ECONOMIC CRISIS AND REGIONAL INTEGRATION: EVIDENCE FROM ASEAN

In this paper, the objective is to evaluate the role of Regional Trade Agreements (RTAs) among developing countries in the context of economic crisis. This paper attempts to examine whether RTAs actually lead to faster regional spread of crisis (within RTA or in non-member country) or whether such arrangements may act as safeguards for members against such crisis. For this purpose, we study the response of the regional integration in the Association of South East Asian Nations (ASEAN) region to the crisis inside and outside the region. We develop an analytical framework that analyses the possible channels of response of regional integration to the occurrence of crisis inside the region or outside the region. To capture the possibility of contagion effect of a crisis inside or outside the region, we compute unconditional probability and conditional probability of three types of economic crisis- currency, stock and banking crisis- in the major ASEAN economies. To capture the possibility of safeguard role of regional integration in an event of economic crisis, we compute the probability of episode of crisis (inside or outside the ASEAN region) being followed by positive growth rate in intra regional trades. We obtain non-zero probabilities in both the cases - contagion and safeguardindicating possibility of both the responses to a crisis inside or outside a region and the final outcome depends on the net impact of both the effects. However, one important policy implication to be drawn from this analysis is to strengthen the regional integration and substitute it for trade links with external trading partners to curb the effects of an economic crisis in an outside country, thereby strengthening the insulation effects of regional integration.