Regional Economic Integration

Regional economic integration is the trade unification between the states of a region by partially or fully abolishing the custom tariffs on the trade taking place between these states. That result is the evolution of a single market place where free flow of products or factors of production is possible with no or limited costs.

The concept came into being after unification of the colonies of Cape, Natal, Transvaal and the Orange Free State under the name of Union of South Africa in 1910. Afterwards in 1951 another example of regional economic integration was formed by the name of European Steel and Coal Community. It was a six nation international organization created to unify the Western Europe during the period of cold war by creating a common market for steel and coal. This organization laid the foundations for the European Union. The objectives of these early examples of regional economic integration were to provide welfare to the people and boost up trade and GDP.

The economic integration between regions is a process that starts from establishing the formal trade relationships with in that region and with passage of time other trade barriers are removed thus providing a common and uniform market of the region and if this process further gets developments that might result in economic, monetary and financial integration and then up to the maximum of political integration.

This integration might be very beneficial for the whole region but still there are certain barriers to that integration, which may be the lack of technical and operational capabilities of that country. Moreover, people of a country might be reluctant towards this change to increased competition in the home market, loss of control and sovereignty of the local government. Moreover, ongoing management and administration issues might also surface. So a careful understanding and analysis is necessary to opt for the option to integrate regionally.

The most common example of this integration is European Union which is the economic and political union of 27 states formed by the Treaty of Maastricht on November 1, 1993. Out of these 27 states 16 have common currency. European Union is said to be the best example of legal, monetary, financial and economic integration in the world. There are other examples as well like Association of Southeast Asian Nations (ASEAN) formed at August 8, 1967 by 5 states of that region and its members are now increased to 10. The growth prospects of the ASEAN are very good. Then there is South Asian Association for Regional Cooperation (SAARC) consisting 8 members of South Asia. It was formed on December 8, 1985. This alliance is not very much functional due to clashes of the member countries. Then there is an example of North American Free Trade Agreement (NAFTA) which is formally a trade block of USA, Canada and Mexico. This agreement came into force on January 1, 1994. These developments in the second half of 20th century have reshaped the concept of regional integration a lot.

There integrations have casted a strong effect on how the business was done in these regions as well as on the globe. These evolutions of these integrations have increased the business opportunities of the corporation but on the other side the local industry suffers as there large companies put the competitive pressure on the local industry. The cultural and traditional values of the countries of these integrations are reshaped and in some case the country losses control and sovereignty. On the other hand political and economic consensus and cooperation increases and the fruits of greater good are reaped by all the participating economies.

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Globalization

The phrase “World has become a global village” is very common now a days. The multinationals also stress upon “Think global”. These concepts relates to the globalization process that refers towards an ongoing process by which regional economies, societies, and cultures have become integrated through a globe-spanning network of communication and execution. The concept was first described by Charles Taze Russell in 1897 but the term was widely used after 1960s.

There were four aspects of globalization as indicated by the presenters i.e. economic aspects are the economic integration of the world economies that is said to lead the world toward prosperity and economic excellence. Environmental aspects such as global warming etc also lead to the unification of the world to think about the whole world about environmental issues. Political aspects of the globalization stress upon the cross country political cooperation and understanding of other political systems of the globe and the last cultural and social aspects of the globalization relate to the understanding of the other cultural norms and social patterns.

The history of the globalization is very much old indeed starting from the colonizing the people in other regions of the world as the British did. Australia and America were colonies of the Europe in the beginning. Moreover, golden Islamic age also laid the foundation for the globalization as the Muslim traders and preachers travelled across the world to trade and spread their ideology. In British Empire the East India Company and various other companies exploited the potential and richness of the sub continent but this thing also contributed towards the concept of globalization. After World War II, the evolution of the global financial institution such as IMF and World Bank also led towards the unification of the world. The recent developments include the inauguration of WTO and European Union.

The things contributed towards the globalization also include free trade areas under different treaties as NAFTA, SAFTA etc; evolution of the custom unions and alliances; development of common markets and economic unions. European Union is the most popular example of all this.

The global institutions supporting this concept are WTO main function of which is to liberalize trade, elimination of various quotas and settlement of trade disputes among the countries of the world; and IMF which formed 1944 as result of Bretton woods conference to oversee the monitory issues of the world and supporting the under developed countries by providing them loans; and UNCTD United Nations Conference on Trade and Development established in 1964 as a permanent intergovernmental body. It is the principal organ of the United Nations General Assembly dealing with trade, investment, and development issues

The most quoted example of the financial and economic integration is European Union which constitutes 27 member countries sharing common currency (for 16 countries), monetary policy, trade mechanism, and foreign policy.

Companies go global because they want to be reactive as to respond to the low trade barriers, customer demand in global market, local competition etc or some companies adopt proactive approach to exploit growth opportunities, economies of scale and recourse assess and cost saving such as utilizing the cheap labor force.

The hurdles faced by the globalization process on its way are political and regulatory constraints of each country, currency and market differences, cultural and social disparity, ethical and environmental perspectives which largely are country specific.

Some talk about the fruits of the globalization that can be reaped in the shape of economic and political excellence and other have some reservation regarding the destructive effects of the globalization on the world as it is argued that the all upsides are for the developed countries who are so called drivers of the globalization, moreover the biased role of the IMF and World Bank toward the less developed courtiers also raise the question. Some people are of the view that bubble of the globalization is a conspiracy of the Jews to take over the world and its resources which are concentrated in less developed Muslim countries.

THe Myth Of Foreign Direct Investments

Foreign direct investments are the investments which are invested by the foreign investors into a country to generate profits and spread their business in that country. The FDI is probably most attractive thing for the governments of the countries which is considered very good for the economic health of the country and governments provide feasible and favorable conditions to attract FDIs into their country. Especially developing countries strive hard to bring foreign investments into the country to minimize the negative balance of payments and for the economic uplift of the country as these investments create job opportunities and provide a mean of financial activity.

But, do these FDIs come without any negative impacts on the economy and the society?

No, there are certain threats which are associated with the associated with the FDIs.

First thing, when the FDI comes into the country, it is beneficial for the country but, after the business is established from that investment, that business earns the profits and then the foreign investor take the most of the profit, which becomes the out flow. Thus it provides short term benefits to the country and in long run it contributes towards the outflows of the country.

Second thing, when FDI comes into a country it takes foreign style of business, foreign culture and their traditions which affect the local traditions and damage the local traditions and culture.

Then, there is competition factor which destroy the local industry because foreign investors can afford better technology. Some people argue that FDI also boost the technological advancements in the country but they ignore the fact that they need that technology to get an edge over the local industry.

The point here is that we may attract FDI for the short run stability but we will have to strengthen the local market for the long term sustainable growth.

LOVE LETTER OF AN ECONOMIST (ENGLISH VERSION)

My Economics like dear,

I believe in the fact that you love me as Robbins Uncle believed in his theory of wants and needs. Your love is an assumptotic function which can never be zero and one day the curve of your love will rapidly grow and will make hockey shape curve like marginal cost curve because the supply curve of my love is horizontal at the time showing infinity, means its slope and rate of change is zero. You can trust me as gold standard money is trustable.

 Maybe, now, the graph of circumstances is showing my love as short run function, but I assure you that I shall provide appropriate circumstances to change it into long run function and shall produce the love according to your demand. I promise you that I will invest my love and it does not matter to me that how low your return rate is (see I can leave rational behavior for you) and if you would give me appropriate return for my investment of love, I will again invest that return because my MPI (marginal propienciety to invest) is equal to one at the moment and this is how we can, in the consequence of multiplier effect, produce love to infinity and we together can increase the love level in the economy to get equilibrium point of love in the economy and in the world. As you know that I am a big fan of Lord Keynes, so I want to apply it on macro level instead of micro and in this lies the existence of our economy and world.

 I have a dream that we both create perfect competition for lovers where the combination of lovers would be on the point where demand and supply curves o both would intersect. There would be monopoly of lovers in the market and barriers on the entry of rivals and they would have to bear the loss more than average fixed cost on entrance and they would have to exit.

 More than that I assure you that I will keep you happy because I am a rational person and keep in mind both cardinal and ordinal theories of utility maximization. I would, for you, increase my MPC (marginal propienciety to onsume) to one. I know that the rate of your love is of progressing nature, which increases with the increase in income, so, I have decided to increase my income through black marketing, smuggling, corruption, profiteering, and tax embezzlement and fraud to satisfy your demands.

 And before that my taste and habits change or I and other lovers make cartel and decrease supply of love because of high demand (in consequence of which it is predicted that the price of love will increase to double from one to two hearts and yet Islam allows for four) and government may impose tax on the activities of love, due to increasing trade deficit, you will have to think about my proposal.

 This is a hypothesis of mine which can be converted into the theory if you marry and we may create a model. Now, you must accept my proposal because you are a big fan of models.

                                                                                                                        Only yours,

                                                                                                                        Allocator of love in a better way

Luxry and Necessity

It is observed that a luxury converts into necessity over time. People want a luxurious life so they keep trying to earn more and more. As their experience in a specific field grows, their earnings also increase. As a result, their purchasing power increased now they are in a position to enjoy some more   luxuries. With time being, these luxuries become a part of their ordinary life course and become necessity for them. Although there involve some other factors being discussed hereunder:

1.    The price of luxuries may fall over time making it easier to afford luxuries for people. There are so many factors which may affect the price of a luxury and are as under:

a)    The first and most likely cause is technological progress which makes it very much easy, cheap and efficient to produce a luxury.

b)    The second reason is profit margin in luxuries which may induce other companies to enter in the market and produce the goods of same nature. This may create competition. Competition may affect the price dually:

i. Advertisement and sales promotion activities may increase the cost of the goods sold, as the result increasing the price of luxury.

ii. To remain in a stable position in a competitive market, the producer may offer less and suitable prices, better terms and conditions and improved quality goods to the consumer. The demand for luxuries is highly elastic, so the demand of such products may increase rapidly.

c)    Normally, inflation does not affect prices of luxuries much because of highly elastic demand. Although the price of goods do not increase in real terms due to inflation but consumer consider it as increase in price in real terms due to physiological effect. So, producers are reluctant to increase the prices of goods except in extra ordinary circumstances. As a result the value of money declines but the prices do not increase so it affects the prices inversely.                                                                                        

2.    Now day’s different financial institutions e. g; banks and installment businesses have made it very much easy for the people to afford luxuries. We may take the example of car leasing schemes in Pakistan from many banking and financial institutions.

Thus, for the reasons discussed above a luxury becomes affordable and necessity for the majority of people living in that economy.

When a good has become necessity:
At the stage where a good has converted into necessity from luxury, government may impose some price restrictions and may decrease taxes on the good. So the price of the good may further decrease due to this fact making it yet more affordable for more people.

At the stage, the profit margin is this much low that some companies my retreat from the market and other may reduce the advertisement and sales promotion expenses to increase their profit margin to some extent. At that stage the advertisement and sales promotion expenses are not necessary but a burden because consumer is very much aware about the characteristics of good.

The price of the good remains stable for some time and then it may increase due to lack of competition and inflation factor.

However, it is quite unpredictable to announce the time duration which a luxury takes to become a necessity.

Examples in Pakistan’s economy:
The following examples may not fulfill all the essentials of theory discussed earlier but these are the things which have almost converted in the necessity from luxury. The deficiency to fulfill all the requirements of the theory of these goods may be is the weak economic and financial structure of the economy of the Pakistan.

Personal computers, Mobile phones, Cars, etc,

                                                        Sarfraz