Economic and Political Literature

This article aims to provide an overview of the literature on theories of economic integration from both an economic and a political perspective, with particular attention to the case of developing countries. Some professors define economic integration differently. According to Balassa (1961), economic integration is defined as "abolishing discrimination within an area". Balassa's work for different forms of economic integration is seen as the cornerstone. He speaks of four different levels of economic integration. The first is a free trade area (FTA) this means zero duties between member states but trade barriers to non-member states, then a customs union (CU) agreement to apply the common external tariff to goods imported from abroad, then a common market (CM) free movement of labor and capital between member states and finally an economic union the most advanced type for example countries of the EU who use a single currency, the Euro.

Theorists claim that the theory of economic integration has gone through two phases of evolution, which are argued as gains. First, traditional theories of economic integration explain the possible gains from trade and economic integration. The first theory and the important one is `Viner's Traditional Customs Unions theory` this proves that countries are motivated to integrate if integration is likely to lead to static gains rather than losses. With this theory, developments were made like Trade-Diversion and Welfare, Secondary effects, Small vs. Large Tariff reductions or like Gradual Tariff reductions. And second, the new theories of economic integration that have evolved with changing economic conditions and trade environments. Over the years, it has been found that static analysis is insufficient to capture welfare gains, so dynamic analysis needs to be highlighted. These changes came for example through Economies of Scale, Increased importance of Services or Increased importance of Foreign Direct Investment.

Balassa argued that the theoretical literature on economic integration for developing countries dealt almost exclusively with the customs union between industrialized countries. Therefore, after the Viner era, new theories of economic integration emerged that are adapted to the special needs of developing countries. An attempt was made to answer the following two questions: How does economic integration affect the well-being of the world? These were limitations of the production effects like employment and productivity effects or changing patterns of trade with developed countries. What factors influence the desirability of economic integration? These were Limitations of the Factors affecting the desirability of Economic Integration like the size of the union or the Proportion of trade with member countries.

The political determinants of economic integration, political officials are the ones who eventually sign economic integration agreements. Political motives and incentives are therefore crucial determinants. Political factors are therefore of general importance, e.g. International negotiations for the ability of the member countries to strengthen their bargaining power or strategic interaction is the formation of the EFTA in response to the formation of the EEC (now the EU). Also political factors of particular importance for developing countries such as the dependency theory that politicians and economists from developing countries can actually promote economic integration programs with other developing countries or the stage of political entrance this means that economic integration usually precedes political integration. Ultimately, however there must be favorable political and economic factors together for an economic integration program to be successful.

--- Sinan BULUT

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