Understanding economic integration - I

This Article was published in
Business Recorder (July 17, 2010)
The Frontier Post (July 30, 2010)

By Sahibzada Hussain Mohi-ud-Din Qadri

Global economic integration, a generally rising trend, does not constitute a new phenomenon. Even during ancient times, communication and trade occurred between distant civilisations. Since Marco Polo's travels, global economic integration included communication of economically useful knowledge and technology, factor movements and trade.

Even though the globalisation process in the economic domain routinely experienced challenges as well as occasional interruptions, such as the period following the collapse of the Roman Empire or this century's inter-war period, sometimes it did not benefit all of those it affected. Nevertheless, among different societies around the world, the degree of economic integration has regularly risen.

The pace of economic globalisation has reportedly been particularly rapid during the past half century. There are three fundamental factors that currently affect the process of economic globalisation and are predicted to continue driving it in the future.

First, improvements in the technology of transportation and communication have reduced the costs of transporting goods, services, and factors of production and of communicating economically useful knowledge and technology. Second, the tastes of individuals and societies have generally, but not universally, favoured taking advantage of the opportunities provided by declining costs of transportation and communication through increasing economic integration.

Third, public policies have significantly influenced the character and pace of economic integration, although not always in the direction of increasing economic integration. The previous three fundamental factors, which influenced the pattern and pace of economic integration in important dimensions, include the three significant dimensions of economic integration: human migration, trade in goods and services and movements of capital and integration of financial markets.

The term economic integration may be interpreted in two senses. The more usual sense is that economic integration constitutes the process by which member states gradually eliminate economic frontiers between themselves, eg, abolishing national discrimination between integration partners, with the previously disconnected national economic entities progressively merging into a larger whole. "In a static sense, it is the situation, in which national components of a larger economic zone function together as one entity."

The economic frontiers between independent states result in the economies of these states ultimately functioning as one entity, albeit economic integration does not serve as an objective by itself. Instead, it aims to serve higher objective; both economically and politically.

The Business Dictionary.com (2009) defines economic integration simply as "elimination of tariff and non-tariff barriers to the flow of goods, services, and factors of production between a group of nations, or different parts of the same nation".

Molle asserts that the following potential factors may also relate to economic integration:

ECONOMIC WELFARE: The prosperity of all participating countries is enhanced by overcoming the inefficiencies of nationally segmented economies through specialisation of production and through co-operation in policy making, the two basic elements of economic integration.

PEACE AND SECURITY: When countries become dependent upon each other as a result of economic integration, this reduces the chance of armed conflicts between them.

DEMOCRACY: If participation in a group that brings benefits through integration is made conditional on the existence of a parliamentary form of democracy, it is less likely that attempts to overthrow this system of government in a member country will stand much chance of a success.

HUMAN RIGHTS: In much the same way, the respect for human rights may be safeguarded if this is set as a precondition for participation in a scheme for economic integration.

Economic integration is generally achieved through an evolutionary process of regional co-operation. The most outstanding example is the European Union (EU), which after achieving near-complete economic union, is seriously debating about a political union. In the Americas, the most important regional grouping is the North America Free Trade Area (NAFTA).

The Association of South East Asian Nations (ASEAN) is the most successful economic grouping in Asia. These groupings are better positioned than individual countries to exploit opportunities offered by the rapid globalisation of the world economy.

Under the WTO arrangements, these Regional Trading Arrangements (RTAs) are viewed as complements to multilateral free trade. Under the Article XXIV of General Agreement of Tariff and Trade (GATT), regional economic integration agreements are permissible provided that the resulting liberalisation of trade among the countries in the group takes place without raising the pre-existing tariffs against third countries.

Economic Co-operation Organisation (ECO) aims to promote economic, technical, and cultural co-operation among its member states. Origins of the ECO may be found in its forerunner, the Regional Co-operation for Development (RCD), founded in 1964, with the ECO's identical goals and working procedure. The activities of ECO are organised through the eight working groups or technical committees in the fields of economic and commercial co-operation, transport and communications, agriculture, energy, infrastructure and public works, narcotics, educational, scientific and cultural matters.

At the 1992 ECO summit, a very limited system of tariff preferences among member countries was agreed, establishing a 10% reduction on specific tariff lines. The agreement was initially for four years, but would be automatically extended for further periods of two years each.

The ECO summit of 1993 adopted a decision to establish the ECO Development Bank as well as a joint insurance company for shipping and airlines. These global organisations, representing different regions, aim to integrate their member countries in structured economic frameworks for the attainment of the optimal results. The fast-changing geo-strategic imperatives have also made it incumbent upon the world community to protect and promote their interests through regional partnerships.

(To be continued)

(The writer is a PhD candidate in Economics at Australian University)