Section 5555 Regional Economic Cooperation and Integration Ba Ba PDF

Regional Integration Arrangements
International Economics I (Econ 3081)
BA Degree in Economics
Section 5: Regional Economic Integration/Cooperation
Mengesha Yayo(Ph.D.)
AAU, Department of Economics

December , 2021
International Economics I (Econ 3081) BA Degre

Mengesha.Y(Ph.D.)
Definition of Baisc Concept: Regional Economic In
The Rationale for Integration Schemes
Regional Integration Arrangements Stage/Forms/ of Regional Economic Integration
Static Vs Dynamic Effect of Regional Econo
Regional Economic Integration in Africa
Content covered
. Regional Integration Arrangements

The Definition of Basic Concept
The Forms of Integration
Trade Deflection and Rules of Origin
The Theory of Customs Union (CU)
The Static Effects of a CU
The Dynamic Effects of a CU
The Limitations of the Theory of CU
Historical Background of Regional Integration in Africa

Mengesha.Y(Ph.D.)
Definition : Regional Economic integration
There are different aspects of regional integration, and these include economic,
social and political aspects.
Regional integration schemes are famous ways in which regions embark on their
integration.
There are differences, however, in the manner in which regional integration
schemes have been implemented across the world, as well as in the results
obtained by different regions.
The main difference is in the extent of commitment to the application of
regional integration in economic integration schemes in both developed
and developing counties.

Mengesha.Y(Ph.D.)
Before the 1950s, the term economic integration was used as a generic term to
refer to every conceivable aspect of international economic relations including
Trade and monetary relations,
Capital and labor movements and
Even international cooperation for such purposes as the control of
pollution, the exploitation of the seabed and the regulation of air
transport (Robson, 1980:1).

Mengesha.Y(Ph.D.)
But since 1950,

it has been used more specifically to refer to a process of combing
separate economies in to large economies regions (Alemayehu, 2006:4).
The term ‘economic integration ‘is specifically meant to refer to either
regional economic integration or international economic integration.
Whereas, international economic integration is synonymous with
globalization, regional economic integration limits economic to a
particular region (Mandyo, 2008:11).

Mengesha.Y(Ph.D.)
Economists have defined the term ‘economic integration’ in various ways over
period.
Economic integration is a process of eliminating restrictions on
international trade, payments and factor mobility (Carbaugh, 2004).
Economic integration thus results in the uniting of two or more national
economies in regional trading agreements .
According to Biswaro (2003), regional economic integration involves the
process of trade, economic and financial convergence of integrating states.

Mengesha.Y(Ph.D.)
The economic integration literature clearly distinguishes between regional

economic integration and regional economic cooperation.
Regional economic cooperation is seen more as an ad hoc and temporary
scheme, which is mainly based on contractual agreements with regard to
projects of mutual interest between member states.
Such projects could involve two or more countries in the region.
On the other hand, regional economic integration involves agreements that are
more permanent.

Mengesha.Y(Ph.D.)
Motivation of Regional Economic integration

Mengesha.Y(Ph.D.)
Major Arrangements in Economic Integration/Stage or forms of REI/
Preferential Trade Arrangement ·

Provides lower barriers on trade among participating countries ·
Is the lowest form of economic integration ·
Example: Common wealth countries, most African regional groupings

Mengesha.Y(Ph.D.)
A Free Trade Area ·
All barriers are removed on trade among members

Each country maintains its own barrier to trade with non-members ·
Politically easy to achieve but administrative headaches! Rules of origin
end up complicating administration of free trade areas
Example: EFTA (European Free Trade Area)

Mengesha.Y(Ph.D.)
A Customs Union ·
No tariff or other barriers among members ·
Have a common external tariff barrier against non-members ·
Harmonize trade policies towards the rest of the world
Politically difficult to achieve but administratively easy to run
An example is the European Union.

Mengesha.Y(Ph.D.)
A Common Market ·
Goes beyond customs union by allowing the movement of factors of
production ·
Example: EEC (European Economic Community)
Economic Union ·
Goes beyond common market by harmonizing (even unifying) monetary
and fiscal policy of member countries ·
The most advanced type of economic integration ·
Example: Benelux countries (Belgium, The Netherlands and Luxembourg)

Mengesha.Y(Ph.D.)
Effect of Regional Economic Integration

Mengesha.Y(Ph.D.)
Stattic
Trade creation vs trade diversion
For a given product, trade creation appears when high cost
production is substituted by low cost production because of regional
integration . While economic diversion occurs when low cost
production is substituted by high cost production
Trade creation occurs when high cost domestic production is
replaced by low cost imports from other members.
Trade diversion occurs when low cost imports from
non-members are diverted to high cost imports from member
nations
Labour opportunity cost” effect
Foreign exchange savings’ effect

Mengesha.Y(Ph.D.)
Dynamic
Economies of Scale
Enhancing Bargaining power
Structural Transformation
Efficiency
Competition
Investment And
Growth Capital Formation

Mengesha.Y(Ph.D.)
The motives for regional integration in Africa stemmed from both political and
economic rationales.
Before independence, political integration took the form of dependence of
African states on foreign colonial powers.
After independence, however, this has changed to intraAfrican
cooperation and integration to free the region from external dependence
and to promote self-sufficiency of the region (Robson, 1968).
To this end, Organization for African Unity (OAU) was founded in 1963.

Mengesha.Y(Ph.D.)
At the economic level, the basic motivation for integration emanated from the
need to combat African major economic problems especially after independence.
These problems relate, among others, to the limited economic size of
many African states, poor infrastructure services, landlocked ness of many
of the states.
Regional integration is then seen as the best way to relax these constraints
and to increase intra-regional trade (Robson, 1968; ADB, 2000).
The first effort in this regard was made under OAU by establishing a
specialized commission, the Economic and Social Commission of OAU, in
1963 to coordinate and harmonize the policies of the member states in a
number of fields of economic policy (Robson, 1968).
This effort was further culminated in the signing of the African
Economic Community Treaty (or the Abuja Treaty) in 1991
(Alemayehu and Haile, 2002).

Mengesha.Y(Ph.D.)
Economic integration in Africa is not limited to continent-wide integration only.

There have been substantial developments in sub-regional integrations
and co-operations.
Such attempts have a long history, which can be traced back to 1910 and
1919 with the establishment of the South African Customs Union (SACU)
and the East African Community (EAC), respectively.
However, major regional economic integration schemes (REIS) emerged in
the 1970s (Lyakurwa et al, 1997: 175).
Currently, there is no country in Africa that isn’t a member of at least one
regional economic group (Alemayehu and Haile, 2002).

Mengesha.Y(Ph.D.)
Although it is not possible to list all regional economic communities in Africa,

ADB (2002) lists the following as the major ones. These include,
the Arab Meghreb Union (AMU) of North Africa;
the Economic Community of West African States (ECOWAS),
the West African Economic and Monetary Union (WAEMU, formerly
CEAO), and
the Mano River Union (MRU) of West Africa;
the Central African Monetary and Economic Community (CEMAC,
formerly UDEAC),
the Economic Community of Central African States (ECCAS), and

Mengesha.Y(Ph.D.)
Although it is not possible to list all regional economic communities in Africa,

ADB (2002) lists the following as the major ones. These include,
the Economic Community of Great Lakes (CEPGL) of Central Africa;
the East African Community (EAC) of East Africa;
the Southern African Customs Union (SACU) and
the Southern African Development Community (SADC) of Southern
Africa; and
the Preferential Trade Area of Eastern and Southern Africa (PTA), which
is succeeded by the Common Market for Southern and Eastern Africa
(COMESA).

Mengesha.Y(Ph.D.)
Despite the proliferation of efforts to promote regional integration in Africa,

empirical studies reveal that most regional integration arrangements in the
continent failed either to increase trade or to enhance the region’s overall growth
(Johnson, 1995; Lyakurwa, 1997; ADB, 2000; Alemayehu and Haile, 2002).
The ADB (2000) study shows that between 1970 and the early 1990s,
intra-regional trade as a percentage of total exports of member countries
had actually declined in all major regional groupings with the exception of
AMU, ECOWAS and WAEMU’s predecessor, the West African Economic
Community (CEAO).
Moreover, it is noted that Africa’s regional groupings have failed to
attract direct foreign investment.
Various factors are believed to be responsible for such poor performance.
For instance, ADB (2000) argues that in addition to design and
implementation problems, the narrow pattern of trade, dependence on
primary commodity exports, and the low potential for complementarities
in goods and services as the chief factors.
Mengesha.Y(Ph.D.)
In addition, Johnson (1995: 213) argues that unwillingness of governments to:

(i) surrender sovereignty of macroeconomic policy making;
(ii) face potential consumption costs that may arise by importing from a
high cost member country;
(iii) accept unequal distribution of gains and losses that may follow an
integration agreement; and
(iv) discontinue existing economic ties with non-members, are major
problems.
Similarly, Alemayehu and Haile (2006) noted that, apart from the political and
institutional issues they have emphasized in their study, there are about three
other outstanding issues that greatly hampered regional integration efforts in
Africa (See also Aryeetey and Oduro, 1996, Ayeetey, 2000 and N’dung’u, 2000
for a list of such problems).

Mengesha.Y(Ph.D.)
This list includes the following:

1. The first point relates to the issue of revenue loss.
Reducing trade barriers in economies where tariff revenue is one of
the most significant sources of government revenue complicates the
inter-temporal tradeoff between the apparent short-term loss of
revenue and the expected long-term benefits emanating from
regional integration.
2. The second outstanding issue relates to compensation issues and
variation in initial condition.
This relates to the issue of appropriate mechanisms that ensure
gainers are compensating losers in the short run and losses are
minimized in the long run.
3. The final outstanding issues relate to the problem of poor private
sector participation.
To the extent that implementation of the treaties requires the
understanding, conviction, and confidence of the private sector, an
active involvement of this sector in particular and the general public
at large in general are crucial.
Mengesha.Y(Ph.D.)
In sum, although the importance of regional economic groupings is crucial to

survive in the increasingly integrating world economy, addressing major obstacles
noted above is a daunting task.
Thus, it is imperative that African governments appreciate this challenge.
Although the task of overcoming these challenges primarily rests on
African countries, their development partners can also play a positive role.
In particular, the latter can play a positive role by fostering regional
support programs such as regional infrastructure provisions.
Countries in Africa need not take integration issues as lingering
pan-African ideology but as an economic survival strategy aimed at
combating marginalization from the global economy (see Alemayehu and
Haile, 2006).

Mengesha.Y(Ph.D.)

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Regional Integration Arrangements

International Economics I (Econ 3081)

Section 5: Regional Economic Integration/Cooperation

AAU, Department of Economics

International Economics I (Econ 3081) BA Degre

. Regional Integration Arrangements

International Economics I (Econ 3081) BA Degre

Definition : Regional Economic integration

International Economics I (Econ 3081) BA Degre

Definition : Regional Economic integration

International Economics I (Econ 3081) BA Degre

Definition : Regional Economic integration

But since 1950,

International Economics I (Econ 3081) BA Degre

Definition : Regional Economic integration

International Economics I (Econ 3081) BA Degre

Definition : Regional Economic integration

The economic integration literature clearly distinguishes between regional

International Economics I (Econ 3081) BA Degre

Motivation of Regional Economic integration

International Economics I (Econ 3081) BA Degre

Major Arrangements in Economic Integration/Stage or forms of REI/

Preferential Trade Arrangement ·

International Economics I (Econ 3081) BA Degre

Major Arrangements in Economic Integration/Stage or forms of REI/

A Free Trade Area ·

All barriers are removed on trade among members

Example: EFTA (European Free Trade Area)

International Economics I (Econ 3081) BA Degre

Major Arrangements in Economic Integration/Stage or forms of REI/

International Economics I (Econ 3081) BA Degre

Major Arrangements in Economic Integration/Stage or forms of REI/

International Economics I (Econ 3081) BA Degre

Effect of Regional Economic Integration

International Economics I (Econ 3081) BA Degre

Effect of Regional Economic Integration

International Economics I (Econ 3081) BA Degre

Effect of Regional Economic Integration

International Economics I (Econ 3081) BA Degre

Regional Economic Integration in Africa

International Economics I (Econ 3081) BA Degre

Regional Economic Integration in Africa

International Economics I (Econ 3081) BA Degre

Regional Economic Integration in Africa

Economic integration in Africa is not limited to continent-wide integration only.

International Economics I (Econ 3081) BA Degre

Regional Economic Integration in Africa

Although it is not possible to list all regional economic communities in Africa,

International Economics I (Econ 3081) BA Degre

Regional Economic Integration in Africa

Although it is not possible to list all regional economic communities in Africa,

International Economics I (Econ 3081) BA Degre

Regional Economic Integration in Africa

Despite the proliferation of efforts to promote regional integration in Africa,

Regional Economic Integration in Africa

In addition, Johnson (1995: 213) argues that unwillingness of governments to:

International Economics I (Econ 3081) BA Degre

Regional Economic Integration in Africa

This list includes the following:

Regional Economic Integration in Africa

In sum, although the importance of regional economic groupings is crucial to

International Economics I (Econ 3081) BA Degre