International Economic Integration: Limits and Prospects

By Miroslav N. Jovanović | Go to book overview

4

Economic Union

None of the types of international economic integration may exist in its pure theoretical form. A customs union does not only deal with the elimination of tariffs and quotas and the introduction of the common external tariff, but also with industrial policy and specialization. It may also deal with NTBs and FDI from partner countries, as well as from outsiders. Free mobility of labour in a common market does not only require the elimination of discrimination of labour from partner countries, but also some degree of harmonization of social policy (social security, unemployment benefits, pension funds, vocational training). Without harmonization of these issues, distortions may be created which may induce labour to move in response to other signals than purely to its relative abundance/ scarcity and returns. The buffer against unacceptable costs which accrue from the free migration of labour and flow of capital can be found in regional policy. Therefore, common markets may have some elements of economic unions. In addition, an economic union need not be complete. The basic argument in favour of an economic union is found in its potential to increase the efficiency in the allocation of resources in relation to a common market.

The creation of an economic union can be defended by the same arguments which are used in favour of the creation, implementation and protection of a single economic policy in a country which has different regions. It can also be attacked by the same arguments that say that one policy for different regions does not make sense (as often heard in Canada). This chapter starts with a section on monetary policy because that is the field where the impact of international economic integration is quickest and most obvious. It is followed by a section on fiscal policy, which is necessary for the proper operation of an economic union. Industrial and regional (as well as social) policies are crucial for the survival of an economic union. While industrial policy is directed towards the creation of new wealth, regional (and social) policies are turned towards the distribution of already created wealth.

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