turing
(105 million).
Moroccan exports
(2.7
billion of old Frenchfrancs)
directed mainlyto Algeria; textiles
(565 million),
household utensils(199 million).
What is important for us here is that imports of the four countries
of the Maghreb of manufactured goods from each other are negligible. In 1966, they represented a very low percentage of the total imports: Algeria
0.036$;
Libya0.04$,
Morocco0.055$
and Tunisia0.15$-^
To sum up: the Maghreb countries are primary producers; their agricul¬
tural and mineral production represents a very high proportion in their
GDP. The bulk of their agricultural and mineral products are exported to
the World market. The proportion of foreign trade of each country to
domestic production is high. The inter-Maghreb trade in agricultural products is very small and in manufactured goods is almost negligible.
They export most of their mineral resources, thus deprive their economies
from essential inputs necessary for their industrialization. They produce
more or less the same agricultural goods, and except for oil and gas whicl
are produced mainly in Libya and Algeria, they have nearly the same miner?.,1
resources, with the result that they compete in these products in the
world market. Their level of industrialization, and hence of development,
is very low, compared with some underdeveloped or semi-developed countries.
1/ See
R.ERBES, "Dote
sur lecontenu de la motion d'agrément Regional,
Sep. 1968, p.20, quoted in Ben Amor, op.cit. p.40.
IV
APPROACH TO ECONOMIC INTEGRATION Iff THE MAGHREB
The économie characteristics of the Maghreb economies, as well as other typical of the underdeveloped countries, would draw our attention
to the relevance or the usefulness of the conventional economics of integration in the Maghreb conditions. A great part of the theoretical analysis is devoted to the Customs Union theory. The Customs Union is
the form of economic integration where a group of countries agree to
eliminate or suppress trade impediments among themselves and establish
a uniform tariff and other trade arrangements vis-avis the outside
world.
1/
The Conventional theory maintains that the gainsfrom*a
cus¬toms union would be realized if it is more trade creating - that if it
results in shifting purchases of a given commodity from more expensive j^qmestic to cheaper member-country sources of supply than it is "trade diverting", i.e. shifting sources of supply from lower-cost foreign to higher cost member-country goods.
According to Viner, one of the main advocates of the theory, trade
creation is good and trade diversion is bad. A customs union is more likely to result in net welfare gains if there is a greater degree of overlap between the class of commodities produced under tariff protec¬
tion in the two countries. If the two countries are complementary,
_1/
Por the definition of other conventional types ofEconomic Integration,
i.e. free trade area. Common Market, Economic Union, etc. See Bela Belassa, Theory of Economic Integration, London 1962, and K.H. KHALIL,
Economic Integration in Africa,
IDEP/ET/LXVII/971•
IDEP/ET/2340
Page 31.
different industries are likely to be protected in each country and a customs union will tend on balance to be trade diverting with the loss
of efficiency, and hence welfare.
li
37, See for example, H.H. Tiesner, 'Regional Pree Trade? Trade
-Creating
'and Trade - Diverting Effect o* Political, Commercial and Monetary Areas, in ..International Trade Theory in a Developing World
(ed)
byRoy Harrod & D.C. Hagne, London, Macmillan 1964? who contends that
Viner implicitly assumes that supply elasticities are infinite and
demand elasticities zero. His contention on inter country substitution
and the complete neglect of inter-commodity substitution provides the starting point for further development of the theory. This was under¬
taken independently by S.E. Meade, P. Gehrebs and R.G. Lipsy, and in
essence consists of the recognition of the fact that the lowering of
consumers' prices which takes place with trade diversion as well as with trade creation would permit an expanded consumption of commodities
which the tariff had previously made artificially scarce. This means, in the case of trade diversion, that a favourable consumption effect
has to be placed against the loss due to the switch to higher costs of supply and that trade diversion will not necessarily lead to a decrease of welfare,...
- Whether trade creation rather than trade diversion will take place depends on a number of factors; perhaps the most important of them is
the degree of rivalry of the member countries with respect to protected
industries. The wider the range of industries producing similar goods
under tariff protection the greater the elements of trade creation and
the smaller the elements of trade diversion and vice versa.
See P. Gehrel, Customs union from a single country viewpoint, Review
of Scon-Studies vol.xxiv
(ï)
N°.63j R.G. Lipsy, "The Theory of Customs Unions, Trade Diversion and Welfare, Economic , vol. xxiv IT0.93,(Feb.
1957).
See also Viner, The Customs Union Issue, Carnegie Endowment for
International peace, New York, 1950? J.E. Meade, The Theory of Customs Unions, North Holland Publishing Company, Amsterdam 1965» R.G. Lipsy,
"The Theory of Customs unions: a general survey," The Economic Journal, Sept., 19.60. See also H.G. Johnam, "The Economic Theory, of Customs Unions," in Money Trade and Econ. Growth, Allen & Unwin, London 1962.
Recent contributions to the conventional theory have shown that
either trade creation and trade - diversion can be good or bad. We are not going to show their analysis in detail as it is exposed in the
litera-ture.
jy
Suffice it to say that they contend that customs union, or regional trading arrangements, will be trade creating, and will hence increase eco¬nomic welfare, if the member countries have little external trade, in
proportion to total production, or total expenditure, and if a higk propor¬
tion of this trade is with the other partners. Welfare is also likely to
be greater if the economies of the members are very competitive, but
potentially very complementary. Trade creation depends also on the sensi¬
tiveness of trade pattern to tariff changes, and on the extent of the
differences in the pattern of relative prices at which protected products
are produced. The customs union would also be useful the higher each
member's pre-union duties are on other products. 1
Leaving the premises on which the' conventional theory rests for the
time being as we will come to them later, it is clear that these conclu¬
sions are the exact opposite of the economic characteristics and conditions prevailing in the Maghreb countries.
Some writers, however, have departed from the conventional tradition,
and introduced new elements in their analysis. Some of them have tried
to develop a theory of customs unions for the underdeveloped countries, or extend the analysis of the present theory to these countries - They main¬
tain that the effects of the creation of a customs union or a free trade
area on the fundamental problems of the underdeveloped countries such as increasing opportunities for profitable investments, broadening the export
_l/
C.A. Cooper and B.P. Massell, 'Toward a Theory ofCustoms Union for
Developing Countries; Journal of Political Economy, October1965s
W°.5;P.P. Mikesell, The Theory of common markets as applied to Regional arrangements among developing' countries, in International Trade Theory
in a Developing world
(ed)
by Harrod op.cit.; H.H. Liesner, RegionalFree Trade op.cit.; Harry C. Johnson, 'An Economic Theory of Protec¬
tionism, Tariff Bargaining and the Formation of Customs Union' Journal
of Political Economy, June 1965»
idep/et/2340
Page 33.
base, dealing with balance of payments problems ana the changes in the
terms of trade, mobilizing unemployed resources and avoiding- economic
dualism have been largely neglected or have received isolated treatment.
They believe that the theoretical analysis of customs unions or free
trade areas should be directed more towards the problem of their impact
on the direction of investment in the developing countries for future output rather than limited to an analysis of the welfare implications
of shifting existing trade
patterns.-^
They assume that the underdeveloped countries have preference for
industrial production, and one of the main objectives of the less developei
countries is to foster industrial development and to guide such develop¬
ment along more economic lines. Protection is thus justified on economic grounds; to alter the country's
terms
of trade, to increase domestic employment, to raise revenue, or to foster local industry. Thus, the potential gain from a customs union will be larger if:-1. There is a steeply rising marginal cost of protection in the
two countries,
2. The countries have a strong preference for industry, 3. They are complementary
4. Neither country dominates the other in industrial production
generally.-^
1J
Mikesell op.cit.2J
See C.A. Cooper and B.P. Massell, op.cit. They argue that theirmodelo
differ from the conventional theory in two aspectss 1. They allow a possible preference for industry. 2. They regard the tariff as policy
instrument rather than exogenous variable. The gains from a customs
union depend on what happens to both income and industrial output,
(that
depends on the external commontariff).
In this model eithertrade diversion or trade creation can be good or bad. With a trade
diversion case, each economy exjjends its industrial production to
supply the other's market
(this
may reduce national income but industryexpands).
Without knowing more about the countries indifference curvosone cannot say whether this raises or lowers welfare. Similarly with
trade creation. If a has low cost for industrial production, the latter
will shift from B to A. B. May pay less for industrial products, but
its industrial sector has been lost in the bargain. Is B better off?
one cannot answer without some knowledge of B preferences. They reached
the conclusion that Economic Integration may enable two or more coun¬
tries to protect a given amount of industry at a lower real cost whether
or not this result is effected depends on the preferences of the par¬
ticipants and much more important, on the degree to which they co—opeiat
Other
protectionists-!/
tried to construct a theory to explain some important phenomena, such as the nature of tariff bargaining, the commer¬cial policies adopted by various countries, the conditions under which
countries are willing to embark on customs unions, and considerations that
have weight in persuading countries to change their commercial policies.
To do so they departed from, the conventional assumptions of international
trade theory and welfare economics, that welfare depends on private consump tion of goods and services, in an attempt to construct a theory of protec¬
tionism, tariff bargaining and customs union formation. They posited a
"preference for industrial production" involving the treatment of indus¬
trial production as a collective consumption good the quantity of which
is governed by commercial policy.
2/
1/
H.G. Johnson, op.cit. He maintains that thetraditional theory of
tariffs is concerned with such matters as the possibility of increasing
real income by using the tariff to exploit monopoly or monopsony power in the world markets, the welfare costs of the tariff in terms of for¬
gone real income, and the effects on real income of changes in particu¬
lar tariffs or in tariff structures, such as are entailed by the forma¬
tion of customs unions and free trade areas. Implicit in this approach is the assumption that "real income" is identifiable, on social welfare
functions lines, with the utility derived by individuals from their personal consumption of goods and services...
2J
Johnson contends that one branch of economics is concerned with theconsequences of the assumption that firms act rationally to maximize profits, while another branch is concerned with devising decision rules
and operations on data that will yield the profit maximizing decisions.
He concealed the latter in the concept of "a preference of industrial production." in order to explore and rationalize the behaviour of
governments, ibid. See also for protectionism H. Myuits "Infant indus¬
try arguments for assistance to industries in the sotting of dynamic
Trade Theory," in International Trade Theory in a Developing World, ed.
by E. Harrod & J). Hague, Kacmillan, London, 1964•
idep/et/2340
Page 35°
However, from the view point underdeveloped economies, in our
case the Maghreb, the conventional theory still has two major defectss 1. the unrealistic assumptions on which it is built,
1/
2. it has very little to say on the crucial problem of economic development, and it is mainly concerned with static welfare gains.
The theory rests on static assumptions. It considers the inputs
of the factors of production, +he state of technical knowledge-tastes, type of economic organization, social institutions as constant and
autonomous variables. Other groups of premises are; perfect competi¬
tion within each country, external economies and diseconomies disre¬
garded, no interference with prices, full employment, problems of adjust¬
ment disregarded etc. With these static assumptions, the theory is mainly concerned with gains which can be achieved from reallocating given inputs of existing
resources.-^
jy Leisner
argues that the theory rests on unsatisfactory premises,and in particular, upon the assumption that other optimum condi¬
tions are satisfied, and it is almost entirely confined to a con¬
sideration of static welfare effects and has little to say on such important questions as the effect of the formation of a Customs union upon the rate of economic growth in the member countries
(combined
as well as takenseparately),
Regional Free Trade, op.cit.2/
See, P. Robson, Economic Integration in Africa, George Allen andUnwin 1968 pp. chapter 1 & 2.
It appears that the conventional theory of customs union has in¬
herited the static assumptions of the conventional theory of interna¬
tional trades comparative costs and free trade.
1/
With these unrealistic assumptions, the conventional model of economic integration(customs
/
union, free trade area
etc)
will be of little significance, if any, tothe Maghreb countries as well as for other african countries. If we
look at the customs union theory as a "mini" version of the classical theory of comparative advantage and free trade, inheriting its static y The theory assumes a
given quantity of
resources,free trade will
result in the optimum allocarion of these resources and the maximiza¬
tion of output. Another assumption is that factors of production can
move easily from one economic activity to another. It also assumes full employment and the absence of unemployment problems, so that the
increase in the output of a commodity would mean the decrease of the production of another. The theory is based also on perfect competi¬
tion. It abstracts from a group of social factors and economic social
institutions neglecting them, considering them as given and concentrates
its analysis on some economic variables. It goes without saying that
these social problems and economic and social institutions constitute
one of the most intricate group of obstacles to economic development
in the underdeveloped countries. Another assumption is that the state
of technology is given and hence the resources endowment of a country
would stay the same.
Another weakness of the theory, is that it
(according
to some econo¬mists)
follows what they call the "stable equilibrium" analysis. Theycontend that the social system does not move by itself towards any kind of equilibrium between forces, but it moves away from that situa¬
tion, according to the "circular causation of a cumulative process."
Under the influence of the stable equilibrium, the static assumptions
and concepts like free trade. Laissez-faire, laissez-passer, harmony
of interests, the failure to conceive the dynamic and cumulative
process of development and underdeveloped, the theory of international
trade did not develop to take into consideration the growing inequality
between the underdeveloped and the developed countries. The theory did
not give much attention to the problems related to the big differences
in the relative scarcity of factors of production, nor did it examine
the productivity functions themselves which are related to the great
differences in the relative scarcity of the factors of production. It
also did not explain the great gap in the standard of living and cul¬
tural systems in the countries of the world. The upward cumulative
process with its backward effects took place in the poor countries according to the circular causation of a cumulative process.
See G. Myrdal, Economic Theory and underdeveloped Regions, luck-worth, London, 1957, see a defence of the conventional theory by Bauer, International Economic development, Economic journal, March
1959 & Haberler G., International Trade and Economic Bevelopment,
National Bank of Egypt, Fiftieth anniversary commemoration lectures,
Cairo 1959. Compare: HIa Myint, "Economic Theory and underdeveloped countries," the journal of Political Economy, October, 19^5 N°«5
pp. 477-4915 See also K.H. KHALIL, Regional Bevelopment and Economic Integration,
IBEP/ET/2272-1.
idep/et/2340
Page
37-assumptions and stable equilibrium analysis, neglecting the realistic
circular causation of the cumulative social process,
1/
and abstracted like the trade theory, from the most important problems which hinderthe development of the-underdeveloped countries, and consider them as constant or given, while they are not given at all, one can conclude safely that this type of theorizing is -unrealistic so far as the Maghreb
economic conditions are concerned, if not irrelevant.
To be sure the creation of a free trade arcja, a customs union etc.
would result in the suppression or elimination of trade restrictions
(tariffs,
quotas,etc.)
between the member countries of the integratedarea, and the discrimination against the third countries. One should distinguish here between the effects of the regional, trade arrangements
on third countries and on the member countries. So far as the third countries are concerned, these may be developed or underdeveloped corn-tries. So far as the third countries are concerned, these may he
developed or underdeveloped countries. The Maghreb countries have very little trade with other african countries so the effect of the customs union on them will be insignificant. As for the developed countries, nobody would seriously argue that when the Maghreb countries try to
establish a Maghreb economic community they should take into considera¬
tion the unfavourable effects of their regional arrangements on the
welfare of the already very advanced countries in Western Europe or Northern America.
If we turn to the effect of the customs union or froe trade areas, etc. and the conventional theories they are based upon on the member
countries of the integrated area we find that they are not of great help
to the Maghreb countries. They are not in the same» stage of development.
Libya is certainly less developed than the other three. The population
of both Libya and Tunisia is smaller than that of Algeria and Morocco.
Hence under a customs union or a free trade areas, those less developed
countries will certainly be at a disadvantage, and they will be
faced with a situation, similar to that which exists between
_1/
See the preceding footnote.developed and underdeveloped countries, where industrialization
and economic progress with its polarization or spread .effects take place
in the relatively developed countries leaving the less developed country, Libya in this case, in stagnation. In such a situation the overall cus¬
toms union or free trade area will be neither useful, nor will it be accepted by the less developed partner. This is not a mere theoretical
toms union or free trade area will be neither useful, nor will it be accepted by the less developed partner. This is not a mere theoretical