Economic Integration

An economic integration, established on global, continental or regional level, is not a newborn phenomenon. Ever since the voyages of Marco Polo in 1260, (Latham, 1958) the collaboration and integration of world economies- through trade, movements of factors of production and transmission of economically effective knowledge and technology- has been continuously increasing.

The overall process of globalisation and economic integration has been in most cases globally beneficial, but alongside winners it had also created losers, and the progression of economic integration has neither always advanced smoothly nor has it been advantageous to all whom it had affected. The ideas and their implementation leading towards greater economic integration have not always been digested with effortlessness and immediate comprehension, but as it is very common in the world of business, new and brave ideas generally have a long and complicated ‘gestation period’.

This assignment will place an emphasis on depiction of advantages and disadvantages of various levels of economic integration occurring within the European community and also in the global context, and highlighting and evaluating the economic interaction between the European Union and the rest of the world. The rationale of creating cooperative and integrated markets would range from the common desire for social, cultural or political cohesion to the necessity to obtain the most basic economic resources.

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The latter was once portrayed rather intriguingly by Cuban writer and avid advocate of a free-market economy, Jose Marti: “The country that wants to die sells only to one country, and the country that wants to survive sells to more than one. ” (Thinkexist, 2009) A departure from survival could be found in Balassa’s Theory of Economic Integration, where he compares two extreme views of the means and objectives of the economic and political integration- ‘liberalist’ and ‘dirigist’ ideals.

Defenders of economic liberalism (Maurice Allais and Wilhelm Ropke) deem European integration as a restoration and return to the free-trade ideals of the pre-WW1 Europe, while the dirigist standpoint discards the use of market processes and relies purely on non-market economic means without the lifting of trade barriers. Balassa, 1965) A less extreme historic approach, taken by Cook and Piggot, would focus on the achievements of economic integration in the 19th century, particularly the Austro-Hungarian customs union and the zollverein’ in Prussia, which led to nations’ political development, economic prosperity, and most importantly, the unification of Germany. (Cook & Piggot, 1999) There is a clear evidence that integration never happens purely on economic level. (Dearden & McDonald, 2005) The main by-product, or the actual cause of this process, is a political gain.

According to Molle, the political goal of economic integration, such as enhancing economic welfare of voters or equitable income distribution, can be reached by implementing governmental or international policies which would go ‘hand in hand’ with such processes. (Molle, 2001) Clifton argues that it is the belief in the superiority of private ownership which commands political decisions and the role of the states involved. (Clifton et al, 2003) Simon diverts the attention from governments to the large and privately-owned corporations by asking: “.. ether the economic futures of nations or states were actually being determined more within the boardrooms of the world’s largest corporations than in the corridors of government economic ministries. ” (Simon, 1995) Whether the motives behind economic integration are of a political, private or social nature, the execution of this process, at its various stages, normally follows a certain pattern and the aim of integration is always the same: to benefit all parties involved.

Johnson and Turner define the economic integration as a process which primarily concentrates on the elimination of barriers that would hinder the flow of services, goods, labour and capital between states or regions, (Johnson & Turner, 2006) while Dearden and McDonald accentuate that modifications of commercial, environmental, social and some sectoral policies need to be made in order to achieve a significant level of economic integration.

Suranovic emphasizes the importance of effectiveness of communication between all integrated countries and also focuses his attention on the coordination of their trade, fiscal and monetary policies. (Suranovic, 1998) Tinbergen in his ‘International Economic Integration’ recognized two integrational dimensions and identified them as negative and positive.

Negative integration, generally less complicated to reach than the positive, eradicates the measures used by states to obstruct the free flow of economic resources between integrated countries, while the positive integration involves alteration of already existing economic and political instruments and permits international markets to operate more effectively. (Tinbergen, 1965) Example of implementation of the negative dimension could be found in the early stages of the European Union, which, by employing the positive approach, reached the ‘higher’ levels of the economic integration.

It is very seldom that countries involved in the process of integration actually follow a certain pattern, (Holden, 2003) however, there are several formally recognisable phases of economic integration which would take place in this incessant process. (Barnes & Barnes, 1997) All economic theorists concur that each of these stages entails a different degree of obligation by the participating countries, (Johnson & Turner, 2006) and that each stage of integration leads to further and even deeper form of integration.

While Holden, Johnson and Turner distinguish four stages of economic integration- Free Trade Area, Customs Union, Single (common) Market and Economic and Monetary Union; Vickerman, Dearden and McDonald would argue that the ‘p’ between Common Market and Economic and Monetary Union is too wide and should be sealed with Economic Union- a stage where co-ordination of macroeconomic and social policies takes place, but not to the extent of adopting a single currency.

Five stages of economic integration are summarised below: Free Trade Area, generally perceived as the weakest form of economic integration, (Suranovic, 1998) is a trade agreement based on the elimination of quotas, tariff barriers and some other commercial obstructions between signatory countries. (NAFTA, 2009) Members of free trade area retain their non-tariff barriers, national tariffs (when trading outside this economic pact) and also most of their political and economic sovereignty.

Most noticeable active free trade agreements are North American Free Trade Association (1994), Association of Southeast Asian Nations (1967) and Greater Arab Free Trade Area (1997). (WTO, 2009) Customs Union overcomes problems of trade deflection with implementing a common external tariff, (Johnson & Turner, 2006) and this level of economic integration embraces some of Tinbergen’s positive elements.

Europe had experienced customs unions for over a century through Zollverein in Prussia, the Austro-Hungarian Empire and the early stages of the EU (after Treaty of Rome in 1957), but, since 1910, the oldest and still active customs union is The Southern African Customs Union. (WTO, 2009) Common Market enhances the existence of customs union by enabling free (freer) movement of factors of production and also by harmonising business laws and other common policies, such as competition or regional policy.

The establishment of the largest common market in the world, Single European Market, was agreed in 1992, (Dearden & McDonald, 2005) closely followed by Common Market of Eastern and Southern Africa, uniting circa 400 million Africans. (COMESA, 2009) An Economic Union (or Economic Integration) ensures the effectiveness of free trade and distortion-free trade flows by harmonising macroeconomic policies of its members, (Dearden & McDonald, 2005) and thus allowing fixed exchange rates and unified monetary policies to take place.

This stage of economic integration, composed of more positive elements than the common market, was achieved by creating the European Monetary System in 1979. (Harris, 1999) The highest level of integration- Economic and Monetary Union is impossible to reach without a high measure of political and social integration. (Barnes & Barnes, 1997) It comprises of creation of the central bank and adoption of single currency, (Johnson & Turner, 2006) but is often perceived as a concept of centralised supranational power, severely limiting independent action of states and thus damaging their sovereignty.

Because of certain restrictions on movement of labour, various levels of ‘national insurance’ and taxation, and only 16 out of 27 members adopting the single currency, we could conclude that the European Union has only partially succeeded in creating this form of economic union. (Staab, 2008) In order to understand benefits of economic integration we must assess the impact of globalisation on countries and their businesses.

The elimination of many trade barriers and liberalisation of world markets leads to higher competition on a regional and global scale, with strong prospects of seeking out economies of scale and diversification of businesses. (Simon, 1995) An undisputed advantage of economic integration is a trade creation- unified economies generate broader selection of goods and services which were previously not obtainable.

This formation results in the increase of supply from more efficient producers and will also augment members’ national welfare. (Barnes & Barnes, 1997) Suranovic also stresses the opportunity for businesses of any size to enter new markets, which emerged from country’s membership in the economic pact. (Suranovic, 1998) Amongst many success stories in the EU there is one which transcended all- the story of the ‘Celtic Tiger’.

Ireland’s economy has hugely benefited from the trade creation which rose from their EU membership and managed to convert itself from a mainly agricultural society into a modern and technologically advanced one. (Europa, 2009) Resisting “every obstacle the world economy has thrown at it”, Irish gross domestic product has grown every year since the early 1990s (until the global recession in 2008) by at least 4 percent.

Arguably less beneficial factor of economic integration, particularly when considering the effectiveness of the single market, is a trade diversion. By imposing tariff barriers (or common external tariff in the EU), countries within the unified economic area shield their markets and protect their employment by making imported produce more expensive than the domestic one, (Barnes & Barnes, 1997) however, trade diversion can also occur by giving the economic advantage to selected countries by lowering or eliminating tariffs on their export.

Example of the latter would be EU’s attempt to “assuage Europe’s post-colonial guilt” by giving the African-Caribbean-Pacific union preferential access to European markets and thus raising the level of their competitiveness in the Old Continent’s markets. (FT, 2007) Many economists believe that the protectionist aspect of trade diversion could not only be detrimental to consumers, (Suranovic, 1998) but also to countries outside the economic pact, usually being amongst the world’s poorest.

There are incalculable examples of this matter- from “Bra Wars”, (Independent, 2005) cheap shoes or energy-saving light bulbs to imposing barriers to entry on the import of Chinese candles. Stephen Robertson, director of British Retail Consortium, described EU’s trade diversion policies as: "The European Union talks about the benefits of free trade but, yet again, does exactly the opposite. Like a parent constantly indulging a spoilt child, the EU repeatedly featherbeds uncompetitive producers at the expense of consumers and retailers. Guardian, 2008) Economic integration provides businesses with more opportunities and stimuli to expand into the new markets, but this action also creates many new challenges.

United markets and economies are provided with higher and more flexible supply of factors of production and with more equal production conditions, resulting in higher competition and consequently giving consumers more choice. Molle, 2001) Both advantages and disadvantages arise from more vigorous competition- the principle of survival of the fittest’ usually increases efficiency and decreases cost of the final product, but can harm the weaker businesses, resulting in job losses and total company closure. A prime example of this matter would be the company which arguably revolutionised the air-travel in Europe- Ryanair.

Loved by its customers for their cheap fares, but hated by their competitors for damaging their profit margins (or their potential collapse), Ryanair’s ability to benefit from integrated European markets has shown everyone what competition was all about. Guardian, 2005) ‘Borderless’ markets, one of the main advantages of economic integration, enable businesses to benefit from economies of scale. Johnson & Turner, 2006) These permit businesses to spread their overhead costs across a bigger operation, lower the cost of manufacturing, increase their purchasing power and improve the efficiency of company’s logistics. (Parkin et al, 2005) Economies of scale could be accessed by setting up joint ventures or mergers, which would facilitate companies to expand and move into the new markets within the economic union or globally.

Largest corporate merger in history- Vodafone’s (semi-hostile) takeover of German telecommunications provider Mannesmann in 1999 has benefited both companies and their stakeholders, raising enough capital to expand all over Europe and also globally. (BBC, 2000) The downside of economies of scale is the creation of oligopolies and monopolies- existence of these could have damaging impact on the end consumer, on small and medium-sized businesses, and possibly on the transnational economic pact itself.

With European energy giants E. ON, GDF-Suez and EDF being in dangerously close relationship with Russian Gazprom and together dominating the energy supply in the EU, no-one can be sure what the future holds for Europeans. (Independent, 2009) Another advantage of economic integration, especially when reaching the stage of common market or economic and monetary union, is the benefit of four freedoms.

With free movement of goods, services and capital being covered in the previous parts of this assignment, we can now examine the free movement of labour and other advantages associated with this matter. The enlargement in 2004, from 15 to 25 countries, was the most significant in the history of European Union. (Europa, 2009) Ever since then, the migration of labour has played a very important role not only in the employment market, but also in the social and cultural unification of the Old Continent.

Despite labour restrictions by some western EU members on the employment of workers from the last 12 accession states, majority of the European workforce can (or will be able to) freely choose where to reside and seek employment. (Guardian, 2004) Unified labour markets also benefit businesses- not only can they relocate to country or a region where the cost of labour is significantly cheaper, but also can take advantage of employing greater variety of workforce and thus enhance their productivity, efficiency and research and development possibilities.

Great example of this scenario would be the automotive industry in Slovakia- VW’s take-over of car plant near Bratislava in 1991, relocation of Peugeot- Citroen plant in 2006 and the opening of new Kia manufacturing plant just few months later meant great economic boost for Slovakia’s economy and also enabled these car firms to draw advantages from Slovak highly-skilled and low-cost workforce. (Johnson & Turner, 2006) Unlike The World Trade Organisation with its 147 members, countries unified in a regional economic pact are more likely to gain consensus when trying to reach common economic goals.

While the lobbying power of a single country may be fairly insignificant, a group of integrated nations can have momentous political influence and use it as a tool to overcome economic, political and social disputes in their own region or on the global scene. The main contribution of economic integration is therefore safeguarding of peace- it is absolutely crucial to remember that it was the continuous involvement in political and economic integration that unified fragmented post-war Europe.

Euro-sceptics would often stress that the competition within the EU is often weakened by high level of protectionism of national ‘champions’ which traditionally exists amongst some of the key members. National interests of France, Germany or Britain have shaped some of the fundamental European economic policies which have benefited mainly large and uncompetitive corporations. Cook and Piggot described these industrial policies as: “(being) primarily driven by political considerations, dirigisme, and defending national champions.

The issue of national protectionism could be illustrated by looking at the example of substantial financial aid given by the British Government to British Aerospace in 1998. £123 million given to British Aerospace helped the company to secure 2000 jobs which were dependent on the development of a new Airbus aircraft. Despite the clear case of safeguarding of inefficient national firm, many argued that because the BA was a 20 percent shareholder of European giant Airbus this financing could have been justified on the grounds of “promoting a project of common EU interest.

Many theorists believe that the main purpose of economic integration is to unify all the markets globally. (Mussa, 2000) Since the process of barrier-free trade has been occurring purely on regional or continental level, we could concur that another disadvantage of economic integration would be creation of trading blocs. Within these, the abolition of tariffs and quotas encourages their members to trade only amongst themselves and therefore this action can result in increasing trade barriers against non-member countries.

The industrial and social benefits of economic integration are often overshadowed by a threat of the loss of national sovereignty. Some of the political parties in the European Union have failed to understand that in order to profit from deeper level of economic integration, a certain degree of national sovereignty needed to be given up. This required the EU members to sacrifice some of their core monetary and fiscal policies and resulted in the unfortunate rise of strong nationalist feelings amongst some members and in the rejection of certain EU policies.

Complications with the ratification of Lisbon Treaty, Czech and British refusal of accepting the single currency, and, most alarmingly, the increase of popularity of Hungarian Jobbik Party, German NPD or Britain’s BNP are just some of the warning signs indicating that the battle for our cultural, political and economic unification has yet to be won. (BBC, 2009) The crux of the economic integration, at any stage, is the effect it has on every single individual involved. This impact could range from common economic prosperity to a stronger social, political and cultural cohesion between people and their countries, regions or continents.

The essential determiner for successful economic integration is the occurrence of this process through voluntary means- a prosperous economic unity will never arise at sword’s point or facing the barrel of a gun. (Mussa, 2000) Therefore it can be concluded that the voluntariness of our individual and collective economic decisions, which are happening in a free, open and united marketplace, is the vigour driving our world towards a more thriving economic, political, and social future.

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