Maurer School of Law: Indiana University Digital Repository @ Maurer Law Articles by Maurer Faculty Faculty Scholarship 1969 Economic Integration in East Africa: Distribution of Gains Robert L. Birmingham Indiana University School of Law Follow this and additional works at: https://www.repository.law.indiana.edu/facpub Part of the African Studies Commons, Growth and Development Commons, and the Law and Economics Commons Recommended Citation Birmingham, Robert L., "Economic Integration in East Africa: Distribution of Gains" (1969). Articles by Maurer Faculty. 1701. https://www.repository.law.indiana.edu/facpub/1701 This Article is brought to you for free and open access by the Faculty Scholarship at Digital Repository @ Maurer Law. It has been accepted for inclusion in Articles by Maurer Faculty by an authorized administrator of Digital Repository @ Maurer Law. For more information, please contact [email protected]. Economic Integration in East Africa: Distribution of Gains ROBERT L. BIRMINGHAM* I. THE NEED FOR CONTROLS A. BENEFITS OF UNIFICATION Although both integration proposals and attempts to implement them have been frequent throughout the last decade, there are few if any successfully functioning economic unions among developing states.' The manifest disparity between effort and consequence does not appear to be adequately explained by disillusionment on the part *Assistant Professor of Law, Indiana University School of Law. A.B., Pitts- burgh, 1960, LL.B., 1963, Ph.D., 1967; LL.M., Harvard, 1965. Professors Det- lev F. Vagts of the Harvard Law School and Marina von Neumann Whitman of the University of Pittsburgh have been of great help to me in the prepara- tion of this paper. Errors are my own. 1. The two traditional forms of economic integration, the customs union and the free-trade area, have been defined in the General Agreement on Tariffs and Trade: (a) A customs union shall be understood to mean the substitution of a single customs territory for two or more customs territories, so that (i) duties and other restrictive regulations of commerce (ex- cept, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated with respect to substantially all the trade between the constituent terri- tories of the union or at least with respect to substantially all the trade in products originating in such territories, and, (ii) subject to the provisions of paragraph 9, substantially the same duties and other regulations of commerce are supplied by each of the members of the union to the trade of terri- tories not included in the union; (b) A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restric- tive regulations of commerce (except, where necessary, those per- mitted under Articles XI, XII, XIII, XIV, XV and XX) are elimi- nated on substantially all the trade between the constituent territories in products originating in such territories. General Agreement on Tariffs and Trade, Oct. 30, 1947, art. XXIV, para. 8, 62 Stat. 2013, T.I.A.S. No. 1765, 62 U.N.T.S. 56. The term "common market" normally denotes a customs union within which "not only trade restrictions but also restrictions on factor movements are abolished." B. BALASSA, THE THEORY OF ECONOMIC INTEGRATION 2 (1961). "An economic union . combines the suppression of restrictions on commodity and fac- tor movements with some degree of harmonization of economic policies." Id. Although more limited economic cooperation among states has been called "integration," this word is generally employed only to designate groupings of at least the free trade level. These terms, together with such non-technical labels as "amalgamation," "consolidation," and "combina- tion," are frequently used indiscriminately where precise delimitation of the characteristics of the arrangement is not required. 19691 EAST AFRICA INTEGRATION of national leaders concerning the magnitude of potential gain to par- ticipants as a group. Conventional customs union theory, best characterized as an ex- pansion of the static neo-classical international trade framework to embrace discriminatory restraints, indeed offers little justification for combination: "If we apply [traditional] analysis to underdeveloped countries, it looks as though we should have to conclude that these countries should avoid economic unions like the plague." 2 But class- ical arguments are largely irrelevant in a dynamic context: As regards underdeveloped countries . the conventional theory simply misses the basic point. Being designed to ex- plore the problem of optimal allocation of given resources, under given conditions of production, within a competitive framework, it cannot illuminate situations, such as those which arise in underdeveloped countries, in which neither resources nor conditions of production can be taken as given, and in which immobility of factors of production obstructs the operation of market forces. For any underdeveloped country contemplating closer economic ties with its neigh- bours the primary question is not-will this enable us to use our present resources more efficiently? . The primary question for any potential grouping of underdeveloped coun- tries is whether discriminatory encouragement of trade with one another would tend to accelerate the rate of growth or not.3 Proponents have asserted: "A customs union of underdeveloped countries . has a greater number of strictly economic arguments in its favor than does its counterpart among industrial countries." 4 Prospective gain is primarily attributable to the possibility of ex- ploiting economies of scale in manufacturing. The problem of inade- quate internal markets currently confronts almost all developing states: among them, gross national product exceeds seven billion dollars only in India, Brazil, Mlexico and Pakistan.5 Over ninety of the underdeveloped nations have populations below fifteen million; 2. S. DELL, A LATIN AiaEmcAN CoMMoN MARxEr? 15 (1966). "An extremely low level of economic development will tend to keep economic benefits at a minimum.... The higher the stage of economic development, the greater is the potential economic gain." Allen, Integration in Leso Developed Areas, 14 KYKL0s 315, 319, 329 (1961). 3. S. DELL, supra note 2, at 16-17. "The traditional theory of customs unions will . be of little usefulness for evaluating the desirability and the pos- sible consequences of integration in less developed areas." B. BALASSA, ECO- NOMIC DEVELOPMENT AND INTEGRATION 35 (1965). 4. Linder, Customs Unions and Economic Development, in LATIN ARaICAN EcoNoMic INTEGRATION 32, 41 (M. Wionczek ed. 1966). "It is certain that without integration there will be no economic development in Latin Amer- ica." Herrera, The Financing of Latin American Integration, INT'L DEVEL- OPMENT REV., Sept. 1963, at 7. 5. B. BALfASSA, EcoNobnc DEVELOPMENT AND INTEGRATION 80 (1965). 410 VIRGINIA JOURNAL OF INTERNATIONAL LAW [Vol. 9:2 more than sixty have fewer than five million people.6 Efficient in- dustrialization, rightly or wrongly the objective of most national leaders,7 can generally be achieved only through economic consolida- tion. Autarkic policies normally either preclude substantial manufac- turing activity or require sacrifice of income through reliance on ex- pensive low-volume production techniques." B. INTRAMARKET IMBALANCE Although economic union may facilitate development of the inte- grated region as an entity, an individual state must still weigh the advisability of joining a prospective combination or of continuing participation in a functioning amalgamation. Union will most likely be viewed by 211 member nations as profitable only if gains are so distributed that the position of each is superior to that probable in isolation. Institutional structures promoting relative distributional equality, politically undesirable because they may restrict national autonomy or add a burden of continuing negotiation, are necessary to the extent that unimpeded market forces fail adequately to allocate the rewards of combination. The possibility of exploitation of the less industrialized, inherent in economic integration among nations at different stages of devel- opment, may be simply demonstrated. Sheltered from competition from excluded countries by tariff barriers, a state previously capable of exporting only raw materials may find intraunion markets for its. high-cost finished goods. Partners may be forced to surrender both customs revenue derived from duties on manufactures and exclusive control over import policies with little possibility of gain: elimina- tion of impediments to trade with other member nations will prove valueless if newly opened markets experience a continuing surplus of primary products. Disadvantaged states will find foreign exchange earned by extraunion sales expended on association output; favored partners will supplement income from traditional sources with earn- ings from protected export of manufactured goods. As a result, "the less favored regions can be said to be financing the industrial de- velopment of their more advanced counterparts by paying higher than world-market prices for industrial products in intra-area trade." 9 6. S. DELL, supra note 2, at v. 7. "What alchemy was to the Middle Ages, industrialization is to the under- developed world of this century-the magic elixir that can transform feudal societies." P. NEHEMKIS, LATIN AMERICA: MYTH AND REALITY 185 (1964). 8. See Birmingham, Integration and Economic Development,