chapter  2
11 Pages

Towards a Developmental Theory of Integration among Developing Countries

Orthodox comparative static analysis based on the customs union theory of Bye (1950) and Viner (1950) attributes such gains to increased production arising from specialisation according to static comparative advantage, that is, essentially to static resource alloca­ tion gains. The orthodox theory analyses the effects of integration principally in terms of the trade creation and trade diversion that would result. Trade creation refers to a shift from the consumption of higher-cost domestic products in favour of the lower-cost products of other member states. This reduces the cost of goods previously pro­ duced domestically. Trade diversion refers to a shift in the source of imports from lower-cost sources outside the regional bloc to a higher-cost source within it. The merits of integration are then evalu­ ated using the relative magnitudes of trade creation and trade diver­ sion as the sole criterion. A union that is on balance trade creating is regarded as beneficial, whereas a trade-diverting union is regarded as detrimental.