Estimates of the Effects of Economic Integration among the LDCs

Abstract

The analysis in Chapter 5 clearly indicated that both the static and dynamic (as traditionally defined) resource reallocation effects of economic integration are irrelevant for schemes of integration among less developed countries (LDCs). This is due to the fact that perfect competition, hence free trade, lies at the very heart of the analysis and that economies of scale have to be achieved through enhanced competition in order to guarantee the attainment of the necessary cost reductions per unit of output. The neoclassical approach to economic integration among a group of LDCs is based on an entirely different framework. It is built on the understanding that there is a rationale for protecting certain areas of economic activity (especially industry, which is why trade theorists have conceded the ‘infant industry’ argument as the only exception to free trade, but only under very specific conditions — see El-Agraa (1983b) for a full discussion of this issue) in these countries in order to raise their income levels or their rates of economic growth or to realise certain non-economic aims which are desired for their own sake. Hence, the quest for economic integration among the LDCs has to be seen in the much wider context of economies of scale, which cannot be achieved within single national markets, and divergencies between private and social costs because of distortions in both factor and commodity prices, which are the result of government policies.