Economic Integration and Development Strategies: A Theoretical Perspective

Economic integration creates two different forces on industrial location: dispersion and agglomeration forces. The dispersion force relocates industries across integrated countries according to each country’s comparative advantage and achieves the static efficiency of resource allocation. In contrast, the agglomeration force serves as a dynamic source of industrialization but at the same time, it may produce the economic disparities among integrated countries and among domestic regions within each country. In order to work out effective development strategies under the influence of the two forces, it is important to manage dexterously the nonlinear effects, such as home market effect, lock-in effect and hub effect. With these effects, drastic progress in long-term economic development can be triggered by a single success of a short-term program for inviting firms, particularly in the initial stage of agglomeration. Individual policies therefore bear great importance in the industrialization process, but the government of each country is likely to face two kinds of difficulties in developing a successful strategy: (1) strategy-building requires extremely accurate information about the state of the country; and (2) difficulty in policy coordination to avoid excess public investment for development.