3.1 The Concept Regional Integration
3.1.1 Key Issues that Motivate Regional Integration
In the initial stages the rallying point for regional integration for the Southern Africa region was completely different from that of many regions (Langhammer and Hiemenz (1990). The early stages of regional integration in SADC were motivated by the strong desire to free the region from colonialism. Later the region was attracted by the expected regional economic development. Generally, the main reason why countries get into an integration arrangement is because of the expected benefits whether economic or non-economic. If there is no expected benefit from entering into a regional integration, then countries are unlikely to participate in the arrangement. This chapter will explore the expected economic benefits first and then attempt to relate them to the thinking that informs the African economic ethic of indigenisation.
Firstly, there is the so called “training ground” argument. According to Viner’s (1950) customs union theory there are two short-run effects of allowing liberal intra-regional trade: Domestic production is replaced by imports from countries that are partners in the arrangement. Known as trade creation, and the replacement of imports from non-member countries with goods from member countries, known as trade diversion. Such effects on the market arise from trade liberalisation in which preferential treatment is given to regional members’ products and services while non-member countries’ goods are less preferred. In this analysis Viner (1950) notes that trade creation was welfare increasing especially for the nations involved while trade diversion was regarded as welfare reducing from a world welfare perspective. Viner’s views were however contested by Gehrels (1956), Lipsey (1957; 1960), and Meade (1955), who observed that a trade
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diverting customs union could in fact be welfare creating while a trade creating customs union could be welfare reducing.
Viner’s conclusions were dismissed by many policy makers in developing countries and scholars who found the conclusions irrelevant in the conditions which prevailed in developing countries such as those in SADC. They observed idle capacity. In their assessment they found trade expansion being beneficial and they even argued for traded diversion. Their arguments were based on the expected ‘posture effect of infant industry’ protectionism approach. Such effects would help prepare infant industries on issues such as quality control and marketing which could help for future success (Linder, 1966; Jaber, 1970).
Further in line with the views of Linder (1966) and Jaber (1970), Morawetz (1974) argued that with integration trade growth can encourage an intra-industrial specialisation base on product diversification, hence leading to an improvement in the competitiveness of export out of an integrated region. Promotion of regional capitalists can be viewed along these lines and a regional approach to indigenisation can be pursued along the lines of Linder and Morawetz’s argument.
The second reason why countries get into regional integration is that they would expect to enlarge the size of their domestic market in order to achieve economies of scale. By entering into a regional integration, developing countries expect a reduction in costs of investment per unit of output (Vaitsos, 1978). This thinking was informed and supported by empirical studies done for developed and developing countries. This was especially so for capital-intensive industries and when the developing countries had small markets. Regional integration would therefore support regional industrialisation. In line with indigenisation regional integration should see an increase in locally owned or indigenous industries. This would be another way of domesticating capitalism in the region as indigenous capitalists would get an opportunity to create wealth and with more wealth created by local people poverty would also be expected to decline.
However, scholars like Kahnert, Richards, Stoutjesdijk, and Thomopoulos (1969:22) challenged the argument of economies of scale in that the growth in the size of companies or production would not simply translate into increased economies of scale because other factors such as marketing distribution and transport costs could also grow disproportionately. The need for
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developing efficient regional communication and transport networks is apparent from this argument with the advent of informational and communication technology and the internet.
Kahnert et al’s argument would be weakened because of lower communication costs but transport infrastructure remains critical even for integration as in the case of the SADC if the distribution costs are to be reduced.
The third reason for countries to enter into a regional integration arrangement would be to improve resource allocation and availability of resources at the regional level. With the understanding that small domestic markets limit economic growth, regional integration has been perceived as a way of reducing the effects of small restrictive domestic markets on economic growth. Before exposing the small developing economies to highly a competitive global neo- liberal capitalist market, regional integration enables countries to set up intra-regional divisions of labour based on the comparative advantages of member states. This enhances regional production efficiency and hence low costs of production and competitive pricing models. A more efficient allocation of regional resources is expected, and more funds can be availed for more wealth creation and hence regional economic growth (Kahnert et al, 1969:26; Langhammer and Hiemenz, 1990:5). This argument is valid when the availed resources are fully utilised. Where resources are idle the challenge becomes that of employing them rather than the reallocation which would make sense to already employed resources. Langhammer and Hiemenz (1990:6) however observed that the argument of improving resource availability and resource allocation was more valid for developing countries at advanced and middle-income levels of development, unlike low income countries which might end up with low resource utilisation.
The fourth reason for regional integration would be to enhance industrialisation. Most developing countries have accepted that industrialisation leads to rapid economic growth and development. However, industrialisation requires large capital costs. In cases where the size of the domestic market is small and characterised by low consumption levels which do not justify high capital expenditure needed for industrialisation, a regional export drive helps broaden the market needed to support large scale industrialisation and draw benefits from economies of scale.
Regional integration provides an opportunity for broadening the market and hence economies of scale which promote industrialisation for a bigger market. Industrialisation for regional import substitution becomes easier.
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Even though developing countries forego the benefits of importing cheaper products in favour of import substitution in areas where they have no comparative advantage, they derive comfort in the belief of better days to come as a result of industrialisation or industrial capacity development. Since industrialisation would be done for a larger regional market, regional integration lowers the opportunity costs of import substitution as the industrialisation costs would be less than benefits of bigger market. The only challenge with opening the domestic market would be the foregone or the sacrificed domestic industrial capacity in case of the existing regional competition. For such losses there should be compensation through reciprocal preferences for industrial products given away by other member countries. This however is not very practical as each member country would demand preference to be given to products in which it has comparative advantage over others in the group (Langhammer and Hiemenz, 1990:6). Sometimes countries are endowed differently with resources such that some may have limited or not have industries to produce products for negotiations on the basis of compensatory preferences. Instead they could be enjoying comparative advantages in non-industrial products making negotiations on mutual basis of compensatory preferences difficult. On the other hand, stronger countries can put pressure on weaker members to provide a market for high cost products produced by the stronger member without reciprocal compensation in line with mutual industrial terms (Johnson, 1967:206). The weaker countries in this case exhibit weak capacity to domesticate capitalism and would benefit from a regional effort to domesticate capitalism especially with a collaborative regional approach borrowing from indigenisation values which seek to increase greater participation in the regional economy by the indigenous people. Despite all these challenges, intra-regional trade, in cases where there is comparative advantage in the industrial sector every partner may benefit by gaining from trade compared to other option of import substation at the national level.
The fifth motivating factor for regional integration, though more on the cooperation side, is the joint production of public goods. This is possible when the nature of the public goods is such that it is non-excludable and there is no rivalry in its production. Furthermore, when pareto-relevant technological externalities exist, that is, when there is interdependence in the “production and/or utility functions of the economic agents” like exploitation of internationally mobile fish and
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world life Langhammer and Hiemenz, 1990:7) Benefits and cost are easier to share in cases of public goods and services which are provided under a regional integration arrangement.
Another economic benefit of regional integration is the protection against adverse developments in the world markets. Commodity export dependent countries benefit from a reduction of external vulnerability. It has been observed that regional integrations “…foster structural change in production from primary to the secondary sector and within exports towards manufactured goods” (Langhammer and Hiemenz, 1990:8). An industrialisation and value addition drive is evident. For post-colonial African countries, regional integration offers an opportunity to develop new trade routes and links different from those left by imperial countries which promote risk and dependence for weak African countries’ economies. Such capitalist practices based on strong exploitative economic dependence links become risky in cases of erratic price fluctuations in the commodity markets. With regional integration it would be less detrimental as alternative regional markets can be created. Lewis (1980) argued that through regional integration there is protectionism on developing countries’ economies. However, the slower growth that arises from regional integration would need a new engine to drive development. In this case he believes that trade among developing countries or broadly the South-South preference scheme could be such an engine. Lewis seems to suggest that there is scope for the creation of value and growth within the developing economies. This thinking proposes developing a strong capitalist economy within the developing world through regional integration. Such a strong capitalist system would help domesticate capitalism and develop the much-needed capacity of these developing countries to participate in a highly competitive neo-liberal global capitalist economy.
Other than the expected economic benefits of regional integration, there are several non- economic benefits that have been observed by many scholars. One critical benefit as argued by Langhammer and Hiemenz (1990:9) is that regional integration improves the collective bargaining power of weaker developing countries against stronger industrialised countries. They can speak with one voice. Such bargaining power can be economic and political. Economically developing countries which can be primary commodity markets can come together and form mini-cartels and enjoy monopoly rents in jointly demanding better deals and access to markets of developed countries (Akinyemi and Aluko, 1984:13). Because of geographical proximity in regional integration, it is highly likely that countries can produce similar commodities because of
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similar climatic geological conditions. There are high possibilities that they supply similar agricultural and mineral commodities which make it ideal for cartels. Cartels if used to improve the collective bargaining power can offer short-term income gains. The only problem is whether individual countries would be able to maintain the discipline required in a cartel. Some member states might be pursuing their own national interests at the expense of collective regional interest.
The other challenge would be in cases where the regional grouping has no capacity to value add in certain commodity lines and the will fail to secure concessions from industrialised countries.
On the demand side of commodities or products, regional integrations can pool their import demand into the region. However, coming up with an import policy might be difficult because countries may not import homogeneous commodities. Furthermore, the import levels may vary with income levels and industrial capacity. Generally, developing economies remain small even after bundling their import demand. They will not be able to come up with a monopolistic position to enjoy income gains through putting in place optimum tariffs or coming up with terms of trade gains through any means (Keohane, 1982).
Politically, when countries under a regional integration use collective bargaining, they can have greater voting power to influence favourable international decisions or negotiation outcomes.
There are also improved prospects for regional security in regional integration. From the regional security perspective countries in a regional organisation tend to develop consensus and become committed to common regional objectives. Consensus building becomes easier, especially when a common threat to the region’s interest is identified. This has been observed in SADC because of its common colonial history and struggle against oppression and colonialism. Consensus building only gets weakened when the common threat ceases to exist and each member state finds more benefit in pursuing its individual interests (Krasner, 1982).
Another benefit of regional integration is to promote domestic political and economic stability.
Then regimes naturally align to regional norms and practices and cannot simply come up with new policies which contradict regional norms. However, to the contrary regional integrations may provide a scapegoat for unpopular policy or decisions. Regimes will simply shift the responsibility to the anonymous supranational body, for example, sector specific policies which help redistribute wealth can be unpopular and controversial in a specific country but can be
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attributed to the remote anonymous supranational body (Pelkmans, 1983; 1986). Policies such as indigenisation will thus be easier to implement in countries where they are not popular or controversial.