The value of economic integration

By Batanai Matsika | Aug. 2, 2024

In the modern economy, all economies feature a form of a market system.

SEVERAL economists contend that economic integration can improve the welfare of individual countries.

The definition of economic integration encompasses all the different agreements between countries that include the elimination of trade barriers and aligning monetary and fiscal policies which then lead to a more inter-connected global economy. In fact, another term to describe economic integration is globalisation, which simply refers to the inter-connectedness of businesses and trading among countries. In the modern economy, all economies feature a form of a market system.

There are different stages of economic integration that include:

Preferential trading area
Free trade area
Customs union
Common market
Economic union,
Economic and monetary union
Full Economic Integration.

Many countries move in and out of these stages with other partnercountries. One of the best examples of complete economic integration is with the European Union (EU).

According to our research, there is evidence that economic integration can improve the welfare of individual countries. For example, there is optimism that the African Continental Free Trade Area Agreement (AfCFTA) will impact positively on African economies.

Basically, the AfCFTA initiative has seen the creation of the world’s second largest free trade bloc by area and third by population and is set to spur intra-African trade while increasing the appeal of direct investment in Africa.

A free trade area is the form of economic integration wherein all barriers are removed on trade among members, but each nation retains its own barriers to trade with non-members.

Economic integration is beneficial in many ways, as it allows countries to specialise and trade without government interference. The following are some of the benefits:

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Trade costs are reduced, and goods and services are more widely available, which leads to a more efficient economy. An efficient economy distributes capital, goods, and services into the areas that demand them the most;

The movement of employees is liberalised under economic integration. Normally, employees would need to deal with visasand immigration policies to work in another country;

Political cooperation is encouraged, and there are fewer conflicts. A group of nations can have significantly greater political influence than each nation would have individually.

This integration is an essential strategy to address the effects of conflicts and political instability that may affect the region;

Trade creation: Member countries have (i) wider selection of goods and services not previously available and (ii) acquire goods and services at a lower cost due to lowered tariffs or removal of tariffs;

Employment opportunities: As economic integration encourages trade liberation and lead to market expansion, more investment into the country and greater diffusion of technology, it creates more employment opportunities for people to move from one country to another to find jobs or to earn higher pay;

Increased returns and increased competition: Within a tiny market, there may be a trade-off between economies of scale and competition. Market enlargement removes this trade-off and makes possible the existence of (i) larger firms with greater productive efficiency for any industry with economies of scale and (ii) increased competition that induces firms to cut prices, expand sales and reduce internal inefficiencies;

Investment: Regional trade agreements (RTAs) may attract foreign direct investment (FDI) both from within and outside the regional integration arrangement (RIA) because of (i) market enlargement and (ii) production rationalisation (reduced distortion and lower marginal cost in production);

Insurance: RTAs can also be seen as providing insurance to its members against future hazards (macroeconomic instability, terms of trade shocks, trade war, resurgence of protectionism in developed countries);

Coordination and bargaining power: Within RTAs, coordination may be easier than through multilateral agreements since negotiation rules accustom countries to a give-and-take approach, which makes trade-offs between different policy areas possible; and

Security: Entering RTAs may increase intra-regional trade and investment and link countries in a web of positive interactions and interdependency.

Overall, an important aspect about the AfCFTA initiative has to do with the opportunity of trading services. While the level of trade in services remains low in Africa, the service sector in Africa is very important given that it can account for over 50% of GDP in many countries. Categories include business services (including professional and ICT services) as well as communication services (including audio-visual services).

In the Zimbabwe Country Economic Memorandum titled Boosting Productivity and Quality Jobs, the World Bank Group asserts that Zimbabwe can take advantage of AfCFTA through service areas such as business outsourcing.

That said, this will require significant investments in digital infrastructure. More recently, Afreximbank announced a US$400 million fund for Zimbabwe businesses looking to develop their operations throughout the African continent.

The fund, which aims to spur economic growth and development in Zimbabwe, will provide financial assistance to enterprises in a variety of industries, including manufacturing, agriculture, mining, and technology. We contend that investors can take advantage of the economic integration theme by taking strategic public and private equity positions in businesses that are actively positioning themselves for AfCFTA.

Matsika is a corporate finance specialist with SwitzView Wealth Management. — +263 78 358 4745 or batanaim@switzview.com.