohesion fund
(continued)
EI21: Convergence of income levels

Indicators of Functional Cooperation (FC)
FC1: Regional road and rail networks
FC2: Intra-regional traffic of trade seaports
FC3: Regional sea and river lines
FC4: Intra-regional air traffic
FC5: Existence of an ITC regional policy
FC6: Telecommunication and interconnection regional projects
FC7: Degree of digital access
FC8: Existence of a regional energy policy
FC9: Regional electric interlinked network
FC10: Intra-regional electricity
FC11: Existence of a regional water policy
FC12: Availability of water resources
FC13: Actions of water common management
FC14: Level of regional debit of renewable water resource
FC15: Existence of a regional policy for environment and other natural resources
FC16: Regional Actions for environment and other natural resources
FC17: Existence of a regional policy for agriculture, fisheries and food security
FC18: Regional Actions for agriculture, fisheries and food security
FC19: Existence of a regional policy for tourism
FC20: Regional tourism «significance» (arrivals)
Indicators for Social Integration (SI)
SI1: Existence of a regional policy for employment, education and research (S&T)
SI2: Regional Actions for employment, education and research (S&T)
SI3: Degree of university cooperation
SI4: Existence of a regional policy for health
SI5: Regional Actions for health
SI6: Regional map of poverty-health
SI7: Existence of an agreement for the free movement and residency rights of the community
citizens
SI8: Intra-regional migration flows
SI9: «people willingness» for regional integration
SI10: Existence of a regional gender policy
SI11: Regional actions for gender equality
SI12: Women Participation in public institutions
SI13: Existence of a regional cultural policy
SI14: Regional media
Source: Project Second Seminar Final Report
238 J.-M. Salmon
Annex A.10.3: Core Indicators Distribution in Terms of System

Dimensions and Indicators Typology
Number Number
Number Number of of
Number Number Number of of specific general
of Number of of input output outcome Impact Impact
Dimensions domains of Areas indicators indicator indicator indicator indicator indicator
Regional 3 7 20 4 6 8 2
governance
Economic 3 7 21 0 8 3 5 5
integration
Functional 3 9 20 1 12 0 4 3
cooperation
Social 2 4 14 0 8 1 2 3
integration
TOTAL 11 27 75 5 34 12 11 13
Source: Document (CSRI Methodological Guide)
References
ACP-EU Joint Parliamentary Assembly. (2008). Resolution on experiences from European

regional integration process relevant to ACP countries, 20 March, ACP-EU/100.203/08/fin.
COMESA. (2002). Discussion paper on surveillance as a means to measure the degree to which
integration is taking place in the COMESA Region. COMESA Secretariat.
De Lombaerde, P., & Salmon, J. M. (2011, July 6–8). Systèmes d’indicateurs pour la mesure et le
suivi de l’intégration régionale: o
u en sommes-nous? Paper discussed at the Annual Confer-
ence of the ARSDLF organized by the CEGERMIA in Fort de France, Martinique.
Dinka, T., & Kennes, W. (2007, September). Africa’s Regional Integration Agreements: History
and Challenges (ECDPM Discussion Paper n 74).
European Commission. (2008a). Communication on Regional Integration for Development in
ACP Countries. COM (2008) 604, October 1st.
European Commission. (2008b). Commission Staff Working Document accompanying the Com-
munication on Regional Integration for Development in ACP Countries, SEC (2008) 2539,
October 1st.
European Commission. (2008c). Commission Staff Working Document accompanying the Com-
munication on Regional Integration for Development in ACP Countries, The Regional Strategy
Papers and Indicative Programmes of the 10th European Development Fund, SEC (2008) 2538,
October 1st.
Lyakurwa, W., McKay, A., Ng’eno, N., & Kennes, W. (1997). Regional integration in subSaharan
Africa: A review of experiences and issues. In A. Oyejide, I. Eldabawi, & P. Collier (Eds.),
Regional integration and trade liberalization in sub-Saharan Africa (Vol. 1). London: MacMillan.
OECD. (2002). Glossary of key terms in evaluation and results, Paris
Ruiz Estrada, M. A. (2004). Global Dimension of Regional Integration Model (GDRI-Model)
(FEA Working Paper, 2000 4–7, June).
UNECA. (2004), Assessing Regional Integration in Africa. ECA Policy Research Report, Addis
Ababa.
Chapter 11
The East African Community Common
Market Scorecard
Alfred Ombudo K’Ombudo, Philippe De Lombaerde, and Maria Borda
11.1 Introduction
This chapter presents and assesses the EAC Common Market Scorecard (CMS)
which was published by the World Bank Group (WBG) in 2014, in collaboration
with the EAC Secretariat (World Bank/EAC 2014).
The East African Community (henceforth EAC) itself was established in 1999
by Kenya, Tanzania and Uganda after signing the EAC Treaty.1 Its objectives are to
deepen cooperation among member states in political, economic, and social fields.
They include the ambitious goals of establishing a customs union (2005), a com-
mon market (2010), a monetary union and ultimately even a political federation of
East African Partner States. Burundi and Rwanda joined the EAC later than the
others (in 2007), and joined the customs union in 2009.
A fairly classical economic integration process is thus followed. ‘Deep integra-
tion’ is pursued, requiring trade liberalisation, followed by trade facilitation through
1
More precisely, the EAC was revived after it had already existed between 1967 and 1977. The
treaty was signed in 1999 and entered into force in 2000.
A. Ombudo K’Ombudo
EAC Common Market Scorecard 2014 Project, Nairobi, Kenya
Advocate of the High Court of Kenya, Nairobi, Kenya
US International University, Nairobi, Kenya
P. De Lombaerde (*)
NEOMA Business School, Rouen, France
e-mail: philippe.de-lombaerde@neoma-bs.fr
M. Borda

240 A. Ombudo K’Ombudo et al.
building regional infrastructure, institutions and business rules, in order to bring

intra-regional trade levels closer to their potential levels. The latter are estimated at
around 40% higher on average than actual levels for African RECs (de Melo and
Tsikata 2014). The establishment of the EAC Common Market is in line with the
provisions of the EAC Treaty. It provides for four freedoms (free movement of
goods, labour, services, and capital), and two rights (right of residence and
establishment).
As part of the implementation process of the EAC Common Market Protocol,
which came into force on July 1st 2010, EAC Partner States have been undertaking
measures to review their domestic regulatory environments to ensure compliance
with the Protocol and bring the resulting business environment towards a common
(and upgraded) regional standard.2 It should hereby be observed that the liberali-
zation of intra-regional trade in goods (art. 6 of the Protocol) was already covered
by the Customs Law of the Community as specified in Article 39 of the Protocol on
the Establishment of the EAC Customs Union. Also providing legal basis for the
operations of the Common Market are the EAC Protocol on Standardisation,
Quality Assurance, Metrology and Testing and the EAC Standardisation, Quality
Assurance, Metrology and Testing Act.3 The provisions of the Common Market
Protocol also permit the incorporation of additional protocols that may be con-
cluded in areas such as sanitary and phytosanitary (SPS) cooperation and technical
barriers to trade (TBTs). In fact, the EAC Partner States have already concluded the
EAC Protocol on Sanitary and Phytosanitary Measures, which is currently ratified
by Kenya, Uganda and Rwanda.
After revising two progress reports on the implementation of the Protocol, the
EAC Council of Ministers expressed concern that the implementation of the
Protocol was lagging behind schedule. In an effort to expedite the implementation
process, National Implementation Committees were created following a Council
directive to that effect. In the same vein, monitoring efforts were stepped up.
Upon request of the EAC Secretariat and upon evidence of interest for such a
monitoring mechanism from EAC Partner States and civil society, the World Bank
Group therefore developed and published the EAC CMS which is the object of
study in this chapter. The first step towards achieving this was to design a compre-
hensive operational plan for implementing this scorecard, with input from relevant
stakeholders, including the WBG, Ministries of EAC, EAC Secretariat, East Afri-
can Business Council, United Nations University (UNU-CRIS), East African Law
Society and other stakeholders. An EAC CMS Reference Group, which drew from
relevant stakeholders and other value-adding persons, was constituted as a consul-
tative mechanism for the design phase of the scorecard.
This chapter presents a preliminary assessment of the scorecard. It looks at its
purpose and scope, methodological framework (including data collection and
2
On the implementation challenges for the regional harmonization of commercial laws, see also
Agaba (2011).
3
An EAC Metrology Bill was mooted in 2009.
11 The East African Community Common Market Scorecard 241
validation), governance and stakeholder structure, communication and reporting

aspects, and perspectives for the future.
11.2 Purpose, Scope and Ownership
The purpose of the monitoring instrument which is discussed here is to develop an

instrument that allows tracking the measures taken by individual EAC Partner
States (including sector regulators and other competent authorities) in order to
comply with their commitments as defined in the Common Market Protocol and
with other related commitments. Monitoring is understood here as an instrument for
policy-makers and public sector officials to control policy implementation and to
take corrective actions whenever necessary. It is also an instrument at the regional
level through the provision of an institutionalized information and communication
channel among member states, to support the synchronization and coordination of
their actions, and early problem-solving. In addition to being an element of ‘good
practise’, the monitoring system increases transparency, generates trust, and allows
the private sector to more fully benefit from economic integration and to resort to it
in the face of inadequate or inconsistent implementation. Monitoring thus contrib-
utes to ‘good regional governance’ practices, such as openness and transparency,
participation, accountability, effectiveness, and appropriateness (Corkery 1999: 15;
European Commission 2001; Kondo 2002: 7; Best 2010: 185–193; Blagescu and
Lloyd 2010: 215–217; De Lombaerde et al. 2008a).
The purpose and scope of the monitoring system for the implementation of the
EAC Common Market is essentially derived from a Collaboration Agreement
between the EAC Secretariat (with membership from the ministries with responsi-
bility for EAC affairs in the Partner States) and the WBG, and is complimentary to,
yet different from, the EAC Secretariat’s obligation towards implementing Article
50 of the Common Market Protocol (see Box 11.1). While the Council determines
the monitoring framework, the EAC Secretariat is in charge of implementing the
framework. The commitments and programmes included in the Protocol are to be
taken as evaluation criteria, although the monitoring exercise is not limited to
policy implementation. Art. 50 also foresees monitoring of results variables related
to ‘the enjoyment of freedoms and rights’. The monitoring periodicity is in princi-
ple annual, with the exception of a more general evaluation of the implementation
of the Protocol, which is three-yearly.
The collaboration agreement between the EAC Secretariat and the WB narrowed
the scope of the operational plan. The WBG designed an independent scorecard
which maps and compares member states’ implementation of EAC’s Common
Market obligations. The EAC CMS combines quantitative (and related technical
assessments) and qualitative data to track the level of commitment of the member
states towards completion of the Common Market, bearing in mind that this is not to
be a purely legal exercise. The scorecard fuses approaches, where appropriate,
gleaned from other regional blocs’ approaches. The scorecard facilitates evidence-
Box 11.1: Art. 50 Monitoring and Evaluation of Implementation

of the EAC Common Market
1. The Council shall establish a framework for monitoring and evaluating the
implementation of this protocol.
2. For the purposes of this article the Council shall:
(a) Ensure that the operations of the Common market conform to the
objective of the protocol;
(b) Annually review the specific commitments and programmes in this
protocol and take the necessary measures to ensure that the partner
states adhere to their commitments and programmes within the
agreed timeframe;
(c) Evaluate the implementation of this protocol; and
(d) Assess any cause of delay in the implementation of this protocol and
take the appropriate measures to remedy the situation.
3. For the purposes of the implementation of paragraph 2 the Council shall
take into account any changes occurring in the economic and social
circumstances of the partner states.
4. The annual review in subparagraph b of paragraph 2 shall:
(a) Consist of an assessment of the implementation of the agreed com-
mitments and programmes, taking into account the results of any
relevant activities of the monitoring and evaluation exercise; and
(b) In particular, include an assessment of the results achieved in the
realization and enjoyment of the freedoms and rights of citizens
guaranteed under this protocol, measured against:
(i) The agreed commitments;
(ii) The effectiveness in the implementation of the agreed commit-
ments; and
(iii) The extent to which the commitments agreed to in the imple-
mentation Schedules have been adhered to.
5. The evaluation of the implementation of the common market referred to in
subparagraph (c) of paragraph 2 shall be carried out every 3 years.
Source: Protocol on the Establishment of the East African Community
Common Market
based tracking of the progress towards achieving a common market and contributes
to maintaining attention and resources towards the key success factors necessary for
achievement of a better investment climate in a common market arrangement.
Taking into account the mandate of the WB Investment Climate Advisory
Services (now the WB Trade and Competitiveness Practice), the focus of the
monitoring exercise was on business-related policy implementation issues. The
purpose and scope of the EAC Common Market Scorecard are thus more precise
and limited than most of the proposed indicator systems so far. The most relevant
reference points seem to be the European Commission’s Internal Market Score-
board4 and ASEAN’s Economic Community Scorecard.5
11.3 Methodological Framework for the EAC Common

Market Scorecard
Initially, a number of options were considered with respect to the selection of

variables and indicators to be used in the scorecard. These variables can be grouped
in five categories (Fig. 11.1). Categories I and II include variables that inform us
about the implementation of the agreed policies (regulations and measures). These
variables are subdivided because a narrow interpretation of the mandate of WB-IFC
covered only the business-related variables in category I (goods, services, capital,
and labor). A more liberal interpretation of this mandate however covered other
common market areas such as free movement of persons and rights of establishment
and residence. This approach would have been more consistent with the broad
mandate of the EAC Secretariat (see art. 50 of Protocol; see above). The
4
The endorsement of the Action Plan for the Single Market by the European Council of Amster-
dam of 17 June 1997 led to the creation of the ‘Single Market Scoreboard’, first published in
November 1997. The European Council emphasized “the crucial importance of timely and correct
transposition of all agreed legislation into national law; the need to fully inform citizens and
business about the Single Market and the need for active enforcement of Single Market rules in the
Member States” (European Commission, 1997: 1). DG Internal Market and Services developed
quantitative and qualitative methodologies to assess (i) the transposition of Internal Market
directives into national law, and (ii) the number of infringement proceedings initiated by the
Commission against the member States. The Internal Market Scoreboard (IMS) is published twice
a year since then. See: http://ec.europa.eu/internal_market/score/index_en.htm. Interestingly, the
methodology of the IMS has also been adapted to be used by the EFTA member states that signed
the EEA Agreement. With the ‘Internal Market Scoreboard – EFTA States’ (IMS-EFTA) the
EFTA Surveillance Authority aims at measuring the effectiveness of the Internal Market rules that
are part of the EEA Agreement and encouraging the transposition of the Internal Market directives
in a timely manner. In addition, the IMS-EFTA contains information on the infringement pro-
ceedings commenced by the EFTA Surveillance Authority against the EFTA States with the
objective to ensure correct enforcement of the rules. The IMS-EFTA, together with the Interim
Report on Transposition Status of Directives, has been published since May 1998 and is published
twice a year (Costea et al., 2008). For further details and updated information, see Chap. 1 in
this book.
5
ASEAN adopted the ASEAN Economic Community Blueprint in Nov. 2007, outlining the
measures to be taken (and the time frame for implementation) in order to establish a competitive
single market by 2015. The first Scorecard was published in March 2010 and covered the period
2008–2009. See: http://www.asean.org/publications/AEC%20Scorecard.pdf. It should be
observed, however, that the scope of the AEC Scorecard goes beyond the ‘single market’; it also
covers other dimensions: ‘competitive economic region’, ‘equitable economic development’, and
‘integration into the global economy’. See also, Chap. 13 in this book.
Fig. 11.1 Possible components of an EAC common market monitoring mechanism
implementation variables can be assessed based on information coming from the

member states (notifications) or through other means.6 Categories III and IV inform
us about the target variables (enjoyment of rights and freedoms) of the common
market programme. These can be assessed (measured) by making use of official
statistics (III) or via perception surveys (IV). Art. 50 also foresees a role for the
EAC Secretariat with respect to category III.7
6
Ideally, EAC Partner States should notify the EAC Secretariat and other EAC Partner States
about potential measures that are under consideration and that are likely to affect the enjoyment of
rights under the protocol by other Partner States. However, currently there exists no infrastructure
or clear policy for a system of notifications. The scorecard partially addressed this problem, by
outlining key measures that the Partner States had taken that were inconsistent to their obligations
to the EAC Common Market Protocol. However, this only provided information as regards
existing measures, but not (perhaps the more important) ex-ante measures i.e. legal, regulatory,
administrative and policy proposals that have not yet been promulgated. The latter are more useful,
given that they are designed to allow other EAC Partner States to exercise their right of advance
comment on potential common market-limiting measures.
7
UNECA has relevant expertise in monitoring category III variables, built-up in the framework of
its ARIA Reports and indicator system (UNECA 2002, 2003, 2004). See, Chap. 9 in this book.
Also of relevance is the recent ACP Monitoring Regional Integration project, involving the design
of an indicator system for monitoring the regional integration processes in the various ACP
subregions. See: http://mri.acp.int/spip.php?page¼indexen. See, Chap. 10 in this book.
The ambition of the monitoring exercise was consciously limited to these four
categories, which are all directly measurable in some way or another. It was
considered as being beyond the scope of a monitoring exercise to establish the
causal link between policy and target variables, i.e. to establish ‘results’ and
‘impacts’. Results and impacts (category V) cannot be directly measured but
require statistical analysis and econometric estimation, which is better kept outside
the monitoring system.8 The role of monitoring is, precisely, to provide all stake-
holders with relevant data in an impartial and transparent manner. The interpreta-
tion and further (statistical) analysis of these data are tasks for the interested
stakeholders. This is also the approach used in the Internal Market Scoreboard
(see above) and the AEC Scorecard. The latter is a compliance tool, not an
instrument for impact assessment (Rillo 2011).
A step-wise approach was followed by concentrating first on Category I and II
(where the mandates of EAC Secretariat and WBG coincide), which can then be
expanded by the Secretariat in the future to include category III. WBG could further
play a role with respect to category IV by adapting its business climate question-
naires for this purpose.9
A consensus view emerged among the stakeholders that the monitoring system
should not be limited to the regulations and measures not implemented by the
deadlines that can be found in the Protocol and its Annexes (i.e. following the
European model), but that it should rather be designed to accompany the whole
Common Market implementation process, in line with art. 50. As seen in other
regions, monitoring does not necessarily end after the provisions of an agreement
have been practically fully implemented: the concerns of private sector actors
trading and investing under the terms of the agreement will still need to be attended
and any further commitments that the partner countries may have assumed during
the implementation process will have to be monitored, including directives by EAC
Council of Ministers, on an ongoing basis (De Lombaerde et al. 2008b). The
ambition was therefore to develop an instrument which continues to be useful
beyond the specific short-term deadlines.
8
See e.g. De Lombaerde and Van Langenhove (2010: 2–29).
9
The World Bank Group conducts a number of business questionnaires on business climate issues.
Enterprise Surveys (www.enterprisesurveys.org) are firm-level surveys of a representative sample
of an economy’s private sector. The surveys cover a broad range of business environment topics
including access to finance, corruption, infrastructure, crime, competition, and performance
measures. Doing Business Reports (www.doingbusiness.org) provide measures of business regu-
lations for local firms in (currently) 183 economies and selected cities. The Investing Across
Borders Report (www.iab.worldbank.org) is a World Bank Group initiative comparing regulation
of foreign direct investment around the world. It presents quantitative indicators on economies’
laws, regulations, and practices affecting how foreign companies invest across sectors, start
businesses, access industrial land, and arbitrate commercial disputes. According to the 2016
edition of the Ease of Doing Business Report, performance across the EAC economies varies:
Rwanda is ranked 62nd globally, followed by Tanzania (131st), Kenya (136th), Uganda (150th),
and Burundi (152nd), on a total of 183 economies covered by the Report.
An underlying goal is that information on implementation should – in the

medium term - be gathered by the EAC Secretariat from the national ministries in
the EAC partner states (MEACAs),10 but should not be limited to this. Other,
independently measured, variables should be added and/or questionnaires could
be used to validate the information reaching the system through notifications.
Indeed, the EAC partner states have for example agreed to eliminate the NTBs
identified by the EAC Secretariat including non-harmonised technical standards,
SPS requirements and roadblocks, all of which constitute a major constraint to
intra-EAC trade. Although the EAC member states agreed to eliminate the NTBs
flagged by the EAC Secretariat, the majority of the rules and regulations have not
been eliminated. In an effort to address NTBs, a National Monitoring Committee
(NMCs) was established in all the EAC member states and these report quarterly to
the EAC Regional Monitoring Group and relevant sectoral committees.
Each EAC Sectoral Committee is responsible for the preparation of a compre-
hensive implementation programme and the setting out of priorities with respect to
its sector; it monitors and keeps under constant review the implementation of the
programmes of the Community; and it submits reports and recommendations to the
Co-ordination Committee either on its own initiative or upon the request of the
Co-ordination Committee concerning the implementation of the provisions of the
Treaty that affect its sector.
Further, data points may be generated as part of tracking policy outputs. The
completion of the Common Market rests not only on community law, regulations
and directives, but also on its effective enforcement and the supremacy of these
provisions over national law. As a matter of fact, there are several national laws that
have to be amended so that they are compatible with the Common Market.
The completion of the Common Market will also require the implementation of
agreed programmes and effective cooperation on subjects with a direct bearing on
business. If this approach were to be pursued in addition to the data points above,
then it would be necessary to take stock of policy planning at the EAC level, in
order to identify the various types of support of the agreed policies that could be
eligible for the CMS. This exercise should be constructed as follows:
(a) List key targets required to meet the objectives of the EAC Common Market,
(b) List policy documents relevant to meet targets in (a),
(c) List measures and activities agreed upon for implementation during period
under review,
(d) Review the percentage of the measures and activities implemented during the
period under review,
(e) Weight the information in (d) based on an appropriate variable,
(f) Present a weighted average for the implementation rate for the EAC.
In this respect, it is worth noting that art. 41 par. 4(b) of the Protocol stipulates
that the Council may issue directives on “the key indicators for monitoring the
10
An on-line reporting tool has been designed with support from TradeMark and GIZ.
implementation of the integration process of the Common Market and evaluating

the impact of the integration process on the welfare of the people in the Community
and the competitiveness of the Community”. This approach remains an option for
an internal scorecard generated by the EAC Secretariat in the medium run.
The annexes to the Protocols give some benchmarks against which policy
implementation can be monitored and evaluated. It should be observed however
that not all aspects of the common market have been translated into implementation
schedules. Only for the free movement of workers, the liberalization of services,
and the liberalization of capital detailed schedules were included in the annexes.
Tables 11.1, 11.2, and 11.3 present a synthetic view of these schedules by country
and per year. New commitments will have to be closely monitored and gradually
included in the monitoring system. By providing information on the level of
completion of the design of the EAC Common Market Protocol, the scorecard is
a means to maintain focus on completing all annexes and schedules.
It should be observed that, from a conceptual point of view, a distinction should
be made between ‘liberalization effort’ and ‘liberalization level’. Especially if
member states are to be compared on the basis of the indicators in the monitoring
system, this distinction is important both from a political and a technical point of
view. In the former case (measurement of liberalization effort), the number of
commitments (obligations) per country can indeed be taken as the point of depar-
ture and as the benchmark against which to evaluate the liberalization effort.11
However, implementation rates may be difficult to compare as they do not take
initial liberalization levels into account and as the number of measures to-be-
implemented may be marginal or even zero for some member states (which is for
example the case in the implementation schedule on removal of restrictions to free
movement of capital, see Table 11.3). In the case of the measurement of the
liberalization level, the point of departure should be the list of all (or most)
measures that should be in place for the implementation of the common market
(i.e. a sort of check-list), independently of their initial level of implementation at the
start of the process. Apart from not only reflecting marginal progress towards the
end goal (i.e. establishing a common market), a major advantage of this approach is
that the indicators remain better comparable over time, especially when the set of
commitments to-be-implemented varies over time. This is precisely the case in the
EAC where articles 51–53 explicitly foresee the adoption of additional commit-
ments (Box 11.2). This approach has also been recently included in the methodo-
logical improvements to the World Bank Group’s Doing Business Report, which
assesses “the absolute level of regulatory performance and how it improves over
time. This measure shows the distance of each economy to the “frontier,” which
represents the best performance observed on each of the indicators across all
economies in the Doing Business sample. . .”.12
11
In the case of the ASEAN Economic Community, benchmarks are found in the AEC Blueprint
and in the AEC Strategic Schedule (Rillo 2011).
12
http://www.doingbusiness.org/data/distance-to-frontier
Table 11.1 Original implementation schedule of regulations related to free movement of workers
(number of occupational titles covered by regulations to be implemented per year)
2010 2011 2012 2013 2014 2015
Burundi 7
Rwanda 5
Tanzania 5 2 2 5
Uganda 4
Source: The East African Community Common Market (Free Movement of Workers) Regulations
– Annex II, EAC Secretariat, 2009
Table 11.2 Original schedule of commitments related to liberalization of services (number of

commitments per year)
2010 2011 2012 2013 2014 2015
Burundi Market access 53 5
National treatment 56 3
Kenya Market access 33 21
National treatment 45 7
Rwanda Market access 46 6 6
National treatment 48 4 4
Tanzania Market access 20 1 2 3 4
National treatment 22 1 2 2 4
Uganda Market access 39 4 1 13
National treatment 40 3 1 13
Source: The East African Community Common Market Schedule of Commitments on the Pro-
gressive Liberalisation of Services – Annex V, EAC Secretariat, 2009
Table 11.3 Original 2010a 2011 2012 2013 2014 2015

implementation schedule on
Burundi 1 9
removal of restrictions to free
movement of capital (number Kenya
of restrictions to be removed Rwanda 5
per year) Tanzania 4 5 5
Uganda
Source: The East African Community Common Market Schedule
on the Removal of Restrictions on the Free Movement of Capital
– Annex VI, EAC Secretariat, 2009
a
Includes 31/12/2009
Finally, a combination of both approaches is of course also possible, a crucial

element thereby is a clear and unambiguous communication about the results of the
monitoring exercise so that the figures are correctly interpreted. This is the
approach adopted by this scorecard.
In such a scorecard, data is collected from the EAC Common Market Protocol
itself, EAC Council of Ministers directives, EAC Court of Justice, EA Legislative
Assembly and through surveys. This data can roughly be categorised as:
Box 11.2: Articles 51–53 of the Protocol

ARTICLE 51
Regulations, Directives and Decisions
The Council shall from time to time make regulations, issue directives and
make decisions as may be necessary and such annexes shall form an integral
part of this Protocol.
ARTICLE 52
Annexes
The Partner States shall conclude such Annexes to this Protocol as shall be
deemed necessary and such annexes shall form an integral part of this
Protocol.
ARTICLE 53
Amendment of the Protocol
1. This Protocol may be amended by Partner States in accordance with the
provisions of Article 150 of the Treaty.
2. Subject to the provisions of paragraph 1, the Council may:
(a) With the approval of the Summit, review the annexes to this Protocol
and make such modifications as it deems necessary;
(b) Submit to the Partner States proposals for the amendment of the
provisions of this Protocol.
Source: Protocol on the Establishment of the East African Community
Common Market
• Data representing the reference “community output,” which include the EAC
Common Market Protocol, and legal acts collected at community source.
• Data representing action taken at EAC Partner State level in pursuit of imple-
mentation of the community objectives: it comprises information about national
laws transposing community law or decisions or approximating national law to
EAC law. Most of this information is mined through desk research, expert panels
and through a verification process coordinated through the MEACs.
The scorecard team initially expressed the intention to construct a series of
indices on the basis of the following information:
(a) Index on Completeness of the EAC Common Market Protocol. This index
would measure the extent to which the EAC Common Market offers action-
able guidance for the implementation of the EAC Common Market Protocol. It
would measure which parts of the protocol have schedules and annexes, and
where the protocol provides that further instructions will be offered through
agreement by partner states, whether there is evidence that such agreements
have been reached. It would aggregate information on the four freedoms and
two rights.
(b) Index on Directives of the Council of Ministers. This index would measure the
extent to which decisions of the EAC Council of Ministers are focused on
delivering the provisions of the Common Market Protocol. In other words, this
is a measurement of the work rate of the Council of Ministers towards
delivering actionable instructions to the EAC Partner States and the EAC
Secretariat to deliver on the EAC Common Market Protocol.
(c) Index on Acts of the East African Legislative Assembly (EALA). This index
would measure the extent to which decisions of the East African Legislative
Assembly are focused on delivering the provisions of the Common Market
Protocol. In other words, this is a measurement of the work rate of EALA
towards delivering actionable instructions to the EAC Partner States and the
EAC Secretariat to deliver on the EAC Common Market Protocol.
The rest of the indices would measure the level of compliance by each EAC
Partner State towards commitments made to allow the free movement of goods in
the EAC. A composite score for the EAC for each index would also be provided. All
agreements and commitments that provide actionable instructions from the Com-
mon Market Protocol, EAC Council of Ministers, EALA, and EACJ would be
covered.
(d) Index on Free Movement of Goods. This index would cover issues contained in
the Protocol on the Establishment of the East African Community Customs
Union.
(e) Index on Free Movement of Persons and Labour. This index would cover: the
free movement of persons; standard identification systems13; travel documents;
free movement of workers; harmonization and mutual recognition of academic
and professional qualifications; and harmonization of labour policies, laws and
programs.
(f) Index on Rights of Establishment and Residence. This index would cover the
right of establishment; right of residence; and access to and use of land and
premises.
(g) Index on Free Movement of Services. This index would cover free movement of
services; national treatment; and the most favoured nation principle.
(h) Index on Free Movement of Capital. This index would cover: elimination of
restrictions on operations related to: equity and portfolio investments; bonds
and other debt instruments; money market instruments; collective investment
schemes; bank transactions; direct investments; repatriation of proceeds from
sale of assets; and other transfers and payments relating to investment flows.
13
The EAC has a harmonized passport. In an effort to encourage ease of movement, Kenya and
Rwanda made it acceptable to cross their mutual borders with only an identification card, and in
2010 the two countries entered into a reciprocal agreement waiving the work permit fee.
For the first edition of the EAC CMS, these indices were finally not withheld.
The focus was restricted to de jure compliance by EAC member states, i.e. not de
facto implementation, and no aggregate indices were calculated.
The analysis for the 2014 Scorecard was based on the assessment of 683 regu-
lations and laws with a direct link to the implementation of the common market, as
well as other reports, legal notices, and also trade statistics. Of the 683 regulations
and laws, 14 are in the area of goods, 545 in the area of services, and 124 in the area
of capital (WB/EAC 2014: 34).
In the area of trade, focus was placed on compliance with four obligations:
(a) elimination of tariffs and equivalent measures on intra-regional trade,
(b) elimination of non-tariff barriers, (c) implementation of a common external
tariff, and (d) harmonization and mutual recognition of SPS standards and technical
standards (WB/EAC 2014: 38). In the area of services, the focus was on the key
obligations as listed in Part F of the Protocol (articles 16.1–7). Sectors covered
include: business services, communication services, distribution, education, finan-
cial services, tourism, and transport. In the area of capital, the 20 capital market
operations listed in the Protocol Schedule on the Removal of Restrictions have been
targeted.
Data sources included: (a) national laws and regulations, (b) implementation
reports of national authorities, (c) national official statistics, (d) EAC reports,
(e) international treaties, and (f) reports of international organizations (such as
IMF, World Bank Group and UNECA). The review process was conducted via
desk research in combination with expert opinion and stakeholder consultation
(including ministries, regulatory agencies, and professional associations). Expert
opinion was gathered by means of surveys addressed to lawyers, other professional
service providers, academics, business associations and other expert respondents
based in the five EAC Partner States, and selected on account of their expertise on
areas covered by the protocol.
All original data were treated confidentially. The pool of potential respondents
was based primarily on the following sources of information: (a) members of the
East African Business Council; (b) EAC professional associations focusing on
professional services liberalized for trade under the protocol; (c) trade and invest-
ment lawyers; and (d) firms that trade and invest in the EAC.
Conflicting responses were cured through counter-checks with desk research,
use of “best respondents” to clarify conflicting issues, and through verification/right
of reply missions to public authorities, coordinated by Ministries of the EAC. Being
categorised as “best respondent” requires that the individual is qualified specifically
in the legal issue contested, not only by having attained the academic qualification
but by being a practitioner in the field.
Confidential meetings were convened with Ministries of EAC after completing
the desk research and compiling the first draft of the EAC CMS. The objective was
to work with the ministries as a coordinating mechanism to check through the
information in the draft report with relevant line ministries.
The approach which has been followed in this monitoring process presents three
types of limitations: (a) substantive, focusing on the content and coverage of the
indicators; (b) methodological, concerned with the objectives of the desk research,
the respondent questionnaire design and data collection; and (c) limits to the
implications of the indicators, addressing their potential interpretation, uses, and
relationships with other scorecards or evaluation material covering the EAC com-
mon market process. These limitations should be kept in mind when interpreting
the data.
Substantive Limitations:
(a) Where the EAC CMS measures legal and regulatory compliance to the EAC
CMP, it does not take into account bilateral agreements between EAC Partner
States; for example, the agreement between Kenya and Rwanda that allows
citizens to travel with only national identity cards.
(b) EAC CMS does not consider specially regulated economic zones in determin-
ing compliance to the protocol. Therefore legal regimes for special economic
zones, export processing zones (EPZs), and other areas governed by special
legal frameworks are excluded from the scope of the project.
(c) If a right granted under the CMP is extended generally as part of the external
trade policy of the country to foreign nations, then this is counted as compli-
ance to the CMP i.e. the right or freedom does not have to be exclusive to EAC
countries.
Methodological Limitations:
(a) EAC CMS is not a survey of perceptions,14 but of legal facts and expert
responses collected through standardized questionnaires completed by a
small number of specialists in each EAC country.
(b) The data does not require to be based on a statistically significant sample of
respondents in each EAC Partner State. This survey is complemented with
thorough desk research, and an intensive consultation process, including a
verification process with authorities in the EAC countries.
(c) The EAC CMS does not seek to measure the ‘de facto’ application of laws and
regulations that facilitate the implementation of the protocol. The possibility
remains of a discrepancy between the passed laws and regulations and the
actual practice (non-tariff barriers). Thus, countries could score higher than
they would if a compliance process was in place.
Main Limitations of Interpreting the EAC CMS:
(a) EAC CMS does not provide an indication of the actual level of enjoyments of
rights and volumes of transactions in the common market, but only an indica-
tion of the legal and regulatory environment allowing these transactions to
14
Where checklists were shared with entrepreneurs and business people, the input sought was not
their perceptions, but they were rather contacted as a source of information, specifically as regards
administrative letters from public authorities requesting their compliance with various industry
regulations.
happen. It should therefore not be assumed that increased indicator scores will
automatically lead to higher levels of trade and investment in the EAC.
(b) EAC CMS data should not be used as a proxy for government business reforms
in general. It only measures legal and regulatory compliance to the protocol,
and in so doing, facilitate policy dialogue by identifying good practices, track
reforms, facilitate sharing of reform experiences, and enable research and
analysis.
11.4 Governance and Stakeholders
A Reference Group was proposed to provide stakeholder input into the process of
designing the scorecard. Working closely with the World Bank Group, the refer-
ence group:
• Advised on the scope of coverage and feedback mechanism for the EAC CMS.
• Reviewed and provided inputs into drafts generated by World Bank Group in
operational plan areas such as: (a) objectives, (b) methodology, (c) reporting
strategy, (d) communications, and (e) ownership and governance.
The reference group comprised persons drawn from EAC stakeholder institu-
tions, professionals with experience in development planning monitoring, experi-
enced practitioners in regional integration and other regional integration
communities that have done scorecards before. The stakeholder institutions
included World Bank Group, Ministries of EAC, EAC Secretariat, East African
Business Council, national institutions already implementing scorecards (nomi-
nated by MEACs where necessary), research and civil society institutions, private
sector bodies, United Nations Economic Commission for Africa (UNECA), and
United Nations University (UNU-CRIS). A secretariat function for the reference
group was offered by the World Bank Group.
The Scorecard was published by the World Bank Group, and was handed over to
the EAC Secretary General and staff, and to Ministers responsible for East African
Community Affairs in each of the EAC Partner States, much in the style of the EAC
Doing Business Report. The EAC Partner States have adopted the results of the
scorecard as part of their official monitoring tools and the EAC Council of Minis-
ters have directed Partner States to implement the recommendations of the
scorecard.
In the elaboration process of the first edition of the Scorecard it was also
observed that the obligation for each member state to regularly inform the EAC
Council of any new laws and administrative guidelines which affect trade in
services and free movement of capital had not been commonly respected.
Establishing an effective reporting mechanism would add transparency and facil-
itate monitoring of the member states’ progress towards liberalization.
11.5 Reporting and Communication
The experience with other existing scorecards has shown the potential of this type
of monitoring instrument. For example, the regularly published transposition def-
icits in the Internal Market Scoreboard have become often cited figures in national
parliaments and the mass media. The IMS is effectively contributing to pressuring
member states to implement timely and correctly the regionally decided rules.
The most delicate issue for reporting and communicating the EAC CMS is not so
much technical, but political, as it concerns the question of the comparative perfor-
mances of the member states. There are different approaches that other scorecards
have used, and are a reflection of the regional integration environment and of cultural
differences. For example, the naming and shaming technique of the EC is not seen to
cause major embarrassment, because the emphasis was on emulation, and the failures
were both very technical and the gaps were expressed in a few percentage points. This
technique may pose some challenges to a much more recent economic union, where
variances may be markedly larger. The ASEAN scorecard emphasizes collective
responsibility and does not publish any list of good and bad performers.
It was the view of stakeholders that the EAC Common Market Scorecard should
express country-related information and draw comparisons from this information. It
was recommended, however, that the terminology adopted should be ‘soft’ when
describing national performance, for example the Lisbon process approach in the
EU emphasized successes, with lists, for each priority area, of “leaders” (or another
suitable designation), for partner states who have completed the transposition or the
implementation in a timely and accurate manner; it also lists “points to watch” and
“country recommendations”, to indicate partner state situations where results are
not yet up to expectations.
11.6 Findings of the First EAC Common Market Scorecard
The 2014 scorecard, the first of its kind in EAC, covers the liberalization of trade in
goods, services, and capital flows, which are the three pillars of the Common
Market project (World Bank/EAC Secretariat 2014). Progress was registered by
all partner states, especially in goods. Nevertheless, much work remains in
guaranteeing the free movement of capital. In the following paragraphs a brief
summary of the key findings is presented.
11.6.1 Free Movement of Goods
The removal of restriction and prohibition from erecting new ones is governed by
the Customs Law of the Community (as specified in Article 39 of the Protocol on
the Establishment of the East African Community Customs Union). Under Article 5
(2)(a) of the Protocol, Partner States are committed to eliminating tariff and
non-tariff barriers to trade, establishing a common external tariff, and harmonizing
and mutually recognizing certain trade standards. The review examined legal
obligations arising from the four commitments above, and entailed a review of
laws, regulations, legal notices and trade statistics relevant to the movement of
goods in the EAC.
Formally, all member states have eliminated tariffs on intraregional trade, but
measures with equivalent effects remain and constitute barriers to trade in all
member states. Non-tariff barriers (NTBs) reported in the region amount to
51 and are mostly related with sanitary and phytosanitary measures, rules of origin,
charges of equivalent effect to tariffs, and technical barriers to trade.
Though most member states, except Burundi, are in formal legal compliance
with the implementation of the Common External Tariff (CET), they all belong to
other free trade areas and, thus, apply different tariffs to extra-regional trade
partners, which conflicts with the spirit of the CET. The perforation of EAC’s
CET remains a serious structural problem, and an obstacle to achieving free
circulation of goods. This is because perforation discourages removal of internal
borders and complicates implementation of a common trade policy. Article 37 of
the EAC Customs Union Protocol recognizes the existence of other free trade
obligations of member states, but requires them to formulate a mechanism to
make these other free trade arrangements compatible with the protocol.
11.6.2 Free Movement of Services
The 2014 edition of the Scorecard reviewed more than 500 key sectoral laws and
regulations of the EAC Partner States identifying at least 63 measures inconsistent
to commitments to liberalize services trade within the EAC (nonconforming mea-
sures, NCMs). The term “nonconforming measure” refers to specific provisions in
laws and regulations that negatively affect the liberalization commitments under-
taken by each member state in Annex V of the CMP. The goal of the analysis was to
identify specific legal measures that are inconsistent with commitments incorpo-
rated in the protocol. The review focused on professional services (legal, account-
ing, architectural, and engineering), road transport, distribution (retail and
wholesale), and telecommunications legislation.
The report showed that none of the Partner States has fully liberalized trade in
services as agreed under the CMP.
Professional services account for nearly three-fourths (73%) of the 63 identified
measures. Telecommunications and retail were the only studied sectors without
measures identified as inconsistent to the protocol. The measures are most common
in Tanzania (17) and Kenya (16), followed by Rwanda (11), Uganda (10), and
Burundi (9). Burundi’s strong performance on the scorecard is partly due to the fact
that some of its sectors are not yet regulated through sectoral legislation. Across the
Partner States, 75% of measures were identified in laws, 15% in administrative

guidelines, and 10% in regulations. None of the Partner States have been complying
with their obligation to regularly inform the EAC Council of any new laws and
administrative guidelines that affect trade in services.
11.6.3 Free Movement of Capital
Annex VI of the protocol identified 20 operations that had to be free from legal and
regulatory impediments including securities, credit, direct investment and personal
capital operations.
Kenya, complying with 17 out of the 20 unrestricted operations, makes it easiest
to move capital across the EAC. Tanzania and Burundi, complying with only 4 out
of the 20, make it hardest. All EAC partner states have restrictions that affect
inward investment from other EAC economies. And among the member states,
Burundi and Tanzania also impose restrictions on outward direct investment.
Four EAC Partner States—Burundi being the only exception—have introduced
exemptions to the protocol without following notification requirements to other
member states or the EAC Secretariat. At least nine such exemptions are in place,
justified by concerns about prudential supervision, public policy, money launder-
ing, financial sanctions agreed to by Partner States, and financial disturbances.
Despite signing the protocol in 2010, and contrary to the requirements of Article
24, the adoption of new restrictions on the movement of capital can be observed in
some laws.
Article 24 (c) of the protocol requires member states not to introduce new
restrictions on the movement of capital and payments connected with such move-
ment. Member states have applied measures inconsistent to this regulation.
The EAC Secretariat and EAC member states are urged to enforce the notifica-
tion mechanism in order to create a transparent and credible system for monitoring
intra-regional free movement of capital. And in the exceptional case that member
states deemed necessary to impose restrictions on the movement of capital, these
should be intended to be temporary. Exemptions allowed under Article 25 (1) of the
protocol should be applied only when essential.
Capital controls restrict investors from Burundi and Tanzania to invest in other
EAC markets. And for Tanzania, its regulatory framework restricts access to its
own stock exchange for investors from the EAC region.
Article 25 (1) of the protocol allows member states to restrict the freedom of
movement of capital for reasons of prudential supervision, public policy, money
laundering, and financial sanctions agreed to by member states. But Article
25 (2) of the protocol requires the states that adopt any of the restrictions stipulated
in Article 25 (1) to notify the EAC Secretariat and other Partner States and furnish
proof that a restriction was reasonable and justified. This approach was designed to
allow for discussion of the proposed actions, taking into account the views of state
and non-state actors that might be affected by them, and for monitoring to ensure
that such restrictions last only as long as needed. Yet no EAC member state has
complied with these notification requirements. Uganda has 3 exemptions, Tanzania,
Kenya and Rwanda each 2 and Burundi none.
11.7 Conclusions
This chapter assessed the EAC CMS, as published for the first time in 2014 by the
World Bank Group, in collaboration with the EAC Secretariat. The Scorecard is
part of the implementation process of the EAC Common Market Protocol, which
came into force on July 1st 2010, and aims at monitoring the measures that are
taken (or not taken) by the EAC member states to review their domestic regulatory
environments and ensure compliance with the Protocol, and it recommends reform
measures if needed.
The Scorecard assesses member states’ compliance with the agreed commit-
ments on the liberalization of intra-regional flows of goods, services and capital
over a period of 18 months. The 2014 edition of the Scorecard identified at least
51 non-tariff barriers affecting trade in goods and 63 non-conforming measures in
the trade of services. With respect to the liberalization of capital flows, only 2 of the
20 operations covered by the CMP were free of restrictions in all of the EAC
member states.
From the experience with the first edition of the EAC CMS, a number of lessons
can be drawn:
– Even if a monitoring system is limited to assessing de jure implementation of
regionally agreed measures (to build a common market, in this case), a number
of technical difficulties and governance challenges are faced.
– As in a regional multi-country context one has to take institutional diversity into
account, it is not always easy to identify good region-wide data points.
– Monitoring provisions in treaty texts contribute to reaching sufficient levels of
commitment from national governments and administrations. Member state
level commitment towards the monitoring exercise is indeed an essential success
factor, independently of the many good reasons that exist to justify the moni-
toring process. National governments are not always demanding parties for
monitoring tools, especially if they expect below-average scores in cross-
country comparisons. For this reason, the private sector needs to take up a
more active role as an interested party in common market implementation, so
that they can maintain pressure on national governments to assure their enjoy-
ment of rights under the protocol in regional markets.
– Process scorecards – monitoring instruments that track commitments made by
government regulators and private sector through a process of private-public
dialogue – need to be strengthened and implemented for faster delivery of
integration commitments.
– Ex-ante approaches for monitoring regional integration should be further

explored and implemented. Ex-ante approaches to monitoring are targeted
towards implementing the stand-still obligations of members of regional trade
agreements. They work by identifying potential laws, regulations and adminis-
trative actions (bills before parliament, draft regulations, etc) that have potential
to constrain implementation of the agreement (the protocol) in this case, and
remove them through an advocacy process. Ex-ante techniques sometimes are
more effective given the difficulty and time consuming nature of the roll back
process of regulatory reform.
– Monitoring is not synonymous to participatory governance. The aim of the
monitoring process is to produce a set of reliable data which can then be used
by the various stakeholders to interact with or participate in the governance of
the regional project.
– It makes sense to clearly distinguish between indicator-based monitoring and
quantitative analysis of causal effects.
– Concerning the scope of the EAC CMS, special regimes (e.g. export processing
zones) are not very well covered.
– Some learning from other regional monitoring experiences is not impossible, but
a monitoring system should be tailor-made for a specific regional context.
– As also experienced in other regions in the world, making a monitoring system
sustainable and sustained over time is a real challenge. This is also the case in
East Africa. However, in this case, it might still be too early to see whether the
monitoring system will become fully incorporated into the EAC governance
system.
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De Lombaerde, P., & Van Langenhove, L. (2010). Indicators of regional integration. In P. De
Lombaerde (Ed.), Assessment and measurement of regional integration (pp. 9–41). Abingdon-
New York: Routledge.
De Lombaerde, P., Estevadeordal, A., & Suominen, K. (2008a). Governing regional integration for
development: Introduction. In P. De Lombaerde, A. Estevadeordal, & K. Suominen (Eds.),
Governing regional integration for development: Monitoring experiences, methods and pros-
pects (pp. 1–7). London: Ashgate.
De Lombaerde, P., Estevadeordal, A. & Suominen, K. (2008b), Governing regional integration for
development: Summary and conclusions. In: P. De Lombaerde, A. Estevadeordal and
K. Suominen (eds), Governing regional integration for development: Monitoring experiences,
methods and prospects. London: Ashgate, pp. 275–283.
de Melo, J., & Tsikata, Y. M. (2014). Regional integration in Africa: Challenges and prospects,
(WIDER Working Paper, (2014/037)).
European Commission. (1997). Single market scoreboard, November (1). Brussels: European
Commission.
European Commission. (2001). European Governance: A white paper (COM(2001)428).
Brussels: European Commission.
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transparency and accountability: Making it happen (pp. 7–12). Paris: OECD.
Rillo, A.D. (2011). AEC scorecard: The road to ASEAN single market. Presentation at Network of
Reformers Meeting, Feb. 4, Mombasa.
UNECA. (2002). Annual report on integration in Africa 2002. Addis Ababa: UN Economic
Commission for Africa.
UNECA. (2004). Assessing regional integration in Africa, ECA policy research report. Addis
Ababa: UN-ECA.
World Bank/EAC Secretariat. (2014). East African common market scorecard 2014. World Bank
and EAC Secretariat: Washington – Arusha.
Chapter 12
Assessing Regional Integration at
the Country Level: A Possible Framework
as Illustrated for the COMESA Region
Rattan J. Bhatia
12.1 Introduction
There is a plethora of literature on regional integration listing and analyzing various

trade and other integration indicators. However, most (if not all) studies look at the
integration from the point of view of the region as a whole rather than from that of
individual member countries. Also, almost exclusively they deal with assessing the
existing degree of integration at one point in time, rather than assessing the process
of integration over time. This chapter attempts to supplement those studies by
developing a framework to assess individual member countries’ performance
over time in their integration efforts in the context of a regional program of
integration. To that effect, it develops a performance assessment framework
(PAF) that employs performance indicators to measure the degree of progress in
integration efforts of individual member states. What is being assessed is not the
existing degree of integration of a member state into a region but rather the process
of the implementation of regionally agreed integration actions/measures by a
country over a given period of time.
Although integration is a multidimensional process, the focus of this study is one
dimensional: i.e. trade integration. This one dimensional focus is justified in the
present stage of integration in most African regional arrangements where
The present chapter is a modified version of a report prepared for COMESA by the author to design
a performance assessment framework that can track and assess individual country’s integration
efforts periodically and provide objective basis for disbursing aid funds related to that
performance.
R.J. Bhatia (*)
African, and Policy and Development Review Departments, IMF, Washington, DC, USA
IMF Office, United Nations, New York, NY, USA
e-mail: rjbhatia@aol.com

262 R.J. Bhatia
authorities are aiming at setting up monetary unions and currently focusing on

establishing effective FTAs/customs unions (Salmon and Akanni-Honvo 2009).1
Africa’s development partners are also focusing on assisting individual countries’
efforts at implementing their regional obligations as members of various regional
arrangements; EU’s financial support under its current Regional Integration Sup-
port Mechanism (RISM) is an example of that assistance.2 The conclusions and
recommendations of this study could be helpful to those interested in evaluating
individual country performance in domesticating regional integration obligations,
and linking their policy formulation and financial assistance to that assessment.
12.2 The Framework
The methodology behind the proposals here was developed on the basis of an
answer to a simple question: What it takes for a country to join a group of countries
aiming to form a mutually beneficial economic and monetary union? This issue has
been fairly extensively discussed in a AfDB/COMESA report on Multilateral Fiscal
Surveillance Framework (MFSF) for the COMESA region (Bhatia et al. 2011) and
in the integration promotion programs of the Asian Development Bank in central
and south-east Asian regions. The substance of the answer to the question empha-
sizes actions in four areas: Connectivity, Communications, Commerce (the three
Cs) and, Sustainability with its two sub-components of Competitiveness (the fourth
C) and, Productivity growth (one P). Assessment of the integration process could be
based on developing monitoring and evaluation indicators in these areas.
The general menu of assessment indicators should be comprehensive and thus
cover major actions in these areas of 4Cs and 1P that may be needed to advance
trade integration sustainably towards its immediate objective of operationalizing
customs union. Furthermore, regional integration involves legal and regulatory
processes (agreement at regional level, domestication, and implementation), policy
formulation and implementation, institutional building and strengthening, and
finally the resulting output. A comprehensive integration program will, therefore,
include a myriad of legal, institutional, and policy measures and their
corresponding indicators. Several authors have developed and proposed various
indicators of regional integration (De Lombaerde et al. 2008) that could be utilized
for the purpose of this paper. Dennis and Yusof (2003)3 have identified a
1
Even existing studies dealing only with regional trade integration deal with the end-outcome of
trade integration as noted in this quote: “Even considering RI under the restricted dimension of
trade, most. . .publications actually focus on measuring the effects/impact of trade integration,
much less . . . on the process of trade integration”.
2
Indeed, the performance matrix of COMESA MTSP is essentially on promoting intra-regional
trade facilitation and trade promotion.
3
Thus, a country could stagger the domestication of regional regulations and laws over a period of
years, and in the meantime may be reducing NTBs.
12 Assessing Regional Integration at the Country Level: A Possible Framework. . . 263
comprehensive set of 145 indicators focusing on trade in goods and in financial and
other services, investment flows and stock, infrastructure, customs, standards,
mutual recognition agreements and conformity assessments, SMEs, e-ASEAN,
and intellectual property. Salmon and Akanni-Honvo (2009) have proposed
50 ‘core’ indicators of which 9 relate to trade integration, 4 for monetary and
financial integration, and 8 for transport and communication. Similarly, the
COMESA Medium-Term Strategy Plan (MTSP) 2011–2015, had a large number
of regulatory, institutional, and policy measures that member countries, as well as
the regional actors responsible for promoting integration, needed to undertake on
the road to regional integration.
Following Dennis and Yusof, integration indicators may be categorized as
process indicators, input (implementation) indicators, output indicators, and stock
and flow indicators. Process indicators measure the progress towards the establish-
ment of an appropriate legislative, regulatory and implementation environment for
the indicator under consideration in each member country. Input indicators measure
the actual implementation of measures to realize that particular aspect of regional
economic integration. Output indicators record what the actual result is when the
new policy framework is in place and appropriate implementation measures have
been taken. Stock and flow indicators are relevant in the case of the integration of
financial services and investment regime. In the earlier stages of integration,
process indicators are likely to dominate the assessment exercise, whereas in the
later stages, once the regulatory and institutional environment is in place, imple-
mentation and outcome indicators would become predominant. However, this
sequential scenario may not be how the integration process unfolds, as countries
may be putting in place various regulatory and legal requirements gradually over a
period while simultaneously implementing other policy and institutional require-
ments to achieve some results (output) earlier on the integration roadmap (Dennis
and Yusof 2003). Thus, at any time, a country’s integration program may consist,
and generally will consist, of a combination of process, input, and output indicators
suggesting that a performance assessment framework should also provide for
simultaneous assessment of these types of indicators.
The selection of assessment indicators must satisfy certain criteria. In the first
place they, in their entirety, must ensure that their fulfillment will result in a
sustainable integrated region. Beyond that, each of the selected indicators should
be relevant to the purpose of the evaluation, be simple and clear to understand and
to monitor, should be objective to avoid value judgments, and have statistical
consistency and timely availability across member countries. However, an excep-
tion to these requirements may need to be made in respect of some indicators-
especially those denoting outcomes of policy consequences. Such indicators,
though relevant and objective, may not meet the requirement of clarity and time-
liness because the causal relationship and/or time interval between cause and effect
are indeterminate. Nevertheless, tracing the development in these indicators pro-
vides indispensable insight into the progress being made in achieving the integra-
tion objectives and an invaluable guide to assessing the efficacy of policies being
pursued. Accordingly, these indicators need to be included as ‘benchmarks’ or
264 R.J. Bhatia
‘impact’ indicators to complement the proposed menu of assessment indicators,

though performance in their regard should not influence assessment of member
countries’ performance and scoring for purposes of disbursement of supportive
funds (see below).
The type and number of assessment indicators selected would depend upon who
and what is to be assessed. In this paper, we earmark three levels of assessment: the
regional level, the individual country level, and the development partners (aid
providers) level. The objectives and assessment needs of these three levels are
different and will require different assessment indicators. However, as all three
levels pursue the same objective of regional integration, the matrix of indicators
needed at the regional level for prescribing, monitoring, and evaluation should
constitute the general menu from which the needed assessment indicators for the
other two levels should be derived. At the individual country level, indicators
should reflect the country’s overall implementation strategy elucidating what the
country plans to implement, and when, and must be drawn largely out of the
regional matrix of targets and intervention instruments embodied in the regional
indicators. These indicators should also assist authorities in monitoring and evalu-
ating their implementation strategy. Short of the country implementing the whole
regional matrix, in general the number of indicators needed for reflecting and
assessing country programs will be smaller than those needed for the regional
purposes. Finally, development partners providing supportive assistance for inte-
gration efforts are interested primarily in assessing a country’s integration effort
against the country’s programmed targets and link that measure with aid disburse-
ment. For this purpose, they would need a set of ‘performance’ indicators and their
baseline values (targets) against which to measure the actual outcome. In general,
indicators needed for this purpose will be smaller in number than those included in
the country implementation program, albeit taken from the indicators included in
that program. This descending, but linked, series of assessment indicators could
constitute the outline of a Performance Assessment Framework (PAF) that not only
assesses the progress in integration, but also scores that assessment for the purpose
of disbursing supportive aid funds.
In the above paragraph, we have assumed that, in general, countries would not
adopt the full matrix of regional objectives and intervention instruments at the very
beginning of the regional program. Adoption of the full program by all member
countries would assume that all of them are expected to realize the regional targets
simultaneously in designated time periods and a problem with this approach is that
country circumstances vary greatly as between member states, at least during the
earlier and middle stages of the integration process. Performance of individual
countries would be constrained by those circumstances so that not all countries may
be able to adopt simultaneously those targets or the needed intervention instruments
envisaged in the regional matrix. Thus, assessing their individual performance with
those indicators will not necessarily reflect the degree of their efforts at
implementing integration policies and procedures.
A more realistic approach would be to leave the choice of indicators and their
base values (annual targets) to individual countries themselves in the light of their
own circumstances, including their human and institutional capacities. Such an

approach would allow countries the needed flexibility to choose the indicators and
the time frame within which those values would be realized. Countries should be
expected to elucidate these (annual) targets, and underlying policies to achieve
those targets, in the form of a medium-term regional integration implementation
program (RIIP). Member countries should then also specify the timeframe within
which the regionally agreed targets in respect of those chosen indicators will be
achieved. This approach ensures country ownership of the implementation pro-
gram, takes into account country circumstances in the design of the program.
Member countries’ above flexibility should however be circumscribed by certain
limitations. A first such limitation should be the stipulation that the indicators
chosen by individual countries be from the menu of regionally agreed (larger
number of) matrix indicators. RIIPs should also be subject to a review by a regional
body which would certify that the targets are realistic and consistent with the
regional objectives and that the intended policies are appropriate to achieve those
targets. In that sense, the regional Matrix serves as a general guideline for the
formulation of specific country regional integration implementation programs
(RIIPs), which not only indicate chosen baseline indicators and benchmarks, but
also the time period within which specified targets would be realized. The indica-
tors and benchmarks thus outlined will serve two purposes: (i) they provide
guidelines to member states for the formulation of their respective RIIP, the issues
they must address and the targets they must set for themselves in the medium period
and (ii) they serve to assess a country’s integration efforts within a Performance
Assessment Framework (PAF). As a guideline, member states have to determine
when they would meet the regional target indicators, what intervention instruments
they would use to meet those targets, and what time sequence they would follow. As
an assessment tool, the indicators enable a comparison of actual outcomes with the
targets set in the RIIP and, based on those comparisons, enable mid-term policy
corrections if needed, and scoring of average performance in implementing RIIP.
Generally, RIIPs will comprise a smaller number of indicators than that in the
regional matrix, and not all RIIPs will choose the same indicators from the regional
Matrix of indicators. Under the RISM type of supportive mechanism, country
performance will be assessed and scored on the basis of indicators included in
respective RIIPs. As argued above, the number of these latter indicators could be
smaller than the number included in RIIP. But should this number be mandated for
inclusion in every RIIP? An argument could be made that there should be no
mandatory number of performance indicators and, that the member states should
be free to identify and choose the number of such indicators they would wish to be
assessed on, and scored for disbursement purposes.4 It is argued that this option
would still ensure that a minimum number is reflected in RIIP which has to be
4
This freedom, however, is subject to the limitation that the performance indicators are selected
from the list of indicators included in the RIIP of the country concerned and, hence, also in the
regional Matrix.
266 R.J. Bhatia
approved by the regional authorized body; if the latter deems the number of
performance indicators proposed by a member state in its RIIP as insufficient it
would not approve the program and ask the member country to revise the number
upwards. But this approach introduces unnecessary uncertainty for member states
regarding the approval of their respective RIIPs and may delay the finalization of
the program. Furthermore, in the absence of such a requirement, member states may
be tempted to identify only a very small, and easily achievable, number of perfor-
mance indicators to ensure that they could fully satisfy those criteria and draw their
entire allocated tranche. But this approach will risk that even a full satisfaction of
those fewer indicators may not ensure that integration objectives will be met if
some needed crucial indicators in the RIIP remain unfulfilled.
An efficient procedure would entail that member states are provided with some
specific guidelines to formulate their RIIPs, and which give the governments
reasonable assurance that if those guidelines are followed, their programs would
meet with the approval of the regional body. Member states must also be well
apprized of the basis for satisfactory conclusion of subsequent assessments to
unlock further tranches. These guidelines should include, inter-alia, the following:
1. Regional objectives and intervention instruments should be translated into a
regional matrix of indicators of which a few should be designated as ‘core’
indicators.
2. Country RIIPs should be consistent with the regional objectives and include
indicators5 chosen from the regional matrix, including the designated ‘core’
indicators.
3. Of the indicators included in RIIPs, countries should identify a minimum
number as performance indicators, including all the ‘core’ indicators,6 as the
basis for performance assessment and scoring.
4. In addition to the above indicators, RIIPs should include a few specified ‘bench-
marks/impact indicators’ which, although not a factor in the scoring exercise,
could assist the monitoring and evaluation process.
It is difficult to settle a priori on a specific number of performance indicators
which should be decided on a case by case basis. However, the number must be
such as to accommodate all the core indicators while still providing some flexibility
to countries in the choice of their performance indicators.
Each member country’s performance in advancing its integration within the
region in any one year will be assessed in relation to the baseline performance
indicators in its RIIP.7 Since there will be more than one such indicator, an overall
assessment of the performance would require some averaging of the performance
for each indicator. This may be done by either a simple arithmetic average where
5
Not necessarily the same for all RIIPs.
6
This requirement will also ensure a kind of a ‘level playing fields’ for scoring purposes.
7
Thus, if the base indicator relates to the decrease of 8 in non-tariff barriers (NTB) and the actual
decrease is 4, the performance ratio would be 50%.
each indicator has the same weight or by a weighted average where different
indicators have different weights according to their importance. Disbursement of
supportive aid funds, if linked to the performance assessment, could be determined
on the basis of this calculated average performance ratio. At the outset, the country
would have been ‘allocated’ a certain amount of assistance for each year should it
meet its baseline indicators for that year. The actual amount of disbursement,
however, would be a proportion of that amount equal to the average ratio of
outcomes to baseline indicators. Thus, if the initial allocation of assistance in the
first year was 20 million Euros and the average performance ratio is 0.50 actual
disbursement would be only 10 million Euros. If, however, the country
overperforms and its average performance ratio is greater than 1, disbursement
would still be limited to the initial allocation, i.e 20 million Euros even though
actual outcome is better than the baseline indicator.8
It is to be expected that in actual practice annual outcomes may differ from the
baseline indicators (targets). The question then arises whether the baseline targets
for the remainder of the program period be changed or remain fixed as originally
indicated in the implementation program. On the premise that exceptions make a
rule unfortunate, and in the interests of lending credibility to the implementation
programs, a desirable option will be not to change the baseline indicators. The
annual baseline targets should be regarded as ‘cumulative’ so that any deviations
from the baseline targets at the end of a year are automatically reflected (compen-
sated) in the baseline target for the following year. Thus, if a country has
programmed to reduce NTBs by 10 and 20 in year 1 and 2 respectively, but reduces
NTBs by only 5 in year 1, then its baseline indicator (reduction in NTBs) for the
following year will be 25 (20+5). Conversely, if the country reduced NTBs by 15 in
the first year, then its baseline indicator for the following year will be 15 (205).9
12.3 COMESA/EU Performance Assessment Framework –

A Proposal
12.3.1 Background
The Common Market for Eastern and Southern Africa (COMESA) is a regional
economic grouping made up of 19 Member States with an estimated population of
400 million people. Pursuant to the 1993 Treaty COMESA was established in 1994
to succeed the Preferential Trade Area (PTA) for Eastern and Southern Africa that
had been in existence since 1981. Its current vision is the promotion of a monetary
8
This is further explained and illustrated in considering the COMESA example below.
9
Another way to indicate baseline indicators could be to express them in cumulative numbers
e.g. 10 for the first year and 30 for the second year Cumulative outcomes would then also be
expressed cumulatively for assessment purposes.
268 R.J. Bhatia
union among its member countries- a vision that builds upon its past achievements
in promoting regional integration, primarily through trade integration, but also
through promoting economic, fiscal and monetary harmonization and convergence.
In October 2000, it launched Africa’s first Free Trade Area which is operational and
now comprises 14 of its 19 member states. A few years later, in 2009, it launched
the Customs Union which was expected to be operational in 2012. The 1993 Treaty
amongst Member States of COMESA also envisages the setting up of a Monetary
Union, enjoining that member countries shall “in the field of monetary affairs and
finance, cooperate in monetary and financial matters and gradually establish con-
vertibility of their currencies and a payments union as a basis for the establishment
of monetary union.” This objective is being pursued within the framework of a
Monetary and Fiscal Harmonization Programmed that stipulates various conver-
gence criteria that member states must achieve. In that context, COMESA has
established a common Clearing House, and a regional payments union.
COMESA’s Medium-Term Strategy Plan (MTSP) for 2011–2015 summarized
this progress as follows: “Beyond achievements in trade liberalization and facilita-
tion in general, notable progress has been made in the specific areas of customs
management, transport facilitation, trade and project finance, institutional develop-
ment, technical co-operation and capacity building. Progress has also been made in
policy coordination and cooperation in the productive sectors” (COMESA
2011–2015).
Despite the progress achieved in establishing various region-wide institutions
and arrangements, however, actual progress in regional integration has been rather
limited. Two recent studies (Bhatia et al. 2010, 2011) commissioned by the African
Development Bank summarized the status of integration as follows:
1. The financial integration process still has far to go as some member states have
yet to achieve macroeconomic stability, which is an essential precondition for a
sustainable monetary union, and as the modernization and harmonization pro-
cess among member states is at different stages of implementation.
2. Stabilization and harmonization of fiscal situation and fiscal policies is even
further from being in place, with almost all member states not conforming with,
or moving towards, the intended fiscal convergence criteria.
3. Trade integration, as measured under three different concepts of integration:
intra-regional traded openness,10 Degree of regional trade integration,11 and
Relative Integration of each (member) country vis-a-vis other (member) coun-
tries,12 so far has been limited, with FTA not being ‘effective’ in terms of
promoting intra-regional trade.
10
Defined as the member country’s trade with other member countries of the region as a proportion
of its GDP.
11
Defined as the ratio of the country’s intra-regional trade to its trade with the rest of the world.
12
Defined as the ratio of the country’s trade with other member states of the region to the total
intraregional trade within that region.
Aware of these developments, COMESA authorities redoubled their efforts

within the framework of their Medium-Term Strategy Plan (MTSP) 2011–2015
focusing on advancing the Customs Union and the Common Market agenda, and a
(proposed) strengthened multilateral fiscal surveillance framework. During the Plan
period, COMESA continued to consolidate its internal market by making substan-
tial progress in removing barriers to factor mobility, thus facilitating freer move-
ment of goods, services, capital and people. To that effect it has finalized a
Performance Framework indicating various annual integration targets to be
achieved by the COMESA region. This integration effort was being supported by
EU under its Regional Integration Support Mechanism (RISM) project that made
available a predetermined amount of financial assistance for the 3-year period,
2012–2014, for the region as a whole to be disbursed among individual member
states based on a pre-determined allocation formulation and their ‘performance’
(achieved progress) in specified integration indicators (primarily related to trade
matters). The following sections elucidate a proposal for an appropriate Perfor-
mance Assessment Framework (PAF) and a model of a scoring system of the PAF
that reflects the framework developed in the previous section and uses the allocative
formula of COMESA Secretariat. Included in these sections are also the recom-
mendations on how to use that framework for the specific purposes of RISM-
establishing baseline indicators and suggesting possible milestones for performance
assessment on a yearly basis and disbursing allotted supportive funds.
12.3.2 Performance Indicators and Impact Benchmarks
The COMESA MTSP and Performance Framework clearly set the region’s prior-
ities and intervention instruments to meet its integration goals that envisage an
eventual monetary union, with time-bound intermediate goals of FTA, CU, and
Common Market. However, COMESA has also rightly adopted the ‘variable
geometry’ approach under which member countries choose their own time path
for effectively participating in the regionally agreed integration stages, and
employing intervention instruments, leading up to the monetary union. This
approach implies that member states may also choose to have a different time
frame (sequence) for implementing MTSP’s priorities and intervention instruments,
though consistent with the ultimate objective of joining the monetary union. Thus,
for the immediate purposes of RISM, country performance cannot be compared
with the time-bound objectives and intervention instruments set in the MTSP. For
example, the MTSP envisaged operationalizing Customs Union in 2012. However,
some countries that have not as yet joined the COMESA FTA may effectively aim
at joining the already operational FTA in the immediate period ahead, and follow it
with joining the CU sometime later in the medium-term period extending beyond
2012. A similar argument may be made concerning the intervention instruments.
While countries may be expected to employ those instruments eventually, they may
choose to employ different combinations of those instruments in the light of their
270 R.J. Bhatia
specific circumstances and capacity. As an example again, countries may choose

variable time frames for eliminating identified non-tariff barriers (NTBs), or meet-
ing the competitive and productivity indicators differently but consistently with
their respective chosen time table for joining the Customs Union and, later, the
Common Market.
The above considerations justify the RISM requirement that countries, to be
eligible for RISM funds, formulate their own Regional Integration Implementation
Plan (RIIP) detailing their integration objectives and programs, and a concrete
envelop of measures they propose to implement in the coming years in order to
meet their commitments under the COMESA/EAC integration agenda. The RIIP
will, in effect, serve three purposes. First, RIIPs will ensure that the programs are
consistent with the objectives and intervention instruments of MTSP. Second, RIIPs
will enable authorities to monitor and evaluate their integration progress. Third,
RIIP assessment would enable disbursement of RISM funds to be related to the
performance of recipient countries in implementing their integration programs. The
first purpose would be served by the requirement that each RIIP be pre-approved by
the COMESA FUND for the country to be eligible for receiving RISM financing.
As mentioned earlier, not all the MTSP indicators, or their implementation
sequence, need to be included in RIIP, depending upon country circumstances,
though it should be expected that the included indicators would be sufficiently large
in number to cover the 4 Cs and 1 P referred to in the previous section. The second
purpose would be served by evaluating and monitoring outcome for each included
indicator with its baseline value, thus enabling the authorities to make any mid-term
revision of policies if needed. The third purpose should be served by selecting
performance indicators that are objective, credible and timely. For the assessment
and scoring exercise to be manageable, the number of performance indicators,
chosen from the RIIP, could be smaller. Moreover, as argued in the previous
section, to provide a ‘level playing field’ for comparative purposes, member
countries should be provided with a uniform set of baseline indicators to designate,
inter-alia, as their performance indicators.
In the case of COMESA considered here, the MTSP performance Matrix
identifies several areas of strategy intervention and their annual targets that member
states are expected to address. The intervention areas cover practically all areas that
need to be addressed on the road to a common market, and comprise, among others,
trade, services, productive capacities, supply side constraints, and factor mobility.
Table 12.1 suggests a menu of intervention areas and corresponding indicators, all
(except concerning fiscal deficit) picked up from that Matrix, but limited to trade
areas that a country may adopt for its RIIP. The proposed menu comprises 19 main
indicators classified under 8 intervention areas as identified in the COMESA
Matrix. Some of the main indicators comprise of intermediate indicators, also
totaling 19, because more than one type of action is needed to satisfy the main
indicator.
Table 12.1 also indicates the expected outcomes, following satisfactory imple-
mentation of the appropriate policies. Among these outcomes are the increased
intra-regional trade and, improved competitiveness and productivity increase which
Table 12.1 Proposed menu of RIIP indicators for COMESA

Intervention Area Outcome Indicators
A. Monitoring mech- National ownership of RIIP enhanced 1. Parliamentary approval/
anism at national endorsement of RIIP and its
level availability in public domain
Improved accountability of public 2. Establishment of a Monitor-
officials responsible for ing, Evaluation and Reporting
implementing RIIP Unit (MERUa) comparable
MS establishes joint Min Fin. Min institutional arrangements at
Trade MERU with (Cabinet) agreed national level
MOU.
Improved chances that RIIP imple-
mentation remains on track
B. Consolidate the Private sector-led report on NTBs 3. Reduction in tariff level to
internal market (Free listing existing NTBs and recom- zero on intra-regional trade
Trade Area) mendations for their eliminationb 4. Reduction in number of
NTBs
(a) Identification and sched-
ule of reduction
(b) Number of NTBs reduced
Schedule of reductions of identified 5. Agree on SPS measures
NTBs (baseline) prepared on the constraining trade and resolve
basis of the recommendations in the at least 20% of unresolved SPS
report, MERU charged with moni- issues
toring implementation of schedule 6. Harmonization of regional
SQA standards:
(a) Schedule of standards to
be harmonized
Steps and measures to eliminate (b) Number of standards
barriers to trade harmonized
C. Operationalize the Domestication of the Common Tariff 7. Implementation of CTN
Customs Union Nomenclature (CTN) 8. Implementation of CET:
(a) Establish schedule of
implementation (% point
progress)
Increased intra-regional trade (b) Implement schedule
MS implements Common External 9. Submit sensitive list of
Tariff (CET) products that cannot be aligned
within 5 years for economic
reasons
Customs Management Regulations 10. Reduction in the number of
operationalized products in the exclusion and
sensitive lists
11. Implementation of Cus-
toms Management Regulations
(CMR):
(a) Domestication of CMR
(b) Implementation of fol-
lowing elements of CMR
(to be identified and
included)
(continued)
272 R.J. Bhatia

D. Trade in Servicesc Trade in services liberalized 12. Liberalization of services
(a) Establish schedule of
liberalization
commitments
(b) Number of services
liberalized
E. Common Compe- 13. Enforce guidelines and
tition Policy procedures of the Competition
regulations adopted by mem-
ber states
F. Foreign Direct Increased flow of FDI and intra- 14. Sign and ratify COMESA
Investment, and regional investment Common Investment Area
Domestic Investment Agreement
15. Domestication of
COMESA Common Invest-
ment Area Agreement (CCIA)
16. Improvement in productiv-
ity and competitivenessd:
(a) WBk Sub-index Regis-
tering property
Improved productivity and (b) WBk Sub-index
competitiveness Enforcing contracts
(c) WBk Sub-index
Protecting Investors
(d) WEF Sub-index of GCI:
either Performance of
domestic economy, or
Efficiency of labor mar-
ket, or Basic
infrastructure
G. Transport Facili- MS implements transport facilitation 17. Implementation of
tation Instruments measures COMESA Transit Transport
Facilitation Instruments
(a) Carrier License
(b) Axle Load limits &
overload controls
(c) Yellow Card
(d) Harmonize Road Trans-
port Charges (HRTC)
(e) Implement Phase 1 of the
COMESA legal notice
no: 2 for liberalization of
air transport within
COMESA region
Reduced cost of intra-border move- 18. Reduction in cost of intra-
ment of goods border trade
Improve ranking in WBk
sub-index Trading Across
Borders of the WB index
(continued)

H. Macroeconomic Progress made towards fiscal 19. Reduction in overall fiscal
stability sustainability deficit to regional performance
criterion
a
In those cases where monitoring arrangements already exist and do not wish to substitute them
with MERU, the existing set up should be given revised MOU, defining its new tasks and endowed
with appropriate staff and other capacity to perform those tasks
b
A, less preferential, alternative may be to use the existing COMESA monitoring system, with
countries agreeing with COMESA on the identification and number of existing NTBs (base line
end-2011) and preparing a schedule of reductions. It is understood that the agreed base list would
remain the reference list for the satisfaction of this criterion
c
Especially in the financial and communication sectors
d
Depending on the timeliness and availability of data; otherwise these could be redefined as
benchmarks
Table 12.2 COMESA proposed benchmarks/impact indicators

Intra-regional trade as % of GDP
Intra-regional trade as % of total trade
Total intra-regional trade of member states as % of regional GDP
Intra-regional inter-bank transfers (inward and outward)- Annual % increase
Overall ranking in WB’s Doing Business index
are more germane to the performance assessment exercise. Thus inclusion of these
two outcomes as indicators would appear to be desirable. However, the problem in
those cases is that the causal relation between outcomes and policies, as well as the
time lag between cause and effect, is not clear or determinate. For example, intra-
regional trade may respond to domestic policies with different time lags and may be
influenced by external circumstances that may negate, enhance or hide the impact
of domestic policies. In such cases it is difficult to justify including these outcomes
in the menu of indicators. It will nevertheless be useful to trace the evolution of
these outcomes as they could assist in determining the effectiveness of the policies
being followed and, in the case of RISM, be used as a guide in the formulation of
the second RISM. Table 12.2 above lists a few such indicators that, on a priori
considerations, would be the consequence of policies implemented in the earlier
years, though with indeterminate time lags. To distinguish them from performance
indicators, they are termed here as ‘benchmarks’/impact indicators, but their evo-
lution will not affect the annual PAF scoring.
The first two benchmarks would inform how far the country has succeeded in
integrating its trade with the regional economies. The comparison between bench-
marks 2 and 3 would rate the performance of the member country with that for the
region as a whole. The fourth benchmark would suggest the impact of liberalization
of financial services on intra-regional flow of financial transactions, and the fifth
benchmark would indicate improvement in the country’s business profile vis-a-vis
274 R.J. Bhatia
its regional partners and the rest of the world. Country RIIPs should include these
benchmarks as monitoring and assessment tools. Implementation of regionally
agreed regulations, procedures, and policies as reflected in RIIP should contribute
to an improvement in the above benchmarks. However, as there could be annual
fluctuations in these benchmarks/impact indicators, the assessment could be based
on some moving average formula.
The formulation of the above set of indicators and benchmark to be included in
country RIIPs is dictated by the objective that it be a comprehensive menu covering
major actions in the areas of 4 Cs and 1 P mentioned earlier. It may be noted,
however, that COMESA countries have a long history of cooperation and coordi-
nation of their policies, and of introducing region-wide regulations and institutions.
Thus, some of the indicators listed in Table 12.1 may have been partially or fully
fulfilled by some member countries. In those cases countries would be expected to
maintain those policies, regulations, and institutions but may have to review them
with a view to refocusing them on the objectives, and strengthening their imple-
mentation capacity to meet the overall integration objectives as may be identified in
their respective RIIPs. As an example, the menu of indicators in Table 12.1 includes
the establishment of a Monitoring, Evaluation, and Reporting Unit (MERU) as one
indicator. However, many countries have already established inter-ministerial
committees that monitor their implementation of regional obligations. In that
case, member countries will need to determine what the tasks of the MERU could
be in the light of their strengthened integration agenda, and determine whether
those tasks could be fulfilled by the existing arrangements and, if not, what changes
would be required in their terms of reference and in staffing and other capacities to
meet the new tasks. A choice will then need to be made whether to maintain the
inter-ministerial committee format or to set up a new MERU.
Member states’ integration status within the region and their special circum-
stances also differ greatly. For example, as of mid-2014, 13 member states have
already joined the COMESA FTA and only six member states remain to join the
Arrangement. Thus the indicator relating to reducing tariffs on intraregional trade
to zero is relevant for only those six countries. Further, as an example, in their
programs, countries are likely to adopt different time horizon for joining the
Customs Union than the 2012 target date of COMESA’s MTSP and, accordingly,
a different time sequence for the implementation of the relevant intervention
instruments (e.g. implementation of CET). In other cases, some countries may
have already fulfilled some of the indicators listed in the general menu. Thus in
their RIIPs, member states may not need, or wish, to adopt immediately the entire
menu of objectives and intervention instruments outlined in Table 12.1 above.
Their respective RIIPs in any year may, therefore, contain fewer objectives and
instruments than the full menu as may be justified by their objectives for the 3-year
RISM period, and by their specific circumstances. In this sense, the 19 indicator
framework may be regarded as an a la carte menu for member states to choose from
and include in their respective RIIPs that nevertheless should be comprehensive

enough and consistent with the overall objectives of COMESA MTSP and address
the latter’s intervention areas.13
12.3.3 Formulation and Monitoring of RIIP
Table 12.3 below elucidates a ‘generic’ Matrix that reflects a country’s RIIP,14
indicating ‘objectives’ (targets) the country wishes to achieve in respect of the
19 indicators during a 3-year period (here: 2012–2014). It may be noted that in this
case not all the indicators are being addressed in each year. While some quantifiable
indicators are targeted to be met over a period longer than just one year, the
non-quantifiable indicators (e.g. implementation of CTN) by their very nature are
targeted to be met in one year. The Table also indicates hypothetical realization
(‘estimate’) of those targets. While qualitative indicators, by their nature, will be
satisfied at a point in time, the selected quantifiable indicators are targeted to be
realized gradually during the program period. These latter annual targets are
cumulative and are so shown in the RIIP Matrix of Table 12.3. This implies that
if any target is not met (or over met) in one year the shortfall (excess) is automat-
ically added to (subtracted from) the initial target for the next year. As an illustra-
tion, if the targeted reduction in the number of NTBs is 6 in each of the 3 years, the
cumulative target indicator will be 6, 12 and 18 for the 3 years respectively. If in
year 1 the reduction number is 3 (7) compared to the target of 6, the remaining
shortfall (excess) of 3 (1) is added to (subtracted from) the original annual reduction
target of 6 in year 2 and becomes 9 (3), with the cumulative target remaining as 12.
While a qualitative target cannot be cumulative in this sense, it is nevertheless
‘cumulative’ in the sense that if it is not satisfied in one year it is added as the
indicator for the following year. For example, if the initial target of domestication
of CTN is not fulfilled in the year it is targeted to be implemented, it automatically
becomes the indicator target for the following year. Conversely, if an indicator that
was targeted to be met in the second year is fulfilled in the first year it will be
credited for scoring in that year and no new target would be put in its place in the
second year.
As argued in the previous section, not all the above indicators included in the
RIIP need to be adopted as ‘performance’ indicators and their number could be
smaller, say nine. However, to ensure that the chosen performance indicators will
make a significant contribution to trade integration, and that there will be some
13
Thus, even if, for example, a country may not wish to implement CET during 2012-14, RIIP
should at least indicate when, after 2012, will the country begin to implement CET.
14
The word ‘generic’ is meant to indicate that while the Table 12.3 lists all the indicators of
Table 12.1 in practice individual country RIIPs may contain a fewer such indicators and some
other country specific indicators.
Table 12.3 COMESA illustrative regional integration implementation program (RIIP), 2012–2014
276
2012 2012 2013 2013 2014 2014 Score Score Score

Indicator Type Baseline Obj. Est. Obj. Est. Obj. Est. 2012 2013 2014
1. Parliamentary approval/endorsement of RIIP & availabil- Process 2012 Yes Yes – – – – 1.00 –
ity in public domain
2. Monitoring, Evaluation and reporting Unit (MERU) Input 2011 Yes No Yes Yes – – 0.00 1.00 –
3. % point reduction in average tariff level to zero on intra- Output 30 10 5 20 15 30 30 0.50 0.75 1.00
regional trade
4. Reduction in number of NTBs:
(a) Identification and Schedule of reduction (1.00) Input 2011 Yes Yes – – – – 1.00 – –
(b) Number of NTBs reduced (cumulative) (1.00) 18 6 3 12 8 18 14 0.50 0.67 0.78
5. Agree on SPS measures constraining trade and resolve at Output 2011 5 5 12 8 20 20 1.00 0.75 1.00
least 20% of Unresolved SPS
6. Harmonization of SQA Standards (cumulative numbers Input 2011 20 15 40 30 68 50 0.75 0.78 0.75
harmonized)
7. Implementation of CTN Output 2011 Yes No Yes Yes – – 0.00 1.00 0.00
8. Implementation of CET
(a) Establish schedule of implementation (1.00) Input 2011 Yes Yes – – – – 1.00 – –
(b) Implement schedule (%9 point reduction) Output 80% 30 10 60 30 80 50 0.33 0.50 0.62
9. Submit list of sensitive products that cannot be aligned Input 2011 Yes No Yes Yes – – 0.00 1.00 –
within 5 years
10. Reduction in the number of products in the exclusion list Output 2011 5 0 10 7 15 10 0.00 0.70 0.67
(cumulative)
11. Implementation of Customs Management Regulations
(CMR)
(a) Domestication of CMR (0.50) Input 2011 Yes No Yes Yes – – 0.00 0.50 –
(b) Implementation of CMR (0.50) Output – – – – Yes Yes – – 0.50
12. Liberalization of servicesa
(a) Establish schedule of liberalization commitments Input 2012 Yes No Yes Yes – – 0.00 1.00 –
R.J. Bhatia
(1.00)
(b) Number of services liberalized (1.00) Output 10 3 1 6 3 10 7 0.33 0.50 0.70
12
13. Enforce guidelines and procedures of competition Output 2011 – – Yes No Yes No – 0.00 0.00
regulations
Adopted by member states
14. Domestication of COMESA Common Investment Area Input 2011 Yes No Yes Yes – – 0.00 1.00 –
Agreement
15. Improvement in productivity and competitivenessb
(a) WB. Sub-index Registering productivity (0.25) Output 2011 – – >0 >0 >0 >0 – 0.25 0.25
(b) WB. Sub-index Enforcing Contracts (0.25) Output 2011 – – >0 0 >0 >0 – 0.00 0.35
(c) WB. Sub-index Protecting Investors (0.25) Output 2011 – – >0 0 >0 0 – 0.00 0.00
(d) WEF Sub-index of Global Competitiveness Index Output 2011 – – >0 >0 >0 >0 – 0.25 0.25
(0.25)
Either Performance of domestic economy or Efficiency of
labour markets or Basic infrastructure
16. Implementation of COMESA Transit Transport Facili-
tation Instruments
(a) Carrier License (0.20) Input 2011 Yes Yes – – – – 0.20 – –
(b) Axle Load Limits & Overload Controls (0.20) Input 2011 – – Yes No Yes Yes – 0.00 0.20
(c) Yellow Card adopted and used where applicable (0.20) Input 2011 – – Yes Yes – – – 0.20 –
(d) Harmonized Road Transport Charges (0.20) Input 2011 – – – – Yes Yes – – 0.20
(e) Implement Phase 1 of COMESA Legal Notice # 2 for
Liberalization
(f) Air Transport within the Region (0.20) Input 2011 – – Yes Yes – – – 0.20 –
17. Reduction in cost of intra-border trade & Exchange Output 2011 – – >0 >0 >0 >0 0 1.00 1.00
Improved ranking in W Bk. Sub-index Trading Across
Borders of DBI
Assessing Regional Integration at the Country Level: A Possible Framework. . .
18. Reduction in fiscal deficit to COMESA Performance Output 2011 2 1 4 2 5 4 50 50 80
Criterion (3%) (% point cumulative reduction)
a
Especially on financial services
b
Reduction in the gap vis-a-vis COMESA average ranking (base 2011)
277
278 R.J. Bhatia
region-wide implementation of some such common measures, member states

should be asked that their chosen indicators include, inter-alia, the following four
mandatory indicators, designated as ‘core’ indicators, in this particular case of
COMESA15:
1. Parliamentary endorsement16 of RIIP and its availability in public domain;
2. Monitoring, Evaluation and Reporting Unit (MERU);
3. Implementation of CET17;
4. Implementation of regional transport facilitation policy.
Member states will still have the flexibility of choosing five further performance
indicators to include in their respective RIIP. They will also have the flexibility
regarding the sequencing for the realization of those indicators, subject to the
limitation that they envisage achieving regional objectives either within the
COMESA specified timeframe, or within a reasonable delay beyond the COMESA
time frame. It is, of course, understood that RIIP has to be approved by the
COMESA Fund as a precondition for the disbursement of the initial tranche
under RISM, and this approval would be guided by an assessment that the RIIP
proposed by the country is consistent with the regional MTSP and that the policies
proposed are adequate to meet the RIIP’s targets.
The performance indicators so chosen and reflected as annual targets in the RIIP
will form the basis for the scoring exercise for the respective years. The specific
indicators identified by member states as performance indicators at the beginning
will remain fixed for the 3 year period and cannot be changed subsequently during
the remaining period of the current RISM. However, member states could seek
COMESA Fund approval for changing the annual target for any particular indicator
if justified by external circumstances or other plausible reasons (that do not include
slippages in implementation). Thus suppose a member country has opted for the
indicator ‘reduction in NTBs’ and indicated in its RIIP target reductions of 6 NTBs
each year. The indicator ‘reduction in NTBs’ will remain and cannot be dropped, or
substituted by a new indicator, during the entire 3-year period of the current RIIP.
However, a member state may request COMESA Fund for a change in the targeted
value (number) of NTBs to be reduced because of external circumstance or other
plausible reasons. Should the COMESA Fund agree to that request, the target value
(number) would be revised accordingly for future assessment purposes but the
indicator ‘reduction in NTBs’ will remain as one of the performance
assessment base.
It may be useful to recall that some indicators have two or more ‘intermediate’
indicators. For satisfying the requirement of the minimum number of performance
15
This set is only an illustration and actual preferred criteria could be different.
16
Some states may opt only for cabinet approval of RIIP but this runs the risk that it could easily be
reversed by a subsequent decision of the same cabinet. As a minimum, therefore, if a MS prefers
the cabinet approval option, it should be required to state that in case of the reversal of the decision,
the reversal will be available in public domain along with the explanation as to its rationale.
17
In the case of member states that have yet to join the FTA, a corresponding indicator will be the
‘Reduction in the gapvis-a-v is COMESA average ranking (base2011)’.
indicators, the intermediate indicators will not count as separate indicators but as
parts of one indicator of which they form the components. As an example, the
indicator ‘Implementation of COMESA Transit Transport Facilitation Instruments’
has five ‘intermediate’ indicators but all the five intermediate indicators together are
to be regarded as one indicator, and not five, for the purpose of meeting the
performance requirement.
12.3.4 Measuring Performance and the Scoring System

for RISM
The scoring system will first compare realization (‘estimate’ in Table 12.3) with the
targets and assign each such comparative outcome a numerical value. The scoring
system elucidated in Table 12.3 is a revised version of the present COMESA system
that grades every performance as ‘yes’ or ‘no’ when a target is fulfilled or not
fulfilled. ‘Yes’ is assigned a value of 1, while ’No’ is graded as 0. The overall
performance score is then the simple average of these individual scores. The system
proposed here retains the ‘Yes’ and ‘No’ classification for non-quantifiable indica-
tors, with respective scoring of 1 and 0. However, for those indicators that can be
quantified, the score is valued as a proportion of 1 corresponding to the performance
as a proportion of the target value of the performance indicator. Thus, if the
indicator target for one year is a reduction of six NTBs, but the country reduced
only three NTBs, its performance is 50% of the target and the corresponding score
assigned will be 0.50. In cases where the performance indicator has two or more
intermediate indicators, the maximum value for each intermediate indicator is
deemed as equal to the value of 1 divided by the number of intermediate indica-
tors.18 Thus, if the number of intermediate indicators is five, then each such
intermediate indicator is assigned a value of 0.20 and scoring will be the percentage
of 0.20 corresponding to the percentage of the target achieved. As in the COMESA
system, the performance scores for each relevant indicator will then be added up
and a simple average arrived at and compared with that for the average value for the
target indicators. Note that only the indicators that are identified as the performance
indicators and have value assigned to them for the year are assessed, added and
averaged for purposes of RISM scoring and fund disbursements.
The COMESA framework of performance assessment adds the individual scores
of all the indicators and a simple average is then calculated for the indicators so
graded. These averages are then grouped into three categories of performance with
corresponding three categories of percentage disbursement of budgeted allocation
(Table 12.4).
18
An alternate, perhaps simpler, system may be to value even the intermediate indicators as 1, but
this may give the impression that each intermediate indicator is a stand-alone indicator, which it is
not. To avoid this impression, intermediate indicators must be shown as sub-components of the
main indicator, whatever scoring value may be adopted.
280 R.J. Bhatia
Table 12.4 COMESA performance and disbursement formula

Performance category Average performance Percentage disbursement
Category 1 30% 0%
Category 2 >30 and 65% 50%
Category 3 >65% 100%
Although in theory disbursement from the allotted tranches could be calibrated to

correspond to the realized average performance, pragmatism and simplicity consid-
erations would argue for retaining some version of the COMESA system of perfor-
mance and disbursement, envisaging three categories of overall performance.
To illustrate the above framework, Table 12.5 traces a hypothetical case of
country A that identifies the stipulated nine performance indicators and establishes
annual targets for each such indicator for a 3-year period, 2012–2014. The
Table also provides actual outcomes (referred as ‘estimate’ in Table 12.5) for
each of those indicators. Assessment of performance and scoring for purposes of
determining the amount of disbursement is then related to the outcome compared to
the initial target (performance indicator).
It may be noted that in the above illustration the country does not begin imple-
mentation of each target in every year. Rather, it has staggered implementation of
some indicators over the period of the RISM. For example, the country does not
propose to fulfill the CCIA indicator in the first year but only in the second year. In
the first year, therefore, it is addressing only eight of the nine performance indicators.
Further, the reduction in the NTBs target is staggered over the full 3 years for which it
has provided the schedule of annual targets against which its performance will be
assessed. Once a country has completely fulfilled its particular target, the
Table indicates that the country’s further task is confined to fulfilling the remaining
originally identified targets; it does not have to add another target to fulfill, and its
performance is assessed in relation to the remaining targets. For example, in this case,
the country has fulfilled the target relating to MERU in the first year of the program.
In the following years then it has only remaining eight targets to attend to. Finally, if a
target is not fulfilled in one year, it is rolled over as the target for the following year.
In this case the country is scored 0 for the year in which it missed the target and that
score is added for averaging the overall performance for that year. In summary, the
country initially identifies a set of nine indicators for PAF purposes and establishes
annual targets as performance targets. These targets remain fixed19 and are not
dropped or substituted by another target during the entire RISM period. If a country
fails to achieve any performance target in one year it is carried over to and added as
the target for the following year. Once a performance target is fully satisfied, no
additional indicator has to be added for PAF assessment and the country’s remaining
responsibility calls for the fulfillment of the remaining indicators. Scoring is based on
the performance with respect to each performance indicator target for that year and
included in the overall performance averaging formula.
19
Unless any requested changes in the target are approved by the COMESA FUND, as explained
earlier in the text.
12
Table 12.5 RISM: illustrative PAF and scoring for country A

2012 2013 2014 Score 2012 Score 2013 Score 2014
Indicator Obj. Est. Obj. Est. Obj. Est. Obj. Est. Obj. Est. Obj. Est.
Parliamentary approval of RIIP audits availability in public domain Yes Yes – – – – 1.00 1.00 – – – –
Monitoring, Evaluation and Reporting Unit (MERU) Yes No Yes Yes – – 1.00 0.00 – 0.00 – –
Reduction in number of NTBs
(a) Identification and Schedule of reduction Yes Yes – – – – 1.00 1.00 – – – –
(b) Number of identified NTBs reduced (cumulative) 6 3 12 8 18 14 1.00 0.50 1.00 0.67 1.00 0.78
Implementation of CET
(a) Establish schedule of implementation (% point progress), Yes Yes – – – – 1.00 1.00 – – – –
(b) Implement Schedule 30 10 60 30 80 50 1.00 0.33 0.50 0.62 1.00 0.62
Implementation of Customs Management Regulations (CMR)
(a) Domestication of CMR Yes No Yes Yes – – 0.50 0.00 0.50 0.50 – –
(b) Full implementation of CMR – – – – Yes Yes – – – – 0.50 0.50
Domestication of CCIA ¼¼¼ ¼¼¼ Yes Yes – – – – 1.00 1.00 – –
Improvement in productivity and competitiveness
(a) WB sub-index Registering Property – – >0 >0 >0 >0 – – 0.25 0.25 0.25 0.25
(b) WB sub-index Enforcing contracts – – >0 0 >0 >0 – – 0125 0.00 0.25 0.25
(c) WB sub-index Protecting Investors – – >0 0 >0 0 – – 0.25 0.00 0.25 0.00
(d) WEF sub-index of GCI (to select) – – >0 >0 >0 >0 – – 0.25 0.25 0.25 0.25
Implementation of COMESA Transit
(a) Carrier License Yes Yes – – – – 0.20 0.20 – – – –
(b) Axle Load limit & overload controls – – Yes No Yes Yes – – 0.20 0.00 0.20 0.20
Assessing Regional Integration at the Country Level: A Possible Framework. . .
(c) Yellow Card adopted and used where applicable – – Yes Yes – – – – 0.20 0.20 – –
(d) Harmonization of Road Transport Charges – – – – Yes Yes – – – – 0.20 0.20
(continued)
281
282
2012 2013 2014 Score 2012 Score 2013 Score 2014

Indicator Obj. Est. Obj. Est. Obj. Est. Obj. Est. Obj. Est. Obj. Est.
(e) Implementation Phase 1 COMESA Legal Notice # 2 for Yes Yes – – – – 0.20 0.20 – –
liberalization of air transport
Reduction in overall fiscal deficit to regional performance criterion 2 1 4 2 5 4 1.00 0.50 1.00 0.50 1.00 0.80
(% point reductions)
TOTAL 7.70 4.28 5.60 4.19 4.90 3.85
Performance ratio % ¼ (Estimate/Objective) 56 75 79
R.J. Bhatia
On the basis of the above calculations, and in conformity with the disbursing
framework of Table 12.4, the country’s performance will rate as category 2 perfor-
mance in the first year, and category 3 performance in the second and third years. It
will, therefore receive 50% of its allocation in the first year and 100% in the
subsequent 2 years. The question then arises as to what happens to the undisbursed
amount of the first year. Three options could be considered:
1. The undisbursed amount is not lost to the country but is added to its original
budgeted allocation for the following year and available on the basis of its
performance for that year.
2. The undisbursed amount is lost to the country, carried over to the following year
and added to the general kitty for that year for allocation among all members in
the pre-determined proportions.
3. The undisbursed amounts are reserved for distribution at the end of the RISM
period and disbursed to all the countries in the currently COMESA agreed pro-
portions, or on the basis of their average performance ratio for the RISM period.
Each option has its pros and cons. Under option 1, the country does not lose its
allocation, and the incentive for it to perform better in the following year is increased
as the amount available becomes larger. It is nevertheless penalized by losing the use
of funds for one or more years depending on its performance in the subsequent years.
On the other hand, it may also be argued that the country has less incentive to perform
in the earlier years in the certain knowledge that it will have those funds available in
the subsequent years if it performs better. Under Option 2 and 3, the country has
better incentive to perform in each year, as the amount it will receive in the following
years from the funds withheld from it for underperformance in the first year will be
only a small proportion of the amount lost in that year (assuming it performs better),
the rest being distributed to other members in the group. Option 2 has an advantage
over the third option in that it avoids accumulation of large undisbursed funds at the
end of the RISM period when their distribution may encourage political disputes.
Both options, however, imply penalizing the underperformers more severely than
under Option 1. On the other hand, option 2 still leaves the problem of undisbursed
funds at the end of the RISM period. Should they be lost for the underperforming
countries in that year, defining under performers as those below the regional average
for the full 3-year RISM period? Or should they just be redistributed to all the
members in the agreed COMESA proportions? Obviously, the first option is too
drastic, but there may be other alternatives to the second option, e.g. distribution
among all the members in the agreed COMESA proportions.
12.4 Conclusion
The main purpose of this study was to develop a system of indicators and a
Performance Assessment Framework that could be used to assess the process of
integration of a country into a regional block. To that effect it develops a
284 R.J. Bhatia
Performance Assistance Framework (PAF) comprising various indicators and

benchmarks that can be evaluated, assigned numerical values and averaged to
arrive at an overall average implementation performance. The framework assumes
that countries will have flexibility, subject to certain limitations, in choosing from
among the regionally agreed objectives and intervention instruments and their
implementation sequence, taking into account their specific circumstances, as
they progress on the roadmap towards integration. These objectives and policies
will be elucidated in country-specific Regional Integration Implementation Pro-
grams (RIIPs) which become the focus of implementation and assessment. The
paper further uses this framework to score the average performance as the basis for
disbursing any supportive funds. For this latter purpose, RIIPs are expected to adopt
the regional objectives and intervention instruments, and designate a minimum
number of those indicators as performance indicators. It is recommended that these
performance indicators include, inter-alia, a few mandated indicators in order to
assure a ‘level playing field’ in the assessment and scoring exercise. The PAF and
the proposed scoring system could be used by national authorities in monitoring and
evaluating their integration policies, and by development partners in calibrating
their supportive assistance to encourage country integration efforts. The practical
application of the proposed framework is demonstrated by considering the case of
the COMESA region whose immediate priority is to encourage those members who
have as yet not joined the COMESA FTA to join it, and for the region as a whole to
operationalize the customs union in preparation for the establishment of a Common
Market and, eventually, a Monetary Union. A scoring system, a modification of the
present COMESA system, is proposed to determine disbursement of RISM funds
on the basis of outcomes in performance indicator compared to their targets.
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De Lombaerde, P., Pietrangeli, G., & Weeratunge, C. (2008). Systems of indicators for monitoring
regional integration processes: Where do we stand? The Integrated Assessment Journal, 8(2),
39–67.
Salmon, J. M., & Akanni-Honvo, A. (2009). ACP regional integration support- monitoring
regional integration. Brussels: The African, Caribbean and Pacific Group of States.
Part IV
Asia
Chapter 13
Monitoring the ASEAN Economic
Community
Aladdin D. Rillo
13.1 Introduction
Since the Association of Southeast Asian Nations (ASEAN)1 has envisioned building an
ASEAN Economic Community (AEC) by 2015, efforts have been strengthened to
deepen regional integration. Under the AEC, the goal is to establish a single market
and regional production base, as well as a highly competitive region with equitable
economic development, and a region that is fully integrated into the global economy.
Realization of this goal requires the elimination of barriers to free flow of goods, services,
investment, capital and skilled labor, with ultimate objective of improving the material
welfare and well-being of countries in the region. To implement the AEC, an AEC
Blueprint was also developed comprising of various policy actions, measures and
strategies, with clear timelines, to achieve the envisioned goals of establishing the AEC.2
1
ASEAN was established in 1967 by five countries (Indonesia, Malaysia, Philippines, Singapore and
Thailand; collectively known as ASEAN5) mainly for political reason. Since then the Association has
expanded to its current ten members (ASEAN5, Brunei Darussalam, Cambodia, Lao PDR, Myanmar,
and Viet Nam), and has broadened its thrust toward greater economic cooperation, beginning with the
Declaration of ASEAN Accord in 1976.
2
The decision to establish an ASEAN Economic Community (AEC) as an end-goal of regional economic
integration was made in Bali, Indonesia during the 16th ASEAN Summit in 2003. AEC is actually one
pillar comprising the ASEAN Community, which includes the other two pillars such as the ASEAN
Socio-Cultural Community (ASCC) and ASEAN Political and Security Community (APSC). In early
2007 the Leaders agreed to develop “a single and coherent blueprint” to implement the AEC, and
consequently, the AEC Blueprint was signed in November that same year. To ensure that this Blueprint is
implemented on time, the AEC Scorecard was developed in 2008 to track countries’ compliance of their
commitments to the AEC Blueprint, as well as to measure the implementation rate of the Blueprint.
A.D. Rillo (*)
Senior Economist, Capacity Building and Training, Asian Development Bank (ADB) Institute,
Tokyo, Japan
e-mail: arillo@adbi.org

288 A.D. Rillo
However, one challenge facing ASEAN is how to monitor the progress of the
AEC. Given the diversity of the region and the capacity constraints of countries in
the implementation of various measures, building an integrated community is not
easy. It requires not only the ability to implement initiatives to support the markets,
but as well as a high level commitment by countries to ensure that policies are
supportive of integration. At the same time because regional economic integration
is a complex process, there’s a need to engage the participation of all relevant
stakeholders and players whose competing interests may sometimes hinder the
implementation of various integration initiatives and measures. Thus, it is within
this context that the monitoring of the AEC becomes crucial.
13.2 AEC Scorecard: Monitoring Compliance to AEC

Commitments
Monitoring of the AEC is undertaken on two levels: compliance monitoring and

outcome-based monitoring (Fig. 13.1). In terms of compliance, one approach used
is the AEC Scorecard. Developed in 2008 to support the AEC Blueprint, the
Scorecard is designed to measure the implementation of the various measures
under the AEC Blueprint, as well as to track the extent by which countries comply
with their commitments in the Blueprint. It covers the four elements under the AEC
Blueprint, namely: single market and production base; a highly competitive eco-
nomic region; a region of equitable economic development; and a region fully
integrated into the global economy.
There are three fundamental reasons why monitoring the AEC is crucial. One is
to monitor compliance as specified in the AEC Blueprint, which also mentions the
need to harmonize national statistics and indicators to assess progress of the AEC.
Second is to benchmark outcomes and impacts of AEC implementation. Finally is
to improve quality of decision-making and make integration process more sustain-
able, by identifying problems (information gathering) and assessing changes
required (information analysis).
As designed the AEC Scorecard has three major components. These include the
provision of qualitative and quantitative indications of the ratification, adoption,
and transposition into domestic laws, regulations and administrative procedures of
agreed obligations and commitments within the prescribed timeframes as specified
in the AEC Blueprint. Another component is tracking the implementation of
agreements and commitments and achievements of milestones in the AEC Strategic
Schedule. Finally is the provision of statistical indicators on the AEC.
In terms of process, monitoring is done through a simple reporting and updating
of measures by the various working bodies that are responsible for implementing
the measures in their respective area. For example, for all measures under the trade
in goods, reporting is coursed through the Coordinating Committee on ASEAN
Trade in Goods Agreement, which submits regular updates to the ASEAN
13 Monitoring the ASEAN Economic Community 289
Fig. 13.1 AEC monitoring framework
Secretariat.3 In calculating the implementation rate, a measure is considered as

implemented only when all activities under the said measure are fully completed by
all countries. Country-specific measures to be implemented by individual ASEAN
Member States are not counted as measures for ASEAN. These measures will be
counted for the country scorecards.4 Thus, measures by individual ASEAN Mem-
ber States will be more than or equal to the measures for ASEAN. To ensure that the
timelines and targets of AEC are met, it was initially agreed that the AEC would be
monitored in four phases: Phase I (2008–2009); Phase II (2010–2011); Phase III
(2012–2013); and Phase IV (2014–2015).5
3
Monitoring is undertaken by the ASEAN Secretariat through its ASEAN Integration Monitoring
Office (AIMO) established in 2010. In developing the Scorecard, AIMO compiles all measures as
earlier identified by the various sector bodies in the AEC Scorecard Master Plan. The list is then
circulated to all working bodies for validation and approval. The approved list of measures
becomes the basis for the scorecard for that particular phase of monitoring.
4
The AEC country scorecards are also developed in a similar way as the AEC Scorecard and
consist of country-specific measures identified by the countries themselves. The country score-
cards are updated by AIMO through inputs submitted by ASEAN Member States.
5
There are two versions of the AEC Scorecard being prepared by ASEAN Secretariat. The
“official” version contains all detailed information about country commitments and specific
measures and the rate of compliance. This version is an internal document, updated twice a year
and is reported to the ASEAN Economic Ministers (AEM), ASEAN Economic Community
Council (AECC), and ASEAN Leaders’ Summit Meeting. Another version is called a “public”
version which is published by ASEC every two years for purposes of informing the general public
of the progress and achievements by AEC.
290 A.D. Rillo
Table 13.1 AEC scorecard (2008–2015)

Implementation
AEC pillar Key initiatives rate (%)a Key achievements
Single ATIGA, AFAS, ACIA, 82.7 Completion of tariff elimi-
Market AMNP, RIA-Finb; Priority nation schedules;
Integration Sectors (PIS), operationalization of
agriculture and food security National Single Window in
ASEAN-6; completion of
7th AFAS package; entry
into force of ACIA; devel-
opment of Capital Market
Implementation Plan.
Competitive Transport, infrastructure, 81.9 Completion of Regional
Economic intellectual property rights, Guidelines and Handbook
Region consumer protection, energy on Competition Policy in
and mineral cooperation. ASEAN; establishment of
Coordinating Committee on
Consumer Protection; com-
pletion of various transport
roadmaps.c
Equitable Initiative for ASEAN Inte- 97.4 Development of IAI Strate-
Economic gration (IAI), SME gic Framework and Work
Development development Plan; development of SME
Strategic Action Plan.
Integration Free Trade Agreements 67.5 Realization of ASEAN Plus
into the (FTAs) One FTAs (Australia and
Global New Zealand, China, India,
Economy Japan, and Republic of
Korea); launch of RCEPb
negotiations
AEC 82.3
(2008–2015)
Notes: aMeasured as the ratio of number of measures implemented (503) to total number of
measures due to be implemented (611) over the 2008–2015 period
b
ATIGA ASEAN Trade in Goods Agreement, AFAS ASEAN Framework Agreement on Services,
ACIA ASEAN Comprehensive Agreement, AMNP Agreement on Movement of Natural Person,
RIA-Fin Roadmap on Monetary and Financial Integration of ASEAN, RCEP Regional Compre-
hensive Economic Partnership
c
These include the Strategic Plan for ASEAN Single Shipping Market and ASEAN ICT Master
Plan 2015
Overall, ASEAN has done a good deal in advancing the AEC as shown
in Table 13.1. This translated to a total implementation rate of 82.3 percent as
of end-December 2015 (503 out of 611 ASEAN-wide measures already
implemented).
Despite this progress, monitoring the AEC through the Scorecard remains
challenging. At a practical level, compliance to AEC commitments is constrained
by implementation problems on the ground. In general, most of the bottlenecks in
implementing the AEC are due to: (1) delays in the ratification of the signed
ASEAN agreements/protocols which affect their entry into force; (2) failure to
align regional initiatives to domestic laws and regulations; and (3) lack of political
will to implement regional and country-specific commitments. Because of these
problems, the ability of the Scorecard to keep track of the implementation is also
limited.
On a technical level, the AEC Scorecard at this juncture is only a compliance
tool to ensure ASEAN and its Member States are on track with the implementation
of their commitments. It is not a tool to evaluate the impact of these measures.
Nonetheless, the AEC Scorecard should be an evolving document that could be
improved or revised and could be used in tandem with other instruments for
evaluation purposes. Since the AEC Scorecard is a compliance tool, it is not
expected to be a rigorous monitoring tool which in a way also limits its
effectiveness.6
13.3 Output Based Monitoring: ASEAN Community

Progress Monitoring System
By way of a background, the ASEAN Community Progress Monitoring System

(ACPMS) is a monitoring tool initiated by the heads of the ASEAN statistical
offices (AHSOM) in mid-2000 to monitor progress toward the ASEAN Commu-
nity. In particular, it was developed in response to the two statements in the AEC
Blueprint and ASCC (ASEAN Socio-Cultural Community) Blueprint, which call
for ASEAN Secretariat to “monitor and review implementation of the Blueprints”
and “develop and adopt indicators and systems to monitor and assess the progress of
implementation.” Thus, the ACPMS covers both the economic and social aspect of
ASEAN Community. However, for purposes of this paper, the ACPMS as
discussed here will focus only on the AEC.
Unlike the AEC Scorecard which measures policy implementation, the ACPMS
is a monitoring tool that measures the outcomes (integration results covering the
core elements of AEC) rather than the process (implementation) of integration. This
is made possible by developing a set of indicators that are being monitored to
capture progress towards the AEC targets. As seen in the ACPMS Framework
(Fig. 13.2), most of the indicators are considered as outcome indicators (e.g.,
variation in terms of prices and per capita income) rather than process indicators
(e.g., number of AEC agreements ratified), and are selected based on the overarch-
ing goals of the AEC. For example, in measuring progress toward the creation of
single market, the ACPMS Framework uses indicators such as growth in intra-
6
One issue about the current AEC Scorecard is the methodology being employed to measure
compliance, which is based on a simple “yes” or “no” to determine if a particular measure is fully
implemented or not. To enhance the Scorecard, two studies were undertaken by the Economic
Research for ASEAN and East Asia (ERIA) which tried to develop a rigorous methodology and a
set of indicators to assess status and progress of integration both at the national and regional levels.
The results of the studies were supposed to complement the AEC Scorecard and to assist ASEC in
improving it.
292 A.D. Rillo
Fig. 13.2 ASEAN community progress monitoring system (ACPMS) framework
ASEAN trade, tariff reduction, growth in intra-ASEAN FDI, income convergence,

and the like.
As a monitoring tool, the ACPMS Framework is not designed to evaluate
specific short-term policy or intermediate goals about integration, but more to
provide a broad policy direction. This means that the indicators used in the
framework are meant mainly to track the trends of a specific measure or initiative,
but not to evaluate its impact. For example, in assessing how the AEC can
contribute to higher economic welfare, the framework uses indicators that only
present the trends in income convergence over time, but not the outcomes of the
AEC measures designed to increase income.
There are two important considerations in selecting the indicators. First is data
availability. Given that outcome indicators are meant to provide up-to-date status of
the progress, the data requirements are much higher than policy indicators, hence
data availability is crucial. Even if data are available and cost-effective to collect,
the required data for constructing each indicator should also satisfy the conditions
for accuracy, timeliness and consistency across countries. Second consideration is
the reliability of indicators. Given the existence of multiple policy initiatives that
can affect the integration outcomes, it is important that concise and well-targeted
indicator for each measure is selected to ensure a correct interpretation and mon-
itoring of results.
The original ACPMS framework7 was developed in 2007 with 21 indicators to
measure the progress of AEC across the four pillars. As can be seen in Table 13.2,
the 2007 ACPMS framework consists of 15 indicators for Pillar I (single market and
production base), two indicators for Pillar II (competitive economic region), one
indicator for Pillar III (equitable economic development), and one indicator for
7
The ACPMS Framework consists of indicators for AEC and ASCC, respectively. However, since
the purpose of this paper is about AEC monitoring, only indicators for economic integration are
reported and discussed. For complete list of ASCC indicators, see 2012 ASEAN Community
Progress Monitoring System Report.
Table 13.2 ACPMS 2007 – list of 21 AEC indicators

Indicators Description Data Frequency Source
AEC 1 Convergence in GDP per capita in PPP$ Annual ASEAN
income Secretariat
Population National Statis-
tics Office
AEC 2 Converge in labor Gross value added by sector Annual National Statis-
productivity (constant price) tical Office
Employment by sector
AEC 3 Intra-ASEAN tour- Tourism arrivals to AMS by Annual ASEAN Tour-
ism arrivals home country ism Database
AEC 4 Convergence in PPP conversion factors Annual IMF Financial
prices - overall (GDP and Private Statistics
Consumption) WB’s World
Databank
AEC 5 Intra-ASEAN trade Value of trade in goods by Annual ASEAN Trade
in goods (value, AHTN for each reporting Statistics Data-
share, and intra- AMS and partner country base (REXDBS)
industry)
AEC 6 Tariffs on intra- Tariff rates by AHTN for Annual ASEAN Tariff
ASEAN imports each AMS Database
AEC 7 Goods trade Costs to export and import a Annual WB’s Doing
facilitation container Business Report
WB’s World
Databank
AEC 8 ASEAN trade in Imports and exports of ser- Annual ASEAN Ser-
services vices by subsectors vices Trade
Database
(REXDBS)
AEC 9 AFAS services AFAS schedule of Irregular ASEAN Data-
trade liberalization commitment base on AFAS
Schedule of
Commitments
AEC 10 Intra-ASEAN Value of inward FDI into Annual ASEAN Invest-
inward FDI each AMS ment Statistics
Database
(REXDBS)
AEC 11 Commercial profit Taxes and mandatory con- Annual WB’s Doing
tax rate tributions excluding sales, Business Report
income and value-added tax WB’s World
Databank
AEC 12 Convergence in Lending and deposit interest Annual IMF Financial
interest rates rates; FX rates; Inflation Statistics
rates (CPI based) WB’s World
Databank
AEC 13 Domestic credit Domestic credit provision Annual IMF Financial
provision by bank and to private sec- Statistics
tor as % of GDP WB’s World
Databank
(continued)
294 A.D. Rillo

AEC 14 Convergence in 10-year government bond Annual ADB’s Asian
government bond yields Bond Online
yields
AEC 15 Co-movement and Stock market prices (daily) Annual Bloomberg
convergence of
stock markets in
ASEAN
AEC 16 Convergence in Total monthly wages paid to Annual National Statis-
skilled labor cost skilled workers in constant tics Office
price Number of skilled
workers
AEC 17 Global Global Competitiveness Annual World Eco-
competitiveness Index and World Competi- nomic Forum
tiveness Scoreboard and IMD
AEC 18.1 New science and Number of new science and Annual National Statis-
technology tech grads (Bachelor tics Office
graduates degree)
AEC 18.2 R&D expenditures R&D expenditures % of Annual National Statis-
GDP tics Office
AEC 18.3 Researchers per Number of researchers in Annual National Statis-
1 million people R&D role per 1 million tics Office
population
AEC 19 Telephone sub- Number of fixed line and Annual National Statis-
scribers per mobile tel. subscribers per tics Office
100 people 100 people
AEC 20 Patent and trade- Number of patent and direct Annual World Intellec-
mark applications trademark applications filed tual Property
by residents by resident of ASEAN Organization
(WIPO)
AEC 21 Share of high-tech (see AEC 5 above) Annual (see AEC
manufacturing 5 above)
exports
Source: ACPMS Pro-forma Progress Report (unpublished report, ASEAN Secretariat, May 2013)
Pillar IV (integration into the global economy). Note that the distribution of
indicators is not even due to data availability.
In fact these perceived data gaps have prompted the revision of the ACPMS
framework in 2012, by including additional indicators that are deemed important
for monitoring the outcomes of integration. For example, in the 2007 ACPMS
framework, there were no indicators to measure the free flow of capital and
investment despite the fact that these are the core elements of AEC.
One motivation for enhancement of the framework is to provide both refine-
ments and data updates to indicators of integration in order to capture more detailed
information on the general outcomes of the AEC and thus gain more insights into
the monitoring of ASEAN economic integration. Through a series of consultations
Table 13.3 Enhanced ACPMS 2012 – list of 29 AEC indicators

AEC (See Table 13.2 (See Table 13.2 above) (See (See Table 13.2
1-21 above) Table 13.2 above)
above)
AEC 22 ASEAN6: CLMV GDP per capita in PPP$ Annual ASEAN
ratio in GDP per Secretariat
capita Population National Statis-
tics Office
AEC 23 ASEAN6: CLMV Value of trade in goods by Annual ASEAN Trade
ratio in intra- AHTN for each reporting Statistics Data-
ASEAN trade in AMS and partner country base
goods (REXDBS)
AEC 24 ASEAN6: CLMV Value of inward FDI into Annual ASEAN Invest-
ratio in inward FDI each AMS ment Statistics
Database
(REXDBS)
AEC 25 Cost of business Cost to register a business Annual WB’s Doing
start-up procedures as a percentage of gross Business Report
national income per capita WB’s World
Databank
AEC 26 Tariffs on extra- Tariff rates by AHTN for Annual ASEAN Tariff
ASEAN imports each AMS Database
AEC 27 Extra-ASEAN trade Value of trade in goods by Annual ASEAN Trade
in goods (value, AHTN for each reporting Statistics Data-
share, and intra- AMS and partner country base
industry) (REXDBS)
AEC 28 Extra-ASEAN Value of inward FDI into Annual ASEAN Invest-
inward FDI each AMS ment Statistics
Database
(REXDBS)
AEC 29 Extra-ASEAN tour- Tourism arrivals to AMS Annual ASEAN Tour-
ism arrivals by home country ism Database
Source: ACPMS Pro-forma Progress Report (unpublished report, ASEAN Secretariat, May 2013)
and reviews,8 the framework was assessed in terms of indicators included and their
overall relevance. It was recognized that as a monitoring tool for AEC, the
framework should be able to measure economic convergence outcomes particularly
in the areas of economic and financial cooperation, logistics services, and ASEAN
connectivity. At the same time indicators to better reflect the economic competi-
tiveness of the region were also sought.
8
As part of the process of enhancing the framework, extensive consultations with direct users and
producers of integration indicators were made, including desk officers from the ASEAN Secre-
tariat, officials from various government agencies in ASEAN, and other stakeholders in the region.
The original 21 ACPMS indicators were also reviewed based on their relevance to AEC monitor-
ing as well as feedback received from stakeholders who were involved in actual integration
monitoring. Finally, a number of regional integration studies and researches were also reviewed
to supplement the findings from consultations and desk review of ACPMS indicators.
296 A.D. Rillo
Thus, under the enhanced 2012 ACPMS framework (see Table 13.3), the
number of indicators was increased to 29 to address some gaps in measuring the
outcomes for price convergence, finance integration, infrastructure connectivity,
regional competitiveness and equitable economic development.9
The main output for these indicators is a statistical report called the ASEAN
Community Progress Monitoring System which is prepared by the ASEAN Secre-
tariat, and which serves as a basis for developing a monitoring system of progress
toward the ASEAN Community. The first report was published in 2008 based on the
2007 ACPMS indicators, and the second one in 2013 using the 2012 ACFMS
indicators. Both reports tried to asses, in a comprehensive manner, the various
efforts by ASEAN member countries in meeting the main goals of the ASEAN
Community, and to complement other compliance monitoring efforts and reports.10
13.4 Issues and Challenges of Monitoring the AEC
While progress has been made, the road to the ASEAN Economic Community is
still a long one. Although various initiatives have been carried out, more efforts are
still needed to deepen the region’s economic integration. Truth is, economic
integration is a very complex agenda with many challenges, requiring greater
scope of critical actions. Still a number of measures remain pending and require
immediate action by Member States.
Despite this progress, some measures have not been fully implemented, partic-
ularly those under trade facilitation (customs modernization and standard and
conformance), services liberalization, investment, agriculture, consumer protec-
tion, and ratification of transport agreements. One reason for this shortfall is the
delay in the ratification of the signed ASEAN agreements and its protocols and
completion of countries’ specific commitments in the Blueprint. Meanwhile, the
Phnom Penh Agenda for Community Building, adopted during the 20th ASEAN
Summit in 2012, highlighted the need to double efforts to realize the AEC by 2015.
Since then efforts have been intensified to set priority activities and concrete key
measures to achieve the AEC goals. In fact under the AEC Blueprint 2025 adopted
in 2015, the immediate priority is to implement the outstanding measures in AEC
9
To construct the ACPMS indicators, data are sourced mainly from ASEAN member states
through the various national statistical offices. Data submission by NSOs is made directly to the
ASEAN stats at the ASEAN Secretariat. ASEC databases are also used such as those for finance
and surveillance, FDI, tariff, services, and tourism. Other sources of data are international
organizations such as the World Bank and the IMF, particularly for some indicators where data
are only available from these institutions.
10
One such important report is the ASEAN Baseline Report (ABR) published in 2003. The ABR
provides indicators across each of the four dimensions of ASEAN Community, namely economic,
socio-cultural, political-security, and narrowing development gap, and presents their baseline
situation as of 2003. In effect, the ABR is a predecessor of the ACPMS Reports in a sense that
both reports contain indicators of integration. The ACPMS Reports, however, re-focus the
framework of the indicators and refine/improve them.
Blueprint 2015 as well as the new measures under AEC 2025. However, to ensure a
higher implementation rate as well as to avoid backlogs of unimplemented com-
mitments, a number of challenges remain.
First, to ensure that AEC is realized, ASEAN should strengthen the implementa-
tion of programs at the national level. ASEAN Member States have been urged to
ensure that regional commitments are transposed into national commitments through
appropriate domestic processes. At the same time, capacity building, particularly for
less developed ASEAN economies, should be given particular emphasis to enable
policy makers in those countries to follow through on their commitments.
Second, it is imperative that a stronger monitoring be put in place both at the
country and regional levels. This should be the priority. In the absence of an
effective and well-functioning mechanism to monitor the outcomes, identify issues
and address implementation gaps, the risks of the AEC falling short of achieving its
targets. Strengthening the monitoring mechanism also requires improving coordi-
nation among national agencies at a country level.
Third, given the difficult and complex process of building a single market, it is
only logical that regional institutions be developed over time to enforce rules and
monitor progress of implementation. ASEAN has taken steps to develop its insti-
tutional support to integration, like the development of enhanced dispute settlement
mechanism. But more steps are needed. One critical institutional support is the
strengthening of mechanism for private sector consultation. Formal consultations
with private sector and regional authorities may still be used, but new strategies to
involve the private sector in the integration process should be explored. Moreover,
there is a need to enhance the monitoring mechanism of the AEC. The establish-
ment of the ASEAN Integration Monitoring Office within the ASEAN Secretariat is
a step in the right direction, but this has to be complemented by well-developed
mechanisms at the country level to ensure that monitoring is effectively carried out
both at the country and regional levels.
Finally, since regional economic integration is not an end by itself, but a policy
instrument designed to achieve development goals, greater macroeconomic and policy
coordination is needed. In particular, the coordination of trade and financial policies is
crucial to ensure that both policies support each other. It goes without saying that both
financial and trade integration should go hand in hand. To facilitate trade, financial
instruments are needed to hedge the risks of trade and investment flows. In the same
manner, financial integration is needed to facilitate specialization and exploitation of
economies of scale, which are related to trade. Without significant integration of
financial systems, deeper integration of trade and investment is unlikely to happen.
References
ACPMS. (2013). Pro-forma Progress Report. Jakarta: ASEAN Secretariat.

ASEAN. (2003). Baseline Report (ABR). Jakarta: ASEAN Secretariat.
ASEAN. (2012). Community progress monitoring system report. Jakarta: ASEAN Secretariat.
Part V
Methodology
Chapter 14
Opening the Black Box of Trade Agreements
Tristan Kohl
14.1 Introduction
Empirical studies on international trade have long made simplifying assumptions

about the design of individual trade agreements (TAs). In gravity models of
international trade, the presence of TAs is usually only captured by a binary
variable (Tinbergen 1962; Rose 2004; Baier and Bergstrand 2007).
An emerging literature is slowly opening the black box of trade agreements by
explicitly taking stock of the specific commitments contained within these agree-
ments. Doing so not only reveals their heterogeneous design, but also enables
researchers to enhance their understanding of how specific provisions come into
existence and influence economic outcomes (Mansfield et al. 2008; Kohl et al.
2016).
The central issue in this chapter is to demonstrate how provisions in trade
agreements can be coded for quantitative applications. After a brief tour of the
literature in Sect. 14.2, we provide a concrete demonstration of the coding meth-
odology employed in a new dataset on trade agreement heterogeneity in Sect. 14.3.
Section 14.4 discusses a number of challenges arising from coding exercises, how
these may be dealt with in empirical work and concludes.
T. Kohl (*)
Faculty of Economics and Business, University of Groningen, Groningen, The Netherlands
e-mail: t.kohl@rug.nl

302 T. Kohl
14.2 Literature
During the past decade, numerous studies have surfaced in which scholars inves-
tigate particular features embodied in TAs. While some provide in-depth coverage
of one or two policy areas of interest, others develop measures that capture the
broader variation in a TA’s design. The former include, but are not limited to,
studies on the design of trade dispute settlement mechanisms (McCall Smith 2000),
investment provisions (Lesher and Miroudot 2006; Houde et al. 2007), trade in
services (Houde et al. 2007; Roy et al. 2007; Fink and Molinuevo 2008) or the type
of integration documented in the TA (Mansfield et al. 2008).
For example, McCall Smith (2000) looks into the governance structures of
62 regional trade pacts, in particular with respect to the design of the dispute
settlement mechanisms. For each TA, the author develops an indicator for the
level of legalism in the dispute settlement procedure. By construction, the level
of legalism is non-existent, low, medium, high or very high. Agreements with a low
level of legalism imply that participating states must settle disputes through diplo-
matic negotiations, while agreements with a high level of legalism are subject to
(binding) third-party arbitration. A number of underlying provisions are examined
to construct this measure of legalism, based on the presence of an independent
third-party review of disputes; whether third-party rulings are binding; whether
arbitrators are organized on an ad-hoc basis or as a standing tribunal; whether
individuals or bodies other than participating states have access to the dispute
mechanism; and the nature of remedies than can be imposed. Based on these
indicators, the author documents extensive variation in how states design their
dispute settlement mechanisms in TAs. Interestingly, he finds that economically
stronger states prefer lower levels of legalism and that this outcome prevails in
negotiations with partners that are more dependent on trade.
Another illustration of provision-specific studies is Houde et al. (2007), who
investigate provisions on investment and trade in services for 20 TAs. The authors’
methodology enables them to compare liberalization commitments following a
North American Free Trade Agreement (NAFTA)-inspired “negative list”
approach and those using a General Agreement on Trade in Services (GATS)-
inspired “positive list” approach. The extent to which investment provisions are
covered is captured in terms of investment liberalization, investment protection and
investment promotion, cooperation and facilitation. Provisions on trade in services
are measured based on the presence of commitments on market access, national
treatment, most favored nation treatment, temporary movement of natural persons,
recognition of qualifications and the abolition of monopoly service providers, to list
just a few. Among their findings, the authors demonstrate that the choice for either
the “positive list” or “negative list” approach is determined by factors such as the
desired degree and speed of liberalization, participants’ prior experience and
administrative capacity. However, the approach adopted by the negotiators does
not limit the extensiveness of the final degree of liberalization agreed upon in
the TA.
14 Opening the Black Box of Trade Agreements 303
Alternatively, the broader design of trade commitments across several policy

domains has also been explored for reciprocal Asian agreements (Hicks and Kim
2012), for European Union (EU)- and United States (US)-based agreements (Horn
et al. 2010) and at a global level (Baccini et al. 2014; WTO 2011; Kohl et al. 2016).
Hicks and Kim (2012) explore the credibility of liberalization commitments in
57 reciprocal Asian TAs. The authors construct a credibility index that reflects, on
the one hand, the degree to which commitments are binding and the extent to which
trade is actually liberalized on the other. They develop a coding scheme with
5 categories covering 19 components, where each component receives a higher
score, the more credible the commitment. The categories account for the type of
agreement, breadth of coverage, depth of coverage, the pace of change and admin-
istrative aspects of the agreement. Each category contributes to the overall index
based on a subjective weighting scheme. Most of the categories are based on a
number of indicators that are also coded based on a subjective score, depending on
the level of integration proposed, the range of products involved, how quickly the
schedule of liberalization must be achieved, and so on. The authors’ coding scheme
reveals considerable variation in the extent to which reciprocal agreements repre-
sent credible commitments to achieve trade liberalization in Asian economies.
Horn et al. (2010) provide an alternative approach to the notion of credibility and
also consider interaction with multilateral trade provisions at the World Trade
Organization (WTO). The authors’ reading of 17 EU-based and 14 US-based
trade agreements allows them to take stock of the policy areas laid out in these
agreements. Moreover, they consider whether these undertakings are legally
enforceable in a court of international law. This is because a policy area could be
covered, but the undertaking may be too imprecisely formulated to give rise to a
legal obligation that would be enforceable in the event of a dispute settlement
proceeding. The authors consider undertakings only to be legally enforceable if the
undertaking specified at least some obligation that is clearly defined, and that is
likely to effectively bind the Parties (Horn et al. 2010: 1572). Moreover, undertak-
ings may not be legally enforceable because they are explicitly excluded from
dispute settlement procedures.
In terms of WTO policy, undertakings confirming participants’ existing multi-
lateral obligations are identified as WTO+ provisions. Examples of WTO+ pro-
visions are measures on anti-dumping, restrictions on state aid and the liberalization
of trade in services. In contrast, WTOX provisions involve policy areas that are not
covered by the WTO’s current mandate and may compromise the WTO’s ability to
expand into these legal territories with binding, non-discriminatory policies. Exam-
ples include regulations on anti-terrorism, environmental protection and labor
practices. The authors find that both the EU and US are strongly committed to
legally enforceable WTO+ undertakings, although the EU emphasizes obligations
on state trading enterprises (STEs) more than the US. In turn, the US focuses on
trade-related investment measures (TRIMs), technical barriers to trade (TBT) and
trade in services (GATS). WTOX provisions feature more prominently in the EU’s
agreements, but are often not legally enforceable, while the few US-based WTOX
undertakings also tend to be legally enforceable.
304 T. Kohl
Finally, the World Trade Report (WTO 2011) adopts Horn et al. (2010)‘s
methodology to identify policy areas in 96 trade agreements worldwide. The Report
shows that (legally enforceable) WTO+ provisions on tariff liberalization, intellec-
tual property rights and investment abound, while WTOX provisions on competi-
tion policy and capital mobility have also become more popular.
Our reading of the literature has so far demonstrated that a number of insightful
contributions have recently emerged in which scholars have started to tackle the
issue of trade agreement heterogeneity. Depending on the research question at
hand, (parts of) trade agreements can be successfully coded to reveal their design
and credibility. We now turn to a more thorough demonstration of how the design
of 296 TAs has recently been accounted for in a new publicly available dataset on
trade agreement heterogeneity.
14.3 Coding
In their study on the impact of trade agreement heterogeneity on international trade,

Kohl et al. (2016) provide an extensive dataset covering 296 TAs active in the
world economy1. This dataset draws on the Global Preferential Trade Agreements
Database (GPTAD) developed by the World Bank (2011) and the Tuck Centre for
International Business. GPTAD provides access to the legal treaties and hosts a web
platform that can be used to search the underlying provisions on a variety of
keywords.
GPTAD classifies the provisions of every agreement according to WTO criteria,
which allows the user to compare provisions across agreements. So, a researcher
interested in measures on anti-dumping and countervailing measures may search
the database with these keywords. All agreements containing provisions on this
topic will then be listed, along with the relevant chapters, titles and/or articles for
each agreement.
The choice for the number of policy domains quantified depends on the identi-
fication strategy. For example, Horn et al. (2010) use chapter and article headings of
the agreements to justify their decision to explicitly account for 52 policy domains.
An alternative would be to compile a detailed list of each and every single policy
domain that could conceptually be included in a TA, regardless whether provisions
in such domains have ever been negotiated. Although this approach has the merit of
exhaustiveness and precision, which is arguably a preferred route when analyzing a
limited set of agreements, it introduces even more complexity when the objective is
to identify the key domains of importance for a substantial number of TAs.
GPTAD features 13 WTO+ policy domains that, in line with Horn et al. (2010)
and WTO (2011), are all part of the WTO’s current mandate. Another four WTOX
policy areas can be identified that extend beyond the scope of the WTO. Finally,
1
The dataset is available at http://www.tristankohl.org
nine indicators of the TA’s institutional quality (IQ) are also obtained. After the
policy domains that need to be coded have been identified, we can proceed by
reading the TAs in GPTAD and double-checking in the actual legal treaty.
Building on Horn et al. (2010), policy domains for which the agreement contains
a provision are coded 1 and 0 otherwise. In order for a provision to be considered
“covered” (C) and scored 1, all that is needed is for the provision to reflect
agreement by both parties to somehow cooperate with a view of trade liberalization.
The issue of legal enforceability is not relevant at this stage. So, a provision calling
for an exchange of Parties’ information on their environmental policies would score
a 1, but so would provisions that give rise to obligations to protect natural resources.
The odd provisions that only state that Parties reserve the right to protect their
natural resources are scored 0 because such measures are essentially protectionist
and do not require any form of cooperation.
A provision that is also considered to be legally enforceable scores 1 for
“enforceability” (E). The criteria build on those laid down in Horn et al. (2010).
These provisions typically use the word “shall”. For example: “Parties shall grant
service providers treatment no less favorable than that accorded to their own.”
Timing is also important. A provision calling for gradual liberalization of govern-
ment procurement policies, without indicating the date by which the liberalization
must be complete, scores 0. This is because it is unclear when the Party must be able
to meet that particular requirement. Provisions stating that Parties “shall negotiate”,
“shall consider” or “shall cooperate” are also difficult to be enforced. Negotiations
may still fail and not abolish trade barriers. It also seems very unlikely that it would
be able to prove that Parties have not given due consideration to a matter or that
they have not cooperated. Note, however, that all IQ provisions are considered fully
legally enforceable because they provide the underlying organizational mechanism
that is needed to implement the agreed upon commitments, including consultations
and dispute settlement.
For clarity and ease of replication, several excerpts from actual trade agreements
are provided below. Table 14.1 shows examples of WTO+ provisions and WTOX
provisions and classifies them as being either covered but not legally enforceable,
or both covered and legally enforceable.
Upon completion of the coding exercise, Kohl et al. (2013) construct an index of
trade agreement heterogeneity,
1 X X X
I Az ¼ WTOþ ,z
A =13 þ WTOXA, z =4 þ IQA =9 ð14:1Þ
3
where I is the index of agreement A. Superscript z (z¼C, E) is C for undertakings

that are covered (ignoring their legal enforceability) and E for undertakings that are
both covered and legally enforceable. Note that the index is the unweighted sum of
all three components (WTO+, WTOX and IQ) because there is no theoretical
argument that one should weigh heavier than the other.
The index of trade agreement heterogeneity can be used to obtain descriptive
information about the design of individual TAs. It also serves as a measure to
306 T. Kohl
Table 14.1 Coding examples

Covered
Type Provision and. . . Example(s)
WTO+ AD & CVM not (...) The provisions of this Article shall not be subject
enforceable to the dispute settlement provisions of this Agreement
enforceable Each Party retains its rights and obligations under
Article VI of GATT 1994 and the WTO Agreement,
and their successors, with regard to the application of
antidumping and countervailing duties
WTO+ Customs not The Member States recognize that the objectives of
administration enforceable this Agreement may be promoted by harmonization of
customs policies and procedures in particular cases.
Accordingly the Member States shall consult at the
written request of either to determine any harmoniza-
tion which may be appropriate
enforceable The Parties shall apply the provisions of Article VII of
GATT 1994 and the WTO Agreement on the Imple-
mentation of Article VII of GATT 1994 for the pur-
poses of determining the customs value of goods
traded between the Parties
WTO+ IPR not Each Party, recognizing the importance of protecting
enforceable intellectual property in further improving the business
environment in the Party, shall: (a) endeavor to
improve its intellectual property protection system;
(b) comply with the obligations set out in the interna-
tional agreements relating to intellectual property to
which it is a party; (c) endeavor to become a party to
international agreements relating to intellectual prop-
erty to which it is not a party; (d) endeavor to ensure
transparent and streamlined administrative procedures
concerning intellectual property; (e) endeavor to
ensure adequate and effective enforcement of intel-
lectual property rights; and (f) endeavor to further
promote public awareness of protection of intellectual
property
enforceable The Parties agree that the WTO Agreement on Trade-
Related Aspects of Intellectual Property Rights shall
govern and apply to all intellectual property issues
arising from this Agreement
Each Party affirms its rights and obligations with
respect to each other Party under the TRIPS Agree-
ment. Each Party shall accord to the nationals of each
other Party treatment no less favorable than it accords
to its own nationals with regard to the protection1 of
intellectual property, subject to the exceptions pro-
vided in the TRIPS Agreement and in those multilat-
eral agreements concluded under the auspices of
WIPO
The Parties shall grant and ensure adequate and effec-
tive protection of intellectual property rights on a
non-discriminatory basis, including effective measures
for enforcing such rights against infringement, and
particularly against counterfeiting and piracy
(continued)

Covered
WTO+ Investment not To promote investments, the Parties agree to enter into
enforceable negotiations in order to progressively liberalize the
investment regime
To promote investments and to create a liberal, facil-
itative, transparent and competitive investment regime,
the Parties agree to enter into negotiations in order to
progressively liberalize their investment regimes,
strengthen cooperation in investment, facilitate
investment and improve transparency of investment
rules and regulations, and provide for the protection of
investments
If a Party grants to a non-Party, after the entry into
force of this Agreement, a more favorable investment
framework than under this Agreement, it shall afford
adequate opportunity to the other Parties to seek to
obtain, including through possible negotiations, com-
parable conditions, on a mutually beneficial basis
enforceable The Sides will not: impose local taxes or charges,
directly or indirectly on goods, covered by the present
agreement, of another Side, at the rate that exceeds the
level of relevant taxes or charges imposed on analo-
gous goods of the local production or those produced
in third countries; introduce special restrictions or
demands towards export and import of goods, covered
by the present agreement, that in similar cases are not
used towards analogous goods of the local production
or those produced in third countries;- use different
rules towards warehousing, unloading, storage, ship-
ment of goods, originated from another country to the
agreement, as well as towards repayments and remit-
tances, with the exception of rules that in similar cases
are used towards domestic goods or those originated
from third countries
WTO+ Public not The Parties will progressively develop their respective
procurement enforceable rules, conditions and practices on public procurement
and shall grant suppliers of the other Party access to
contract award procedures on their respective public
procurement markets not less favorable than that
accorded to companies of any third country
The Parties consider the liberalization of their respec-
tive public procurement markets as an objective of this
Agreement. The Parties aim at opening up of the award
of public contracts on the basis of non-discrimination
and reciprocity
The Parties shall, subject to their laws, regulations and
policies, exchange information in respect of their
government procurement policies and practices
(continued)
308 T. Kohl

Covered
enforceable The Parties consider the opening up of the award of
public contracts on the basis of non-discrimination and
reciprocity, to be a desirable objective. 2. As of the
entry into force of this Agreement, both Parties shall
grant each other’s companies access to contract award
procedures a treatment no less favorable than that
accorded to companies of any other country
WTO+ SPS not The Parties shall aim to reduce differences in stan-
enforceable dardization and conformity assessment. To this end the
Parties shall conclude where appropriate agreements
on mutual recognition in the field of conformity
assessment
enforceable Each party affirms its rights and obligations with
respect to each other Party under the SPS Agreement
Each Party undertakes not to adopt or maintain any
prohibition or quantitative restriction on the importa-
tion of any goods of the other Parties or on the expor-
tation of any goods destined for the territory of the
other Parties, except in accordance with its WTO rights
and obligations or other provisions in this Agreement
The Parties reaffirm the rights and obligations relating
to SPS measures under the SPS Agreement among
those Parties that are parties to the said Agreement.
The Parties shall apply their regulations in sanitary and
phytosanitary matters in a non-discriminatory fashion
and shall not introduce any measures that have the
effect of unduly obstructing trade
WTO+ Services not The Parties agree to enter into negotiations to pro-
enforceable gressively liberalize trade in services with substantial
sectorial coverage
Each Party shall provide free transit over the territory
of its country for goods originated within the customs
territory of the other Party or having originated in third
countries and destined for the customs territory of the
other Party or any third country, and shall supply the
exporters, importers, and shipping companies involved
in such transit operations with all the available
resources and services required for the execution of
these transit operations on terms (including financial)
that are not worse than the terms for providing the
same resources and services to exporters, importers,
and national shipping companies of any other third
country. Contracting Parties shall conclude a special
agreement on transit
enforceable Each Party shall accord services and service suppliers
of any other Party treatment no less favorable than that
provided by those of the Party
There shall be free movement of services
(continued)

Covered
WTO+ State aid not The Parties shall review the issue of disciplines on
enforceable subsidies related to trade in services in the light of any
disciplines agreed under Article XV of GATS with a
view to their incorporation into this Agreement
enforceable Each Party agrees to eliminate and not reintroduce all
forms of export subsidies for agricultural goods des-
tined for the other Parties
The following are incompatible with the proper func-
tioning of this Agreement in so far as it affects trade
between the Contracting Parties: any state aid which
distorts or threatens to distort competition by favoring
certain undertakings or the production of certain goods
Contracting Parties shall not use state aid in the form of
subsidies to enterprises or in any other form if the
result of such state aid would be the distortion of
normal economic conditions in the territory of the
other Contracting Party
The Parties confirm their rights and obligations arising
from the WTO Agreement on Subsidies and
Countervailing Measures
WTO+ STE not The Contracting Parties shall adjust progressively any
enforceable state monopoly of a commercial character so as to
ensure that no discrimination regarding the conditions
under which goods are procured and marketed exists
between nationals of the Contracting Parties
enforceable The Parties shall adjust progressively any state
monopoly of a commercial character so as to ensure
that by the date of entry into force of this Agreement,
no discrimination regarding the conditions under
which goods are procured and marketed exists between
nationals of the Parties
Each Party shall ensure that any state monopoly sup-
plier of a service in its Area does not, in the supply of
the monopoly service in the relevant market, act in a
manner inconsistent with the Party’s commitments
under this Chapter
The States Parties to this Agreement shall ensure that
any state monopoly of a commercial character be
adjusted, subject to the provisions laid down in
Protocol D, so that no discrimination regarding the
conditions under which goods are procured and
marketed will exist between nationals of Party 1 and of
Party 2
WTO+ TBT not The parties agree to strengthen their co-operation in
enforceable measures including technical barriers to trade/non-
tariff measures
(continued)
310 T. Kohl

Covered
The Member States shall:(a) examine the scope for
taking action to harmonize requirements relating to
such matters as standards, technical specifications and
testing procedures, domestic labeling and restrictive
trade practices; and (b) where appropriate, encourage
government bodies and other organizations and insti-
tutions to work towards the harmonization of such
requirements
enforceable Member States shall eliminate other non-tariff barriers
on a gradual basis within a period of 5 years after the
enjoyment of concessions applicable to those products
Each Party undertakes not to adopt or maintain any
prohibition or quantitative restriction on the importa-
tion of any goods of the other Parties or on the expor-
tation of any goods destined for the territory of the
other Parties, except in accordance with its WTO rights
and obligations or other provisions in this Agreement
The Parties reaffirm the rights and obligations relating
to standards, technical regulations and conformity
assessment procedures under the TBT Agreement
among those Parties that are parties to the said
Agreement
The rights and obligations of the Parties, relating to
technical barriers to trade (technical regulations, stan-
dards and conformity assessment procedures) and the
respective measures, shall be governed by the WTO
Agreement on Technical Barriers to Trade
WTOX Capital not Not available
mobility enforceable
enforceable Each Party shall permit all transfers relating to a cov-
ered investment to be made freely and without delay
into and out of its territory. Such transfers include:
(a) contributions to capital; (b) profits, dividends,
interest, capital gains, royalty payments, management
fees, and technical assistance and other fees;
(c) proceeds from the sale of all or any part of the
covered investment or from the partial or complete
liquidation of the covered investment; (d) payments
made under a contract entered into by the investor, or
the covered investment, including payments made
pursuant to a loan agreement; (e) payments made
pursuant to paragraphs 1 and 2 of Article 10.6 and
Article 10.11; and (f) payments arising under
Section B. 2. Each Party shall permit returns in kind
relating to a covered investment to be made as autho-
rized or specified in a written agreement between the
Party and a covered investment or an investor of the
other Party. 3. Each Party shall permit transfers relat-
ing to a covered investment to be made in a freely
usable currency at the market rate of exchange
prevailing on the date of transfer
(continued)

Covered
WTOX Competition not The Commission shall adopt, at the General Secretar-
enforceable iat’s proposal, the rules which are needed to guard
against or correct practices which may distort compe-
tition within the Subregion, such as dumping, improper
price manipulations, manoeuvres made to upset the
normal supply of raw materials and others with a like
effect. In this respect, the Commission shall consider
the problems that could derive from the imposition of
levies and other restrictions on exports
enforceable Where a Party’s monopoly supplier competes, either
directly or through an affiliated company, in the supply
of a service outside the scope of its monopoly rights
and which is subject to that Party’s specific commit-
ments, the Party shall ensure that such a supplier does
not abuse its monopoly position to act in its territory in
a manner inconsistent with such commitments
WTOX Environment not Member Countries shall undertake joint policies that
enforceable enable a better use of their renewable and
non-renewable natural resources and the preservation
and improvement of the environment
enforceable A Party shall not fail to effectively enforce its envi-
ronmental laws, through a sustained or recurring
course of action or inaction, in a manner affecting trade
between the Parties, after the date of entry into force of
this Agreement
Subject to the requirement that such measures are not
applied in a manner which would constitute a means of
arbitrary or unjustifiable discrimination between the
Parties where the same conditions prevail, or a dis-
guised restriction on international trade, nothing in this
Chapter shall be construed to prevent the adoption or
enforcement by a Party of measures: (a) necessary to
protect public morals; (b) necessary to protect human,
animal or plant life or health
Each Party recognizes that it is inappropriate to
encourage investments by investors of the other Party
by relaxing its environmental measures. To this effect
each Party should not waive or otherwise derogate
from such environmental measures as an encourage-
ment for establishment, acquisition or expansion of
investments in its Area
WTOX Labor not Cooperation between the Parties will complement the
enforceable cooperation set out in other Chapters of this Agree-
ment. Areas of cooperation may include but should not
be limited to: science, agriculture including the wine
industry, food production and processing, mining,
energy, environment, small and medium enterprises,
tourism, education, labor, human capital development
(continued)
312 T. Kohl

Covered
and cultural collaboration. Cooperation on labor and
employment matters of mutual interest and benefit will
be based on the concept of decent work
enforceable Neither Party shall require labor market testing, labor
certification tests or other procedures of similar effect
as a condition for temporary entry in respect of natural
persons on whom the benefits of this Chapter are
conferred
Each Party shall grant entry and temporary stay to
nationals of the other Party in accordance with this
Chapter including the provisions of Annex 13
Source: Excerpts from various TAs obtained from World Bank (2011)
account for TA heterogeneity when studying regionalism’s effect on trade in

gravity equations (Kohl et al. 2016) or the determinants of trade agreements
(Kohl 2013).
A demonstration of the index’ descriptive properties is provided for a selection
of 25 TAs in Chart 14.1. We point out a number of observations.
First, note that the agreements are sorted in terms of provisions that are both
covered and legally enforceable (IE), rather than on mere coverage of the provisions
while ignoring their enforceability (IC). With IE ranging between 0.06 (PAFTA)
and 0.94 (Japan-Switzerland FTA), the coding scheme indeed accounts for remark-
able variation in the design of TAs.
Second, traditional WTO+ provisions on import restrictions, export restrictions
and anti-dumping and countervailing measures are predominant, while newer
policy areas such as investment, state trading enterprises and services are covered
less. WTOX policies on capital mobility and competition are featured more often
than those involving the environment or labor (Kohl 2013).
Third, although most agreements listed have similar indices in terms of IC and IE,
accounting for legal enforceability matters. For example, NAFTA and the Chile-US
bilateral trade agreements both score a perfect 1 for covering all WTO+, WTOX and
IQ indicators identified in GPTAD. However, undertakings in SPS measures are not
legally enforceable in the case of Chile-US, while commitments on competition
policy are not subject to dispute settlement procedures in NAFTA.
14.4 Discussion and Conclusion
This chapter provides an overview of recent attempts to address trade agreement

heterogeneity. The coding exercises discussed above illustrate different approaches
to how the qualitative nature of TAs can be quantified for analytical purposes. The
14
WTO+ WTOX IQ Indices
Trade
Agreement
IE
IC
IPR
SPS
STE
TBT
Labor
Services
State Aid
Objectives
Investment
Definitions
Agriculture
AD & CVM
Competition
Environment
Consultations
Transparency
Capital Mobility
Plan & Schedule
Dispute Settlement
Export Restrictions
Import Restrictions
Public Procurement
Evolutionary Clause
Customs Administration
Institutional Framework
Duration & Termination

PAFTA 0.06 0.06
GCC 0.18 0.10
Honduras-
0.19 0.19
Panama
LAIA 0.23 0.20
WAEMU 0.29 0.29
SAFTA 0.32 0.30
SPARTECA 0.31 0.31
APTA 0.36 0.36
ANZCERTA 0.43 0.38
ASEAN 0.41 0.41
ECOWAS 0.50 0.42
Opening the Black Box of Trade Agreements
ECCAS 0.48 0.46

CACM 0.49 0.49
MERCOSUR 0.50 0.50
Andean 0.76 0.52
CARICOM 0.58 0.53
EAC 0.54 0.54
EFTA 0.62 0.62
CEFTA 0.68 0.66
EEA 0.83 0.83
EC 0.84 0.84
Chile-US 1.00 0.89
COMESA 0.90 0.90
NAFTA 1.00 0.92
Japan-
0.94 0.94
Switzerland
Chart 14.1 Examples of heterogeneous trade agreements (Source: Kohl et al. (2016). Notes: Undertakings not covered are white; those that are covered
(ignoring legal enforceability) are grey; provisions that are covered and legally enforceable are black)
313
314 T. Kohl
empirical results obtained in the literature thus far indicate that trade agreement
heterogeneity matters when examining, for example, their political origins and
economic outcomes. Nevertheless, coding practices are subject to a number of
challenges that call for consideration.
First, despite efforts to promote the transparency of the coding method used,
coding practices may be subject to observer bias. Having one individual code the
entire dataset is one option (Kohl et al. 2016), but methods do exist to check for
consistency among multiple scorers (Baccini et al. 2014).
Second, the extent to which a provision is credible or legally enforceable is a
matter of treaty interpretation. For example, dispute settlement rulings of the WTO
Appellate Body have shown that obligations may arise from statements using the
word “should” instead of “shall” (WTO 2011). Indeed, it is important to acknowl-
edge that there are limitations to the extent to which the legal enforceability of an
undertaking can be determined with absolute certainty. However, we have shown
that it is useful to differentiate, in one way or another, between those undertakings
that instill in the reader some sense of concrete and imminent policy liberalization
and those that merely reflect a loosely defined agreement to explore possible
avenues of future cooperation.
Third, the de jure content of TAs does not necessarily have to be the same as de
facto practices. For example, countries may not need a trade agreement with trade
partners because they liberalize trade unilaterally. Another issue is that provisions
not subject to dispute settlement may still be enforceable through political and
diplomatic channels. On the other hand, it may not at all times be possible to
enforce provisions that are subject to dispute settlement, due to political, non-legal
and/or resource considerations.
Fourth, provisions that are excluded from the agreements’ dispute settlement
system may still be subject to dispute settlement flowing from commitments that
the Parties may have elsewhere. This argument applies not only to WTO+ pro-
visions related to other commitments at the WTO, but also to WTOX commitments
arising from, for example, international treaties on labor standards and environ-
mental protection. Alternatively, the legal enforceability of a provision that allows
the use of countermeasures to enforce rights or obligations in one agreement may be
limited by commitments stemming from other agreements. For example, invest-
ment provisions in bilateral investment treaties (BITs) may overrule investment
measures in trade agreements. Future research may address this issue by further
looking into overlapping provisions across several economic cooperation agree-
ments (Estevadeordal and Suominen 2008).
Finally, there are different approaches to how indicators are weighted in the
construction of overall indices of regulation. Where Hicks and Kim (2012) use
subjective weights, Kohl et al. (2016) assume equal weights for all indicators in the
absence of a clear theoretical motivation to do otherwise. Useful robustness checks
would include experimenting with different weights and examining the relevance of
underlying (sub)components.
In conclusion, trade agreement heterogeneity matters in terms of our under-
standing of the origins of international economic integration and in terms of its
consequences for the world economy. Despite a number of challenges in

transforming qualitative legal provisions to quantitative measures, the develop-
ments in coding practices and the dataset described in this chapter provide tools that
future endeavors can use in opening the black box of trade agreements.
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Preferential Trade Agreements (PTAs): How much further than the GATS? World Trade
Review, 6, 155–192.
Tinbergen, J. (1962). Shaping the world economy: Suggestions for an international economic
policy. New York: The Twentieth Century Fund.
World Bank. (2011). Global preferential trade agreements database. http://wits.worldbank.org/
gptad. Accessed 18 Dec 2011.
WTO. (2011). The WTO and preferential trade agreements: From co-existence to coherence.
Geneva: World Trade Organization.
Chapter 15
Assessing Globalization and Regionalization
Through Network Indices
P. Lelio Iapadre and Lucia Tajoli
15.1 Introduction
A strong perception concerning the current wave of globalization is that the

characteristics of international trade have changed over the last decade. The change
was both quantitative and qualitative: before the global financial crisis, the amount
of trade kept increasing substantially more than world production, on average by
more than 6% per year. Furthermore, over the years, the composition of trade flows
changed, with a higher share of trade in inputs, intermediate goods and services,
making countries even more deeply interconnected, especially at the regional level
(WTO 2011), and the geographical composition of trade also changed, with an
increasing role of the emerging countries, especially in Asia (WTO 2010).
According to most observers, these changes have made countries more integrated
into the world economy.
In this chapter, rather than considering measures of integration at the country
level, we examine how some of these changes affected the entire structure of trade
flows using the tool of network analysis (NA). Representing world trade flows as a
P.L. Iapadre
Dipartimento di Ingegneria Industriale e dell’Informazione e di Economia, Universita
dell’Aquila, L’Aquila, Italy
e-mail: lelio.iapadre@univaq.it
L. Tajoli (*)
Dipartimento di Ingegneria Gestionale, Politecnico di Milano, Milan, Italy
e-mail: lucia.tajoli@polimi.it

318 P.L. Iapadre and L. Tajoli
network allows to emphasize the relationship between the countries in the network
and the structure, or the systemic features, of the network itself. This is exactly the
purpose of network analysis. In fact, both graph theory and NA place more
emphasis on the relationship between vertices in the graph, and on the structure
of the system itself, than on the vertices’ attributes, that are generally left in the
background. The application of NA to international trade can, therefore, nicely
complement other empirical analyses of trade, which instead put countries’ char-
acteristics or dyadic relationships at the forefront of the analysis, and that, even if
recognizing the importance of the structure of the system, leave this structure in the
background.1
In particular, NA can contribute to the analysis of changes in the level of
integration and connectivity of the world trading system as a whole: as international
trade links shift and re-arrange, this would become evident through the change of
the network structure. The extent of these changes over time is the first thing we
present, using some of the most common network indices to measure its cohesion
over time. In addition, we show how network analysis can be used to address some
issues debated in the recent trade literature, like the degree of integration within
regional blocks, and the position of single countries within the network structure.
The results obtained through this analysis provide a measure of trade integration at
the world level, showing that the world is still far from being fully connected, but
that full connection (or network completeness) is already evident in some
sub-regional components of the World Trade Network. This evidence also indicates
a strong heterogeneity in the countries’ level of connection and position. We
conclude by mentioning how these results can change when network analysis is
conducted at the product level.
15.2 Structure and Connectivity in the World Trade

Network
In order to define the structure of the World Trade Network (WTN), we need
observations on bilateral trade flows between countries. In fact, in our network,
each country represents a node of the network, and links between nodes are given
by trade flows directed from one country to another. In the analysis of the World
Trade Network, we use aggregate bilateral imports, as reported by each country and
1
The literature analyzing world trade flows as a network is growing. Some earlier papers empha-
size the topological properties of this network, but lack to a very large extent the economic
interpretation of these findings. See for example, Bhattacharya et al. (2008), Fagiolo et al.
(2008), Garlaschelli and Loffredo (2005), Serrano and Boguna (2003). More recently, this type
of analysis was used to assess the economic implications of the properties of the international trade
network. See for example, De Benedictis and Tajoli (2010, 2011), and Chaney (2011). For a
general analysis of economic networks, see Jackson (2008).
15 Assessing Globalization and Regionalization Through Network Indices 319
measured in US dollars, drawn from the IMF Direction of Trade Statistics database,
as well as some sector-level data from the BACI-CEPII database.2
Observing the dataset, it is apparent that the bulk of the value of world trade
tends to be concentrated among a sub-group of countries and a small percentage of
the total number of flows accounts for a disproportionally large share of world
trade.3 Therefore, many of the observed patterns in trade flows are driven by a small
subsample of observations. In order to represent the entire system and evaluate all
existing trade links, which might be relevant for some small or peripheral countries
in spite of the very different orders of magnitude, we analyze the international trade
system both as a binary network, assigning a value of 1 to all existing trade flows,
and zero to all the missing bilateral links, and as a weighted network, maintaining
the dollar value of trade flows.
In Tables 15.1 and 15.2, we compare some of the trade network characteristics
over time, based on different observation samples. In Table 15.1, we included in the
network in each year only the countries for which at least one trade flow was
recorded, i.e. excluding unconnected countries, or considering only the so-called
“giant connected component”, that is the sub-network formed by the group of nodes
that are all connected to each other, directly or indirectly. While this might reduce
the overall number of errors in the observations,4 at the same time, it makes it more
difficult to compare the trade network over time because of the inherent change in
its structure given the changing number of vertices. Therefore, we computed the
network indices also for the balanced panel composed of the constant subset of
113 countries for which observations are available in the entire time span, and these
are reported in Table 15.2.
The first measure of integration or connectivity in the network is given by the
number of existing links (or bilateral trade flows) between countries. Given that
trade flows in our dataset are reported by importers, we can directly calculate the
2
The choice of the trade data is not neutral for describing the network. Even if the origin of all data
is the same database, a long time span might introduce some discontinuities. A number of
countries (especially the smallest and poorest ones) are not always reporting trade data. Additional
problems in assessing our dataset come from the fact that over time new countries were born
(e.g. the Czech Republic and Slovakia), and a few disappeared (e.g. Yugoslavia), changing the size
of the network. We use import data because they are more reliable in terms of coverage and
completeness, but import data can give rise to a network structure that is slightly different than the
one found with exports – as shown by Kali and Reyes (2007) and by De Benedictis and Tajoli
(2008) – or with average trade flows (the average of exports and imports). The same is true in a
gravity context; see Subramanian and Wei (2007).
3
In 2000, 90% of total trade value corresponded to 855 flows out of nearly 12,000 registered trade
flows, and only 82 countries out of the 157 reporting countries generate again 90% of trade.
4
Working at the aggregate level, we are aware of the fact that apparently unconnected countries
(for example Malta or United Arab Emirates, showing no link at all in some years) are in fact not
reporting data and the missing links therefore do not indicate that the country does not trade at all.
By consequence, removing vertices without any link will eliminate a few meaningful (but
unobserved) links and some meaningless zeros, but it should not introduce a systematic bias,
even if it changes the size of the network.
Table 15.1 Trade network indices over time (all reporting countries are included)
1960 1970 1980 1990 2000 2008
No. countries 113 130 143 145 157 154
No. arcs 3655 6593 8180 10289 11938 15850
Density 0.289 0.393 0.403 0.493 0.487 0.673
In-degree 0.601 0.565 0.58 0.511 0.519 0.329
centralization
Out-degree 0.546 0.51 0.438 0.469 0.484 0.329
centralization
Closeness 0.678 0.57 0.614 0.535 0.581 0.353
centralization
Betweenness 0.063 0.036 0.032 0.016 0.016 0.005
Centralization
Diameter 3 3 2 2 2 2
Aver. distance 1.657 1.567 1.52 1.486 1.497 1.327
among reachable
pairs
Source: Elaboration on IMF data
Note: Reporting countries included in the computations are the ones for which at least one trade
flow is recorded
number of incoming links for each node of our network, the so-called in-degree of
countries, but of course we can also compute the number of outgoing links, or
out-degree of each node, as we know the origin of each import flow.5 Looking at the
number of trade links among countries, measured as the number of arcs, we observe
that this has increased significantly over time.
From the number of links, an overall measure of the connectivity in the network
can be computed. This is called the density of the network, and it is defined as the
ratio between the number of existing links and the maximum number of potential
links in the given network. We observe also an increasing trend in the density of the
network in all the samples presented. Density declines slightly in 2000 compared to
ten years earlier, but this is explained by the increase in the size of the trade network
in terms of vertices.6 Density increases quite sharply again in all our samples
in 2008.
The rising trend in the network density confirms what other measures of eco-
nomic integration indicate, that linkages between countries have been increasing in
the second half of the twentieth century. Here we consider the number of linkages,
and we are not weighting for the value of trade carried by each flow, therefore this
indicator is showing something different than the standard measures that consider
openness at the individual country level. An increase in density means that on
5
We include all the definitions of the indices in the Annexes.
6
Larger networks are expected to have a lower density, because an increase in the number of
vertices requires a much more than proportional increase in the number of links to keep the density
constant.
Table 15.2 Trade network indices over time (balanced panel)

1960 1970 1980 1990 2000 2008
No. countries 113 113 113 113 113 113
No. arcs 3655 5807 6522 7355 6964 9184
Density 0.289 0.459 0.515 0.581 0.55 0.725
In-degree 0.6005 0.519 0.48 0.3866 0.3547 0.2675
centralization
Out-degree 0.5464 0.492 0.3809 0.3776 0.3547 0.2675
Centralization
Closeness 0.6784 0.5426 0.49 n.a n.a n.a
centralization
Betweenness 0.0627 0.0308 0.0155 0.0097 0.0065 0.004
Centralization
Diameter 3 3 2 2 2 2
Aver. distance 1.657 1.518 1.423 1.369 1.324 1.261
among reach-
able pairs
Note: Here network indices have been computed including only the group of countries for which
data are available over the entire time span 1960–2008
average each country has a larger number of trade partners, and that the entire
system is more intensely connected. Still in 2000, though, the density index,
computed for all reporting countries, is around 0.5 and reaches 0.67 in 2008,
meaning that the network is relatively dense, but far from being complete. In
other words, this means that most countries do not trade with all other potential
partners, but that they are rather selective.
Other possible measures of integration of the system are given by the diameter of
the network and the average topological distance between nodes of the network,
also reported in the Tables. These indices measure the maximum number of steps
needed to go from one node to any other (the network diameter) and the average
number of steps between any two nodes. All the samples indicate that the network
diameter reduced from 3 to 2 in the 1970s, and that the average distance between
countries declined quite regularly over time. In other words, if we look at the world
as a network of trade linkages, the world has indeed become smaller in the past
decades.
The change in density or distance was not uniform across the network, and the
network structure changed over time also in other respects, as it can be assessed by
considering not only the number of links, but also their distribution, as well as other
network indices. Some of these indices suggest that over time the connectivity in
the network has become more evenly distributed. This assessment can be made
through centralization indices, ranging between zero and one, and measuring to
what extent the network is built around some nodes working as hubs (betweenness
centralization index), or whether there are nodes in central positions, closely
connected to a large number of other peripheral nodes (closeness centralization
index). The notion of betweenness centrality has important strategic implications
(Borgatti 2005). The central vertex could, in fact, exploit its position to its
advantage.
The decline in the betweenness centralization index, Cb, in all the tables from
1960 to 2008 implies that the increase in trade linkages has been fairly widespread,
reducing the role of hubs in the network. In line with this evidence is the trend in
degree centralization, especially evident in Table 15.2, with a fixed number of
countries. Closeness centralization, Cc, which is also influenced by the size of the
network, moves in a less regular fashion.
15.3 Assessing the World Trade Network Integration at

the Regional Level
Do the measures discussed above indicate that integration is high or low? What we
have is a clearly increasing trend over time, but in order to assess this result, we
should know which are the predictions of international trade models in terms of the
structure of the trade network. Unfortunately, most trade models deal with the
pattern of trade of individual countries, and do not have much to say about the
structure of the whole system, and about the number of trade flows that we should
observe between countries. We know that perfect integration in theory would
require absence of trade costs and of any other barrier, even if we do not expect
to observe it in the data. As stressed by Brahmbhatt (1998), the general difficulty in
measuring economic integration using any type of outcome indicator is to provide a
standard against which actual outcomes in the real world can be judged. To do this
would require very strong assumptions, and therefore when we observe a gap
between actual results and theoretical standards, it is very difficult to tell if the
difference is due to underlying unrealistic assumptions or if it can indeed be
interpreted as the distance of the real world from full integration.
A different approach to assess the results obtained for the whole world network
is to compare them to the results obtained for different subsets of countries. In this
way, rather than setting an absolute benchmark, we can compare the average level
of world integration with the indices computed for specific groups of countries or
specific cases. In what follows, we show how the statistical tools developed in
network analysis can be applied to the study of trade regionalization. Drawing also
from the evidence emerging from other works, we compare the indices for the entire
world trade network with those obtained for groups of geographically nearby
countries, and for trade flows in specific sectors.
15.3.1 Is Integration Higher in Geographically-Close

Countries?
Assessing whether the degree of integration we found is high or low may be done by
checking if in the world there are regional areas at different levels of trade
integration. Here we verify if there are more trade flows between (relatively)
geographically close countries that belong to the same continent and even more
between countries that are parties to a regional trade agreement. To do so, we
present some of the characteristics of continental sub-networks of trade, reported in
Table 15.3.
If we consider density as an indicator of trade integration within each continental
sub-network, we see that both in 1980 and in 2000 the density of trade flows in each
continent – with the notable exception of Africa – is significantly higher than at the
world level, implying that among countries belonging to the same continent there
are proportionally more trade flows than with a random country elsewhere in the
world. In this respect world trade is indeed regionalized.7 However, we can also see
that over time, the density index within some continents declines, while world
density tends to increase. Europe, for instance, is close to being a complete network
in 1980, while in 2000 its density index is much lower, due to the increase in the
number and heterogeneity of trading countries after the Soviet era.
A further important push toward tighter integration for specific groups of
countries can be the existence of preferential trade agreements (PTAs), removing
barriers between partner countries signing such agreements. In the case of Europe,
the affiliation to the European Union (EU) seems indeed to play this role, as the EU
sub-continental area is a complete network with density equal to one, showing the
strength of the economic links between EU members. The fact that this indicator
can reach its maximum when computed with real data for a given group of countries
shows that there is still room for increasing the network density and the overall level
of integration at the regional and global level.
Besides density, several concepts used in network analysis can be adapted to the
study of regional trade flows, in order to better understand the topology of their
networks (Iapadre and Tironi 2009). For example, at the country level, what matters
is not only the node’s degree (the number of partners), which can be seen as a
measure of geographic diversification of regional trade, but also the average degree
of a node’s partners, which shows to what extent a country is connected to the most
important nodes of the network. Even more, for any given average partner degree, it
can be interesting to check if a country’s partners tend to be connected between
each other more than with other nodes of the network (clustering). In our context, it
tells us what the probability is that the trading partners of a country are themselves
trading partners. Table 15.4 reports some descriptive statistics of the clustering
coefficients in our sample. Generally, these clustering coefficients display an
7
This finding is in line with the evidence gathered through gravity models, showing that geo-
graphical distance is important in trade relations, as well as sharing a border and other proximity
indicators.
324
Table 15.3 Regional trade networks

World Europe (EU) America Asia (ASEAN) Africa Oceania
Countries 1980 130 23 (9) 33 28 49 9
2000 157 32 (15) 33 38 (10) 45 9
Arcs 1980 8180 463 651 517 530 45
2000 11938 826 757 849 618 49
Regional share of arcs 1980 1 0.057 0.08 0.063 0.065 0.006
2000 1 0.069 0.063 0.071 0.052 0.004
Density 1980 0.403 0.915 (1.00) 0.617 0.684 0.225 0.625
2000 0.487 0.833 (1.00) 0.717 0.604 (0.75) 0.312 0.681
Source: De Benedictis and Tajoli (2011)
P.L. Iapadre and L. Tajoli
Table 15.4 Clustering of countries over time

1960 1970 1980 1990 2000 2008
No. countries 113 130 143 145 157 154
Aver. clustering coefficient 0.71 0.66 0.7 0.75 0.78 0.8
Median clustering coefficient 0.72 0.66 0.72 0.78 0.83 0.8
St.dev. of clustering coeff. 0.18 0.14 0.15 0.15 0.16 0.1
increasing trend over time. This seems to indicate that the increasing integration
that we observed in the world trading system has occurred especially through a
gradual expansion of links in the existing ‘neighborhoods’.
Conversely, the degree centrality of a node in a network is the higher, the lower
the number of connections among its partners, so that a central node plays the role
of a hub in the network. Correspondingly, the centralization of a network is often
measured as the highest centrality achieved by any of its nodes. The maximum
degree of centralization is reached in a star network, where only one country is
connected with all the others, whereas each of the others is connected only with the
hub of the network.8 Several concepts have been proposed to define centrality and
centralization in network analysis, giving rise to a wide range of different indicators
(see below).
Since regional integration areas are made of a small number of neighboring
countries, density and clustering indicators are normally very high, whereas cen-
trality measures tend to be very low. So, the interest of these simple applications of
binary network analysis (BNA) is limited to the few regions in which they give
anomalous results, such as in South Asia, or to data at product level, for which even
regional networks are not necessarily dense.
As mentioned above, BNA is based only on the number of trading partners and
neglects the intensity of their linkages. Motivated by the observation that the world
trade network is concentrated in a relatively small number of high-value bilateral
flows, weighted network analysis (WNA) of international trade represents the
intensity of linkages among the network nodes through the actual matrix of their
bilateral trade flows, expressed in absolute or relative terms.
Apart from the difference between the respective matrices, indicators used in
WNA are similar to those used in BNA. In the analysis of regional networks, the
node’s degree is replaced by the intra-regional node value, which is the value of a
country’s total trade with its region. Other WNA indicators, based on the
corresponding binary measures of average partner degree and clustering, can be
used to illustrate the topology of regional trade networks in terms of connectivity
8
A similar image is sometimes used to describe the network of preferential trade relationship
between the European Union and its partner countries, particularly in developing regions, which is
depicted as a hub-and-spoke system. The lack of preferential agreements among the spokes of the
system is sometimes considered as a factor that can inhibit their ability to reap the benefits of their
integration with the EU.
and centralization, taking into account not only direct bilateral trade flows between
a country and its regional partners, but also trade among the latter.
However, whereas in BNA the total number of possible linkages offers a natural
criterion for building normalized indicators, such as density measures, in WNA the
choice of a benchmark is more difficult, since there is no exogenously given
maximum value for trade. A widespread practice is to normalize indicators with
respect to the actual maximum value of bilateral trade in the network. However, this
choice is questionable, because it implies that the maximum levels of some
indicators could be reached only if all bilateral trade flows in the network were
equal to their maximum, which is clearly implausible given the large disparities in
country size.
Another possibility is to use revealed trade preference indicators, based on a
geographic neutrality criterion derived from the logic of trade intensity indices. A
node of a regional trade network is said to exhibit an intra-regional trade preference,
if its intra-regional trade share is higher than the region’s share of trade with the rest
of the world. The corresponding indicator at the network level may be called
regional trade introversion (Iapadre 2006).
Also for regional trade networks, it is useful to look beyond overall integration
measures to understand the potential asymmetry of the system. In a recent work,
Iapadre and Tajoli (2014) consider the centralization of some regional PTAs and the
centrality of their respective members to assess additional characteristics of the
regional process of integration, finding that the position of countries within a PTA is
often very different, some of them playing the roles of export hubs, others of
dominant suppliers of the regional system.
15.3.2 Network Structure and Regionalization
A different perspective is taken by analyzing the entire world trade network to

measure its degree of regionalization. Loosely speaking, trade regionalization can
be seen as a process leading a region’s member countries to trade more intensely
among each other than with countries in other regions. Stated differently, this
process implies that countries characterized by a certain qualitative feature (belong-
ing to a given region) tend to trade more intensely with countries sharing the same
feature. This pattern of selective linking has been characterized in network analysis
as assortative mixing or homophily and a number of indicators have been devised to
measure its intensity. Unlike previous indicators that can be computed at country
and region levels, homophily can be measured only with reference to the entire
network of trade flows, including both the target region and the other regions in the
rest of the world, or in a pre-defined benchmark area. In a binary context, Newman
(2003a, b) suggests an assortativity coefficient, which can be easily adapted to a
weighted matrix of regional trade flows. The resulting intra-regional assortativity
coefficient is equal to zero in the case of geographic neutrality, which is when
regions trade among each other in proportion to their total trade values, and reaches
a maximum value of one in the limiting case of no inter-regional trade. An

application of this index to the world trade matrix, classified by regional integration
areas, shows that the degree of trade regionalization, after rising substantially in
the Nineties, has receded in the last decade (Iapadre and Plummer 2011). According
to this analysis, forces leading to globalization have become stronger than prefer-
ential factors at the regional level.
Another assessment of the extent to which integration is more ‘local’ or ‘global’
can be made by discarding specific exogenous partitions of the nodes of the network
(like continents or PTAs, in the previous section), and looking for the possible
existence of communities within the WTN. In general terms, a significant network
community is a set of nodes with strong internal connections, much stronger than
those with the remaining nodes of the network, forming groups which are much
tighter than the ones that are expected to be observed in a random network.
Community analysis applied to the WTN can then discover – without
pre-imposing any preferential link or structure – groups of countries with a higher-
than-average level of integration in terms of trade flows, originated by geographical
vicinity, common language or religion, traditional partnerships, and preferential
trade agreements.
Piccardi and Tajoli (2012) apply different methodologies to search for commu-
nities in the world trade network in the period between 1962 and 2008, in order to
verify the robustness of the results obtained. All the different methods applied base
the search for a community on the identification of a group of countries sharing a
disproportionate amount of trade among them when compared with the trade they
have with the rest of the world. The results show that the WTN is not significantly
split into groups. Some “weak” communities emerge, mostly geographically based,
but the countries involved are generally not much more connected among them than
with the rest of the world, so that they do not form truly privileged or exclusive
relationships. Therefore, this kind of analysis does not support the existence of a
strong trend in regionalization in trade patterns. However, its results may be
affected by the statistical threshold chosen to identify strong communities.
15.3.3 Network Connectivity at the Sector Level
Trade integration can be different if we consider aggregate trade flows or specific

industries. De Benedictis and Tajoli (2010) analyze the networks created by
international trade flows of different manufacturing industries. The results, reported
in Table 15.5, show that the trade networks at the industry level display quite
different characteristics. Density at the industry level is lower than at the aggregate
level, but there are industries with a relatively high network density, such as
machinery, both electric and non-electric, and transport equipment, and industries
with a much lower density, such as tobacco or petroleum and coal products.
Generally, the results suggest that homogenous and less complex goods give rise
to less dense trade networks. The analysis presented in De Benedictis and Tajoli
Table 15.5 Trade networks characteristics in the year 2000 for different sectors
In- Out-
% on tot. Aver. degree degree Betweenness
ISIC Trade
code Industry value Arcs Density Degree Central Central Central
311 Food 4.5 12710 0.259 57.25 0.485 0.644 0.049
products
313 Beverages 0.7 7078 0.144 31.88 0.432 0.705 0.076
314 Tobacco 0.3 3651 0.074 16.45 0.266 0.612 0.103
321 Textiles 3.5 12829 0.262 57.79 0.510 0.619 0.046
322 Apparel 3.9 11475 0.234 51.69 0.561 0.661 0.062
323 Leather 0.7 7842 0.160 35.32 0.453 0.644 0.061
products
324 Footwear 0.7 6623 0.135 29.83 0.437 0.633 0.104
331 Wood 1.1 8884 0.181 40.02 0.527 0.641 0.071
products
332 Furniture 1 8522 0.174 38.39 0.507 0.685 0.099
341 Paper 2.5 8984 0.183 40.47 0.407 0.666 0.078
products
342 Printing and 0.7 9585 0.195 43.18 0.472 0.695 0.064
publishing
351 Industrial 7.9 11627 0.237 52.37 0.439 0.662 0.054
chemicals
352 Other 4.1 11748 0.240 52.92 0.437 0.669 0.048
chemicals
353 Petroleum 2.8 5338 0.109 24.05 0.341 0.627 0.109
refineries
354 Petroleum 0.1 2689 0.055 12.11 0.186 0.559 0.069
and
coal prod.
355 Rubber 0.9 8951 0.182 40.32 0.385 0.676 0.078
products
356 Plastic 1.2 10286 0.210 46.33 0.399 0.662 0.060
products
361 Pottery, 0.2 6604 0.135 29.75 0.419 0.647 0.081
china,
earthenware
362 Glass 0.5 7979 0.163 35.94 0.364 0.678 0.060
products
369 Other 0.6 7846 0.160 35.34 0.367 0.689 0.066
non-metal
mineral
products
371 Iron and 2.9 8465 0.173 38.13 0.359 0.668 0.055
steel
372 Non-ferrous 2.8 7619 0.155 34.32 0.449 0.662 0.094
metals
381 Fabricated 2.9 12195 0.249 54.93 0.496 0.655 0.048
metal
products
(continued)

In- Out-
% on tot. Aver. degree degree Betweenness
ISIC Trade
code Industry value Arcs Density Degree Central Central Central
382 Machinery. 16.7 14304 0.292 64.43 0.544 0.630 0.044
except
electric
383 Machinery. 17.1 13055 0.266 58.81 0.578 0.646 0.046
electric
384 Transport 14.9 11423 0.233 51.45 0.512 0.680 0.050
equipment
385 Prof. and 3 10430 0.213 46.98 0.550 0.691 0.066
scient.
equip.
390 Other 1.8 10521 0.214 47.39 0.521 0.666 0.071
manufact.
Products
Aggregate 21700 0.442 97.75 0.478 0.501 0.015
bilateral
trade
Source: De Benedictis and Tajoli (2010)
(2010) also shows that more complex goods in terms of their production processes9
are associated to more dense and articulated trade networks, suggesting the exis-
tence of an international organization of production stretching over many countries.
At the industry level, trade integration seems to be driven also by the involvement
of countries in international production networks that give rise to a number of trade
links in intermediate goods.10
15.4 Conclusion
In this chapter, we have shown how the tools of network analysis can be used to
examine the cohesion of the international trading system. Through the indices
describing the network’s properties, such as density, closeness, betweenness and
degree distribution, we see that the world trade network has indeed changed in the
past decades. In particular, the trading system has become more intensely
interconnected, while the heterogeneity among countries increased; the average
9
Goods’ complexity here is following the definition given by Nunn (2007), which refers to the
number of intermediate inputs necessary to produce a final good.
10
For further analysis of the international trade network at the sector level, see De Benedictis et al.
(2013). The paper is also providing a large set of centrality indicators for individual countries, to
understand countries’ position in the WTN and their evolution over time.
structural network distance has decreased, and the position of many countries in the
network changed.
Furthermore, network analysis can show how trade policies play a role in
shaping the trade network, at global and regional levels. An important feature of
these results is that they pertain to the trading system as a whole, which is the object
of analysis in this context, and are not due to a specific country or group of
countries. The main contribution of NA to the empirical investigation of trade
flows is probably that it offers a unified view of the system characteristics, drawing
from the underlying heterogeneity of its components and its complexity. This
approach can have relevant implications both for trade policy and for the modeling
of trade relations.
Annexes
Annex A.1: Definition of a Network
A network consists of a graph plus some additional information on the vertices or

the lines of the graph. In its general form, a network:
N ¼ ðV; L; W; PÞ ð15:1Þ
consists of a graph G ¼ (V,L), where V ¼ (1, 2, . . .. n) is a set of vertices and L is a

set of lines between pairs of vertices. In simple graphs, L is a binary variable, and Lij
E (0,1) denotes the link between two vertices i and j, taking a value of 1 if there
exists a link between i and j and 0 otherwise. Another convenient way (Vega-
Redondo 2007) of representing simple graphs is through its adjacency matrix, a
V V-dimensional matrix denoted by aij such that:

1 if ði; jÞ 2 L
aij ¼
0 otherwise
Therefore, two vertices are said to be adjacent (or at just one-step distance) if
they are connected by a line. The concept of geodesic distance in networks refers to
the number of steps needed to connect two vertices Vi and Vj, named δij. The
shortest the distance between two vertices the closest is the connection
between them.
Weighted networks add to simple graph some additional information on the lines
of the graph. The additional information is contained in the line value function W,
where line values are positive weights associated to each line, usually indicating the
strength of the relation. In the ij case, wij is the link’s weight. The additional
information on the vertices is contained in the vertex value function P, assembling
different properties or characteristics of the vertices.
The size of a network is expressed by the number of vertices n and the number of
lines m. The set of vertices that are connected to any given Vi defines its neighbor-
hood where d 0 denotes the number of neighbors of Vi. Since, in simple directed
graphs, a vertex can be both a sender and a receiver, the indegree of a vertex is the
number of arcs it receives, and the outdegree is the number of arcs it sends. The
notion of neighborhood is associated to the one of clustering. The clustering
coefficient of a vertex Vi is the proportion of a vertex’s neighbors which are
neighbors of each other. The clustering coefficient for the network as a whole can
be derived taking a weighted or an unweighted average across vertices in the
network.
Annex A.2: Structural Properties and Centrality of a Network
The density of a network is the number of lines in a simple network, expressed as a

proportion of the maximum possible number of lines. It is defined by:
m
γ¼ ð15:2Þ
mmax
where in a simple directed graph, mmax ¼ n(n 1).

Accordingly, a complete network is a network with maximum density.
The position of every vertex in a network is measured in terms of centrality.11
The simplest measure of centrality of Vi is the number of its neighbors, i.e. its
degree centrality, Cid ¼ d:12
The degree centralization of a network is defined in relative terms (like most
other measures of centralization) looking at the unevenness of the distribution of
links among nodes in the network. The minimum degree for any component of the
*
network is 0 and the maximum possible degree is n1. If Cdi is the centrality of the
vertex that attains the maximum centrality score, the variation in the degree of
vertices is the summed absolute differences between the centrality scores of the
vertices and the maximum centrality score among them. So, as the maximum sum
of degree centrality absolute differences is (n2)(n1), the degree centralization of
a network is defined as:
P n d
*
i¼1 Ci Cdi
Cd ¼ ð15:3Þ
ðn 1Þðn 2Þ
and the higher the variation in the degree of vertices, the higher the centralization of
a network. The degree centralization of any regular network is 0, while a pure star
has a degree centralization of 1.
11
For a general discussion on the concept of centrality in networks, see Bonacich (1987).
12
The standardized degree centrality of a vertex is also often used, given by the vertex degree
divided by the maximum possible degree: Cisd ¼ n1 d
.
The notion of geodesic distance is the base of a second definition of centrality:

closeness centrality. The closeness centrality of a vertex Vi is the number of other
vertices divided by the sum of all distances between Vi and all others vertices:
n1
Cic ¼ Pn1 ð15:4Þ
i6¼j δij
*
At the network level, if Cci is the centrality of the vertex that attains the
maximum closeness centrality score, the closeness centralization of a network is
(Freeman 1979; Goyal 2007):
P n c
c*
i¼1 Ci Ci
Cc ¼ ð15:5Þ
ðn 1Þðn 2Þ=ð2n 3Þ
A third notion of centrality often used in the literature is based on the intuition
that a vertex Vi is central if it is essential in the indirect link between Vj and Vk. A
vertex that is located on the geodesic distance between many pairs of vertices plays
a central role in the network, because it is necessary for all periphery vertices in
order to be mutually reachable. This concept of centrality is called betweenness
centrality. The betweenness centrality of vertex Vi is the proportion of all geodesic
distances between pairs of other vertices that include this vertex (Vega-Redondo
2007):
X δjki
Cib ¼ ð15:6Þ
j6¼k
δjk
where δjk is the total number of shortest paths joining any two vertices Vj and Vk ,
and δjki is the number of those paths that connect Vj and Vk through Vi. The core of a
star network has maximum betweenness centrality, because all geodesic distances
between pairs of other vertices include the core. In contrast, all other vertices have
minimum betweenness centrality, because they are not located between other
vertices.
The betweenness centralization is the variation in the betweenness centrality of
vertices divided by the maximum variation in betweenness centrality scores possi-
ble in a network of the same size:
P n b
*
i¼1 Ci Cbi
Cb ¼ 2 ð15:7Þ
n ðn 1Þ=ð2n 1Þ
Annex A.3: Network Analysis of Regional Trade Flows13
Binary Network Analysis
The simplest indicator that can be used to analyze the structure of a regional trade
network is the intra-regional node degree (INDi),14 that is the number of regional
partner countries of each country i, which can be expressed in absolute terms, or as
an intra-regional density index (IDIi), that is as a ratio of the total number of
possible regional partner countries (n 1):
IDI i ¼ INDi =ðn 1Þ ð15:8Þ
The intra-regional density index can be computed also for the entire region r,
where it measures to what extent the actual number of trade linkages corresponds to
its maximum potential level:
IDI r ¼ Σ i INDi =½nðn 1Þ ð15:9Þ
The density of a regional trade network can be compared with a pre-defined

external benchmark area o that can be a set of other regions or the rest of the world
made of m countries. Denoting with ENDi the extra-regional node degree, that is
the number of country i’s trading partners located in the external benchmark, a
relative intra-regional density index (RIDIi) can be defined as:
RIDI i ¼ ðIDI i EDI i Þ=ðIDI i þ EDI i Þ ð15:10Þ
where: EDIi ¼ ENDi/m

RIDIi ranges between 1 and 1and is equal to zero if IDIi ¼ EDIi (geographic
neutrality). At the regional level:
RIDI r ¼ ðIDI r EDI r Þ=ðIDI r þ EDI r Þ ð15:11Þ
where: EDIr ¼ Σ iENDi/(n∙m)

Another indicator frequently used in the BNA of the world trade network is the
average nearest neighbor degree (ANNDi), which is simply the average node degree
of country i’s partners. In our context, to reduce the complexity of notation, we will
replace the phrase nearest neighbor with partner, and define an intra-regional
average partner degree (IAPDi) as follows:
13
The indices presented here are developed by Iapadre and Tironi (2009) to which we refer
for further details.
14
In the network analysis literature, node degree is sometimes called neighborhood degree.
IAPDi ¼ ðAðiÞ A 1Þ=INDi ð15:12Þ
where A(i) is the ith row of the adjacency matrix A describing the network and 1 is a
unitary vector. The maximum level of IAPDi is reached when all country i’s
regional partners’ IDIj are equal to one, that is when all the possible n(n 1)
trade linkages exist. This allows us to define an average intra-regional partner
density index (IPDIi) as follows:
IPDI i ¼ IAPDi =ðn 1Þ ð15:13Þ
At the regional level IAPDr and IPDIr can simply be computed as the averages of
the corresponding country indicators.
An extra-regional average partner degree (EAPDi) and an extra-regional partner
density index (EPDIi) can be defined as follows:

EAPDi ¼ EAðiÞ OA 1 =ENDi ð15:14Þ
EPDI i ¼ EAPDi =ðm 1Þ ð15:15Þ
where EA is the nm adjacency matrix of linkages between the region’s members
and the benchmark area’s countries, and OA is the m m adjacency matrix of
linkages among the benchmark area’s countries.
Finally, a relative intra-regional partner density index (RIPDIi), ranging from 1
to 1 with a neutrality threshold of zero, can be computed as:
RIPDI i ¼ ðIPDI i EPDI i Þ=ðIPDI i þ EPDI i Þ ð15:16Þ
The fact that a country has a certain average partner degree does not necessarily
imply that all its partners are connected between each other. In order to capture this
feature of the network, a third indicator has been developed, named binary cluster-
ing coefficient (BCCi), aimed at measuring to what extent a country’s partners tend
to cluster into triangles, that is to trade between each other. BCC has also been used
to detect a possible hierarchic structure of the network.
The intra-regional binary clustering coefficient (IBCCi) can be defined as:

IBCCi ¼ A3 ii =½INDi ðINDi 1Þ ð15:17Þ
where (A3)ii is the i-th entry on the main diagonal of A A A. Given INDi, IBCCi
measures the actual number of bilateral linkages between country i0 s regional
partners, relative to its potential.15
Another useful concept is the degree of centrality, which is used to assess to what
extent trade linkages tend to concentrate towards one or more hub countries. The
maximum degree of centralization is reached in a star network, where only one
15
IBCCi can be computed only if INDi >1.
country is connected with all the others, whereas each of the others is connected
only with the center of the network.
Several indicators have been proposed to measure the centrality of a node and
the centralization of a network. At the country level, intra-regional node centrality
(INCi) can simply be measured as:
INCi ¼ ð1 IBCCi Þ ð15:18Þ
INCi measures to what extent a country is connected to regional partners that are
not connected between each other.
At the network level, an intra-regional centralization index (ICIr) can be defined
as:
ICI r ¼ max½INCi ¼ Σ i ðmax½INDi INDi Þ=½ðn 1Þðn 2Þ ð15:19Þ
This indicator measures the network’s actual centralization as a proportion of its

theoretical maximum, defined by the number of missing linkages in the
corresponding star network, which is equal to (n 1)(n 2).16
Weighted Network Analysis
The weighted network analysis (WNA) of international trade represents the inten-
sity of linkages among the network nodes through the actual matrix of their bilateral
trade flows (W) expressed in absolute or relative terms.17
Apart from the difference between the respective matrices, indicators used in
WNA are similar to those used in BNA. In our context, node degree is replaced by
intra-regional node value (INVi), which is the value of a country’s total trade with
its region. However, since there is no given maximum value for trade, a density
index similar to that used in BNA cannot be easily defined, and there are several
options to build a normalized INVi.
If we refer to the geographic neutrality criterion mentioned in the text (Sect.
15.3.1), we can introduce intensity and revealed trade preference indices into the
context of WNA. Since INVi refers to intra-regional trade, we can define extra-
regional node value (ENVi) as the total value of country i’s trade with the bench-
mark area, and the density index of BNA can be replaced by a homogeneous
(country-size-independent) trade intensity index HIir. More precisely:
HI ir ¼ Sir =V or ð15:20Þ
16
See Kali and Reyes (2007).
17
Fagiolo, Reyes and Schiavo (2008) show why WNA is more informative than BNA in describing
the world trade network.
where:
Sir ¼ INV i =ðINV i þ ENV i Þ

V or ¼ Σ k ENV k =Σ k ðENV k þ INV k Þ
and k ¼ 1, . . ., m refers to countries of the benchmark area o.

HIir is higher (lower) than one if country i’s intra-regional trade share is higher
(lower) that the share of region r in the benchmark area’s trade.
In a similar way, a homogeneous extra-regional trade intensity index (HEir) can
be defined as:
HEir ¼ ð1 Sir Þ=ð1 V or Þ ð15:21Þ
and finally the relative intra-regional revealed trade preference index (RIRTPir) can
be computed as:
RIRTPir ¼ ðHI ir HEir ÞðHI ir þ HEir Þ ð15:22Þ
This index measures unambiguously if intra-regional trade is more or less

intense than what implied by the geographic neutrality criterion.
Other WNA indicators can be used to better illustrate the topology of regional
trade networks in terms of connectivity and centralization, taking into account not
only direct bilateral linkages between a country and its partners, but also linkages
among the latter.
Reminding that the importance of a node in a network depends not only on its
own degree, but also on the degree of its partners, we can adapt the binary indicator
of IAPDi to WNA in several ways.
The first possibility is to compute an intra-regional weighted average partner
degree (IWAPDi) through the following formula:

IWAPDi ¼ WðiÞ A1 =INV i ð15:23Þ
where W(i) is the i-th row of the weight matrix W.

A similar indicator could be built for extra-regional partners and the two
indicators could be compared as for the previous ones. However, IWAPDi, although
weighting each partner with its trade value, is still to be considered as a binary
indicator, since its unit of measurement remains the number of partners.
A more appropriate WNA equivalent of the binary IAPDi is the intra-regional
average partner value (IAPVi), which is the average value of a country’s regional
partners’ intra-regional trade:

IAPV i ¼ AðiÞ W1 =INDi ð15:24Þ
The maximum level of IAPVi can be defined as follows:
MaxðIAPV Þi ¼ Σ k INV k =INDi ð15:25Þ

where k ¼ 1, . . . INDi are the possible regional partners of country i ranked

according to their total trade value. This implies that Σ kINVk necessarily grows
less than proportionally than INDi. It is also important to note that, for any given
IND, the list of possible partners changes across countries, because it cannot include
country i. As a consequence, Max(IAPV)i is negatively related to INVi and will be
reached only if the actual regional trade partners of country i happen to be those
with the highest total trade value.
This definition allows us to build an intra-regional normalized average partner
value (INAPVi) as the ratio between IAPVi and its maximum.
At the regional level IAPVr and INAPVr can simply be computed as the weighted
averages of the corresponding country indicators.
The binary concept of clustering into triangles can easily be adapted to WNA.
The intra-regional weighted clustering coefficient (IWCCi) is defined as follows:
3
IWCCi ¼ W½1=3 =½INDi ðINDi 1Þ ð15:26Þ
ii
where W[1/3] is the matrix obtained by raising each element of the W matrix to 1/3
and (W[1/3])3ii is the i-th entry on the main diagonal of W[1/3] W[1/3] W[1/3]. IWCCi
measures the intensity of trade among country i0 s regional partners relative to the
total number of their potential connections. So, it is positively related to the actual
density of these connections (IBCC) and to their intensity.
For any given INDi, the maximum level of IWCCi is not scale-independent. This
problem can be solved by dividing each element in the W matrix by their maximum,
which results into an intra-regional normalized weighted clustering coefficient
(INWCCi), ranging from 0 to 1:
3
INWCCi ¼ NW½1=3 =½INDi ; ðINDi 1Þ ð15:27Þ
ii
where NW is the matrix of trade flows within region r normalized with respect to
their maximum.
Assortative Mixing (Homophily) and Trade Regionalization
This application of network analysis is aimed at detecting the degree of regional-

ization of the world trade network (Iapadre and Plummer 2011), and is based on the
weighted equivalent of the binary assortativity coefficient proposed by Newman
(2003a, b).
The starting point is a matrix of international trade flows classified by regions,
reporting intra-regional trade values on the main diagonal and inter-regional flows
in the remaining cells. The resulting intra-regional assortativity coefficient (IAC) is:
IAC¼ðTrðRÞ jjR2 jjÞ=ð1 jjR2 jjÞ
where R is the matrix of intra- and inter-regional trade flows, divided by their total,
Tr is the trace operator, and kR2k is the sum of all the elements of matrix R2.
IAC is equal to zero in the case of geographic neutrality, which is when regions
trade among each other in proportion to their total trade values, and reaches a
maximum value of one in the limiting case of no inter-regional trade. On the other
hand, in the limiting case of no intra-regional trade, the minimum (negative) value
of IAC is equal to – kR2k/(1 kR2k).18
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Lombaerde, R. Flôres, L. Iapadre, & M. Schulz (Eds.), The regional integration manual
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Chapter 16
Measuring Actual Economic Integration: A
Bayesian State-Space Approach
Glenn Rayp and Samuel Standaert
16.1 Introduction
Despite the academic and policy interest and in contrast with other aspects of
institutional economics (like governance), a systematic and standard index of
regional integration is still lacking. An index that gives a quantitative measure of
the level of regional integration is deemed useful, because it would allow to
determine the trends in the world economy more precisely (e.g. the link between
globalization and regionalization), to monitor integration policy initiatives more
accurately and to assess the effectiveness of current or past policy initiatives
(e.g. aiming at indicating good practices). Yet, in their review, De Lombaerde
et al. (2008) note that “only a few attempts have been undertaken to design
composite indices of regional integration and no proposal has been systematically
and continuously used as a policy tool.”
The most plausible explanations for this dearth are data availability and meth-
odological issues. Regional integration is a complex and multidimensional process
and therefore difficult to capture by a single or a few indicators. Consequently, a
larger set of data is used, usually of very different quality in which scoring by the
analyst is not uncommon. Interpretation and analysis of the data demands a
summary indicator that integrates the information of all the available data, which
immediately brings up the problem of how to summarize (i.e. aggregate) the
individual indicators and which weighting scheme to use. For example, Feng and
Genna (2003) follow Hufbauer and Scott (1994) in their construction of Integration
Achievement Scores by taking the simple arithmetic average of the categories that
measure distinct components of (institutional) regional integration. The index of
G. Rayp (*) • S. Standaert

Department of Economics, Ghent University, Ghent, Belgium
e-mail: Glenn.Rayp@UGent.be; Samuel.Standaert@UGent.be

342 G. Rayp and S. Standaert
institutional regional integration in Dorrucci et al. (2004) is also computed as an

unweighted average of assigned achievement scores in each of the Balassa stages in
regional integration, which is then related to a set of indicators of actual economic
integration indicators in order to study causal effects. In UNECA (United Nations
Economic Commission for Africa) (2001, 2002, 2004) the composite index is
constructed as a weighted mean: first at the country level taking expert opinions
as the basis of the weighting scheme; second at the regional level, using country
Gross Domestic Products (GDPs) as weights. Dennis and Yusof (2003) take as
composite integration indicator the simple arithmetic average of a small subset of
their key indicators. Finally, the UN-ESCWA (United Nations Economic and social
Commission for Western Asia) (2006) report uses a principle component analysis to
compute the level of actual integration of Arab countries.
In this contribution, we propose a new approach to constructing a regional
integration indicator that is a Bayesian state-space approach, which can remedy
the obstacles mentioned and therefore allow a systematic and continuous use.
De Lombaerde et al. (2011) formulate a three-step method in constructing a
composite index. The first step concerns the principles on which the individual
indicators of the index should be based: relevance, accuracy and credibility, data
availability, timeliness and comparability. Often, these principles are (partially)
neglected out of necessity: the lack of indicators that take account of the
multidimensionality of regional integration compels the use of incomplete or
inaccurate data. Of course, this is common to whichever method is used to construct
an aggregate indicator. However, the state-space approach can take the uncertainty
of the data into account, as well as correct for missing values in a statistically
transparent way, in contrast to other methods that have been used.
The second step of De Lombaerde et al. (2011) refers to the classification of the
variables according to particular aspects of regional integration, e.g. the distinction
between indicators of the actual integration process and the institutional character-
istics. The state-space approach allows for such a functional distinction between the
indicators and can deal with this in two ways: either as separate composite indices,
which can be further used for analytical purposes, or as components of a more
general index, in which case their respective weights are informative about the
impact on the integration process just like their correlation gives an indication of
their complementarity.
The third and final step of De Lombaerde et al. (2011) consists of the construc-
tion of the composite regional integration index, in particular the issues of the
determination of the weighting scheme for the indicators (e.g. statistical or not) and
the method of aggregation (e.g. arithmetic mean or more involved). There, the
Bayesian state-space approach offers the advantage of making fewer assumptions
in determining the indicators’ weights and of being more transparent in the
aggregation.
In the next section, we describe the principles of the Bayesian state-space
methodology. We keep this description brief and refer the interested reader to
more formal and thorough treatments of the subject. To show the potential of the
approach, we discuss in the third section the construction of an indicator of actual
16 Measuring Actual Economic Integration: A Bayesian State-Space Approach 343
economic integration at the bilateral country level for the member countries of the
Organisation for Economic Co-operation and Development (OECD). For these
countries a large set of indicators of good data quality are available such that due
account can be taken of the multidimensionality of regional integration. Based on
this first application, we consider in the fourth section the extensions that the
method allows. Conclusions are drawn in the last section.
16.2 Methodology
This section only aims to give a limited overview of the state-space methodology.
For more information on state-space models and how to estimate them, see Kim and
Nelson (1999) or Durbin and Koopman (2012). More detailed information on this
particular model can also be found in Standaert (2014) where it is used to combine
indicators of corruption.
16.2.1 The State-Space Model
The main idea in the state-space model is to estimate the unknown overall level of
regional integration RI (the state variable), using the information in the different
h i0
ð1Þ ðkÞ
indicators of regional integration, yi, t ¼ yi, t , . . . , yi, t : 1 In order to understand
how this happens, it is necessary to go back to the two equations that define its
workings: the measurement (Eq. 16.1) and state equation (Eq. 16.3).
yi, t ¼ C þ Z*RI i, t þ Ei, t ð16:1Þ
Ei, t Nð0, HÞ ð16:2Þ
RI i, t ¼ T i *RI i, t1 þ νi, t ð16:3Þ
νi, t Nð0, 1Þ ð16:4Þ
for all country-couples i 2 f1, . . . , ng and years t 2 f1, . . . , Ng.

The measurement equation states that the k indicators of regional integration yi,t
(for example the level of bilateral trade) depend on the overall level of integration
1
For the sake of readability, the notation is sometimes simplified. y( j ) is a single indicator of
integration for all country-couples and all years. yi , t is the vector of all indicators in a given year
and for a given country-couple, while this vector for all years and all country-couples is simply y.
RIi,t. The error term Ei,t captures differences in the quality of the indicators whether
due to measurement errors or because of the influence of factors other than the level
of integration. The better an indicator y( j ) measures the level of integration, the
smaller the variance of the corresponding error term H( j, j ).
The ð1 kÞ vectors C and Z rescale the indicator variables to put them on equal
footing. The exact rescaling parameters are indicator-specific, but are kept constant
over time and country-couples. Similarly, each indicator can differ in terms of its
reliability, but the reliability of an indicator does not change over i or t if the
indicator is not missing (cf. infra).
The state equation (Eq. 16.3) allows the current level of integration to depend on
its past values. Especially in the case of natural trading partners or institutional
integration, we would expect to find a high level of persistence (with the exception
of major policy changes, institutional integration remains more or less unchanged).
As with the other parameters in the model, the level of dependence (Ti) is not
imposed ex ante but determined endogenously. It can vary for each country-couple
i, but is restricted to lie within the [1,1] interval. This rules out ever-increasing
values for the RI index and ensures that the model converges to a steady solution.
However, it does not preclude non-stationarity in the level of regional integration.
Figure 16.1 illustrates the advantage of adding the time-dependency in the state
equation. To the extent that the level of integration depends on its previous values,
both past and future information are used to predict what the level of integration is
today (step a). This prediction is governed by the state equation (Eq. 16.3). This
forecasted value is then compared to the indicators of integration today yi,t. Using
the parameter values in the measurement equation (Eq. 16.1) the estimated level of
integration is adjusted (step b). The stronger the time-dependence, the more impor-
tant step a becomes. The more reliable an indicator is, the bigger the influence of
step b is.
Because the RI i, t1 and RI i, tþ1 also depend on their past values and future values,
the entire time-series is used when estimating the current level of integration. The
advantages are manifold. First of all, it significantly increases the number of years
for which the indicator can be reliably computed. Moreover, the increase in
information helps the algorithm to better distinguish between random measurement
errors and the actual changes in the level of integration. This results in smoother
estimates made with smaller confidence bounds.
The strength of the state-space model is the ease with which it handles missing
observations. Simply put, missing observations are replaced by information which
has absolutely no value: y ¼ 0 and var(E) ¼ 1. This allows the model to run
uninterruptedly without fundamentally changing the value of missing data. More-
over, because the entire time-series is used when estimating the value of RI, it
negates the need to impute or otherwise manipulate missing data (Kim and Nelson
1999; Durbin and Koopman 2012).
An additional advantage of this model is that it encapsulates a number of other
techniques. For example, if we assume that RI does not depend on its previous
values (T ¼ 0) and all indicators have the same reliability (H( j, j ) ¼ cH), it can be
shown that this model will return a principle component analysis. If in addition it is
Fig. 16.1 Estimation using a. predict!

time dependency RIi,t-1! RIi,t! RIi,t+1!
a. predict!
b. update!
yi,t-1! yi,t! yi,t+1!
assumed that all indicators are scaled the same way (Zðj, 1Þ ¼ cZ and Cðj, 1Þ ¼ cC ),
then it returns a simple average.
In other words, the usefulness of the state-space approach follows directly from
the validity of the assumptions on the parameter values. If the level of integration is
not expected to depend on its previous values ( T ¼ 0 ) a principle component
analysis suffices. However, if these assumptions are incorrect, using simple tech-
niques will discard information and could lead to incorrect conclusions. It also
means that it is possible to test the validity of the state-space model ex-post using
the estimated parameter values.
16.2.2 Bayesian Estimation
In order to estimate the state-space model, it is necessary to solve for the level of RI
as well as the parameters of the state and measurement equation: H, Z, C and T. As
the number of countries and years increases, this estimation becomes more and
more cumbersome. However, using a Bayesian Gibbs sampler, it can be split up
into different sections that can be dealt with one at a time.
If the values for RI were known, the state and measurement equations would be
simple linear regressions and we could easily compute and draw from their distri-
butions. Similarly, if the parameters were known, we could draw from the distri-
bution of RI using a simulation smoother (Durbin and Koopman 2012). It can be
shown that by iteratively drawing from both conditional distributions while condi-
tioning on the last drawn value, these draws will converge to the unconditional
distribution. After discarding the first non-converged values (the burn-in), the
remaining drawn values can be used to reconstitute the original unconditional
distribution of RI as well as those of the parameters. For more information on
Bayesian econometrics and Gibbs sampling see Lancaster (2004) and Koop
et al. (2007).
Because this model is estimated in a Bayesian framework, it is necessary to be
explicit about the prior distribution of the parameters. However, seeing that there is
no ex-ante information on them we use flat priors. This means that these parameters
are not restricted in any way. The only variables that are limited are Ti, whose
values have to lie inside the [1,1] interval, and the diagonal elements of the
variance H, whose values have to be strictly positive.
pðCÞ 1 ð16:5Þ
pðZÞ 1 ð16:6Þ

p logðH ðj, jÞ Þ 1, 8j 2 f1, . . . , ng ð16:7Þ
pðT i Þ ¼ 0:5*1T2½1, 1 , 8i 2 f1, . . . , kg ð16:8Þ
16.3 An Application to the OECD
16.3.1 Defining Integration
This section illustrates the state-space approach by measuring the level of regional
integration between the members of the OECD. Specifically, it examines the level
of Actual Economic Integration (AEI) defined by Mongelli et al. (2005) as:
the degree of interpenetration of economic activity among two or more countries belonging
to the same geographic area as measured at a given point in time. (Mongelli et al. 2005:
p. 6)
This definition is relatively narrow and puts strict limits on the variables to be
included. It excludes institutional or cultural integration. Even within the perspec-
tive of economic integration, it focuses on actual interpenetration of activities.
Strictly speaking, this implies that co-movement of prices and GDP and other
factors from the optimal-currency-area theory should not be included. In addition,
it focuses on actual integration as opposed to measuring the potential benefits of
integration.
As a result, the AEI indicator computed here is relatively neutral. It does not rely
on any specific (economic) theory on integration, nor does it treat integration as
necessarily good or bad. It simply measures the extent to which the economic flows
of two countries are intertwined. Needless to say, this definition is one of the many
possible choices and the state-space methodology can be easily expanded to include
different aspects of regional integration.
The unit of analysis in this study is country couples, and their integration is
measured in a directional sense. In other words, the values of the index AEIB,A
express to what extent the bilateral economic flows between countries A and B are
important for country A.2 Allowing the values of AEIB,A to differ from AEIA,B
makes sense in a network where country size varies significantly. For example, that
the German-Estonian trade is important for Estonia does not necessarily imply that
the same holds for Germany.
2
In network theory the link (or edge) going from country (node) A to country B is denoted XB,A
(Newman 2010).
It is important to note that even using this definition of regional integration,

many other units of analysis are possible. For instance it would also be possible to
study the level of integration of a country within a region. The choice of unit should
be primarily driven by the intended use of the indicator. For example, as defined
here, the results enable us to build a directed and weighted network of integrated
countries, but other uses require different definitions and basic units.
16.3.2 Data
Actual economic integration is measured on four levels, organized according to the

“four freedoms” of the European Single Market: flows of goods, flows of services,
Foreign Direct Investment (FDI) and other financial flows and migration. For each a
distinction is made between incoming and outgoing flows.
In order to compare the importance of the flows over countries, they are
normalized both using GDP (population in the case of migration) and as a percent-
age of total flows. This means that for each different category four different vari-
ables are used: incoming flows to GDP, outgoing flows to total outgoing flows, etc.
The idea is that there are two dimensions in which the bilateral flows can matter for
a country: either it covers a significant fraction of total flows and/or it represents a
large proportion of GDP. By rescaling the indicators in this way, the size of the
country is abstracted from the index: only the relative size of the flows matters.
Because some product categories play a more crucial role than others, the
disaggregated data is used whenever appropriate. For example, the international
trade in fuels is of crucial importance for the economy and for that reason it is
separated from the total trade flows. Conversely, making a distinction between the
international migration of men and women would not serve much practical purpose
here and is left out. Table 16.1 lists the different categories of economic flows.
Almost all bilateral flow data come from the OECD statistical compendium and
the OECD iLibrary. The only exceptions are the non-FDI financial flows, which
come from the International Monetary Fund (IMF)’s Coordinated Portfolio Invest-
ment Survey (CPIS). In addition, total trade is taken from IMF’s Direction of Trade
Statistics (DOTS). The reason is that the disaggregated trade data of the OECD is
only available from the 1980s onwards, while the DOTS data starts in 1950. Using
both total trade and all of its sub-categories would lead to problems of perfect
multicollinearity, which is why OECD’s “other trade” is dropped from the dataset.
Finally, the data on GDP and population is taken from the Penn World
Tables (Heston et al. 2012).
The dataset was constructed for all 34 current members of the OECD from 1970
to 2010.3 The data for Belgium and Luxembourg is consolidated into the Belgium-
3
Estonia (1991), Slovakia (1993), Slovenia (1993) and the Czech Republic (1991) are added later
to the sample.
Table 16.1 Categories of integration variables

Trade in goods Trade in services
Agriculture, hunting, forestry and fishing Travel
Mining and quarrying Communication
Total Manufacturing Construction
Electricity, water and gas Insurance
Total trade (DOTS) Financial
Financial flows Computer and Informational
FDI Royalties and license fees
Equity (CPIS) Transportation
Long-term debt securities (CPIS) Other business services
Short-term debt securities(CPIS) Other commercial services
Migration
Total migration
Luxembourg Economic Union because the earliest data is often not available for
both countries separately. This gives us a total 33 times 32 or 1056 country-couples
whose level of integration is studied over a period of 41 years.
16.3.3 Results
The Gibbs sampler ran for 100,000 iterations, of which the first 50,000 were
discarded as burn-in. The remainder was used to reconstitute the distribution of
the AEI index. While the AEI index can be compared over time and over countries,
the exact values are arbitrary and can be transformed as long as the relative
differences remain unchanged. Throughout this paper, a high value of the AEI
index will mean that the level of integration is high.
Setting the variance of the annual change in integration to one (the variance of ν
in Eq. 16.3) gives us values for AEI that lie between 13 and 133. However, the
distribution is strongly skewed to the left: the mean and median are 7 and 10,
respectively. In other words, most countries have very low values of integration:
90% of country couples have negative levels of integration and less than one
percent has values greater than 35.
Figure 16.2 plots the level of integration and the 90% confidence bounds for four
country-couples. It illustrates many of the points made in the previous sections. For
example, while the bilateral flows between Mexico and the United States of
America (USA) are crucial for Mexico (they lie entirely within the top 95th
percentile of all AEI values), they are far less important for the USA. The same
holds for the flows between Austria and Germany, but to a lesser extent.
Secondly, we see that as the number of missing observations decreases, the
uncertainty bounds grow tighter. This is especially clear in the second panel. The
number of indicators for Austria-Germany increases from 4 (1970–1984) to
Fig. 16.2 Plot of AEI

indicator with 90%
confidence interval (Plot of
AEI estimates ( full lines)
and its 90% confidence
interval (dotted lines))
80 (2003–2008) falling back to 40 in 2009, and this is reflected in the size of the
confidence bounds (Fig. 16.2).
Returning to the individual indicators of integration, Fig. 16.4 graphs their
correlation with the AEI index. It shows the indicators from all four different
types of flows are highly correlated with the index, but that migration (represented
by diamonds) weighs the least. A possible explanation is the opposite influence that
different types of integration have on other flows. For example, economic migration
is expected to subside when high trade between countries creates opportunities in
the home country. On the other hand, the existence of many migrants from a
particular country increases the information on potential beneficial trade, implying
a positive correlation. To the extent that this is indeed the case, this might be
resolved by including indicators that are able to distinguish between different
motivations for migration: economic versus political migration, high-skilled versus
low-skilled, etc.
16.3.3.1 Weighted Directed Network
As mentioned, we can use the values for AEI to construct a weighted directed
network (Newman 2010). Using the python software package NetworkX, we can
show the shape of this network in every decade (Fig. 16.3). The values of the index
are reflected in the darkness of the arrow between the countries. The position and
color of the countries are determined by its weighted indegree: the more important a
country is for its partner countries, the darker its color and the more central its
position.4 The colors reflect only the values of the AEI index, which could lead to
the situation where a country that is strongly connected to a few small countries
takes up a central position on the network. To capture this, the position of the
country also depends on the size of the partner countries: the higher the level of
integration with countries with high GDP, the closer to the center a country is
positioned. Unsurprisingly, it shows that the most central players in the OECD are
the USA, Germany and the United Kingdom, with France, Italy and Japan as close
second.
When comparing the network’s structure over time, it becomes clear that trade
among the OECD countries is being condensed to a few central players. In 1970,
most countries had a lot of incoming and outgoing arrows and the level of AEI was
relatively similar between many country-pairs. In contrast the pattern in 2010
reveals a stark divergence between core and periphery countries. The former have
many incoming arrows representing high levels of integration, while the latter have
one predominant link to one of the core countries and fewer incoming arrows. The
standard deviation of AEI values reflects this: it rises from 7.32 in 1970 to 10.47 in
2010, falling back slightly to 9.93 in 2010. Similarly, the indegree (reflected in the
color of the countries) decreases for the periphery and increases for the core. It
should be mentioned that these changes only apply to the relative level of integra-
tion of countries. In other words, these results do not necessarily imply that trade
between peripheral countries has increased, only that the increase with core coun-
tries has been larger.
A second pattern in the evolution of the network is the rise and subsequent fall of
the USA. While it remains one of the core countries, its importance in the network
starts to decline in the year 2000. A possible explanation is the rise China and other
Asian countries as major trading partners outside the OECD, especially because this
pattern is also apparent for Japan. Conversely, during the same period Italy and
Spain take up a more central position in the network.
An often-used metric to study the overall connectivity of a network is the
network density. It is defined as the number of links (edges) between countries
divided by the total number of possible links ( nðn 1Þ with n the number of
countries). However, since AEI is a continuous variable, a threshold has to be
defined which separates the connected countries from the unconnected ones.
Figure 16.5 plots the network density with the threshold set at 10% lowest value
4
The weighted indegree of a country is the sum of the AEI index of all incoming arrows.
Fig. 16.3 Plot of the network formed by the AEI indicator (Countries are represented by their ISO
code, with the Belgium-Luxemburg Economic Union abbreviated to BLU. The color of countries
reflects the weighted indegree while level of the AEI index is reflected in the opacity of the arrow:
the darker the colors, the higher these values are. Finally, the position on the concentric circle of
the countries is determined by the importance of a country for its trading partners multiplied by the
GDP of those trading partners (weighted indegree with AEI*GDP sender as weights))
Fig. 16.4 Correlation of

AEI with individual
indicators (Plot of the
correlation of the AEI index
with the individual
indicators from which it was
computed. ○ denote trade in
goods; þ financial flows; e
migration; and □ trade in
services)
Fig. 16.5 Network density (The uninterrupted line represents the network density including 95%
confidence interval. The dotted line corrects for the inclusion of new countries by keeping the total
number of nodes constant over time)
(14.6). Because the Gibbs sampler returns the entire probability distribution of the
AEI index, it is possible to construct the 95% confidence interval for the network
density. It shows that the overall connectedness significantly decreased over time
(at 1% significance level). One possible explanation is that this result is driven by
the addition of a number of lesser-connected countries in the early nineties,
i.e. Estonia, the Czech Republic, Slovakia and Slovenia. To control for this, the
density was recomputed keeping the number of countries constant (the dotted line).
While this takes out the initial drop in the 1990s, it does not do away with the
decline in density in the 2000s. This is probably due to the concentration of trade,
which raises the AEI index for links between core and periphery, but lowers it
between peripheral countries. Seeing that there are more peripheral countries, the
overall connectivity declines.
16.3.3.2 The EU and NAFTA
This section briefly looks at the effect of the expansion of the European Union
(EU) and formation of the North American Free Trade Agreement (NAFTA) on the
AEI index. Do these trade agreements increase the level of actual economic
integration for the participating countries?
Table 16.2 shows the results of a difference-in-difference study of the level of
integration. The level of actual integration is regressed on two dummy variables EU
and NAFTA, which are one if both sender and target country are members of the
Table 16.2 Effect of EU and AEI (1) (2)

NAFTA on Actual Economic
EU 6.538*** 2.903***
Integration
(0.232) (0.328)
NAFTA 47.174*** 51.295***
(1.514) (2.204)
Years EU – 0.120***
(0.009)
Years NAFTA – 0.506***
(0.194)
Sender EU 0.644*** 0.667***
(0.124) (0.123)
Target EU 1.898*** 1.875***
(0.130) (0.129)
Sender NAFTA 0.858*** 0.860***
(0.189) (0.190)
Target NAFTA 6.242*** 6.239***
(0.243) (0.243)
Controls for time yes yes
Observations 43296 43296
Country-couples 1056 1056
Years 41 41
Linear regression of the AEI index on dummy variables EU and
NAFTA (one when both are member, zero otherwise) and control
variables. Standard errors (between brackets) are corrected for the
uncertainty of the AEI index
***denotes significance at the 1% significance level
same agreement in a certain year. Additional controls are added to ensure that the
effect is not driven by the characteristics of the countries that joined the integration
agreements, or the time period in which they joined. As was the case with the
network density, the standard errors are adjusted for the uncertainty of the AEI
estimate.5
The first column shows that entering into the EU on average caused a 6.5-point
increase in the AEI index, while joining NAFTA causes the index to grow with
46 points. In the second column, the duration of membership is also taken into
account: e.g. EU years is the number of years both countries are members of the
EU. It reveals that the increase happens gradually in the EU, while in NAFTA the
level of integration increases quickly and then slowly degenerates of time. While
significant this effect is nevertheless small: the maximum decrease is 8. It is once
5
In Table 16.2, the following regression is estimated: AEI ¼ βX þ μ with μ ~ N(0, σ 2). This is done
by drawing
a value for β using randomly drawn values of the AEI index from the Gibbs sampler:

βðjÞ X, AEI ðjÞ N½b; σ ðX XÞ1 , with b ¼ (X X)1X AEI( j ), σ ¼ e0 e=ðn kÞ and e ¼ AEI( j ) Xb.
0 0 0
The adjusted standard deviation is then computed using the drawn values of β( j ).
again most likely driven by the emergence of Asia on the global market. Lastly, the
control variables indicate that regardless of whether they are a member themselves,
the OECD countries are significantly more likely to be highly integrated with
members of the EU and NAFTA. This confirms the central position the latter take
up in the OECD.
A similar pattern emerges when plotting the network structure of the EU
(Fig. 16.6). The edges between member countries become brighter over time.
However, at the same time, we also see the concentration of trade towards the
core countries. The combined effect of both trends causes the network density to
increase until the mid 90s, after which it decreases to its original level (Fig. 16.7).
16.3.3.3 Comparison with Other Techniques
In this section, the AEI index is compared to the two other techniques used in the
literature: the simple average and a principle component analysis (pca). Firstly,
both are applied when all data is available, but this only provides us with 68 obser-
vations. The computations are then adjusted to cope with this missing observations
problem. The mean is calculated when at least one data point is available and the
weights are adjusted every time. The weights of the pca are computed once using
the pairwise correlation matrix and the index is composed when at least one
observation is available. Keep in mind that the parameters of the state-space
model are kept constant over time themselves.
As was already mentioned, both techniques can be seen as simplified versions of
the AEI index where the values of the parameters are restricted in some way. This
means that we can test the statistical validity of the state-space approach using the
parameter values we find. Figure 16.8 plots out these values including their 95%
confidence interval. However, for clarity’s sake only the first thirty drawn values
are shown; Z, C and H actually have k ¼ 80 elements, while T has nðn 1Þ ¼ 1056
elements. From these graphs, it immediately becomes clear that the assumptions
that T ¼ 0 or that Z, C and H are constant over all indicators are invalid. T lies very
close to one for almost all parameters, and Z, C and H significantly differ even after
all indicators have been standardized to mean zero and a standard deviation of one.
However, the overall correlation (Table 16.3) indicates the mean results of the
three techniques do not differ that much from each other. The only exception is the
adjusted pca analysis, which scores relatively low. This can be explained by the fact
that the weights are kept constant for all country-couples and time-periods, ignoring
the availability of the indicators.
The last two columns of Table 16.3 decompose the overall correlation into the
correlation between the means for each country (between), and that of the
demeaned series (within). It shows that the strong overall correlation is the result
of the high correlation of the mean values. The within-variation on the other hand
differs significantly over the three methods. This implies that while the methodol-
ogy might not matter in a cross-country study, this radically changes when the level
of integration is compared over time. This could lead to substantial differences in
Fig. 16.6 Network structure EU-25 (Network structure of the EU-25 member countries, exclud-
ing Cyprus, Latvia, Lithuania and Malta. The color of the links (edges) reflects the height of the
AEI index, the position and color of the countries the weighted indegree. If both countries are a
member of the EU, the link between them changes color)
Fig. 16.7 Network density

of the EU-25 (Network
density of the EU-25
member countries,
excluding Cyprus, Latvia,
Lithuania and Malta)
Fig. 16.8 Parameters state-

space model (Plot of the
first 30 parameter values
of Z, C, H and T (circles)
and their 95% confidence
interval (triangles))
Table 16.3 Correlation with mean and principle component analysis

Obs. Overall Betweena Withinb
Mean 68 0.9902 0.9575 0.2527
pca 68 0.9885 0.9491 0.2537
Mean (adj.) 37134 0.9315 0.9725 0.4094
pca (adj.) 37134 0.4811 0.7229 0.09
a
The between correlation is defined as the correlation between the means of each country-pair
b
The within correlation is the correlation between the demeaned values for all country-pairs
fixed effects studies, that use only the within variation, or for example in the
analysis of the effect of institutional integration on actual economic integration
(cf. Dorrucci et al. 2004).
Lastly, the adjusted mean and the state-space model differ significantly in the
confidence with which they make their predictions. Assuming normality or using
the central limit theorem, the variance of the mean is equal to σ 2 =k with σ 2 the
population variance of yi,t. This implies that as the number of available data
increases from 4 to 80, the standard deviation falls to less than one fourth of its
original level. While the AEI index’s reliability also decreases as availability
increases, the difference is far less pronounced. The reason is that the AEI index
uses all available data from the entire time-series and gives less weight to indicators
that are less reliable. This results in confidence bounds that are on average only half as
large. Resizing the AEI index and the mean to lie between zero and one, the average
standard deviation of AEI is only 0.008 versus 0.016 for the adjusted mean. More-
over, in less than 1% of the sample is the standard deviation of the mean lower.
16.4 Extensions
As was mentioned, the model estimated in this paper can be extended in multiple
ways. An obvious extension is to include a larger number of countries. As more
non-OECD countries are added, the quality and availability of data becomes
increasingly problematic. However, as was demonstrated, the model is particularly
well suited to handle these problems. The main concern would be computational
power. Expanding the current dataset with one country would add 34 additional
country-couples times 41 time periods or 1394 observations. Running the model
with 193 countries for the same time period would result in more than one and a half
million observations.
A second extension concerns the type of integration studied and the unit of
analysis. The state-space model can be used to study potential economic integra-
tion, or political integration. With respect to the latter, a powerful advantage of the
state-space model is that it can combine different types of data. For example, the
model defined in Sect. 16.2 only combines continuous variables, but through the use
of latent variables it can easily be extended to combine dichotomous information or
a combination of both:
y*i, t ¼ C þ Z*RI i, t þ Ei, t ð16:9Þ

1 ify∗
i, t 0,
yi, t ¼ ð16:10Þ
0 otherwise:
The value of the (observed) dichotomous indicator y depends on the value of the
(unobserved) continuous latent variable y*i, t which in turn is driven by the to-be-
estimated level of regional integration RI.
The ability to combine both different types of data means that qualitative data on
integration can be added without having to impose a subjective scaling. As is the
case in Hufbauer and Scott (1994) and Feng and Genna (2003), the different aspects
of integration are viewed in a parallel rather than a sequential way. For example,
currency unions can be viewed separately from customs unions. In this way, the
index would prevent a one-track, EU-dominated view of integration.
Secondly, it also does away with the linear scaling between the different forms
of integration as the information contained in the continuous indicators provide a
natural scaling. For example, if closing a free trade agreement goes hand in hand
with a significant increase in bilateral flows, the weight of this measure will be
higher than when it leaves the bilateral flows unperturbed.
16.5 Conclusion
Regional integration is a complex and multidimensional process, which is the main

reason why a systematic standard index of integration is lacking to this day. Even
the most basic of definitions of regional integration encompasses many different
aspects, increasing the difficulty of finding appropriate data exponentially. The
solutions to these problems often undermine the objectivity of the resulting index:
different definitions, data and methodologies lead to different results and rankings.
The state-space model can bring some much needed objectivity and standardi-
zation to the problem of measuring regional integration. By using the time structure
present in the regional integration indicators, it circumvents the problem of missing
observations. Moreover, the model is designed to filter out the measurement noise
from the integration signal and deals with data of inferior and dissimilar quality.
The Bayesian estimation of the model returns the entire probability distribution of
the regional integration indicator, making it possible to say whether the change in
the index over time is significant or whether the level of integration significantly
differs between countries. Moreover, this uncertainty can be taken into account
whenever the index is used in statistical research or in computations like the
network density.
To illustrate the advantages of the state-space model, we computed the level of
actual economic integration for all current members of the OECD, based on
indicators of international flows of goods, of services, FDI and other financial
flows and migration. Whereas the state-space method leads to a similar overall
ranking of countries relative to the other approaches used in the literature (either the
mean or a principle component analysis), the time pattern of individual countries
differs substantially. Looking at the overall evolution of the index, we observe an
increase in the integration level between the OECD countries in the first 20 years,
which then declines steadily in the last 20 years. In addition, we notice the
weakening of the central position of the USA and Japan in the integration network,
as well as the shift of Spain, Poland, Hungary and Slovakia from a peripheral to an
intermediate position after their adhesion to the EU. Overall, European integration
agreements as well as NAFTA seem to have had a positive effect on actual

economic integration.
Based on this first application of the state-space approach, two extensions
immediately come forward. First, the estimation of the index for an arbitrary
country-couple at the world level, where one will face much more frequent missing
or low quality data. Second, the inclusion of institutional characteristics or the
estimation of an institutional economic integration index. A next challenge is the
use of the indicator for analytical purposes in view of its estimated character,
non-stationarity and endogeneity, which calls for appropriate techniques such as a
Bayesian VAR approach. This we intend to consider in future research.
Acknowledgements We are indebted to Gaspare Genna, Philippe De Lombaerde and the partic-
ipants of UNU-CRIS’s Workshop on Indicator-Based Monitoring of Regional Economic Integra-
tion for their comments and suggestions. Funding provided by the Research Foundation – Flanders
and the Belgian National Bank.
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United Nations University Series on Regionalism 13

International Editorial Board members include

More information about this series at http://www.springer.com/series/7716

ISSN 2214-9848 ISSN 2214-9856 (electronic)

Library of Congress Control Number: 2017934079

© Springer International Publishing AG 2017

Printed on acid-free paper

This Springer imprint is published by Springer Nature

12 – Impact of Circular Migration on Human, Political and Civil Rights. A

Rouen Philippe De Lombaerde

Part I Europe and Eurasia

Part II The Americas and the Caribbean

Part III Africa

Maria Borda is Research Intern at the United Nations University Institute on

Philippe De Lombaerde is Associate Professor at NEOMA Business School,

Quentin de Roquefeuil is Senior Consultant at Saana Consulting, London (UK); at

Vanessa Fernández Moriana is Lecturer at the Toulouse Business School,

Gaspare M. Genna is Associate Professor at the Department of Political Science,

P. Lelio Iapadre is Associate Professor at the Dipartimento di Ingegneria

Tristan Kohl is Assistant Professor, Faculty of Economics and Business,

Alexander Libman is Researcher at the German Institute for International and

Gabor Miklos is Assistant Professor at Corvinus University, Budapest (Hungary).

Tibor Palankai is Professor Emeritus at Corvinus University, Budapest (Hungary).

Vladimir Pereboyev is Head of Projects, Centre for Integration Studies, Eurasian

Glenn Rayp is Professor at the Faculty of Economics, University of Ghent

Aladdin D. Rillo is Senior Economist, Capacity Building and Training, Asian

Jean-Michel Salmon is Associate Professor, CEREGMIA, Faculty of Law and

Edgar J. Saucedo Acosta is Professor of Economics, IIESES, Universidad

Samuel Standaert is Researcher at the Department of Economics, Ghent University

Lucia Tajoli is Professor of Economics at the Dipartimento di Ingegneria

Alexandra Melissa Vida is Policy Officer at the American Chamber of Commerce

Evgeny Vinokurov is Director, Centre for Integration Studies, Eurasian Development

In addition to being an element of “good practice” for policymaking in general,

The European Commission’s Internal Market Scoreboard, published twice a

1. Only few actors seem to be involved in the monitoring exercises; participation of

Europe and Eurasia

In Chap. 1 (“The European Commission Internal Market Scoreboard”), Fernández,

performance of member states with regard to the transposition of Internal Market

Chapter 2 (“Scoreboard for the Surveillance of Macroeconomic Imbalances”)

The Americas and the Caribbean

In Genna’s Chap. 6 (“Measuring Integration Achievement in the Americas”), an

Fourth, the monitoring system must begin with a modest ambition.

In Chap. 9 (“Assessing Regional Integration in Africa: Indicators of Integration

technical difficulties and the complexity (and multidimensionality) of the regional

Rouen, France Philippe De Lombaerde

Vanessa Fernández Moriana, Alexandra Melissa Vida,

© Springer International Publishing AG 2017 3

1.2 Historical Development

Plan”.2 The complementary underlying goal of the Scoreboard was to promote

Although the initial objective only concerned a depiction of Member States’

The November 1999 Scoreboard introduced an entire section focused on price

1.3 The Single Market Scoreboard Today

Fig. 1.1 The single market

to the fourth challenge, aiming at trimming total transposition delays. It monitors

In addition to the above-mentioned indicators, and in order to offer a deeper

1.3.3 Inform and Enable

simplifying and accelerating administrative procedures for service providers

Roadmaps, Citizen’s Consultations, Impact Assessments, fitness checks as well as