In the Western economic literature discussions of the types of economic integration of national states have customarily focused on the various stages of integration. From its lowest to its highest forms, integration has been said to progress through the freeing of barriers to trade (trade integration), the liberalisation of factor movement (factor integration), the harmonisation of national economic policies (policy integration) and the complete unification of these policies (total integration).

These definitions have been criticised on the grounds that they conform to the principles of classical economic doctrines but do not apply to present-day market economies, which are characterised by a considerable degree of state intervention, and apply even less to developing and to socialist economies. <…>

Integration in Developed Market Economies

The European Common Market or European Economic Community (EEC) is the dominant integration scheme in developed market economies. It has absorbed the United Kingdom. the major participant in its would-be competitor organisation, the European Free Trade Association, and now accounts for over four-fifths of the gross national product of Western Europe. Following the creation of the EEC, the existent quantitative restrictions on intra-area trade were soon abolished; tariffs on intra-area trade were reduced (and, ahead of schedule, eliminated (1968); and a common tariff for extra-area imports was established.

The freeing of barriers to trade was accompanied by the rapid expansionof trade among the partner countries. Between 1959 and 1971, trade among the original member countries of the EEC (Belgium, France, Germany, Italy, Luxembourg. and the Netherlands has increased nearly sixfold, as against a fourfold increase in their total imports and exports. As a result, the share of intra-EEC trade in the total rose from one-third in 1959 to one-half 1971.

The question arises of whether, and to what extent, the expansion of intra-EEC trade represents trade creation (the replacement of domestic by partner-country sources of supply) or trade diversion (the replacement of foreign by partner-country sources) and how these changes in trade flows affect the welfare of member and nonmember countries. Trade creation is considered beneficial as the elimination of protection for domestic production vis-à-vis producers in the partner countries permits the replacement of higher-cost domestic products with lower-cost partner-country products. In turn, trade diversion may be detrimental both to member and to nonmember countries. The elimination of barriers to intra-area trade entails discrimination againstimports from nonmember countries that continue to pay a duty, thus providing inducement to replace the lower-cost products of nonmember countries by higher-cost products of the partner countries. <…>

Higher growth rates associated with the establishment of the EEC have also had beneficial effects on nonmember countries by increasing demand for their exports. These favourable effects, then, have contradicted the adverse repercussions due to trade diversion that some of these countries have experienced. <…>

Rapid increases of trade in manufactured goods indicate that firms in the member countries have made use of the possibilities offered by the abolition of tariffs and of quatitative restrictions. Increased trade has, in turn, contributed to the acceleration of economic growth in the EEC countries by permitting the exploitation of economies of scale and greater competition. Economies of scale have been appropriated as increased specialisation has led to the construction of larger plants, the lengthening of production runs in the manufacture of particular goods, and the use of specialized machinery and equipment. Gains have also been obtained through the rationalisation of production that has resulted from the increased competition, especially in the previously highly protected economies of France and Italy.

Increased investment undertaken to exploit the possibilities for economies of scale has given a further boost to economic growth in the member countries, enabling them to maintain the rates of growth attained during the period of post-war reconstruction. Growth has been most rapid in Italy, with the result that differences in income levels among the individual countries have narrowed. Furtherimore, all but one of the twenty-two regions that had income levels below four-fifths of the Community average have experienced higher-than average growth rates. The most rapid increases have occurred in Southern Italian regions, where incomes per capita were the lowest. <…>

It should, however, be added that the effects of the EEC on various groups of nonmember countries have been rather uneven. The main beneficiary has been the United States, which is the principal supplier of the sophisticated machinery and equipmentdemanded in the EEC countries. By contrast, developing and socialist countries have been adversely affected by trade diversion in food and in simple manufactured goods. In particular, by increasing barriers to food imports, the common agricultural policy has penalised foreign suppliers as well domestic consumers. This contrasts with reductions in tariffs on the imports of industrial materials and manufactured goods in the framework of multilateral trade liberalisation that has proceeded since the Second World War.

While the beneficial effects of integration on economic growth in the Common Market stem from ‘market integration’ in manufactured goods following the elimination of barriers to intra-area trade, little progress has been made with regard to ‘production and development integration’. In technologically sophisticated industries, such as the aircraft, space, computer and electronics industries, where efficient operations are limited by the size of national markets, there is as yet no common policy at the EEC level. Rather, decisions on research and development and on public procurement are taken in the national framework, thereby contributing to the establishment and the expansion of national firms that serve largely the country’s own market.

As a result, certain agreements among national firms notwithstanding, production and research in these industries take place at less than optimum scale. This fact has retarded the development of technologically sophisticated industries in the EEC as compared with the United States, where firms have benefited from the existence of a large market and from governmental policies of research and development in particular industries.

Integration in Socialist Countries

The Council for Mutual Economic Assistance (CMIEA) was established in 1949, with the participation of the Soviet Union, Bulgaria, Czechoslovakia, Hungary, Poland and Romania. to provide a framework for the economic cooperation of these countries. Albania and the German Democratic Republic (GDR) joined shortly thereafter; subsequently Mongolia and Cuba became full members, while Albania has ceased to participate in CMEA activities. <…> In 1959 these CMEA countries signed the formal charter of the CMEA, which added to the original purpose of economic cooperation (as stated in the Founding Declaration of 1949) the objectives of speeding up economic and technical progress in the member countries and raising the level of industrialization in less industrially developed countries (Article I).

In turn, the resolution on ‘Basic Principles of the International Socialist Division of Labour’, adopted in 19622, called for the rational division of labour within the CMEA in the framework of long-term agreements based on coordination of national plans. Reference was further made to the need for the increased multilateral coordination of plans, the working out of consolidated economic balances, and ‘the future creation of a Communist economy directed according to a uniform plan’. The coordination of national plans remained one of the key objectives in the Comprehensive Programme adopted in 1971. However, the document emphasized the primacy of national planning bodies in the process of cooperation and that of national interests in intra-CMEA specialization; it made no mention of a common plan.

To date, the main achievements of the CMEA include the exchange of technical information, the establishment of a multinational pipeline and electricity grid, and the creation of a common freight-car pool. Furthermore, differences in income levels have been reduced, as growth has been more rapid in countries at lower levels of development (for instance, Bulgaria and Romania). Finally, long-term bilateral trade agreements between the CMEA member-countries have provided assured markets for the products of the partner countries. With the availability of assured market outlets, the trade of the CMEA countries has continued to grow. However, the rate of expansion has slowed: down, and the share of intra-area trade has declined since the CMEA charter was signed. <…> The share of intra-CMEA trade in the total declined from 71 per cent ill 1959 to 63 per cent in 1971, involving mainly a shift to trade with developed market economies. Whereas, in the period 1953-1959, developed market economies accounted for 21 per cent of CMEA imports (excluding imports from China), their share in the total reached 27 per cent in 1971. In turn, the rate of expansion of imports from developing countries slowed down during the 1960s. The share of these countries in CMEA imports increased from 3.6 per cent in 1953 to 7.4 per cent in 1959 and reached 8.7 per cent in 1971.

Various factors account for the lack of full utilisation of the trade potential of the CMIFA countries and for the trend towards increased imports from developed market economies. To begin with, the centralisation of economic decision making reflected in the planners’ desire to lessen the uncertainty associated with foreign trade, as well as in the absence of direct trade relationships between firms, tends to limit the volume of trade.

Opportunities for trade may also be foregone because of the lack of appropriate price signals. Despite improvements in pricing with the introduction of charges for capital, domestic prices in the CMEA countries do not adequately describe resource scarcities and are divorced from prices in foreign trade. In turn, foreign trade prices show considerable variations in bilateral relationships, while exchange rates do not appropriately reflect inter-country differences in commodity values. Under these circumstances, there is a risk that trade in particular commodities may involve a loss, rather than a gain, for the countries concerned, and the risk tends to discourage trade among them.

Although several of these factors discourage trade with developed market economies as well, the prices used in trade with them tend to reflect scarcity of relationships in the world market. Furthermore, the need for the sophisticated machinery, materials, and other intermediate products that are not available, or are available in limited quantities, in the CMEA countries has given a boost to imports from developed market economies. These imports are paid for largely through exports of food, raw materials, fuel, and simple processed goods. <…>

At the same time, in bilateral relationships between the CMEA countries there is the attempt to attain trade balance for individual commodity groups, in particular for ‘hard goods and for ‘soft goods’. Moreover, countries at lower levels of industrial development increasingly demand that the CMEA partner countries accept their machinery products in exchange for imported machinery.

These developments have reinforced the principle of bilateralism, which tends to restrict the volume of trade and to reduce its efficiency. This is mainly because the requirements of bilateral balancing of trade induce countries to limit imports and to purchase from nations with which the country has an export surplus, rather than from a lower-cost source. <…> The tendence towards bilateralism has not been offset by the operation of the International Bank for Economic Cooperation (IBEC), which has been established for the purpose of carrying out clearing operations and providing credit in intra-CMEA trade.<…>

While specialization agreements have assumed importance with regard to products such as machine tools, ball-bearings, and trucks, their growth has been limited by much the same factors as have restricted the expansion of intra-CMEA trade in general. <…>

Integration in Developing Countries

During the post-war period, various attempts have been made at economic integration among developing countries. Integration schemes in the individual regions include the Latin American Free Trade Association (LAFTA), the Central American Common Market (CACNI). the Andean Common Market (ACM), the Caribbean Community (CARICOM), the East African Community (EAC), the Central African Customs and Economic Union (Union Douaniere et Economique de l’Afrique Centrale, or UDEAC), the West African Economic Community (Communaute Economique de l’Afrique de l’Ouest. or CEAO), the Regional Cooperation for Developmnent (RCD), the Maghreb, and the Arab Common Market.

These integration schemes have generally not lived up to expectation. The CACMI provides the only case where tariffs on intra-area trade were abolished and a common external tariff was adopted. As a result, trade among these countries increased rapidly, with the average initial rate of growth exceeding 30 per cent between 1960 and 1968. However, following the unilateral introduction of fiscal incentives by member countries and the withdrawal of Honduras from the CACM, the rate of increase of intra-area trade among the remaining member-countries declined also.

In LAFTA, the target date for completely freeing trade was repeatedly postponed and the annual negotiations on tariff reductions, carried out on an item-by-item basis, slowed down after a few years and have made practically no progress in recent years, In the ACM, tariff reductions are proceeding according to schedule but quantitative restrictions on intra-area trade have been largely retained and the establishment of the common tariff has been postponed. Finally, in CARICOM, duties on much intra-area trade have been eliminated, but, given similarities in production patterns and high transportation costs among the small islands participating in it, the prospects for the expansion of intra-area trade are not very favourable.<…>

Various factors account for the limited progress made in efforts at ‘market integration’ in developing countries. First, item-by-item negotiations on tariff reductions encounter considerable difficulties because of the power of special interests. Second, difference in the level of industrial development have made agreements on trade liberalisation difficult. Third, in view of the distortions in relative prices due to protection, it has been difficult to determine the benefits to be derived from integration and there has been a tendency to consider changes in the trade balance as a sign of gains or losses. Last but not least, the governments of the individual countries have been reluctant to proceed with integration because they are anxious to safeguard their sovereignty. <…>

While several agreements have been reached with regard to transportation, communications and water resources, where benefits are relatively easily qualifiable, there are few cases of so-called integration industries in developing countries.

In LAFTA, there are twenty agreements on product specialisation among private firms, none of which are in basic industries such metals and metal transformation, petrochemicals and fertilisers, pulp and paper, and heavy equipment.

Iri the ACM, a sectoral programme has been established in the metal transformation industries but technical obstacles have so far impeded the establishment of firms in the branched allocated to several of the countries. There are no integration industries in CARICOM, while in the CACM only three plants are operating under the integration-industry regime that provides exclusive rights to the CACM market.

Trade Integration: Evaluation

The preceding review of the experience of developed market, socialist, and developing economies suggests certain conclusions regarding the possibilities for, and the preconditions of ‘market integration and ‘production and development integration. First of all, the use of prices reflecting resource scarcities will clarify the available choices and reduce uncertainty with regard to possible gains and losses from integration. As a result, there will be less resistance to the elimination of barriers on intra-area trade and decisions on production and trade can be decentralised.

These conclusions apply irrespective of social system. As the experience of Hungary since 1968 indicates, markets and prices can be used to advantage in socialist countries too. At the same time, the experience of that country points to the fact that decision making at the firm level will give desirable results only in the absence of monopoly positions, since otherwise the interests of the firm and those of the national economy would differ. In such instances, and where infant-industry considerationslimit the reliance that can be placed on foreign competition as an anti-monopoly device, intervention by central authorities would be required in order to avoid possible distortions.

It further appears that the optimal degree of market, as against production and development, integration will depend on the size of the market of the integrated area: the larger this market, the fewer will be the industries where monopoly positions may emerge, because the full exploitation of economies of scale requires only a single firm. In the EEC, the aircraft, space, computer and electronics industries come into this category; in LAFTA, economies of scale may be appropriated in the framework of a single firm in, for instance, fertilisers and automobiles, and in the EAC the case will be the same in the production of steel or paper. Thus, the desirable scope of production and development integration will vary inversely with the combined market size of the countries participating in an integration scheme.

Interference with allocation patterns brought about by the market mechanism will also be desirable in cases when participating countries are at different levels of industrial development, lest such disparities be perpetuated. This conclusion represents the application of the infant-industry argument to the integration of nation states and will apply irrespective of social system, as is shown by the cases of Romania in the CMEA, Ireland in the EEC, and Honduras in the CACM.

However, production and development integration and the need to safeguard the interests of countries at lower levels of development require joint decisions. The taking of such decisions in turn entails a diminution of the national sovereignty of the individual countries. The existence of a trade off between the uncertain benefits of integration and the (partial) loss of national sovereignty leads to the conclusion that the chances of success of integration schemes increase with their size and the homogeneity of the would-be partner countries.

Economic Union and National Sovereignty

The issue of national sovereignty is put in an even sharper focus in the case of an economic union that involves, in addition to trade integration, the coordination of economic policy making. The co-ordination of economic policies in turn requires political decisions that would necessitate establishing a common decision-making apparatus. <…>

The experience of the EEC confirms this conclusion. Recent efforts to achieve monetary integration without the coordination of economic policies have proved to be a failure. And, <…> progress in policy coordination, and in transforming the Common Market into an economic union, is hampered by the present institutional structure. At the same time, changes in this structure would necessitate political decisions and a degree of political integration that is not presently acceptable to the national governments. <…>

Rather than attempt to make a prediction about the likelihood that one or another integration scheme will be transformed into an economic union, it is better to emphasize, in conclusion, that the conflict between national sovereignty and economic self-interest can be resolved only if there is a political interest and the political will to do so. Economic integration thus appears as part of a political process the final outcome of which is determined by essentially political factors.

/from Types of Economic Integration by Bela Balassa/


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  1. State your opinion on the implications of the EEC on the development of European and non-European countries. Study the cases and support your claim by arguments.
  2. Conduct a mini-research using additional sources to find out if Belassa’s ideas are still relevant. Make your assessment in the form of a three-minute statement with your arguments accompanied with evidence.