Overview of regional intergration

In a context of increased globalization, integration remains a powerful means for economic and social development, especially for low-income countries.

One of the most compelling justifications for regional integration in the continent is a key desire for greater economic independence and development.

The classical theory¹ of regional integration points out that integration can take many different forms, depending on the degree of political and economic commitment of the member countries. The arrangements, which are to be made, can range from a simple operation consisting of a reduction of customs duties to a more ambitious form of economic integration, with provisions for a common monetary and fiscal policy. The theory thus lays out a menu of options on integration, in which regional integration deepens as restrictions on trade and investment diminish (see Table 2 below).

Hungarian economist, B. Balassa (1961), identifies five different meanings or degrees, ranging from the lowest to the highest: free trade area, customs union, common market, economic union, total economic integration. This last degree, or final phase, of the process requires the creation of a common entity which will make decisions on several domains, mainly in the economic, political and social domains, on behalf of the group and in compliance with modalities agreed upon beforehand.

Total economic integration is therefore the outcome of a process for unifying economic policies between the various States, which necessarily entails establishing a monetary union between member countries, complete removal of obstacles to cross-border economic activities relating to trade, free movement of labour and services, as well as of capital.

In practice, the monetary union (characterized notably by the institution of a single currency) may be established before the advent of an economic union (symbolized by a common market and the harmonisation of economic and sectoral policies of member countries). This trend was first experienced in the West African Economic and Monetary Union (WAEMU) which, certainly on the basis of special and historical considerations, started by instituting a common central bank and currency before engaging in the process of economic unification, as from 1994. The European Union chose the reverse process; with the common market having preceded the institution of the Euro and the European Central Bank in 1999.

1See, for example, Balassa (1962, 1965), Meade (1955), Baldwin and Venables (1995) and Lipsey (1957).

Moreover, the convergence of the economic and sectoral policies of member countries of an economic union can only be achieved within the context of a process which requires time for attaining set objectives; since the States usually embark on the process from very different starting points.

The explanatory reasons behind the establishment of large regional blocs - and therefore behind integration - are essentially economic in nature. Since the time of pioneer authors, A. Smith (1776) and D. Ricardo (1748), international trade has been considered as a source of specialization for countries and a means for increasing the size of their markets. In this context, contemporary authors, like P. Krugman (1979), have shown, through theoretical models of monopolistic competition, that consumers benefit from a wider variety of goods and services at lower prices as a result of international trade. On the other hand, regional integration is an effective means for substantially increasing trade within a group of countries.

For a small country, regional integration gives it access the international market, by achieving a critical mass, and presents it preferential opportunities in the major member countries. On the other hand, integration enables the major countries to establish preferential markets in the integrated regional space.

Table 2: Characteristics of regional integration Type of

arrangement

Free trade among members

Common Trade policy

Free factor mobility

Common monetary and

fiscal policies

One government Preferential trade

area No No No No No

Free trade area Yes No No No No

Customs union Yes Yes No No No

Common market Yes Yes Yes No No

Economic union Yes Yes Yes Yes No

Political union Yes Yes Yes Yes Yes

Source : ECA, 2004

The growing enthusiasm for most of Africa‟s regional trade agreements stems from the underlying principles of the traditional trade theory which postulates that liberalizing trade and investment between two or more countries generally has positive welfare effects for the countries concerned and leads to economic growth and poverty reduction, as articulated in the fourth edition of Assessing Regional Integration in Africa (ECA, 2010).

The theory on Free Trade Areas (FTAs) is deeply rooted in the theory on customs unions, and can be defined as a process to reduce or abolish tariff and non-tariff restrictions to trade in goods and services among a group of countries in a given geographical area.

The theoretical literature shows a wide consensus that most important benefits derived from integration are heavily anchored in the expected gains expected from an expanded market. Indeed, the expansion of the market is in itself a factor of competitiveness, thus for increase in international trade.

It produces two main effects (A. Young, 1928): (i) an increase in productivity gains associated with the growing mechanization that accompanies the increase in production and with the phenomenon of learning (learning by doing); (ii) a differentiation and increasing specialization of sectors.

In case of free and unrestricted movement of goods and persons, investment is expected to more readily meet the requirements of market demand and supply in the FTA, which leads to a more efficient resource allocation.

But to reap the potential benefits of integration, Member States have to meet certain conditions: a stable and predictable business environment, elimination of restrictions on competition among firms within the region, and implementation of trade facilitation measures which reduce barriers to trade, notably non-tariff barriers (NTBs).

In addition, measures to protect foreign direct investment (FDI), through broader property rights and special regional arbitration courts, would be incentives for investors.

According to Velde and Meyn (2008), the benefits drawn from a successful integration can be considered as a

“cost of non-integration” for regions which have not yet completed their integration process. A recent study by FERDI (2012)² has shown that the gains expected from a significant strengthening of regional integration in African countries are estimated at a minimum 2 – 3 per cent additional growth annually. This thus constitutes the cost of non-integration for the sub-regional economies, considering that the regional integration process is far from complete.

However, successful integration requires preconditions regarding the behaviour of Member States and their relations. The present world economic setting, which is characterized by globalization of national economies, requires States to work together to ensure the effectiveness of their policies. Cooperation and policy coordination therefore become inevitable for member countries.

Cooperation refers to joint action by member countries in order to find one or more solutions to a global problem. It often requires the establishment of specialized agencies for each type of problems. Economic policy coordination is justified by the need to avoid situations in which a policy implemented in a country is neutralized by another implemented in some other member country of the customs union or common market.

Under an FTA, countries gradually abolish custom duties and quantitative restrictions to ultimately establish the free movement of products from the area, but each nation keeps its own commercial policy vis-à-vis third countries.

2Fondation pour les Etudes et Recherches sur le Développement International (FERDI, 2012) : «Evaluation des gains attendus de l’intégration économique régionale dans les pays africains de la Zone franc »

The customs union is characterized by a common trade policy (establishment of a common customs tariff or of a CET). Lastly, regarding the economic union, the harmonization and convergence of member countries‟

economies are indispensable for the expected gains to become the order of the day.

In fact, completing an economic integration process requires attaining specific objectives in the following areas:

(i) integration of trade; (ii) monetary integration and unification of financial markets; (iii) coordination of macroeconomic and sectoral policies.