Economic Integration I

(L11115)

Module Convenor: Dr. Zhihong Yu

Autumn 2019

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 Economic Integration , or Disintegration?
 We are living in a economically integrated world but facing
unprecedented challenges of economic disintegration , e.g.

Brexit , US-China Trade War

 To understand these pressing challenges , we fist need to
develop a deep understanding of what is economic integration ,
how it works and its consequences.
 1 What is ‘economic integration’?

 two or more countries are economically integrated if there

are no barriers or restrictions on trade, investment and
migration between them
 hence market prices should be similar and should
converge, with only small differences due to trade costs
 economic integration can also be defined as a process
 ‘the elimination of economic frontiers between two or
more economies’
 negative integration removes barriers e.g. tariffs
 positive integration coordinates/ harmonises government
policies: e.g. banking regulations
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 negative integration
 economic frontiers restrict movement of goods, services,
production factors (capital and labour)
 restrictions on movement of goods: e.g. customs duties
 restrictions on migration: e.g. visa, work permit , etc.
 restrictions on international investments
 controls on financial flows

 economic case for removing barriers/restrictions across

countries is essentially argument for markets:
bigger markets
 increased competition,
 specialisation,
 greater use of economies of scale,
 wider consumer choice 4
 positive integration

 ‘international policy harmonisation’

 national economic policies have impacts on other countries
(spillovers) which national governments may ignore
 such non-cooperation is economically inefficient,
 but international cooperation involves some loss of national
sovereignty (argument for Brexit!)
 gains from cooperation likely to be greater as international
economic interdependence increases, e.g. through trade

 should cooperation be regional or global, or both?

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 regional & global integration

 global integration: economic integration across the world

 governments attempt to support this through institutions such
as the World Trade Organisation which in principle are open
to all countries
 global institutions avoid discrimination and have a wider
impact
 but may be slower to act because of the diversity of views

 regional integration (e.g. EU, NAFTA) may be quicker and

deeper because members are more similar
 but may involve damaging discrimination (see Lecture 2)

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 2 Global institutions for economic integration

 World Trade Organisation began as GATT in 1940s

 rules for world trade (enforceable through dispute settlement system)
 periodic negotiations to reduce trade barriers
 Covers 97% of world trade and GDP
 International Monetary Fund (IMF):
 exchange rates/ short term capital flows
 began when exchange rates were fixed (Bretton Woods system)
 World Bank:
 long term capital flows,
 initially for European reconstruction, later for developing economies

 GATT/ WTO (success in reducing trade barriers & establishing a body of

rules with dispute settlement body)
 IMF/ World Bank have been called in to help countries in crisis, but 7
regarded with suspicion by some: ‘tools of western neo-colonialism’
 Global economic governance: G20

 19 large economies + EU
 (Norway: ‘arbitrary, self-appointed’)
 80% world production & trade; 2/3rds world population

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 G20

 ‘the premier forum for our international economic cooperation’

 ‘a global economy needs a global governance’ Sept 2009
 the Crisis ‘has transformed global governance – emerging
economies are now equal partners’
 initial focus on coordinating stimulus programmes/ banking
reforms

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3. Regional integration: Balassa (1961) classification

a) Free trade area (e.g. North American Free Trade Area)

tariffs and quotas abolished on internal area-origin trade
members keep national tariffs on outside trade
b) Customs union
tariffs and quotas abolished on all internal trade
equalisation of tariffs on outside trade
c) Common market
CU + no restrictions on factor movements
d) Economic union (e.g. the European Union)
CM + some harmonisation of national policies
Within the EU, 17 countries share the same currency ,
the euro €
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 Critique of Balassa (1961)

 Balassa classification useful starting point

 But not necessarily progression ad: EU started with
CU not FTA

 also: CU/ FTA/ CM in practice need some policy

harmonisation
 (example of European Free Trade Association formed
1960 by UK + 6)

 thus even looser forms of integration need some

supranational policy-making
 supranational powers imply loss of national sovereignty
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 4. Conclusions

 world economies are increasingly interdependent

 driven by globalisation through global institutions such as
WTO
 also by governments – prepared to give up national
sovereignty for economic and political benefits of closer
integration
 regional integration can take a number of forms
 EU ‘special case’
 future lectures will examine
 economic consequences of different forms of
integration
 EU and other experience of integration
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 Textbooks
 Main Textbooks
 Baldwin & Wyplosz (2012) The Economics of
European Integration (4th ed) HC241.B2
 Senior Nello (2011) The European Union: Economics,
policies and history (3rd ed) HC241.S4
 El-Agraa (2011) The European Union: Economics
and Policies (9th ed) HC241.E8

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 Appendix: European Integration

 historically, Europe was integrated by force: Romans,

Napoleon

 postwar: voluntary: initially to curb conflict between

nation states (WW II)

 1951 European Coal & Steel Community

 six members
 France, Germany, Italy
 Belgium, Luxembourg, Netherlands

 1952-3 proposals for Political Union/ Defence

Community : failed 14
 ‘ever closer union’?

 Treaty of Rome (in force 1958)’T on Functioning of EU’

 A customs union by 1970
 A common market
 A partial economic union (agriculture, competition etc)
 Single European Act (1987)
 Extended common market (Single European Market)
 Treaty on European Union (Maastricht) (in force1993)
 Monetary and (partial) economic union
 Treaty of Lisbon (in force 2009)institutional reform
 BUT many areas of economic policy remain substantially
under national control

 membership expanded from 6 to 28

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 population 504 million (US 317, Japan 128)
 Appendix:EU decision-making

 by Treaty, member states have given EU powers in

certain areas
 Council of Ministers of the EU is main decision-making
body
 comprises one representative from each country
 major issues (e.g. new members) decided unanimously
 others by qualified majority, based on country size

 European Commission proposes/ administers/ monitors

 one Commissioner per country

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 EU decision-making (2)

 European Parliament: 732 MEPs directly elected

 vote more along party than national lines
 on 80% issues, share control with Council (codecision
procedure)
 on some issues can only issue opinion, or veto

 Court of Justice in Luxembourg settles disputes about

EU law

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 Membership of EU

 28 countries
 big 6 of France, Germany, Italy, Poland, Spain, UK
 + smaller countries Austria, Belgium, Cyprus, Czech
Republic, Denmark, Estonia, Finland, Greece, Hungary,
Ireland, Latvia, Lithuania, Luxembourg, Malta,
Netherlands, Portugal, Slovakia, Slovenia & Sweden
 Romania & Bulgaria joined in 2007, Croatia 2013
 UK joined 1973

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 G20 agenda: (Pittsburg September 2009)

1. avoid premature withdrawal of stimulus & plan exit strategies

2. agree framework for strong sustainable and balanced growth
3. strengthen financial regulation (via reformed rules on capital
adequacy & remuneration of bank employees)
4. reform global institutional architecture, including a
reallocation of IMF quotas
5. phase out fossil fuel subsidies
6. complete Doha Round trade negotiations in 2010 
7. agreement on climate change in Copenhagen Dec 2009 
provides a framework for collaboration but slow progress

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