The Theory of Economic Integration (Routledge Revivals)
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The Theory of Economic Integration (Routledge Revivals)

Bela Balassa

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eBook - ePub

The Theory of Economic Integration (Routledge Revivals)

Bela Balassa

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First published in 1962, The Theory of Economic Integration provides an excellent exposition of a complex and far-reaching topic. Professor Balassa has been remarkably successful in covering so much ground with such care and balance, in a treatment which is neither in any way abstruse nor unnecessarily technical. His book will interest economists in Europe by reason of its subject and treatment, but it is also a valuable and reliable textbook for students tackling integration as part of a course of International Economics and for those studying Public Finance.

He distinguishes between the various forms of integration (free trade area, customs union, common market, economics union, and total integration). In addition, he applies the theoretical principles to current projects such as the European Common Market and Free Trade Area, and to Latin American integration projects.

In offering this theoretical study, the author builds on the conclusions of other writers, but goes beyond this in providing a unifying framework for previous contributions and in exploring questions that in the past received little attention – in particular, the relationship between economic integration and growth (especially the interrelationship between market size and growth, and the implications of various factors for economic growth in an integrated area).

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Economic Theory



Dans la hiérarchie des mots obscurs et sans beauté dont les discussions économiques encombrent notre langue, le terme d’intégration occupe un bon rang.
—Francois Perroux, L’Europe sans rivages (Paris: Presses Universitaires de France, 1954), p. 419
The term economic integration, whatever might have been its earlier history, only recently became a slogan for action, or what the French call more respectfully, une idée force.
—M. A. Heilperin, “Economic Integration: Commercial and Financial Postulates,” in European Integration, ed. C. C. Haines (Baltimore: Johns Hopkins Press, 1957), p. 126

The Concept and Forms of Integration

In everyday usage the word “integration” denotes the bringing together of parts into a whole. In the economic literature the term “economic integration” does not have such a clear-cut meaning. Some authors include social integration in the concept, others subsume different forms of international cooperation under this heading, and the argument has also been advanced that the mere existence of trade relations between independent national economies is a sign of integration.1 We propose to define economic integration as a process and as a state of affairs. Regarded as a process, it encompasses measures designed to abolish discrimination between economic units belonging to different national states; viewed as a state of affairs, it can be represented by the absence of various forms of discrimination between national economies.2
In interpreting our definition, distinction should be made between integration and cooperation. The difference is qualitative as well as quantitative. Whereas cooperation includes actions aimed at lessening discrimination, the process of economic integration comprises measures that entail the suppression of some forms of discrimination. For example, international agreements on trade policies belong to the area of international cooperation, while the removal of trade barriers is an act of economic integration. Distinguishing between cooperation and integration, we put the main characteristics of the latter—the abolition of discrimination within an area—into clearer focus and give the concept definite meaning without unnecessarily diluting it by the inclusion of diverse actions in the field of international cooperation.
Economic integration, as defined here, can take several forms that represent varying degrees of integration. These are a free-trade area, a customs union, a common market, an economic union, and complete economic integration. In a free-trade area, tariffs (and quantitative restrictions) between the participating countries are abolished, but each country retains its own tariffs against nonmembers. Establishing a customs union involves, besides the suppression of discrimination in the field of commodity movements within the union, the equalization of tariffs in trade with nonmember countries. A higher form of economic integration is attained in a common market, where not only trade restrictions but also restrictions on factor movements are abolished. An economic union, as distinct from a common market, combines the suppression of restrictions on commodity and factor movements with some degree of harmonization of national economic policies, in order to remove discrimination that was due to disparities in these policies. Finally, total economic integration presupposes the unification of monetary, fiscal, social, and countercyclical policies and requires the setting-up of a supranational authority whose decisions are binding for the member states.3
Adopting the definition given above, the theory of economic integration will be 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. The theory of economic integration can be regarded as a part of international economics, but it also enlarges the field of international trade theory by exploring the impact of a fusion of national markets on growth and examining the need for the coordination of economic policies in a union. Finally, the theory of economic integration should, incorporate elements of location theory, too. The integration of adjacent countries amounts to the removal of artificial barriers that obstruct continuous economic activity through national frontiers, and the ensuing relocation of production and regional agglomerative and deglomerative tendencies cannot be adequately discussed without making use of the tools of locational analysis.4

The Recent Interest in Economic Integration

In the twentieth century no significant customs unions were formed until the end of the Second World War, although several attempts had been made to integrate the economies of various European countries.5 Without going into a detailed analysis, political obstacles can be singled out as the main causes for the failure of these projects to materialize. A certain degree of integration was achieved during the Second World War via a different route, when—as part of the German Grossraum policy—the Hitlerites endeavored to integrate economically the satellite countries and the occupied territories with Germany. In the latter case, economic integration appeared as a form of imperialist expansion.
The post–Second World War period has seen an enormous increase in the interest in problems of economic integration. In Europe the customs union and later the economic union of the Benelux countries, the European Coal and Steel Community,6 the European Economic Community (Common Market),7 and the European Free Trade Association (the ‘Outer Seven”)8 are manifestations of this movement. Plans have also been made for the establishment of a free-trade area encompassing the countries of the Common Market and the Outer Seven, but negotiations in the years 1957–60 did not meet with success. However, concessions offered in early 1961 by the United Kingdom with regard to the harmonization of tariffs on non-agricultural commodities give promise for the future enlargement of the Common Market in some modified form.9
Besides the European area, Latin America shows the greatest progress in economic integration. The United Nations Economic Commission for Latin America prepared plans for creating a free-trade area to include all Latin-American economies,10 with a view to eventually transforming this free-trade area into a full-fledged customs union. The proposal was not accepted, but agreements have actually been reached in two groupings of these countries. In 1960, six South American states11 and Mexico concluded an agreement (the Monte-video Treaty) to establish the Latin American Free Trade Association, while four Central American countries signed a treaty creating the Central American Common Market.12
The establishment of a customs union is in progress in the West Indies, too. On the Asian continent the possibilities for integration have been considered in Southern Asia, while in Africa different groupings of the newly independent states prepared proposals for eventual economic integration. Such plans have been discussed in regard to the North African Arab countries, between Ghana, Guinea, and the Mali, and between a number of former French dependencies.
The considerations that have prompted these plans for the integration of independent national economies are by no means uniform; various factors must be given different weights in the movement toward economic integration in Europe and on other continents. Leaving aside political considerations for the moment, we shall presently review some of the economic factors operating in Europe and in underdeveloped countries.
The interwar period has witnessed a considerable degree of disintegration of the European and the world economy. On the European scene the mounting trade-and-payments restrictions since 1913 deserve attention. Ingvar Svennilson has shown that, as a result of the increase in trade impediments, the import trade of the advanced industrial countries of Europe shifted from the developed to the less developed economies of this area, which did not specialize in manufactured products.13 This shift implies a decline in competition between the industrial products of the more advanced economies and a decrease in specialization among these countries. But lessening of specialization was characteristic not only among the more advanced European economies but also of the European economy as a whole. This development can be demonstrated by trade and production figures for the period of 1913–38. While the volume of commodity production in Europe increased by 32 per cent during those years, intra-European trade decreased by 10 per cent.14 The formation of a European union can be regarded, then, as a possible solution for the reintegration of European economies.
Another factor responsible for the disintegration of the European economy has been the stepping-up of state intervention in economic affairs in order to counteract cyclical fluctuations, sustain full employment, correct income distribution, and influence growth. Plans for economic integration are designed partly to counteract the element of discrimination inherent in the increased scope of state intervention.
A related argument regards the establishment of customs unions as desirable for mitigating cyclical fluctuations transmitted through foreign-trade relations. The foreign-trade dependence of the European Common Market countries decreases, for example, by about 35 per cent if trade among the six countries is regarded as internal trade. The memory of the depression in the 1930’s gives added weight to this argument. Note, however, that for this proposition to be valid, there is need for some degree of coordination in countercyclical policies among the participating countries.
Last but not least, it is expected that integration will foster the growth of the European economies. This outcome is assumed to be the result of various dynamic factors, such as large-scale economies on a wider market, lessening of uncertainty in intra-area trade, and a faster rate of technological change. In this regard, the increased interest in economic growth has further contributed to the attention given to possibilities of economic integration.
Turning to underdeveloped countries, economic development appears as the primary consideration. Countries following the advice given by protagonists of the balanced-growth doctrine may strive for economic integration in order to ensure a sufficiently large market for the parallel development of new industries. In carrying out programs for industrialization, the exploitation of economies of scale unattainable in the small national markets will assume importance. It is also alleged that establishing a union furthers economic development by increasing the bargaining power and reducing the external vulnerability of the member countries. Finally, the increased interest in integration in the underdeveloped countries may be attributed in part to a desire to imitate the European example and to deliberate efforts to counteract possible trade-diverting effects of the European Common Market.
To summarize, economic integration in Europe serves to avoid discrimination caused by trade-and-payments restrictions and increased state intervention, and it is designed to mitigate cyclical fluctuations and to increase the growth of national income. In under-developed countries, considerations of economic development are of basic importance; further contributing factors are imitative behavior and the endeavor to protect these economies from possible adverse effects of European economic integration.

Integration and Politics

In examining the recent interest in economic integration, we have yet to comment on the role of political factors. There is no doubt that—especially in the case of Europe—political objectives are of great consequence. The avoidance of future wars between France and Germany, the creation of a third force in world politics, and the re-establishment of Western Europe as a world power are frequently mentioned as political goals that would be served by economic integration. Many regard these as primary objectives and relegate economic considerations to second place. No attempt will be made here to evaluate the relative importance of political and economic considerations. This position is taken, partly because this relationship is not quantifiable, partly because a considerable degree of interdependence exists between these factors. Political motives may prompt the first step in economic integration, but economic integration also reacts on the political sphere; similarly, if the initial motives are economic, the need for political unity can arise at a later stage.
From the economic point of view, the basic question is not whether economic or political considerations gave the first impetus to the integration movement, but what the economic effects of integration are likely to be. In some political circles the economic aspects are deliberately minimized and the plan for economic integration is regarded merely as a pawn in the play of political forces. Such a view unduly neglects the economic expediency of the proposal. Even if political motives did have ...