3.1 Concepts and Definitions Countries that agree to regional arrangements soon realize that the…

3.1 Concepts and Definitions Countries that agree to regional arrangements soon realize that the more they remove restrictions on the movement of goods and services, the more they lose control of the national economy. Moreover, if the process is allowed to continue, the more they lose control of domestic politics. Consequently, the integration of economies often takes place in stages, with the first preferential agreements being potentially less threatening to loss of domestic control than the later ones. There is a need for a clear distinction between the terms integration and cooperation. The main goal of the process of integration is to abolish discrimination between local and foreign products, services and factors of production in member countries and to maintain protection against third countries. The process can take place on many different levels and has at least four stages and usually include a free trade area (FTA), a customs union, a common market and an economic (and political) union. The integration process is generally characterized as a linear movement from an FTA to and economic and political union. In an FTA member countries remove barriers to trade in goods and services between them but maintain their own tariff policies vis-à-vis third countries. Retention of national tariffs is what distinguishes an FTA from a customs union in which members establish a common external tariff (CET). Thus, a customs union combines free intra-regional trade with a CET. A common market is achieved when the circulation of production factors is liberalized. Capital, labor and entrepreneurship move freely among member countries. An economic union involves two steps. A full, economic and political union is characterized by a total unification of monetary, social and fiscal policies. A supranational body, whose decisions are binding on the union, supervises. In a complete political union the member countries literally become one state, i.e. the union’s authority is also controlled by a central parliament. 13 No regional organization has ever reached the stage of economic and political union.14 Cooperation is more limited than integration. Any agreement aimed at reducing various kinds of discrimination in areas of common interest is a form of economic cooperation. All international organizations and agreements, including those aimed at integration are therefore types of cooperation.15 In this paper emphasis is on cooperation aimed at integration. An intermediate form of regional integration is the Asia Pacific Economic Cooperation Forum (APEC) established in 1989. It includes both developing and developed countries, (e.g., Japan, the US and China, and all members are considered equal partners. The objective of the organization is to promote trade liberalization in a manner consistent with GATT. APEC pursues this goal by promoting trade, improving information flows and working to improve each member’s knowledge of each others’ markets.16 Table 1 Categories of Economic Integration 13 This assumes that the US is not considered a political and economic union of states. This is supported by the fact that only Texas was once a sovereign state. 14Langhammer & Hiemenz, 1990, p.2 15Langhammer & Hiemenz, 1990, p.2 16The Economist, November 12, 1994, p.21 f ————— Theory ————— 10 No Tariffs or Quotas Common or External Tariffs Free Flow of Factors Harmonization of Economic Policies Unification of Policies and Political Institutions 1. Free Trade Area X 2. Customs Union X X 3. Common Market X X X 4. Economic Union X X X X 5. Total Economic and Political Integration X X X X X Source: Bela Balassa “The Theory of Economic Integration”, 1962 3.2 Theoretical Aspects of Economic Integration in LDCs In this section the theoretical framework used in this essay is presented. It includes customs union theory, the theory of preconditions and barriers, the security aspect, the theory of development integration and neo-functional theory. Section 3.2.1 and 3.2.2 describes the development strategies import substitution and export orientation. It is questionable whether these theories are well equipped to deal with the troublesome economic and political situation found in most of the LDCs involved in an integration scheme. When these countries try to implement an integration scheme they do not face the same kind of problems and obstacles as industrialized countries do. Their problems are well-known and concern security, poverty and colonial heritage. These areas of immediate concern for LDCs are of course seldom taken into consideration in conventional integration theories. 3.2.1 Import Substitution and Export Orientation Policy Jacob Viner’s classical customs union theory17 and the so called Latin American structuralist paradigm made up the theoretical background for the discussion of economic integration among LDCs in the 1950s. The European integration process has also influenced the discussion.18 Early structuralism argued that the world trading system exploits LDCs and even perpetuates their poverty. It was also argued that underdevelopment in some parts of the world was a necessary condition for development in other parts. As European integration advanced it affected the structuralist paradigm. Structuralists began to promote closer regional cooperation as a way to create economies of scale and to liberate LDCs from the dependence on the more developed countries (MDCs). LDCs traditionally produce primary goods which structuralists argued received unfavorable treatment in the global economy. At the same time, the import barriers of the MDCs discouraged them from producing and exporting manufactured products. This lead many LDCs in the 1950s to advocate import substitution, development policy to encourage domestic production. The theoretical core of import substitution policy is the protection of infant industries through tariffs. The strategy also involves the imposition of tariffs and non-tariff barriers to keep out foreign-produced goods and policies aimed at reducing the prices of goods produced in the domestic market, for example subsidies or a quality changes. Another element of import substitution is to get foreign companies to invest rather than trade. Foreign investment is supposed to bring technology and management know-how to LDCs. Import substitution is often part of a planned economy and includes many administrative regulations.19 Two negative outcomes of the import-substitution policy are inefficient and protected industries and overvalued currencies.20 17see Viner, Jacob (1950): The Customs Union Issue, New York: Carnegie Endowment for International Peace 18Blomqvist, 1992b p. 3 19Blomqvist, 1992a p.143 ff 20de Melo & Panagariya, 1993, p.254