vii.e trade policies for development i.regional economic integration see text, chapter 12, sections...

VII.E Trade Policies for Development

I. Regional Economic Integration

See text, Chapter 12, Sections 12.5, 12.6 and 12.7, pp. 593-620

ECON 3508 April 4 2013

VIII.E REGIONAL ECONOMIC INTEGRATION Among Developing

Countries

ECON 3508 April 4, 2013

1. How does REGIONAL ECONOMIC INTEGRATION Work? Advantages

2. Potential Disadvantages

3. Forces promoting economic integration

4. Types of Integration Scheme

5. Experience with Economic Integration

6. Some Specific Integration Schemes: Africa, Latin America and Asia

The Historical Record:

Some comments on:1. The US common market after 1776;

Germany after 1870 unification

2. The European Common Market: from 6 members to 27 or so.

3. LAFTA; NAFTA; CAFTA

4. Chavez “Bolivarian Alternative (?)

5. Asian, African and other integration attempts

1. How does REGIONAL ECONOMIC INTEGRATION Work?

It makes possible productivity improvements,– i.e. it permits more output to be squeezed out of

given quantities of human, natural and capital resources.

It thus can contribute to – increasing real incomes in a country, thereby

permitting – improved human development by individuals and

families for themselves, and – by governments through increased taxation and social

expenditures (health, education, social security, infrastructure etc.)

It can also promote economic development through– strengthening the tax base of governments so that– more can be invested in public goods or other

purposes directed more specifically at economic development.

 The economic expansion facilitated by economic

integration may make possible public investment in safeguarding the environment? Maybe

Does Economic Integration promote stability and peace among countries?

Evidence and argumentation pro:Evidence contra:

How does Regional Economic Integration promote productivity improvements?

1. Permits Implementation of Economies of Scale and Consequent Resource Saving (human, natural and capital resources):– Larger plant size

– Larger enterprise size

– Increased length of “production runs”

– Increased intra-industry specialization

– Increased vertical specialization

– Increased agglomerative economies.

These are some of the “dynamic benefits” of improved rationalization of economic structure.i.e. it permits the emergence of a rational division of labour

i.e. it permits the emergence of a rational division of labour and larger scale production with higher productivity for countries that otherwise would be too small to permit economies of scale on an “Import Substitution Industrialization” strategy.

It may also make possible a coordinated industrial strategy among members (e.g. the Canada-US Automotive Agreement of 1962, or the European Coal and Steel Community of 1953 or so.)

2. Static Benefits: gains from comparative advantage from trade creation

3. Impacts of Increased Competition within the Integration Area:

– Stimulates domestic product quality improvement;

– Stimulates improvements in product quality and reductions in production costs.

4. Expanded Market Size can Promote Increased (and more efficient) Investment.

5. Strengthened Ability for the Region to develop successful “clusters” of economic activities and thus to integrate and compete in the international economy

6. Strengthened Ability for the Region to Face External Competition for its own domestic markets.

.These gains can be greatest for small country partners

2. POTENTIAL DISADVANTAGES OF REGIONAL INTEGRATION

1. Costs of Transition to Larger Markets:Some industries or types of economic activity may

not be able to compete with imports.

The result is then labour displacement, economic dislocation, and unemployment.

– Are these “costs” of economic integration borne by the workers and enterprises themselves, or does society share in their burden?

– enterprise and industry restructuring costs;

2. Possible Longer Term Negative Impacts:– “agglomerative dis-economies” for some

regions or countries– consequent loss of economic activity and

employment; (e.g. the Maritime provinces in Canada?)

3. Trade diversion may harm some partners

What is “Trade Diversion?

3. Forces behind the attempts to form larger economic communities:

Economic theory and argumentation Problems with ISI;

Other regional integration experiences, esp. the European Common Market, but

Also the USA and Asian and L. American

Demonstration effects

Political arguments: • peace and stability and

• regional bargaining power

4. Types of Integration Scheme1. Specific Functional Cooperation

Agreement to cooperate for specific purposes

(watershed management; transport, energy….)

2. Free Trade Area (FTA);Lowering and elimination of trade barriers between two or more

countries; separate tariff structures for the rest of the world

2. Customs Union (CU)CU = FTA + Common External Tariff

3. Common Market (CM):Common Market = CU + Factor Mobility (capital & labour)

4. Economic and Monetary Union (EMU):EMU = CM + Single Currency (monetary &Exchange rate policy)

5. Political Union (PU)Political Union = EMU + Common foreign and security policy

Obstacles to Successful Integration

Achieving effective economic integration is complex and politically difficult. Why?

1. Vested interests of enterprise may object due to fear of competition from neighbors

2. Political or philosophical differences among neighboring countries

e.g. East African Community with Idi Amin, Nyrere and Kenyatta

3. Trade Diversion may damage some partners and induce them to leave

4. Distributional Issues: fear that some countries gain disproportionately while others lose

5. Weaknesses in the supranational institutions

6. Infrastructural weaknesses prevent meaningful economic interaction

Developing Country Experiences with Economic Integration: Africa

1. Early ambitious “Pan-Africanists” and modest gradualists;

2. Moderates unwilling to sacrifice national independence so soon after achieving it. A gradualist approach for some time, but with high aspirations

3. Major difficulties have hindered progress Antagonisms among countries

4. Logistic Obstacles: Infrastructure Gaps (see map)

5. Physical Magnitude of Integration Task (see map)

African Economic Integration Schemes

1. Southern African Development Community (SADC)

2. East African Community (EAC)

3. Economic Community of West African States (ECOWAS)

4. Economic Community of Central African States (ECCAS)

5. Common Market for Eastern and Southern Africa (COMESA)

6. Arab Maghreb Union (UMA)

7. Southern Africa's Common Monetary Area (CMA)

8. African Economic Community, (AEC)

6. Some African Integration Schemes

o Originally SADCC; Founded 1980; o Defensive economic organization vs. aparteid S.

Africao Re-founded in 1992 with S. African presenceo Objective: a full common marketo 200 million people; GDP +/- 200 milliono Dominated by S. Africao Successful expansion of intra-regional trade

A. Southern African Development Community (SADC)

Southern African Development Community

B. East African Community

o Long pedigree starting in the 1967Dissolved in 1977

Re-founded in 1994

o Early Progress was limited due toProblems among Prime Ministers and political

differences

Idi Amin

Perceptions that Kenya was gaining most

oSignificant success recently:Rapid expansion of intra-bloc trade

East African Community, member countries

H. African Economic Community

(The Community of Common Markets)

Founded in 1991;

The Sub-Saharan Integration Scheme, including all others except Mahgreb

Ambitious objectives: • Promote ec., soc., &cultural development and integration

• Establish a framework for the mobilization af all resources

• Promote cooperation in al fields of human endeavour

• Harmonize policies of all existing and future economic communities

“Fund for community solidarity and compensation”

Envisages rather complete union ultimately.Common currency; common Central Bank, Pan-African parliament

African Economic Community,

including

African Intra-Bloc Exports as a Per Cent of Total Exports

Integration Scheme

1970 1980 1990 2000 2007

COMESA 9.1 6.1 6.6 6.0 4.7

EAC 16.9 8.9 13.3 17.6 20.4

ECCAS 2.2 1.4 1.4 1.0 0.6

ECOWAS 2.9 10.1 7.8 10.8 9.4

SADC 1.4 0.3 2.8 12.2 15.2

Source: Text, p. 490 and World Bank, World Development Indicators, 2009. p. 349

Latin American Experience with Economic Integration

Early Beginnings;

Limited Early Achievements

Current Schemes

Prospects

Asociación Latinoamericana de

Integración

ALBA Alianza Bolivariana para los Pueblos de Nuestra

América

Central American Common Market

Grupo Andino

Caribbean Associations

Mercosur

ASEAN

Conclusion:Numerous attempted integration

schemes;Mixed resultsSome schemes excessively ambitious,

falter in implementationDifficulties in establishing effective

integration movements are immenseSuccess re integration is vital for Africa’s

and Latin America’s Future