TYPES OF ECONOMIC INTEGRATION

PROJECT ON
A STUDY ON TYPES OF ECONOMIC
INTEGRATION

SUBMITTED BY
ASHISH S. TIWARI
ROLL NO. A-90

M.COM PART I (SEMESTER - I)

2015-2016

UNDER THE GUIDANCE OF

PROF. DIPTI PAREKH

SUBMITTED TO
UNIVERSITY OF MUMBAI

NIRMALA MEMORIAL FOUNDATION

COLLEGE OF
COMMERCE AND SCIENCE
90 FEET ROAD, ASHA NAGAR, THAKUR

TYPES OF ECONOMIC INTEGRATION

COMPLEX,
KANDIVALI (E), MUMBAI-400 101.
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

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

TYPES OF ECONOMIC INTEGRATION

Student
(Ashish
S.Tiwari)

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.

TYPES OF ECONOMIC INTEGRATION

DateMumbai
S.Tiwari )

TYPES OF
ECONOMIC
INTEGRATION

(Ashish

TYPES OF ECONOMIC INTEGRATION

INDEX
SR.N
O

TOPIC

1.
2.

INTRODUCTION
OBJECTIVE & THEORY OF ECONOMIC
INTEGRATION

3.

TYPES OF ECONOMIC
INTEGRATION

4.

BENEFIT OF ECONOMIC INTEGRATION

5.

EFFECT OF ECONOMIC INTEGRATION

6.

CONCLUSION

7.

BIBLIOGARPHY

PG.N
O

TYPES OF ECONOMIC INTEGRATION

1.
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
productivity of the states.
The trade stimulation effects intended by means of economic integration are
part of the contemporary 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 option, 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.

TYPES OF ECONOMIC INTEGRATION

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.

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 interdependent 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

2.
OBJECTIVE OF ECONOMIC
INTEGRATION

Obtain economic benefits.

Helps in economic growth by increase in foreign investments.
To strengthen political ties.
The bargaining strength of the union improves.
Protect infant industries.

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
development 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 proposed for
intercontinental economic blocks, such as the Comprehensive Economic
Partnership for East Asia and the Transatlantic Free Trade Area.

TYPES OF ECONOMIC INTEGRATION

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 quantities 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 Portugal than England, it is cheaper still for
Portugal to produce excess wine, and trade that for English 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 advantage, 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 producers average cost per
unit to fall as the scale of output is increased. 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
justification 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 market.

THEORY OF ECONOMIC
INTEGRATION
The framework of the theory of economic integration was laid out by Jacob
Viner (1950) who defined the trade creation and trade diversion effects, the
terms introduced for the change of interregional flow of goods caused by
changes in customs tariffs due to the creation of an economic 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

TYPES OF ECONOMIC INTEGRATION

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 Bla
Balassa in the 1960s. As economic integration increases, the barriers of trade
between markets diminish. Balassa believed that supranational common
markets, with their free movement of economic factors across national
borders, naturally generate demand for further integration, not only
economically (via monetary unions) but also politicallyand, thus, that
economic communities naturally 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 interdisciplinary
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 creation and trade diversion effects (inter-regional output
flows).
The straightforward conclusion from the findings is that one may use the
accumulated knowledge of the exact and natural sciences (physics,
biodynamic, and chemical kinetics) and apply them towards the analysis and
forecasting of economic dynamics.

SUCCESS FACTORS

TYPES OF ECONOMIC INTEGRATION

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 unification); "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
implemented to use a different speed of economic unification (coherence)
applied both to economic 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
Kirgyzstan. It is also the creation of BRICS with the bank of its members, and notably
high motivation 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
economic activity.

TYPES OF ECONOMIC INTEGRATION

3.
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

TYPES OF ECONOMIC INTEGRATION

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
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.

TYPES OF ECONOMIC INTEGRATION

7.POLITICAL UNION
Represents the potentially most advanced form of integration with a common government
The level of Economic integration as opposed to its complexity is illustrated in the graph below:

TYPES OF ECONOMIC INTEGRATION

4.
BENEFITS OF ECONOMIC INTEGRATION
1. PROGRESS

IN TRADE

All 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 countrys
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,

TYPES OF ECONOMIC INTEGRATION

people and the economies involved in the process

CONTENTS
The European Union is not the only international
organisation immersed 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, Cambodia, Indonesia,
Laos, Malaysia, Myanmar, the Philippines, Singapore,
Thailand and Vietnam.
Southern Common Market (MERCOSUR):
Argentina, Brazil, Paraguay, Uruguay, Venezuela and
Bolivia.
Central American Common Market (CACM): Costa
Rica, El Salvador, Guatemala, Honduras and
Nicaragua.
Bolivarian Alliance for the Peoples of Our
America (ALBA TCP): Venezuela, Cuba, Bolivia,
Nicaragua, Dominica, Ecuador, San Vicente 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 production.
POSITIVE INTEGRATION: this refers to the
creation of a common sovereignty through the

TYPES OF ECONOMIC INTEGRATION

modification of existing institutions and the creation

of new ones.

SOUTH ASIAN ASSOCIATION FOR REGIONAL COOPERATION (SAARC).

In recent years, the global economy is witnessing certain dynamic and
unprecented changes. Regional economic integration is a prominent feature. It is the
youngest grouping among the seven countries, namely, India, Pakistan, Maldives, Sri
Lanka, Bangladesh, Bhutan and Nepal.

The following are the main objectives of SAARC:

1. To promote the socio-economics welfare and cultural development of the
people in the region.
2. To achieve the goal of collective self-reliance.
3. To encourage active collaboration in the economic social, technical and
scientific among the grouping nations.
4. To strengthen over-all co-operation and harmonious economic and political
relations among the grouping nations of the SAARC.
5. To facilitate optimum utilization of human and material resources.
6. To develop free regional trade
7. To stimulate investment flow and accelerate pace of economic development.
There are evidences to show that there is ample scope for extending trade and
economic relations. These countries compete for trade with other countries. E.g.: India
and Bangladesh compete for jute in the international market while, India, Sri Lanka and
Pakistan compete for readymade garments.

TYPES OF ECONOMIC INTEGRATION

5.
EFFECT OF ECONOMIC INTEGRATION
STATIC EFFECTS: SHORT-TERM EFFECTS (SHIFT
OF PRODUCTION)
Trade creation: production shifts to more efficient member countries from inefficient
domestic or outside countries.
Trade diversion: production shift to inefficient member countries from more efficient
outsiders.

DYNAMIC EFFECTS: LONG-TERM EFFECTS

Cost reduction due to economies of scale
Cost reduction due to increased competition
Effects of Economic Integration Irrespective of the actual motives that drive
integration arrangements, boante and ex-post economic analyses of
economic integration are undertaken to:
Identify the economic effects and issues relating to such
formations. and
Quantify the economic effects of such formations. Identification
of economic effects is of course guided by theory whereas
quantification of such economic effects belongs to empirical
work.
Empirical studies measuring effects of economic integration have dealt
basically with three issues related to the RIA arrangements described
above:

TYPES OF ECONOMIC INTEGRATION

The extent to which economies are integrated,

The aggregate effects of integration on trade and other variables
influencing welfare.
(c) The distribution of costs and benefits of economic integration.

TRADE DEFLECTION: Goods produced in a third country enter a free trade area
with the help of a member countries.

NATIONAL SOVEREIGNTY: Member countries should surrender certain

some amount of control related to the important policies like trade, monetary and fiscal
policies

It requires coherence of the policies (customs, tax, financial, social policies etc. and entity
registration) applied in integrated states. Economic parameters (domestic savings rate,
tax rates, etc.) are striving to one single multitude. Coherence policy finally leads to equal
multi-dimensional economic space within integrated area. At the same time, it is very
similar to the process of mixing differently colored liquids in a retort: coherence leads to
one final color in a retort.[1]
It needs permanency of economic integration stages applied to unified states (free trade
area, customs union, economic union, political union). Otherwise integration process
stagnates, finally leading to termination of economic unions (Belgium-Luxemburg Union).
Economic integration leads to Pareto-reallocation of the factors (labor and capital) which
move towards their better exploitation. Labor moves to area of higher wages, while
capital - to area with higher returns. It was found [2] that the pair of the value added of
sectors and labor disperse within a region in the same way as heat or gas in a space.
Domestic saving rates in the member states of economically integrated region strive to
the one and same magnitude, described by the coherence policy of economic blocks. At
the same time, practical observation shows that this phenomenon is taking place before
formal creation of economic unions.
Formulation of economic integration theory has been initiated by Jacob Viner who
described trade creation and trade diversion effects caused by economic integration.
They actually mean a change in direction of interregional trade flows respectively caused
by the change of tariffs within and outside economic union. The dynamics of trade

TYPES OF ECONOMIC INTEGRATION

creation and diversion effects was mathematically described by R.T.Dalimov. The finding
shows that trade flow (an output moving from region to region) may be described by
Navier-Stoxes equation, with the goods flow caused by the price difference - quite similar
to gas or liquid moving under pressure difference.
Economic integration of states leads to the creation of the terms of trade. Economic
union of states obtains more privileged position in trade negotiations.
Economic integration benefits (growth of economy, specifically the GDP; raise of
productivity) depend on the level of development as well as a scale of unifying states. For
instance, if there are two states being economically integrated, than the larger is the size
of economy the less it receives from integration and vice versa (observed empirically).
The same principle is observed regarding the level of development of integrating states,
although it is not as clear as the firstly mentioned principle. Productivity in the unified
area is increased. Remarkably, it is increased more in less developed states, and vice
versa (Dalimov, 2008), i.e. according to the principle observed in practice.
Among the main benefits for the countries which decided to be unified is a free access to
markets of the other member states. Since the stage of the common market, or since
supranational bodies of the union are created, specific regional funds are created to
reallocate revenues from more developed states to less developed ones. This way
development of the member states is equalized, with less developed ones developing
faster, leading to an increase of their earnings per capita and thus purchasing more from
more developed partner states.
Economic integration has no war consequence. The European Union has started with
agreement between France, Great Britain, Belgium and Luxemburg - on the ohe hand,
and Italy and Germany, on the other hand, fought with each other during World War II. In
other words, economic integration unites nations, leading them to prosper with each
other.

TYPES OF ECONOMIC INTEGRATION

6.
CONCLUSION
The meaning of the term economic integration vanes between various
branches of economics. In the context of international economic relationships,
it means the state of affairs as well as the process subscribing to economic
links between two or more countries generally in the market framework. This
term had not been used in economics in quite in this context before the
1940s. Even at present, the are a several terms used to refer to the same
phenomenon: fusion, cooperation, openness, interdependence etc. In the
context of economic efficiency economic integration is found in the area of the
second best policy. The term economic integration is used to refer to either
partial or general integration. A precise definition of economic integration has
not been found even at present as various theorists continue to provide
different views on the meaning of integration. It however deals with the
process of removal of barriers to international movements of goods, factors
and technology and also deals with the consequences of such movements.
Hence economic integration is concerned with the economic effects of
integration in its various forms and with problems that arise from divergences
in national monetary, fiscal and other policies. It is also concerned with the
manner in which integration comes about. ie. Whether it results from
unilateral reduction or removal of barriers to trade or whether it comes
through the process of multilateral negotiations possibly under multilateral
agencies like the World Trade Organization (WTO) [formerly the General
Agreement on Tariff and Trade (GATT)] or whether it come through what might
be called 'managed free trade' within a small group of nations. Regional
economic integration is both a state and process of economic links between
two or more countries and within only a subset of countries in the world,
generally close to each other, measured in a geographical context. In general
a common economic space is created within such groups, benefits of which
are designed to be exclusive for members. There are many stages of

TYPES OF ECONOMIC INTEGRATION

integration classified from FT A to TEl for analytical purposes. Integration
arrangements in the real world do not conform to these patterns. The scheme
189 Economic' Integration itself has been evolved based on the experience of
the European Union. The new development like open regionalism is designed
not to disadvantage non-members while it strengthens economic integration
between the members. Liberalization of economic policy between economies
of different sizes may draw industries away from small countries into larger
ones as is predicted in new trade models. This creates a bias in favor of larger
countries in the pattern of integration.

7.
BIBLIOGARPHY
Websites:

www.google.com
http://scholar.google.com
www.managementparadise.com
www.scribd.com