Economic Integration
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Economic Integration
This is an agreement between countries in a geographic region to remove or reduce both tariff and non-tariff barriers to allow free movement of goods, services and factors of production.
It is a discriminatory removal of all barriers of economic cooperation.
The goal is to increase trade, investment and living standards of the people.
Economic integration is greatly influenced by;
- Technology
- Public policy
- Tastes.
Although each of the above factors has an impact on economic integration, they closely interrelate in important ways.
The following factors have greatly influenced the pattern and pace of economic integration;
- Trade in goods and services
- Movements of capital and integration of financial markets
- Human migration.
The theory of economic integration states that each country is better suited to engage in certain activities other than others. Some countries are rich in labour,,some natural resources and others capital, hence if capital and labour are free to move across international borders, each country can capitalize on its advantage.
Countries with great amount of capital will concentrate on the economic activities that require greater capital investment such as emerging technologies and pharmaceuticals. In addition, they will export capital-intensive goods and services and import labour intensive goods and services. This will eventually lead to increased labour supply and consequently force wages to go down, as more people will be competing for the same jobs.
On the other hand, countries with more labour, will focus their economic activities on industries that rely on a great amount of labour like manufacturing because labour is cheap. Eventually, the supply of labour will decrease, leading to increased wages.
LEVELS OF ECONOMIC INTEGRATION
There are five levels of economic integration namely;
- Economic Union; This is also known as a single market. The member countries eliminate barriers to trade and movement of capital and labour, enabling workers to move and work in member countries. They have a common trade policy against non members, and they coordinate their economic policies. The tax, monetary and fiscal policies are harmonized, Implying a level of political integration. Example; European Union. The member countries use a common currency.
- Common Market; Is where Countries remove all barriers to trade .and allows movement of labour and capital. They have a common trade policy against non-members. There’s free movement of people and cross border investments. It requires cooperation in economic and labour policy, hence difficult to attain. Examples; Comesa, CARICOM.
- Free Trade Area; Countries remove all barriers to trade among members, but each country determines its own barriers to trade against the non-members. The countries establish a way to solve any member disputes. The general goal of free trade agreements is to develop economies of scale and comparative advantages, promoting economic efficiency.
- Customs Union; Countries removes all barriers to trade among members and establish a common trade policy against non-members. Nonmembers are treated the same. The member countries may negotiate as the same entity with other organizations such as the World Trade Organization.
- Political Union; The members have a common policy on economic and political systems regarding non-members. The members can set up certain political and economic policies within their territories.
It is important to note that as the level of economic integration increases, the complexity increases too. This involves a set of numerous regulations, enforcement and arbitration mechanisms.
THE EFFECTS OF ECONOMIC INTEGRATION
Economic integration has both advantages and disadvantages.
Advantages
- Trade is increase. This is because the consumers and buyers have a wider selection of goods and services at cheaper prices. The lower costs lead to high demand for the goods since the buyers have more money to purchase the products.
- Increased employment opportunities since there is freedom of movement of people from one country to another. Through these people are able to search for higher paying jobs.
- Political cooperation: Many nations together have a greater political power than individual nations. It reduces possibilities of military conflicts between the member countries.
- Improved Consensus because of the eliminated trade barriers between the member countries.
- There is increased competition leading to product innovation.
- No member country can manipulate its exchange rates to protect its economy from shocks in other member countries.
- It leads to Pareto reallocation of the factors of production such as capital and labour. Labour moves to areas of high wages and capital to areas of high return.
- There is temporary unemployment because when the inefficient firms exit from the market,, their employees move to the other firms.
Disadvantages
- Reduced trade with a more efficient non-member country in favor of a less efficient member country because of reduced tariffs.
- Leads to loss of national sovereignty because integration requires member nations to surrender more sovereignty.
- It leads to shift in employment because of the eliminated barriers to trade. The industries that required unskilled labour shift their production to low wage nations.