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Theories of Economic Integration: A Survey of the Economic and Political…
Theories of Economic Integration:
A Survey of the Economic and Political Literature
Economic Integration
“the abolition of discrimination within an area" (Balassa 1961)
5 stages of economic integration
Customs Union: member countries apply a common external tariff on a good imported from outside countries
Common Market: a Customs Union which further allows free movement of labor and capital among member nations
Trade Free Agreement: member countries do not impose any trade barriers (zero tariffs) on goods produced within the union but, each country keeps its own tariff barriers to trade with non-members
Economic Union: monetary and fiscal policies of member states are harmonized and sometimes even completely unified
Preferential Trade Agreement: an arrangement between two or more countries in which goods produced within the union are subject to lower trade barriers than the goods produced outside the union
The Gains from Economic Integration
Static Effects of Economic Integration
Trade Creation: when trade shifts from high cost supplier member country to low cost supplier
RAISES HOME COUNTRY´S WELFARE
Trade Diversion: when trade shifts from low cost supplier or no member country to a high cost supplier
LOWERS HOME COUNTRY´S WELFARE
Customs union will likely produce welfare gains to a country the higher is the proportion of trade with its partner in the union, and the lower the proportion with the rest of the world
Countries most likely to benefit from economic integration are those who have lower volumes of foreign trade as a percentage of their GDP
Dynamic Effects of Economic Integration
Static is no longer sufficient due to
Non-preferential tariff policy is more trade liberalizing than a customs union
forces driving the current integration developments differ radically from those driving previous waves of regionalism
Theories of Economic Integration for Developing Countries
Limitations of production efects
welfare impacts of economic integration among developing countries should not be confined to production and consumption effects only, but should also include employment, productivity, and income effects
Economic integration of developing countries should be treated as an approach to economic development, not as a tariff issue
Small countries tend to gain more because their exports will now be demanded by a larger pool of consumers if smaller countries integrate with larger ones
Economic development can be attained to developing countries through economic integration because it will lead to an increase in the size of the market and allow them to benefit from economies of scale
Most developing countries nowadays aim at making economic integration policies compatible with, and complementary to, other policies to enhance their international competitiveness in general
Limitations of the Factors Affecting the Desirability of Economic Integration
Other targets such as joint industrial development and establishment of infrastructural links should be of equal importance in the indicators of a successful economic integration agreement, not just the growing level of regional trade
Developing countries should aim at reaching a substantial degree of complementarity between them
Other Factors Affecting the Desirability of Economic Integration
The issue of improvement of existing transport facilities should be emphasized in economic integration schemes between developing countries
The higher the initial tariff rates between countries entering a customs union, the larger are the expected gains of economic integration between these countries
Differences in macroeconomic policies in general plus the lack of coordination between member countries may be the reason behind limited regional trade growth
The Political Determinants of Economic Integration
The political Factors of General Importance
Possible political moves for economic integration
Public officials to gain support
Countries to strengthen bargaining power
Producers to have political weight
A smaller group of the former members of an unsuccessful integration scheme may launch a successful integration scheme of their own
Shallow integration: tariffs
Deep integration: the need to further change barriers other than tariffs
economic integration schemes require strong political commitment on the part of member countries to be able to advance to common objectives
Incentives of integration: military men and labor leaders, illegal migration, common religion, etc.
Political Factors of Special Importance to Developing Countries
Stage of political entrance: economic integration usually precedes political integration
Dependency theory: mean to strengthen their self-reliance and gradually eliminate economic dependency
Political and Economical Factors Combined
Favorable political and economic factors combined must be present for an economic integration scheme to succeed
Elisa María Solís Galán A01375195