Advantages and Disadvantages of Economic Blocks - Research Paper Example

Advantages and Disadvantages of Economic Blocks The Central American Integration System (CAIS) is the political and economic organization of the nations in the Central American region since February 1, 1993. On December 13, 1991 the ODECA countries entered into a Protocol of Tegucigalpa that extended earlier cooperation for regional peace democracy, political freedom, and economic development. This article analyses the advantages and disadvantages of the membership of the CAIS. Advantages Firstly, the member state enjoys lower tariff or non-tariff trade restrictions that increase trade and increase consumer choice. In the case of the CAIS, the immediate "trade creation" effects mainly reflect the elimination of governmental barriers as customs and duty checks are withdrawn from internal borders. This basically means that the member states of CAIS are subjected to zero tariffs and customs duty when selling goods and services to other member states. Improvements in cross-border regional logistics might also play an significant role. Secondly, producers and manufacturers of goods and services within a regional integration block benefit from the larger market size. A big market size, is an imperative factor that facilitates innovation. In this case, members of the Central American Integration System are able to apply innovation to reduce some of the fixed costs. Simultaneously, consumers of goods and services will also benefit from larger competition in the product market. However, these effects vitally depend not just on the establishment of a single customs area, but also doing away with barriers to market access. In this case, key progress has been achieved in this respect to the Central American Integration System where companies have equal access to public contracts in all member countries. Thirdly, exporting within the Central American Integration System serves as the first step towards the extension of exports worldwide. In this case, the block initially builds export capacity taking using the low tariff and non-tariff barriers within the region. Then, they leverage this huge capacity to achieve competitive advantage in exporting to other non-member countries. In this case, member countries accumulate their export and make a collective bargaining for the best price and terms of sake for their products. Fourthly, larger extent of regional economic integration can assist member to strengthen their political and economic institutions. As some specialist are delegated to newly founded supranational bodies, and other parameters of economic policy experience cross-country synchronisation, the opportunity arises to revise and review laws, policies and regulations that strengthen their operation, in turn promoting business environment liberalisation and improvement. As such, economic society can make institutions stronger as compared to those of any of its single member states, Bryant (2009). Lastly, the Central American Integration System has encouraged the liberalisation of the job market. In this case, the trade block has opened job opportunities in its different member countries. As such, the human capital circulates effectively allowing different sectors to enjoy quality and diverse skills and expertise. Job market liberalization has allowed businesses to do very well as they can source the best human capital from any of the member countries. This has two significance: it creates jobs for member countries and as aforementioned, businesses within the block get a bigger pool of experts to pick the best human capital, Teitelbaum, Wilensky (2013). Disadvantages Regional economic and political integration comes with some challenges. As such, member countries in a trade block thrive minimise adverse effects of economic links. Such effects characteristically occur due to trade diversion. In this case, a relative change in customs and tariff barriers can redirect trade from efficient external exporters to that with less efficiency. In addition, some countries can create artificial shortage so that they do not supply goods at a lower consideration to a member country. As such, the trading block will be forced to seek goods from external sources at higher prices and more strict terms of trade. As a result, nonetheless, consumers ought to buy goods and services from the less efficient manufactures and producer. Another major concern, and particularly in relation to the Central American Integration System, is economic asymmetry. The disproportion in the economic size makes some countries accrue more benefits compared to others. For example, Hondurass gross domestic product (GDP) and population are approximately two-tenth of those of Mexico, and those of Nicaragua. As such, economic asymmetry can become a huge obstacle. It is essential to make sure that the decisions and interests of bigger economies are given priority by all member states. In addition, these supranational states should be given proportionate number of votes so as to hence equity in various levels of integration. Another notable challenge facing the Central American Integration System is the commonness in technology, natural resources endowments and human capital structures. As such, factors of production in these economies are identical and hence most of their outputs are identical. This basically implies that almost the entire block will produce goods and services that match those of other countries. In this case, export and imports in the region are almost not possible. This has the implication that each member country has to establish ties with other countries-at higher tariffs- outside the block so as to obtain various goods. To mitigate this scenario, the Central American Integration System block is identifying and engaging other countries so that the entire block can benefit. The fight for economic superiors has also dealt a blow for to the Central American Integration System block. This has brought about a lot of infighting and suspicion that has threatened to break the economic ties. Lastly, while extended economic and political integration may produce considerable benefits, it can also substantially aggravate the macro and micro economic vulnerabilities of member countries. As production and distribution chains become more integrated, small and infant business are shocked by bigger companies as the competition intensifies. Producers of intermediary and primary goods may be particularly adversely affected as suppliers of finished goods and services scale down orders and run down their existing stock of raw materials. As a result, outputs contractions can be enlarged through closely linked trade and thus affects the strength of consequent recovery. Various steps are being taken by economic blocks so as to mitigate these adverse effects of economic and political integrations. Some of them include the creation of block to block integration and globalization among others. References Bryant, T. (2009). Central American Integration System. Toronto: Canadian Scholars Press. Teitelbaum, J., & Wilensky, S. (2013). Advantages and Disadvantages of Economic Blocks (2nd ed.). Sudbury, Mass.: Jones & Bartlett Learning. Migwi, W. (2014). Integration causes more undoing than doing. NY. Mass.: Jones & Bartlett Learning. Read More