Policy making in asymmetric regional integrations: a methodology for allocating cohesion fund resources

We propose a combination of region- and product-identification procedures in order to map the potential of economic activities in areas with poor infrastructure in an asymmetric regional integration. After identifying spatial units with relative backwardness in terms of infrastructure, we detect the most competitive exports, estimate gravity models for each of them and perform simulations for an improvement of 20% in the value of the infrastructure index. In a final step, we identify goods/provinces where investment in infrastructure should be directed to. A thorough and data intensive application is made to the case of the Fondo de Convergencia Estructural del MERCOSUR (FOCEM), the recently created cohesion fund of one of the most asymmetric integration projects. Our main conclusion is that FOCEM resources, under the global objective of enhancing structural convergence among the members, should be totally directed to Paraguay instead of being dispersed among all backward regions in the bloc.