The Economics of International Integration

Peter Robson

• Publisher: Routledge
• Year: 2002
• ISBN:
  9781134751693
• Edition: 4
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

International economic integration can in many ways be seen as one of the everyday consequences of globalization. As communication lines grow shorter, more and more countries are seeing the use in hacking down trade barriers. This new edition of Peter Robson's classic text will doubtless please its many fans

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INTRODUCTION

International economic integration, often termed regionalism, may be defined as the institutional combination of separate national economies into larger economic blocs or communities. Integration in this sense first took off in the late 1950s when the European Economic Community (EEC) was set up under the Treaty of Rome of 1956. Led by this example, regionalism soon spread throughout Africa, Latin America and other parts of the world in the 1960s, leading Haberler (1964) to characterize our era as ‘the age of integration’. Earlier examples of regional blocs can be found before the 1960s, but those established in the twentieth century were nearly all associated with either imperialism or colonialism. Soviet imperialism gave rise to COMECON, which was set up in 1949, while British colonialism and French colonialism were separately responsible for the creation of a number of African blocs. For most of the 1970s regionalism, though widespread, made little real headway outside Europe.

From the mid 1980s, regionalism has developed a remarkable new impetus. This new phase was marked by the successive enlargements of the European Community (EC) and its policy-deepening measures; by new initiatives in North America following the conversion of the US to the merits of free trade areas after years of hostility to regionalism; and by attempts to relaunch existing arrangements in Latin America, the Caribbean, Africa, South East Asia and Australasia and to establish new ones. The diverse initiatives of the new wave of integration differ markedly from earlier arrangements in their implications, approach and motivation, partly as a result of changes in the global policy context, and partly as a result of the identification of new sources of gain from regional integration. The outcome, in any case, is that today regional integration is just as striking an institutional feature of the world economy as it was when Haberler first drew attention to its spread more than thirty years ago. The claims made on its behalf and its effects merit close analysis.

THE SCOPE OF THE SUBJECT

Economic integration is basically concerned with the promotion of efficiency in resource use on a regional basis. Necessary conditions for its fullest attainment include: the elimination of all barriers to the free movement of goods and factors of production within the integrated area; and of discrimination on the basis of nationality amongst the members of the group in that respect. In addition, where resources are allocated by the price mechanism, measures will be required to ensure that the market provides the right signals. Institutions will also be required to give effect to the integrating force of the market. The term negative integration was coined by Tinbergen (1965) to denote those aspects of regional integration that simply involve the removal of discrimination and of restrictions on movement, such as arise in a process of regional trade liberalization. This he contrasted with positive integration, which he saw as concerned with the modification of existing instruments and institutions and the creation of new ones, for the purpose of enabling the market to function effectively and also to promote other broader policy objectives in the union.

Arrangements for international economic integration take a variety of forms. For analytical purposes the principal ones to distinguish are customs unions, free trade areas, common markets, monetary unions, and economic and monetary unions. Between customs unions at one extreme and economic unions at the other, a spectrum of forms of integration may be envisaged, corresponding to the degree of integration, harmonization or co-ordination of other policies that is adopted. All such arrangements for international economic integration rest on the conclusion of agreements among the member states that are intended to have a lasting character, and which limit the unilateral use of those instruments of economic policy that are harmonized. The customs union (CU) is a basic form of integration, and the one with which orthodox theory is mainly concerned. It is characterized by a common external tariff (CET), tariff-free trade amongst its members, and the integration of tariff policy. The core of the EEC was such a customs union. The nineteenth-century Zollverein amongst the German states is an important early example. The free trade area is a related form of integration that, like the customs union, is also exclusively trade-focused. Currently this form enjoys considerable support and indeed, in numerical terms, free trade areas outnumber customs unions. Like the customs union, the free trade area is characterized by tariff-free trade amongst its members, but each country continues to determine its own external tariff. The European Free Trade Association (EFTA), that was established in reaction to the formation of the EEC, is a leading example of this kind of arrangement. The Canada—US Free Trade Agreement (CUFTA) took this form, as does the North American Free Trade Agreement (NAFTA), which brings together the US, Canada and Mexico.

A common market is a third form of regional integration in which there is not only a common external tariff and tariff-free movement of goods and services, but also freedom of movement for factors of production—labour, capital and enterprise. The EC was popularly termed a common market from its inception, but it only began to fulfil the requirements of a fully unified market thirty years later as a result of action taken after 1985, following the adoption of wide-ranging proposals to complete the internal market. The action taken to implement these proposals in a variety of spheres was a necessary precursor to the inauguration of the Single European Market in 1993.

Monetary union is another form of regional integration. Its establishment requires the adoption of a single currency, central bank and monetary policy. Normally monetary union is found only in conjunction with a customs union or a common market. Conventional wisdom suggests that monetary union should follow and not precede the institution of arrangements for market integration. Few examples exist of monetary unions amongst independent states except in Africa, although multi-country currency boards which share some of their qualities are found in the Caribbean and elsewhere. Under the Maastricht Treaty on European Union of 1992 (CEC, 1992a), the EU is committed to the establishment of a monetary union and it is planned that a single currency will be introduced on 1 January 1999.

Economic and monetary union is the most developed form of integration. This form of regional integration, which the EU is to implement under the Maastricht Treaty, involves both a common market and a common money and the integration or harmonization of a range of policies in other areas. Whether and to what extent the operation of an economic and monetary union also requires fiscal integration in the shape of a significant community budget and the co-ordination and convergence of national budgetary policies in relation to deficit financing and debt policies is a subject of debate. As far as the EU is concerned, fiscal criteria have been laid down in the Maastricht Treaty that not only define fiscal qualifications for entry into the monetary union, but will also govern subsequent national budgetary practice.

Arrangements for international economic integration clearly involve the acceptance of constraints on national policy making. And the farther along the road between customs union and economic and monetary union that countries progress, the greater those constraints become. What induces countries to accept such constraints? Evidently, twentieth-centry initiatives have been influenced by both political and economic objectives and there may in some instances have been a significant trade-off between the two. COMECON, for instance, had political benefits to the USSR as a means of politically delinking Eastern Europe from the West, but it proved costly to the Soviet Union in economic terms (Marrese and Vanous, 1983). Likewise, the Southern African Customs Union (SACU) is of doubtful economic value to South Africa on its present terms, but it produced substantial political benefits. The EC itself was strongly rooted in both political and economic goals, but for most of its members there were advantages in membership from both points of view. The importance of the political element as a factor in understanding the actual progress of economic integration throughout the world can scarcely be overrated. From the policy standpoint, the role of economic analysis is to identify and to quantify the economic effects and issues, so as to provide a basis for judging whether and to what extent the economic impacts reinforce or run counter to the political considerations. What are the expected economic benefits that provide the motivation for forgoing policy independence in relation to trade, factor movements and other major policy areas? The orthodox approach looks at this question in terms of the effects of integration on efficiency and welfare, and almost entirely in terms of static resource allocation gains.

It demonstrates that both customs unions and free trade areas can generate potential gains in terms of the national income of the bloc by encouraging specialization amongst the member countries on the basis of comparative advantage. A common market can generate additional gains in real income by overcoming the barriers to factor mobility that allow differences in factor productivities to exist in the bloc. Although factor mobility can be a major source of additional gains over and above those generated by trade blocs like customs unions, free factor movement within a bloc does entail important additional constraints on national policies by making it difficult or impossible for national authorities to maintain autonomous jurisdiction in key policy areas, including taxation. In this sense, it is ultimately unobstructed factor mobility—factor market integration—that creates an integrated economy out of separate national economic entities. Essentially the orthodox gains from product and factor market integration arise from increased specialization according to comparative advantage among countries with different economic characteristics. This will result in a growth of intra-bloc trade of an inter-sectoral or inter-industry character. If economies of scale are introduced, market size itself becomes a source of integration gains which may then be derived from specialization even where member countries possess similar economic characteristics. A further source of potential gain may arise from improvements in the terms of trade of the bloc with the rest of the world.

One major problem with the traditional theory is that, like the orthodox theory of international trade from which it sprang, it fails to explain the phenomenon of trade in similar products between member countries. Yet this kind of trade, termed intra-industry trade, was from the outset a marked feature of the expansion of intra-EC trade that followed the establishment of the customs union. In the early 1980s, two main explanations were developed for the phenomenon. One centred on the interaction of scale economies with product differentiation (Krugman, 1979). The other focused on monopolistic competition and the incentives it provides for active market segmentation by producers to permit the charging of separate prices in different markets (Brander and Krugman, 1983). These theories have been applied to the economics of international integration and have substantially changed its thrust, first by identifying new sources of potential allocational gains from market integration that result from its pro-competitive effects, and second by providing plausible grounds for supposing that the gains from market integration in an imperfectly competitive situation would be much larger than the orthodox customs union approach might suggest.

The allocational gains from market integration, even in the broader context just outlined, are only one aspect of the economics of integration. Further allocational gains may also be derived from regional integration in respect of activities in which there are significant cross-border spill-overs in private activities and public policies. Furthermore, integration may affect the location of production, and, through this and other channnels, may have important implications for the geographical distributional of the gains from integration. The traditional theory focuses on the benefits to the bloc as a whole. Since it cannot be assumed that, even though integration is potentially beneficial to a bloc, market forces would necessarily produce an accceptable outcome for all member states, the compensation issue cannot be ignored. Market integration may also have effects on capital accumulation and growth. Finally, monetary integration may have important implications for economic stability.

An analysis of the effects of international economic integration must therefore extend far beyond the traditional theory of market integration. This is reflected in the evolution of the post-Vinerian literature, which now has several main pillars, although its main emphasis continues to be on allocational gains. The analysis of certain other aspects—notably the accumulation and growth dimension—remains relatively underdeveloped. One important implication of the broader scope of the subject is that it evidently requires the evaluation of integration arrangements by reference to a broader set of criteria or goals than that of efficiency in resource allocation, which alone is considered in orthodox customs union theory. This poses the issue of the relative weight to be attached to the attainment of the different objectives by member states and the bloc, and of a possible trade-off between the attainment of one or other of the objectives. Ultimately, international economic integration has to be viewed as a state or process for enabling its participants to achieve a variety of common goals more effectively by joint or integrated action than they could by unilateral measures. In this light, as Tinbergen’s pioneering contribution emphasized, it is concerned with the problem of policy optimization in a broad sense within the integrated area. The contribution of international economic integration to the more effectual attainment of policy objectives can thus be appraised only in terms of a cost—benefit analysis that reflects the weight attached to all relevant dimensions of welfare and the terms on which they can be traded off against one another.

The role of economic integration in that context in any case must be viewed in its proper dimensions. Membership of an economic bloc cannot of itself guarantee satisfactory economic performance to a member state, or to the group as a whole, or even better performance than in the past, whatever the criteria employed. The purely static gains from integration, although they may be significant, can be—and often are—dwarfed by the operation of factors of domestic or international origin that have nothing to do with integration. Moreover, many of the more fundamental factors influencing a country’s economic performance are dynamic and these are unlikely to be affected by integration except in the long run. The experience of many countries throughout the world, some of them very small, makes it plain that it is not a necessary condition for economic success that a country should be a member of an economic community, although this does not exclude the possibility that some of those that have been successful without integration might have performed even better as members of a suitable group. Above all, regional integration is plainly no substitute for sound domestic economic policies, and is unlikely to succeed in their absence. Nevertheless, there are many sources of potential gain from regional arrangements amongst suitable partners that have been identified by economic analysis. There exists an expanding range of empirical studies that attempt to calibrate the orders of magnitude of those gains for specific regional initiatives.

THE EMERGENCE OF THE THEORY OF INTERNATIONAL ECONOMIC INTEGRATION

The branch of economic analysis that deals formally with the economics of regional international economic integration is of quite recent origin. The core of the subject is the theory of customs unions, which is commonly regarded as having taken shape with the publication of Viner’s pioneering study (1950), although important contemporary contributions were also made by de Beers (1941) and Byé (1950).

This view of the late origins of customs union theory appears to be essentially well founded. The pre-Vinerian literature on customs unions in the twentieth century is sparse, and some of it suggests that, before the publication of Viner’s study, economists simply regarded customs unions as a step on the road to free trade.

This is not to say that some of the more sophisticated ideas underlying current orthodoxy cannot be found in earlier writings. Since as many as sixteen customs unions were formed between 1818 and 1924, it would be surprising if this were not the case, for it is hardly to be imagined that the classical and neoclassical economists would have been wholly blind to their implications. O’Brien (1976), however, takes a more extreme position and has contended that the central features of the Vinerian analysis of customs unions—namely, trade creation and trade diversion—were a matter of essentially correct analysis by classical economists in the nineteenth century.

The classical economists certainly discussed at length the effects of preferential commercial treaties such as the Methuen Treaty of 1703 (which admitted Portuguese wines into Great Britain on preferential terms in return for the removal of a prohibition on British woollen exports to Portugal) and the Cobden (Anglo-French) Treaty of 1860. In their turn, Adam Smith (1776), Ricardo (1817) and McCulloch (1832) each attacked the Methuen Treaty, essentially on the grounds of its trade-diverting effects. The Cobden Treaty also generated lively debate on its trade effects, and trade diversion was an issue in that debate. Moreover, when the German Zollverein, the most notable example of a customs union to be formed in the nineteenth century, was established in 1834, McCulloch and others subjected its provisions to detailed scrutiny in the course of which its diversionary trade effects were paid particular attention. In a different analytical tradition, the German economist List (1885) clearly viewed customs unions as protective devices for promoting infant industries, and in this way he can be said to have anticipated a stream of modern customs union theorizing initiated by Johnson (1965) and Cooper and Massell (1965).

Relying on such contributions as these, O’Brien has claimed that:

all Viner did was to start from the position of the classical economists and of Hawtrey and Lord Robbins, and then simply add to this the logical possibility of some trade creation, depending on the relative height of the preunion tariff and the common external tariff, and/or the possibility that both countries in the union were producers of the goods in question.

(1976, p. 560)

Strictly speaking, this may be true, but this apparently simple addition, embodying the concept of trade creation, is crucial to the orthodox theory of customs unions, since it is the sole source of benefit in that context. It is not clear that earlier economists appreciated its significance, as distinct from the idea of trade expansion. In any event, the discussions of customs unions by classical and neoclassical economists were largely incidental to their consideration of broader issues, and any theory was largely implicit. It is fair to say that historians of economic thought (Machlup, 1977) have failed to disclose any adequate treatment of the allocational effects of customs unions in the literature prior to the studies of Viner (apart from the work of de Beers, who was himself a pupil of Viner) and Byé. Those two economists together deserve to share the credit for their innovative theoretical insights, and for providing the first explicit formulation of a systematic analytical foundation for customs union theory. In any case, however significant the contributions of their forerunners are judged to be, it must be accepted that customs union theory is only one part of the economics of international integration. Not until the 1950s did there begin to develop, initially on the basis of policy-driven studies by economists such as Shoup (1953), Meade (1953, 1955a), and Tinbergen (1965), a major body of theoretical literature dealing systematically with the impact of other dimensions of policy integration, including its monetary, fiscal and spatial aspects, and much of this literature is in fact the product of the last fifteen years.

THE PRESENT REACH OF INTERNATIONAL ECONOMIC INTEGRATION: A GLOBAL PERSPECTIVE

During the past four ...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• FIGURES AND TABLES
• ABBREVIATIONS AND ACRONYMS
• PREFACE
• 1. INTRODUCTION
• 2. THE THEORY OF CUSTOMS UNIONS AND FREE TRADE AREAS
• 3. BROADENING THE FRAMEWORK
• 4. CUSTOMS UNIONS VERSUS UNILATERAL TARIFF REDUCTION
• 5. THE RATIONALE FOR THE INTEGRATION OF OTHER ECONOMIC POLICIES
• 6. THE THEORY OF COMMON MARKETS
• 7. THE NEW ECONOMICS OF MARKET INTEGRATION
• 8. TRANSNATIONAL CORPORATIONS AND REGIONAL INTEGRATION
• 9. FISCAL INTEGRATION
• 10. FISCAL HARMONIZATION
• 11. MONETARY INTEGRATION
• 12. EQUITY, COHESION AND CONVERGENCE: REGIONAL ISSUES
• 13. ECONOMIC INTEGRATION IN A GLOBAL PERSPECTIVE: EXPERIENCE AND INITIATIVES
• REFERENCES AND SELECT BIBLIOGRAPHY