Economic integration

Economic integration is the coming together of countries with common interest to form themselves into an organization with the major objective of creating better economic atmosphere and removing obstacles that diminish the free flow of goods and services in the economies between or among the associated members as well removing trade barriers. The extent of cooperation depends largely on the ideologies of the ruling class in the member countries. Research and studies have shown that the existence of ideological differences may complicate things for economic integration. The European Economic Community has sustained for long time because member nations have the same ideology.

Economic integration promotes large-scale production and encourages specialization. It is highly favorable and desirable among countries, which are ready to demonstrate commitment to it.

Objectives of Economic Integration

The objectives of economic integration are as follows:

1. To take advantage of the economies of scale (both internal and external)
2. To improve and promote economic stability among the member nations
3. To bring about structural transformation of developing economies as in decreasing the subsistence level and improving the monetization of the economy
4. To enhance liberalization and a common market devoid of the hurdles of quota restrictions and custom duties and thus overcome the problem of small size which characterizes many markets.
5. To improve the economic welfare of the member countries through greater investment, specialization and healthy cooperation
6. To present a common front by bringing countries together to solve economic problems
7. To tackle the problem of unevenness of resources endowment by encouraging development in member countries through specialization and large scale production.
8. To reduce if not eliminate poverty among member countries
9. To eliminate the problem of unequal distribution of natural resources by encouraging economic development in member countries through large scale production and specialization
10. To ensure success in the struggle against subjugation by external forces and economic domination through cooperation

Types of Economic Integration

The different types of economic integration are:

1. Economic Union
2. Custom Unions
3. Preferential Area
4. Common Market
5. Free Trade Area

1. Economic Union: This is an economic integration, in which member countries remove intra tariffs, maintain tariff in dealing with non-members and go to the extent of uniting and harmonizing certain policies such as monetary policy, currency, planning and industrialization. This form of economic integration makes the participating countries “one country” economically. No economic integration acquires all the features of economic union in the world as at present. The European Economic Community possesses some of its characteristics but it is yet to possess all.
2. Custom Unions: This is another free trade area in which member nations removes all tariffs against members, the difference between free trade and customs union lies in the fact that member countries in custom unions have harmonized tariff rate that they use against nom members. An example of the customs union is the Customs Union of West African States (CUWAS). All French speaking West African countries with the exception of Togo are members.
3. Preferential Area: This is an economic integration in which the members agree to grant one another favorable tariff concession than they give to outsider or non-members. They do not abolish tariffs but make a difference in the tariffs for members compared with non-members. Examples include preference granted by Britain, France and the United States of America to their dependents.
4. Common Market: This economic integration is a kind of custom union. It restricts intra tariffs and maintains common tariffs against non-members. It further goes to the extent of permitting free movement of capital and labor among the member countries. An example is the European Economic Community (EEC). Another example is the European Coal and Steel Community (ECSC), which maintains a common market in coal and steel products only.
5. Free Trade Area: Member countries remove all tariffs on trade between or among the members in this economic integration. Each country however retains its tariff rates against the non-members. An example of this economic integration is the Latin America Free Trade Area (LAFTA), the General Agreement on Tariffs and Trade (GATT), the European Free Trade Association (EFTA) and so on.

Features of Economic Integration

The following characteristics of economic integration are as follows:

1. It applies the principle of comparative cost advantage pattern of production
2. There is the existence of free trade and trade cooperation among members.
3. There is movement of goods and services across the member countries though it is liberalized in some cases
4. It leads to trade creation among creations among members. Trade creation fosters increase in trade and improves the well-being of the members.
5. Citizens in member countries enjoy free movement
6. The participating countries encourage the facilitation of trade links among the members
7. There is cooperation in policy formulation as members harmonize many critical factors.

Challenges of Economic Integration

Economic integration faces different challenges, which include the following among others:

1. An incorrect determined exchange rate policy in the integrated area may obstruct inter-regional trade in no small way. Over-valuing exchange rate will discourage imports from member countries in favor of non-members or outsiders
2. Member countries will have to pay a price of surrendering their sovereignty in some case for harmonizing certain policies for the benefit of all
3. The so called spread effect expected to benefit the backwashed areas through increased purchase of raw materials from them and the taking of income home to spend by the labor from such areas may not provide a sizeable benefit to them after all as the spread effect is likely to be too weak to cover up the imbalance on the effects on standard of living.
4. The existence of poor communication system and the absence of good transportation links characterized by time-consuming procedure and inadequate information sharing have hindered many developing countries from joining economic associations. Geographical factors also complicate transportation in some cases.
5. There is tendency for industrial activities to cluster in few areas in order to enjoy external economies of scale as in harness to supplier, savings in transportation cost, proximity to customers and so on. This may backfire and engender external diseconomies on the part of some member countries.
6. The possibility of movement of factors of production in some integrated areas may end up in having factors of production such as labor, capital, entrepreneur concentrated in few areas at the expense of others. Where a member country is not fortunate to have one of these few areas in its own territory, it will be to the disadvantage of its people unless the entire integrated area will become a geographical and government entity. This is however far from being practicable.

Trade Creation and Trade Diversion

Economic integration may pave way for either of two things. These are trade diversion and trade creation

Trade diversion on the other hand will be the case when the abolition of internal barriers only end up in making members to change or divert from external low cost supply sources to internal high cost supply sources. The situation will pose inhibition to the welfare of member countries.

Trade creation arises when the impact of abolition of intra-tariff is gainfully exploited. Members import goods from one another at a lower cost. Certain goods are also imported from those who produce them best at lower or least cost. The members that import are able to divert attention and resources into the production of other goods they are better in or best in producing. The result of this will be a rise in the trade volume together with better welfare for members.