Arab Industrial Integration (RLE Economy of Middle East)

A Strategy for Development

Elias T. Ghantus

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000155914
• Edition: 1
• Topic: Business
• Subtopic: Contabilità finanziaria
• Index: Business

The Arab countries are increasingly recognising their importance as a regional economic grouping. Given the highly skewed distribution of natural, human and financial resources, the course of economic development in the Arab countries seems to be interrelated. Through pooling their resources and markets these countries will not only be able to optimise investment decisions but also broaden the potential for development. This book argues that economic integration is not merely a question of reducing or eliminating discriminatory measures, as emphasised in previous integration attempts. It calls rather for a positive action based on a regional investment strategy which coordinates production programmes, to reap the benefits of specialisation and scale. The book focuses on past industrialisation efforts in the Arab countries and examines the emerging patterns of industrial growth. A pioneering attempt is made to identify specific industries whose economic viability can be enhanced by conceiving them on a regional basis. The book concludes by framing a strategy for an integrated industrial development in the Arab region.

First published in 1982.

PART ONE:
A THEORETICAL FRAMEWORK

1 ECONOMIC INTEGRATION AND DEVELOPMENT

Since the end of World War II, the idea of economic integration among regional groupings gained a growing importance in the realm of international economic relations. In an attempt to emulate the European Economic Community (EEC) various schemes for regional economic integration have been realised in the developing world, though with varying degrees of success. It can be presumed that apart from political considerations, the driving force behind this movement emanates from the potential economic gains made possible by the pooling of markets and use of resources.

It is amply evident from theory and application that economic integration in the context of developing countries exhibits growth reinforcing effects and could act to reduce the cost of economic development in the integrating countries. As such it is usually conceived of as a strategy or paradigm for economic development, rather than a tariff issue as it has been basically treated in the context of developed countries. Indeed, the fact that the theory of economic integration was developed with the case of the industrialised countries in mind, renders this theory of limited relevance to developing countries. This makes it necessary to extend the basic theory of economic integration, which is drawn in ‘static’ terms, by including in the analysis some ‘dynamic’ elements that are inherent in the theory of economic development. Therefore, the main purpose of this chapter will be to develop an appropriate theoretical framework for studying the development implications of economic integration, and to suggest a conceptual approach for economic integration in a typical developing setting. In the introductory part, a brief discussion of the concept and forms of economic integration will be presented, with a view to defining it for the purposes of this study.

Concept and Forms of Economic Integration

The term economic integration denotes either a process or a state of affairs.¹ But the fact that integration theorists have varying conceptions as to what the process of economic integration must entail and to what constitutes a state of integration does not help to formulate a standard definition of this concept.

As a process, economic integration involves essentially the gradual removal of discriminatory barriers between two or more national economies (or alternatively between units of the same economy) with the purpose of optimising economic performance. Myrdal considers that ‘The economy is not integrated unless all avenues are open to everybody and the remuneration paid for productive services are equal’.² But some theorists contend that the process of economic integration is a dual-pronged one; it amounts not only to the removal of discriminatory barriers, but as well the introduction of coordination and harmonisation which ensure the optimal functioning and development of the economy as a whole. Thus, Tinbergen defines integration as ‘the creation of the most desirable structure of international economy, removing artificial hindrances to the optimal operation and introducing deliberately all desirable elements of coordination or unification’.³ This view is based primarily on the general presumption that the release of market forces through ‘negative’ economic integration is not likely to bring about the desired effect and that ‘positive’ economic integration must be instituted through appropriate policy means.

The foregoing brief discussion suggests that when viewed as a state of affairs, the term economic integration refers to a situation characterised by increased economic interdependence and the absence of discrimination between national economies which carries with it optimising effects. It is important to recognise, however, that the concept of economic integration is distinct from the broader concept of economic co-operation. While co-operation comprises various measures aiming at harmonising economic policies and lessening discrimination, economic integration entails measures which suppress some forms of discrimination. But there are some forms of international co-operation which may be regarded as pre-integration stages. For instance, trade consultations or sharing of experiences in planning economic development between two or more countries could be a first step towards some form of economic integration.

It seems that the general approach to economic integration has been inspired by the theoretical writings on the formation of customs unions, within the broader field of international economic relations. This approach focuses on integrating the markets of the participating countries as a means for achieving an optimum reallocation of resources in the integrated area. In this context, several forms of economic integration can be perceived.

The simplest form is the free trade area which involves the elimina- tion of tariffs and quantitative restrictions between member-countries, but each country is allowed to fix its own separate tariff rates on imports from non-member countries. A higher level of economic integration is the customs union, which involves, aside from the elimination of tariffs among member-countries, the unification of tariffs against the outside world. The common market is a still higher level of integration, adding to the customs union situation the removal of restrictions on the movement of factors of production among member-countries. The highest level of integration is the economic union which fuses national economies into a single unit (i.e. a trans-national economy), adding to the common market situation the harmonisation or unification of economic and social policies of member-countries, and this usually calls for the setting up of a supra-national decision-making body.

As will be revealed later in this chapter, economic integration need not embrace all sectors of the economies concerned. Partial integration, limited to one sector or even one industry, has proved to be a more promising form of integration especially among developing countries. Such schemes are often referred to as partial customs unions with investment planning. It is useful to look at partial integration as a joint action to solve common development problems, in the sense that it focuses on production activities which cannot be carried out with relative efficiency by the individual countries concerned. This applies specifically to manufacturing industries whose minimum-efficient-scale of production is larger than could be absorbed by any of the domestic markets. In this respect, partial integration seems to be more fundamental than market integration which is attained through mere trade liberalisation, since it involves from the beginning both investment coordination and trade liberalisation. However, it ought to be conceived as a supplement to, rather than a substitute for, national development efforts in the participating countries.

Obviously, all forms of economic integration have in common two basic features: first, they facilitate trade exchange and specialisation in production in an enlarged market area; and, second, they discriminate against the outside world. The form that economic integration takes depends on the aim and degree of integration desired by the countries concerned. In practice, the higher the level of integration, the greater the limitations on sovereignty of member-countries in carrying out their trade and development policies. This explains to a large extent why progress in the integration process tends to lead to the ‘pooling of sovereignty’. Actual experience shows that this is not specially appealing to developing countries, since their national consciousness is high and economic development to them is a post-independence endeavour. For example, the East African integration experience indicates how after independence the integrating countries started to pursue national economic policies, thus creating much difficulty in maintaining the degree of success in integration attained during colonial rule.⁴

To reconcile this with the desire to reap the benefits of integration, most developing countries have not gone in their integrative efforts beyond the formation of customs unions. Indeed, most developing countries tend to be sensitive to factor mobility (both capital and labour), but they would allow under certain conditions free mobility of goods. It is observed that in most cases developing countries designate their preferential trading arrangements as free trade areas or common markets, either because they aim at more integration or because they wish to conform to the General Agreement on Tariffs and Trade (GATT), which allows for the relaxation of the most-favourednation clauses only in the case of customs unions and free trade areas, but not for preferential arrangements.

For the purposes of this study, the term economic integration will be used in a restricted sense to denote either an integrative system of the customs union type or the process leading to the creation of such a system. This is justified further by the fact that the theory of economic integration is framed in terms of customs unions, and its general analysis is applicable to all forms of integration. No attempt will be made throughout this study to analyse the political motives and implications of economic integration. The analysis will be drawn in purely economic terms. It will be assumed, however, that economic integration is supported by a basic political understanding among the integrating countries, and conversely the increase in interdependence through economic integration can help to diminish the propensity for political conflict. It should be clear that the need to distribute the benefits and costs of integration equitably among the integrating countries, which will be discussed later, means implicitly that the integrating countries would remain as sovereign states.

Theory of Customs Unions

The theory of customs unions was mostly developed in the period following World War II, and is characterised by its slim foundation. It is defined as ‘that branch of tariff theory which deals with the effects of geographically discriminatory changes in trade barriers’.⁵ Its general proposition is that when two or more countries form a customs union the set of relative prices facing producers and consumers are apt to change and the change may be to the ‘benefit’ or ‘detriment’ of the union-members and the world at large.

In point of fact, Viner was the first to challenge the view held by liberal economists that since the formation of a customs union leads to the reduction of tariffs it represents a movement in the direction of universal free trade and thus it enhances economic welfare. His contention was that any customs union contains elements of both freer trade and greater protection, and therefore it is impossible to draw a priori conclusions as to the net gain or loss it entails. Focusing on inter-country substitution in production (under conditions of zero-elasticity of demand and constant cost of production), Viner argued that a customs union increases welfare to the extent that free trade among the union-members causes a reduction of inefficient production, or to the extent that it leads to ‘trade creation’. Similarly, a customs union decreases welfare to the extent that it allows, by discriminating against low-cost producers outside the union, the less efficient union producers to take up the trade flows cancelled by the formation of the union, or to the extent that it leads to ‘trade diversion’. Thus, he concluded that a predominantly trade-creating customs union benefits at least one member and the world at large, whereas a trade-diverting customs union is harmful to at least one member and the world at large.

A major shortcoming of Viner’s analysis is the omission of inter-commodity substitution which arises from the response of consumers to the change in relative prices associated with customs unions. Lipsey and others extended the analysis to include consumption effect, and by doing so they demonstrated that a trade-diverting customs union does not necessarily reduce welfare.⁶ The reasoning was that a customs union results in an unambiguous welfare gain to consumers with respect to intra-union trade, since the removal of tariffs leads to the equalisation of the marginal rate of substitution between the goods in consiimp-tion with their marginal rate of transformation in production, and this welfare gain could be enough to offset the welfare loss arising from trade diversion. Thus Lipsey concluded that in general ‘the consumption effect, like the production effect, can work either to raise or to lower welfare’, and added that ‘if one wishes to predict the welfare effects of a customs union it is necessary to predict the relative strengths of the forces causing trade creation and trade diversion’.⁷

In conjunction with these effects, a customs union may lead to an improvement in the terms of trade of member-countries. This is likely to happen when the elasticity of demand for divertible imports in the union is high and the elasticity of supply of t...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Table of Contents
• List of Tables
• Preface
• List of Abbreviations
• Part One: A Theoretical Framework
• Part Two: The Case of the Arab Middle East
• Select Bibliography
• Index