ABSTRACT
Allowing market forces to operate is a central aspect of regionalization. It supposes a political willingness to allow the market to provide information and incentives, to reward and punish, to force efficiency upon many unwilling and willing actors. In this chapter I will try to explain how states have adapted to the international environment in the light of external pressures. I will argue that domestic policies shape the regionalization process when sufficient opportunities are offered to states in order to gain the required comparative advantages for a successful shift to outward-oriented economic policy. The regionalist trend received its original impetus from multinational companies interested in delocalizing their production units in order to lower their production costs. Multinational firms established branches in developing countries and started global assembly lines. But these branches in foreign countries also bought most of what they sold in the region of the products’ final sale, rather than transferring from the home base. This attracted the interest of multinational firms in cross-border activities and encouraged international finance to operate on a world scale. International finance reinforced this process by financing international trade and Foreign Direct Investment (FDI). As a consequence of these cross-border activities in developing countries, their share of world FDI inflows jumped from 23 per cent in the mid-1980s to more than 40 per cent in 1992-94. Structural change in developing countries contributed to greater international capital market integration and deregulation, liberalization of markets, asset diversification, and the operations of the multinationals contributed to this drive. Thus, what matters here is understanding these connected drives towards globalization and regionalization and the underlying internal and external pressures caused by these drives exercised on regimes adapting their economies to global constraints (Ruigrok and Van Tulder 1995:237-238).
