ACKNOWLEDGEMENT

My project is a result of the inspiring and thankful guidance and supervision of

my project guide Prof. Mr.Shyam Lilani, I am deeply indebted to him whose help, time,
support, inspiration, stimulating suggestion and encouragement helped me in all the
times of research and writing of this report.
This project has widened my horizon to various areas under general knowledge
regarding the practical and real aspects of Types of Integration
Last but not the least, this PROJECT has definitely helped me to achioeve
something, which will be useful to us in future and hence am thankful to all persons who
have helped in gaining such useful knowledge.
To end with, I thank the people who helped me indirectly but without their
assistance this project was not possible. I thank all my friends and dear ones for their
kind support.

OBJECTIVES OF STUDY
The setting of objective is the corner stone of a systematic study. The study will
be fruitful one when the basis laid down is a concrete one they represent the desired
solution to the problem and help in proper utilization of opportunities.
Objectives:
The objectives of the research are:

To know why nations pursue economic integration

To know why economic integration has been pursued in practice are largely

political.
To know the level of Integration.
To know the Importance of Integration.
To know the Gain from Integration.

Executive Summary
2

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.

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.

Methodology
This project is prepared with the combination of theoretical knowledge as well
as practical knowledge and a blend of advices and suggestion from the guide of
the project.

Various books helped me out in extracting the theoretical element. Also the
information relevant to the project is being surfed from internet. All these activities
are conducted as per the guide consent.

Finally, the project has been advantageously finished with various kinds of
experiences gained throughout. It had been possible with my facts and
information on this subject.

Sr.No

Topic

Pages

Introduction

Benefits of Integration

Objectives of Economic Integration

11

Types Of Integration

13

Obstacles to Integration

30

Success Factors

31

Global Economic Integration

32

Advantages And Disadvantages

33

Levels Of integration

36

10

fundamental factors driving economic Integration

38

11

Conclusion

42

12

Bibliography

43

Introduction
The elimination of tariff and nontariff barriers to the flow of goods, services, and factors
of production between a group of nations, or different parts of the same nation.
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 an
Increase of economic productivity of the states.
Economic integration has been one of the main economic developments affecting
international trade in the last years. Countries have wanted engage in economic
cooperation to use their respective resources more effectively and to provide large
markets for member-countries of the resulting integrated areas. There are mainly four
levels of economic integration:
The trade stimulation effects intended by means of economic integration are part of the
contemporary economic Theory: where, in theory, the best option is free trade, with free
competition and no 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.

Concept of Economic Integration

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
inter-dependent stages of cooperation, co-ordination and finally, of full integration. So,
8

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 harmonization of all
policies, rates, and economic trade rules.

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.

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.
9

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, people and the economies involved
in the process.

10

Objectives of Economic Integration

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
11

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.

Comparative advantage refers to the ability of a person or a country to produce a

particular good or service at a lower marginal 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 labor 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.
Increase of Trade
When foreign products are subject to tariffs, exporters either have to accept the
extra cost of trade or make do with a lesser volume of exported products. A basic
element of economic integration policies is the abolition of part of the extra fees or
12

even the full amount of them, making trade cheaper and giving exporters a bigger
incentive to do business with integrated economies.
Allowing Consumers to Spend More
Economic integration reduces or eliminates customs duties, which in turn results in
cheaper imported products for consumers. This way, the purchasing power of
consumers grows, and with it, activity in the market. The public can start buying
more imported products or spend former duty expenses on other products or
services. In addition, goods that are not produced in sufficient quantities in one
country can be imported and distributed in the market with low cost.
Movement of Capital
Movement of capital refers to the transfer of business or individual assets among
countries. The benefits of capital movement is the investment in new markets,
leading to their eventual development. Economic integration removes barriers to
foreign investors, minimizing or abolishing extra tax, while advanced integration
policies, such as a monetary union, can even eliminate the cost of currency
exchange. Movement of capital is recognized as an essential element of economic
integration by associations such as the European Union and the Caribbean
Community.
Economic Cooperation
The concepts of economic cooperation and equitable economic development are the
basis of economic unions. When economies within the integrated area encounter
problems, it is the duty of other members to help, not only as a moral obligation, but
because a failing economy can have serious effects in the whole integration
process. For this reason, European Union countries have offered to bail out the
troubled economies of Greece, Ireland and Portugal.

Types of Economic Integration

Preferential Trading,
Free Trade Area,

13

 Custom union
Common market
Economic Union,
Economic &Monetary Union
Complete Economic Integration

14

15

Preferential Trade Area

Preferential Trade Areas (PTAs) exist when countries within a geographical region
agree to reduce or eliminate tariff barriers on selected goods imported from other
members of the area. This is often the first small step towards the creation of a
trading bloc. Agreements may be made between two countries (bi-lateral), or several
countries (multi-lateral).

Economic Union
Economic Union is a term applied to a trading bloc that has both a common
market between members, and a common trade policy towards non-members,
but where members are free to pursue independent macro-economic policies.

Monetary Union
Monetary union is the first major step towards macro-economic integration, and
enables economies to converge even more closely. Monetary union involves
scrapping individual currencies, and adopting a single, shared currency, such as the
Euro for the Euro-16 countries, and the East Caribbean Dollar for 11 islands in the
East Caribbean. This means that there is a common exchange rate, a common
monetary, including interest rates and the regulation of the quantity of money, and a
single central bank, such as the European Central Bank or the East Caribbean Central
Bank.

Fiscal Union
A fiscal union is an agreement to harmonize tax rates, to establish common levels of
public sector spending and borrowing, and jointly agree national budget deficits or
surpluses. The majority of EU states agreed a compact in early 2012, which is a less
binding version of a full fiscal union.

Economic and Monetary Union

Economic and Monetary Union (EMU) is a key stage towards compete integration, and
involves a single economic market, a common trade policy, a single currency and a
common monetary policy

16

Free Trade Area

In this case, tariff barriers to the trade of goods between member states are
eliminated, but each country retains control over its own commercial policy;
this means that certain types of barriers are effectively maintained. There are
certain limitations imposed by rules of origin: only goods that have either
been completely produced in one of the member countries, or which have
mainly been produced in them are allowed to circulate freely.

Characteristics of Free Trade

Tariffs
The most common characteristic of free trade is the lack of state tariffs on
imports. A tariff is a tax placed on incoming goods by the host country. it
makes foreign goods, therefore, artificially more expensive than domestically
produced goods, giving the latter a competitive edge.

Markets
Markets, not the state or even powerful economic actors, are empowered to
make decisions in free trade systems. If foreign goods are priced according
to market norms, then the winner in economic competition is who makes the
best product at the lowest price. In protected trade, it often is the actor with
the most political power who gets its economic interests protected.

States
Free trade takes the state out of the economic equation. States are
disempowered to make any kind of economic decision concerning the global
economy. Consumers and companies are then empowered to make these
decisions based on their preferences rather than state policy.

Contracts
Markets are based on contracts between buyers and sellers. Therefore, the
removal of the state from economic decision-making means the dominance
of contracts over state regulations in global economics. In this case, free
contracts are an important characteristic of free trade. Protected trade, on
the other hand, is international economic activity controlled, at least in part,
by the state.

Economics
17

Economics is at the center of free trade thinking. Politics is at the center of

protected trade. Therefore, any free trade regime thinks in terms of
economic categories: efficiency, markets and contracts. Protectionism thinks
in terms of political categories: domestic producers, powerful interests, state
power.

Globalism
Free trade demands a world without borders. In an economic sense, the
states of the globe are irrelevant, only the demands of the global market
have any economic relevance. Hence, under free trade, the globe becomes
progressively smaller as corporations and bankers serve a global, rather than
a national, market.

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CUSTO MUNION
Agreement between two or more (usually neighboring) countries to remove trade
barriers, and reduce or eliminate customs duty on mutual trade. A customs union (unlike
a free trade area) generally imposes a common external-tariff (CTF) on imports from
non-member countries and (unlike a common market) generally does not
allow free movement of capital and labor among member countries.

Characteristics of Custom Union

Free Trade
One of the defining features of the customs union is a policy of free trade between
member states. Free trade is the economic term for the elimination of import and
export tariffs between states. As David Ricardo outlined in his theory of Competitive
Advantage, free trade is generally desirable because it maximizes total economic
efficiency by allowing competition to run its natural course. Under free trade, if nation
A can produce a product more cheaply than nation B, consumers in nation B can
buy the product from nation A without paying an additional tax. Without free trade,
the government of nation B might impose a heavy tariff on imports of the product in
question, forcing consumers in nation B to purchase nation B's products at a higher
price.

Common External Tariff

A common external tariff is the agreement between the parties of the customs union
that stipulates that all member states maintain the same tariffs, import quotas, nontariff trade barriers and preferential policies towards non-member states. This
prevents the practice of re-exportation within the customs union, which occurs if one
member charges lower tariffs to attract foreign imports, and then re-exports those
products to other members of the customs union for a profit under the internal free
trade policy. The common external tariff is also useful in that it allows the members
of the customs union to combine their economic power in enacting punitive or
favorable tariffs towards non-member states.

A Building Block of Economic Cooperation

Perhaps the most important advantage to forming a customs union is that it
represents an important step in the process of economic integration. In today's
globalized economy, economic integration is more important than ever, as
advancements in transportation technology have made international trade

19

increasingly viable, and economic interdependency has emerged as a tool to

facilitate cooperation and conflict resolution.

Common Market Economics

A common market, also called a single market, refers to an economic agreement
between two or more countries that stipulates that the signatory countries establish a
free trade area, share a single currency and have the same tariffs on goods
imported from non-member countries. Primary example of common markets
includes the European Union, or EU, and the European Economic Area, or EEA.

Characteristics of Common Market

Efficient Allocation of Resources
A bigger market more efficiently allocates resources than a smaller one. As goods,
services, capital and workers move across borders as if there were no borders,
resources move from places of abundance to where they are needed most. A
notable example is high unemployment in one country or region and a shortage of
qualified labor in another. As a result of the common market, people from one place
can easily move to another place, helping to boost productivity and increase their
living standards.

Economies of Scale
20

A common market is good for business. Selling products or services in a country of 1

million people differs greatly from operating in a market with 350 million potential
customers, for example. As companies do not need to comply with a multitude of
national regulators but only have to satisfy one common regulator, doing business
becomes easier. Consumers benefit, too, through lower prices and higher quality as
a result of greater competition between producers.

Shared Currency
Another important aspect of a common market is a single currency. Single currency
lowers transaction costs by eliminating the exchange risks and currency conversion
fees. Furthermore, a shared currency also allows easier cross-border investments
and price comparisons by consumers between countries. For example, if a person in
country A goes online and finds a cheaper car in country B, he can order the car
from that country, without paying any additional taxes or levies.

Problems
A common market has a number of theoretical as well as practical problems. First,
as of February 2011 the implementation of a common market in its pure form has
never taken place in any country. The Euro zone comes close, but it still faces many
hurdles, and some states still protect their markets from foreign competition,
particularly cross-border takeovers. In addition, there are also problems that would
be present even in a pure common market. For example, a common market cannot
be fully integrated unless people speak a common language, which is difficult
provided countries' unique cultural and linguistic heritages. Technical problems also
exist. As different regions of the common market may experience different stages of
economic cycle, no single monetary policy, such as interest rates, can fully
accommodate them. For example, Germany may have high inflation, demanding
high interest rates, while Ireland can have deflation and may need low interest rates.

21

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.

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 .

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:

22

23

Other Types
Vertical integration
In microeconomics and management, vertical integration is an arrangement in which
the supply chain of a company is owned by that company. Usually each member of
the supply chain produces a different product or (market-specific) service, and the
products combine to satisfy a common need. It is contrasted with horizontal
integration. Vertical integration has also described management styles that bring
large portions of the supply chain not only under a common ownership, but also into
one corporation (as in the 1920s when the Ford River Rouge Complex began
making much of its own steel rather than buying it from suppliers).
Vertical integration is one method of avoiding the hold-up problem. A monopoly
produced through vertical integration is called a vertical monopoly.
A simple example of backward vertical integration strategy is an ice cream company
that buys a dairy farm. The company requires milk to make ice cream and either can
buy milk from a dairy farm or other milk supplier or could own the dairy farm itself.
This ensures that it will have a steady supply of milk at its disposal and that it will
pay a reasonable price. This can protect the ice cream maker in the event that there
are several other buyers vying for the same milk supply.

Another example
24

Let's assume XYZ Company, which manufactures frozen french fries, wants to vertically
integrate. By purchasing a potato farm and a potato processing plant, XYZ could
engage in upstream integration (also known as backward integration) and control the
quantity, cost, and quality of the product's raw materials. Likewise, XYZ Company could
engage in downstream integration (also known as forward integration) to control the
distribution of the company's products by purchasing a packaging plant and a fleet of
delivery trucks. Ultimately, XYZ could also use balanced integration, which incorporates
both upstream and downstream integration, to control the cost and quality of the entire
production and distribution process.

Advantages
One of the biggest advantages of vertical integration is that it often creates economies
of scale and lowers production costs because it eliminates many of the price markups in
each production step. Vertically integrated companies also achieve cost efficiencies by
controlling quality at each step, which reduces repair costs, returns, and downtime. In
addition, vertically-integrated companies do not have to allocate resources to pricing,
contracting, paying, and coordinating with third-party vendors.

Vertical integration can ultimately create barriers to entry for potential competitors,
especially if the company controls access to some or all of a scare resource involved in
production. This is why in some cases a company may control so much of the market or
supply of raw materials that vertical integration can raise antitrust concerns.
A company must have expertise in each step of the production and distribution process
in order to maximize the advantages of vertical integration. Using the example above,
XYZ Company must know how to farm potatoes as well as it knows how to manufacture
French fries. Another considerable risk is that XYZ will need to modify its infrastructure
significantly to accommodate technological changes and other industry innovations.
This investment in infrastructure can be very expensive and limit the company's
flexibility. By controlling the value chain, the company also becomes responsible for
innovation and product variety.

Horizontal integration
25

In business, horizontal integration is a strategy where a company creates or

acquires production units for outputs which are alike - either complementary or
competitive. One example would be when a company acquires competitors in the same
industry doing the same stage of production for the creation of a monopoly. Another
example is the management of a group of products which are alike, yet at different price
points, complexities, and qualities. This strategy may reduce competition and
increase market share by using economies of scale. For example, a car manufacturer
acquiring its competitor who does exactly the same thing.
Horizontal integration is orthogonal to vertical integration, where companies integrate
multiple stages of production of a small number of production units.
Horizontal integration is related to horizontal alliances (horizontal cooperation).
However, in the case of a horizontal alliance, the partnering companies set up a
contract, but remain independent. For example, Rue& Wieland (2015) describe the
example of legally independent logistics service providers who cooperate. Such an
alliance relates to competition.

An example
An example of horizontal integration would be McDonalds buying out Burger King.
Obviously, this has not happened, but is an example of what a horizontal integration
would be like. Another example that actually did happen was the Heinz and Kraft
Foods merger. On March 25th, 2015, Heinz and Kraft merged into one company.

26

Benefits of horizontal integration

Benefits of horizontal integration to both the firm and society may include economies of
scale and economies of scope. For the firm, horizontal integration may provide a
strengthened presence in the reference market. It may also allow the horizontally
integrated firm to engage in monopoly pricing, which is disadvantageous to society as a
whole and which may cause regulators to ban or constrain horizontal integration.

Todays Best Companies are Horizontally Integrated

In big companies, management teams focus on achieving the right level of vertical
integration. The pendulum has swung from Henry Fords buying ships and railroads and
even a rubber plantation in Brazil to ensure his supply of tires to Boeings radical
outsourcing of Dream liner components, and more recently, back to greater ownership
of upstream and downstream assets by companies as different as Pepsi and Oracle.
With every degree of virtualization now made possible by information and
communications technologies, the right scope of operations for any given firm is an
open question. Let me suggest, however, that it is the wrong question to obsess about.
Efficient production through whatever combination of ownership and partnering is now
table stakes. Customers assume you can cobble together an offering without defects at
low cost. Meanwhile, what they really respond to is a brand experience that is coherent
and consistently pleasurable. Today, your management team should be giving more
thought to horizontal integration.
Customers expectations have been raised by the handful of sellers, such as Amazon,
Virgin Atlantic, and Apple, that manage to provide integrated experiences that are so
distinctive and pervasive as to be brandedthat is, uniquely associated with their
names. But most companies arent able to deliver such satisfying experiences because
theyre too soloed internally. Brand experience is the outward expression of what goes
on inside an organization, and its hard to wallpaper over structures split by inconsistent
goals and cultures that do not value collaboration.
Decades of tweaking levels of vertical versus horizontal integration have left deep
impressions on organizations. When your goal is to optimize sourcing, clean internal
separations make the puzzle easier for managers: engineers do the engineering,
marketers do the marketing, the designers do the designing, and so forth. A lack of
overlap makes it easier to shift any given piece inside or outside the companys walls.
When your organization is so compartmentalized, each group learns to do its own job
according to its own metrics, without worrying about the folks down the hall. Managers
describe their workflows as waterfalls but for the customers interacting with the
company, the handoffs dont seem so fluid.
27

This kind of fragmentation commonly results from growth. In a tiny startup, the handpicked team of coworkers collaborates naturally. Everyone is communicating and
working toward a common purpose, or they would not be there in the first place. This
was certainly true in the early days of Ziba, when it was just me, an engineer, three
designers, and a project manager. We sat together in a single room and everyone knew
what everyone else was doing, and why we were there. Now there are 110 of us in a
dozen different disciplines, handling 25 complex projects simultaneously, and
collaboration takes effort. Our ability to provide a client with an integrated experience
used to be something I took for granted. Now my horizontal concerns keep me awake
nights.

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Backward integration
Backward integration refers to a company buying or internally producing parts of its
supply chain. They did backward integration and I found that to be a little bit strange,
because that was not how it was normally done. The company decided to purchase one
of their major suppliers to hopefully reduce material costs through backward
integration and improve profits. One way to improve the logistics of you company is to
use backward integration buy purchasing the supply chain from one or more of your
suppliers. Backward integration is when a firm buys a company who previously supplied
raw materials to the firm. It is a type of vertical integration, but specifically refers to the
merging with firms who used to supply the firm.

Example of Backward integration

A car firm buys the company who used to sell it tyres for its cars. A coffee retailer like
Nescafe mergers with coffee growers thereby controlling supply of coffee beans.
Backward integration may be beneficial if it helps secure a reliable source of supplies. It
will be harmful if it leads to increased monopoly power and new competitors have
difficulty accessing raw materials.

29

Benefits
Increased control: Through the process of integrating backward, companies can control
their value chain in a more efficient manner. When retailers take the decision to develop
or acquire a manufacturing business, they attain increased control over the production
segment of the distribution phase.
Cost Control: Through backward integration, costs can be considerably controlled all
along the distribution process. In the conventional distribution process, each phase of
product movement includes mark-ups to enable the reseller to earn profit.
By direct sale to end buyers, manufacturers are able to do away with the middle man
through removal of one or more mark-up steps in the course. In other words, a single
entity controlling the entire distribution process brings in enhanced capability leading to
optimization of resource utilization. Transportation costs are lowered, and other wasted
costs can be avoided.
Competitive Advantages:
Some companies adopt backward integration in order to block competitors from gaining
any access to important markets or scarce resources. For instance, a retailer might
purchase a manufacturing company and have access to proprietary technology as well
as resources or patents that are solely available in the local area of the firm.

30

Obstacles to Economic Integration

Obstacles standing as barriers for the development of economic integration include the
desire for preservation of the control of tax revenues and licensing by local powers,
sometimes requiring decades to pass under the control of supranational bodies. The
experience of 1990-2009 has shown radical change in this pattern, as the world has
observed the economic success of the European Union. So now no state disputes the
benefits of economic integration: the only question is when and how it happens, what
exact benefits it may bring to a state, and what kind of negative effects may take place.
The two most common reasons that stated against economic integration are

Economic Integration takes away a countrys political sovereignty.

Economic Integration takes away a countrys Economic sovereignty

31

SUCCESS FACTORS

32

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
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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.

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Advantages Of Economic Integration

Trade Creation:
Member countries have (a) wider selection of goods and services not previously
available; (b) acquire goods and services at a lower cost after trade barriers due to
lowered tariffs or removal of tariffs (c) encourage more trade between member countries
the balance of money spend from cheaper goods and services, can be used to buy
more products and services

Greater Consensus
Unlike WTO with hugh membership (147 countries), easier to gain consensus amongst
small memberships in regional integration

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Political Cooperation:
A group of nation can have significantly greater political influence than each nation
would have individually. This integration is an essential strategy to address the effects of
conflicts and political instability that may affect the region. Useful tool to handle the
social and economic challenges associated with globalization.

Employment Opportunities:
As economic integration encourage trade liberation and lead to market expansion, more
investment into the country and greater diffusion of technology, it create more
employment opportunities for people to move from one country to another to find jobs or
to earn higher pay. For example, industries requiring mostly unskilled labor tends to shift
production to low wage countries within a regional cooperation.

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Disadvantages Of Economic Integration

Creation Of Trading Blocs:
It can also increase trade barriers against non-member countries.

Trade Diversion:
Because of trade barriers, trade is diverted from a non-member country to a member
country despite the inefficiency in cost. For example, a country has to stop trading with
a low cost manufacture in a non-member country and trade with a manufacturer in a
member country which has a higher cost.

National Sovereignty:
Requires member countries to give up some degree of control over key policies like
trade, monetary and fiscal policies. The higher the level of integration, the greater the
degree of controls that needs to be given up particularly in the case of a political union
economic integration which requires nations to give up a high degree of sovereignty .

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Levels of Economic Integration

Free trade. Tariffs (a tax imposed on imported goods) between member countries
are abolished or significantly reduced. Each member country keeps its own tariffs in
regard to third countries. The general goal is to develop economies of scale and
comparative advantages, which promotes economic efficiency.

Custom union. Sets common external tariffs among member countries, implying
that the same tariffs are applied to third countries. Custom unions are particularly
useful to level the competitiveness playing field and address the problem of reexports (using preferential tariffs in one country to enter another country).

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Common market. Factors of production, such a labor and capital, are free to
move within member countries, expanding scale economies and comparative
advantages. Thus, a worker in a member country is able to move and work in
another member country.

Economic union. Monetary and fiscal policies between member countries are
harmonized, which implies a level of political integration. A further step concerns a
monetary union where a common currency is used, such as with the European
Union (Euro).

Political union. Represents the potentially most advanced form of integration with
a common government and were the sovereignty of member country is significantly
reduced. Only found within nation states, such as federations where there is a
central government and regions having a level of autonomy.
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Interactions Among the Fundamental Factors Driving Economic

Integration
Although technology, tastes, and public policy each have important independent
influences on the pattern and pace of economic integration in its various dimensions,
they clearly interact in important ways. Improvements in the technology of transportation
and communication do not occur spontaneously in an economic vacuum. The desire of
people to take advantage of what they see as the benefits of closer economic
integrationthat is, the taste for the benefits of integrationis a key reason why it is
profitable to make the innovations and investments that bring improvements in the
technology of transportation and communication. And, public policy has often played a
significant role in fostering innovation and investment in transportation and
communication both to pursue the benefits of closer economic integration (within as well
as across political boundaries) and for other reasons, such as national defense.
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The tastes that people have and develop for the potential benefits of closer economic
integration are themselves partly dependent on experience that is made possible by
cheaper means of transportation and communication. 2For example, centuries ago,
wealthy people in Europe first learned about the tea and spices of the East as the
consequence of limited and very expensive trade. The broadening desire for these
products resulting from limited experience hastened the search for easier and cheaper
means of securing them. As a by-product of these efforts, America was discovered, and
new frontiers of integration were opened up in the economic and other domains. More
recently, if less dramatically, it is clear that tastes for products and services produced in
far away locations (including tastes exercised through travel and tourism), as well as for
investment in foreign assets, depend to an important degree on experience. As this
experience grows, partly because it becomes cheaper, the tastes for the benefits of
economic integration typically tend to rise. For example, it appears that as global
investors have gained more experience with equities issued by firms in emerging
market countries, they have become more interested in diversifying their portfolios to
include some of these assets.

Public policy toward economic integration is also, to an important extent, responsive to

the tastes that people have regarding various aspects of such integration, as well as to
the technologies that make integration possible. On the latter score, it is relevant to note
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the current issues concerning public policy with respect to commerce conducted over
the internet. Before recent advances in computing and communications technology,
there was no internet over which commerce could be conducted; and, accordingly,
these issues of public policy simply did not arise. Regarding the influence of tastes on
public policy, the situation is complicated. Reflecting the general desire to secure the
perceived benefits of integration, public policies usually, if not invariably, tend to support
closer economic integration within political jurisdictions. The disposition of public policy
toward economic integration between different jurisdictions is typically more ambivalent.
Better harbors built with public support (and better internal means of transportation as
well) tend to facilitate international tradeboth imports and exports. Import tariffs and
quotas, however, are clearly intended to discourage people from exercising their
individual tastes for imported products and encourage production of domestic
substitutes.. Even very smart politicians, such as Abraham Lincoln (who favored a
protective tariff, as well as public support for investments to enhance domestic
economic integration) often fail to understand the fundamental truth of Lerners (1936)
symmetry theorema tax on imports is fundamentally the same thing as a tax on
exports.

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It should be emphasized that the interactions between public policy and both tastes and
technology in their effects on economic integration can be quite complex and
sometimes surprising. Two examples help to illustrate this point. First, for several
centuries, there has been active trade between Britain and the Bordeaux region of
France, with Britain importing large quantities of Bordeaux wine. This trade, however,
was seriously interrupted (if not completely suppressed) during various periods of
hostility between the two countries when one side or the other wished to suppress trade
with the enemy. Partly as a result of being cut off from Bordeaux wines, and partly as a
means of strengthening its alliance with Portugal, Britain sought to develop imports of
Portuguese wines. The existing Portuguese wines, however, did not meet British
requirements. A solution was found in creating a new productPortuguese red wine
from the Duoro region, fortified with grape brandy that gave the wine an extra alcoholic
kick, retained some of the fruit sugar that would otherwise have been absorbed in
fermentation, and helped protect the wine during shipment in hot weather. The result of
this technological innovation was a new productmodern Portthat developed and
retained a considerable market, especially in Britain, even after barriers to the
acquisition of French wines were reduced.
The second example concerns U.S. public policy toward international trade in sugar
which, in a bizarre way, is partly the consequence of policies pursued by Napoleon
Bonaparte and Admiral Lord Nelson. For many years, the United States has maintained
tight import quotas on sugar to keep the domestic price typically at roughly three times
the world market level. The domestic political interests that support this policy include
some sugar refiners, some producers of cane sugar in the deep south and Hawaii, and
a few thousand sugar beet farmers primarily in the upper midwest. Production of sugar
from beets is a new technology, dating back to the Napoleonic period. Before that
time, sugar was produced from cane grown primarily in the West Indies. Admiral Lord
Nelsons establishment of naval supremacy over the French enabled Britain to cut off
Napoleons empire from imports of West Indian sugar. In response, Napoleon
established a prize for finding a substitute for cane-based sugar which could be

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produced within his empire. The sugar beet was discovered, and has been with us ever
since.
This story becomes even more complicated when we consider reactions to the U.S.
governments sugar policy. Responding to the high domestic price of sugar, users have
searched for alternatives. High fructose corn syrup is a cheaper and attractive
alternative, especially for producers of soft drinks who are major users of sweeteners. A
key by-product of high fructose corn syrup is corn gluten meal which can be used as
animal feed and which the U.S. both uses domestically and exports, notably to the
European Union. Thus, through this round-about channel of public policies and product
innovations, what was started by Napoleon and Nelson has come back to European
shores.

Conclusion

There are many regional trade agreements (RTAs) in the world.

We also distinguish FTAs, customs union, common market, economic union.

RTAs in general increase welfare through trade creation, but the discriminatory
nature of an RTA may make the net welfare effect negative.

Increased popularity of Regionalism rather than Multilateralism may be bad for

the world economy.
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EU is most successful and powerful economic integration scheme; many CEE

countries want to join; EUs political decision process needs to be revised.

There are essentially two factors that define the economic

integration between states:

NEGATIVE INTEGRATION:

POSITIVE INTEGRATION:

this implies the elimination of barriers

that restrict the movement of goods, services and factors of production.
this refers to the creation of a common
sovereignty through the modification of existing institutions and the creation of new
ones.

Bibliography
www.google.com
www.wikipedia.com

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www.economicsonline.co.uk
www.globalnegotiator.com
Manan Prakashan Book of Economics

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