ECONOMIC INTERGRATION/REGIONAL GROUPINGS

ECONOMIC INTERGRATION/REGIONAL GROUPINGS

This  refers to where two or more countries in same region join up and co-operate with each other for their mutual economic benefit.it also refers to economic cooperation within a region.

It means abolition of discrimination within an area.it also means any type of arrangement in which countries agree to coordinate their trade, fiscal and or monetary policies.

In a region where complete economic integration is in practice implies that there is:

  1. Free trade in all goods and services.
  2. Free flow of capital.
  3. Freedom of migration.
  4. Freedom of establishment of business.
  5. Free flow of information and ideas
  6. No difference in taxation.
  7. No national difference in rules governing competitors and monopoly.
  8. No differences in environmental regulations
  9. A single currency in use.

This type of integration is beneficial to member countries as they are able to develop faster than if they were to carry their economic activities individually.

FORMS OF ECONOMIC INTEGRATION

They are  categorized depending on their degree of integration.

PREFERENTIAL TRADE AGREEMENT.(preferred treatment).

This is the weakest form of economic integration here, countries would offer tariff reductions and not eliminations, to a set of partners countries in some product categories.

FREE TRADE.

This is a group of two or more custom authorities in which duties and other restrictive territories regulations of commerce are eliminated here, tariffs between the member countries are abolished but each country retains its own tariffs against non-members ie member countries apply uniform tariff rates to each other but separate individual tariffs to the remaining countries.

Customs union.

It allows no tariffs /other trade barriers between member countries as in free trade areas but the difference  is that it harmonizes trade policies of member countries with those of the rest of world e.g. member countries setting common tariffs according to the rest of world.

Common market.

It goes beyond the customs union and in addition to eliminating trade barriers among member countries and sharing trade policies,free movement of labour and capital among member nations is allowed e.g. EAC where one can work and establish business in any part in the region.

Economic union

It will typically maintain free trade in goods and services, set common external tariffs among members, allow the free mobility of capital and labour and will also relegate some fiscal spending responsibilities to a supra-national agency. An example is of the European union common agriculture policy(CAP)

Monetary union.

It establishes a common currency among a group of countries this involves the formation of a central monetary authority which will determine monetary policy for the entire group as well as using common public services e.g. Railway and communication network e.g. European Union (E.U) which has adopted Euro as their common currency.

Multilateralism versus regionalism.

The main objective here is on trade liberalization. The logic here is that the larger the regional trade area, relative to the size of the world market, the larger will be that regions market power in trade the more market power, the higher would be the regions optimal tariffs and export taxes.

Duty free zones/free economic zones.

This are set up to attract foreign investment allowing raw materials and intermediate products to be imported duty free.

IMPORTANCE/CASE FOR  ECONOMIC INTEGRATION TO A COUNTRY

  1. Enables countries to specialize in production of those commodities where they have comparative advantage thus trading surplus commodities.
  2. Enables a country to exploit economies of scale as it provides wider market for goods and services and therefore promotes employment in the countries involved.
  3. Encourages peace, free flow of information and  better relations both economically and politically as the countries involved depends on each other.
  4. Encourages foreign investment because the possibility of making large profits in a more enabling economic environment.
  5. Trade stability is enhanced in cases where there is use of a common currency e.g. the Euro in the European Monetary Union.
  6. Regional unemployment differences are reduced in where  regional integration involves permitting free movement of factors between factors.
  7. It fosters a great degree of competition thus promoting economic efficiency and consumer sovereignity through a wider variety of goods and services.
  8. It leads to redistribution of income in favour of low income areas through low cost production in such areas and exporting to areas where prices are higher.
  9. Availability of market/extension of locally produced goods-a wider market for a countrys products is created.
  10. Creation of industries-this is so as to cater for the increased demand.
  11. Extension of research-to cater for large markets ,research institutions are established to enhance efficiency in production as well as production of quality products.
  12. There is higher bargaining power in the world market and this helps the countries to get better prices for their goods.
  13. Flow of resources-member states which might be disadvantaged in terms of technical and human resource capabilities benefit from those which are more advanced. E.g. Kenya being more advanced than her neighbours will benefit from the big pool of human and technical resources in Kenya as there will be a free flow of resources among the countries.

CASE AGAINST/PROBLEMS FACED BY ECONOMIC INTEGRATION.

  1. Political instability within the countries and political aggression between the various countries failing the integration efforts.
  2. Production of similar products thus limiting scope of trade.
  3. Unequal distribution  of the benefits of regional integration where industrialized countries tend to grow more as they already enjoy certain economies of scale.
  4. It leads to trade diversions where trade leads to of sources of commodities from low to high cost produce.
  5. Since it involves reduction of tariff barriers between member countries, it leads to loss of revenue which implies that the government has less money to spend on developing projects.
  6. In cases where there is sharing of common services such as railway and ports it may be difficult to allocate the benefits and costs of such sharing.
  7. Inefficient industries may be killed off imports from other member states, which is likely to result in increased unemployment in countries where industries have to close down.

EXAMPLES OF ECONOMIC INTEGRATION

  • European common market.

TRADING BLOCS IN AFRICA AND COMMON MARKETS.

  • Common market for eastern and southern Africa.
  • The south African development community.
  • The economic community for west Africa states.
  • T.A (Preferential Trade Area) The market has 21 members countries.

THE OBJECTIVES OF PTA ARE;

  • To eliminate tariffs on certain products and to reduce on certain others in order to facilitate easy trade in members countries.
  • To enable member country’s citizens to interact and exchange ideas that can be beneficial to all.
  • To reduce the problem of limited market.
  • To enable members country bargaining power in the world market. That is in all matters relevant to commerce and matual interest.
  • It facilitates infrastructure on inter state transport and communication among members countries.

Others are:

  • E.C. ( European Economic Community ) Aimed at facilitating and promotion trade relations between European members countries.
  • P.E.C. (Organization of Oil Exporting Countries.) The organization caters for interest of the member oil producing nations.
  • F.T.A ( European Free Trade Area)
  • A.T.T. (General Agreement on Trade and Tariffs) This is aimed at reducing tariffs as an aim of increasing international trade. Over thirty developing nations including Kenya are signatories to the agreement. Its headquarters is in Geneva.
  • C.O.W.A.S. (Economic Community of West Africa, Caribbean and the pacific. The major aim is to negotiate for better terms with the industrialized nations, in trade. This is necessary since the members countries are basically producers of raw materials.

There exists two main effects of a trading bloc

  1. Trade creation-this basically means creation of intensive trading activities.
  2. Trade diversion-when the removal of barriers inside the bloc results in trade being switched from a more efficient producer outside the union to a less efficient one inside.

Free trade.

  • In free trade importers and exporters do not need the government consent basically it refers to movement of goods and services into and out of a country without any government interference.

ADVANTAGES OF FREE TRADE;

  1. Promotes production.
  2. Expands trade among members countries.
  • Establish uniform custom policy in members countries.
  1. Help members countries to raise their standard of living-Through specialization in particular countries, which it produces best and most efficiently,costs of production are reduced. This means that consumers pay less for quality goods and services.
  2. Help to achieve full employment level because there is efficient allocation of resources i.e. residents of a country are free to migrate to any area where their services are needed.
  3. Helps to develop for a greater variety of goods and services.
  • Creates economies of scale, more supply in member’s country
  • Market help to reduce prices.
  1. Enhances of specialization-it allows international division of labour which leads to specialization.countries engage in production of commodities which they can produce most economically resulting in lower production costs leading to favourable prices of goods and services.
  2. Leads to quality and cheaper products.
  3. Leads to international peace and understanding.
  • Promotion of industrial growth-wide markets encourages new firms while the existing ones are forced to increase their production capacity to cater for the increased demand.
  • Helps to dispose off the surplus

Negative effects;

  1. It reduces efficiency in production of different commodities.
  2. Country involved remains less developed since more industries are not established.
  3. The major disadvantage is that it gives way to inferior goods to enter the market and may pave way to monopolies.
  4. Unfair competition-the less developed countries  suffer due to stiff competition from the economically advanced countries which have better production techniques and adequate finances.
  5. Slow economic development-a country may stagnate in other areas due to over-specialisation.there may also be no need to establish new industries as all needs are being met through trade.
  6. Injurious and harmful products to social well-being of the citizens may get into the local market.
  7. Dumping-sale of goods in an export market at a price below price charged in local economy.the motive may be to dispose off any surplus stock in the exporting country or an attempt to penetrate the local market unfairly.
  8. Bad cultures are likely to find their way into the market.
  9. Infant industries are usually killed.
  10. Leads to exhaustion of natural resources.

Reasons why a country may find it necessary to control its international trade:

  • To protect infant and key industries against foreign competitions.
  • To avoid entry of harmful commodities in the country.
  • To avoid dependency in other countries.
  • To eliminate dumping of foreign goods, which may jeopardize the local market.
  • To create the employment opportunities through economic growth.
  • To correct the balance of payment deficit.
  • To determine the necessary and unnecessary goods and services.
  • To fight against possible monopoly super firms.
  • To raise revenues for government projects in the country.
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