Regional economic integration for developing countries

REGIONAL ECONOMIC
INTEGRATION
A BROAD
DISSCUSSIO
N

REGIONAL ECONOMIC
INTEGRATION
1. Regional Economic Integration (REI) refers to the
commercial policy of discriminatively reducing or eliminating
trade barriers only between the states joining together.
2. Regional economic groups eliminate or reduce trade tariffs
(and other trade barriers) among the Partner States while
maintaining tariffs or barriers for the rest of the world (non-
member countries).
3. Geographical proximity, cultural, historical, and ideological
similarities, competitive or complementary economic
linkages, and a common language among the Partner
States are importantly required for effective economic
integration. M V S SAI HEMANT 3

REGIONAL ECONOMIC
INTEGRATION:AIM
The aim of economic integration is to lessen
costs for both consumers and
producers, in addition to increase trade
between the countries taking part in the
agreement.
M V S SAI HEMANT 4

OBJECTIV
ES
REGIONAL ECONOMIC
INTEGRATION

REGIONAL ECONOMIC
INTEGRATION:
OBJECTIVES
A primary economic objective of integration is to
raise:
a) real output and income of the participants
&
b) rate of growth
by increasing specialization and competition
by facilitating desirable structural (linkages) changes.
M V S SAI HEMANT 7

REGIONAL ECONOMIC
INTEGRATION:
OBJECTIVES
1. Increase of Trade.
2. Allowing Consumers to Spend More.
3. Movement of Capital.
4. Economic Cooperation
M V S SAI HEMANT 8

INCREASE OF TRADE
A simple constituent of economic integration
policies is elimination of the additional
payments or tariffs, making trade low-
priced and giving exporters a superior
incentive to do business with integrated
economies.
M V S SAI HEMANT 9

ALLOWING CONSUMERS
TO SPEND MORE
Economic integration reduces or eliminates customs
duties, which in turn results in cheaper imported
products for consumers.
This way, the purchasing power of consumers
grows, and with it, activity in the market.
The public can start buying more imported products
or spend former duty expenses on other
products or services.
In addition, goods that are not produced in
sufficient quantities in one country can be
imported and distributed in the market at low cost.
M V S SAI HEMANT 10

MOVEMENT OF CAPITAL
The benefit of capital movement is the
investment in new markets, leading to their
eventual development.
Economic integration removes barriers to
foreign investors, minimizing or abolishing
extra tax, while advanced integration policies,
such as a monetary union, can even
eliminate the cost of currency exchange
M V S SAI HEMANT 11

ECONOMIC
COOPERATION
When economies within the integrated area
encounter problems, it is the duty of other
members to help, not only as a moral
obligation, but because a failing economy can
have serious effects on the whole integration
process.
For this reason, European Union countries have
offered to bail out the troubled economies of Greece,
Ireland and Portugal
M V S SAI HEMANT 12

REGIONAL ECONOMIC
INTEGRATION FORMS

SIMPLE FORMS OF
REGIONAL INTEGRATION
Bilateral Investment Treaty (BIT)
Trade and Investment Framework
Agreement (TIFA)
M V S SAI HEMANT 14

BILATERAL INVESTMENT
TREATY (BIT)
A bilateral investment treaty (BIT) is
an agreement establishing the terms
and conditions for private investment
(FDI) by nationals and companies of
one state in another state.
BITs are established through trade
pacts.
M V S SAI HEMANT 15

TRADE & INVESTMENT
FRAMEWORK
AGREEMENT (TIFA)
A trade pact between countries that seeks to
develop the necessary structures or
frameworks, such as committees and trade
councils, that will move the trading countries
closer to a free trade agreement.
It is a form of economic integration.
M V S SAI HEMANT 21

USA & BANGLADESH TIFA
M V S SAI HEMANT 22

REGIONAL ECONOMIC
INTEGRATION : FORMS
Regional economic groupings can take several forms
raging from the
1.Preferential Trade Agreement (PTA)
2.Free Trade Area (FTA)
3.Customs Union
4.Common Market
5.Economic Union
6.Political Union.
These forms are diverse, involving different levels of
economic integration. M V S SAI HEMANT 23

PREFERENTIAL TRADE
AGREEMENT (PTA)
A preferential trade area (also preferential trade
agreement, PTA) is a trading bloc that gives
preferential access to certain products from the
participating countries. This is done by reducing tariffs but
not by abolishing them completely. A PTA can be
established through a trade pact.
EXAMPLE
Lome’s Convention, 1975 is a trade and aid
agreement between:
71 African, Caribbean, and Pacific (ACP) countries
and
The European Community (then known as EuropeanM V S SAI HEMANT 24

FREE TRADE
AGREEMENT (FTA)
A free-trade area is the region encompassing a
trade bloc whose member countries have signed a
free-trade agreement (FTA). Such agreements
involve cooperation between at least two countries
to abolish or reduce trade barriers – import quotas
and tariffs – and to increase trade of goods and
services with each other.
EXAMPLE
Columbia/ USA FTA
M V S SAI HEMANT 25

CUSTOMS UNION
A customs union is a type of trade bloc which is
composed of a free trade area with a common
external tariff.
The tariffs are then shared among members
according to a prescribed formula.
Example - The EU (1960-1990).
M V S SAI HEMANT 28

COMMON MARKET
Members of a common market remove barriers to
trade in goods and services among themselves,
establish a common trade policy with respect to
non-members (common external tariff) and remove
restrictions on the movement of factors of
production (labor, capital, Land & entrepreneur)
across borders.
Restrictions on immigration, emigration, and cross-
border investments are abolished.
Members cooperate closely on monetary, fiscal, and
employment policies.
Example –
EU since 1990s.
M V S SAI HEMANT 30

ECONOMIC UNION
Members of an Economic Union:
1.remove barriers to trade in goods and services among
themselves;
2.establish a common trade policy with respect to non-
members (common external tariff);
3.remove restrictions on the movement of factors of
production (labor, capital, and technology) across borders;
and
4.Coordinate their economic policies (monetary, fiscal,
taxation, and social welfare) so as to blend their economies
into a single entity.
Example –
M V S SAI HEMANT 31

POLITICAL UNION
1.Remove barriers to trade in goods and services
among themselves;
2.Establish a common trade policy with respect
to non-members (common external tariff);
3.Remove restrictions on the movement of
factors of production (labor, capital, and
technology) across borders; and
4.Coordinate their economic policies (monetary,
fiscal, taxation, and social welfare) so as to blend
their economies into a single entity.
5.It involves the unification of previously
separate states.
M V S SAI HEMANT 32

Most trade groups contain countries in the same area of
the world (although not necessarily), for the reasons that,
The distance that goods need to travel between such
countries is short and consumers’ tastes and preferences
are likely to be similar,
Distribution channels can be easily established in adjacent
countries resulting in reduced distribution cost.
Another reason is that the neighboring countries may have
a common history and interests, and they may be more
willing to coordinate their policies.
WHY MOST OF THE REI’S IS
FORMED IN SAME REGION?
M V S SAI HEMANT 36

REGIONAL ECONOMIC
INTEGRATION
FORCES /
MOTIVATION
S

FORCES / MOTIVATIONS OF
REI
1. Degree of integration depends upon the
willingness and commitment of
independent sovereign states to share
their sovereignty.
2. Economic aspects and political aspects as
the main motives of economic integration.
M V S SAI HEMANT 38

ECONOMIC
ASPECTS/FORCES THAT
MOTIVATES REGIONAL
ECONOMIC INTEGRATION
Reducing uncertainties
Improving credibility
Thus making it easier for the private
sector to plan and invest.
M V S SAI HEMANT 39

ECONOMIC EFFECTS OF
REGIONAL INTEGRATION
1. Trade Creation
2. Trade Diversion
M V S SAI HEMANT 40

TRADE CREATION
Trade creation occurs when common external trade policy
and internal free trade lead to a shift in production from
high to the low cost Partner State in the community.
TRADE DIVERSION
Trade diversion on the other hand arises when imports
from the rest of the world are replaced by more expensive
imports from the partner country.
The overall gain depends on whether trade creation is
larger than trade diversion.
M V S SAI HEMANT 41

POLITICAL
ASPECTS/FORCES THAT
MOTIVATES REGIONAL
Many regional economic communities have been
driven by political rather than economic goals.
These political objectives include,
1.National Security
2.Structure of Governance : Macroeconomic Policies
3.Democracy
4.Human rights.
M V S SAI HEMANT 44

NATIONAL SECURITY
Regional economic integration can enhance security
because it increases the level of trade between
member countries and, in so doing, increases
familiarity between the people of the member
countries and lessens the degree of misconception.
It can also be a means through which democracy
and governance objectives can be pursued and to
lock in changes in political institutions.
It may also worsen security and this is likely to
happen where the distribution of transfers is
asymmetric between the member states.
M V S SAI HEMANT 45

BENEFITS OF REGIONAL
Regional Economic Integration offers many benefits to the
participating member countries. However, these benefits
are not pre-determined and they depend among other
things on the internal design of the integration including the
degree of political commitments by the Member States.
An important feature of the higher levels of economic
integration is free trade among members and this free
trade is expected to lead to a rapid increase of trade which
in turn is likely to lead to rapid economic growth.
These gains result from the dynamic effects of integration
which are cumulative in nature and lead to growth.
M V S SAI HEMANT 46

The dynamic effects of integration are often described as
the long-run consequences of economic growth of member
states as a result of
increased market size
exploitation of economies of scale
increased competition
learning by doing
increased investment.
The larger the integration (in terms of the size) the more
likely it is to lead to growth since the larger the integration,
the larger the market created and so on. Also, the stronger
the potential economies of scale are, and the more rapid the
autonomous productivity advances, the more likely the
integration will lead to growth.
M V S SAI HEMANT 47

economic integration can also serve as incentives for
investment and attraction of Foreign Direct Investment
(FDI).
General reforms such as stabilization, market liberalization,
and privatization adopted under regional arrangements can
raise returns to all factors and are likely to be more than
enough to increase private investment.
Economic integration can help to ensure that production is
located according to comparative advantage in each
member states which in turn will lead to specialization
which will further lead to increased output and services thus
making the whole region better off as a result of such
specialization scheme.
M V S SAI HEMANT 48

NEED FOR REGIONAL
IN DEVELOPING
COUNTRIES
1. To promote a balanced division of labor among a group of
countries.
2. To achieve Economies of Scale.
3. Isolated tiny national economies has to give way to strategic
alliances that harness knowledge and resource based
comparative advantages through integration.
4. One of the major problems developing countries face is the
formulation and implementation of good macro economic
policies. Consequently, these countries have experienced
instability in their macroeconomic environment and thus regional
integration can help them to harmonize their macro policies,
including fiscal and monetary policy and to achieve a stable
macroeconomic environment within the integrated economies.
M V S SAI HEMANT 49

REGIONAL ECONOMIC
INTEGRATION EXAMPLES

EXAMPLE OF REI
United States is the perfect
example of economic integration-
the largest economy comprised
of fifty states in the continental
United States plus Alaska and
Hawaii,
common currency,
perfect labor
capital mobility
and however it is just a single
country.
M V S SAI HEMANT 51

EXAMPLE OF REI :
EUROPEAN UNION
The European Union is a unique economic union between 28
European countries that together cover much of the continent.
The EU is based on the rule of law: everything it does is founded on
treaties, voluntarily and democratically agreed by its member
countries.
Mobility of Factors of Production
Growth in Living standards of people
Market stability : Single Market
Single currency : EURO
Human rights
Equality
EU is also known as one of the best examples of REI.
M V S SAI HEMANT 52

European Union which began in
1951
established of the European
Coal and Steel Community
(ECSC)
by six countries, namely; The
Netherlands, Britain, Italy,
Luxembourg, France and the
then West Germany.
This was followed by the
establishment of the European
Economic Community (EEC) in
1957
European Free Trade
Association (EFTA) in 1960.
These schemes and more
importantly the survival and
apparent success of the EEC
triggered a proliferation of
integration schemes in Latin
America, Asia and Africa. M V S SAI HEMANT 53

M V S SAI HEMANTM V S SAI HEMANT
BBA FOREIGN TRADEBBA FOREIGN TRADE
UPES, DEHRADUNUPES, DEHRADUN
UTTARAKHAND, INDIAUTTARAKHAND, INDIAM V S SAI HEMANT 55

Regional economic integration for developing countries

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