Economic integration

A. Free trade – It refers to the condition in which the free flow of goods and services in
international exchange is neither restricted nor encouraged by direct government
intervention.
B. Economic integration – It refers to the action of a group of nations towards free trade.
The levels of economic integration
I. Free trade area – It is a form of regional integration where member countries agree
to reduce the barriers to trade among themselves, whereas each member country is
free to pursue its own trade policy vis-à-vis non-member countries. This removal of
trade barriers may only be on specified commodities.
II. A customs union – It is a form of regional integration where member countries
remove all trade barriers among themselves but have a common external tariff with
respect to non-member countries.
III. The common market – It refers to a type of regional integration where in addition to
meeting the requirements of a customs union, there is free mobility of factors of
production between member countries.
IV. An economic union – It refers to a level of economic integration where there is a
joint economic institution among the member countries to coordinate economic
policy as in the case of European Union where a European central bank exists in
Brussels. The most advanced form of economic union is monetary union where
member countries share a common currency or where each country retains its own
domestic currency but member allow a free exchange of these currencies at an agreed
rate and member countries agree to synchronize monetary policies.
The case for economic integration
i. Specialization – It enables countries to specialize in the production of those commodities
where they have a comparative advantage since the reduction of trade barriers makes it
easier for countries to benefit from comparative advantage in that they can trade surplus
commodities that they produce.

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 ii. Economies of scale – it enables a country to exploit economies of scale since the
provision of a much wider market for goods and services than before the regional
integration. This will enable industries to make use of their excess capacity and in the
process promote employment within the countries that form part of the regional trading
block.
iii. Better relations – It enables the encouragement of better relations, politically and
economically speaking between the countries that form the trading block. This is because
the countries are dependent on each other.
iv. Regional unemployment differences are reduced where regional integration involves
permitting the free movement of factors between countries a in the case of a common
market.
v. Greater degree of competition – It promotes competition which enhances economic
efficiency and enhances consumer choice through variety of goods and services.
vi. Redistribution of incomes – It facilitates redistribution of incomes in favour of low-
income areas since in such areas, goods are produced cheaply and exported to areas
where incomes and prices are higher.
Problems faced by economic integration
i. Political instabilities – within the countries themselves and political aggression between
the various countries has limited the success of integration efforts.
ii. Loss of revenue – since the formation of economic blocks entails the reduction of tariff
barriers between member countries; there is certain loss of revenue from tariffs, which
implies that the government has less money to spend on development projects.
iii. Inefficient industries may be killed off by imports from other member states, which is
likely to result in increased unemployment in countries where industries have had to
close down.

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