REGIONAL INTERGRATION

Regional integration is the process by which two or more nation-states agree to co-operate and work closely together to achieve peace, stability and wealth. Usually integration involves one or more written agreements that describe the areas of cooperation in detail, as well as some coordinating bodies representing the countries involved. This co-operation usually begins with economic integration and as it continues, comes to include political integration. Promotion of regional integration remains an important economic and political goal in the world.

Regional integration can be defined along three dimensions:

(i) geographic scope illustrating the number of countries involved in an arrangement (variable geometry),

(ii) thesubstantive coverage or width that is the sector or activity coverage (trade, labor mobility, macro-policies, sector policies, etc.), and

(iii) thedepth of integration to measure the degree of sovereignty a country is ready to surrender, that is from simple coordination or cooperation to deep integration.

Pre-conditions and key principles for successful regional integration

Successful regional integration is premised on a number of pre-conditions. As far as politics is concerned, these relate to the existence of:

(i)              domestic peace/security in countries

(ii)            political and civic commitment and mutual trust among countries.

With regard to economics, there is a need for

(i)              a minimum threshold of macro-economic stability and good financial management in countries (price stability, realistic real exchange rates, etc.)

(ii)            sufficiently broad national reforms to open markets.

Successful integration has to be guided by principles, which would assure that the sub-regional and the national programs are compatible and mutually reinforcing. One such principle, “open-regionalism” which seeks to insure that a sub-regional strategy is bred in the same ideological paradigm as national reform policies.This implies outward-orientation, meaning that sub-regional policies must contribute to lowering and eliminating obstacles to global trade and investment, including tariff and non-tariff barriers. Secondly, it implies a market-driven integration process, meaning that governments must not develop national monopolies, nor should they collude at the sub-regional level to develop multinational monopolies. Thirdly, private sector involvement is implied by the very idea of a well-functioning market. Ultimately, integration is for the benefit of the people of a sub-region; they should be the critical actors, and governments and regional organizations only facilitators through appropriate choices and policies.

The other, “subsidiarity”, provides guidelines for dividing responsibilities between countries and regional organizations for facilitating the integration process. Subsidiarity simply means that regional institutions should be responsible only for those activities that are not better handled at the national level. In return, government must be selective and parsimonious in creating sub-regional organizations and initiatives.

Another principle, “pragmatism/gradualism”, indicates how, given differences in countries conditions, integration may proceed realistically so as to build on demonstration cases and minimize the frequency of policy reversals. Accelerated integration means, fundamentally, credible integration, built on pragmatic, gradual steps that reinforce trust and commitment, and make the process self-perpetuating. It is certainly valuable to have a clear vision of what regional integration should ultimately mean in a sub-region, but experience also strongly suggests that it would be wise to move forward in a pragmatic, gradual fashion, by building blocs and with timetables and targets that are credible and realistic.

Major reasons for Regional Integration

Traditional Gains from Regional Integration Arrangements

1.     Trade gains: If goods are sufficiently strong substitutes, regional trade agreements will cause the demand for third party goods to decrease, which will drive down prices. In addition, more acute competition in the trade zone may induce outside firms to cut prices to maintain exports to the region. This will create a positive terms of trade effect for member countries. However, the move to free trade between partners who maintain significant tariffs vis-à-vis the rest of the world may well result in trade diversion and welfare loss. The risk of trade diversion could be mitigated if countries implement very low external tariffs (“open regionalism” arrangements).

2.     Increased returns and increased competition: Within a tiny market, there may be a trade-off between economies of scale and competition. Market enlargement removes this trade-off and makes possible the existence of (i) larger firms with greater productive efficiency for any industry with economies of scale and (ii) increased competition that induces firms to cut prices, expand sales and reduce internal inefficiencies. Given the high level of fragmentation in SSA, it is expected that market enlargement would allow firms in some sectors to exploit more fully economies of scale. Competition may lead to the rationalization of production and the removal of inefficient duplication of plants. However, pro-competitive effects will be larger if low external tariff allows for a significant degree of import competition from firms outside the zone. Otherwise, the more developed countries within the regional integration scheme would most probably dominate the market because they may have a head-start. On the other hand, current technology may be obsolete in these countries compared to current and future needs of the regional market. Firms may then decide to re-deploy new technology and relocate in other areas depending on factor costs. In this case, countries with the most cost effective infrastructure and human resources would be the beneficiaries.

3.     Investment: Regional trade agreements may attract FDI both from within and outside the regional integration arrangement (RIA) as a result of

(i)              market enlargement (particularly for “lumpy” investment that might only be viable above a certain size),

(ii)            production rationalization (reduced distortion and lower marginal cost in production).

Enlarging a sub-regional market will also bring direct foreign investment, which will be beneficial, provided that the incentive for foreign investors is not to engage in “tariff-jumping”. This advocates once again for the necessity to reduce protection and more specifically external tariffs.

Non-traditional Gains from Regional Integration Arrangements

1.               Lock in to domestic reforms: Entering into regional trade agreements (RTAs) may enable a government to pursue policies that are welfare improving but time inconsistent in the absence of the RTA (e.g. adjustment of tariffs in the face of terms of trade shocks, confiscation of foreign investment, etc.). There are two necessary conditions for an RTA to serve as a commitment mechanism. One is that the benefit of continued membership is greater than the immediate gains of exit and the value of returning to alternative policies. The other is that the punishment threat is credible. Regional integration arrangements work best as a commitment mechanism for trade policy. But RTAs can also serve to lock the country into micro and macroeconomic reforms or democracy if (i) those policies or rules are stipulated within the agreement (deeper integration arrangements) and (ii) the underlying incentives have changed following the implementation of the RTA. RIAs may be an instrument for joint commitment to a reform agenda, but their effectiveness may be limited by the low cost of exit and difficulties in implementing rules and administering punishment. With respect to other macroeconomic reforms, one may argue that the degree of openness of RIAs may help discipline in macro policies (especially if the zone shares or target a common exchange rate).

2.               Signaling: Though entering RTAs is costly (investment in political capital and transaction costs), a country may want to do so in order to signal its policy orientation / approach, or some underlying conditions of the economy (competitiveness of the industry, sustainability of the exchange rate) in order to attract investment. This may be especially important for countries having a credibility and consistency problem.

3.               Insurance: RTAs can also be seen as providing insurance to its members against future hazards (macroeconomic instability, terms of trade shocks, trade war, resurgence of protectionism in developed countries, etc.). Given that countries are in the “same boat”, the insurance argument may not be an important rationale for regional arrangements between developing countries. But with asymmetric terms-of-trade shocks (such as with oil in Nigeria and the rest of ECOWAS), “insurance” may become an important rationale for integration.

4.               Coordination and bargaining power: Within RTAs coordination may be easier than through multilateral agreements since negotiation rules accustom countries to a give-and-take approach, which makes trade-offs between different policy areas possible. Since RTAs may enable countries to coordinate their positions, they will stand in multilateral negotiations (e.g. World Trade Organisation - WTO) with at least more visibility and possibly stronger bargaining power. The collective bargaining power argument is especially relevant for the poor and fractioned countries within a sub-region. It may help countries to develop common positions and to bargain as a group rather than on a country by country basis, which would contribute to increased visibility, credibility and even better negotiation outcomes.

5.               Security: Entering RTAs may increase intra-regional trade and investment and also link countries in a web of positive interactions and interdependency. This is likely to build trust, raise the opportunity cost of war, and hence reduce the risk of conflicts between countries. Regarding security, RTAs could also create tensions among member countries should it result in more divergence than convergence by accelerating the trend of concentration of industry in one or a few countries. On the other hand, by developing a culture of cooperation and mechanisms to address issues of common interest, RIAs may actually improve intra-regional security. Cooperation may even extend to “common defence” or mutual military assistance, hence increasing global security.

Advantages of regional integration

Larger Markets

• Regional integration usually allows several different countries to come together and form common markets. This is done by opening up borders and eliminating tariffs and taxes on imports and exports between member nations. Where before it might have been difficult for a manufacturer in country A to find enough demand, it is now able to easily market and sell its products in countries B, C and D, thus allowing it to expand its business. Manufacturers and other firms operating in countries B, C and D can do the same, thus increasing economic activity overall. That in turn raises GDP and if properly managed, this can lead to a better standard of living for all citizens within a regional block.

Increased Global Competitiveness

• Another advantage of regional integration is that the effect of a larger market not only allows the internal economic output within the regional block to increase, it also puts the block at an advantage in relation to other countries around the world. Increased economic output and better efficiency through free trade across borders, allows the regional block to offer many more goods and services on the international market than competitors.

Disadvantages of regional integration

Loss of Sovereignty

• Usually in order to create regional integration, member nations have to give up some of their sovereignty to the newly created supranational body such as a regional parliament or council. This body will have to be entrusted to make binding decisions which affect every member country, effectively subordinating some national legislative and executive power to that body. This means that member countries may no longer be able to enact policies that meet their specific needs and interest, especially if such policies would come into conflict with regional initiatives. Furthermore, if representatives to regional bodies are appointed or the election process is unclear, this might create the perception of a lack of democratic control and accountability.

Loss of Flexibility

• As mentioned, regional integration can make it difficult for national governments to create and implement policies based on their own particular needs. This can be problematic when the specific economic conditions within a member country require actions such as adjusting the money supply or increasing public debt in order to finance infrastructure development or entitlements. These policies, while necessary for one member nation, could skew the economies of other member nations, especially if there is a unified currency as with the European Union. Additionally, richer member nations may be forced to bail out poorer member nations or risk devaluation of their currency and diminishing the whole regional economy.