Embed Size (px)
Citation preview
INTRODUCTION
Economic integration is the unification of economic policies between different states through the partial or full abolition of tariff and non-tariff restrictions on trade taking place among them prior to their integration. This is meant in turn to lead to lower prices for distributors and consumers with the goal of increasing the combined economic productivity of the states.
The trade stimulation effects intended by means of economic integration are part of the contemporary economic Theory of the Second Best: where, in theory, the best option is free trade, with free competition and no trade barriers whatsoever. Free trade is treated as an idealistic option, and although realized within certain developed states, economic integration has been thought of as the "second best" option for global trade where barriers to full free trade exist.
The term economic integration has been interpreted in different ways. “Some authors include social integration in this concept, others subsume different forms of international cooperation under this heading, and the argument has also been advanced that the mere existence of trade relations between independent national economies is a sign of economic integration.”
However, the term is commonly used to refer to the type of arrangement that removes artificial trade barriers, like tariffs, between the integrating economies. “The structure of regional agreements varies hugely, but all have one thing in common-the objective of reducing barriers to trade between member countries. At their simplest, they merely remove tariffs on intrabloc trading goods, but many go beyond that to cover non-tariff barriers and to extend liberalization to trade and investment. At their deepest they have the objective of economic union, and they involve the construction of shared executive, judicial, and legislative institutions.”
-5-
Balassa defines economic integration as “a process and as a state of affairs. Regarded as a process, it encompasses measures designed to abolish discrimination between economics units belonging to different national states; viewed as a state of affairs, it can be represented by the absence of various forms of discrimination between national economies.”
The removal of barriers to trade that prevent or hinder the flow of goods and
services into or out of a nation or society. Economic integration usually implies repealing
tariffs, embargos, or other punitive customs practices, and may also include extending
favorable taxation rates or regulatory treatment to encourage.
-6-
OBJECTIVES
Economic integration schemes have several objectives. The motivation to form
trading blocs may vary from region to region and from country to country. Nevertheless,
as Shiells suggests, the following motivations seem to play a key role in the formation of
trading blocs.
1. To obtain economic benefits from achieving a more efficient production structure
by exploiting economies of scale through spreading fixed costs over larger
regional markets, increased economic growth from foreign direct investment,
learning from experience etc.
2. To pursue non-economic objective such as strengthening political ties and
managing migration flows.
3. To ensure increased security of market access for smaller countries by forming
regional trading blocs with larger countries.
4. To improve members collective bargaining strength in multilateral trade
negotiations or to protest against the slow pace of trade negotiations.
5. To promote regional infant industries which cannot be viable a protected regional
market.
6. Finally, to prevent further damage to their trading strength due to further trade
diversion from third countries.
-3-
Economic Theory
The framework of the theory of economic integration was laid out by Jacob Viner (1950) who defined the trade creation and trade diversion effects, the terms introduced for the change of interregional flow of goods caused by changes in customs tariffs due to the creation of an economic union. He considered trade flows between two states prior and after their unification, and compared them with the rest of the world. His findings became and still are the foundation of the theory of economic integration. The next attempts to enlarge the static analysis towards three states+world (Lipsey, et al.) were not as successful.
The basics of the theory were summarized by the Hungarian economist Béla Balassa in the 1960s. As economic integration increases, the barriers of trade between markets diminish. Balassa believed that supranational common markets, with their free movement of economic factors across national borders, naturally generate demand for further integration, not only economically (via monetary unions) but also politically—and, thus, that economic communities naturally evolve into political unions over time.
The dynamic part of international economic integration theory, such as the dynamics of trade creation and trade diversion effects, the Pareto efficiency of factors (labor, capital) and value added, mathematically was introduced by Ravshanbek Dalimov. This provided an interdisciplinary approach to the previously static theory of international economic integration, showing what effects take place due to economic integration, as well as enabling the results of the non-linear sciences to be applied to the dynamics of international economic integration.
Equations describing:
1. enforced oscillations of a pendulum with friction;2. predator-prey oscillations;3. heat and/or gas spatial dynamics (the heat equation and Navier-Stokes equations)
Were successfully applied towards:
1. the dynamics of GDP;2. price-output dynamics and the dynamic matrix of the outputs of an economy;3. Regional and inter-regional migration of labor income and value added, and to
trade creation and trade diversion effects (inter-regional output flows).
The straightforward conclusion from the findings is that one may use the accumulated knowledge of the exact and natural sciences (physics, biodynamic, and chemical kinetics) and apply them towards the analysis and forecasting of economic dynamics.
-7-
Dynamic analysis has started with a new definition of gross domestic product (GDP), as a difference between aggregate revenues of sectors and investment (a modification of the value added definition of the GDP). It was possible to analytically prove that all the states gain from economic unification, with larger states receiving less growth of GDP and productivity, and vice versa concerning the benefit to lesser states. Although this fact has been empirically known for decades, now it was also shown as being mathematically correct.
A qualitative finding of the dynamic method is the similarity of a coherence policy of economic integration and a mixture of previously separate liquids in a retort: they finally get one color and become one liquid. Economic space (tax, insurance and financial policies, customs tariffs, etc.) all finally become the same along with the stages of economic integration.
Another important finding is a direct link between the dynamics of macro- and micro-economic parameters such as the evolution of industrial clusters and the GDP's temporal and spatial dynamics. Specifically, the dynamic approach analytically described the main features of the theory of competition summarized by Michael Porter, stating that industrial clusters evolve from initial entities gradually expanding within their geographic proximity. It was analytically found that the geographic expansion of industrial clusters goes along with raising their productivity and technological innovation.
Domestic savings rates of the member states were observed to strive to one magnitude, and the dynamic method of forecasting this phenomenon has also been developed. Overall dynamic picture of economic integration has been found to look quite similar to unification of previously separate basins after opening intraboundary sluices, where instead of water the value added (revenues) of entities of member states interact.
-8-
Different Forms of Integration
There are five important types of economic integration. They are:
1. Preferential trading agreement2. Free trade area3. Customs union 4. Common market5. Economic union
Basic Elements of the Stagesof Economic Integration
Free Trade Agreement (FTA)
Zero tariffs between member countries and reduced non-tariff barriers
Customs Union (CU)
FTA + common external tariff
Common Market (CM)
CU + free movement of capital and labor, some policy harmonization
Economic Union (EU)
CM + common economic policies and institutions
The above types of economic integration start at the lowest degree of economic integration, that is, preferential trading club, and go through progressively higher
-9-
Stages to the most complete degree of economic integration, that is, economic union. A brief analysis of the above forms of economic integration is undertaken below:
1. Preferential Trading Agreement: A preferential trading agreement is the loosest form of economic integration. Under it a group of countries have a formal agreement to allow each other’s goods to be traded on preferential terms. These countries usually reduce their respective duties on imports of all goods from each other. However, the member countries retain their original tariffs against the outside world.
2. Free Trade Area: A free trade area means that the barriers and quotas to mutual trade are removed. At the lowest level there is the preferential trade area, this means that the members charge each other lower tariffs than those applicable to non-members; however there is no free movement of goods within the area. It is usually a permanent arrangement between group countries. It allows for tariff- free made among the member countries .There is complete removal of tariffs on goods traded between the members of the free trade area. The member countries are free to levy their own tariffs on imports of goods from other countries outside the free trade area. For instance, the members of the North American Free Trade Area (NAFTA), Canada, Mexico and the United States, pledge to do away with the barriers to mutual trade. Unlike a customs union, each member continues to determine its own commercial relations with non-members.
Other examples of free trade area are the ones between Mexico and the EU; between Canada and Chile; between the US and Jordan. The EU has a higher level of integration which incorporates a free trade area, but it has progressed well beyond the simple removal of tariffs.
3. Customs Union:
A customs union is a free- trade area plus an agreement to establish common barriers to trade with the rest of the world. A custom union requires a higher degree of political cooperation than it is necessary within a free trade area. Agreement is needed on the level of the common external tariff and on the administration of the tariff revenues.
-10-
An example of a customs union is the established customs union between the European Union and Turkey, which came into effect in 1996.
The customs union offers Turkey improved access to the countries of the European Union. The free circulation of industrial goods and processed agricultural products is guaranteed, there are no more customs duties, and quantitative restrictions such as quotas are prohibited. The customs union involves harmonization of Turkey's commercial and competition policies including intellectual property laws with those of the European Union. A large part of the EU's trade and competition rules is also extended to the Turkish economy.
Another example of a customs union is, notwithstanding its name, Mercosur: Mercado Común Del Sur or the Southern Common Market.
4. Common Market:
Common market is a customs union that also has free movement of all factors of production among the common market countries. The common market countries abolish all trade restrictions on their mutual trade and also establish a common external tariff, as a custom union. The existence of a common market implies that the internal market comprising all the member countries is common to all firms trading within it.
The creation of a common market is the next step, whereby the obstacles for the free movement of labor, capital, services and persons are eliminated.
The instruments necessary to establish a common market are: a trade liberalization programmed; common external tariff; the coordination of macroeconomic policy; and the adaptation of sect oral agreements.
Since the establishment of the European Community the main objective of cooperation has been to generate opportunities for persons, goods, services and capital to move freely across the borders between the member states. The main idea is to eliminate within the EC all special national rules, which discriminate against the citizens, companies or products of other member countries. The initial plan was to realize this common market by the end of 1969; however this goal was only partially achieved. It was only in the eighties that real action was taken to achieve a common market. The single market with the "four freedoms" - the free movement of goods, services, persons and capital - forms the core of the European Common Market.
-11-
5. Economic Union:
An economic union is the most complete form of economic integration between countries. It involves a common market and also the harmonization of economic policies, in particular monetary union and coordination of fiscal policies. Monetary union implies there is a fixed exchange rate system between the member countries, a common or single currency, and central control over interest rates and other instrument of monetary policy. An economic union is the ultimate form of economic integration.
The establishment of an economic union, which entails a common currency and/or the harmonization and unification of monetary, fiscal and social policies, follows this step.
An example of an economic union is the Economic and Monetary Union within the EU.
6. Political Integration:
As already indicated, the weaker forms of international political integration refer to cooperation between states and formations of state-based regimes. The deeper forms of integration refer to the constitution of new political entities, which have a certain degree of independence in regard to the individual states.
Thus, political integration involves the strengthening of a political system, in particular the scope and capacity of its decision-making process. Besides this institutional aspect of integration, there is as well the normative dimension of creating a political community.
Legal integration is closely related to political integration and involves the establishment of common legal rules and a common legal system for the citizens of the different states of a region. Sometimes political integration is interpreted as the creation of supranational institutions. However, as already indicated, supranational institutions cannot be considered as the condition par excellence to achieve an increased coherence. Treaties might well stipulate a certain degree of sovereignty transfer; however the actual practice might sometimes diverge considerably from the stipulations of the treaty.
-12-
7. Security Integration:
During the heat of the Cold War era, security was articulated in narrow terms of politico-military security. However, since the eighties the concept is conceived in broad terms, whereby security goes beyond the military to embrace as well the political, economic, societal and environmental dimensions.
The lifting of the Cold War swathe has removed the principal organizing force at the global level, hereby reducing the integrating dynamic and decreasing the continuity between the global system and the regional subsystem. The great powers are not any longer motivated by ideological rivalries and seem to avoid wider political engagements, unless of course their own interests are at stake. This is reinforced by the increasing resource constraints, which decreases their capability to become involved in regional conflicts. All in all, this resulted in a weak global leadership and fed into the assumption that the burden of addressing regional problems was shifted to the local states, which at the same time provided them with better opportunities to gain greater control over their regional environment.
-13-
Benefits of Economic Integration
Economic integration can be defined as a kind of arrangement where countries get in agreement to coordinate and manage their fiscal, trade, and monetary policies in order to be mutually benefitted by them. There are many degrees of economic integration, but the most preferred and popular one is free trade. In economic integration no country pays customs duty within the integrated area, so it results in lower prices both for the distributors and the consumers. The ultimate aim of economic integration is to increase trade across the world. There are many other advantages associated with this concept. Some of these are:
Progress in Trade:
All countries that follow economic integration have extremely wide assortment of goods and services from which they can choose. Introduction of economic integration helps in acquiring goods and services at much low costs. This is because the removal of trade barriers reduces or removes the tariffs entirely. Reduced duties and lowered prices save a lot of spare money with countries which can be used for buying more products and services.
Ease of Agreement:
When countries enter into regional integration, they easily get into agreements and stick to them for long periods of time.
Improved Political Cooperation:
Countries entering economic integration form groups and have greater political influence as compared to influence created by a single nation. Integration is a vital strategy for addressing the effects of political instability and human conflicts that might affect a region.
-14-
Opportunity for Employment:
The various options available in economic integration help to liberalize and encourage trade. This results in market expansion due to which high amount of capital is invested in a country a €™s economy. This creates higher opportunities for employment of people from all over the world. They thus move from one country to another in search
of jobs or for earning higher pay.
Beneficial for Financial Market:
Economic integration is extremely beneficial for financial markets as it eases firm to borrow finances at low rate if interest. This is because capital liquidity of larger capital market increases and the resultant diversification effect A reduces the risks associated with high investment.
Increase in Foreign Direct Investment:
Economic integration helps to increase the amount of money in Foreign Direct Investment (FDI). Once firms start FDI, through new operations or by merger, takeover, and acquisition, it becomes a international enterprise.
Thus economic integration is a win-win situation for all the firms, people and the economies involved in the process. Is has become a preferred strategy for most countries of the world.
-15-
Advantages
Trade Creation:
Member countries have:
(a) Wider selection of goods and services not previously available;
(b) Acquire goods and services at a lower cost after trade barriers due to lowered tariffs or removal of tariffs
(c) Encourage more trade between member countries the balance of money spend from cheaper goods and services can be used to buy more products and services.
Greater consensus:
Unlike WTO with Hugh membership (147 countries), easier to gain consensus amongst small memberships in regional integration.
Political Cooperation:
A group of nation can have significantly greater political influence than each nation would have individually. This integration is an essential strategy to address the effects of conflicts and political instability that may affect the region. Useful tool to handle the social and economic challenges associated with globalization
Employment Opportunities:
As economic integration encourage trade liberation and lead to market expansion, more investment into the country and greater diffusion of technology, it create more employment opportunities for people to move from one country to another to find jobs or to earn higher pay. For example, industries requiring mostly unskilled labor tends to shift production to low wage countries within a regional cooperation.
-16-
Price transparency:
EU firms and households often find it difficult to accurately compare the prices of goods, services and resources across the EU because of the distorting effects of exchange rate differences. This discourages trade. According to economic theory, prices should act as a mechanism to allocate resources in an optimal way, so as to improve economic efficiency. There is a far greater chance of this happening across an area where E.M.U exists.
Uncertainty caused by Exchange rate fluctuations eliminated:
Many firms become wary when investing in other countries because of the uncertainty caused by the fluctuating currencies in the EU. Investment would rise in the EMU area as the currency is universal within the area; therefore the anxiety that was previously apparent is there no more.
Prevent war:
The EMU is, and will be a political project. It's founding is a step towards European integration, to prevent war in the union. It's a well known fact that countries who trade effectively together don't wage war on each other and if EMU means more happy trade, then this means, peace throughout Europe and beyond (we hope).
The Political agenda:
There is also a political agenda to European bank (the European System of Central Banks -ESCB), the complete removal of national control over monetary policy and the partial removal of control over fiscal policy. Individual nation states will lose sovereignty (i.e. the ability to control their own affairs). It will be a considerable step down the road towards political union. There are many in the EU who faviour economic a do political union and they are very much in factor of EMU. There are also many who wish to keep national sovereignty and are struggling to prevent EMU, whatever its merits might be, from going ahead.
-17-
Disadvantage
Creation of Trading Block:
It can also increase trade barriers against non-member countries.
Trade Diversion:
Because of trade barriers, trade is diverted from a non-member country to country despite the efficiency in cost. For example, a country has to stop trading with a low cost manufacture in non-member country and trade with a manufacture in a member country which has a higher cost.
National Sovereignty:
Requires member countries to give up some degree of control over key policies like trade, monetary and fiscal policies. The higher the level of integration, the greater the degree of controls that needs to be given up particularly in the case of a political union economic integration which requires nations to give up a high degree of sovereignty.
The instability of the system:
Throughout most of the 1980s the UK refused to join the ERM (Exchange rate mechanism). It argued that it would be impossible to maintain exchange rate stability within the ERM, especially in the early 1980s when the pound was a petro-currency and when the UK inflation rate was consistently above that of Germany. When the UK joined the ERM in 1990 there had been three years of relative currency stability in Europe and it looked as though the system had become relatively robust. The events of Sept. 1992, when the UK and Italy were forced to leave the system, showed that the system was much less robust than had been thought.
-18-
Over estimation of Trade benefits:
Some economists argue that the trade and cost advantages of EMU have been grossly overestimated. There is little to be gained from moving from the present system which has some stability built into it, to the rigidities which EMU would bring.
Loss of Sovereignty:
On the political side, it is argued that an independent central bank is undemocratic. Governments must be able to control the actions of the central banks because Governments have been democratically elected by the people, whereas an independent central bank would be controlled by a non elected body. Moreover, there would be a considerable loss of sovereignty. Power would be transferred from London to Brussels. This would be highly undesirable because national governments would lose the ability to control policy. It would be one more step down the road towards a Europe where Brussels was akin to Westminster and Westminster akin to a local authority.
Deflationary tendencies:
Perhaps the most important economic argument relates to the deflationary tendencies within the system. In the 1980s and 90's France succeeded in reducing her inflation rates to German levels, but at the cost of higher unemployment, For the UK, it can be argued, that membership of the ERM between 1990 and 1992 prolonged unnecessarily the recessional period. This is because the adjustment mechanism acts rather like that of the gold standard. Higher inflation in one ERM country means that it is likely to generate current account deficits and put downward pressure on its currency. To reduce the deficit and reduce inflation, the country has to deflate its economy. In the UK, it could be argued that the battle to bring down inflation had been won by the time the UK joined the ERM in 1990. However, the UK joined at too high an exchange rate. It was too high because the UK was still running a large current account deficit at an exchange rate of around 3 Dm to the pound. The UK government then spent the next two years defending the value of the pound in the ERM with interest rates which were too high to allow the economy to recover. Many forecasts predicted that, had the UK not left the ERM in Sept 1992, inflation in the UK in 1993 would have been negative (ie prices would have fallen).The economic cost of this would have been continued unemployment at 3million and a stagnant economy. When the UK did leave the ERM and it rapidly cut interest rates from 10% to five and a half %, there was strong economic growth and the current account position improved, but there was an inflation cost.
-19-
Levels of Economic Integration There are about five additive levels of economic integration:
Free trade. Tariffs between members are abolished or significantly reduced. A tariff is a tax imposed on imported goods. Each member keeps its own tariffs in regard of third parties. The general goal is to develop economies of scale and comparative advantages.
Custom union. Sets common external tariffs among members, implying that the same tariffs are applied to third parties. Custom unions are particularly useful to address the problem of re-exports.
Common market. Factors of production, such a labor and capital, are free to move within members, expanding scale economies and comparative advantages.
Economic union. Monetary and fiscal policies between members are harmonized as well as the use of a common currency. It also imply a level of political integration. This type of economic integration does not truly exists but the European Union is the closest example.
Political union. Represents the potentially most advanced form of integration with a common government.
-20-
Static effect of economic integration
Static effects “involve a reallocation of resources among existent industries, using existing supplies of the factors and existing technology. Some industries expand others contract, and consumers enjoy lower prices on certain products; otherwise everything goes on as before.” Static effects are primary effect and dynamic effects are consequential effect of customs union.
Dynamic effects refers to certain developments like increase competition, stimulus to technological changes, stimulus to investment and increased economies of scale. That makes the union economy dynamic.
There are broadly, two types of static affects namely production effects and consumption effects.
Production effects:
Production effects refer to the changes in the sources of supply or production bases of a commodity resulting from the formation of the custom union. In other words, “production effects result from shifting purchases of a given commodity from more expensive domestics to cheaper member-country sources of supply (positive effect) and from shifting sources of supply from lower-cost foreign to higher-cost member-country producers (negative effects)
.
Trade creation and Trade Diversion:
Jacob Viner distinguished between two types of production effects, namely, the trade creation effect and the trade diversion effect.
Trade Creation:
The formation of a customs union (economic integration) causes some products that were formerly produce domestically to be imported from other member country due to the elimination of tariffs. In this case, the shift in production is from a higher – cost domestic producer to a lower- cost producer of member country. This results in trade creations. Trade creation improves of the international allocation of resources by shifting the production from a high-cost producer to a low – cost producer. Thus, trade creation increases welfare by reducing cost or by increasing world income.
-21-
Trade Diversion:
It refers to the diversion of trade in a commodity from one country to another as a result of the formation of custom union. On the other hand, the formation of customs union (economic integration) causes some products that were formerly imported from a lowest cost producer in a foreign country to be shifted to a higher cost producer of a member country. This results in trade diversion. Trade diversion worsens the international allocation of resources. Thus, trade diversion reduces welfare by increasing cost or by reducing world income.
Differences between Trade Creation and Trade Diversion:
The distinctions between trade creation and diversion are obvious. Trade creation refers to the newly created trade between the member countries of the custom union, whereas, trade diversion refers to some old trade being diverted from a foreign country to a member country. Secondly, trade creation is beneficial to welfare whereas trade diversion is detrimental to it. Trade creation improves international allocation of resources by shifting the source of supply from high-cost producer to a low cost-producer. Trade diversion, on the other hand, worsens international allocation of resources by shifting the source of supply from a low-cost producer to a high-cost producer.
Positive and Negative Effects:
B alassa remarks that the expression trade creation and trade diversion cover only one aspect of production effects. Positive and negative production effects should be distinguished between. According to Balassa,”positive production effect is a cost saving in nature resulting from a shift of purchases from higher cost to lower cost sources of supply. Negative production effects, on the other hand refer to the extra cost of producing a commodity in the partner country rather than in the foreign country as the trade diversion shifts the source of supply from lower cost (foreign) to higher cost (partner) producers. The world gains or loses according to whether the positive production effects are larger or smaller than the negative production effects.”
Consumption Effects:
Jacob Viner has dealt only with the production effects of the customs union. A customs union, however, has consumption effects have been emphasized by Meade, Lipsey, and Gehrels.
A customs union may have both positive and negative production effects. Similarly, a customs union may have both positive and negative consumption effects.
-22-
Positive Consumption Effect:
Consumers in the customs union benefit from the positive production effects of the union, i.e. the increased efficiency in the source allocation. Before the formation of the customs union, they would be obliged to buy the expensive output of high-cost domestic’s producers but after the formation of the union, they would have access to the low-cost source of supply facilitated by the customs union, the real income of the consumer increases. This is the positive consumption effect of a custom union.
Negative Consumption Effect:
There is a parallel to the negative production effect also- the negative consumption effect. The custom union requires a uniform tariff on import of a commodity from non-members. Before the formation of the union, if a member country was importing a commodity duty free from a non-member, it will now have to impose a duty on it resulting in the diversion of the consumer purchases from low-cost outside producers to high-cost producers inside the customs union. This fall in the consumer welfare resulting from the decline in the real income due to rise in price is referred to as Negative Consumption Effect of a custom union.
Jacob Viner also concluded, in some sense, that trade creation was a ‘good thing’ and trade diversion was a ‘bad thing’. However, Lipsey and others have shown that in some cases a trade –diverting customs union can raise welfare.
Since the effects of customs union on world efficiency depend upon the ensuing changes in the pattern of production and consumption, world real income can increase even in the absence of any improvement in productive efficiency, provided that efficiency in exchange improves.
Dynamic Effects:
The union has some important dynamic effects, too. The dynamic effects of the customs union refer to some developments that increase the economic efficiency of resource utilization. The important dynamic effects are increased competition, economies of scale, stimulus to technical change and stimulus to investment.
As Ellsworth and Leith point out, the dynamic effects of forming a customs union may be far more important than the static effects. The basis for dynamic effects is to be found mainly in the presence of imperfectly competitive conditions in various national markets being united. If such conditions exist, two possibilities emerge: competition may be intensified and unrealized economies of scale may become a reality.
-23-
Competition (Market Structure):
Economic integration is likely to result in increased competition. As trade barriers are eliminated the market expands and the number of competitors increases. Oligopolistic and monopolistic market structures become exposed to outside competition. Inefficient firms must either become efficient or close down. The increased level of competition is also likely to stimulate the development and utilization of new technology. This creates an environment for faster economic growth. All these efforts will lead to reduction in the costs of production and thus benefit the consumers.
Economies of Scale:
Formation of customs union leads to expansion of the size of the market, increase in competition and greater degree of specialization. Firms will be able to exploit internal and external economies. The firms will be able to utilize fully their plant capacity and reach their optimum size. It may also lead to development of a pool of skilled labor and management. Realization of such economies of scale will result in a reduction of cost.
Technological change:
Increased competition and expansion of the market encourage research and development, innovation and technical change. Economic integration will be conducive to technological improvement since large scale economies can be reaped. Firms and industries which could be reap the economies of scale are able to spend more on research and development. This tends to promote faster technical change and economic growth.
Investment:
The formation of custom union may stimulate investment. The increase in competition and technical change leads to additional investment, which is necessary to take advantage of the newly created opportunities. At the same time, some import-competing industries may be hit by the increase in competition coming from more efficient producer located in other union countries. This may result in some disinvestment. This disinvestment must be subtracted from the positive investment activity to determine the net effect on investment.
-24-
Economic Growth:
Increased competition, technical changes, economies of scale and increased investment may lead to increase in income and employment among the member countries of the union. This may lead to higher economic growth which could be sustained with continuing changes in business expectations, higher investment and new production technique in the union countries.
Risk and Uncertainty:
As Balassa point out, economic integration will reduce risk and uncertainty in the economic intercourse between the union members. In the present day world, various factors contribute to the riskiness of foreign transactions. Uncertainties are associated with the complexity of trade regulations and with the possibility of unilateral changes in tariffs and other forms of trade restrictions, foreign exchange regulations and economies policies of general. Integration tends to faster development by reducing such uncertainties.
-25-
Economic integration of Developing Countries
Economic integration of developing countries has been advocated by many experts as a means to accelerate economic development and strengthen their trading and bargaining power vis-à-vis the developed economies. The south commission has also emphasized this. The United Nations conference on Trade and Development (UNCTAD) feels that “regional economic groupings, integration or other forms of economic cooperation should be promoted among developing countries as a means of expanding their intra- regional and extra-regional trade and encouraging their economic growth.”
The countries participating in the second session of the UNCTAD reaffirmed “…. That trade expansion, economic cooperation and integration among developing countries is an important elements of an international development strategy and would make and essential contribution towards their economic development.”
Unfavorable Factors
It has even been argued that integration can do pretty little to improve the economic performance of this nation. The following paragraphs give a very brief account of some very important factors that come in the way of economic integration of developing counties. There are certain conditions to be satisfied for the success of an economic integration. The economic structure and condition of then developing countries, by and large, do not satisfy some of this condition.
1. A customs unions would lead to net economic welfare if the economics of the partner countries are actually very competitive, or similar but potentially very competitive, or dissimilar because under such situation the trade creation will outweigh trade diversion
2. A customs union would increase economic welfare if the trade among the member countries could be substantial, that is the partners should a constitute the major market for the principal exports of each of the member. Further the success of and integration scheme also depends on the proportion of the world’s production, consumption and trade which is covered by the members of the union.
A part from this unfavorable economic factors, there are certain practical problems with respective economic integration of the developing countries.
-26-
First, there is political difficulty. Governments of this region would not favor scarified of their freedom, sovereignty and autonomy by integration. Further, political differences and narrow nationalistic views are “formidable obstacles to the integration of developing countries. This is truer of the developing countries of Asia and Africa which have national rivalries and boundary disputes.”
Secondly, the relatively poor and week countries may have the apprehension that the relatively advanced and strong countries of the group would eventually dominate the entire custom union. The “…. Lagging country becomes frightened, that by giving its partners free access to its market it will never be able to start any industries. Thus, Bolivia refuses to join Latin American Free Trade Association (LAFTA) on the ground that it would impede its development rather than assist it. It regards LAFTA as a devise to speed up the development of Mexico, Argentina and Brazil- now leading in the area- at the expense of the slower countries.”
Thirdly, in spite of their geographic proximity the less develop countries are not economically unified; they lack adequate transportation and other communication and infrastructure and institutional facilities for successful unification. “Forming a single land mass, as they do, the EEC members for the most part have an economic advantage over the outside world in the markets of the community.”
Fourthly. Unequal distribution of the games from integrations due to the unequal economic status of the developing countries themselves makes them less enthusiastic about integration. “as evidenced from the experience of the EU countries, the games will not gates distributed equally even in the case of member countries whose economics status is not very much difference initially. If integrated production units are establish guided by considerations of economies of scale, it is possible that industries might get concentrated in a few partners countries.
Fifthly, the loss of revenue from customs duties, which is an important source of revenue for the governments of the less develop countries, tends to reduce the attractiveness of economic integration to the governments.
Thus, a number of obstacles come in the way of economic integration of the less than developed countries. However, measures those like mentioned bellowed have been expected to promote regional economic cooperation and trade liberalization among developing countries:
1. Development of regional trade instruments i.e. provision for economic intra-regional transport facilities, etc.
2. Establishment of regional institution for facilitate intra-regional trade i.e. expansion of clearing or payment union, Regional Reserve Bank, regional import-export credit facilities, regional trade information centre, etc.
3. Effective implementation, improvement and widening the sc op of regional ‘commodity communities’ i.e. coconut, tin, etc.
-27-
4. Plan harmonization and regional investments projects I.e. exchange of experience of experiences in national panning and economic aspiration, development of regional investment plans, standardization of policies regarding investment from outside the region, etc.
5. A planned effort in the direction of reduction of tariffs and trade barriers between the member countries and possible agreements on common policies vis-à-vis non-regional countries i.e. product by product or systematic reduction of intra-regional tariffs etc.
Integration Schemes
Economic integration experiments have a long history dating back to the third decade of the nineteenth century. One of the earliest attempts of economic integration was the free trade attempted by Norway and Sweden in the nineteenth century. Although this effort failed, a number of customs unions formed at that time did survive. One of these was the German Zollverein, which joined together most of the independent small kingdoms and grand duchies that eventually became modern Germany. Also still in existence are a number of customs unions, each of which joined a very small country with a larger one, an arrangement known as a customs accession. Examples are the union linking Switzerland and Liechtenstein, France and Monaco, San Marino and Italy, and Belgium and Luxembourg.
Economic integration gained great popularity in the second half of the twentieth century. It is pointed out that there has been a veritable explosion of regional integration agreements since around the mid-1980s.
-28-
European Union
The European Economic Community (EEC), also known as the European Common Market (ECM) or the European Community (EC) and now as European Union (EU), is by far the most successful of the regional economic integration schemes.
The EEC, which originally comprised six nations- namely, Belgium, France, Federal Republic of Germany, Italy, Luxembourg and the Netherlands-was brought into being on January 1, 1958 by the virtue of the Treaty of Rome, 1957.
The European Union (EU) is the organization which integrates 27countries within Europe, both politically and economically. It is a customs union, which is an agreement amongst a group of countries to eliminate trade barriers between them on the movement of goods, services, labour and capital, and also to establish a common external tariff on goods and services coming into the union. The EU evolved from the European Coal and Steel Community (ECSC), which was formed in 1951 as a response to the First and Second World Wars to try to ensure future peace in Europe. This became the European Economic Community (EEC) in 1965, which in turn became the European Union in 1992.
By July 1, 1968, a Customs Union had been established among the original six members of the EEC as they abolished tariffs on trade among themselves and imposed a common tariff schedule on imports from other countries. The community members had also taken some noteworthy steps towards approximating their economic policies, including the adoption of Common Agriculture Policy (CAP) in 1962 and establishment of the European Monetary System in 1979.
The white paper listed 300 specific area for action by 1992. These actions were intended to eliminate the physical, technical, and fiscal obstacles to an integrated market to achieve a genuine European Community without internal economic frontiers with freedom of movement for goods services, persons and capital.
The barriers targeted for removal pertained to the following eight categories;
1. Border control2. Limitations on the movement of people and their right to establishment3. Differing internal taxation regimes4. Lack of common legal framework for business5. Controls on movement of capital6. Heavy and differing regulation of services7. Divergent product regulations and standards
-29-
The unification of the EU is expected to produce great benefits for the member nations. It would lead to a restructuring of the economy of the EU and would result in efficiency improvement in production, trade creation and increase in income, employment and consumption. It was also expected to achieve significant reduction in the prices.
It is however true that and the real purpose of the single market is to boost the competitiveness of European industry against its rivals, particularly the USA, Japan and South-East Asian nations. This being the fact, the benefits of liberalization would not be extended to non-EC countries in a unilateral and automatic way. Non-members who want to sell their goods and services in Europe would have to provide EU with reciprocal access to their national markets.
Origin of EU:
Its origin goes back to the period immediately after the Second World War in 1945. There was a strong belief throughout Europe that the way to avoid future military conflict was to create a high level of economic integration between the existing nation states. Later they decided to create a strong economic bloc. As a first step towards this in 1952, France, Belgium, West Germany, Italy and Netherlands formed the European Coal and Steel Community. This removed trade restrictions on coal, steel and iron are among these countries. This treaty required every member country to:
1. Eliminate internal tariff barriers on intra-community trade;2. Establish a common external tariff on imports from the rest of the world;3. Allow free movement of factors of production within the community4. Harmonise taxation and monetary policies and social security policies;5. Adopt a common policy, on agriculture, transport and competition in industry.
-30-
Aims of European Union
The important aims of EU are:
1. To establish the foundations of an ever-closer union among the European people.2. To establish a common market and closer economic cooperation between member
countries.
3. To harmonise national economic policies especially taxation and monetary policies.
4. To achieve balanced regional development of the community as a whole.
5. To establish a common agricultural policy and a commitment to free and fair competition.
The Institution and Policy-making processes of the European Union
The EU is built on an institutional system which is the only one of its kind in the world. The basic institutional structure of the EU was laid down in the Treaties of Paris and Rome and later confirmed by the merger Treaty.
The member states delegates sovereignty for certain matters to independent institutions which represent the interest of the union as a whole, its member countries and its citizens. The important institutions are:
1. Council of the European Union2. European Parliament3. European Commission4. Court of justice5. European central bank
The other institutions are court of Auditors, Economic and social Committee, Committee of Regions, European investment bank.
-31-
Enlarged EU and India
The enlargement of EU by the accession of 10 new members is both a challenge and opportunity for India. India’s exports to these 10 nations were insignificant and imports were lower than exports.
India’s main exports to the accession countries (ACs) include gems and jewellery, drugs and pharmaceuticals, leather and leather products, textiles, plastics and linoleum products and agricultural commodities.
Benefits
1. One great advantage is the replacement of the different policy and regulatory environments of the newly joined members by that of the uniform policy and regulatory environment of the Union and reduction in transaction costs.
2. It is also likely that there would be expansion of the market benefiting from the enlargement of the union.
3. Further, the availability of new ports in the enlarge EU could reduce transportation costs.
4. The harmonization of the tariff structure of the new members with that of the EU will increase the import duty of some countries above the pre-accession levels and reduce those of others. On the whole, the average weighted tariff of these countries will significantly come down the benefit down to the benefit of the exporters to these markets.
5. It is expected that the removal of quota restriction for textile and clothing g from January 2005 may also work to India’s advantage, since it will reduce the protection presently available to ACs export in the EU market.
The enlarge EU may also spur joint venture with Indian Companies looking forward to setting up manufacturing bases in the low cost ACs.
-32-
Challenges
1. Many Indian products will have to face a stiffer competition in the EU from the new members.
2. The low labour cost in these nations could encourage EU firms to establish manufacturing bases there or source from there which can affect Indian exports to EU and give rise to new competition from these firms in other markets
.
3. It is feared that the relative competitive advantage of many of India’s exports to the EU (15) may be affected by the enlargement of EU, as a countries like Poland and Czech Republic compete with India in selling textiles and apparel, footwear and leather, chemical compounds, iron and still, automotive parts etc. in the EU (15) market. According to one estimate, India and Poland compete in EU market for 46 of the top 100 exports from India to the EU. Exports of textiles may be adversely affected with low cost production Central and Eastern European countries (CEECs) eating into India’s EU (15) Markets.
4. As the ACs are labor abundant and low income countries, India may also face stiffer competition on account of temporary movements of its natural persons to EU and business process outsourcing by EU to India.
5. The ASc may even affect the FDI inflow to India. Three of them- Poland, Hungary and Czech Republic- compete with India in top ten most attractive destinations for FDI. The enlargement of the EU establishes that it is a growing market which needs to be explored further.
-33-
Environmental Policy in the European Union
In last decade we can notice a trend of constant growth of environmental
pollution in Europe and also elsewhere in the world. Every year European Union
produces around 2 billion tones of waste materials and the number is getting 10% bigger
every year. There is also a constant increase of carbon dioxide emissions that are a result
of increasing consumption of energy and cars. Majority of European Union members is
fighting with utmost and more and more frequent weather conditions, heat waves and
floods that have disastrous outcomes - economic and also for people. Climate changes
have influence on the environment and our everyday lives. Nineties were the warmest
decade of century across the globe.
Because of all listed reasons the protection of environment is one of the most
important and most demanding challenges placed in front of European Union to deal
with. There have been many criticisms made that European Union is placing trade and
economic development
Before care for environment. That is also one of the reasons why European
Union decided to defend ratification of Kyoto protocol. This protocol places obligatory
boundary values for emissions of greenhouse gases in industrialized states and is
appointing new implementing mechanisms, founded on market laws, such as trading with
emission coupons, common implementation and “mechanism of clean development”.
Consequences of polluted environment are visibly reflected on health of all citizens of
European Union. Especially in urban environment where noise, stress, air and water
pollution are cause of many health conditions and allergies. Also on field of saving
energy and dealing with waist a lot has been done already, however it is still necessary to
look in to other numerous possibilities for reducing to health harmful effects of west
materials.
Environmental legislation of European Union is incredibly extensive. It is
made of numerous directives, regulations and decrees....
-34-
Important policies of EU
In order to implement its aims and objectives, the EU has developed a number a
specified policies. Some of the important policies of the EU are discussed below:
1. Exchange rate policy:
The EU aims at exchange rate stability rate in Europe by limiting the fluctuations of participating currencies within a certain range.
2. Single market:
It was originally inaugurated on January 1, 1993. Creation of single or common market required not only the removal of customs and administrative market required not only the removal of customs and administrative barriers, but also measures to harmonise product and services standard and the facilitate the free movement of people and capital.
3. Tax Policy:
The EU aims at eliminating tax induced distortions of competition within the taxes; eliminating double taxation of corporate profits, interest, and dividends and facilitating cross border mergers and asset transfers.
4. Agricultural Policy:
The EU’s agriculture policy has the objectives of increasing agricultural production, providing certainly in food supplies, ensuring a high quality of life to farmers, stabilizing markets and ensuring reasonable prices for consumer.
5. Industrial Policy:
The industrial policy measures aim to help industry adjust to structural change, to provide an environment conducive to business development, to encourage cooperation between businesses and to encourage industrial innovation and research and development.
-35-
6. Competition policy:
It is intended to ensure undistorted competition within the single market. It prohibits agreements which lead to prevention, restriction or distortion of competition within the common market.
Gains from the single EU market
Percent of 1988EU’s GDP
Gains from
Removal of nontariff trade barriers 0.20
Removal of production barriers 2.20
Economies of scale 1.65
Intensified competition 1.25
Over all total gains 5.30
At the beginning of 1993, all remaining restriction to the free flow of goods, services, capital and labor among member nations were eliminated so that EU became a single, unified market. Over time, this was expected to result in substantial efficiency gains and other benefits to the EU. Table shows that the EU’s Gross Domestic Product (GDP) is expected to increase by 0.2 percent from the removal of non-tariff trade barriers, 2.2 percent from the removal of production barriers. 1.65 prevent from economies of scale and 1.25 percent from intensified competition for an overall total gain of 5.3% of the EU’s GDP in 1988.
-36-
Objective of study
Because of the following reason, I prefer this project work to get the knowledge of the Economic Integration with reference to EU.
To study about the meaning of economic Integration and EU.
To study the purpose of Economic Integration
To study the types and levels of Economic Integration
To study the advantage and disadvantage of Economic Integration and EU
To study the effect of Economic Integration
To main object to prepare project was to understand the Topic Economic Integration and EU in a easy way for everyone.
-2-
Conclusion
After the brief study on Economic Integration I have come to meaningful conclusion that Economic integration between the countries is an important feature of trade liberalization. Economic integration is a group countries which join together for enhancing trade and development. They try to removing or reducing trade barriers. It is generally good or profitable to for the group countries. Because it is lead to free flow of goods and services. As a result, a high cost producing country of the bloc can import goods from low cost producing member nation.
There are various types of Economic Integration, in such type impose the barriers in different way. Sometimes the member countries imposed the restriction on certain classes of goods and services. Economic integration has certain advantage and disadvantage. It is beneficial for the country because due to this, competition generate among the firms of the member countries, reduces the prices of goods therefore, generate employment and their welfare.
The problem of economic integration is the member countries impose the barriers on non-members. Therefore trade gets diverted and non-member country affected. It can be conclude that trading blocs encourage trade among member nation, but it may discourage trade with non-members and therefore trading bloc may create obstacles in the growth of trade between member nations and non-member nations.
The European Union (EU) is also main integration. They promote the free transfer of labor and capital among member nation. EU aims at develop cultural and social relation. At the same time the unification of Europe can be a danger to many firms to other countries. While Europe dismantles internal barriers, it will raise external ones.
-37-
PREFACE
As a student, I was very keen to understand the link and the importance of Economic Integration and role in today’s context world.
History has shown that the Economic Integration is an important part of the dynamics of economic activity and can influence or be an indicator of social mood. Economic Integration means free flow of goods and services between the countries and beyond the countries. It is a way of expansion of business.
The study is based on secondary data available from various books, websites and magazines. My inference is based on the data that I have obtained and understood. The project helps us to understand the importance of Economic Integration and its effect. It helps in create the trade creation and increase the economic growth of the region. It is beneficial to the consumer because consumer get the higher quality product with low prices.
My study shows that Economic Integration in a simple way to understand by the readers who do not have idea about the Economic Integration. As I was not knowing the meaning of the Economic Integration before the starting the research work. I had heard about it in class and collages but I did not know the meaning of this. So I took this as a project to study it in details.
-3-
Bibliography
Websites:
www.Economic Integration.Com
Books:
International Economics
Dr. Francis Cherunilam
Economics of Global Trade and Finance
Dr. P. A. Johnson
-38
Acknowledgement
The satisfaction that accompanies the successful completion of a task would be incomplete without the mention of people who made it possible, whose constant guidance and encouragement crown all the efforts with success.
I take this opportunity to express my profound gratitude to Principal Dr. T.P. Madhu Nair and the management Of Nirmala Degree College of Science And Commerce for giving the opportunity to accomplish that project work.
My journey till date would be incomplete without extending my gratitude towards Ms Neha Goel my course coordinate Dr. Neha Goel my project guide for giving her valuable inputs and suggestion, who not only served as my supervisory but also encouraged and challenged me throughout my academic program. She patiently guided me through the dissertation process, never accepting less than my best efforts.
Above all, I would like to thank my family members who were very supportive and were constant source of inspiration. It is for them and the great almighty god that I have succeeded in my efforts
I thank them all….
-1-
DECLARATION
I NISHA A. BANGAR of Nirmala College of Commerce and Science,
studying in M.COM. – (Part I) hereby declare that I have completed the project on “A
study of Economic Integration with Reference to EU” in the academic year 2012-13.
The information submitted is true and original to the best of knowledge.
--------------------- ---------------------
Date of submission student’s signature
Nisha A. Bangar
M.COM. - Part I
A PROJECT REPORT ON
Study of Economic Integration with Reference to EU
SUBMITTED BY
Nisha A. Bangar
M.COM. (part-I) SEM.-I, 2012
SEAT NO:-
Roll No:-47
UNDER THE GUIDANCE OF
PROF. Neha Goel
SUBMITTED TO
University of Mumbai
NIRMALA MEMORIAL FOUNDATION COLLEGE OF
COMMERCE AND SCIENCE
Thakur Complex, 90feet road
Kandivali (E), Mumbai-400 101
Academic Year
INDEXChap no. contents Page no.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Introduction of economic integration
Objective
Economic theory
Forms of integration
Benefits of economic integration
Advantage
Disadvantage
Effect of economic integration
Economic integration of developing country
Introduction of European Union
Aims of EU
Benefits of EU
Environment policy in the EU
Important policies of EU
Conclusion
Bibliography
1
3
4
6
11
13
15
18
22
26
28
29
31
32
34
35
-4-
Certificate
This is to certify that Ms. Nisha A. Bangar studying in M.COM-I at Nirmala Memorial Foundation College of Commerce And Science, kandivali (E), has completed a project on the “Economic Integration With Reference To EU” in the Academic year 2012-13.
This information which is submitted is true and original to the best of my knowledge.
-------------------- ---------------------
Signature of principal Signature of Coordinator
(Dr. T. P. Madhu Nair) (Dr. Neha Goel)
---------------------- ----------------------
Signature of project guide Signature of External Examiner
(Dr. Neha Goel)
