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Advantages and Disadvantages of Economic Integration in Emerging Economies
Student Name: Sailaja Bandreddi
Student ID: 001244312
Words: 3177
Table of Contents
Introduction
2
Emerging Economies and Their Characteristics
2
SWOT Analysis of Emerging Economies
3
Strengths
3
Weaknesses
4
Threats
4
Opportunities
5
SOAR Analysis
5
Advantages of Economic Integration in Emerging Economies
6
Disadvantages of Economic Integration in Emerging Economies
9
Conclusion
12
References
13
1
Introduction
Economic integration is an important component of international trade and refers to the arrangement of two nations within a certain geographical location to reduce or remove trade barriers and enhance the coordination of monetary and fiscal policies. Economic integration can occur in four areas namely free trade area, common market, customs union, and economic union (Kosev & Tompson, 2020). There are numerous benefits derived from economic integration including reducing the cost of trading, improving the availability of goods and services, a greater
variety of goods and services, and improved efficiency leading to enhanced purchasing power (Abe, 2021). There are also disadvantages associated with economic integration including developing nations becoming over-dependent on developed economies, increased trade diversions which might affect the economies of small nations, and loss of national sovereignty (Sabirovna, 2022). This paper will aim to address the advantages and disadvantages of economic integration in relation to the problems faced by the emerging economies.
Emerging Economies and Their Characteristics
Emerging economies are a term used to refer to countries that have showcased rapid economic expansion. They represent approximately 59 % of worldwide investments (Bruton, Ahistorm, and Chen, 2021). Most of these nations are undergoing rapid industrialization which has led to the growth of a robust middle-class group. Further, these countries are experiencing a rapid transition from low income, less developed, and often pre-industrial economy base and rapidly moving towards a modern, industrial economy characterized by higher living standards (Bruton, Ahistorm, and Chen, 2021). The main features of these nations include rapid levels of economic growth, high volatility rates due to factors including price shocks, low or medium per capita income, currency swings, the presence of regulatory bodies, a transitional culture, young 2
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populations, and policies that allow for potential growth (Bruton, Ahistrom and Chen, 2021). Various countries are falling into this category including Brazil, India, Pakistan, India, China, Greece, South Korea, Turkey, Philippines, Hungary, Indonesia, South Korea, Saudi Arabia, Mexico, Thailand, and the UAE.
SWOT Analysis of Emerging Economies
To identify the potential challenges facing emerging economies, it is imperative to perform a SWOT analysis of these economies. The SWOT analysis is an economic theory and forms a good framework for analyzing the strengths, weaknesses, opportunities, and threats of an entity. The tool is attributed to Albert Humphrey who is credited with developing it in the 1960s (David and David, 2019). It is a perfect tool for analyzing both the internal and external factors that impact firms or entities. Besides, the core goal of this theory is to increase knowledge of the factors that go into making a business decision or establishing a business strategy (David and David, 2019). Performing the SWOT analysis of the emerging economies will give us a perfect knowledge of the strengths, weaknesses, opportunities, and threats that assisted these countries and is key in informing the discussion about the advantages and disadvantages of the economic integration of these countries.
Strengths
One of the strengths of emerging economies is that they have high growth and investment potential. These nations are very attractive for foreign investment considering the high return on investment they give. The investors make investments in low-cost manufacturing firms which are
exported to rich countries, boosting their GDP growth, stock prices, and returns for investors. The second strength of these nations is that they have high economic growth rates (Groh and Wich, 2012). Often, governments in these countries implement policies favoring industrialization
3
and rapid economic growth. These policies result in lower unemployment rates, higher disposable incomes, higher investments, and improved infrastructures.
Weaknesses
There are various weaknesses associated with emerging economies. One of the weaknesses is low or medium per capita income which is less compared to those in the developed nations. The low to medium capital incomes limit the spending power of the citizens. Another weakness associated with these nations is trade tensions with other countries in trading blocs or unions (Yavas and Dedi, 2016). Other weaknesses include disorderly financial market developments and
spillovers from the financial crisis in the developed economies.
Threats
the risks associated with emerging economies are political, economic, and currency risks. Regarding the political risks, these economies have unstable, and sometimes volatile governments. This poses a great threat of political unrest which has severe implications for the economy and foreign investments. Economic risks are another threat to these economies. These economies can suffer from insufficient labor and raw materials from time to time as well as high inflation and deflation, unsound monetary policies, and unregulated markets which present problems to investors. Currency risk is another threat associated with emerging economies (Yavas and Dedi, 2016). The value of the currency of these nations compared to the U.S. dollar can be extremely volatile, and this is bad for the investor who might shy away from investing since the investment gains can be significantly lessened if the currency drops significantly compared to the dollar.
4
Opportunities
There are various opportunities for emerging economies. Some of the opportunities in these economies are a high talent pool due to a booming population, and also multiple advantages when it comes to international trade. Moreover, another opportunity in emerging economies is the youthful populations who are important in providing a ready market for manufactured products (Groh and Wich, 2012).
One type of economic integration is the Free Trade area.FTA refers to a form of economic integration whereby a particular group of nations signs a free trade agreement sealing economic cooperation among them. The FTA aims to eliminate barriers in trading, particularly tariffs and import quotas. The member states usually establish common policies regulating trade, quotas, terms, and tariffs. The FTA enhance the volume of international trade among countries while allowing them to enhance their specialization in their respective comparative advantages.
SOAR Analysis
Another economic theory that will be integral in this discussion is the SOAR analysis. It is closely related to the SWOT analysis but introduces aspirations and results instead of weaknesses
and threats. The aspirations address what an entity aims at doing whereas the results show how the entity will identity as well as track the progress towards the opportunities and aspirations (Padhy
and Panda, 2019
). The SOAR has been praised for being more positive compared to the SWOT analysis by focusing on aspirations and results. Therefore, this theory will be important in
highlighting the aspiration that various units of economic integration should have in9order to have positive results in enhancing trade among countries.
5
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Advantages of Economic Integration in Emerging Economies
Raising per capita incomes is one advantage of economic integration in emerging nations. As the per SWOT analysis above, one of the challenges facing emerging economies is the low to medium per capita income of the citizens. Heretically, economic integration for example FTA addresses this problem of low to medium per capita income by allowing for comparative advantage whereby countries specialize in producing the products or services they are well endowed in and where they enjoy economies of scale (Vitez, 2019). As countries expand their production capacities following comparative advantage, they have the potential of creating more employment opportunities for the citizens, leading to an increase in per capita incomes.
The removal of tariffs and quotas under FTAs makes it easier for countries to reap the benefits of comparative advantage. Purwono, Sugiharti, and Handoyo (2022) investigated the potential impacts of FTAs on enabling emerging countries to gain a competitive advantage thus increasing revenues. The scholars were interested in determining if the ongoing economic liberalization had
led to a more profound trade expansion of Indonesia compared to other partner emerging economies. The findings of the study were that expansion in exports had occurred among the countries in the FTA, revealing comparative advantage and export specialization (Purwono, Sugiharti, and Handoyo (2022). Moreover, the competition had increased between Indonesia and the four other regional partners of India, Thailand, Vietnam, and Indonesia. Specifically, Indonesia had gained by trading in primary materials whereas it has lost regarding the low-cost manufacturing industry. The aspirations of the FTAs in enhancing comparative advantage of countries should be focused on supporting investment in regional value chains which will makes countries aware of the production potential they have for certain products.
6
Fig 1: A Graph of GDP per Capita in Indonesia 2014-2022.Available at https://tradingeconomics.com/indonesia/gdp-per-capita
Improving foresight relations and diplomatic power is another benefit of economic integration for emerging economies. Basing on the SWOT analysis above, emerging economies are faced with the weakness of poor foreign relations resulting from international threats. Thus, developing
FTAs with the more powerful nations helps to guarantee that emerging countries have extra protection from various types of international threats (Vitez, 2019). Moreover, emerging economies can also tap into the FTA to enhance their military strengths and their internal infrastructures as well as to strengthen politically. This unintentional advantage enables the developing nations to know how they ought to govern their economies and the type of government policies that will most benefit their citizens. A good example demonstrating how emerging economies benefit in terms of foreign relations due to economic integration is the case of China. China is one of the most prominent emerging economies. The country has merged as a global economic power largely facilitated by increasing economic integration and its increasing global political power. An economically and politically strong China is one of the major principal policy
7
changes facing the U.S. and Europe. China’s economic transformation over the last 15 years has been phenomenal compared to the year 2001 when the country joined the WTO beginning its journey of economic integration. Today, the country only trails the U.S. in terms of economic size. The economic transformation of China has enhanced its political power on the international stage (Corre and Pollack, 2016). The increasing political power of China has made the country have greater say in the international foreign policy arena. The real hopes that China’s integration into the world’s trade would cause greater liberalization at home and restraint abroad have been quashed over time (WPR, 2023). Instead, China has focused on strengthening its powers and influence in the global diplomatic and political space (WPR, 2023). China’s quiet rise has given the nation more vocal expression and a more assertive international posture, especially concerning the country’s territorial disputes in the south China sea. India is another emerging economy that is benefiting from increasing foreign policy due to economic integration (Tourangbam, 2022). India was a poor nation until the government allowed for the liberalization of the economy and opened up economic integration with other nations. The increasing economic power has led to more say by the country in the international foreign policy space, with strategic alliances with both the west and also with China, and Russia (Tourangbam, 2022).
Another advantage emerging economies gain from economic integration is the improvement of their financial infrastructures due to economic integration. Basing on the SWOT analysis above, many emerging economies have the challenge of underdeveloped financial infrastructures which impact the stock exchange, banks, currency, and information about the present state of investments in these nations. Wu, Jeon, and Luca (2020) investigated the development of financial infrastructures in emerging economies due to economic integration. The scholars note that the number of foreign banks that have successfully penetrated the economies of emerging 8
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economies had increased. They aggregated data from 1996-2003. They concluded that the proliferation of foreign banks in emerging economies enhances economic integration as they serve as intermediaries in enhancing the economic integration of emerging economies and advanced economies. The aspirations of the various economic integration areas in enhancing the foreign policy of the emerging economies and improving their political powers should be focused on building blocks for global interaction where they can be able to defend a member state if they are undermined by the global superpowers in the foreign diplomacy space.
Disadvantages of Economic Integration in Emerging Economies
There are numerous disadvantages faced by emerging economies in economic integration about the challenges they face. Basing on the SWOT analysis, one of the challenges faced by emerging
economies is currency fluctuations. Aftab, Ismail, and Phylaktis (2021) examined the effects of economic integration and the bridge between currency and equity markets in a group of Asian emerging economies. Following trade liberalization, trade, and financial integration have strenghtened among emerging Asian economies. The increasing economic integration as a result of financial liberalization has led to the abolition of trade barriers and capital restrictions among these countries. The scholars established that there are real exchange rates and equity return differentials. Faced with the collapsing global demand, increasing capital outflows, drop in global trade, and major supply chain disruptions, the currencies of many emerging economies are
weakening sharply (Adler, Gopnath &Buitron, 2020). Considering this disadvantage, the aspirations of the various economic integration bodies in ensuring stable currencies for the emerging economies should be focused on keeping funds in stable foreign currency.
Another disadvantage faced by emerging economies basing on the SWOT analysis is the spill-
over effect from developed economies. Erten (2012) examined the impacts of external shocks on 9
emerging economies by utilizing the mean-adjusted BVAR model. The scholar assessed the response of the emerging economies' growth to multiple shocks including global financial conditions and access to the strength of the emerging economies' growth to the worsening external conditions. In particular, the scholars focused on the effects of the Eurozone crisis on the
economic growth of China, emerging Asia, and Latin America, as well as the slowdown in China’s economic growth in the emerging Asia and Latin America economies (Erten, 2012). The findings of the study were that the shocks resulting from the Eurozone growth accounted for a small percentage of the effects on the emerging economies compared to shocks from the U.S. growth. Further, the severity of the worsening Eurozone recession in China and other emerging economies was dependent on the response of the US economy to the Eurozone recession (Erten, 2012). If the US experienced stagnation as the Eurozone crisis depended, the initial negative implications on the emerging economies will be much more pronounced, and the effects would be more negative for the merging of Asia and Latin American economies. Balli, Loius, and Vo (2015) examined the transmission of market shocks and bilateral linkages concerning the world’s emerging economies. The scholars state that the economic linkages between the emerging and developed economies go beyond the usual trade of goods and services, and extend into the flow of capital for foreign direct investment and market speculation,
rendering the emerging economies very vulnerable to the shocks from the developed world. As a consequence, the equity return volatility being experienced in emerging economies is partly linked to this dependence. The scholars used Diebold and Yilamz’s spillover index methodology to obtain the spillover indices representative of the return volatility spillover impacts from the U.S., the developed economies in Europe and Japan on the emerging economies in Latina America, Eastern, and Central Europe, and the Gulf states. The results of the study were that the 10
spillover effects vary across markets. For instance, the study found high spillovers from the U.S. for all the Asian emerging economies with the Philippines and Bangladesh economies being the most impacted by the U.S. markets. Moreover, there was a strong correlation between the volume of trade, market capitalization, and security investment and the spillover effects.
Grima and Caruana (2017) investigated the impacts of the financial crisis on emerging economies. The scholars carried out a stock analysis of the BRIC’S stock market with an aim of ascertaining of these stocks were affected by the U.S. financial stress following the 2008 financial crisis. The scholars undertook regression analysis by running the BRICK’S stock market returns against several repressors including the U. S industrial production, and unemployment rates. The findings of the study were that the BRICKS economies were subject to
spillover impacts during and following the 2008 financial crisis. In order to mitigate against spillover effects, the aspiration of the various economic integration units should be encouraging member states to have a flexible exchange rate in the member states,
Another disadvantage faced by emerging economies due to top economic integration asper the SWOT analysis is the adoption of protectionist rhetoric by other nations which leads to the occurrence of trade disputes. Carvalho, Azevedo, and Massuquetti (2019) investigated emerging economies and the effects of the trade disputes between China and the U.S. According to scholars, the trade war between the U. S and China reduced the trade deficit in the U. S and led to enhanced production levels in those sectors impacted by a high import tariff. However, for China which is an emerging economy, the producers and consumers in the country would bear the greatest share of the trade dispute. Bouet and Laboorde (2017) investigated the impact of the protectionist policies adopted by the U.S. and their impacts on the world’s merging economies in the 21st century. The focus was on China and Mexico. The study reveals that the adoption of 11
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protectionist policies by the U.S. hurt the economies of China and Mexico and had the potential of damaging the global trading system without bringing advantages to the U.S. The effects on China were less severe compared to those on the U.S. The overall impact of this is enhancing tensions and trade disagreements between developed nations and emerging economies.
Ezcurra & Rodriguez- Pose (2014) investigate trade openness and spatial inequality among emerging economies. The scholars note that although emerging economies have experienced significant economic growth in the recent past, this has also been characterized by the evolution of regional inequality which creates an environment of tension and mistrust. The scholars examined data on trade openness and spatial inequality among 20 emerging economies from 1996-2006. The findings of the study were that international trade was resulting in a rise in within-country inequality among the emerging economies leading to economic disparities and a climate of mistrust. Another example of an emerging economy that has gained considerable power in the international foreign space is
Conclusion
This paper has examined the advantages and disadvantages faced by emerging economies regarding economic integration concerning the problems inherent in these nations. From the presentation above, it is evident that emerging economies are counties that are undergoing rapid industrialization which has led to the growth of a robust middle-class group. Further, these countries are experiencing a rapid transition from a low-income, less developed, and often pre-
industrial economy base and rapidly moving towards a modern, industrial economy characterized
by higher living standards. Economic integration is critical to these countries in aiding them to achieve higher levels of economic growth and development. The SWOT analysis s carried out unearths problems experienced by these counties including inadequate developed financial 12
infrastructures, weak bargaining power in foreign policy issues, low to medium per capita income levels among the citizens, spill-over effects from the developed economies, occurrence of trade disputes, and currency fluctuations. These problems have informed the discussion about the advantages and disadvantages these nations face in economic integration. The findings of this
paper are critical in guiding the discussion on the importance of economic integration concerning
the world’s emerging economies going into the future.
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