Economic Integration among the Less Developed Countries | Macroeconomics

In this article we will discuss about the attempts towards economic integration among less developed countries and its problems.

Economic Integration among the Less Developed Countries:

The success achieved by the EU inspired many groups of the LDC’s to have economic integration among themselves. The closer integration among the LDC’s is justified, not so much in terms of trade creation and dynamic gains, as in terms of accelerated growth and speedy industrialisation.

The customs union provides a large protected market in which the member countries can sell their manufactured products duty free, while the competition from non-members remains effectively blocked through high tariff walls and non-tariff barriers to trade.

Some of the attempts towards economic integration among the LDC’s are as under:

(i) Central American Common Market (CACM):

It was established by Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua in 1960. But it could make little headway and was dissolved in 1969.

(ii) Latin American Free Trade Association (LAFTA):

This association became operative in June 1961. It was comprised of 10 Latin American countries. Some of them were Mexico, Bolivia, Chile, Colombia, Equador and Peru. These countries wanted to have a common market for achieving a rapid increase in trade and development. The LAFTA was, however, superseded by the Latin American Integration Association (LAIA) in 1980.

(iii) Caribbean Free Trade Association (CARIFTA):

It was created by the Caribbean countries in 1968. In 1973, it was transformed into the Caribbean Common Market (CARICOM).

(iv) East African Economic Community (EAEC):

It was established by the East African countries including Kenya, Tanzania and Uganda. This organisation collapsed in 1977.

(v) Association of South East Asian Nations (ASEAN):

Of all the attempts towards integration among the less developed countries, the most successful attempt is the creation of ASEAN in 1967. It includes Indonesia, Malaysia, the Philippines, Singapore, Thailand and Brunei. Vietnam and Myanmar joined the Association in 1995 and 1997 respectively.

Under the framework of a generally export- oriented strategy of development, these countries could liberalise inter-member trade and promote import-substitution. The economic growth rate of the ASEAN is quite high. It accounts for the dominant share of world’s natural rubber, tin and palm oil.

This region is also a prominent producer of timber, sugar, bauxite, coal, coffee and petroleum. The ASEAN is likely to develop in future as a free trade area. India has also joined the countries of this region as a trade partner and has been participating in the ASEAN deliberations.

FTA in Goods:

The negotiations started between India and ASEAN in October, 2003. The Free Trade Agreement (FTA) was finally signed in October, 2009. In order to protect certain categories of domestic producers, a negative list of 489 items was drawn. These items would remain outside the purview of the tariff reduction regime. They included farm products, textiles and automobile components. Palm oil, coffee, tea and paper have been put under highly sensitive list. The import duties on these products will be lowered to about 40-45 percent by 2019.

Under the India-ASEAN free trade agreement, a 10 years period has been provided to make the stakeholders of the sensitive products to adjust themselves to gradual reduction of import tariffs. However, both sides are free to impose safeguard duties, in case the spurt of imports is likely to hurt the domestic industry for four years.

With the signing of the free trade agreement, the India-ASEAN trade is likely rise above $35 billion. India has offered very soft terms to the ASEAN, in the matter of deep tariff reductions and the third country imports. If any member country of ASEAN adds even a 35 percent value to them, those can be considered for imports. On being fully operational, 80 percent of the goods traded will be duty free. ASEAN has decided to turn their region into a single market by 2015.

FTA in Services and Investments:

A Free Trade Agreement (FTA) in services and investments was signed by India with 10 countries of the ASEAN on September 9, 2014. The important articles in the agreement are related to market access, national treatment, increasing participation of developing countries, domestic regulations, recognition, transparency, joint committee on services, reviews, dispute settlement and denial of benefits.

Each ASEAN member country as well as India tabled individual schedule of commitments which are equally applicable to all of them. An annexure on movement of natural persons has also been included in the agreement. This annexure will provide commercially meaningful market across the ASEAN for Indian professionals including those from IT/ITE sectors.

(vi) South Asian Association of Regional Co­operation (SAARAC):

This association came into being in December, 1985. It was formed by India, Bangladesh, Pakistan, Nepal, Sri Lanka, Bhutan and Maldives. Afghanistan joined as the eighth member in 2007. This association despite its existence for 25 years has failed to make the desired headway because of its excessive pre-occupation with political issues.

Problems in the Integration among the Less Developed Countries:

Of the different integration schemes among the less developed countries, ASEAN alone has achieved some measure of success. In all other attempts towards integration, they had to encounter a number of difficulties over and above the problems.

The main stumbling blocks in their successful integration are as below:

(i) Problem in Distribution of Gains:

The most important problem in the successful integration among the LDC’s is connected with the distribution of gains. The gains accrue from new, protected and import-substitution industries. A member can secure gain when the new industries are set up in the home country but suffer loss when the industries are set up in the partner countries. Since most of them are industrially-deficient, each one desires that new industry is started in its territory. Such conflicting demands create serious problem.

Moreover, the gains are not evenly distributed among the developing countries. The benefits or gains are likely to accrue disproportionately to the most advanced nations in the group. This makes lagging nations to withdraw, causing the attempt at economic integration to fail. Such a problem can be overcome, if there is a planned and equitable allocation of investment projects among the member countries.

(ii) Competitive Nature of Economies:

The success of integration requires that the member countries should have complementary economies. That was the basic cause of the success of EU. In case of developing countries, on the other hand, the economies are generally of a competitive nature and they have to compete for the same foreign markets for their agricultural exports.

(iii) Unwillingness to Surrender Sovereignty:

Many less developed countries are not willing to surrender a part of their sovereign authority to make economic and political decisions to some central super-national authority. Unless they are willing to do so, co-ordinated uniform economic policies cannot be framed and adopted.

(iv) Inefficient Means of Transport and Communications:

The existence of larger geographical distances and absence of efficient means of transport and communications may result in higher cost of import even from the member countries. It is possible that the tariff structure is not sufficiently high to neutralise the advantage which a non-member country acquires because of lower transport cost.

(v) Little Influence over Terms of Trade:

The LDC’s produce predominantly primary products, the prices of which have shown a secular declining trend. The advanced countries can import the same products from the diverse sources. The developing countries, the economies of which depend excessively upon the exports of primary goods, tend to compete out the rival suppliers through price reduction.

In such conditions, they have little influence over the terms of trade which have remained secularly unfavourable for them. The experience of OPEC during the last few years showed that the petroleum price violently fluctuated because of non-adherence of members to regulations. This shows inherent weakness of LDC’s in organising an effective customs union.

(vi) Tendency to Set Up Competitive Industries:

The LDC’s have a strong urge to develop a sound industrial base. They want to achieve industrial self-sufficiency. The existence of potentially competitive industrial units creates hindrance in forming a successful customs union.

(vii) Excessive Dependence on Advanced Countries:

The LDC’s depend excessively upon the advanced countries for capital, advanced technical know-how and a large variety of manufactured products. They are under huge external debt burden. They persistently have an unfavourable balance of payments with the advanced countries. Given the excessive dependence of poor countries, there is little likelihood that they can afford to raise tariffs against the products of advanced countries.

(viii) Differences in Political System:

Still another hurdle in the organisation of customs union among the developing countries is a great diversity in their political systems and institutions. The integration of non-homogeneous political structures in the member countries is an extremely difficult proposition.

In view of formidable barriers in the organisation of a permanent arrangement of the type of customs union, common market or economic union in the LDC’s, it seems worthwhile that the developing countries should have a less ambitious approach. They should limit the regional co-operation to mutual reduction of tariffs to expand trade among themselves at the first instance and make collective efforts to secure greater access for their exportable products to the markets of developed countries on more favourable terms.

In this connection P.R.D. Wilson commented, “Perhaps LDC’s should limit regional integration to more ad hoc co-operation over tariff reduction in particular products and joint bargaining with DC’s over the importation of foreign capital and technology.”