What is the Rationale of Regional Economic Groupings?

Rationale of Regional Economic Groupings:

Large Size of Market:

If the national market is inadequate due to the small population and/or low income, it would not be able to provide a viable level of demand for a large number of industries, such as fertilizers, automobiles or steel. The economic plant size of such industries is large and unless there is a market to absorb the output, the capacity utilization will be low, making final products costly.

On the other hand, if a smaller plant is established, its operating costs would be high. The only solution, therefore, is to integrate several markets so that a plant’s output can move across frontiers without facing barriers.

Optimum Utilization of Resources:

Optimum utilization of resources requires that each country specializes according to its relative comparative advantage. Artificial tariff and non-tariff barriers do not, however, allow national planning of investment according to comparative advantage. The result is that each country continues to produce goods which can be more economically produced elsewhere.

If free movement of trade and factors of production are allowed within the region each country will specialize in certain sectors where it enjoys the most comparative advantage leaving the other sectors to the rest of the region. The region as a whole will be economically better off as a result of such investment planning.

Increased Efficiency:

Opening up of the domestic economy to competition from the member countries of the grouping can result in increased efficiency, lower prices, increased product variety and introduction of new and modern business methods.

Trade Creation:

One important benefit of tariff liberalization at the regional level is trade creation. Trade creation is defined as substitution of inefficient domestic production in one member country by cheaper imports from another member-country. Since trade moves in favor of a. more efficient producer, this increases welfare of the consumers.

Political Objectives:

Regional groupings help to avoid future conflicts among the member countries. Regional grouping is an effective means to seek political harmony.

Regional Initiative:

There is a feeling among countries belonging to a region that it is more easier and better to trade more with the countries in the region rather than outside the region. Regional grouping offers a better means to developing countries to achieve the objective of rapid industrialization. In our opinion, regional grouping may not be beneficial for India. India is an Asian country and surrounded by a number of least developed countries and developing countries.

There are certain conditions to be satisfied for the success of an regional grouping. The economic structure and.conditions of the countries in Indian region, by and large, do not satisfy these conditions.

A regional grouping requires that the economies of partner countries are actually very competitive or similar, but potentially very competitive or dissimilar, because under such situation the trade creation will be more than the trade diversion. The countries in Indian region are in fact producing similar products, and primary products not for selling among themselves, but for the market in developed countries. The countries do not fulfill the condition of complementary and competitiveness.

Regional countries of India do not have scope for substantial intra-regional trade.

Governments of this region have national rivalries and boundary disputes. Political differences and narrow nationalistic views are obstacles to the success of regional grouping.

Customs duties is an important source of revenue for the governments of developing countries. The loss of revenue from customs duties tends to reduce the motivation for regional grouping.