TYPES OF ECONOMIC INTEGRATION

PROJECT ON A STUDY ON TYPES OF ECONOMIC INTEGRATION

SUBMITTED BYASHISH S. TIWARIROLL NO. A-90

M.COM PART I (SEMESTER - I) 2015-2016

UNDER THE GUIDANCE OFPROF. DIPTI PAREKH

SUBMITTED TOUNIVERSITY OF MUMBAI

NIRMALA MEMORIAL FOUNDATION COLLEGE OFCOMMERCE AND SCIENCE

90 FEET ROAD, ASHA NAGAR, THAKUR COMPLEX, KANDIVALI (E), MUMBAI-400 101.

TYPES OF ECONOMIC INTEGRATION

DECLARATION

I Mr.ASHISH S.TIWARI of M.COM Part 1 (Master of Commerce

Semester – I) hereby declare that I have completed the project on “A

STUDY ON TYPES OF ECONOMIC INTEGRATION as a part of Internal

Examination in the Course of Advanced Cost Accounting during the

academic year 2015-2016.

The information submitted is true and original to best of my

knowledge. Wherever the matter is taken from any published work, I

have included that details in 'reference'.

________________ ________________Date of Submission. Signature of (Ashish S.Tiwari)

TYPES OF ECONOMIC INTEGRATION

CERTIFICATE

This is to certify that the project titled as “A STUDY TYPES OF

ECONOMIC INTEGRATION” has been completed by Mr. ASHISH

S.TIWARI of M.COM Part I (Semester - I) as a part of internal

examination during the academic year 2015-2016.

Project Guide: - _______________

Course Co-ordinator: - _______________

External Examiner: - _______________

Principal: - _______________

TYPES OF ECONOMIC INTEGRATION

ACKNOWLEDGEMENT

I extend my gratitude to Prof. Dipti Parekh for providing guidance

and support during the course of project. She has been a great help

through the making of the project. I thank Nirmala Memorial Foundation

College for giving me the opportunity to work on such a relevant topic.

I also thank the Principal, faculty members and librarian for their

help and other who are indirectly responsible for the completion of this

project. In addition I take this opportunity to thank our M.COM

Coordinator Dr. Alpa Upadhyay for being there with me always to guide

me and for extending her full support.

Date-Mumbai Signature of Student

(Ashish S.Tiwari )

TYPES OF ECONOMIC INTEGRATION

TYPES OF ECONOMIC INTEGRATION

TYPES OF ECONOMIC INTEGRATION

INDEX

SR.NO TOPIC PG.NO

1. INTRODUCTION

2. OBJECTIVE & THEORY OF ECONOMIC INTEGRATION

3. TYPES OF ECONOMIC INTEGRATION

4. BENEFIT OF ECONOMIC INTEGRATION

5. EFFECT OF ECONOMIC INTEGRATION

6. CONCLUSION

7. BIBLIOGARPHY

TYPES OF ECONOMIC INTEGRATION

INTODUCTION OF ECONOMIC INTEGRATION

Economic integration is the unification of economic policies between different states through the partial or full abolition of tariff and non-tariff restrictions on trade taking place among them prior to their integration. This is meant in turn to lead to lower prices for distributors and consumers with the goal of increasing the level of welfare, while leading to and increase of economic pro-ductivity of the states.

The trade stimulation effects intended by means of economic integration are part of the contem-porary economic Theory of the Second Best: where, in theory, the best option is free trade, with free competition and no trade barriers whatsoever. Free trade is treated as an idealistic op-tion, and although realized within certain developed states, economic integration has been thought of as the "second best" option for global trade where barriers to full free trade exist.

Economic integration, process in which two or more states in a broadly defined geographic area reduce a range of trade barriers to advance or protect a set of economic goals

There are varying levels of economic integration, including preferential trade agreements (PTA), free trade areas (FTA), customs unions, common markets and economic and monetary unions. The more integrated the economies become, the fewer trade barriers exist and the more economic and political coordination there is between the member countries.

By integrating the economies of more than one country, the short-term benefits from the use of tariffs and other trade barriers is diminished. At the same time, the more integrated the economies become, the less power the governments of the member nations have to make adjustments that would benefit themselves. In periods of economic growth, being integrated can lead to greater long-term economic benefits; however, in periods of poor growth being integrated can actually make things worse.

TYPES OF ECONOMIC INTEGRATION

CONCEPT OF ECONOMIC INTEGRATION

Regional economic integration is a new and striking idea for the expansion of foreign trade among developing countries. Regional economic integration implies the creation of the most desirable structure of inter-regional economy through the formation of a customs union or of a free, trade within the region and deliberately introducing all desirable elements of coordination and unification.

Generally, such an economic integration would have to pass through three distinct but inter-dependent stages of cooperation, co-ordination and finally, of full integration. So, economic integration may be identified as liberalization of trade as well as factor movements.

Complete economic integration involves a single economic market, a common trade policy, a single currency, a common monetary policy (EMU) together with a single fiscal policy, tax and benefit rates – in short, complete harmonisation of all policies, rates, and economic trade rules.

TYPES OF ECONOMIC INTEGRATION

OBJECTIVE OF ECONOMIC INTEGRATION

There are economic as well as political reasons why nations pursue economic integration. The economic rationale for the increase of trade between member states of economic unions that it is meant to lead to higher productivity. This is one of the reasons for the global scale develop-ment of economic integration, a phenomenon now realized in continental economic blocks such as ASEAN, NAFTA, SACN, the European Union, and the Eurasian Economic Community; and pro-posed for intercontinental economic blocks, such as the Comprehensive Economic Partnership for East Asia and the Transatlantic Free Trade Area.

Comparative advantage refers to the ability of a person or a country to produce a particular good or service at a lowermarginal and opportunity cost over another. Comparative advantage was first described by David Ricardo who explained it in his 1817 book On the Principles of Political Economy and Taxation in an example involving England and Portugal.[3] In Portugal it is possible to produce both wine and cloth with less labour than it would take to produce the same quanti-ties in England. However the relative costs of producing those two goods are different in the two countries. In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore while it is cheaper to produce cloth in Por-tugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for Eng-lish cloth. Conversely England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at a lower price, closer to the cost of cloth. The conclusion drawn is that each country can gain by specializing in the good where it has comparative advan-tage, and trading that good for the other.

Economies of scale refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is in-creased. Economies of scale is a long run concept and refers to reductions in unit cost as the size of a facility and the usage levels of other inputs increase.[4] Economies of scale is also a justifica-tion for economic integration, since some economies of scale may require a larger market than is possible within a particular country — for example, it would not be efficient for Liechtenstein to have its own car maker, if they would only sell to their local market. A lone car maker may be profitable, however, if they export cars to global markets in addition to selling to the local mar-ket.

TYPES OF ECONOMIC INTEGRATION

Besides these economic reasons, the primary reasons why economic integration has been pur-sued in practise are largely political. The Zollverein or German Customs Union of 1867 paved the way for German (partial) unification under Prussian leadership in 1871.

THEORY OF ECONOMIC INTEGRATION The framework of the theory of economic integration was laid out by Jacob Viner (1950) who de-fined the trade creation and trade diversion effects, the terms introduced for the change of in-terregional flow of goods caused by changes in customs tariffs due to the creation of an eco-nomic union. He considered trade flows between two states prior and after their unification, and compared them with the rest of the world. His findings became and still are the foundation of the theory of economic integration. The next attempts to enlarge the static analysis towards three states world (Lipsey, et al.) were not as successful.

The basics of the theory were summarized by the Hungarian economist Béla Balassa in the 1960s. As economic integration increases, the barriers of trade between markets diminish. Bal-assa believed that supranational common markets, with their free movement of economic fac-tors across national borders, naturally generate demand for further integration, not only eco-nomically (via monetary unions) but also politically—and, thus, that economic communities nat-urally evolve into political unions over time.

The dynamic part of international economic integration theory, such as the dynamics of trade creation and trade diversion effects , the Pareto efficiency of factors (labor, capital) and value added, mathematically was introduced by Ravshanbek Dalimov. This provided an interdiscipli-nary approach to the previously static theory of international economic integration, showing what effects take place due to economic integration, as well as enabling the results of the non-linear sciences to be applied to the dynamics of international economic integration.

were successfully applied towards:

1. the dynamics of GDP;

2. price-output dynamics and the dynamic matrix of the outputs of an economy;

3. regional and inter-regional migration of labor income and value added, and to trade cre-ation and trade diversion effects (inter-regional output flows).

The straightforward conclusion from the findings is that one may use the accumulated knowl-edge of the exact and natural sciences (physics, biodynamic, and chemical kinetics) and apply them towards the analysis and forecasting of economic dynamics.

TYPES OF ECONOMIC INTEGRATION

Dynamic analysis has started with a new definition of gross domestic product (GDP), as a differ-ence between aggregate revenues of sectors and investment (a modification of the value added definition of the GDP).

SUCCESS FACTORS Among the requirements for successful development of economic integration are "permanency" in its evolution (a gradual expansion and over time a higher degree of economic/political unifica-tion); "a formula for sharing joint revenues" (customs duties, licensing etc.) between member states (e.g., per capita); "a process for adopting decisions" both economically and politically; and "a will to make concessions" between developed and developing states of the union.

A "coherence" policy is a must for the permanent development of economic unions, being also a property of the economic integration process. Historically the success of the European Coal and Steel Community opened a way for the formation of the European Economic Community (EEC) which involved much more than just the two sectors in the ECSC. So a coherence policy was im-plemented to use a different speed of economic unification (coherence) applied both to eco-nomic sectors and economic policies. Implementation of the coherence principle in adjusting economic policies in the member states of economic block causes economic integration effects.

GLOBAL ECONOMIC INTEGRATION With economics crisis started in 2008 the global economy has started to realize quite a few initiatives on regional level.It is unification between the EU and US, expansion of Eurasian Economic Community (now Eurasia Economic Union) by Armenia and Kirgyzs-tan. It is also the creation of BRICS with the bank of its members, and notably high moti-vation of creating competitive economic structures within Shanghai Organization, also creating the bank with many multi-currency instruments applied. Engine for such fast and dramatic changes was insufficiency of global capital, while one has to mention obvious large political discrepancies witnessed in 2014-2015. Global economy has to overcome this by easing the moves of capital and labor, while this is impossible unless the states will find common point of views in resolving cultural and politic differences which pushed it so far as of now.

Globalization refers to the increasing global relationships of culture, people, and eco-nomic activity.

TYPES OF ECONOMIC INTEGRATION

TYPES OF ECONOMIC INTEGRATION

As you might expect, there are varying degrees or levels of economic integration. Each type of integration represents a particular level of economic integration. You can think of economic integration being on a continuum in which no integration is at one end and complete economic integration is at the other end.

Economic integration may take any one or a combination of the following forms:

1. PREFERENTIAL TRADE AGREEMENT (PTA) A preferential trade agreement is perhaps the weakest form of economic integration. In a PTA countries would offer tariff reductions, though perhaps not eliminations, to a set of partner countries in some product categories. Higher tariffs, perhaps non-discriminatory tariffs, would remain in all remaining product categories.

2. FREE TRADE AREA (FTA) A free trade area occurs when a group of countries agree to eliminate tariffs between themselves, but maintain their own external tariff on imports from the rest of the world. The North American Free Trade Area is an example of a FTA. When the NAFTA is fully implemented, tariffs of automobile imports between the US and Mexico will be zero. However, Mexico may continue to set a different tariff than the US on auto imports from non-NAFTA countries. Because of the different external tariffs, FTAs generally develop elaborate "rules of origin". These rules are designed to prevent goods from being imported into the FTA member country with the lowest tariff and then transshipped to the country with higher tariffs. Of the thousands of pages of text that made up the NAFTA, most of them described rules of origin.

3. CUSTOMS UNION A customs union occurs when a group of countries agree to eliminate tariffs between themselves and set a common external tariff on imports from the rest of the world. The European Union represents such an arrangement. A customs union avoids the problem of developing complicated rules of origin, but introduces the problem of policy coordination. With a customs union, all member countries must be able to agree on tariff rates across many different import industries.

4. COMMON MARKET A common market establishes free trade in goods and services, sets common external tariffs among members and also allows for the free mobility of capital and labor across countries. The

TYPES OF ECONOMIC INTEGRATION

European Union was established as a common market by the Treaty of Rome in 1957, although it took a long time for the transition to take place. Today, EU citizens have a common passport, can work in any EU member country and can invest throughout the union without restriction.

5. ECONOMIC UNION An economic union typically will maintain free trade in goods and services, set common external tariffs among members, allow the free mobility of capital and labor, and will also relegate some fiscal spending responsibilities to a supra-national agency. The European Union's Common Agriculture Policy (CAP) is an example of a type of fiscal coordination indicative of an economic union.

6. MONETARY UNION Monetary union establishes a common currency among a group of countries. This involves the formation of a central monetary authority which will determine monetary policy for the entire group.

Perhaps the best example of an economic and monetary union is the United States. Each US state has its own government which sets policies and laws for its own residents. However, each state cedes control, to some extent, over foreign policy, agricultural policy, welfare policy, and monetary policy to the federal government. Goods, services, labor and capital can all move freely, without restrictions among the US states and the Nations sets a common external trade policy.

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7. POLITICAL UNION Represents the potentially most advanced form of integration with a common government

TYPES OF ECONOMIC INTEGRATION

The level of Economic integration as opposed to its complexity is illustrated in the graph below:

BENEFITS OF ECONOMIC INTEGRATION

TYPES OF ECONOMIC INTEGRATION

1. PROGRESS IN TRADEAll countries that follow economic integration have extremely wide assortment of goods and services from which they can choose. Introduction of economic integration helps in acquiring goods and services at much low costs. This is because the removal of trade barriers reduces or removes the tariffs entirely. Reduced duties and lowered prices save a lot of spare money with countries which can be used for buying more products and services.

2. EASE OF AGREEMENT.

When countries enter into regional integration, they easily get into agreements and stick to them for long periods of time.

3. IMPROVED POLITICAL COOPERATION.

Countries entering economic integration form groups and have greater political influence as compared to influence created by a single nation. Integration is a vital strategy for addressing the effects of political instability and human conflicts that might affect a region.

4. OPPORTUNITIES FOR EMPLOYMENT.

The various options available in economic integration help to liberalize and encourage trade. This results in market expansion due to which high amount of capital is invested in a country’s economy. This creates higher opportunities for employment of people from all over the world. They thus move from one country to another in search of jobs or for earning higher pay.

5. BENEFICIAL FOR FINANCIAL MARKETS .

Economic integration is extremely beneficial for financial markets as it eases firm to borrow finances at low rate if interest. This is because capital liquidity of larger capital market increases and the resultant diversification effect reduces the risks associated with high investment.

6. INCREASE IN FOREIGN DIRECT INVESTMENTS.

Economic integration helps to increase the amount of money in Foreign Direct Investment (FDI). Once firms start FDI, through new operations or by merger, takeover, and acquisition, it becomes an international enterprise.

Thus economic integration is a win-win situation for all the firms, people and the economies involved in the process

TYPES OF ECONOMIC INTEGRATION

CONTENTS The European Union is not the only international organisation im-

mersed in a process of regional integration. In other parts of the world there are similar processes. Here a few examples:

North American Free Trade Agreement (NAFTA): Canada, Mexico and the USA.

Association of Southeast Asian Nations (ASEAN): Brunei, Cambo-dia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singa-pore, Thailand and Vietnam.

Southern Common Market (MERCOSUR): Argentina, Brazil, Paraguay, Uruguay, Venezuela and Bolivia.

Central American Common Market (CACM): Costa Rica, El Sal-vador, Guatemala, Honduras and Nicaragua.

Bolivarian Alliance for the Peoples of Our America (ALBA – TCP): Venezuela, Cuba, Bolivia, Nicaragua, Dominica, Ecuador, San Vi-cente and the Grenadines, and Antigua and Barbuda.

There are essentially two factors that define the economic integration between states:

NEGATIVE INTEGRATION : this implies the elimination of barriers that restrict the movement of goods, services and factors of pro-duction.

POSITIVE INTEGRATION : this refers to the creation of a common sovereignty through the modification of existing institutions and the creation of new ones.

TYPES OF ECONOMIC INTEGRATION