Topic 3: Economic integration and regionalization in the world economy

1. Economic integration concept, preconditions, types, forms, advantages and

disadvantages
2. Featres of new regionalism
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1. Economic integration concept, preconditions, types, forms, advantages and
disadvantages
1.1. "efining the concept of international economic integration.
The expression economic integration has become so current that it gives the impression of a
fundamental notion with a long historical background. In reality the term hasnt been used prior
to the Second World War.
There are lots of definitions by different authors!.. It means different things in dif countries
and at different times. The following definition is compatible with most of the definitions"
With respect to international economic relations integration can be defined as gradual
elimination of economic barriers between independent states #dynamic approach$. %s a result
the economies of these states end up functioning as a single entity #static approach$.
&conomic integration is not a goal in itself. It is the process of overcoming by common
agreement political physical economic and social barriers that divide countries from their
neighbours and of collaborating in the management of shared resources and common regional
goods. The three main ob'ectives of regional integration are"
political sta#ility" a pre(re)uisite for economic development*
economic development" in larger harmonised markets the free movement of goods
services capital and people enables economies of scale and stimulates investment*
$%egional p#lic goods&" only cooperation between neighbouring countries can address
trans(national challenges such as food security preservation of biodiversity and tackling
climate change.
1.2. 'reconditions for economic integration
There are many things that can promote or inhibit successful integration. Its not enough that two
or more countries choose to interact in a cooperative manner.
There are certain conditions that must be present for integration to occur. The absence of more
than a few of them considerably reduces the chances of success.
The main preconditions are"
1. (eographical pro)imity*
2. +imilar political systems* #democracy ( within the &+$* In %sia the coexistence of different
political systems from democracy to authoritarian regimes may prevent member countries from
taking mutual commitments regarding regional integration over the long run. In &urope it was
considered that all members should be democracies and this was evidenced by the se)uencing of
the successive membership of ,reece Spain and -ortugal and .entral &astern &uropean
countries in /01/ /012 and 3445 respectively.
3. ,nternal political sta#ility #instability 6 a partner that cant be trusted$*
-. +teady economic growth #if one partner continuously registers ups and downs 6 they will be
felt by the rest of the partners$
.. +pportive p#lic opinion #gvnt signs agreements for the good of the nation 6 general public
6 economic agents and citi7ens$ #referendum 6 depends on the information available to gen
public$
/. 0ompati#le forms of economic systems #ex(socialist 6 capitalist$
1. 2 shared perception of a common e)ternal threat #&+ 6 +S%* 8%9T% ( &+$
3. 0ltral homogeneity #Turkey and &+$ %ffinities of language and cultural heritage can
obviously facilitate the development of 'oint(institutions and the dissemination of information.
:owever 9rench(speaking %frican countries and to some degree ;atin %merica are examples
where a common history or even language is not a sufficient condition for achieving strong
regional integration. .onversely the &+ illustrates that some differences in languages and
cultural heritages are not an obstacle
4. 'revios cooperative efforts.
15. 2 core grop of contries or an anchor contry ( In &urope a core group of countries <
mainly around 9rance and ,ermany< has clearly been a driving force behind the progress
achieved in several key areas #trade single currency security etc.$. %t several stages of the
&uropean integration process 9rance and ,ermany have played an instrumental role in the
emergence of supranational institutions. This is in part because being two countries of
relatively similar =si7e> neither 9rance nor ,ermany could have accepted an integration process
based on the simple extension of policies or institutional 'urisdiction of one or the other country.
:ence there has been a need to =invent> supranational i.e. neutral institutions to govern the
regional integration process.
Such a configuration with an anchor or core group country #ies$ has not always been
found elsewhere. In %frica no country has over the long run been in a position to exercise
leadership. In ;atin %merica ?ra7il which could be a powerful engine has sometimes been
viewed as ambivalent towards @&A.BS+A. The +nited States is clearly the driving(force
behind 8%9T% but its overwhelming weight makes 8%9T% very specific. In %sia Capan and
.hina have some legitimacy to take co(leadership but doubts have sometimes been expressed
about their appetite for strengthening integration in the region. These two countries are often
seen as rivals rather than partners having divergent views on regional integration. &ven the
recent involvement of .hina in the %sian regional integration process has been deemed to be of
lesser importance than its current priority regarding global integration i.e. implementation of
WTB(related regulations.
11. +imilar levels of economic development
The &uropean experience shows that a certain degree of heterogeneity in terms of economic
development is not a ma'or obstacle. :owever a minimal degree of similarity in levels of
economic development is clearly an initial facilitating factor. In this context %sian economies
are characteri7ed by larger differences in ,D- per capita than in any other region.
12. ,nfrastrctre. The relative lack of regional infrastructures #in particular road and rail
networks$ in %sia %frica and ;atin %merica leads to high transportation costs preventing
deeper trade integration within the region. In &urope over the past fifty years special funds have
been allocated to the development of cross(border infrastructures.
The importance of these preconditions depends on the type of agreement signed between
partners.
1.3. Types of integration agreements
I% can be classified according to diverse criteria such as"
/. With respect to the main goals and used mechanisms there can be"
( 8egative integration #functional$ 6 which implies the removal of discriminatory and
restrictive institutions and the introduction of freedom for economic transactions*
( -ositive #institutional$ 6 which represents the ad'ustment of the existing and the
establishment of new common policies and institutions.
3. With respect to sectoral coverage I% #integration agreements$ can be wide or narrow.
I%s are commonly limited to industry and more specifically to manufacturing. %
minority encompass agriculture and services. In general the more limited the agreement
the more likely it will exclude sectors in which some countries have a comparative
advantage which obviously reduces the potential gains from integration. #almost never
perfect 6 some goods not covered by the agreements$
E. %ccording to the depth of integration I% can be deep or shallow. Deep economic
integration is not only about reducing border barriers but also about working toward
convergence in the policy environments it also re)uires comprehensively(designed
institutional arrangements to facilitate integration.
5. %ccording to the geographical scope I% can be regional #&+ 8%9T%$ inter(regional
#%-&.$ sub(regional #&9T% .&9T% &conomic community of .entral %frican States
etc.$.
F. I%s differ in terms of the relative income levels of their members. Some I%s like the
&uropean .ommunity encompass only industriali7ed countries. Bthers such as the
8orth %merican 9ree Trade %rea #8%9T%$ and the %sia(-acific &conomic .ooperation
#%-&.$ include both industriali7ed and developing countries. Still others include only
developing countries. #676, 67+, +7+, vertical8horizontal9
2. With respect to the main driver of integration I% can be economic or market(induced and
politically driven. The distinction must be made in order to understand the dynamics of
the integration process and differences among different regions. W &urope 6 motivated
primarily by political aspect 8 %m also an important polit aspect. &ast %sia 6 integration
is mainly driven by economic factors. There is always a mix of the two.
1.-. Forms :not stages #ecase integrating contries do not have to pass throgh all of
them9 of economic integration :;alassa framewor<9:
( 9ree Trade %rea #9T%$ ( %n area where tariffs and )uotas are abolished for imports from area
members which however retain national tariffs and )uotas against third countries. &xamples
are %S&%8 and 8%9T%*
( .ustoms +nion #.+$ ( % 9T% setting up common tariffs and )uotas for trade with non(
members. %n example is Southern %frican .ustoms +nion*
( .ommon @arket #.@$ ( % .+ abolishing non(tariff barriers to trade #i.e. promoting the
integration of product and service markets$ as well as restrictions on factor movement #i.e.
promoting the integration of capital and labour markets$. &xamples are the %ndean .ommunity
and the &uropean .ommunity since /00E #with the establishment of the &uropean Single
@arket$.
- &conomic +nion #&+8$ ( % .@ with a significant degree of coordination of national
economic policies andGor harmonisation of relevant domestic laws. %n example is the &uropean
+nion nowadays*
( &conomic and @onetary +nion 6 % &+ with a single currency*
- Total Integration #T&I$ ( %n &@+ with all relevant economic policies developed at the
supranational level. % possible common constitution.
%ssociation of South &ast %sian 8ations. %S&%8 @embers (/02H( ;rnei "arssalam
.am#odia, ,ndonesia, =ao '"%, >alaysia, >yanmar, 'hilippines, +ingapore, Thailand,
?iet 6am
%sia -acific Trade %greement #%-T%$ 9ormely known as I?angkok %greementI in force since
/0H2 ?angladesh* .hina* India* Jorea Aepublic of* ;ao -eopleKs Democratic Aepublic* Sri
;anka interGcross regional #west %sia east %sia$
South %sian 9ree Trade %greement #S%9T%$ in force since 3442 ?angladesh* ?hutan* India*
@aldives* 8epal* -akistan* Sri ;anka #West %sia$
Economic 0ooperation @rganization :E0@$ is an intergovernmental regional organi7ation
established in 143. by ,ran, 'a<istan and Tr<ey for the purpose of promoting economic
technical and cultural cooperation among the @ember States. 0rrent >em#ership:
2fghanistan, 2zer#aiAan, ,ran, Baza<hstan, Byrgyz %ep#lic, 'a<istan, TaAi<istan,
Tr<ey, Tr<menistan and Cz#e<istan
7 >onetary and Economic 0ommnity of 0entral 2frica :0E>209 7 0ameroon, 0entral
2frican %ep#lic, 0had, %ep#lic of the 0ongo, EDatorial (inea, and (a#on.
7 0@>E+2 0ommon >ar<et for Eastern and +othern 2frica 144- ?urundi .omoros
D.A. .ongo D'ibouti &gypt &ritrea &thiopia Jenya ;ibya @adagascar @alawi @auritius
Awanda Seychelles Sudan Swa7iland +ganda Lambia Limbabwe
7 +2"0 +othern 2frican "evelopment 0ommnity /F @ember States namely* %ngola
?otswana Democratic Aepublic of .ongo #DA.$ ;esotho @adagascar @alawi @auritius
@o7ambi)ue 8amibia Seychelles South %frica Swa7iland +nited Aepublic of Tan7ania
Lambia and Limbabwe.
7 E0@E2+ Economic 0ommnity of Eest 2frican +tates 141. 7 ?enin ?urkina 9aso
.ape Merde ,ambia ,hana ,uinea ,uinea(?issau ;iberia @ali 8igeria Senegal Sierra
;eone Togo. The organi7ation was founded in order to achieve Icollective self(sufficiencyI for
its member states by creating a single large trading bloc through an economic and trading union.
It also serves as a peacekeeping force in the region
29 =2,2 =atin 2merican ,ntegration 2ssociation
The ;atin %merican Integration %ssociation #;%I%$ was created in 1435. It replaced the former
;%9T% #;atin %merican 9ree Trade %ssociation$. It is formed by 2rgentina, ;olivia, ;razil,
0hile, 0olom#ia, 0#a, Ecador, >e)ico, 'aragay, 'er, Crgay and ?enezela. Its
ob'ectives are to create a ;atin %merican common market in the long run and in a gradual
manner by means of tariff preferences as well as the signing of regional agreements.
;9 >E%0@+C%
.ommon @arket of the South #@&A.BS+A$ was formed #y 2rgentina, ;razil, 'aragay
and Crgay in 1441. %ssociate members are ?olivia .hile .olombia &cuador and -eru.
Mene7uela signed a membership agreement in Cune 3442 but before becoming a full member its
entry has to be ratified by the national parliaments of the four original members.
09 2ndean 0ommnity of 6ations :260@>9
The %ndean .ommunity was formed in 14/4 #y ;olivia, 0olom#ia, Ecador and 'er. +ntil
/002 it was known as the %ndean -act. Briginally both .hile and Mene7uela were member
countries.
"9 0entral 2merican 0ommon >ar<et :020>9
The .entral %merican .ommon @arket #.%.@$ was formed in /024 by El +alvador, (atemala,
Fondras and 6icaraga. 0osta %ica 'oined the group in /02E. Its ob'ective is to create a common
market among member countries.
,9 0ari##ean 0ommnity :02%,0@>9
The .aribbean .ommunity #.%AI.B@$ was formed /0HE by 2ntiga G ;ar#da, ;ahamas,
;ar#ados, ;elize, "ominica, (ranada, (yana, Faiti, Hamaica, >ontserrat, +t =cia, +t
Bitts G 6evis, +t ?incent G (renadines, +riname and Trinidad G To#ago. %ssociate
members are" %nguila ?ermuda ?ritish Mirgin Islands .ayman Islands and TurksN.aicos
Islands
H9 6orth72merica Free Trade 2rea :62FT29
The 8orth(%merica 9ree Trade %rea #8%9T%$ was created in /003 by .anada @exico and the
+nited States of %merica
0entral Eropean Free Trade 2greement 7 0EFT2 255/ %lbania ?osnia and :er7egovina
.roatia @acedonia @oldova @ontenegro Serbia and the +nited 8ations Interim
%dministration @ission in Josovo #+8@IJ$
Eropean Free Trade 2ssociation EFT2 :14/597 ,celand, =iechtenstein, 6orway and
+witzerland. The original signers of the accord were" %ustria Denmark the +nited Jingdom
8orway -ortugal Sweden and Swit7erland.
1... 2dvantages and disadvantages of economic integration
1. Trade gains: international trade agreements will cause the demand for third party goods to
decrease which will drive down prices. In addition more acute competition in the trade 7one
may induce outside firms to cut prices to maintain exports to the region. This will create a
positive terms of trade effect for member countries.
Dis" :owever the move to free trade between partners who maintain significant tariffs vis(O(vis
the rest of the world may well result in welfare loss #Miner /0F4$. This risk could be mitigated if
countries implement very low external tariffs #=open regionalism> arrangements$.
2. ,ncreased retrns and increased competition: @arket enlargement makes possible the
existence of #i$ larger firms with greater productive efficiency for any industry with economies
of scale and #ii$ increased competition that induces firms to cut prices expand sales and reduce
internal inefficiencies.
Dis" @ore developed countries within the regional integration scheme would most probably
dominate the market because they may have a head(start.
3. ,nvestment" Aegional trade agreements may attract 9DI from within and outside the regional
integration arrangement #AI%$ as a result of #i$ market enlargement #particularly for investment
that might only be viable above a certain si7e$ and #ii$ production rationali7ation #reduced
distortion and lower marginal cost in production$. &nlarging a sub(regional market will also
bring direct foreign investment which will be beneficial provided that the incentive for foreign
investors is not to engage in =tariff('umping>. This advocates once again for the necessity to
reduce protection and more specifically external tariffs.
6on7traditional (ains from %egional ,ntegration 2rrangements
The theoretical as well as applied literatures indicate that there are several =non traditional gains>
from regional integration arrangements.
=oc< in to domestic reforms" &ntering into regional trade agreements #AT%s$ may enable a
government to pursue policies that are welfare improving but time inconsistent in the absence of
the AT% #e.g. ad'ustment of tariffs in the face of terms of trade shocks confiscation of foreign
investment etc.$. There are two necessary conditions for an AT% to serve as a commitment
mechanism. Bne is that the benefit of continued membership is greater than the immediate gains
of exit and the value of returning to alternative policies. The other is that the punishment threat is
credible. Aegional integration arrangements work best as a commitment mechanism for trade
policy. ?ut AT%s can also serve to lock the country into micro and macroeconomic reforms or
democracy if #i$ those policies or rules are stipulated within the agreement #deeper integration
arrangements$ and #ii$ the underlying incentives have changed following the implementation of
the AT%. AI%s may be an instrument for joint commitment to a reform agenda, but their
effectiveness may be limited by the low cost of exit and difficulties in implementing rules and
administering punishment. With respect to other macroeconomic reforms one may argue that the
degree of openness of AI%s may help discipline in macro policies #especially if the 7one shares
or target a common exchange rate$.
+ignaling" &ven if entering AT%s is costly #investment in political capital and transaction costs$
a country may want to do so in order to signal its policy orientation G approach or some
underlying conditions of the economy #competitiveness of the industry sustainability of the
exchange rate$ in order to attract investment. This may be especially important for countries
having a credibility and consistency problem.
,nsrance" AT%s can also be seen as providing insurance to its members against future ha7ards
#macroeconomic instability terms of trade shocks trade war resurgence of protectionism in
developed countries etc.$.
0oordination and #argaining power" Within AT%s coordination may be easier than through
multilateral agreements since negotiation rules accustom countries to a give(and(take approach
which makes tradeoffs between different policy areas possible. Since AT%s may enable
countries to coordinate their positions they will stand in multilateral negotiations #e.g. World
Trade Brganisation ( WTB$ with at least more visibility and possibly stronger bargaining power.
The collective bargaining power argument is especially relevant for the poor and fractioned
countries within a sub(region. It may help countries to develop common positions and to bargain
as a group rather than on a country by country basis which would contribute to increased
visibility credibility and even better negotiation outcomes.
Bf course these benefits depend on members being able to formulate a common position on
relevant issues a goal that has often proved elusive.
+ecrity " &ntering AT%s may increase intra(regional trade and investment and also link
countries in a web of positive interactions and interdependency. This is likely to build trust raise
the opportunity cost of war and hence reduce the risk of conflicts
PPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPP
2. Featres of new regionalism :verss $old& more protectionist reginalisation9
6ew regionalism has the following characteristics:
( 9irst is mega(regionalism. %n extremely wide range of countries are included #or expected to
be included$ in economic arrangements.
( Second economic and political great powers which formerly gave priority to regionalism and
did not participate in regional arrangements now play an important role in regionalism.
( Third regionalism today encompasses both developed and developing nations small and large.
Developing countries have responded to globali7ation by adopting interdependence strategies
designed to secure investment from and access to the markets of developed countries. This is
especially true of the -artnership and .ooperation %greements concerning members of the
?S&. @&A.BS+A and of @exico in 8%9T%.
( 9ourth there is the very wide variation in the level of institutionalisation with many country
groupings consciously avoiding the institutional and bureaucratic structures found in traditional
international organisations and the regional model represented by the &+.
( 9ifth new regionalism has a multidimensional character. The dividing line between economic
and political regionalism becomes even harder to draw as new regionalism is fed both by the end
of the .old War and the decentralisation or regionalisation of security concerns and by
developments in the global economy.
( Sixth the current processes of regionalism come more from below and within than before
and it is not only economic but also ecological and security imperatives that push countries and
communities towards cooperation within new types of regionalist frameworks. The actors behind
regionalist pro'ects are no longer only states but also a large number of different types of
institutions business elites organisations and movements.
( Seventh unlike most old regional schemes the new ones are characterised by overlapping
membership of countries in a number of different groupings. It would appear that the primary
motivation for this multiple membership is to secure access to different regional markets
particularly where regional blocks demonstrate protectionist tendencies against nonmembers.
( Sixth 8ew regionalism can be characteri7ed as involving many of the elements found in the
deepest level of integration or the achievement of full economic #and monetary$ union and may
include"
( Qfacilitating financial and foreign direct investment flows #real and financial capital mobility$ by
establishing investment protocols and protections*
( liberali7ing movement of labor within the AT%*
( harmoni7ing domestic tax and subsidy policies especially those that affect production and
trade incentives*
( harmoni7ing macro policies including fiscal and monetary policy to achieve a stable
macroeconomic environment within the AT% including coordinated exchange rate policy*
( establishing institutions to manage and facilitate integration #e.g. regional development funds
institutions to set standards dispute resolution mechanisms$*
( improvements of communications and transportation infrastructure to facilitate increased trade
and factor mobility*
( harmoni7ing legal regulation of product and factor markets #e.g. anti(trust law commercial
law labor relations financial institutions$*
( Qmonetary union<establishment of a common currency and completely integrated monetary
and exchange rate policy.