The Aims and Mechanics of Economic Integration

Aims and Objectives

Economic integration schemes share the common aim and objective of expanding net benefits available for international distribution through fiscal compensation and net distribution mechanisms. Peter Robson notes:

A primary economic objective of integration is to raise the real output and income of the participants and their rates of growth by increasing specialization and competition by facilitating desirable structural (linkages) changes. This objective may be pursued with reference to trade in products only, as in a free trade area or a customs union, or it may extend to factor mobility—the free movement of labour, capital and enterprises as in a common market, or an economic union.^[2]

The expected rise in output and income are essentially due to a combination of several factors. First, specialization based on comparative advantage in production tends to enlarge the output of products that can be shared by participating states. Second, economies of scale associated with increased production tends to lead to the obtaining of more output from a given quantity of inputs and a given state of industrial technology. Third, this induced widening of economic activity frequently contributes to an increase in outputs arising from the augmented availability of factor inputs and improvements in industrial technology. And fourth, enhanced intraregional competition could cause structural and technological changes that would reduce the power of local monopolies and lead to a more

[2] Peter Robson, International Economic Integration (Middlesex: Penguin, 1972), p. 17. In regard to a more complete economic union, he notes that this maximal form of economic integration requires harmonization of state economic policies (pp. 17–18).

efficient allocation of resources as well as to an expansion of output availability.^[3] In addition, joint action facilitates bargaining with countries outside the area of coordinated action.

Expanding Net Benefits

There are three basic economic principles underlying the generation of net benefits within an economically integrated unit: the classical concepts of trade diversion, trade creation, and what we call trade expansion.^{[ 4]} These principles are pertinent to common markets or to free trade areas. The former is an agreement to eliminate (or reduce) internal tariffs as well as to erect common external tariffs. The latter involves the elimination (or reduction) of internal tariffs while leaving each partner state with complete discretion as to the imposition of tariffs in its commercial relations with the rest of the world.

First, we show the operation of trade diversion. In Tables 12a and 12b, the global economy is simplified into three countries, A, B, and C. Each can produce some product X at varying costs. Assume that B and C are African countries and A is the outside world. Assume also, as in Table 12a, that prior to

[3] The literature on the potential benefits to Africa from economic coordination is extensive. See for example, Arthur Hazlewood (ed.), African Integration and Disintegration (London: Oxford University Press, 1967), chap. 1; Peter Robson, Economic Integration in Africa (London: Allen and Unwin, 1969); Donald Rothchild, "A Hope Deferred: East African Federation, 1963–64," in Gwendolen M. Carter (ed.), Politics in Africa: 7 Cases (New York: Harcourt, Brace & World, 1966), chap. 6; Benton F. Massell, East African Economic Union: An Evaluation and Some Implications for Policy, memorandum RM-3880-RC (Santa Monica, California: Rand Corporation, 1963), sect. II; and Arthur Hazlewood, "State Trading and The East African Customs Union," Oxford Bulletin of Economics and Statistics 35, no. 2 (May 1973): 75–89.

[4] For a general analysis of customs union theory and its application to developing countries, see R. G. Lipsey, "The Theory of Customs Unions: A General Survey," Economic Journal 70, no. 279 (September 1960); C. A. Cooper and B. F. Massell, "Towards a General Theory of Customs Unions for Developing Countries," Journal of Political Economy 73, no. 5 (October 1965); and Bela Balassa, The Theory of Economic Integration (Homewood, [Ill.: Irwin, 1961). Our trade expansion concept is basically derived from W. M. Corden's cost-reduction effect and trade suppression effect, which are developed in his "Economies of Scale and Customs Union Theory," Journal of Political Economy 80, no. 3 (May–June 1972).

the agreement to reduce internal tariffs, country C levied a 100 percent tariff on product X, regardless of the origin of import. The price pattern emerging in country C shows that country A's version is cheaper in price at 250 and is therefore purchased. However, when B and C agree to integrate and reduce internal tariffs, a new price pattern emerges. This price pattern reflects the fact that C imposes no tariff on country B's version of the product, making this country's output the lowest in price at 225 (as shown in Table 12b). In this instance, the region has benefited from the diversion of trade. Consumers in country C purchase X at a lower price, and in country B, employment and income opportunities are expanded because of production for both domestic and partner-state markets. Only producers outside the region are adversely affected by the loss of a market that they once served.^[5]

There is internal specialization based on comparative advantage regionally. Trade has been diverted from the outside to country B. This diversion permits B's producers to take

[5] See James E. Meade, Problems of Economic Union (Chicago: University of Chicago Press, 1953), and his work, The Theory of Customs Unions (Amsterdam: North Holland, 1955); and Jacob Viner, The Customs Union Issue (New York: Carnegie Endowment for International Peace, 1950), as classical analyses of economic integration. Also see Robson, International Economic Integration, Parts I–III.

advantage of economies of scale both within firms and external to them.^[6] That is, these producers are now able to decrease costs either because of enhanced resource productivity or lowercost resources attributable to augmentation or structural changes.^[7] The cost decrease shifts the supply curve in country B from S₁ to S₂ at the same time that the demand curve for B's version of the product moves from D₁ to D₂ ; the latter change is explained by the increased market that now comprises both countries B and C. In our abstract but plausible example, the price actually decreases from P₁ (or 225) to P₂ (or 200) along demand curve D₂ , owing to cost reductions that come about because of specialization.^[8] Consumers in both of the integrated countries can now buy at a lower price because of the combined trade diversion and trade expansion, or efficiency effects, as demonstrated graphically in Figure 13.^[9]

Let us now consider trade creation.^[10] This occurs when internal tariffs are eliminated as a consequence of an integration

[6] See Tibor Scitovsky, Economic Theory and Western European Economic Integration (Stanford: Stanford University Press, 1958); and Jan Tinbergen, International Economic Integration (Amsterdam: Elsevier, 1954).

[7] Clearly B's producers could be direct foreign investors from abroad. Country A's producers could have transferred capital and technology directly through multinational companies in order to seek protection (and avoid discrimination) within the "tariff wall." This makes it difficult to define "insiders" and "outsiders" within regional schemes.

[8] A demand curve (or line) indicates the various quantities that consumers will purchase at alternative prices given their incomes, tastes, and preferences, and the availabilities of substitutes and their prices. A supply curve (or line) indicates the various qualities that producers will make available at alternative prices given their costs of doing so, which in turn are based on availability of resources, their costs, and resource productivity partly as a function of industrial technology.

[9] For an extended discussion of trade diversion see A. P. Kirman, "Trade Diverting Customs Unions and Welfare Improvement: A Comment," Economic Journal 83, no. 3 (September 1973): 890–94; and J. Bhagwati, "Trade-Diverting Customs Unions and Welfare Improvement: A Clarification," Economic Journal 81, no. 3 (September 1971): 580–87.

[10] See, for example, J. Spraos, "The Condition for Trade Creating Customs Unions," Economic Journal 74, no. 1 (March 1964): 101–8. Also note that in the process of creating trade, it might be difficult to make distinctions between insiders and outsiders. Direct foreign investmentsfrom country A might be induced when internal economic activity is expanded. This might be the case even though profit rates are higher in country A or some other country at the economic center. It has been noted that high profit enterprises within the center attract mainly portfolio investments, as outside savings are drawn to participate in its high returns. Periphery enterprises attract primarily direct investments, as the center's industrial management moves to buy out less successful competitors there, and to secure markets for their products and raw material needs. See Hans O. Schmitt, "Integration and Conflict in the World Economy," Journal of Common Market Studies 8, no. 1 (January 1969): 5–6.

An important question is whether the "outsider" companies operating as multinationals within regional markets are efficient and competent. If they tend to exert monopolistic (or monopsonistic) power, then they will also gain and likely expatriate their various economic gains. See, for example, J. N. Behrman, "Industrial Integration and Multinational Enterprise," Annals of the American Academy of Political and Social Sciences, no. 403 (September 1972), pp. 46–57. If this is the case, then various regulatory devices are clearly required. See Robert L. Curry, Jr., "U.S. and L.D.C. Trade and Restrictive Business Practices," Journal of International Affairs 28, no. 1 (April 1974): 67–80.

Figure 13

arrangement between African countries B and C. Prior to the agreement, each levied a 100 percent tariff on a potential imported product (country C on good Y and country B on good Z). The price pattern that emerged in each country protected local producers from imports, but in each case at the expense of local consumers who paid a higher price, as shown in Tables 13a

and 14a. After the agreement and tariff elimination, new price patterns emerged, as in 13b and 14b. Trade was created between member countries based on specialization arising from comparative advantage (country B produces Y and country C produces Z).

Suppose now that economies of scale exist in both countries B and C when they produce Y and Z respectively due to a combination of resource augmentation and structural or technological change. We can use Figures 14a and 14b to show the downward shift in supply (and cost) curves and the upward expansion in demand curves. Here we note that there are direct beneficiaries in each country: consumers pay lower prices, employment and income opportunities are generated for workers within export sectors, and profit-earning opportunities arise for entrepreneurs. What the model does not show is the distribution of benefits within each country. The economic activity generated could lead to urban-rural inequalities, or to industrial-agricultural imbalances. Clearly, monetary, fiscal, commercial, and manpower policies must be developed to cope with these problems and to obtain the benefits of integration. In brief, to avoid sectoral underdevelopment, external integration requires concurrent internal policies whose specific contents are beyond the scope of this book.^[11]

Thus far in our analysis, we have dealt with the generation of net benefits through trade creation, diversion, and expansion, and we have ignored the potential effect that a common external tariff might have under a full market agreement.^[12] Consider the following: suppose three countries in the world exhibited changing trade patterns because of the effect on

[11] For a view of externally related underdevelopment, see Colin Leys, Underdevelopment in Kenya: The Political Economy of Neo-Colonialism 1964–1971 (Berkeley and Los Angeles: University of California Press, 1974). Leys' focus is not on integration per se, but his findings help to show that through neglect of internal distribution, or through failure to implement effective distributional policies, sectoral underdevelopment can be associated with economic growth.

[12] For a fuller discussion of a common external tariff, see J. Kakoza, "The Common External Tariff and Development in the East African Community," Finance Development 9, no. 1 (March 1972): 22–29.

prices of a common market between C and B. Let us focus on the consequences for country C when that country had accepted outside country A's products tariff free prior to the common market between itself and neighboring African country B. Initially a 100 percent tariff was placed on product S, provided that it was imported from B, but no tariff was imposed against the preferential outside seller, country A. Thus, as Table 15a shows, the product would be imported from A at a cost of 125 units. But now let us suppose that B and C formed a common market, reducing internal tariffs and imposing a com-

Figures 14a and 14b

mon external tariff of 100 percent on products; that is, both markets impose a similar tariff on the product. The price pattern changes as shown in Table 15b. Whereas the price of A's version increases to 250, B's declines to 225. B's product now costs less than As, and trade is diverted from the outside to country B because of the common external tariff and the elimination of the internal tariff.

In the process, unless there is a significant trade expansion

effect,^[13] consumers in country C emerge as distinct "losers" in the transaction; they pay higher prices for the product. In West Africa, for example, "the land-locked countries and, even more so, a number of small coastal countries with relatively poor industrial prospects (e.g., Benin, Togo, Liberia, etc.) may prefer to try to manage alone, i.e., to buy better quality goods at generally cheaper prices from overseas industrial countries [i.e., country A in our example], rather than to participate in arrangements which would, in fact, amount to subsidizing the infant industries of neighbouring countries [i.e., country B in our case]."^[14] At this point the problem of a net "loser" country must be confronted. Assume that a larger and relatively more productive state in a region has the capacity to take advantage

[13] Ibid., pp. 24–28. This gets to the point of deciding what shall be a regional grouping of industries to be protected both from imports from industrialized countries abroad and from more industrialized partners. Protection might be based on such criteria as value-added, cost minimization, and maximum taxability. See S. R. Pearson and J. M. Page, "Redistribution of Industry in the East African Common Market," Bulletin, Oxford University Institute of Economics and Statistics 33, no. 4 (November 1971): 275–88. For an empirical analysis of some earlier internal economic effects with the market, see A. R. Roe, "Terms of Trade and Transfer Effects in the East African Common Market," Bulletin, Oxford University Institute of Economics and Statistics 31, no. 3 (August 1969): 153–67.

[14] Nicolas G. Plessz, Problems and Prospects of Economic Integration in West Africa (Montreal: McGill University Press, 1968), p. 43.

of integration, but that numerous smaller and less productive neighbors are not in a position to do so. As Nicolas Plessz notes in this respect (p. 44), "There can be no doubt that the colonial customs unions of French West Africa and French Equatorial Africa led to an undue concentration of manufacturing activity in a few spots which had an initial advantage, such as Dakar and Brazzaville, and that the other participants in the customs union were handicapped in their efforts toward industrial development." This leads us into the matter of benefit distribution, a critical element of any effective integration scheme and a matter to which we shortly return. But first we must focus momentarily on factors that are necessary for successful maximal strategy.

Economic integration efforts that are successful in generating trade creation and diversion effects offer an added benefit. This has to do with bringing about changes in exchange patterns that potentially can relieve dependency relationships in trade and investment between various African and metropolitan countries. But the matter of modifying structural dependency through shifts in trade patterns is clearly not a simple one. We are aware that African countries generally cannot do much about dependency through economic integration that produces no more than trade creation and diversion alone. And certainly even doing this often is difficult in the extreme. In general, the countries are not so structured internally that trade among them is mutually beneficial. For example, "inter-trade in West Africa has remained stagnant at the level of less than 4 percent of total regional imports over a long period of time . . . [while] for the EEC, this proportion is as high as 70 percent."^[15] We are not arguing that this is a reason to shy away from efforts toward dependency modification. Our intent is to suggest that there could be a need for careful "multinational programming of investment based on viable economic spaces, functional linkage projects and resource bunches."^[16] This broader policy focus obviously calls for some degree of regional economic planning, or at least coordination, as well as planning

[15] George C. Abangwu, "Systems Approach to Regional Integration in West Africa," Journal of Common Market Studies 13, no. 2 (1975): 124.

[16] Ibid.

at the national level, particularly in terms of such matters as selecting industries for regional coordination of investment policies among African countries.^[17]

Generating Net Benefits

Successful economic integration requires certain prerequisites, primarily that the region involved in integration be large and diverse enough to ensure that the union embraces varying resource endowments and productive capabilities. Such differences are the basis for specialization and exchange based on comparative advantage.^[18] If there are no such differences, then no interunit trade can be created or diverted from the outside, and no secondary trade expansion effects can take place. Clearly, most African countries occupying a continuous region lack resource endowments significantly different from those possessed by neighboring countries.^[19] This has acted to hold down intracontinental and intraregional commerce. As a consequence, intra-African trade, exclusive of South Africa and Rhodesia, amounted to between 10 and 12 percent annually during the past decade. And in particular regions it was considerably lower than this. Trade among Liberia, Sierra Leone, and Ivory Coast, for example, accounted for less than 3 percent of the aggregate exports of these countries. At the same time, however, intra-Community trade involving the East African Community countries of Uganda, Tanzania, and Kenya remained significantly above the continental average.

An ancillary precondition is that the region must be large

[17] F. I. Nixson, Economic Integration and Industrial Location (London: Longmans, 1973); and Geoffrey B. Nugent, "The Selection of Industries for Regional Coordination among Developing Countries," Journal of Common Market Studies 14, no. 2 (December 1975), 198–212.

[18] See James Meade, Problems of Economic Union, and The Theory of Customs Unions, as well as Jacob Viner, The Customs Union Issue (n. 5 above).

[19] See Peter Robson, Economic Integration in Africa (n. 3 above); Philip Ndegwa, The Common Market and Development in East Africa (Nairobi: East African Publishing House, 1968), p. 40; and Joseph S. Nye, Jr., Pan-Africanism and East African Integration (Cambridge: Harvard University Press, 1965), p. 143.

or varied enough to include a market area where people have various tastes and preferences for each other's goods and services. If consumers have no basic desire to purchase items from neighboring countries, then a market arrangement tends to be irrelevant with respect to trade creation, diversion, and expansion. Indeed, all of these conditions could be potentially present in a region, but an integration scheme might be required to bring them to the surface. The structural transformation associated with integration is taken to mean "dynamically increasing the inter-sectoral dependence in both the regional economy and that of its constituent units,"^[20] in terms of both production and consumption.^[21]

The Euro-based intellectual concepts and integration schemes, when strictly applied, have not proved to be adequate bases on which to construct integration in Africa.^[22] But this does not mean that more appropriate minimalist concepts and schemes cannot be developed and implemented. Even if conditions do not lead to expanded net benefits under full integration, or if conditions create them but other factors inhibit the development of an acceptable sharing scheme, then an alternative policy is a more limited form of economic cooperation.^[23]

[20] Havelock Brewster and Clive Y. Thomas, "Aspects of the Theory of Economic Integration," Journal of Common Market Studies 8, no. 1 (January 1969): 115.

[21] Bela Balassa, "Towards A Theory of Economic Integration," Kyklos 14, no. 1 (January 1961): 1–5. It has been further argued that "the potential gain from a customs union will be larger if: (1) there is a steeply rising marginal cost of protection in the countries, (2) the countries have a strong preference for industry, (3) the countries are complementary, and (4) no country dominates others in industrial production generally." See Charles A. Cooper and Benton F. Massell, "Towards a General Theory of Customs Unions for Developing Countries," (n. 4 above), pp. 475–76.

[22] The developing countries as a group have received some special attention from economic integration theory. See, for example, Charles A. Cooper and Benton F. Massell, "Towards a General Theory of Customs Unions for Developing Countries," pp. 461–76. A general evaluation of their performance is in Charles Pearson, "Evaluating Integration among Less Developed Countries," Journal of Common Market Studies 8, no. 3 (March 1970): 262–75.

[23] See Robert L. Curry, Jr., "A Note on West African Economic Cooperation," Journal of Modern African Studies 11, no. 1 (March 1973): –38. André Simmons, "Economic Integration in West Africa," Western Political Quarterly 25, no. 2 (June 1972): 295–304; and K. M. Barbour, "Industrialization in West Africa: The Need for Sub-Regional Groupings," Journal of Modern African Studies 10, no. 3 (October 1972): 357–62.

Moreover, where continental and extracontinental integration are not realizable objectives for the time being, joint arrangements at the regional level may provide necessary and useful initiatives. Certainly maximizing membership is not the primary goal, even though it has been the "one objective that has almost invariably been regarded as desirable." ^[24] And where wide geographical unions are neither practical nor realistic propositions, African leaders, even while remaining committed in principle to the long-term objective of continental or Third World integration, will at times press for regional unification in order to take advantage of a momentary opportunity to achieve closer union. With unification or closer union the leaders can attempt to cope with two broad types of minimal objectives (that is, those that do not necessitate full economic integration): (1) economic cooperation and (2) joint bargaining. But before turning to these objectives, we briefly note factors involved in sharing.

Distributing Net Benefits

Suppose that maximal integration is achieved. It is likely that member states will differ in size and capabilities and thus reflect dissimilar abilities to take advantage of specialization, economies of scale, augmentation of factor input, and opportunities to improve market structures.^[25] This means that arrangement tends to yield unequal benefits and this requires deliberate policies designed to distribute more evenly, or acceptably, whatever net benefits might accrue to the partner states. Such a deliberate policy would have to be based on the criterion that each member state would be better off inside than outside the arrangement. If such a rule were adopted, then any net loser would have to be compensated for joining and remaining a part of the union. In regard to the SeneGambia Union, Peter Robson observed that "a transitional

[24] K. M. Barbour, "Industrialization in West Africa," p. 357.

[25] See United Nations Economic Commission for Africa, Economic Cooperation and Integration in Africa (New York: United Nations, 1969).

free-trade area as the prelude to a simple customs union offers Gambia no obvious advantages and some evident immediate disadvantages in the form of higher administrative costs." ^[26] Under such circumstances, Gambia would have had to be compensated for joining such an arrangement. The treaty agreement would have had to determine how net benefits would be allocated between the two associated states, putting each in an advantaged position compared with their situation outside the proposed agreement. Such a mutuality of benefit provides the benefit required to bring agreement on unification efforts as well as to maintain the unions once established.

Table 16 sets forth hypothetical data on which to base a compensation and net redistribution scheme. In it we assume that three countries form an economic union resulting in a diversion of trade to country A from the outside in the value of 100 units. A second consequence is the creation of trade amounting to 50 units between countries A and B and another 50 units between A and C. With each instance of trade creation, country A's newly created exports take place at the expense of local production in B and C. The latter cease to produce import substitutes and now import instead from country A. Within the newly formed community, exports expanded by 200 units (all from A), and imports increased by 100 units equally between B and C. The gainer must compensate each deficit state for its loss in local production to the value of 50 units. When this has been accomplished, the net benefits to the region, 100 units of value, must be distributed to each nonadvantaged country from the beneficiary country A.^[27] After compensation and distribution, A gains 50, and B and C gain 25 units each of net benefits.

[26] Peter Robson, "Problems of Integration Between Senegal and Gambia," in Hazlewood, African Integration and Disintegration (n. 3 above), p. 126. Also see United Nations, Report on the Alternatives of Association between the Gambia and Senegal (New York: Department of Economic and Social Affairs, 1964), pp. 1–13.

[27] The Raisman Commission, in 1961, made two key points about the early functioning of the East African Common Market: (1) inequality in distribution of benefits was the fundamental source of strains; and (2) Kenya's extra income was large enough to compensate Uganda and Tanzania for any losses incurred and to redistribute some gains to them. A revenue pool from company profits was established, but it has failed toachieve a completely acceptable redistribution. See Colonial Office, EastAfrica: Report of the Economic and Fiscal Commission (Sir Jeremy Raisman, Chairman), 1961 (London: H.M.S.O., 1961). For a discussion of various plans for compensation and net distribution, such as transfer-taxes, see Robson, Current Problems in Economic Integration (New York: United Nations, 1971), Chap. 5. For an analysis of payments from South Africa to Botswana, Lesotho, and Swaziland, see International Monetary Fund, Surveys of Africa Economics, vol 5 (Washington D.C.: IMF, 1973); and Donald Rothchild and Robert L. Curry, Jr., "Expanding Botswana's Policy Options," in Kenneth A. Heard and Timothy M. Shaw (eds.), Cooperation and Conflict in Southern Africa: Papers on a Regional Subsystem (Washington, D.C.: University Press of America, 1976), pp. 312–328. Our particular example focuses only on balance of trade and payments data. We could have added income and employment variables whose magnitudes would tend to change in the same direction as net exports.

On what basis will the partners be likely to agree upon an acceptable distribution of net benefits? How can the participating members put into effect a fiscal compensation and net distribution arrangement that will achieve distributional objectives? We regard these as the most difficult and divisive issues confronting Third World statesmen engaged in forming and operating common markets, free trade areas, and other joint economic arrangements. If an acceptable compensation and net distribution system is not worked out, then, as Peter Robson observes, "the operation of existing groupings may easily be rendered ineffective or, in extreme cases, they may collapse. The experience of the last few years demonstrates that this is not a remote possibility."^[28] In fact, in 1968, the leaders of Chad decided to withdraw their country from membership in

[28] Peter Robson, Current Problems in Economic Integration, p. 2. Also see his article, "The Distribution of Gains in Customs Unions Between Developing Countries," Kyklos 23, no. 1 (January 1970): 117–19.

the Union douanière et & économique de l'Afrique centrale and to agree to close links with Zaire; this decision was prompted in part by dissatisfaction over UDEAC's inability to work out "a formula for measuring the costs and benefits of integration" and "to agree upon an equitable distribution of industrial projects. ^{[ 29]} In addition, the recent collapse of efforts to unite Senegal and Gambia, and the decline of the East African Community in scope and effectiveness, bear out this point. In the short term at least, Senegal and Kenya stood to gain the most from further integrative efforts. But in the immediate period at hand, Gambia and Tanzania appeared to be either worse off within their respective closer unions, or at least no more than marginally better off. In this vein, Dharam Ghai concluded in 1964, with respect to the operation of the East African Common Market, as follows: "From our analysis of the territorial distribution of benefits and costs of the EACM, it appears that Kenya has been the greatest net beneficiary, that Uganda has on balance gained rather than lost, and that Tanganyika has suffered a substantial net loss." ^[30] Although this conclusion has been the subject of some criticism by fellow economists, they are generally at one in maintaining that "a dissolution of the common market would deny to Tanzania, as well as to the rest of East Africa, the opportunity for many industrial developments. It would set back the industrialization of East Africa by many years."^[31]

[29] Lynn K. Mytelka, "A Genealogy of Francophone West and Equatorial African Regional Organizations," Journal of Modern African Studies 12, no. 2 (June 1974): 304, and her article, "Fiscal Politics and Regional Redistribution," Journal of Conflict Resolution 19, no. 1 (March 1974): 138–60. Also see Abdul A. Jalloh, Political Integration in French Speaking Africa, Research Series, no. 20 (Berkeley: Institute of International Studies, 1973).

[30] Dharam Ghai, "Territorial Distribution of Benefits and Costs of the East African Common Market," in Donald Rothchild (ed.), Politics of Integration: An East African Documentary (Nairobi: East African Publishing House, 1968), p. 207.

[31] Arthur Hazelwood, "The East African Common Market: Importance and Effects," in Rothchild, Politics of Integration, p. 216. Also see E. A. Arowolo, "Economic Cooperation in East Africa," Finance Development 7, no. 1 (March 1970): 47–52; and G.M. Leistner, "Economic Cooperation on a Regional Basis: The English Speaking Countries of Eastand West Africa," Africa Institute Bulletin, no. 15 (September–October 1975), pp. 13–28.

The inability to solve economic problems generated by the attempt to implement a maximalist strategy could profoundly affect further political and social integration of harmonization. William Newlyn, referring to the 1964 crisis within the EACM, made this observation:

The general problem of assessing the gains and losses of common market arrangements has long been recognized as a difficult one. The problem has special significance in the context of underdeveloped economies because of the market limit on scale of production; a particular instance of the problem has been a major political factor in the relationships between the three East African territories. . . . In spite of a nine months old declaration by the heads of the governments of their intention to federate, it became clear that, far from immediate political integration, a complete break-up of the existing economic integration was threatened.^[32]

The inability to generate sufficient net benefits or to distribute them acceptably could lead to the disruption or disintegration of fuller economic integration schemes. An alternative that could capture some (if not all) economic benefits without causing political disruption arising from economic failure is clearly an attractive possibility. And African and other Third World areas appear to be moving toward a more limited strategy with these points in mind.

Service Links, Limited Trade, and Policy Harmonization

The Group of 77, with 96 member states from among African and other Third World countries, propose certain guidelines for limited trade, service links, and policy harmonization. They include the following points:

I. Decision-makers might consider a minimal alternative to maximal integration strategies, an alternative that involves more limited areas of cooperation and the opportunity for joint bargaining with external entities.

II. Economic Cooperation: An Alternative Minimalist Strategy. Economic Cooperation and Joint Bargaining. Effective realization of many of the objectives and aims of fuller integration can be

[32] W. Newlyn, "Gains and Losses in the East Africa Common Market," in P. Robson (ed.), International Economic Integration (n. 1 above), p. 348.

advanced if statesmen consider the following processes and procedures prior to establishing cooperation agreements more minimal in their scope:

(a) intensifying current efforts and initiating new efforts to negotiate and put into effect long-term and meaningful commitments among themselves within the regional, interregional and other frameworks of their choice, in order to expand their mutual trade and to extend their economic cooperation in other fields;

(b) promoting and encouraging expansion of intraregional trade and establishing suitable payments arrangements among themselves;

(c) establishing mutually agreed regional and interregional preferential trade agreements;

(d) taking steps to further liberalize their mutual trade, including the reduction or elimination of tariff and nontariff barriers;

(e) encouraging research, production, trade promotion, and marketing of commodities;

(f) promoting the establishment of associations and joint marketing arrangements among primary producing developing countries with a view to taking concerted action in third country markets, particularly in developed country markets;

(g) rendering fullest support to industrial development and investment rationalization in the countries of the region by optimal use of the resources, including technical skill and know-how, available within the region;

(h) promoting mutual consultations among countries in the region in order to find satisfactory solutions to common problems relating to shipping and ocean freight rates;

(i) encouraging travel and tourism among their nationals by cooperating in schemes for promotion of tourism on a joint basis;

(j) implementing schemes related to the building of transport and communication infrastructure; and

(k) promoting within a regional framework the exchange of information and consultations among themselves on their trade and development policies as well as on their objectives with respect to economic cooperation so as to assist them in determining their priorities and in harmonizing their development programmes and trade policies.^[33]

[33] Ministerial Meeting of the Group of 77, Declarations and Principles of the Action Programme of Lima (Geneva, 1971), pp. 23–24.

In addition, African governments might do well to harmonize some of their policies at the regional or continental levels regarding the conditions under which they host foreign investors and accept the transfer of industrial technology. The governments of some developing countries regulate direct foreign investment and technical collaboration agreements with foreigners. While procedures vary, they contain common criteria that permit investment and collaboration but control commonly prohibited practices:

1. Criteria for issuing permission to conduct business activities:

(a) there must be sufficient overall benefits to national economic development;

(b) the balance-of-payments effects must, to the extent possible, be beneficial;

(c) the proposed arrangements must lead to an expansion of production and increased employment;

(d) the royalty payments must be within certain fixed ranges and regarded as reasonable.

2. Factors against issuing permission to conduct business activities:

(a) prohibitions and limitations on export activity;

(b) the tying of purchases to the suppliers of technical know-how, especially where domestically produced, similar goods are available;

(c) the setting of unreasonably low prices for exports;

(d) the setting of unreasonably high prices for imports of intermediate goods required to produce the final products exported;

(e) restrictions on production or exports after the termination of the technical know-how agreement.

3. Permissible actions after authorization has been obtained:

(a) the remittance of all or an approved portion of the profits made;

(b) the remittance of an approved portion of net proceeds from sales.^[34]

In December 1970, the Andean Pact countries, Bolivia,

[34] UNCTAD, Report on Restrictive Business Practices (New York: United Nations, 1972), pp. 80–81.

Chile, Ecuador, Peru, and Colombia, jointly agreed to harmonize registration and screening procedures:

The agreed common policy requires all foreign investments to be registered with the host country's appropriate authority, and new investment must obtain that authority's approval. . . . Agreements on the importation of technology and on patents and trademarks are to be reviewed and submitted for the approval of the appropriate authority in each of the member States of the Andean Pact to evaluate the effective contribution of the imported technology. Member States have agreed not to authorize, except in exceptional cases, agreements which prohibit or limit the export of manufactured products based on the imported technology or manufactured under the trademark in question. This also applies to similar manufactured products. In addition, restrictive clauses requiring the purchase of new materials, intermediate goods, and equipment from a specified source will not be permitted, except in exceptional cases and then only if the prices correspond to the current levels of the international market. Similarly restrictive clauses relating to sale and resale prices, obligations to pay royalties and non-used patents and trademarks, the prohibition of the use of competing technologies, and restrictions on the volume and structure of production are not permitted.^[35]

In addition to investment policy harmonization, the initiatives fall into three categories: first, those that rationalize the use of capital and other resources and promote limited trade; second, those that foster service linkages integrating economic functions such as transportation, communications, finance, commercial and industrial coordination, and social services; ^[36] and third, those that provide for interstate ownership of enterprises (such as East African Airways).^[37]

[35] See also Articles 20 and 25 of Decision No. 24 of the Cartegena Agreement on the Transfer of Technology, 31 December 1970.

[36] See Donald Rothchild, Politics of Integration, pp. 257–258.

[37] The problem of net benefit sharing remains when these initiatives expand regional output and income. One interesting effort to cope with the problem involves countries in the West African region. They are attempting to make shipping facilities more efficient and to distribute equitably (or acceptedly) the cost-saving. For an account of their efforts, see Babafemi Ogundana, "'Seaport Development—Multi-National Cooperation in West Africa," Journal of Modern African Studies 12, no. 3 (September 1974): 395–407.

Joint Bargaining

Cooperative bargaining among individual African countries or isolated groups of countries faces external constraints that limit the partner states' range of choices, and consequently impedes efforts to increase net benefits.³⁸ Although each individual country might be weak, President Nyerere has said,

Together, or even in groups, we are much less weak. We have the capability to help each other in many ways, each gaining in the process. And as a combined group we can meet the wealthy nations on very different terms; for though they may not need any one of us for their own economic health, they cannot cut themselves off from all of us.^[39]

In due course, this appeal for self-reliant cooperation was accepted, for example, at the Lusaka conference, where it was decided "to foster mutual cooperation among developing countries so as to impart strength to their national endeavour to fortify their independence."^[40]

The African continent is at a critical stage with respect to economic and political regionalism. We agree with Dharam Ghai's contention that African economic integration and cooperation is imperative. Ghai remarks:

[38] See in particular Immanuel Wallerstein, "The Range of Choice: The Constraints on the Policies of Governments of Contemporary Independent African States," in M. Lofchie (ed.), The State of The Nations (Berkeley and Los Angeles: University of California Press, 1971), pp. 19–33, and his "Dependence in an Interdependent World," African Studies Review 17, no. 1 (April 1974): 1–26.

[39] Julius K. Nyerere, Non-alignment in the 1970s (Dar es Salaam: Government Printer, 1970), p. 12. Also see the editorial in The Nationalist (Dar es Salaam), April 14, 1970, p. 4.

[40] Lusaka Declaration, Resolutions of The Third Conference of the Non-Aligned Nations, Lusaka, September 8–10, 1970. Republic of Zambia, Background No. 82/70 (Lusaka: Press Section, Information Services, 1970), p. 40. For a similar thrust the fourth nonaligned summit conference in Algiers in September 1973, see James Morgan, "Non-aligned Nations Rattle an Economic Sabre," Times (London), September 5, 1973, p. 18. Here we are limiting our bargaining focus although we have expanded it elsewhere. See Robert L. Curry, Jr., and Donald Rothchild, "On Economic Bargaining Between African Governments and Multinational Companies," Journal of Modern African Studies 12, no. 2 (June 1974): 173–90.

Perhaps the single most significant feature of the African economic scene is the fragmentation of the continent into a large number of politically distinct entities with only marginal economic links with each other. The absurdly small economic size of most African countries is too well-known to reiterate. Nevertheless, the point may be driven home vividly by a few key statistics. Of the 42 or so independent African countries, only 8 have a population higher than 10 million, more than half have a population less than 5 million, and there are several with populations less than a million. When this fact is combined with very low income levels, the result is that money income for the "median" African country turns out to be less than the income of an English town of 100,000 inhabitants.^[41]

Thus the African environment and the nature of its contact with the global economy make some form of regionalism essential on economic grounds. But what form? Certainly not along rigid maximalist lines derived from Euro-centrist schemes and strategies. It most likely resides in unique African efforts to implement more minimalist schemes designed to cope with a limited array of problems; schemes that will be effective and whose resulting benefits will be shared acceptably.