Economic integration is the unification of economic policies between different states through the

partial or full abolition of tariff and non-tariff restrictions on trade taking place among them prior to
their integration. This is meant in turn to lead to lower prices for distributors and consumers with the
goal of increasing the combined economic productivity of the states.
The trade stimulation effects intended by means of economic integration are part of the
contemporary economic Theory of the Second Best: where, in theory, the best option is free trade,
with free competition and no trade barriers whatsoever. Free trade is treated as an idealistic option,
and although realized within certain developed states, economic integration has been thought of as
the "second best" option for global trade where barriers to full free trade exist.
Etymology[edit]
In economics, the word integration was first employed in industrial organisation to refer to
combinations of business firms through economic agreements, cartels, concerns, trusts, and
mergershorizontal integration referring to combinations of competitors, vertical integration to
combinations of suppliers with customers. In the current sense of combining separate economies
into larger economic regions, the use of the word integration can be traced to the 1930s and
1940s.
[1]
Fritz Machlup credits Eli Heckscher, Herbert Gaedicke and Gert von Eyern as the first users
of the term economic integration in its current sense. According to Machlup, such usage first
appears in the 1935 English translation of Hecksher's 1931 bookMerkantilismen (Mercantilism in
English), and independently in Gaedicke's and von Eyern's 1933 two-volume study Die
produktionswirtschaftliche Integration Europas: Eine Untersuchung ber die
Aussenhandelsverflechtung der europischen Lnder.
[2]

Objective[edit]
There are economic as well as political reasons why nations pursue economic integration. The
economic rationale for the increase of trade between member states of economic unions that it is
meant to lead to higher productivity. This is one of the reasons for the global scale development of
economic integration, a phenomenon now realized in continental economic blocks such
as ASEAN, NAFTA, SACN, the European Union, and the Eurasian Economic Community; and
proposed for intercontinental economic blocks, such as the Comprehensive Economic Partnership
for East Asia and the Transatlantic Free Trade Area.
Comparative advantage refers to the ability of a person or a country to produce a particular good or
service at a lowermarginal and opportunity cost over another. Comparative advantage was first
described by David Ricardo who explained it in his 1817 book On the Principles of Political Economy
and Taxation in an example involving England and Portugal.
[3]
In Portugal it is possible to produce
both wine and cloth with less labor than it would take to produce the same quantities in England.
However the relative costs of producing those two goods are different in the two countries. In
England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal
both are easy to produce. Therefore while it is cheaper to produce cloth in Portugal than England, it
is cheaper still for Portugal to produce excess wine, and trade that for English cloth. Conversely
England benefits from this trade because its cost for producing cloth has not changed but it can now
get wine at a lower price, closer to the cost of cloth. The conclusion drawn is that each country can
gain by specializing in the good where it has comparative advantage, and trading that good for the
other.
Economies of scale refers to the cost advantages that an enterprise obtains due to expansion. There
are factors that cause a producers average cost per unit to fall as the scale of output is increased.
Economies of scale is a long run concept and refers to reductions in unit cost as the size of a facility
and the usage levels of other inputs increase.
[4]
Economies of scale is also a justification for
economic integration, since some economies of scale may require a larger market than is possible
within a particular country for example, it would not be efficient for Liechtenstein to have its own
car maker, if they would only sell to their local market. A lone car maker may be profitable, however,
if they export cars to global markets in addition to selling to the local market.
Besides these economic reasons, the primary reasons why economic integration has been pursued
in practise are largely political. The Zollverein or German Customs Union of 1867 paved the way
for German (partial) unification under Prussian leadership in 1871. "Imperial free trade" was
(unsuccessfully) proposed in the late 19th century to strengthen the loosening ties within British
Empire. The Econopean Economic Community was created to integrate France and Germany's
economies to the point that they would find it impossible to go to war with each other.
Economic theory[edit]
The framework of the theory of economic integration was laid out by Jacob Viner (1950) who defined
the trade creation andtrade diversion effects, the terms introduced for the change of interregional
flow of goods caused by changes in customs tariffs due to the creation of an economic union. He
considered trade flows between two states prior and after their unification, and compared them with
the rest of the world. His findings became and still are the foundation of the theory of economic
integration. The next attempts to enlarge the static analysis towards three states+world (Lipsey, et
al.) were not as successful.
The basics of the theory were summarized by the Hungarian economist Bla Balassa in the 1960s.
As economic integration increases, the barriers of trade between markets diminish. Balassa believed
that supranational common markets, with their free movement of economic factors across national
borders, naturally generate demand for further integration, not only economically (via monetary
unions) but also politicallyand, thus, that economic communities naturally evolve into political
unions over time.
The dynamic part of international economic integration theory, such as the dynamics of trade
creation and trade diversioneffects, the Pareto efficiency of factors (labor, capital) and value added,
mathematically was introduced by Ravshanbek Dalimov. This provided an interdisciplinary approach
to the previously static theory of international economic integration, showing what effects take place
due to economic integration, as well as enabling the results of the non-linear sciences to be applied
to the dynamics of international economic integration.
Equations describing:
1. enforced oscillations of a pendulum with friction;
2. predator-prey oscillations;
3. heat and/or gas spatial dynamics (the heat equation and Navier-Stokes equations)
were successfully applied towards:
1. the dynamics of GDP;
2. price-output dynamics and the dynamic matrix of the outputs of an economy;
3. regional and inter-regional migration of labor income and value added, and to trade creation
and trade diversion effects (inter-regional output flows).
The straightforward conclusion from the findings is that one may use the accumulated knowledge of
the exact and natural sciences (physics, biodynamics, and chemical kinetics) and apply them
towards the analysis and forecasting of economic dynamics.
Dynamic analysis has started with a new definition of gross domestic product (GDP), as a difference
between aggregate revenues of sectors and investment (a modification of the value added definition
of the GDP). It was possible to analytically prove that all the states gain from economic unification,
with larger states receiving less growth of GDP and productivity, and vice versa concerning the
benefit to lesser states. Although this fact has been empirically known for decades, now it was also
shown as being mathematically correct.
A qualitative finding of the dynamic method is the similarity of a coherence policy of economic
integration and a mixture of previously separate liquids in a retort: they finally get one colour and
become one liquid. Economic space (tax, insurance and financial policies, customs tariffs, etc.) all
finally become the same along with the stages of economic integration.
Another important finding is a direct link between the dynamics of macro- and micro-economic
parameters such as the evolution of industrial clusters and the GDP's temporal and spatial
dynamics. Specifically, the dynamic approach analytically described the main features of the theory
of competition summarized by Michael Porter, stating that industrial clusters evolve from initial
entities gradually expanding within their geographic proximity. It was analytically found that the
geographic expansion of industrial clusters goes along with raising their productivity and
technological innovation.
Domestic savings rates of the member states were observed to strive to one magnitude, and the
dynamic method of forecasting this phenomenon has also been developed. Overall dynamic picture
of economic integration has been found to look quite similar to unification of previously separate
basins after opening intraboundary sluices, where instead of water the value added (revenues) of
entities of member states interact.
Success factors[edit]
Among the requirements for successful development of economic integration are "permanency" in its
evolution (a gradual expansion and over time a higher degree of economic/political unification); "a
formula for sharing joint revenues" (customs duties, licensing etc.) between member states (e.g., per
capita); "a process for adopting decisions" both economically and politically; and "a will to make
concessions" between developed and developing states of the union.
A "coherence" policy is a must for the permanent development of economic unions, being also a
property of the economic integration process. Historically the success of the European Coal and
Steel Community opened a way for the formation of the European Economic Community (EEC)
which involved much more than just the two sectors in the ECSC. So a coherence policy was
implemented to use a different speed of economic unification (coherence) applied both to economic
sectors and economic policies. Implementation of the coherence principle in adjusting economic
policies in the member states of economic block causes economic integration effects.
Obstacles to economic integration[edit]
Obstacles standing as barriers for the development of economic integration include the desire for
preservation of the control of tax revenues and licensing by local powers, sometimes requiring
decades to pass under the control of supranational bodies. The experience of 1990-2009 has shown
radical change in this pattern, as the world has observed the economic success of the European
Union. So now no state disputes the benefits of economic integration: the only question is when and
how it happens, what exact benefits it may bring to a state, and what kind of negative effects may
take place.