Regional integration (economic integration)
Regional integration (economic integration) refers to the cooperation of countries – usually geographically close to each other – with the aim of enjoying economic benefits that accrue from trade, tourism and investment. Regional integration helps to create bigger internal markets, bigger bargaining/negotiation voice, and is poised to benefit from international trade and my become a political cooperation. Examples are the EU; Mercusor; NAFTA; ASEAN; COMESA; EAC; etc.
Stages of Economic Integration
- Preferential Trade Area (PTA): This may be regarded as the first stage of integration. At this stage, member states reduce tariffs
between or among themselves on selected commodities, and commit to further integration. - Free Trade Area (FTA): At this stage member states eliminate all tariffs between and among themselves but continue to charge different tariffs on goods that are imported from third countries
(non-member states). - Customs Union (CU): This is the stage where the member states agree to the key elements of free trade among themselves. They too, adopt a common tariff on all goods from third countries.
- Common Market (CM): At this stage all elements of a customs union are embodied. Member states allow free movement of factor services, such
capital and labour, among members. - Economic Community (EC): All elements of common market are included in this stage. Countries at this stage engage in joint ownership of certain enterprises such roads, railways, ports, etc. member states harmonize policies (on trade, investment, infrastructure etc.), and may adopt a common currency.
- Political Federation: At this stage, probably a rare stage, countries join together and form a federal government , former countries becoming federal
administrative unit of the central government – which is now the federal government.
Conditions necessary for economic integration
- Geographical proximity: Countries to become Partner States in economic integration should be geographically close to each other.
- Member States should be more or less at the same level of economic growth. Countries which have quite different levels of economic growth may face problems of unfair sharing of trade and investment opportunities.
- Ideological orientation: These countries should have similar political ideology. Communists cannot integrate well with capitalism. Their
positions on profits, ownership of property, and role of the state will be different between a communist and capitalist state. - Countries may be of slightly equal size. This helped small EU states to come together and form the bigger EU but not necessarily African
countries – some are big and others are too small.
The need for economic integration
- Trade creation effect: When a union is created, member states agree to and eliminate tariffs between themselves. The net effect of this is that, facing lower priced, zero-tariff, imports from members, consumers increase their demand for the goods from within the region – and new trade will be created.
- Sharing of common services – infrastructure and facilities: Members can construct and share such facilities as roads, railways, ports or harbours. This will reduce trade and particularly handling of goods and transport costs.
- Increased bargaining power: member states can collectively negotiate trade and other economic agreements with other countries or regional blocs as a group (as opposed to negotiating as individual countries).
- Intensity of competition within the economic group will result in improved performance of industries and services sector. This will result in quality of products and good services quality.
- Reduced regional conflicts: Member states rarely resort to war as a way of resolving conflicts or disagreements. Such issues as land issues at borders, or sharing of waters in the lakes or rivers can be discussed and resolved in the regional blocs meetings.
- Easy to obtain big grants or loans for big regional projects from donors of financing organizations.
- Attracting big investors who now target not one country but a region of countries, with a big market and GDP.
- With a common currency, such as the Euro in the EU, there is increased flow of trade and investment as the challenges of currency convertibility are removed. In the EU, all countries use the Euro as the common currency.
The factors against economic integration
- Trade diversion: This is the process of efficient producers losing out to inefficient ones. If one of the member states industries and services sector are more developed than those of other members, less developed members may lose out. If joining leads to the replacement of low-cost imports from outside the zone with higher-cost goods from member nations—the case of trade diversion—a country loses.
- Loss of tax revenue: When countries integrate and agree and remove internal (with the region) trade taxes, individual countries lose customs revenue. Developing countries in Africa depend largely on trade taxes but the regional integration removes those taxes from inter-region trade.
- Most developing countries produce and trade in almost similar commodities and therefore find that a regional market may not be meaningful. Instead, these countries need to import capital goods from developed nations to use to grow industries or undertake commercial farming.
- Lack of good infrastructure still hampers smooth inter–regional trade among developing countries
- Political factors still influence the inter–regional trade and effective operations of regional blocs. There is continuing mistrust among leaders in most regional blocs in Africa – with some leaders alleging that a leader(s) of member(s) state(s) is plotting to overthrow his government.
- Uneven growth and development among member states can result in most industries being located in country. During first EAC, and currently, Kenya is seen to be leading in industries and services – where most Kenyan financial services dominate in the EAC.
- Member states consumer may be consuming for of the goods and services from within the region, whose taxes have been eliminated, but not that good quality.
- It requires that all member states tighten the administration of imports from third countries to reduce infiltration without paying taxes of those from neighbors that are not members.
