The Theory of Common Markets as Applied to Regional Arrangements Among Developing Countries

By and large the theory of customs unions has been confined to considerations of welfare gains or losses arising from a disturbance of the existing pattern of trade which is assumed to reflect comparative advantages in the commodities traded as determined by existing factor endowments. Some attention has been paid to the realization of gains from the economies of scale and from increased competition. However, the effects of the creation of regional markets on the more fundamental problems of developing countries such as increasing opportunities for profitable foreign and domestic investment, broadening the export base, achieving balance of payments equilibrium, mobilizing unemployed resources and avoiding economic dualism, have been largely neglected. Some of these problems, which are concerned with the dynamics of economic growth, are of interest to under-developed and to industrially advanced countries alike. I doubt, for example, if the most significant gains from the creation of the European Economic Community are to be discovered through a comparison of trade-diverting and trade-creating effects on welfare, even if we could measure them. Rather, the major impact will occur as a consequence of the effects on entrepreneurial decisions arising out of the new market structure and out of the acute awareness of the continual generation of new products, new processes and new methods of distribution on the part of competitors within the broad regional market.