Week 1 & 2 Economic Integration & Developement Overview

Week 1 & 2 Economic Integration & Developement Overview

Which are the main challenges in the world?DEBATEHow to solve those problems?Economic DevelopmentDevelopment is a multi dimensional process involving changes in social structures, popular attitudes, and national institutions, as well as the acceleration of economic growth, the reduction of inequality, and the eradication of poverty. (Todaro and Smith)7Principles and Concepts: Economic Development What is the real meaning of development? How can one apply economic concepts and theories to gain a better understanding of development process? Why do some countries develop and others remain poor? What are the sources of development and how do we measure development? Economic development ideally refers to the sustained, concerted actions of communities and policymakers that improve the standard of living and economic health of a specific locality. The definition of economic development given by Professor Michael Todaro is an increase in living conditions, improvement of the citizens self-esteem needs and free and a just society. He suggests that the most accurate method of measuring economic development is the Human Development Index which takes into account the literacy rates & life expectancy which in-turn has an outright impact on productivity and could lead toEconomic Growth. However, economic development can also be measured by taking into account the GDI (gender related index).Economic development can also be referred to as the quantitative and qualitative changes in an existing economy. Economic development involves development of human capital, increasing the literacy ratio, improve important infrastructure, improvement of health and safety and others areas that aims at increasing the general welfare of the citizens. The terms economic development and economic growth are used interchangeably but there is a very big difference between the two. Economic growth can be viewed as a sub category of economic development. Economic development is a government policy to increase the economic, social welfare and ensuring a stable political environment. Economic growth on the other hand is the general increase in the country products and services output.Economic development will only be successful if the whole nation is willing to give their best efforts towards its achievement. A lot of theories have been forwarded by different schools of thought about how economic development should be achieved. Many economists have suggested that each country should try to achieve modernization and industrialization in order to achieve economic development.

There seems to be a lot of correlation between economic growth and human development. This can be explained by a simple example in an economy. We shall consider economic growth as a prerequisite for economic development. Assume we have a household in an economy that ekes their livelihood from a horticultural firm. Economic growth will bring business opportunities to the country and the effects spills over to all sectors of the economy. The firm will increase itsprofitswhich will in turn be used to pay for their generation education, improve the access to health care for that family and will increase the general living standard of the family. If this effect is replicated in each household overall economic development will be achieved.Economic development leads to improvements in many sectors of a nation. There are a variety of indicators that economist use to measure the level of economic development in a country. The indicators are: declining poverty rates, increasing literacy rates, declining infant morbidity and increasing life expectancy. Economic development has to be supported by the whole nation from economists, politicians, and also civilians. Thus it can be concluded that, economic development leads to the creation of more opportunities in the sectors of education, health sector, research, human development and environmental conservation It equally implies an increase in the per capita income of every citizen.Economic IntegrationWhat is economic integration?Why is important? Introduction Examine economic integration in general and customs unions in particular Discuss the trade-creating customs union, trade-diverting customs union and the dynamic effects of customs unions Discuss the brief history of various attempts at economic integrationKey TermsEconomic integrationPreferential trade arrangementCustoms unionCommon marketTrade creation and diversionBilateral agreements

Definition & Different Forms Economic integration is the commercial policy of discriminatively reducing or eliminating trade barriers only among the nations joining together. There are different formsPreferential trade arrangements (PTA)Free trade areas (FTA)Customs unions (CU)Common markets Economic unions

Reasons to implement Economic IntegrationTrade development and growthPrices in imports & exports reducedHigher competitionEconomies of scaleBenefits from regional integration compared to national orientationCharacteristics of a process of economic integration(J.Mario)Sovereign statesFree will of integration and decisionGrow by steps and graduallySteps should be stronger and progresiveSteps are not equal for each countryProcess can acelerate or interruptPolitical decision and implicationIntegration has advantages and costsThe integration process starts with bringing the parties together,they could be slow sometimes

Platform for economic integrationCooperationIntegrationUnificationAdvantages of Economic IntegrationEconomies of scaleExternas economiesPrecompetitive efectExchange terms(prices commerce)Dinamic aspects(product variety,competition,equal prices between factors,foreign investmentRisks & DisadvantagesChange in competitive advantage(group producer versus non group producer)Economic dependancy between countriesTrend in reduction of importsHeterogenity in country economic structuresHeterogenity in political reigime during the integration processResistance to give atributions to other parties involved including supranational integrationThe debt & fiscal implicationsReduction of national production to foreign companies(imports)Steps in the Process of Economic Integrations Preferential Trade Arrangements Preferential trade arrangements provide lower barriers on some trade among participating nations than on trade with non-member nations. It is the loosest form of economic integration.

Free Trade Area A free trade area is the form of economic integration where in all barriers are removed on trade among members, but each retains its own barriers to trade with nonmembers, such as EFTA, NAFTA, Mercosur.

Customs Union A customs union allows no tariffs or other barriers on trade among members, and in addition it harmonizes trade policies (such as the setting of common tariff rates) toward the rest of the world, such as EU, or European Union.

Common Market A common market goes beyond a customs union by also allowing the free movement of labor and capital among member nations. The EU achieved the status of a common market at the beginning of 1993.

Economic Union An economic union goes still further by harmonizing or even unifying the monetary and fiscal policies of member states. This is the most advanced type of economic integration. An example is Benelux.

Duty-Free ZonesDuty free zones or free economic zones are areas set up to attract foreign investments by allowing raw materials and intermediate products duty-free.

Trade-Creating Customs Union A trade creating customs union is a union that leads to trade creation only and increases the welfare of both member and nonmember nations.

Trade creation occurs when some domestic production in a nation (a member of the customs union) is replaced by lower-cost imports from another member nation.

If all resources are fully employed before the formation of a customs union, a customs union increases the welfare of member nations because it leads to greater specialization based on comparative advantage.

It also increases the welfare of nonmembers because some of the increase in its real income spills over into increased imports from the rest of the world. Trade-Diverting Customs Union It is a customs union that leads to both trade creation and trade diversion. It may increase or reduce the welfare of member nations, depending on the relative strength of these two opposing forces. Trade diversion occurs when lower-cost imports from outside the union are replaced by higher cost imports from a union member. This is because of the preferential trade treatment given to member nations. Trade diversion reduces welfare because it shifts production from more efficient producers outside the customs union to less efficient producers inside the union. Thus, trade diversion worsens the international allocation of resources and shifts production away from comparative advantage. A trade-diverting customs union results in both trade creation and trade diversion, and therefore can increase or reduce the welfare of union members, depending on the relative strength of these two opposing forces. The welfare of non-members can be expected to decline because their economic resources can only be utilized less efficiently than before trade was diverted away from them. While a trade-creating customs union leads only to trade creation and unequivocably increases the welfare of members and nonmembers, a trade-diverting customs union leads to both trade creation and trade diversion, and can increase or reduce the welfare of members (and will reduce the welfare of the rest of the world). Trade-Diverting & Trade Creating CU Conditions More Likely to Increase Welfare 1.The higher the preunion trade barriers of member countries are, the greater probability it is that formation of the customs union will create trade among members rather than divert trade from nonmembers to members. 2.The lower the customs unions barriers are on trade with the rest of the world, the less likely it is that formation of the customs union will lead to costly trade diversion, because they have already traded each other before. 3.The greater the number of countries in the union and the larger their size are, the greater probability it is that low-cost producers fall within the union. 4.The more competitive the member nations are, the greater opportunities there are for specialization in production and trade creation with the formation of the customs union. 5.The closer geographically the members of the customs union are, the less likely it is that the transportation costs become an obstacle to trade creation among members. 6.The greater the preunion trade and economic relationship among potential members of the customs union is, the greater the opportunities are for significant welfare gains as a result of the formation of the customs union. Conditions More Likely to Increase Welfare Other Static Welfare Effects of Customs Unions One is the administration savings from the elimination of customs officers, border patrols, and so on. This benefit arises whether the customs union is trade creating or trade diverting. Second, a trade-diverting customs union is likely to improve the collective terms of trade of the customs union. For a trade-creating customs union, the opposite is true. Finally, any customs union is likely to have much more bargaining power, such as EU. Dynamic Benefits of Customs UnionThe sourses of dynamic benefits: Increased competition Economies of scale Stimulus to investment Better use of economic resources

Static & Dynamic BenefitsComparison of the static and dynamic benefits: These dynamic gains of a customs union are presumed to be much greater than the static gains and to be very significant. Recent empirical studies indicate that these dynamic gains are about five to six times larger than the static gains. Economic IntegrationsThe larger economic integrationsEuropean Union European Free Trade Association North American Free Trade Agreement (NAFTA)Asian-Pacific Economic Cooperation (APEC)

The European Union was founded by the Treaty of Rome, signed in March 1957 by West Germany, France, Italy, Belgium, the Netherlands, and Luxembourg, and came into being on January 1, 1958. The common external tariff was set at the average of the 1957 tariffs of the six nations. Free trade in industrial goods within the EU and a common price for agricultural products were achieved in 1968; restrictions on the free movement of labor and capital were reduced by 1970. Membership increased to 15 after the United Kingdom, Denmark, and Ireland joined in 1973, Greece in 1981, Spain and Portugal in 1986, and Austria, Finland, and Sweden in 1995. It became 25 when Malta, Cyprus, Poland, Hungary, Czech, Slovakia, Slovenia, Estonia, Latvia, Lithuania joined the EU on May 1, 2004. Economic Integrations---EU

Economic Integrations---EU The European Free Trade Association was formed by the United Kingdom, Austria, Denmark, Norway, Portugal, Sweden, and Switzerland, with Finland becoming an associate member in 1961. The EFTA achieved free trade in industrial goods in 1967, but only a few special provisions were made to reduce barriers on trade in agricultural products. Iceland joined the EFTA in 1970, Finland became a full member in 1986, and Liechtensteinin 1991. However, in 1973, the UK and Denmark left EFTA, as did Portugal in 1986. Thus, in 1991, the EFTA had seven members (Austria, Finland, Iceland, Liechtenstein, Norway, Sweden, and Switzerland) with headquarters in Geneva. On January 1, 1994, the EFTA joined the EU to form the European Economic Area (EEA). In 1995, Austria, Finland, and Sweden left the EFTA and joined the EU. Economic Integrations---EFTA

Economic Integrations---EFTA In September 1993, the United States, Canada, and Mexico signed the NAFTA, which took effect on January 1, 1994. This agreement will eventually lead to free trade in goods and services over the entire North American area. Economic Integrations---NAFTA

NAFTA benefits the United States by increasing competition in product and resource markets, and by lowering the prices of many commodities to U.S. consumers. NAFTA benefited Mexico by (1) Leading to greater export-led growth resulting from increased access to the huge U.S. market (2) Encouraging the return of flight capital (3) Fostering more rapid structural reforms domestically. Mexico suffered a net loss of jobs and incomes in agriculture, but these losses were more than matched by net increases in industry. Economic Integrations---NAFTA APEC's 21 Member Economies are Australia; Brunei Darussalam; Canada; Chile; People's Republic of China; Hong Kong, China; Indonesia; Japan; Republic of Korea; Malaysia; Mexico; New Zealand; Papua New Guinea; Peru; The Republic of the Philippines; The Russian Federation; Singapore; Chinese Taipei; Thailand; United States of America; Viet Nam. APEC has 21 members - referred to as "Member Economies" - which account for more than a third of the world's population (2.6 bill. people), approximately 60% of world GDP (US$19, 254 bill.) and about 47% of world trade. It also represents the most economically dynamic region in the world having generated nearly 70% of global economic growth in its first 10 years. Economic Integrations---APEC Economic Integrations---APEC

Economic Integrations---APEC Economic Integrations---APEC Purpose and Goals: to further enhance economic growth and prosperity for the region and to strengthen the Asia-Pacific community. Since its beginning, APEC has worked to reduce tariffs and other trade barriers, creating efficient domestic economies and dramatically increasing exports. Key to achieving APECs vision are referred to as the Bogor Goals) of free and open trade and investment in the Asia-Pacific by 2010 for industrialised economies and 2020 for developing economies. These goals were adopted by Leaders at their 1994 meeting in Bogor, Indonesia.