Stages of advancement (forms) of economic integration

Processes of economic integration are characterized by stages. By B. Ballasa, considered as classical one, there are five stages of integration process. Starting with the simplest regional forms of economic integration, there are followed by: a free trade zone, customs union, common market, economic and monetary union and a total integration. Each of mentioned stage is characterized by specific charts. The main characteristic charts in singular stages, are presented in Table 2.1.

The simplest institutionally form of the integration grouping, is a free trade zone. Its target is elimination of customs and quantity limits in trade between member countries and, at the same time, keeping by each member country, a full autonomy in economic and customs politics, in relations with countries, which are not members of the zone.

Creation of the free trade zone, in practice, is often preceded by leading preferential commercial agreements, or automatically removing customs in mutual trade [26, p.67].

Table 2.1. Institutional forms of regional integrative groupings

Institutional forms of regional integrative groupings

Source: [6,p.26 ]

Liberalization of commerce in the free trade zone usually happens in stages - analytical schedule to abolish customs barriers and quantity limits for singular groups of goods, is contained in an agreement, signed by countries creating this zone. Such gradual abolishing limits in the commerce, goes to minimalize negative effects of exaggerated competition, and allows the right effect for results of creation and reallocation of commerce, which accompany functioning of free trade zone.

Subject of an agreement of the free trade zone, can be a whole trade sale between countries creating the zone, or only chosen groups of goods. In the second case, usually comes a total abolish of barriers, towards industrial goods, while liquidation of agricultural goods trade, has a selective and partial character (customs and quantitative limits for chosen agricultural products are abolished totally, for others are reduced, and for some stay the same).

After creation the free trade zone, commercial sales between member countries become more liberal. It means that goods, made by member countries, are cheaper by abolished customs in the grouping market. While, towards the third countries, each country uses its own, most often different customs and commercial politics. In a consequence, in the zone area, goods, coming from countries of its zone, are treated differently than from other countries.

The higher form of regional grouping, is the customs union. It is thought to be a stem of integration groupings, and has the most built theory among other forms of integration groupings. Progress of the customs union theory, is tied with J. Viner and his book 'The Customs Union Issues', published inl950.

An essence of the customs union is a full liberalization of mutual trade sales, acceleration a common outside customs tariff and unification of commercial politics, towards other countries. It means that customs politics of this grouping, is focused on liberalization of trade between member countries and discrimination goods from other countries, at the same time.

J. Viner writes that a basic target of the customs union, and a main effect of its functioning, is reallocation of supply sources into specific goods. Depending on circumstances, this reallocation can go either, to a place of lower, or to higher manufacturing costs of these goods [32, p.77].

Abolish customs in mutual trade of countries, creating the union, and keeping them exchange with other countries, cause specific effects. In the literature, most often they are divided into static and dynamic ones.

Static effects appear in a short period, so they have another name - short periodical effects. They appear, when there are not structural changes (changes of equipment in manufacturing factors, changes in structure of production and consumption), or technical - technological changes ( changes of a speed of technical progress and its structure ). Static effects can be divided into commercial, which appear in the trade zone of goods and services, and outside commercial effects, which appear in investments, production and consumption zone.

Dynamic effects, called also long periodical ones, appear with reaction and adaptation of enterprises, governments and labor force, to changes made by creation of the customs union. A result of these adaptive processes, is a stimulation of economic development of the member countries of the union.

Commercial static effects, characteristic for the customs union are: effect of commerce creation and effect of commerce reallocation (changes of commerce directions). They go to a change of volume and structure of commerce. The first of them, concerns mutual trade between member countries of the union, the second one, the commerce of the union members with the third countries. These effects can also appear after creation of the free commerce zone.

Effect of commerce creation, is a creation new stream (streams) of commerce between member countries of the union, resulted by abolish of customs and other limits in the mutual commerce, keeping these barriers in the commerce with countries, which are not members of the union, at the same time. As a result of commerce liberalization, products, imported from member countries, become, in the specific country market, cheaper ( price - related functioning of customs and other barriers is eliminated ), so they are more competitive, than product made in this country. As an effect, the country production is replaced by import from a partner country. A condition to appear the effect of commerce creation, are differences in manufacturing costs of a specific product in singular countries.

A power of the commerce creation effect depends on following factors:

- price flexibility of demand of the country, which has not imported this good so far (the higher flexibility of demand is, the more intensive the commerce creation effect is, while, at a set flexibility, the more intensive creation effect is, the higher were customs rates between countries of the zone before its creation, and the bigger are differences in the costs of production of a similar good, in singular zone countries);

- price flexibility of demand in the country of a cheaper manufacturer;

- keeping a difference in costs and prices.

Liberalization of the commercial exchange in the customs union can cause, that a steam of it from countries, which are not members of the integration grouping, will be replaced by supplies of goods from member countries, even if a member country is characterized by lower production costs. It is connected with preferential treatment goods from member countries, which price and out price competiveness rises, thanks to abolition of commercial barriers and discrimination goods, from countries, which are not members. This phenomenon is called the effect of commerce reallocation. It means a worse allocation of sources, both on member countries side, and the whole world economy. This effect will be always unprofitable for more effective third country. Reallocation of commerce is also accompanied by production and consumption effects, which, in this case, we can find in a relation: member countries - countries, which are not members.

A power of the commerce allocation depends on:

- price flexibility of demand in the importing country and price flexibility in the exporting country;

- outside customs rate;

- reaction of suppliers from the third countries, and reaction of manufacturers from the countries belonging to the zone.

The following stage, of the integration process, by B. Balassa, is the common market. It joins elements characteristic for the customs union -liberalization of the internal trade, a uniform outside customs tariffs and the common economic politics towards the third countries, with a free flow between member countries, and factors of production ( labor and capital ) [ 6, p.27 ].

In frames of the common market happens leading, such called rule of four freedoms, containing the free flow of goods, services, capital and people.

According to the theory of international trade, creation of the common market leads to an increase the economic effectiveness in the region. It happens, thanks to the right allocation of production factors - factors reallocate from areas with a lower final productivity, to areas of the higher final productivity [6 , p.33].

In the literature of the subject, an essence of functioning of the common market, is explained in various theoretical models. Generally, they can be divided into two groups - neo classic (concerning the integration of capital market and labor market) and modern models, containing elements of the theory of international production (stressing internal diversity of capital - flow of payments, portfolio investments, direct international investments) [6 , p.33].

The free flow of production factors causes, that factors go out of the country rich of them, to the country, in which they are relatively rare, and, in which you can get a higher rate of return with their application. Effects are short periodical adaptations of supply and prices of production agents, in the integrating countries.

The most mobile agent of production is capital. Flow of capital, especially productive capital, is accompanied, most often, by migration of technical knowledge, licenses, patents and international flow of labor, which are correlated with improving qualifications and cooperation with specialists [6, p.31].

The following stage of the economic integration, is a monetary union. The monetary union is an important element of the economic integration processes, because an effective functioning of the customs union, the common market or the economic union, is impossible without an advanced integration in the monetary zone.

Theoretically, the monetary union can be realized itself or along to the economic union. In reality, realization of the monetary union, is an element of the economic union functioning.

The monetary union contains all elements, characteristic to the common market, and additionally is characterized by the common capital market (including financial one) of integrating countries and the full rate union.

Three main premises of the monetary union, mentioned in the literature of subject, are:

- internal logics of the integration processes (coming to the stage of the common market, forces a progress in the monetary integration);

- crisis of the international monetary system (it is about the crisis of the system from Bretton Woods, which became a reason to start actions, going to the monetary integration, by countries of European Community);

- elimination of the rate risk and costs of monetary exchange. In case of European Community, reasons, mentioned above, appeared at the

end of the sixties of the 20th century. Then, it became clear, that a farther progress of economic integration is not possible, without acceleration of the monetary integration.

For the right functioning of the monetary union, some conditions are necessary. They are:

- liberalization of the capital sales and providing a freedom of financial service (integration of the capital market means a full freedom of the capital flow, portfolio, productive one ) and an income from lending and productive capital);

- elimination of differences in fluctuation of exchange rate or setting a common currency;

- creation an over national centre of issuing banks, leading the common monetary politics;

- effective coordination of the economic politics of member countries, to eliminate essential differences in stage of the economic cycle.

In the literature, besides the monetary union, there are differed also, the rate union, the union without limited administratively rates and the union with parallel currency. All mentioned forms of the monetary integration, present a narrower range than the monetary union.

In case of the rate union, we can speak about the full and the partial rate union ( pseudo union ). In the partial rate union, a member country is obliged to keep its permanent currency rate, towards the currency of other member countries. It means, that fluctuation of rates is allowed, only in strictly limited borders. At the same time, the member country can keep its own currency reserves, and its own monetary and fiscal system.

The full rate union means, that monetary politics of the whole grouping, is shaped by the common central bank, which can issue the common currency, and keeps common currency reserves of the member countries. One of the banks, creating the union, can takeover functions of the common central bank.

The conception of the union without limited administratively fluctuation of rates, sets, that coordination of the monetary politics, will contribute to approach of creation basic sizes of the monetary market, and they will stabilize in the natural way. The union with parallel currency is the parallel functioning of the common currency, to the national currency of countries, creating union.

W. Molle presented, a little different from B. Balassa, picture of stages of the economic integration [19, p.31].

He thinks that economic integration is the process happening on two fields -market and politics. On the market field, the integration concerns the market of goods, services and the market of production factors. The integration of markets is realized by elimination obstacles, which make hard, a free flow of goods, services and production factors, between member countries. It contributes to improve the effectiveness of economy. The essence of integration in the political field is the integration of intervention influence of governments on economy. Integration in these two fields has, due to the author, (by an author,) a stage character. He differed following stages in the integration of goods and services:

- the free trade zone - all obstacles in trade between partners, are abolished, and, at the same time, each country can use its own customs tariffs, towards other countries; goods in the international trade must have origin certificates;

- not full customs union - obstacles between member countries are abolished, and towards goods coming from the third countries, it is led the common outside customs tariff , so, there is no need to show origin certificates on internal borders; whereas barriers towards some goods are kept,

- the customs union - all obstacles in the trade are abolished and the common outside customs tariff is led.

By W. Molle, the integration of production factors happens in two stages:

- not full common market - its first element, is not full customs union, there is a freedom of internal flow of significant segments of labor and capital, in relations with the third countries, different country regulations can be obligatory -like in the free trade zone - or common regulations - like in the customs union;

- the common market - is consisted of a domestic market, where a freedom of flow of goods, services and production factors is obligatory, as well as, common outside regulations, concerning, both goods, services and production factors. In the integration in political field, W. Molle differs three stages:

- the economic union - determinates the common market, and a high level of coordination or unification of the most significant branches of economic politics;

- the monetary union - currency of member countries are tied by steady currency rates, and, are fully exchangeable, or, in all member countries there is one obligatory currency, reallocation of capital in the union borders is totally free;

- the economic and currency union joins characteristic charts of monetary union and economic one, besides, it is characterized by a big cohesion of macroeconomic and budget politics. To other charts of integration, W. Molle counted:

- political union - in its frames, integration goes out of economic field and contains branches, like foreign politics, to prevent crimes ( police ) and politics of safety,- full union - determinates a total unification of joining economies, and leading a common politics in many important branches, for example: social safety, income taxes, macroeconomic politics and stabilization politics.

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