Understanding economic integration

By Hussain Mohi-ud-Din Qadri

Global economic integration, a generally rising trend, does not constitute a new
phenomenon. Even during ancient times, according to Mussa (2000),
communication and trade occurred between distant civilizations. Since Marco
Polo’s travels, global economic integration included communication of
economically useful knowledge and technology, factor movements and trade.
Even though the globalization 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 interwar 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 globalization has reportedly been
particularly rapid during the past half century.

There are three fundamental factors that currently affect the process of
economic globalization 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 e.g.,
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:

1: Economic welfare. The prosperity of all participating countries is enhanced

by overcoming the inefficiencies of nationally segmented economies through
specialisation of production and through cooperation in policy making, the two
basic elements of economic integration.

2: 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.

3: 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.

4: 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 cooperation. 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 Cooperation Organisation (ECO) aims to promote economic,
technical, and cultural cooperation among its member states. Origins of the ECO
may be found in its forerunner, the Regional Cooperation for Development
(RCD), founded in 1964, with ECO’s identical goals and working procedure.
The activities of ECO are organized through the eight working groups or
technical committees in the fields of: Economic and commercial cooperation,
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 organizations 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.

(Continued)

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