INTRODUCTION
In order to full) understand the n pt of e n mi integration. it must he defined in relation to nomi c lih ra i. m. Indeed .•icr rding to the the ry of nomic Hhcralism. th tru s urr cs of a nation's riches d pend nly on libcruli d ira d and industry and not on the accumulation f g Id an d pre .ious metals a cla i m e d b) the mercantilist theory,
Th e ac umulation of precious m ta ls \\ uld no d ubt r '~ ult it the protection of national economic zones, and ons q ntly, i til erecti n of h ..rrriers, the placing f quot on imp rt~ .md ' por ts , the imposition of hans and all kind of b tad to Ire ~ 111 rncru an production of goods and servi
e .
l.ibc lisrn . n the thcr han d . w lid not only free production force s. but also all iw an el I i .nt. ratic ns I and optimal allocation of production a tors in line \\ ith ih principles of perf t competition.However. regarding nations. vine they h.. vc dill re n t his torir a l ba kg rou n ds, there ar c.. dif r n ' in s iz '. 1.1 tor endowment, in orn e as well as external onorn i ..md l i ' no rnic s.
All th sc factors. which make c nd ition s Ier pcrrc - rnpcuu n elusive. affect the attainment of an optimum onorny . on s quc n t ly . in the absence of widespr d fr trade and induvtry , on ' rc 0 to th cstablishrncnt of a vast grouping in 'elvin 1 imil r n tinn in ord 'r create a zone where c nditions rl " to r ·t c rnp 'tilitn pf '\ i .
he first ono m i r gro u p in f m
in the 19th century in G rm ny , t the h ight l .1 tivi i () th national! t movement, This grou p c lie "I r [ ut h I \ .rc in" " I.Ii
created to ensure the unifi atio n 0 the g eat .erm ..m nation thr iu the tahlishm t of morni lin m nz (it) - t: t v, . u on mou
eg i n • nd th e (,erma -\P , k.i ' in g 0
* 1 nvl.u e d fr m i n h or ig in
67
Another economic grouping was set up in 1929. It was known as the Aus rro-Ger rna n Customs Union and it tried to revive the great Prussia of Otto Bismark. The allies declared this grouping illegal, for the, felt that it violated Protocol N' 1922 of the Peace Tr ea t) signed in Versailles in 1919 under which a commitment was made by members of the union not to give up part of their sovereignty to another body",
THE THEORETICAL BASIS FOR INTEGRATION
Although attempts to establish economic unions were made early in world history, its theoretical justification did not emerge until the 1()SOs. following an article titled "The Customs Union Issue"2. puhlished by Professor jacob Viner. Subsequent theories shed more light on the issue and created a new economic discipline referred to as the theory of economic integration. Economic integration has a wide sphere of activities, for it encompasses the following economic groupings of varying degrees listed in ascending order of importance:
I he Preferential Grouping The Free Trade Area
The Customs Union The Common Market
Economic Union or Complete Integration
The Supra-national Union or Federation-Confederation.
Generally speaking, economic integration involves the partial or total ren unciation of national sovereignty and is roncretised through the signing of treaties, protocols and charters that are to he respected by the signatories.
The provisions of these treaties, charters and protocols vary in strength and scope, depending on the type of integration. This means that integration varies in scope and intensity.
The Preferential Area: This is the primary stage in the integration process when member states of a grouping mutually, and within the framework of a convention, grant privileges concerning certain sectors, branches or products. Such benefits are not extended to non-member states. A good example of this is the EEC-ACP Association under the Lome Conventions.
1 2
Austro-Gcrman Customs Union 1931 PCIj AlB No.
.n.
CUSTOMS UNION ISSUE Ja cob Vine r 1950 New York PUB.
The Free Trade Area: Th is inte grat ion abo lishe to. rif ,
( a ) Theory of Protection and Notions of Trade Creation and Trade Diversion
\Vithin the co n te xt
or
partial cquifihriurn. .1 ur ion of -v ralnorn ics ab ut the sa m e "ill' \\ ill t hlivh an conorni zone without any turi f , quotas or other rc tri ti ns. thus r .ning a n atmo sphere favo u ra b le for the expansion of Ire i trad and industry .
\Vithin this framework, carh ' nom) will hcru-lit from it"
cornplcrncntartty to other partners wit h i n the gr o u p i ng . ihcr h_
imported from -a r io u s parts of the world with the expensive one produced within the Union and protected by tariffs and ot he r obstacle to trade. This phenomenon is referred to as tr de di -er sion .
Th se two phenomena, i.e. trade creation and trad e diversion, are further divided into two secondary effects: second a r c fects on consumption and secondary effects on production.
Second ary effects on production arise when foreign products imported from a member state are replaced by ex ctly the same quantity of goods produced at a higher cost in another member ta te.
Secondary effects on consumption, on the other hand, result from increased imports from member states due to an increase in demand from other members of the Union.
Secondary effects on consumption can eliminate trade dlversion through an increase in production which would lead to a drop in production costs.
( b ) Resource Allocation and Structural Dynamism The free movement of goods guaranteed by the Customs Union could be affected by non-complementarity and difference in the sizes of the economies of member .states. This gives rise to a loss of customs revenue. A sudden elimination of customs barriers could disrupt the management of the economies of the countries of the Union through the loss of taxes, customs revenues and budget revenue. It is therefore appropriate that an adaptation period be introduced to allow adjustment of the structures of the Union's economies, the alignment of the behaviour of firms, such as the modernisation of production units, in order to make them competitive, the redefinition of activities to bring them in line with factor endowments, etc.
This transition period is indispensable if the closure of factories, which would spark off unemployment and probably economic chaos, is to be avoided. During this period, companies wouldexploit the size of the new community market, while entrepreneurswould introduce new technologies and establish new industries that would never have emerged under previous conditions.
However, proximity remains an important factor in ensuring the success of the customs union. Member states must create a homogenous zone so transportation costs will not eliminate the gains of trade liberalisation within the Union.
(c) - The need for a common external .tariff.
The customs union Will only become operationa l afte r the adoption of a Common External Tariff (C.E.T.) because witho u t this common tariff, the future of economic integration is shaky.
For, if tw o cou n t r ies that m: kc up a cus to ms union • dopt f r mt custo ms tari f s, protection of individu al tariffs would be ffl icnl. As wa s experienced in the fre e trade area , one of the m mh r state' cou ld gain fro m this difference in tariffs by importing ods an d freely re-exp orting them in the sa me sta te to anoth er untry. In a sit u a t io n su c h as this, the co u n t ry with the lowest tariff wou ld impose its prices and monopolise trade in these good s. Resides, if the tariff in the country re-exporting is not high en o u g h and the ot he r sta te produ ce s a similar non-comp vtiti v c good by world sta n da r ds , this product would be boycotted at the exp e n se of that or ig in a t in g from other parts of the world, and therefore there would be no integrati on of products or production. Th e lack of a co m mo n exte r na l tariIf results in big differen ces in relative prices.
( d) The Customs Union and International Spec ia Iisation
The integrati on resulting from the cus to ms union pre sents gains for all members and leads to a better allocation of re sources. It also stre n g t he ns the backward and forward linkage s of sectors .
Th e abo lit io n of taxe s redu ces the prk es of go od s an d rrc at ..
'c rti al an d horizontal integration am o n g the industrie s within ih · union.
THE ECONOMIC COMMUNITY
Apa rt fro m the custom s union, the cronomi community is cu r re n tly the most adv..meed form ofc oriornir integ ation . It combine s all the ch a ra cte r is t ics of the first three oriomir groupinus to which sh o u ld be added the introduction. within the common mark t, of common trade policics, including the aho li t io n 01 prohibitions . the elim in a t io n of obstac les to movement of fa ctors. cspcrially capital and labour.
Concerning the pure theory of international trade, the Stolper-Sa m u e ls o n thcorcm-l stat that the fr c mov m nt of good and services is a perfect substitute for the fr rnov merit of production factors, for it pave the way for the equalisation of the remuneration of these factors: in reality, this situation can n v r uri " v n in th long run, for there can nev r be purc ha ing po w er parity am o ng nations. Consequently, it wou ld only be proper to lib rali c th movement of production
r
n or.3 Pro t tion and Real W g 5, 1'.1\., Sam u . tolper (1941) R VI 'W of E nom ic 't ud i
~8-7 .
71
Indeed, companies with shareholders who are nationals 0 f various member states must be established within the Community. In the same vein, skilled and unskilled workers must be recruited from various member states.
In addition to the free movement of production factors, the community must also co-ordinate trade policies of member states hath within and outside the community.
Without this co-ordination, conflicts may arise among member states' industries that operate outside the community. Co-ordination of trade policies"will result in the adoption of a common powerful bargaining stance towards the outside world. A good example of this is the EEC vis-a-vis the ACP.
Economic Union or Total Integration
This type of grouping represents complete and total integration. It involves a combination of the removal of restrictions on the movement of goods and factors, and a high level of harmonisation of economic, monetary,' financial, fiscal, social cyclic and anticyclic policies. This is a way of attaining a completely integrated economy with supra-national powers.
The economic union presupposes that the conditions for the establishment of an economic union are met in such a way that problems arising from disintegration are worse than those currently being faced by the community and as such, member states' interest in the union will be stimulated to overcome chauvinist and nationalist sentiments. It requires the co-ordination of, among other things, economic, monetary, agricultural, industrial, fiscal and banking policies. The adoption by an individual state of an economic measure could result in an unfair gain in terms of competitiveness at the expense of other member states, as well as the transfer of domestic economic problems from one member state to another. For example, devaluation could transfer unemployment from a member state to other countries within the Community, while manipulation of interest rates could attract available capital into one member state to the detriment of other members without really reflecting the marginal efficiency of capi tal.
However, the co-ordination of economic policies presents serious problems, for it involves the giving up of major sovereign rights. This explains why at this stage, the establishment of political institutions within the Community is important to prevent the _integration process from grinding to a halt.
The setting-up of a Community Parliament comprising members elected by the electorate is one type of such institution. But the
u ti n n w i"wha t is the Il'\"{~1 of com m it men t to laws passed by suc h a mmun i -\ asscm blv., and enforce d bv., the national authoritv.- ? fo r th nr ti n: ~. utll oriti s derive their legitimacy from the electo ra te whic h i a ~ I",a) Ii ,'on\'inced that the fu t u re gain s if Integration ar exceed
ho rt-t rm nat.ion.rl benefits.
rile eronoruir union only becomes effective with the cre a t io n of n ptirnu rn monetary zon e, But one of the main attributes of national
v r 'ig n t)' i\ the opportunity to mint money. Th is is very important f r it dates hack to the dawn of time. However, in an economic union, th I harmo nisa tio n of monetary pol ides req u ires either the es tab lish m e n t of a monetary union or the adoption of a single currency wit h a co m m o n central hank.
It h not the exis te nce of several national cu r rc nrie that is the pr blcm in this optimum zone hut the div er se moneta ry an d banking policie s. Indeed, within the cont xt of fixed exchange rates . th introdurtio n and effec t iv e application of an exchange parity with mi n i m u m fluctuation make s possible the harmonisati on of mon etary
ol icy. Thix parity uld he exp ress e d either in term s of gold or the st ro n ges t nation al currency in the .om rn u n i ty. ;\ c; in point is till' Europe n Monctary System. Th e gradual rcdurtion an d ot.il disup p arunr c of monetary flu tu .ition rcprc: .nts m mctary unification and co nseq ue n tly the ' tahlishrncnt of. monett ry zan .
In • co n te xt of Flexib l e cxch an J ' rat ,it is only the rclu tion om m u n ity currencies with the outsid e wo r ld that would he a major co ne rn, for irura-c mrnunity paritic« are prot t t t ) til ' vvistcn«
ofa fr e e market \\ ithin the Community , iru luding th ' 1110n I market.
In any ra e, monetary unifi •tion within til ' corn rn u n ity ai ms at preventing a pre cre nrc for a particular rurr 'fll~ at til ' cvp 'n'il' of another", Such pre crvnr c leads to 1~1('k 0 rontidem ' in I ' CU fT -nri of so m e member stat s, in .uc ird.m '\\ith the la v 01 .re h.un", an d creates d ilfcrcrucs in the relative pri 01 J )()lh , thu ... r ·... u lting in trade diversion. l'hi s al ls into que stion the obj eLi\ ' 01 int 'g Hi n.
The Supra-National Union: Federation and Confederation The success of the .o no rnir union will p \ c the way for su pra-national union which is the last and final stage of the int .grat io n prorc s. It is only when the prcviou ph a hav h \ n p.is xl that th i level can he re ached. In this situati n, it i no Ion «-r the . onorny
anti 1", (h.mj; \ Rat ' ]1)7:::\, lui) lvhiyarna, 5
"'I he "Ihcory of Opt imum Ar
1·1 .xib ility ", IMI Sta! Pap rs Tower. .md Wildl
- u.
Loi de C;r h m: "1' rnau va i monn i \ ha
du tin uit d
c
h ng 'v" .I •
, la bonne
that is important, but politics takes over, for the economic mechanism has laid the foundation for such a unification. llowevcr, at this stage, real determination on the part of the population to do away with all national institutions and specifically accept to bring them under only one supra-national political authority is required. Consequently, the executive, legislative and judiciary powers would he transferred from the nations to the supra-nation which will, of course, delegate powers to the national structures. But defence, external relations, monetary issues and international trade would he the rcs ponsibility of the supra-national authority. Only domestic economic activities would he left to the nationals of the new entity which is the sole subject of international law. '(here are several examples of supra-national unions in the world - the U.S.A., the United Kingdom, India, Nigeria and the former U.S.S.R.
To summarize, the integration process, when viewed in
ascending order of importance, presents a hierarchically organised and co-ordinated structure.
lnstru- Individual Absence Cornrmn Free Ilarmonisa- Unification
ments Agreement of Exte r n a l Move- tion of
of on Quotas Tariff ment of Policies
Integra- Products of Econo mic and
tion or Fa cto rs Policies Political
--- Branches Institutions
and Type of Sectors
Integra-tion
Prcf'ercn- X tial Area
Free X X
Trade Area
Customs X X X
Union
Common X X X X
Market
Economic X X X X X
Union
Supra- X X X X X X
National Union
PRACTICAL DIFFICULTIES OF APPLICATION IN DEVELOPING COUNTRIES
The theoretical analysis of the integration process involves some fascinating and intellectually attractive ideas, but the application poses problems which are not easy to overcome.
Experiences abound in the world economic arena, in industrialised countries with free market or controlled economies and in third world countries.
Generally, the application of economic integration theory, within the context of industrially developed countries with free market economics looking for space to redeploy its industrial fabric has been successful. Although a lot is still to be attained, the European Community has recorded a lot of progress in this area. On the other hand, the experience of developed countries with controlled economics is a total failure and this further strengthens the theory that economic integration is a perfect model which confirms the theory of free international specialisation. But it would be interesting to know if this model would promote and accelerate economic development.
Indeed, we have seen that the theory of customs union links the theory of specialisation to that of the protection of infan t ind us tries.
Consequently, it goes without saying that the union not only encourages the expansion of trade, but also strengthens th e establishment and development of industries. This is the case when a Customs Union is made up of developing countries.
It is for this reason that developing countries have created wide protected areas, for they want to use integration as a means of attaining economic development. Unfortunately, the experiences have been disastrous and the efforts have failed woefully. This failure could be attributed to three major factors, namely:
the difference in the levels of development of countries forming the union;
the problem of distribution of the gains of economic integration;
problems of compensation for loss of revenue suffered through economic integration.
The difference in development levels is a major cause of failure of integration. More often than not, the expansion of a market through the creation of a customs union is advantageous to well-structured and well developed economies for market forces pull towards the strong economies of the community the creation of production units, to the
d irn in t of weake r econo m ies. This is the fa mo us "ba ckwa sh effect"
nd 0 urs when the customs union drains the demands for goods , urn u lat invcst mcn ts, cr ea tes job opportunities and concentrates hig her income, in the most economi cally powerful countries.
Th is phenomenon is attributable to the economies of scale reared b) existing structures and facilities sur h as public services and development administration, i.e. the availability of skilled and sem i-skille d and sp e ci a lised workers, hanks, insurance companies, dist r ih u tio n and parcel services and communications networks, as well as recreational facilities and an enabling socio-economic climate.
Th is phenomenon is attributable to the economies of scale reared b) existing structures and facilities sur h as public services and development administration, i.e. the availability of skilled and sem i-skille d and sp e ci a lised workers, hanks, insurance companies, dist r ih u tio n and parcel services and communications networks, as well as recreational facilities and an enabling socio-economic climate.