Economic Integration

What Does Economic Integration Mean?

An economic arrangement between different regions marked by the reduction or elimination of trade
barriers and the coordination of monetary and fiscal policies. The aim of economic integration is to reduce
costs for both consumers and producers, as well as to increase trade between the countries taking part in
the agreement.

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.

Opportunities Of Economic integration

Economic integration can be defined as a kind of arrangement where countries get in agreement
to coordinate and manage their fiscal, trade, and monetary policies in order to be mutually
benefitted by them. There are many degrees of economic integration, but the most preferred and
popular one is free trade. In economic integration no country pays customs duty within the
integrated area, so it results in lower prices both for the distributors and the consumers. The
ultimate aim of economic integration is to increase trade across the world. There are many other
advantages associated with this concept. Some of these are:

1.Progress in trade. All countries that follow economic integration have extremely wide
assortment of goods and services from which they can choose. Introduction of economic
integration helps in acquiring goods and services at much low costs. This is because the removal
of trade barriers reduces or removes the tariffs entirely. Reduced duties and lowered prices save a
lot of spare money with countries which can be used for buying more products and services.

2.Ease of agreement. When countries enter into regional integration, they easily get into
agreements and stick to them for long periods of time.

3.Improved political cooperation.

Countries entering economic integration form groups and have greater political influence as
compared to influence created by a single nation. Integration is a vital strategy for addressing the
effects of political instability and human conflicts that might affect a region.
4.Opportunities for employment.

The various options available in economic integration help to liberalize and encourage trade.
This results in market expansion due to which high amount of capital is invested in a country
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
a international enterprise.

Challenges Of Economic integration

Thus economic integration is a win-win situation for all the firms, people and the economies
involved in the process. Is has become a preferred strategy for most countries of the world

. The instability of the system

Throughout most of the 1980s the UK refused to join the ERM (Exchange rate mechanism). It argued that
it would be impossible to maintain exchange rate stability within the ERM, especially in the early 1980s
when the pound was a petro-currency and when the UK inflation rate was consistently above that of
Germany. When the UK joined the ERM in 1990 there had been three years of relative currency stability
in Europe and it looked as though the system had become relatively robust. The events of Sept. 1992,
when the UK and Italy were forced to leave the system, showed that the system was much less robust
than had been thought.

Over estimation of Trade benefits.

Some economists argue that the trade and cost advantages of EMU have been grossly over estimated.
There is little to be gained from moving from the present system which has some stability built into it, to
the rigidities which EMU would bring.

. Loss of Sovereignty.

On the political side, it is argued that an independent central bank is undemocratic. Governments must be
able to control the actions of the central banks because Governments have been democratically elected
by the people, whereas an independent central bank would be controlled by a non elected body.
Moreover, there would be a considerable loss of sovereignty. Power would be transferred from London to
Brussels. This would be highly undesirabel because national governments would lose the ability to control
policy. It would be one more step down the road towards a Europe where Brussels was akin to
Westminster and Westminster akin to a local authority.

. Deflationary tendencies.

Perhaps the most important economic argument relates to the deflationary tendencies within the system.
In the 1980s and 90's France succeeded in reducing her inflation rates to German levels, but at the cost
of higher unemployent, For the UK, it can be aruged, that membership of the ERM between 1990 and
1992 prolonged unnecessarily the recessional period. This is because the adjustment mechanism acts
rather like that of the gold standard. Higher inflation in one ERM country means that it is likely to generate
current account deficits and put downward pressure on its currency. To reduce the deficit and reduce
inflation, the country has to deflate its economy. In the UK, it could be argued that the battle to bring down
inflation had been won by the time the UK joined the ERM in 1990. However, the UK joined at too high an
exchange rate. It was too high because the UK was still running a large current account deficit at an
exchange rate of around 3 Dm to the pound. The UK government then spent the next two years
defending the value of the pound in the ERM with interest rates which were too high to allow the economy
to recover. Many forecasts predicted that, had the UK not left the ERM in Sept 1992, inflation in the UK in
1993 would have been negative (ie prices would have fallen).The economic cost of this would have been
continued unemployment at 3million and a stagnant economy. When the UK did leave the ERM and it
rapidly cut interest rates from 10% to five and a half %, there was strong economic growth and the current
account position improved, but there was an inflation cost.