Regional economic communities are formed because of the expected benefits from them.
An important feature of the higher levels of integration is free trade among members.
Free trade is expected to lead to rapid expansion of trade among members, which in turn is expected to lead to rapid economic growth. These gains result from the dynamic effects of a CU, which have been shown to overshadow the static effects, viz., trade creation, trade diversion and terms of trade effect. The dynamic effects, which are cumulative in nature, lead to growth. Indeed, the dynamic effects of a CU are often described as the long-run consequences for the economic growth of member countries as a consequence of increased market size and exploitation of economies of scale, increased competition, learning by doing, and increased investment, Cooper and Massell (1965), Iyoha (1977)
and Kreinin (1964). Iyoha (1977) has shown that the larger the CU, the more likely it is to lead to growth since the larger the CU, the larger will be the market created. Also, the stronger the potential economies of scale are, and the more rapid the autonomous productivity advances, the more likely will the CU lead to growth. Thus, the contribution of a CU (or regional integration in general) to economic growth will be greater if the exploitation of scale economies, made possible by increased market size, takes place pari passu with learning by doing.
African Development Bank Economic Research Working Paper Series Enhancing Africa’s Trade: From Marginalization to an Export-Led Approach to Development Milton A. Iyoha Professor, Department of Economics & Statistics University of Benin, Nigeria Economic Research Working Paper No 77 (August 2005)
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