Economic Integration (Part 1)

ASEAN Economic Integration – A hot subject of discussion among those within the ASEAN community. The success of EU as a regional bloc, though proven so far, its long-term sustainability remains a question and the well-being of individual members can still be a topic of argument. In overall, not bad. Still, much about economic integration can be discussed, and that is what we will do in this post. Keep in mind though that a certain degree of subjectivity applies, but as far as economics is concerned, I think I should be good.

Globalization has brought about deeper connection and stronger reliance between nations. Physical proximity is a yesterday problem, language barriers have been greatly reduced, trans-atlantic and trans-pacific business deals are common, and buyer/seller long-distance relationship is becoming increasingly popular. It is a rather predictable trend, and it should be of no surprise to anyone if soon the term “global citizen” is used more frequently than ever before. This rise in inter-dependence, while introducing multitude of desirable outcomes, has also made us more vulnerable to world economic shocks. In a nutshell, the more unified we become, the more intertwined our fate will be.

Regardless of the presence of its negatives, in economics, a lot have been done to pave the way to this (ideal) state of the world. We have thus far witnessed the emergence of continental economic blocs such as the EU, NAFTA, ASEAN, etc., just to name a few.

From this basic knowledge, we arrive at a simple implication that for nations to work so hard merging together, the benefits of doing so must outstrip the costs. Suffice to say, success has been proven because had that not been the case, there would not have been that many countries jumping onto the “integration” bandwagon.

Before going further into our discussion though, bear in mind that the degree of integration can vary greatly from one region to the next. Countries normally begin by signing PTA (preferential trade agreement) that favors and thus gives special privilege (reduced tariffs, facilitated official documents, etc) in making bi-lateral or multi-lateral trades to the members of the agreement. Next, we have FTA (free trade agreement) where trade barriers like tariffs and quotas are completely abolished between those in membership. Once the degree of integration gets stronger and the right conditions are met, FTA can evolve to:

– “Customs Union” (common external tariffs with non-members),

– “Common Market” (FTA + free movement of labour and capital),

– “Economic Union” (common market + customs union),

– and “Economic union with monetary and/or fiscal union” (economic union + shared fiscal and monetary policies).

Each respective stage leads closer and closer to the complete economic integration, and the economies will then become more synchronized and blended as one. Of course, such would require the most rigorous rules and regulations, painstaking monitoring and evaluation, and immense patience in the front of lesser individual economic freedom (and, it takes decades). Moreover, not just the traditional economic factors that matter, but social and cultural aspects of each and every nation as well will need to be taken into account. In some scenarios, even minor cultural intolerance can cause a wider impact on the integration process that one could have thought of.

To be more specific, consider the case of Germany. One example to justify this seemingly needless caution is that economic or social disparity, even at local level, can stick. Look no further than the aftereffects (structural problems) of the reunification between east and west Germany, where the once homogeneous people became widely separated in terms of their mentality and culture and only later reintegrated while structural problems like demographic and ideological differences were left un-intervened. Up to these days, the east still lags behind the west when it comes to economic well-being, and this causes west-bound migration by, especially the younger portion of the population seeking better opportunities. Demand also grows slower in the east, and since demand is an important supply-inducing factor, supply tends to grow slower as well (this explains the lower per capita yield and employment rate). At the same time, cultural and social differences further prevent people from freely moving to east Germany, and this contributes to the much lesser heterogeneous population in the east. The point is that the continuing disparity between the two parts of Germany makes apparent the fact that integration is not some miracle mechanism that will cause inclusive economic growth.

In fact, integration NOT done right can cause growth to stagnate in one area and double or triple the expected rate in another area; however, if meticulously crafted while exhausting the best of human capacity with the right conditions met, integration can create economic synergy that can propel onwards the economic prosperity to an even greater degree than the combined sum of individual countries’ outputs.

Note that, to realize such favourable outcomes, there exist strict requisites that are not to be neglected. More importantly though, an accurate assessment of the beneficial effects should be conducted before a nation applies for a membership in an economic bloc. The assessment would not just be useful in the “yes or no” decision making process but also in the adjustment and tailoring of domestic economy to comply with the pre-determined standard of economic achievements suitable for the membership. Failure to do so will only increase the risk of economic setback.

Seems rather troublesome, does it not? Thus the question: “what is the rationale behind this concerted effort to achieve regional or even global economic integration?”

Why go that far?

In our next post, we will make an attempt to answer this question by first looking at the merits of integration. Then, we will look at the demerits and a bit into the requirements that make possible successful economic union (which is so much more than merely educating youth to compete on the regional market, something I have heard so much about).

Until then,