Introduction to economic integration
Regional economic integration involves all measures taken by independent countries within a well-defined geographical region to remove all forms of trade barriers within the sub-region with an aim of enhancing increased trade intercourse.
These measures must be calculated to suppress all possible frictions to inter and intra-regional trade flows. Regional economic integration requires the countries involved to cooperate.
However, it is possible for countries to cooperate without necessarily being integrated. For countries to integrate, they must be within some geographical proximity.
Levels of Economic Integration
Economic integration has the following levels of growth.
- Preferential Trade Area (PTA)
- Free Trade Area (FTA),
- Customs Union (CU),
- Common Market (CM),
- Economic Community (EC)
- Economic Union.
These reflect levels of maturity and differ from each other by their properties or characteristics.
Preferential trade area
In this level of economic integration, the member countries agree on:
- The list of goods to be accorded preferential treatment in the trade within the sub- region,
- The schedule of trade liberalization to be complied with by the member countries within the sub-region,
- The duration after which the list of the goods accorded preferential treatment is to be revised.
Free trade area
At this second level of integration, the member countries agree:
- To remove all tariff and non-tariff barriers to trade among them,
- That each country within the sub region retains its own tariff s on all imports from outside the sub region.
This level of economic integration requires the member countries to:
- Levy uniform external tariff s on all goods from outside the sub region and
- To allow free mobility of all goods traded among the member countries.
The common market
At this level of integration, the member countries:
- Allow free mobility of both goods and factors of production within the sub region and
- Charge common external tariff s on all goods from outside the sub-region.
In this level of integration, the member countries combine the features of a Common Market (free mobility of traded goods and mobility of factors of production) and common external tariff s on all imports from outside the sub-region. At the same time, the member countries harmonize their monetary and fiscal policies.
Economic Union marks the peak level of a regional economic integration. It is the level at which the regional economic integration reaches its maturity. An example of this is the European Union (EU).
At this level, the countries involved agree:
- To unify their fiscal and monetary policies,
- To unify their social cyclical and counter cyclical matters,
- To set up a supra-national authority whose decisions bind all member countries,
- To use a common currency to be used by the member countries along with their national currencies in the trade transactions.
Benefits of Joining a Regional Economic Integration
When countries opt to join a regional economic integration, there are benefits they hope for. This hope must have come as a result of some economic problems such countries had experienced that they believe joining a regional economic integration would assist them to alleviate.
Among these problems that many countries, more so the developing countries face, is the perpetual unfavorable balance of payment that they record.
When countries join a regional economic integration they will get many benefits including but not limited to the following:
- Joining a regional integration will enhance production efficiency in the sub-region during which time inefficient productive units in the sub-region will be replaced by more efficient ones. As a result, more output of high quality goods will be produced and traded in the sub-region. This will lead to trade creation among the short term benefits in the sub-region.
- The increased output of high quality goods that arises in the sub-region because of production efficiency will benefit the consumers who will buy the goods at relatively lower prices. This price effect of economic integration will raise the consumer surplus and consumer welfare in the sub-region.
- When consumers find goods cheaper to buy, they will demand more. As a result, investors receiving the market signals from consumers, will hire more factors of production, including labor, to produce more of these goods. This will lead to increased investment and employment of labor in the sub-region. At the same time, the resource capacity utilization in the sub-region will be raised.
- As the countries in the sub-region increase trade among themselves because of trade creation, their terms of trade and balance of payment positions will improve.
- Integrated countries are able to increase their collective bargaining powers against other countries that they may have transactions with. These bargaining powers would be weaker if it is a single country doing it on its own.
- Economic integration enhances co-operation and technological transfer among the member countries.
- Regional economic integration enables the member countries to loosen their dependence on other countries outside the sub region and therefore reduces their socio-economic and political vulnerability.
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Problems of Regional Economic Integration
In spite of many benefits that countries that join regional integrations expect to get by joining these regional blocks, there are also many limitations that these regional integrations may face, the adverse effects of which may be felt by the member countries.
These limitations may include the following among others:
- Among the member countries, there may be lack of political will to take actions that may lead to successful implementation of the regional economic integration. Lack of political will among member counties may arise from differences in political ideologies among the member states in the sub-region. This may drag the process or even cause the regional economic integration to collapse.
- In the formation of a regional economic integration, there are costs to be incurred by the member countries. There may arise a problem of how to equitably share these costs among the member states. The problem may lie on what is equitable among the countries involved as some may find the cost sharing inequitable. If such problems are not resolved, a regional economic block may either drag, fail to take off or collapse if it had taken off on some temporary arrangements awaiting some action by member country.
- Apart from cost sharing problem, there may also be a problem of benefit sharing in regional economic integration. For example, the location of the regional block offices and how the incoming investments gravitate in the region may be considered by some member countries to be unfair.
- In a sub-region, each country may have its own monetary, fiscal and political policies which may be at variance with those of the other member counties. These may cause disharmony among the member states when these policies cannot be harmonized.
- When countries within a region have similar resources and similar consumption patterns, they may find it extremely difficult to specialize in production to trade. This is like in an auto correlated matrix system where no solution is available in determination of what each country should specialize to produce to facilitate trade.