REGIONAL ECONOMIC INTEGRATION

Regional economic integration has enabled countries to focus on issues that are relevant to their stage of
development as well as encourage trade between neighbors. It can best be defined as an agreement between groups
of countries in a geographic region, to reduce and ultimately remove tariff and non-tariff barriers to the free flow
of goods, services, and factors of production between each other. The following are examples of Regional
Economic Integration:
• NAFTA (North American Free Trade Agreement)-An agreement among the U.S.A., Canada, and Mexico.
• EU (European Union)-A trade agreement with 15 European countries.
• APEC (Asian Pacific Economic Cooperation Forum) - This includes NAFT A members, Japan, and China.
• Association of South East Asian Nations (ASEAN)
• South Asian Association for Regional Cooperation (SAARC)
As economies become integrated, there is a lessening of trade barriers and economic and political coordination
between countries increases. There are seven stages of economic integration: preferential trading area, free trade
area, customs union, common market, economic union, economic and monetary union, and complete economic
integration. The final stage represents a complete monetary union and fiscal policy harmonization.

Pakistan—Regional Economic Integration Activity (PREIA)

PREIA works to increase Pakistan’s access to regional and international markets and is a key economic growth
project that stands to benefit numerous Pakistani businesses. This project has two components: improve Pakistan’s
business enabling environment so that policies, laws, and regulations are adaptable and more reflective of on-the-
ground needs; and improve Pakistan’s capacity to access regional markets by identifying bottlenecks and practical
solutions for increasing export efficiency.

Additionally, PREIA’s Activity Fund is helping local organizations build capacities to support trade reform and
modernization and, subsequently, to utilize these capacities in support of local stakeholders.

Activities

• Increase capacity of Pakistani institutions and actors to assess policy, negotiate agreements, improve
regulations, and engage with stakeholders on trade.
• Improve government capacity to better analyze economic and business opportunities that emerge.
• Strengthen dialogues among the business community, academia, media, government policymakers, and other
stakeholders.
• In coordination with other U.S. Government and donor-financed efforts, support the Federal Board of
Revenue (FBR) with development and implementation of its Customs Reform Roadmap.
• Strengthen capacity of FBR/Customs and other border control agencies to implement global best practices
and improve compliance.
LEVELS OF ECONOMIC INTEGRATION
Preferential Trading Agreement -- It is a loosest form of economic integration where a group of countries
make a formal agreement to trade goods and services on preferential terms. It results is reduced tariffs and
sometimes a special quota is allowed for preferential access. These agreements are generally made between
developed and developing countries to promote economic development of developing nations. Example – The
European Union has a preferential trading agreement with the Middle East and Latin America.

Free Trade Agreement – It is a permanent arrangement usually between the neighboring countries. It
involves complete removal of tariffs on goods. However, it is not applied to agricultural sector, fishing or services.
The member countries are free to charge their own external tariffs from countries outside the free trade area.
Therefore each member country has full freedom over trade with external countries. Example – North American
Free Trade Agreement (NAFTA) and European Free Trade Association (EFTA)

Customs Union – Just like the members of Free Trade Area, the members of Custom Union also remove
barriers among themselves. In addition they also have a common trade policy with respect to non-member
countries. Due to the common trade policy, a common external tariff is charged from non-member countries and
revenue is shared among the member countries. Example – Association of Southeast Asian Nations (ASEAN)

Common Market – The common market has no barriers to trade among the member countries and there is
also a common external policy for trade with non-member countries. In addition the restriction on the movement
of the factors of production is also removed. Factors of production include Labour, Technology, Capital etc. The
restriction is abolished on immigration, emigration and cross border investments. This is done to employ the best
resources in the best possible manner.Example – European economic community

Economic Union – Economic Union involves full integration between two or more economies. There are no
trade restrictions between member countries, they follow a common external tariff policy and the restriction on
the mobility of factors of production is also abolished. In addition there is coordination between the member
countries on their economic policies such that the nations have coordinated monetary policy, fiscal policy, social
welfare programs etc. and usually a common currency is used in trade. Example – European Union

Political Union – Political Union involves all features of Economic Union and also complete political
integration between member countries. The member countries share a common decision making and judicial body
and there is complete unity between member nations. The best example is United States of America which
includes thirteen separate colonies operating under Article of Confederation.
KEY CONSTRAINTS TO REGIONAL ECONOMIC
INTEGRATION
1. Development Divide

Despite the success achieved in regional integration, East Asia continues to be characterized by steep development
divide, being home to rich countries, as well as least developed economies. Table 1 shows the income disparity
of different regional groups. It can be noticed that East Asia and ASEAN have the largest disparity in terms of
per capita income. The large income disparity would need to be addressed if East Asia is to hasten regional
integration. Several studies had shown that large disparity in incomes and development will hinder efforts toward
greater integration. (Balboa, Medalla and Yap, 2007) The succeeding section will show the extent of development
gap in the region.

2. Coping with the Changing Institutions and Policy Design

Related to the issue of development divide is the challenge of how to implement the regional goals in the member
countries considering the political and economic diversity. Several questions still need to be answered, such as,
How much of these regional policies are integrated in the domestic legislation? Do the LDCs have enough
technical and financial resources to implement and sustain the new laws, should they be integrated? To what
extent has these improved their participation in regional cooperation endeavors and also contribute to their own
national development agenda? Ultimately, the main impetus for integration comes from individual member
countries and their commitment to align domestic policies to regional goals. It is important that member
economies and the larger population must be convinced of the merits of creating an East Asian Community.

3. Dealing with common risks associated with Regional Integration

Integrating the regional economies is also tantamount to opening the countries to various risks. Other than
economic contagion, it also increases the number of human security risks entering the member economy resulting
from freer moment of goods, capital and labor. There had been some initiatives to contain, or even eliminate these
risks. APEC has programs to enhance Human Security in the region and includes programs associated with anti-
terrorism, health security and food safety. The past years, however, the programs, had received little attention.
Moreover, monetary and financial policy initiatives had been created in East Asia to prevent another Asian
Financial Crisis. The Chang Mai Initiative, which is a direct response to the Asian Crisis of 1997, is a network of
currency swap arrangements which intends to increase the availability of liquidity in the region. It has however,
remained voluntary, uncoordinated, and lacked the appropriate policy tools to smoothly facilitate bilateral swaps
(Nikerk, 2005; Sally, 2010).

4. Geopolitical obstacles
Geopolitical issues further complicate regional integration. While economic links contained some of the tensions,
political tensions and conflict remain. The changing global landscape created multi-polar source of power in the
region and toned down the role of US in regional stability. However, US remains a vital balancing power in the
region due to its overwhelming military capability. Emerging regional powers should also be factored in,
particularly in the context of competition for regional leadership and natural resources
JUSTIFICATIONS OF ECONOMIC INTEGRATION
The extent to which a region will deepen its economic integration and adopt the characteristics of a supranational
state is partially influenced by the factors prompting states to start the regionalization process. Four broad reasons
for pursuing economic integration can be identified.

Reactive regionalism

Reactive regionalism is also referred to as defensive regionalism, suggesting that states choose to
pursue economic integration to protect their shared interests from a specific or nebulous external threat. In a
historical context, reactive regionalism was viewed by developing countries as a technique for providing the large
internal markets needed to support nascent industrial sectors. Although the decline of import-substitution
industrialization strategies and the rise of neoliberalism have greatly reduced the protectionist aspect of reactive
regionalism, the idea of providing a common level of shelter for internal producers does remain in integration
projects such as the South American trade bloc Mercosur.

The more common motive for contemporary economic integration projects lies in the logic of defensive
regionalism. Here the participating states are reacting to perceived threats in the international
economic environment. In some instances, such as Canadian participation in the North American Free Trade
Agreement (NAFTA), the regional economic integrationroute was pursued to prevent a country from becoming
isolated in a global economic system that appeared to be increasingly drifting toward a series of large economic
blocs. Other regional groupings, such as the Andean Community and Mercosur, emerged partly as an attempt to
use the expanded internal market as a lure to attract foreign direct investment(FDI) in an increasingly competitive
international investment climate. Either way, the common element is that the participating states are seeking to
use their combined economic mass and density to protect shared interests and to mitigate external vulnerabilities.

Peace and security

The most prevalent example of an economic integrationemerging as part of an effort to ensure peace and security
is the European Union (EU). As the neofunctionalist school suggests, the idea is to increase economic
interpenetration between erstwhile hostile countries, seeking to raise the level of interdependence to the point
where armed conflict and sustained mutual isolation become economically unsupportable. This underlying
rationale can either emerge as a consensus position between participating states, as was partly the case in
Argentine-Brazilian approximation in the 1980s and the formation of the South Asian Association for Regional
Cooperation (SAARC), or be suggested as a solution to simmering hostilities by mediating actors as an effective
method for diffusing potential conflicts, as has sometimes been the case with the South
American infrastructureintegration program launched in 2000.

Efficiency
The defensive character of many integration projects is in some cases eclipsed by a desire to reduce transaction
costs within a regional space that is seeing growth in transnational production structures. Here the example of
the Association of Southeast Asian Nations (ASEAN) is instructive, with a sustained rise in the regional
distribution of production structures creating pressure for increased logistical and regulatory cooperation
to facilitate the exchange of production factors. Significantly, an efficiency-seeking rationale to economic
integration will not necessarily bring about pressure for labour mobility and often completely rejects the sorts of
political approximations implicit in the deeper forms of economic integration. The profit-making potential of
economic cooperation within the region remains the dominant factor, with only tangential attention being given
to notions of social or political integration.
Externalization
Although rarely explicitly framed as the need to externalize the rationale for
politically contentious policies, economic integration has emerged as a device used on the domestic political
stage. In South America the pursuit of an economic integration project was one justification used by pro-
democracy factions in Argentina and Brazil in the late 1980s to neutralize lingering calls for a return to
authoritarianism. Democratic governments in developing countries have also used the need to adhere to regional
commitments as the justification for the pursuit and implementation of the Washington Consensus model
of neoliberalism. Particularly important in this respect has been the reduction of state supports for local industries,
the lowering of high tariff walls, and the privatization of state-owned firms. The pattern is thus one of domestic
governments placing the blame for some of the politically difficult neoliberal economic programs pursued in the
1990s on the need to meet the country’s regional commitments, with the integration project being presented as
the source of long-term and sustainable economic advantages as well as a collectively improved insertion into the
international economy.

CRITICS VIEW POINT

The cons involved in creating regional agreements include the following:

1. Trade diversion.

The flip side to trade creation is trade diversion. Member countries may trade more with each other than with
nonmember nations. This may mean increased trade with a less efficient or more expensive producer because it
is in a member country. In this sense, weaker companies can be protected inadvertently with the bloc agreement
acting as a trade barrier. In essence, regional agreements have formed new trade barriers with countries outside
of the trading bloc.

2. Employment shifts and reductions.

Countries may move production to cheaper labor markets in member countries. Similarly, workers may move to
gain access to better jobs and wages. Sudden shifts in employment can tax the resources of member countries.

3. Loss of national sovereignty.

With each new round of discussions and agreements within a regional bloc, nations may find that they have to
give up more of their political and economic rights. In the opening case study, you learned how the economic
crisis in Greece is threatening not only the EU in general but also the rights of Greece and other member nations
to determine their own domestic economic policies
CONCLUSION: PATHWAYS FOR REGIONAL ECONOMIC
INTEGRATION
The East Asian region has changed remarkably in the past decade. The economic center of gravity—production,
trade and finance--- is now centered in East Asia with the rise of China and emerging economies of East Asia.
Regionalism had risen sharply in the form of Free Trade Agreements, with new agreements concluded and being
negotiated each year. While it brought a lot of benefits, regional integration also highlighted economic
asymmetries between countries in the region. Several studies had been devoted to respond to this issue and
concrete recommendations were prescribed to address the development gap and help less development economies
catch up with advanced countries in the region. (Salazar and Das, 2007 Green, 2007; Severino, 2007; Nandan
2006; Das, 2009) East Asian economic integration is open and outward-oriented, with gradual and flexible
systems to take into account the region’s varying economic, political and cultural realities.
The regional goals are also pragmatic and gradualist to reinforce trust and commitment among member
economies. This is considered to be a fitting policy design to achieve regional economic integration in East Asia.
Given that it has successfully set the pre-conditions for successful integration, the next step would be for East
Asia to create practical measures to move towards regional integration that will ensure participation of all member
economies and integrate the larger Asia Pacific region. Concrete and well-defined targets are important in this
regard which are mindful of the need for economic and technical cooperation for bridging development gaps.
Enhancing cooperation on transportation, as well as social and economic infrastructure, are also critical. Political
and social cooperation would be important to promote greater regional stability. Moreover, at the technical level,
the region should devote more attention to harmonize the bilateral and plurilateral groups in the region and adopt
simpler and consistent Rules of Origin in the various free trade agreements. The need for domestic restructuring
and strengthening of institutions at the national level are also very important. Implementation is guaranteed only
if regional policies are integrated in national legislation of individual members. Governance reforms are
necessary, particularly those which target the creation of a good investment climate and would enhance
competitiveness. Individual economies should be able to make the necessary adjustment in national policies and
legislation to adapt to the changing institutions, systems and processes.
Regional economic integration is an enormous goal that would need time and huge amount of resources to be
accomplished. ASEAN addressed the implementation challenge by taking a sectoral approach to liberalization5
and integrated the sectors which are expected to enhance the competitiveness and attractiveness of ASEAN as
investment destination. It has also crafted the ASEAN Economic Community Blueprint, which serves as a
reference for member countries in harmonizing and coordinating policies based on regional goals of creating an
Economic Community by 2015. This could serve as a good model to design economic integration initiatives in
the East Asian region, and in the future, Asia-Pacific-wide integration initiatives. Flexibility was given to less
developed members in consideration of their capacity to implement the integration goals. While criticized by
some analysts as a policy that slows down integration which could also lead to shallow integration, providing
Special and Differential Treatment to Less Developed economies during trade liberalization could be the best (if
not the only) way for poorer economies to participate in regional economic integration. Furthermore, the region
is facing the challenge of how to sustain growth and integration in the context of a changing global landscape,
and potentially, a regional and global powershift with the rise of China. Alongside efforts to pursue regional
economic integration, institutions and mechanisms that will reduce political tensions and conflicts between and
among leading and emerging powers in the region should also be built and sustained.