Concept of Economics Intergration

Economic integration passes through different stages of development before reaching the highest or final stage as follows:

1. Preferential trade area (PTA)
2. Free trade area or free trade
3. Custom union
4. Common market
5. Economic union

a. Preferential trade area (PTA)

This refers to the initial stage of economic integration whereby member countries agreed to make gradual reductions of trade barriers (tariffs) among member countries as the way of reducing international cost of trading and enjoying international benefits. Example: PTA of COMESA

b. Free trade

This is the second stage of economic integration whereby member countries agreed to eliminate all trade barriers against movement of goods and services from one country to other countries. In the free trade area, member countries agreed to create free movement of goods and services from one country to another but each country forms own barriers and tariffs against non-members.

c. Custom union

This is the stage of economic integration which involves elimination of trade barriers within a region to create free movement of goods and services (free trade) and member countries form common tariffs to non-members.

d. Common market

This is the stage of common integration whereby member countries agreed to create free movement of goods and services (free trade) and form common trade barriers against non-members and free movement of factors of production such as labour, capital, entrepreneurs within a region or member countries. Under common market, people are free to work, to invest and own land within a member country. Example of common market is East African Common Market.

e. Economic union

This is the highest form of economic integration whereby member countries agreed to create free movement of goods and services, free movement of factors of production such as land, labour, capital and entrepreneurs, formation of common tariffs against non-members. Furthermore, countries agreed to create common policies such as fiscal policies, monetary policy, trade policy and other economic policies within a region. While well developed economic union uses same currency in transaction. Example of economic union is European Union which uses euro currency.

Successful economic integration is the one which achieves pre-determined objectives within a specified period of time or at given desired resources (cost). The following are necessary factors for successful formation of economic integration.

1. Countries should be geographically close This facilitates easier transactions, reducing transaction costs and making it easier for countries to interact and meet.
2. Production of different commodities Specialization in different sectors enables countries to trade what they produce and buy what they cannot produce, benefiting from mutual trade.
3. Use of similar or low variation currencies Having similar currencies or currencies with low value variation promotes trade and reduces barriers in international trade.
4. Political stability among members Stable governments encourage production activities and smooth international transactions within the integrated group.
5. Equal level of development among countries Successful integration is more likely if member countries have similar levels of development (e.g., developing countries should integrate with others at similar stages). This prevents unequal trade outcomes.
6. Similar goals and determination Countries need common objectives and a shared determination to facilitate the creation of common strategies and policies to achieve integration.
7. Availability of improved economic infrastructure Adequate transport and communication systems are necessary to facilitate the smooth movement of people and goods between countries.
8. Similar political and economic ideology Member countries should have a similar economic system, employing common policies and strategies to achieve regional objectives.

All economic integrations may have the following benefits in general.

1. Increased market volume and trade It expands the market size, allowing for greater trade opportunities both within the integrated area and internationally.
2. Increased collective bargaining power Countries can bargain collectively for their benefits, especially in export prices, as opposed to negotiating individually.
3. Improvement in social and economic infrastructure Integration fosters joint policies for improving infrastructure such as roads, railways, schools, hospitals, and airports.
4. Technological advancement The integration process encourages the free movement of goods, people, and ideas, leading to the transfer and development of technology within member countries.
5. Increase in employment With free movement of labor, investment opportunities, and the ability to work anywhere within the region, employment opportunities increase, benefiting all member countries.
6. Maintenance of peace and security Integration often leads to the formulation of common strategies for maintaining peace and security among member states, promoting regional political stability.
7. Increase in supply and production of goods and services Investment and free movement of goods and services boost the supply of products within the region, increasing consumer choice and utility.
8. Trade creation Trade creation refers to purchasing goods at lower prices within the region compared to sourcing them from non-member countries, enhancing regional economic activity.
9. Stimulation of competition Economic integration encourages competition among firms, leading to higher efficiency and better quality of goods and services exchanged.
10. Promotion of social, political, and economic cooperation Social, political, and economic cooperation improves within integrated countries, resulting in greater regional benefits.

Most economic integrations formed by developed countries has the following disadvantages in general.

1. Increase in imports leading to unfavorable balance of payment Countries with weaker economic bases may experience an increase in import demand, which could result in a deficit in their balance of payments.
2. Excessive competition causing decline in infant industries Economic integration can introduce strong competition that threatens infant domestic industries and leads to unemployment in the affected countries.
3. Loss of government revenue The reduction or elimination of tariffs (taxes on imports) within integrated regions may result in a decrease in government revenue from customs duties.
4. Increase in importation of low-quality and harmful products Economic integration can turn a country into a dumping ground for low-quality and harmful goods from other countries.
5. Occurrence of imported inflation Countries may experience imported inflation due to the inflationary pressures from trading with countries already affected by high inflation.
6. Unequal gains from integration Countries within an economic integration may experience unequal gains because of differences in industrial development and imbalanced trade relations.
7. Cultural destruction Interaction among countries with different cultures could lead to cultural erosion, as foreign values and practices overshadow local traditions.
8. Trade diversion Trade diversion occurs when countries within the integration block purchase goods at higher prices from other member countries, rather than sourcing cheaper alternatives from non-member nations.

Most economic integrations in developing countries like EAC, SADC, and ECOWAS face the following problems:

1. Shortage of funds for running integration activities Many integration efforts are hindered by a lack of financial resources, preventing the region from achieving its goals and completing necessary economic activities.
2. Political instability Political conflicts, whether internal or from neighboring countries, can disrupt social and economic activities within the integration zone.
3. Low technological development The lack of advanced technology in many LDCs limits industrial development and reduces the efficiency of investments and production within the integration area.
4. Underdeveloped infrastructure Poor roads, railways, and communication networks in many developing countries hinder the movement of people, goods, and services, limiting regional production and trade.
5. Lack of political commitment and poor governance Bad governance and lack of political commitment among member countries can undermine efforts to meet common goals, as individual countries often prioritize their own benefits over regional integration.
6. Low levels of education and skill The lack of education and skills among the population in many developing countries limits investment opportunities and economic activities, stalling growth and development within the region.
7. Market storage and price fluctuation Most LDCs in economic integration produce similar agricultural products, leading to market saturation and price volatility, which can cause losses for producers.
8. Rapid population growth Rapid population growth in many LDCs places pressure on resources, leads to environmental degradation, causes unemployment, and brings about other socio-economic challenges like poor health and communicable diseases.