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Regional Integration: Assessment of Strategic Issues

Paper Outline

Introduction
Goals for and gains from regional integration

Regional integration at a glance

The stages of regional integration
Strategic approaches in regional economic integration
Currency issues in regional economic integration

Strategies for economic development in regional integration
Costs of regional economic integration

Regional integration and balance of payments
Conclusion
References List

Regional Integration: Assessment of Strategic Issues
Introduction
The economic environment that is prevailing in the world is very dynamic. This environment has been putting pressure on business in different countries and the international market. The competitive business environment brought about dominance of a number of countries in bilateral and multilateral trade. The outcompeted countries faced the wrath in their balance of trade and balance of payments which negatively impacted on the individual, national economies. International trade is essential for national economies. This is because each country is endowed with a given potential in the production of goods and services. Each nation has a competitive advantage in producing and trading in certain product as opposed to others. Different countries are endowed with different resources, which make bilateral and multilateral trade useful. Therefore, regional integration is a crucial factor in enhancing international trade and economies (Alhorr, Boal and Cowden, 2012).
Regional economic agreements are formed with the aim of easing trade between and among different countries lying within a region in the world. Regional economic organizations are economic organizations, which are formed as a result of wide consultation on economic policies by the countries involved. Regional economic organizations are meant to provide a self-sustainable business climate in the multilateral trading activities between and among the member countries. They do that by harmonizing the economic policies–monetary, fiscal and general trading policies of the partner countries. Regional economic integration grows in different stages. Monetary unions denote one of the most crucial and advanced stages of regional integration. This paper thus analyses regional economic integration. It bases on the strategic issues in regional integration by focusing on different regional trading organizations (Girvan, 2009).
Goals for and gains from regional integration
There are many gains that can be attained form regional economic integration. Regional economic integration creates trade between member countries. Regional integration enhances production efficiency between through encouraging specialization and competition. The production of goods and services at national levels is raised. It also encourages production basing on competitive advantage thus enhancing quality production. Specialization plays a large part in this. The transfer of technologies and internal investments is boosted, and the national trading terms improved (Alhorr, Boal and Cowden, 2012).
Regional integration at a glance
There are strong regional organizations now as compared to any other time in history. Globalization and regional integration are supportive of each other (Tuvalu, 2005).Globalization enhances regional integration and vice-versa. There exist many regional trading organizations. However, the level of integration differs from one organization to another. Some regional organizations have reached an exceptionally high level of integration for instance the European Union. The level of integration of a regional economic organization is determined by the intensity of harmonization of economic and to some extent political policies of member states. The European Union has implemented a common currency; the Euro which is acceptable and functional in all its member countries (Hamanaka, 2010).
As it is reflected in the histories of economies, diversity is a common feature of economies. Regional integration thus attempts to adapt to and harmonize this feature by following diverse patterns across the globe. Regional integration has been existent in Europe for a long period. Regional integration in Europe has been marked by strong institutional foundations. On the other hand, North America has opted for a free trade area which does not support the formation of supranational institutions. Regional economic integration in Latin or South America has been aimed at forming common markets with economic policies that are well coordinated. This has been the key objective of MERCOSUR. However, financial turbulence in the region has been a significant setback for regional integration in the region. Trade integration in the Eastern Asia region has gone on well and at an exceptionally fast pace. The integration in the region has been centered on comparative advantages within the region. Closer coordination by governments is witnessed in regional integration in the region. This coordination enhances trade, monetary and the financial activities. Regional integration in Africa has also had a long history. Political and economic constraints, which are common in Africa, have been the main constraining factors for regional integration in Africa (Hamanaka, 2010).
With regional economic integration being a key pointer to collective economic growth and development, efforts to better regional economic integration are ongoing in different regions, in the world. Each nation expects to make gains from trade thence more countries are congregating to discuss how they can enhance regional integration. Regional integration has become the order of the day in international trade negotiations. Many challenges still face regional economic integration. One of these challenging factors is the diversity in political and economic interests of different countries. Countries end up breaking some of the rules stipulated in the regional charters to safeguard their interests (Tuvalu, 2005).
The framework for regional economic integration keeps changing. The economic unity and cooperation in regional economic organizations depends on the actions and the will of partner states. The member states must be committed to working together to eliminate individualistic policies. Harmonized policies form the pillars of integration in regional organizations. However, attaining harmonized policies is the most challenging part of regional integration since most nations are often unwilling to give up their unilateral policies. The actions of individual economies determine the pace at which economic integration works. The economies must base on a belief that the liberalization of trade and investment will work at a quicker pace. This has to be sustained by technical and economic cooperation among the partners. The goals of open and free trade in regional organizations form the basis on which countries act in trade. Each regional organization commits itself to goals as agree by member states. Regional organizations that have grown fast have witnessed a high level of commitment from its members. Member countries work together and collectively intervene in situations of non-compliance by any of the partners. Sanctions are applied where possible to make a deviant country to reconsider its actions and revert them is possible (Frost, 2003).
Regional economic organizations have escape clauses for member countries that are willing to opt out of the organization. However, cases of exit are minimal because of the benefits of integration. Regional economic integration is governed by multilateral economic policies which are non-discriminatory in nature. They peg on the multilateral trading policies that have been established by the multilateral trading systems; the World Trade Organization. Regional economic organizations place much emphasis on the functioning of the multilateral trading system. They closely follow the development in the multilateral trading negotiations and agreements. They even directly and indirectly participate in these negotiations. The multilateral trade development agenda are localized in the agendas of the regional trade organizations. While regional economic integration is promising in some regions, it is constrained in other regions. Even in places where the regional trading organizations are not working well, they are held together by the economic potentiality aspect in them (Frost, 2003).
The stages of regional integration
As mentioned earlier, there are different stages of integration of regional organizations. Each stage marks a certain level of liberalization; elimination of barriers of trade amongst the partner countries. The first stage of regional economic integration is the preferential trade agreements. Here, member states come together and agree to trade together. Members do not fully agree on the modalities of trading together though they consider themselves to be belonging to a single trading block. The second stage of regional integration is the free trade area. Here, member countries eliminate all trade tariffs. The quality restrictions and the non-tariff barriers are eliminated. The third stage of regional economic integration is the customs union. In customs union trade barriers are set at a common level for member countries as well as the non-member countries. A common external tariff is set for goods originating from the non-member states (Hamanaka, 2010).
Common markets form the fourth level of regional economic integration. Common markets are characterized by free movement or exchange of factors of production between the member states. Members agree on modalities of exchanging these production factors. The last stage of regional economic integration is the economic union. Under this, nations integrate their national economic policies. Countries also form a common currency which is acceptable in all the member states. It is worthwhile to note that each stage combines the elements of the previous stages plus the new element. Also, regional economic organizations can be comprised of countries which do not belong to the geographic region where the organization is formed. The most notable thing is for members to agree and implement policies that are set (Frost, 2003).
Regional integration unfolds under diverse economic arrangements. Therefore, a single template does not exist in regional cooperation or arrangements. After ten years since its formation, the North America Free Trade Association has brought about positive impacts on trade. The organization has increased the volume of cross border trade in the region. The financial flows have also been raised while macroeconomic volatility has been lowered. In spite of the integration of business cycles among the member states, closer monetary policies seem to be unnecessary, and the exchange rate is flexible. This is a contrast to MERCOSUR which has been constrained by divergent economic policies and economic performance of the partner countries. Many changes have to be made so that renewed progress can be reached which will foster the spirit of economic cooperation in that region (McKa, Armengol, Oliva, and Pineau, 2004).
There are a number of necessary conditions for regional economic integration. The first one is the setting of exchange rates, which are flexible and monetary policies that are inclined towards stabilizing the economies. The second condition is open trade where countries have to open themselves to the flow of goods from other countries. The other condition is the existence of balanced macroeconomic conditions at the domestic level. When these conditions are met, regional trading blocs work efficiently and even encourage trading relations between different regional trading blocs (Tuvalu, 2005).
Strategic approaches in regional economic integration
The strategies of regional integration can be observed from two levels: the national level and the international level. The production capacities of countries take place internally. The national production capacities are exported to the value chains of production at the regional level. In this respect, countries forming the ASEAN have been working on improving their national production capacities. The more developed the national production capacity, the likely that a nation will benefit more from economic regionalism. Countries with political stability and within a similar bracket of economic development are often better placed to form regional economic organizations. This stands to explain why the European Union is the most credited regional economic organization globally. Though endowed with many resources, Asian countries have not managed to make influential regional organizations. There are many regional economic organizations in the region for instance APEC, ASEAN and GCC among many others. However, political instability and lack and economic development levels have been pointed out as outstanding hindrances to integration. This same case applies to Africa and the Southern America regions (McKa, Armengol, Oliva, and Pineau, 2004).
Currency issues in regional economic integration
As explained earlier, economic union forms the deepest level of economic integration. Nations are expected to adopt and use a common currency in trade and other transactions. While countries agree on adopting of a common currency, it is quite hard for countries to localize the common currency. Countries face different economic challenges at different times. The economic challenges have effects on the value of their currencies. When a common currency is localized by all the countries, the economic problem in one country will affect the common currency in use. Therefore, states opt to use the common currency as an option to easing trading transactions. Nonetheless, they choose to stick to their local currencies in order to avoid currency shock effects (Andréosso-O’Callaghan, and Zolin, 2010).
The conditions in the economic theory stipulate the guidelines for attaining an optimum currency area. Reaching a monetary union is not an easy task. Perhaps the European Union has to be applauded for managing to form and experience a monetary union for a long time. Other so called monetary unions like the Gulf Cooperation Currency are still struggling to attain the true image of a monetary union. Monetary unions are formed without even considering the theoretical concepts guiding the formation of such agreements. This is because a number of the theoretical ingredients of a monetary union are realized after the formation of the monetary union (Andréosso-O’Callaghan, and Zolin, 2010).
For an optimum currency area to be achieved, some conditions must be fulfilled. There has to be economic transparency and openness among the member countries forming the organization. Secondly, there has to be a free movement of factors of production across the member states. Economic diversification is another condition where partner countries are supposed to have diversified economies which will encourage trade and currency exchange. The production structures in member countries have to poses some similar or common characteristics. The other point is that the countries forming the union must have convergent rates of inflation. Also, the budgetary policies must be consistent. The last condition is that political will must exist. Political will works as an action factor which ensures that all other conditions are harmonized and are working for the union. The political will lies with the nations (Al Khater, 2012).
One of the major goals for finding the GCC was to attain a Gulf Monetary Union. The GCC agreed on the stabilization and utilization of the United States dollar as a stabilizing currency. This was to be achieved by the year 2002. The nations forming the GCC agreed to reach convergence criteria. This was supposed to be attained at the beginning of the year 2005. Shortly after the year 2005, member countries began to withdraw from the cooperation. Oman was the first country to pull out of the GCC in the year 2006. It was followed by United Arab Emirates which pulled out two and half years later. The reason behind the withdrawal of United Arab Emirates was the disagreement over the location of the Central Bank for the Cooperation. Kuwait refused to peg its local currency – dinar to the United States dollar. It is evident that there are differing interests between the countries that formed the GCC which results in the absence of political will by the countries to strengthen the Cooperation. Countries forming the GCC do not have convergent economic policies which is why they seldom agreed on the modes of unionizing their currencies (Al Khater, 2012).
Each nation values its currency significantly because currencies are deemed to represent national economic sovereignty. Therefore, monetary unions are to a large extent dependent on the political will of states. Monetary union projects are closely monitored by national governments. The se governments monitor the effect of unionization strategies on their currency. Many economists have argued that the condition for the successful operation of the monetary union is an intermediary towards political unity. Political commitment comes from the assessment of the advantages and disadvantages of a monetary union. Monetary unions need a high level of political and economic flexibility. Financial issues and debt policies are also considered to be significant factors in the formation of monetary unions. Sovereign problem is based on two issues. The first issue is that national currencies are considered to be the most significant symbols of national economic sovereignty. Therefore, it is essential for adopting economic policies that are independent. The economic policies focus on how to overcome the public debt and other financial issues. Therefore, the development of a common economic policy becomes hard since each country struggles to safeguard its national currency. The second point is that political commitment and will of the integrating nations can only be attained when the countries are fully informed of probable gains. The countries also seek to understand the details of the costs of a single currency area (Al Khater, 2012).
The economic theory has set boundaries which bring out a notion that it is hard to form a monetary union and realize all the gains. However, learning from the GCC it can be observed that countries may lose more opportunities if they opt out of monetary unions. The GCC partner states must understand that the benefits of not forming the common currency may exist for a long time. However, as the economies become more globalized, these countries are more likely to lose out as they will have a weaker position in the global economy transactions. The formation of a working monetary union by the European countries has given these countries stronger and influential grounds in the global economy. They have a strong working currency which is highly effective in global trade (Tuvalu, 2005).
The domestic monetary strategies of nations are closed when monetary unions fail to materialize. Countries that are integrated into monetary unions have more option of adjusting their monetary strategies collectively rather than individually. Collective strategies are more comprehensive, and interdependent thus they serve both the domestic economic goals of states as well as states as well international economic goals. It is better for countries in a monetary union to form a currency that is independent rather than pegging a currency on another currency. Economic problems occurring in the country to which the common currency is pegged spills over to the countries in the monetary union. The economies of the GCC were negatively affected by the recent economic downturn in the United States. This is because the GCC countries have pegged the value of their common currency on the United States dollar. Some of the problems witnessed in GCC include speculation over the value of the national currencies, high rates of inflation and a rising surplus liquidity (Hamanaka, 2010).
Effective structural reforms in the monetary sector for instance the liberalizing of the exchange rates are best made in a monetary union. Countries will benefit more from the economies of scale once they conduct business activities as a block rather than doing so as single business entities (Hamanaka, 2010).
Strategies for economic development in regional integration
Each country has its own strategies which govern economic development in the given country. National economic policies are often formulated by senior officials in government. The strategies that are adopted in economic development by a country must fit the intended growth path of that country otherwise they will be mal. Strategies alone cannot be sufficient in economic development they must be accompanied by sound policies and efficient organizational structures for a working economy. National strategies are implemented by national economic institutions. Therefore, a mismatch between the two will impact negatively on economic growth at the national level. The national economic growth strategies have to be in tandem with the economic structure of the country. National economic policies and strategies are the policies and strategies give a foundation on which trading policies and strategies at the regional level are built. Countries in given regions operate within conditions (Giordano, Lanzafame, Meyer-Stamer and Inter-American Development Bank, 2005).
The national economic goals of countries can be composed of fragmented generalities for instance political stability and economic growth. The political conditions in a country play a critical role in determining the economic path of that country. Better structures of governance create a healthy environment for formulating better informed economic policies. Strategies are paths of actions that are undertaken in realizing certain goals or objectives (Giordano, Lanzafame, Meyer-Stamer and Inter-American Development Bank, 2005).
The development of international policies governing regional organizations highly depends on macroeconomic policies being pursued in each country. The policies and strategies that are pursued at national level are exported to the international scene. The improvement is done in order to make them best serve all the countries that belong to the organization. Most if not all countries that form regional economic organizations have trade dependent economies. They come together to harmonize the trading policies so that they can best serve them. Countries that form the Association of South East Asian Nations are dependent on trade for sustenance of their economies. It is only a few countries in the region for instance Japan whose economies did not depend on global trade. More countries in the region have been encouraged to expand their trading activities by virtue of the benefits that accrue to belonging to the regional organizations (Nathan Associates, 1998).
Costs of regional economic integration
The global economy is faced with structural challenges, which add to the challenges of regional integration. The costs of regional economic integration are generated from three crucial strategic issues. These issues have been the stumbling blocks for to the success of many regional organizations for instance the GCC. The first issue is institutional sovereignty, which relates to the stabilization and the sustainable usage of a single currency. It is quite challenging to maintain a stable, common currency due to economic fluctuation in the global economy. The European debt crisis is the best example. Technical challenges and requirements also add to the cost of regional integration. Regional integration requires a comprehensive infrastructure which entails statistics, research and human resources. The political will and commitment of states are another hefty issue in regional integration. Nations keep assessing the short-term as well as long-term goals before agreeing to work as a collective unit (Al Khater, 2012).
Regional integration and balance of payments
Regional integration has a significant effect in the balance of payments for the countries that form up the specific regional organization. A country is affected depending on the level of development and competitive advantage in trade. The balance of payment is boosted when a country exports are more than it does import. For instance, China’s exports have been rising since it entered the ASEAN as in the example below:
 

Country
1971-80
1981-90
1991-00
2001-2005

Japan
12
12.32
9.88
8.36

China
4.37
11.39
21.95
28.71

Singapore
113.08
138.28
135.66
146.98

Korea
26.85
34.5
34.17
39.98

Indonesia
24.44
24.63
31.78
33.77

Malaysia
45.66
59.03
96.27
116.34

Philippines
21.71
25.13
40.97
50.32

Thailand
19.95
26.86
46.32
66.81

 
Figure 1.0 Export of products and services expressed as a change in GDP for ASEANCountries.
Source: Chen, 2007.
The growth of exports is as a result of the scrapping off of tariff and nontariff barriers enabling the country to export more goods. This was also the same case in the GCC where member countries had variations in the balance of payments. The total balance of payments for Saudi Arabia for five years is as below:

Year
2000
2001
2002
2003
2004

Total Balance of Payments
2,589.0
-1,990.0
3,015.0
3,015.0
3,015.0

Source: Rettab, 2007.
A huge surplus is BOP was recorded in the year 2004. The increase is attributed to increases in the current account which offset the negative value in the balance of services. Trade grew between 2003 to 2004 due to a rise in exports and the development towards a common monetary union by the countries in the region (Rettab, 2007).
Conclusion
Regional integration has become the order of the day. Regional economic integration has been boosted by the fact that nations have realized the need for trade exchange. Globalization has also been a booster in the formation of regional economic and political organizations. The aim of the formation of regional economic organizations is to foster bilateral and the multilateral trading or economic relations between states in the world. It is worth noting that there are many regional economic organizations in the world today with some at a high level of integration. The strategic issues facing regional integration include the political will of states, issues of state and institutional sovereignty and technical requirements and constraints.

 


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