Book: Economic Integration, a Comparative Analysis

May 7, 1992 by
Filed under: Articles, Books 

The Islamic Development Bank, and Trade Among Muslim Countries.

By

Nidal Sakr

INTRODUCTION

While development economists can not agree on a universal definition to economic development, there seems to be an agreement on at least one element in that definition.  That is development is the process whereby output, or more precisely, the real per capita income is increased, provided that the number of people under poverty line does not increase and that income distribution does not become more unequal[1].  Economic development theories, and economic theories for that matter, are centered on maximizing output at the lowest costs possible.  The concept of economic efficiency in production is interpreted as a relation between the physical volume of production and the cost of production.  In most of the western text books, economic analysis is limited to searching on the physical variables that are related to the production process.  In neoclassical economics, little or no consideration is given to the continuous interaction between economics and the society that economics is projected to deal with, especially in development.  Furthermore, the issue whether economics is a strictly theoretical discipline or a human and social science that deals with the factual realities of human societies, is still debated in many western text books.  The terms “normative analysis” and “positive analysis” are used in some economic dictionaries to describe this ongoing debate[2].

As an economist with exposure to different ideologies and economic systems, I believe that the theoretical aspect of the economic discipline is essential to understand and model the economic behavior of individuals and groups in any given society.  On the other hand, we live today in a world of irregularities and enormous unpredictable transitions, at least theoretically.  That makes economics less applicable to problems that it is projected to deal with unless considerations such as the social and ideological elements of the societies are included in the analysis, more so in the area of economic development for less developed countries.

This view is expressed by Soedjtmoko; an Indonesian intellectual and a former rector of the United Nations University when he said:

“Looking back over these years, it is now clear that, in its preoccupation with growth and its stages and with provisions of capital and skills, development theorists have paid insufficient attention to institutional and structural problems and to the power of historical, cultural, and religious forces in the development process[3].”

Economic Development and integration

We mentioned earlier that economic development theories mostly deal with increasing the levels of Gross National Products.  When trying to increase the levels of the GNP, most of the attention is given to large scale projects that can make a significant contribution to the increase in GNP.

On the supply side, cost efficiency serves as a function between the factors of production, and is defined by the amount of inputs needed to produce a certain volume of output.  For large scale production, it is projected that higher levels of cost efficiency are reached at higher levels of production.  In other words, the larger is the scale of the firm the more cost-efficient its production is expected to be.

In contrast, the smaller the size of the firm is, the less efficient is its production and, therefore, the firm is expected to be less capable of competing in the market.  One of the ways to introduce a large scale firm is through integration by merging small production units into a larger production facility.

This part of the analysis is almost universal with regard to integration both between countries on the international level and between production firms on the national level.

As we will see later, economic theorists discuss many factors that are related to the economic advantages and the drives to integration in general terms.  In this research about economic integration among Muslim countries, I find it necessary to make a clear reference to the Muslim economies and Muslim societies.

Muslim Integration.   

Most of the western anthropologists use the term religion to describe a faith or a set of spiritual values.  Because of their historical experiences, to a large extent, western societies moved to create a distinction between the ideological system of the society and other aspects of life such as politics and economics, at least in theory.  The concept of religion in the contemporary western economic literature is dealt with as an exogenous factor in the analysis that has little or no relevance to economic problems.  Secularism is announced to be the political ideology for many western societies and is promoted as a main reason for the industrial development of the West.  Contrary to what is claimed in the West, I, myself, along with other analysts in the Muslim World believe that we live in a world were ideologies continue to play, as ever, a central role in determining the strategies of any given society or political unit.  In that context, even secularism is defined as an ideology.

Understanding these facts is essential to understanding economics today especially when it comes to the relatively-traditional developing societies, where faith systems play a dominant role in determining the orientation of the society as a whole.

Economics is initially projected to deal with economic behavior of the individual and the group.  While there have been universally accepted concepts and principles in the economic theory, it is always necessary to keep in mind the essential link and relevance of economics to the human and social element.  Unless full attention is paid to this fact, economics will be a fiction or some set of mythical ideas that are merely hypothetical with no relevance to what economics is all about.

The concept of religion in Islam is uniquely characterized with universality.  Human life in Islam is viewed as chain links between the different aspects of life.  Life itself is viewed as a continuously developing phenomenon during which all aspects should be linked under an umbrella of the rules and guidelines of the creator, Allah the almighty.  According to Islam, Muslims should strive to observe the rules of Allah in all aspects of their lives in totality, and any partition or distinction in that regard is considered to be “Polytheism” which is a total contradiction to the foundation of the “Monotheism-based” Islam.  The universality in Islam is a concept that expands to include, among others, geographic and ethnic elements, comprehensiveness of teachings, and the changing nature of time.  Islamic teachings are integrated in a way to accommodate unprecedented continuous occurrences in life.

One should understand the historical background of the Muslim societies as it pertains to the existing economic realities.  Since the rise of Islam in the sixth century, Islamic rules were maintained under a state that is based, more or less, on the sovereignty of the divine guidance.  The Islamic State existed as a universally-dominant state for most of the fourteen centuries-long Islamic history.  Islamic rules in the different political and economic aspects of the state were generally implemented along with the Islamic mechanism of deriving the rules and answers to problems of new occurrences.  Like all states, the Islamic state lived through periods of relative strength and weakness.  As emphasized in the Holly Qur’an and recorded by historians, periods of strength were always combined with a closer and stricter observation by Muslims and the state to the Islamic rules and guidelines.  Periods of weakness and, eventually, deterioration of the Muslim societies and state were characterized by the deviation from the Islamic way of life.  The unity of Muslim territory and “Ummah”[4] under the Islamic state included the comprehensive form of what was later called integration by western scholars.

For the first time in the Islamic history, the umbrella under which Islamic rules were maintained became absent by the defeat and the dismantling of the Ottoman Empire after WWI.  The territory of the Ottoman Empire was subjected to an unprecedented foreign domination that aimed to establish control of western powers over resources, economies, and even cultures of the controlled territories.  The unity and integrity of the Muslim Ummah were deliberately attacked by dividing Muslim territory into small political entities that were decided according to pure imperialistic plans for the area.  The partition of the Muslim World occurred primarily in the San Remo conference in April 1920, and the Sykes-Picot agreement between France and Britain with the approval of the Soviet Union.  The winning European parties in WWI represented by Britain, France, and Italy occupied the newly divided parts of the Muslim state to begin what is known as the “Colonial Imperialist Era”.  Colonial policies wasted no time in eliminating what is left of the Islamic systems, including economics, in the new colonies that later became countries.  Islam and the Muslim activists were outlawed, labeled as terrorists and criminals, and were prosecuted.  The cultural systems were subjected to deliberate policies of elimination while many western cultures and systems were imposed on Muslims, and the language of the Holy Qur’an was restricted, outlawed, and replaced with European languages in many colonies.[5]

The era of colonization by direct European influences continued until the end of WWII in most Muslim Countries, where the “foreignization” or westernization of the Muslim societies was centered on blaming Islam, instead of deviating from Islam, for the defeat of Muslims.  Muslims were made to believe in the determinism of their “Slave-Master” relationship with the colonizer.  Tribes and groups were picked to be a “political elite” and servants of the colonizer according to their levels of loyalty to the occupying colonizer.  The power of influence of these new groups was mostly derived from their support by colonizers[6].

After WWII, most of the Muslim Countries were given formal political independence from direct military control of the colonizer to signal the era of “Neocolonization” under the control of the previously prepared groups.  Alliance of the new “artificial” regimes with the colonizer appeared in different forms, from a declared loyalty, to a deceiving declared animosity with actual hidden loyalty.

Along with the other systems, Islamic economics was victimized by this process, that was almost simultaneous with the rise of interest in the theory of economic integration among western economists.  Economic integration was initially projected for industrialized western countries and was later used as a foundation to form the European Economic Community.  Economic integration was earlier introduced in the United States as a result of the union or confederation.  The validity of the boosting effects of integration on maximizing production entered the economic dictionary as an undisputed fact.

The simple analytical origin of the theory can be derived from observing the diminishing tendency in the marginal and average costs with increasing production on the levels of both the firm and the industry supply.  This can be translated in producing the maximum volume of goods and services at the lowest possible costs which leads to increases in the welfare of the society.  Higher levels of production can be further expanded by joining productive economic units in the same country which represents what can be called national integration, or by a merger between firms in more than one country under integration on regional or international levels.  These high levels of production will enable the new “big” producer to benefit from economies of scale at higher production levels.

In theory, producers compete in a competitive market where free flow of goods and services is allowed.  The quantity demanded in the market increases with the decrease in prices.  Producers who produce at higher costs will only sell, at least in the long run, at higher prices.  The small quantities demanded at higher prices will result in low sales, production levels, revenues and, therefore, economic losses that will eventually drive high cost-producers out of the market.  Expanding this mechanism to international markets means that only those producers with comparative advantages based on low costs will be able to compete and survive.  This, in turn, results in a more efficient use of resources of the society which increases its surplus.

As we note in this paper, many economists started to come to a consensus that contemporary problems of development can not be isolated from their historical evolution or the historical background of their societies.  Similarly, a historical review of emergence of Muslim countries is essential  to understand their existing problems including underdevelopment.  Many Muslim economists strongly believe that any solution should have some sort of reversal process to eliminate the dividing factors and the obstacles to development that were inherited from the colonial era.  Different reasons for underdevelopment can be cited in the Muslim Countries but the most common, perhaps, is the marriage between inefficient policies of mostly corrupted governments and the foreign influence.  Foreign influence can take different forms among which is importing development theories or strategies that evolved in almost a total isolation from the problem.

A particular significance should be given to the relevance between Islam and Muslim societies.  As we shall see later, economic development and integration is a long painful process.  After determining priorities, sacrifices have to be made on the short run for expected gains on the long run.  Furthermore, under integration, sacrifices might have to be made by some countries for the long term interest of the group.  Returns on these sacrifices might be gained, collectively, on the group level, on the national level, or both.  That is to say some countries may have to give up some of their “exaggerated welfare” to enable others to reach the sustenance level for their people.  Quiet frankly, economic sacrifices on the part of the rich might not be rewarded equally, and so an economic incentive alone might not be enough to create the drive for integration.

Islam, through its emphasis on the unity of the Ummah, can provide the justification behind integration that the simple cost-benefit analysis may not provide otherwise.  Although discussion in this thesis will be mostly limited to pure economic analysis, I feel compelled to say that a true Muslim development will never take place unless the Islamic rules have domination over economic considerations and others.

In the first chapter of this thesis, the theory of economic integration will be presented and detailed in general terms.  The driving forces behind economic integration, the theoretical evolutionary stages of integration,  as well as an economic analysis to the effects of integration will be included.

The Organization of the Islamic Conference and the Islamic Development Bank will be presented in the second chapter.  The OIC was projected to function as an umbrella of unity of the Muslim Ummah.  The IDB operates within a framework aimed at expanding trade among members of the OIC as a step towards integration.

Trade among member countries of the OIC in goods that are subjected to most of the IDB foreign trade financing along with the impact of IDB operations on expanding intra-trade should be discussed in the third chapter.

Finally I should conclude my thesis with evaluating the IDB experience in foreign trade financing in the light of the theory of economic integration as it pertains to trade along with relevant Islamic references.

 

 

Chapter I

The Theory of Economic Integration

                                 - Evolutionary Stages of Economic Development

                                 – The Welfare Effects of Economic Integration

                                 – The Andean Pact: A Case Study

                                 – Conclusion

 


Foreword

 

One goal of economic development theories is to increase levels of Gross National Product.  The theory of economic integration is based on removing barriers on trade and eventually on factors of production between a set of countries.  Having a free flow of goods and services along with free competition in the new market will lead to elimination of the producers who are less efficient.  Such producers with relative high costs of production will be driven out of the market due to their highly priced products.

A more specialized use to the factors of production will result in higher productivity of the factor, lower average costs, and higher profits to the producers.  Producers will offer higher compensation for specialized factors, and with free mobility factors will be employed in firms that offer higher compensation.

Integration can be looked at from two main angles; the demand side, and the supply side.  On the demand side, integration leads to a bigger market with a greater demand.  The larger market results from combining small markets and, therefore, the new demand is a function of adding together demand volumes in these small markets.  On the supply side, integration provides an opportunity for a more efficient use of factors of production due to their free mobility.  Integration also provides wide markets that are needed for industries and large scale production.

Another rationale behind economic integration among less developed countries is that western industrialized economies control trade conditions in the international markets for both primary products and finished goods and services.  Such control takes the form of monopsony or oilgopsony in the markets of primary goods and raw materials and the form of monopoly or oligopoly in the markets of finished and manufactured goods and services.  Consequently, prices of primary goods tend to be greatly underpriced while prices of manufactured goods are often overpriced.  This situation leads to deteriorating balances of payments of less developed countries (LDC’s) which are primarily dependent on their exports of unfinished goods to obtain foreign exchange that is badly needed to finance development.

 

By moving towards integration and removing intra-trade barriers, LDCs can replace their dependency on the industrialized countries with interdependence with other LDCs.  This transformation can help to isolate the negative effects of dependency such as the deficit in the balance of payments.  It is also argued that integration among LDCs with similar market sizes can help avoid turning any member country into a monopoly.

 

As we shall see in this chapter, the theory of economic integration centers initially around trade liberalization.  The standard welfare analysis of integration is mostly a cost-benefit analysis of trade integration under the stage of customs union where free intra-trade along with common external trade policies are applied[7].


The Theory of Economic Integration[8]

The theory of economic integration starts with the point that integration takes place between politically independent entities or national states.  In that sense, politically independent nation states in their search for integration should be looking for an economic element in unification.

 

Forms of Integration

If the national states focus on the removing of barriers to trade among themselves, it is called “Trade Integration.”  Freeing of trade barriers for the international movement of goods and services, by itself, does not necessarily increase the welfare of nation states if there exist payment difficulties, such as restrictions on transfer of payments or control of foreign exchange.  Payment difficulties are a form of increasing transaction costs for exchange of goods and services, which means higher real costs of trade.  Payment difficulties may also mean delays in payment transfers from buyers to producers, which can accrue some cost such as interest, etc.   Liberation of trade barriers should, therefore, be accompanied by a removal of payment restrictions.  This is called “Payment Integration” and is viewed as a complementary stage for the trade integration.  One further step is the “Liberalization of Factor-Movements” among the integrating nations.

A minimum level of common objectives and principles is required for the benefits to be derived from any sort of integration.  The integration process can be  pursued by the harmonization of the national economic, fiscal, and social policies.  This is usually called “Policy Integration.”

Once all these policies have been realized uniformly throughout the integrated region, the concerned member nations become in a state of “Total Integration[9].”

On the basis of the above description, it can be argued that economic integration consists of negative policy actions (removal of existing barriers) with respect to the application of discriminatory treatment between the economic agents in member nations, as well as a positive policy element in terms of formulation, adoption and implementation of coordinated common policies on a sufficient scale to ensure the derivation of major economic and welfare benefits.

Two different types of integration can be distinguished from that perspective.  One is market integration and the other is production and development integration[10].  Market integration implies market enlargement from a small size to a wider or even to a global one.  It requires the complete removal of all trade barriers among the member nations so that an unhindered sale of each other’s products within the framework of social system of participating countries is achieved and guaranteed[11].  Production and development integration, on the other hand, is more comprehensive.  It covers the planning of industrial production at the international level which cannot otherwise be developed to an optimum size within an autarkic economy of national boundaries.  Planning of industrial production at the global level also covers the distribution systems as well as the marketing channels.  In general, this is done by multinationals rather than nationals.  Market size enlargement is an important element in increasing the productivity, efficiency, and profitability of the firm.

 

 

Driving Forces for Economic Integration[12]

Behind the movements towards any form of economic integration among the nations, there must be certain motivating factors.  These factors can be viewed as the benefits which member countries expect to gain from their integration.

 

Creation of Free Trade Environment

It is theoretically argued that the unification among nations on the regional level would create the conditions for the union producers as well as the union consumers in which the maximum level of satisfaction for both parties in the union would be achieved.  Free trade gives producers in other areas equal access to the domestic market.  This creates a competition for domestic producers which, in turn, creates a downward pressure on prices, more purchasing power, and higher levels of consumer satisfaction.   Increasing the level of production and trade is certainly expected to promote the welfare of the union.

 

Free Mobility of Factors of Production  

In more advanced stages of integration, the free mobility of factors of production, particularly labor, capital, and entrepreneurship, is provided within the union.  It is expected that this will further expand the union-wide potential for more production.  If realized, this will definitely increase the prosperity within the union.  In theory, free mobility of factors occurs when union members reach the common market stage as we shall see later.

 

Common External Financial and economic Policy

The adoption of a general code for conduct of the members’ business and trade relations with the non-members will free intra-union producers from outside competition by providing an expanded market for them.  This will certainly motivate union producers to compete with each other to get the maximum share of the internal market.  Consequently, intra-union marginal firms will be driven out while the most efficient producers will remain and increase their output depending on the cost conditions.  These intra and inter-firm adjustments might also lead to certain locational changes.  Production location may be shifted to other regions or locations after careful cost-benefit calculations.  One of the most important cost considerations in this enlarged but protected market is transportation costs and their effects on comparative advantages or relative prices and profits.  This will push each member in the direction of the most comparatively competitive commodity; and as a result, will create or further enlarge intra-union trade volume.  Thus, improvement in consumption and welfare level for the members beyond their autarkic consumption utility frontier would be potentially possible.

On the other hand, the long-term implication of a common external trade policy might be more effective in terms of protection of a new born industry against outside competition.  Following the initial stages, the union may become self-sufficient or even start to export the output produced by the protected industry.  This certainly depends on the kind of commodity, the comparative advantages, and the protection provided for the union firms.  It is a matter of competitiveness in the long run.

 

Acquisition of Additional Political and Economic Strength

One of the most important by-products of a movement towards economic unification is the political cooperation and alliance between the members.  Each member may naturally expect to gain more political and international economic power.  The integrated developing countries are no longer fully dependent on the industrialized countries as buyers to their primary products.  The establishment of large scale production as a result to the expanded market of the union diverts these exports toward other members, or are used in a newly established domestic industry.  These new industries negatively affect imports from non member countries and reduce economic dependency of the union on the industrialized countries.  This reduced dependency is expected to reflect positively on better trade terms and bargaining power of the member countries versus the non-member industrialized countries.

An integration between industrialized countries, for example, would leave less developed countries out and further limits their exports to the union.  Consequently, their export level and production of certain commodities will decrease, and the industrialized countries will have a price advantage over the less developed countries.  The terms of trade are expected to change in favor of the union members and, therefore, it is unfavorable to the non-members.

Another strength gained through integration against outsiders is the expansion in the financial capital market.  The increase in profitability and returns on investments of the union production will attract capital from both internal and external sources.  Outflow of domestic capital may stop partially or totally and even an inflow might take place instead.

 

Creation of Large Corporations

Large corporations need expanded markets free from all sorts of national and international restrictions to expand their operational boundaries.  Economic integration is one of the efficient and low cost means to achieve this purpose.  Unionization would provide the conditions to create large corporations through mergers and joint ventures.  In such a free environment, national firms will integrate to form larger holdings.  Already existing large corporations will be given the chance to extend and expand their economic and financial positions beyond their national boundaries.

Large corporations will, naturally, have a union-wide advantage to have an access to the intra-union market protected from external competition through a common external trade policy.  They will also have international advantages of investments, distribution and marketing through their affiliates, subsidiaries or associates.  Thus, large corporations usually endorse the movements towards economic integration from their profit standpoint.

Creation of large corporations can take place in any stage of integration depending on their economic activity.  If a corporation initially exists in a region with high comparative advantage, a free trade area may provide the enlarged markets that allow the corporation to expand and produce at large scale and become large.  In other situations, large corporations are introduced only after the stage of common market where factors of production become freely mobile and resources are relocated according to their highest level of utilization.

 

If economic integration was allowed to take place among developing countries and reach levels where economic gains of integration are achieved, developing countries can be well on their way to their development. Isolating the negative effects of economic dependency on the industrialized countries should be regarded as a high priority towards reaching that end.

 

 


Evolutionary Stages of Economic Integration

In a broader sense, the term economic integration means the removal of all kinds of national restrictions to trade, to payments and to the movements of factors of production among the prospective member nations.  Conversely, all kinds of barriers imposed on trade, payments, and factor movements are the elements of economic disintegration.

An economic integration is a movement towards or an attempt by the group of nations to reduce or completely eliminate the restrictions to trade, payment, and factor mobility in between, while retaining most or all of the restrictions on transactions with respect to the non-member countries (i.e., the rest of the world)[13].

 

From the above definitions, it is possible to identify, theoretically, a variety of forms of international economic integration on the basis of their intensity.  Initial stages of integration can be characterized by the movement towards the elimination of intra-trade barriers.  Later stages can be characterized by applying a uniform set of foreign trade policies with non members.  More advanced stages of integration entail harmonizing fiscal and monetary policies and moving towards a unified currency.  The transition from one stage to another is directly related to the intensity of changes needed for each stage which requires a certain degree of compromise in national sovereignty by members.  A gradual path for integration and submission of national sovereignty is assumed to be more acceptable to member governments, particularly if gains from integration start to occur and justify further concessions.

Some economists believe that integration stages should each be given a sufficient time frame to allow internal transformations to take place and to smooth any possible economic shocks or harsh impacts on member economies.  It is argued that giving enough time for each stage allows the introduction of economic gains which can stimulate the movement towards the next evolutionary stage.

The formality of different stages of integration occurs when member countries sign an integration accord which usually provides a timed plan for implementing the different stages of integration such as EEC.  Some agreements specify a certain level or stage of integration, i.e., bilateral free trade agreements such as “free trade area between U. S. and Israel”.

 

Free Trade Area

The first level of integration is the creation of a free trade area.  A Free Trade area requires the least intense form of cooperation between integrating nations.  The basic feature of a Free Trade Area is to abolish the existing trade restrictions among the participating regional nations.  Each national economy retains its own trade barriers and other forms of restrictions vis-a-vis the rest of the world.  Member countries, while eliminating restrictions within the area, are completely free to act as they desire in their own external trade and commercial policies in terms of import and export regulations and control.  In a free trade area, there is definitely no common external trade policy towards non-members.  There might be, nevertheless, some simple alternate forms of free trade area depending upon the circumstances.  Some member countries may be permitted by previous arrangement and agreement to continue to retain temporarily some trade restrictions on the imports from any of the member countries.  This type of special treatment of a member might be due to necessary structural adjustments to be made and, therefore, is expected to be transitional and temporary in nature.  This situation can occur when an infant industry exists in a member country with a relative comparative advantage.  Infant industries need protection and time to mature and become competitive.  Removal of protection in the “prematurity” stage can kill such infant industries because of competition by the established ones even if the later enjoyed less comparative advantage[14].  That is due to the fact that most large scale industries reach the stage of constant returns on production only in the long run and at high levels of production.

Free trade should be accompanied with easing payment restrictions among members to reduce costs of intra-trade.  Free trade without a certain level of payment integration may reduce possibilities of higher levels of trade among members.  Restrictions on payment transfers should be relaxed starting from this stage if gains from trade liberalization are to be fully utilized.

 

Customs Union

Elimination of intra-trade barriers, as we saw earlier, is expected to lead to higher volumes of trade between member countries.  Intra-traded goods and services are expected to face competition by imports from non members which will limit growth of intra-trade and negatively affect the possibilities of any expansion in production of intra-traded items.  When each country is allowed to maintain its own set of tariffs and quotas, there is a possibility that imported goods can infiltrate markets of member countries through the country that has the lowest trade barriers against non members.

Customs Union is one step further in the evolutionary process.  In addition to the removal of trade barriers, customs union involves a common external trade policy towards non-members to be observed by all the members.  Each member in this case is no longer independent in setting up its own foreign economic relations in terms of restrictions on trade, namely tariffs and quotas.  Instead, the union establishes a system of common external tariff and quota policy.  As a result, each member country maintains identical restrictions on the imports from a non-member country.  From the standpoint of free flow of goods and services within the union with common external tariff and quota system, customs union can attain an almost complete integration of its own and, therefore, intra-union trade conditions approximate those prevailing inter-regionally within a single country.  In other words, removal of restrictions on the flow of goods and services among the union provides similar conditions of mobility as if these goods and services are exchanged in the same national market.

 

Common Market

Up to this point, it is assumed that member countries succeeded in allowing a free intra-flow of goods and services while protecting intra-union production from foreign competition by applying a uniform set of foreign trade policies.  This means that markets are being allowed to integrate on the demand side since consumers now have a choice between goods and services beyond what was previously available by domestic producers in each individual member which represents additional increase in consumer welfare.  In order for economic gains from integration to be better utilized, markets should be allowed to further integrate on the supply side as well, namely in the area of production factors.

The common market stage of international economic integration is more comprehensive and complex than the preceding first two steps.  Besides providing an unrestricted market for the domestically produced commodities and services within the union and a common external trade policy, it further stipulates or provides free mobility of factors of production among the member countries by establishing political, legal, economic and even social framework for such flow to take place.  It is one of the most important assumptions that the factors of production, generally labor, capital and entrepreneurship would move from one location to another depending upon the return differentials.  If set free, labor and capital will shift from one nation or region to another within the union due to the actual and expected higher returns.  In other words, capital can flow according to investment yield and labor will relocate in accordance with the locational differentials in wage rates.

In theory, a positive correlation exists between economic efficiency and both the yield on investment and labor wage rates, as long as producers behave as free competitors, provided that wage rates are a function of labor productivity.  If new efficient industries were run as a monopoly such positive correlation becomes less true.  Some policy procedures can be put in place by union members to ensure an equitable distribution of such gains by wage laws or certain tax structures, etc., which can be implemented under a more advanced stage of integration such as an economic union.

The primary major properties, namely elimination of barriers to trade and a union-wide external trade policy together are particularly significant from the production as well as consumption points of view.  The purpose of such decisions tends towards optimization of production and consumption of goods and services produced within the union.  On the other hand, the mobility of production factors creates the possibility and perhaps the feasibility for maximum efficiency of the resource mobilization and use.  Since entrepreneurship and management are viewed as distinct elements of production, distribution, and marketing, optimization of returns should be expected in these areas as well.

 

Economic Union

In addition, economic union intends to eliminate most of the policy differences among the member countries and thereby to create a more harmonized set of working conditions towards a homogeneous union.  Such policy differentials might be either economic or social or both.  Examples to such differentials can be seen in different laws to encourage both domestic and foreign investments, laws that regulate industrial relations and labor unions, import and export procedures, etc.  National policy of taxation and monetary and fiscal policies present a wide range of diversities among the nations due to national necessities, possibilities and preferences and other considerations.  Different tax structures in member countries, for example, can introduce an “artificial” pressure that might affect allocation of resources.  Large scale investments move away from countries with high tax rates on high income brackets which might have a comparative advantage otherwise.

Although many text books do not distinguish between the stage of common market and economic union, I choose to make such distinction due to the higher intensity of common national policies in the later, that may serve beyond achieving merely free factor mobility.

 


Monetary Union

The next step is seen in the field of currency integration.  This stage involves the adoption of a single currency and monetary standard for the entire area for which a single central bank is required to organize, administer and control the prospect monetary order.

The stage of monetary integration gets directly into the issue of power delegations by integrating nations on behalf of a supranational agency.  The question is then a matter of national sovereignty since the individual nations should be giving up most of their right and power, particularly on monetary and other related policy issues in addition to and beyond the ones already delegated in preceding steps.  Such further submission generally requires willingness and readiness to accept a supranational authority as a cost in return for the expected benefits from such integration for each nation and for the entire union as well.

The supranational agency, which is founded by the members as an independent authority, will be acting independently in issuing the currency, its regulation, control and other monetary policies in accordance with the designed objectives of the union.  Therefore, it will have its own regulations and criteria covering the whole area.  In other words, the supranational authority is an element of the entire union, but definitely not an element of any of the national members which created such a body.

To understand the benefits of forming a monetary union, one should keep in mind that member nations move towards integration by realizing that their long term interest lies in the benefits of integration.  That is to say the interest of each individual nation is achieved in the long run as a part of the realized interest of the group, assuming an equitable distribution of the gains from integration does exist.  A single currency means the removal of such restrictions that may exist due to payment difficulties that are related to exchange rates’ fluctuations and differences among member countries.  Flow of trade between countries with different currencies can be affected so that a lower exchange rate of a country will result in higher exports and lower imports and, therefore, a positive balance of payments, while negative balance of payments may occur in a country with opposite circumstances.  Elimination of such effects on trade can take the form of applying a unified currency and monetary policy.  This creates similar conditions in the integrated areas which in turn allows economic factors such as the comparative advantages to operate freely and, consequently, specialization occurs according to economic efficiency differentials.

 

Economic integration, with the monetary step missing, is not expected to be complete since it will still require conversion of national currencies within the union irrespective of the successes recorded in other fields.  Balance of payments problems will also be accompanied by a loss of efficiency.  Such problems can take the form of intra-trade balance fluctuations due to the fluctuations in exchange rates of member countries’ currencies.    Therefore, a logical evolutionary sequence should run through its course of action if a complete integration is really desired among the members.

 

Total Economic Integration

All the decisions and actions required for the successive phases should have made the national economies interdependent and, therefore, the system must have interactions among its various elements.  Commencing particularly with the monetary union phase, the individual national elements had or have been delivering almost all important decision makings in economic and business areas on behalf of a supranational authority.  National agencies are expected to give up, voluntarily, their duties and authorities in other fields for the formation of an international authority.  By having all the properties of previous steps and an agency equipped with additional power in the most important decision making policy issues for the entire region, the stage almost represents the final step of an economic integration process.  National states will actually be left with very limited decision making power within their domain while the union presents a welded form of a multinational economy  or a federal state.

 


The Welfare Effects of Economic integration

In theory, member nations in economic integration should first eliminate the previously existing protective restrictions on trade and then formulate a common external trade policy against non-members.  Both measures will have short run or static and long run or dynamic implications for the members, for the union, and for the rest of the world.  Trends in many integration attempts reflect evolutionary steps similar to the framework introduced above.  However, as we shall see later in the Andean Pact case, such attempts aim to achieve goals at a time frame that could be different than the presented chronology.  Analyzing the welfare effects of integration can not be made solely based on each stage since many stages have transitional nature and because of the difficulty of making a clear distinction between the end of a stage and the start of another.  However, standard welfare analysis of integration is usually based on the case of customs union.

Welfare effects of integration occur on two different intervals; the short and the long runs.  Each of these intervals includes positive and negative effects.  The cost-benefit analysis of integration is mostly based on weighing these opposite effects, and the overall result depends on the outcome of this weighing process.  This type of analysis is solely based on economic factors and does not include other considerations that can be of equal or higher significance[15].

 

Short-run or Static Welfare effects

The static welfare effects of forming a customs union refer to the once-and-for-all changes in productive efficiency and consumer welfare in each member country and in the union as a whole.  Economic integration would certainly affect the level of social welfare due to the changes in the pre-union levels of production and prices of goods and services.  The formation of the union enforces the elimination of tariffs and other trade barriers.  Tariff revenues collected by member countries will be transformed into lower prices to consumers.  This in turn increases real income, consumer surplus and levels of individual as well as social welfare[16].

Price changes would in turn affect distributional patterns of consumption within the union, the rest of the world and between members and non-members[17].  This is the natural consequence of short-run repercussions of price changes through transactions of trade among the nations.  Changes in distributional patterns due to price adjustments are expected to be positively influential within the union in increasing the level of welfare[18].

On the other hand, there will also be a series of changes in production locations after the formation of a customs union.  There will be expected changes in consumer choices, and the range of choices for consumers would be widened.

 

Trade Creation Effects

Trade creation occurs as a result of new production or when production shifts from less efficient producers to the more efficient producers within the union.   Trade creation effects can be divided into positive production and positive consumption effects.


Positive Production Effects

Creation of a customs union by abolishing trade restrictions between the members and further accepting a common external trade policy enlarges the size of the market not only in terms of the area but in terms of the purchasing power as well.  The protected union market allows any national domestic producer to sell his products as long as he can compete.  In other words, the entire union market is open to the lowest cost and the most efficient producer within the union regardless of the supplier’s location or nationality.  Because of having no national bias and neutral preference for goods and services produced within the union, union consumers are expected to select the cheapest goods provided that the same set of commodities have equal qualities.  This will shift consumer purchases from the higher cost and relatively inefficient domestic suppliers to more efficient, lower cost, and lower price producers within the union.

Under these circumstances, the production of almost all the commodities would tend to shift and concentrate towards the most efficient and lowest cost producers and locations within the union.  The domestic producers should adjust their costs and productions to compete with the other member countries’ suppliers and have a share in the domestic as well as the union market.  Marginal firms in any member country and in any line of production would be driven out as a result of severe competition following the formation of the union.

The positive production effect can be defined as a shift and concentration of production towards the most efficient and lowest cost suppliers and locations within the boundaries of the union and, consequently, an increase in the amount of production accompanied by a decrease in the price levels of the corresponding goods as a reaction to consumers’ free choices.  A member which was previously producing a certain commodity under the protection of national tariff system, may start to import the very same commodity from the partner which is specialized in the production of that particular commodity.  It is assumed, however, that the low cost partner country would have an elastic supply and thereby increase the amount of production without incurring additional unit costs.  It is clear that the high cost domestic producer would possibly be replaced by the lowest cost partner country producers in the process[19].

 

Positive Consumption Effect

From the forgoing analysis of positive production effect, we conclude that the final beneficiary of increased production, reduced cost, lower prices, and widened range of choices are the union consumers.  Since the post union prices paid by the consumers are generally lower than the pre-union prices for the same quality commodities, an actual increase would be realized in consumer’s real income even though his nominal income is unchanged.  That will definitely increase his level of well-being as he can buy more with the same amount of income.  The second element in the short-run statics to increase the welfare of the union consumers is found in the broadening range of choices.  The consumer is no more confined to buy goods and services produced domestically at relatively higher prices.  The quantity as well as the quality of products he can buy at lower prices should have been widened as a consequence of unification.  Assuming substitution between the commodities, the significance of broadening the range of choices is then in the replacement of a high cost-high priced by a low cost-low priced commodity.  This would be beneficial even though the goods are partially substitutable.

Accordingly, the positive consumption effect can be defined as the increase in consumer’s welfare due to the potential upward shift in his real income and purchasing ability because of the falling prices and increased range of choices.  In other words the two main sources of welfare increase are the substitution of high cost commodity with low cost one and the wider selection range among commodities produced.

Both positive production and consumption effects constitute trade creation as a consequence of unionization.  It directly refers to large-scale post-union trade flows among the member countries and the expected improvement in consumer’s welfare within the union as a whole.

The welfare trade creation effects are illustrated in Figure 1.1, where effects are analyzed for two countries, A and B.

 

FIGURE 1.1  Welfare Effects of Trade Creation[20]

For country A, both domestic supply and demand of commodity x are respectively shown as SS and DD.  The more efficient country B can supply the same commodity x at OP price and we assume that its supply curve is perfectly elastic at P and shown as PP’.  The quantity consumed in this case would be ON’ of which the quantity OM’ is produced domestically in A, and M’N’ is imported from country B.  When tariffs are imposed against the imports from B, the price of x in A’s market would increase to OT which is equal to OP+tariff, and, therefore, the supply curve of x after tariffs becomes TT’.  The consumed quantity becomes ON of which domestic supply of A increases to OM, and imports from B shrink to MN.

When tariffs are eliminated, as in the case of customs union, the increase in welfare of A consumers is measured by the whole area 1+2+3+4.  Of this whole area: area 1 represents a loss in producers welfare, area 2 represents a loss in tariffs revenue to the government, while both areas 2 and 4 represent the net total welfare increase from trade creation.

 

Trade Diversion Effect

The other component of static welfare effects is trade diversion.  Trade diversion occurs when trade with non-members is diverted into intra-trade between members because of the protection given to the union producers.  Effects of trade diversion are considered negative because they affect consumer welfare negatively when more efficient non-member producers are substituted with less efficient union producers.  Trade diversion can be analyzed in the light of negative production and negative consumption effects.

 

Negative Production Effects

During the pre-union phase, the domestic market of any participating country in certain products was presumably open to all world producers to compete.  After unionization, the market is open to partner producers but closed for the producers stationed in non-member countries.  This is basically the purpose of common external trade policy adopted by the union members.  It will generally prohibit the low cost-low priced producers stationed in the non-member countries from entering the union market while the union producers with relatively high cost and high prices will be protected by the unionization and the accompanying common foreign trade regulations.

Under such circumstances, it is expected that production and thereby trade of certain commodities will be shifted from the low cost-low priced suppliers in non-member countries to the high priced suppliers within the union.  In other words, resources will be reallocated from the efficient world producers to the inefficient union producers.  Consequently, the world welfare will suffer from this diversion of resource allocation and direction of trade.  Negative production effects can then be interpreted as the counterpart of positive production effects with negative consequences on global resource allocation, world production, trade flows, and welfare as well.

 

Negative Consumption Effects

In the pre-union period, the consumer was able to buy, at comparatively lower prices, the commodities which were imported from non-member producers who operate at relatively lower cost conditions.  Post-union regulations, however, prohibit such transactions and actually force the domestic consumer to divert and allocate his disposable income towards high cost-high priced commodities of domestic and intra-union producers.  This could decrease his real income as he could possibly buy less amount of the same kind of commodity with the same level of nominal income.  This results from the newly imposed common external trade barriers for the non-member as well as the elimination of restrictions against intra-union producers.  The second negative outcome, on part of the consumer, will be realized in terms of narrowing commodity range since he is confined to make his selections among the limited number of products provided by the intra-union producers.  These two negative elements are expected to affect adversely the consumer’s level of satisfaction and welfare previously attained.  This is called the negative consumption effect of integration and it has a great potential to depress the well being of those who consume the previously imported products.

Both of these negative effects in production and consumption would certainly reduce the trade volume between a member and non-member country and between the union and the rest of the world.  Trade would be diverted to high price producers in the member countries.  Such a change in the direction of trade flow from low cost non-union producers to high cost union producers is termed as trade diversion.  The welfare effects of trade diversion are illustrated in Figure 1.2 where both countries A and B form a customs union.

 

FIGURE 1.2  Welfare Effects of Trade Diversion[21]

 

The demand for commodity y in country A is illustrated by DD.  The world’s supply of commodity y is perfectly elastic at the OPc, the price of country C; the most efficient producer in the world.  Country B is less efficient in producing y and its supply curve is perfectly elastic at the price  0PB.  When tariffs against all imports are imposed, the price of imports from country B increases to TB, while C supplies all A’s consumption of y, the quantity 0MC, at the price 0TC.  When tariffs against imports from B are removed under a customs union between both countries A and B, the price of imports from B falls to 0PB which undercuts the world price TC, and B supplies all of A’s consumption, the quantity 0MB.  The government loss of tariff revenues in country A is illustrated in both areas 3+5 of which area 3 is transferred into a consumers welfare, while area 5 remains as a pure loss.  The increase in consumer welfare is represented in both areas 3+4 of which area 4 is the pure gain in welfare.  A net loss in welfare as a result to trade diversion occurs when area 5 is larger than area 4.

 

As it is clear from the earlier analysis, the negative trade diversion effects and the positive trade creation effects work against each other.  The net result on the level of welfare of the consumer highly depends on the changes in both sides.  If there is a substantial improvement on the trade creation side that overweighs negative developments of the trade diversion, the consumer would be better off or vice versa.

 

It should be noted that the overall evaluation of integration can not be determined based solely on consumer welfare.  Consumer welfare can be affected differently from the short run to the long run.  In the short run for some of the newly established industries it is expected that they may produce at higher costs than previously imported goods.  However, in the long run a strong possibility exists that such industries will be able to develop, become more efficient and produce at competitive costs to imports.  In addition, many imports are artificially low priced such as U. S. agricultural products, which indicates that factors other than costs and prices should be considered when drawing development and national policies.  Development goals are generally set according to priorities that might not be economic in their entirety.  Nations act according to what they believe as their own national security interest even if such behavior lacked economic justification.  The short and long term dimensions of strategic planning are factors that can be based on strategic interest that goes beyond short term effects.

All in all, while consumer welfare is a main objective on the long run for any development strategy there is a strong possibility that consumer preference and behavior might need to be changed or rearranged according to the long term interest of the group.  Just because integration might have some negative effects does not mean that governments should take counter measures to compensate for these negative effects.  That is assuming that member countries realize the economic feasibility of integration before moving towards its formal application.

 

In the Islamic perspective, consumer choice and preference is encouraged to be around life necessities.  While attaining high levels of material satisfaction is generally allowable, Muslims are required to preserve a modest lifestyle where pleasure in consumption is not always encouraged.  Furthermore, economic resources in Islam should be directed towards production to meet the different needs of the present generation, while preserving nature and unused resources for future generations.

 

 

 

Long-run or Dynamic Welfare Effects[22]

The dynamic forces of integration are more related to the long run objectives and problems of economic development.

In the case of less developed countries, it has been realized that the national economic development efforts would be relatively unsuccessful through international trade, especially with those which favor free trade on the global level but practice just the opposite; i.e., protectionism[23].  It is, therefore, the case that less developed nations, including members of the OIC, are motivated to integrate to protect their interest and survival[24].

In the short run, regional economic integration for the less developed member countries may first create the opportunity to realize most of the static effects.  Once these static effects are put together, with the pooling of efforts and resources, the dynamic elements will be set in motion as a second order generation.

Dynamic welfare effects of the integration occur on the long run interval after adjustments and transformations in member economies are allowed to take place as a result of integration.  Our analysis will be divided to discuss these long run effects on the demand side, on the one hand, and on the supply side on the other.  We have to keep in mind throughout the analysis that the long run welfare effects do not occur unless integration forces are allowed to operate on a long term interval.

 


Demand Side Dynamics: The Market Size and its Functions

The term “market size” does not necessarily refer to the size of the country or that of the population.  Instead, the market size of an economy is best measured by the purchasing ability of a nation to absorb the commodities both produced domestically and imported within a certain time period.  By looking at the issue from a different angle, it can also be argued that the size of production also creates a purchasing power.  Then the Gross National Product (GNP) can be considered as the measure to the market size[25].  Countries with low levels of GNP are considered to have small markets, even if their per capita GNP was relatively high, i.e., United Arab Emirates ($19,270 in 1985).  On the other hand, countries with high levels of GNP are considered to have larger markets even if their per capita GNP was relatively low, i.e., Pakistan ($380 in 1985).  Consequently, levels of GNP can serve as an indicator to the market size.

 

Fragmentation of nations into small political units has been observed in less developed regions.  These countries have been put in a closed inward-looking or autarkic position with respect to each other, while close association and trade relations with the ex-colonial powers or the West in general have to be safeguarded by friendship treaties following political independence.  Furthermore, some less developed countries are under the pressure of over-population or population explosion while others are sparsely populated.  It can also be argued that the present structural organization and inter-industry relations and the present production patterns in the less developed countries are not convenient for the creation of a large market size nationally.  From the stand point of creating large markets, it is quite impossible to create a large market through boosting GNP of an individual country, since most economies operate close to capacity.  Creating a large market through integration, by adding together GNP of members, seems to be a more realistic approach since it does not require a significant sudden increase in their GNP individually[26].

The market size determines the magnitude as well as the composition of production.  Large scale production would be possible only  if there exists a large market to stimulate and absorb.  Unless the less developed countries integrate their small-scale economies, there is not much probability for the creation of such a large market.  Therefore, in order to develop large scale production, developing countries need to integrate their small markets into a unified large market.

 

 

Economies of Mass Production

Mass or large-scale production is a function of the market size.  If the market size increases, large scale production becomes possible.  Large scale production requires efficiency in the first place, and is basically resulted from the enlargement of the market size on the demand side through positive internal and external economies.

In most of the less developed economies, domestic markets are not large enough to produce at optimum level.  Industries should be supported or particular commodities must be encouraged and assured for absorption.  The argument about the optimal size is valid for both finished as well as intermediate goods which will be demanded as inter-industry relations develop towards integrated industries.

Economic integration between less developed countries is, therefore, expected to increase the efficiency through enlarging domestic markets into the union market size.  This more efficient use of resources represents another increase in welfare.

 

Changes in Competition

Without free competition, the enlarged market size and the scale economies are not easily realized.  In addition, national economies would not produce at optimum efficiency or at minimum cost.  Increase in competition increases average productivity.  Under market conditions other than perfect competition, the producer tends to choose the techniques that maximize his profits.  Firms in an imperfect market adopt new cost-effective price decreasing techniques only if they increase the total profit.

Enlarged market size is a necessary condition for internal economies to be realized.  An accompanying sufficient condition is the competition among the firms involved.  An economic integration not only enlarges the market size but also ideally eliminates almost all the barriers against the entry and opens up competition among the firms within the union.  All pertinent business activities are forced to increase their efficiency consistently to survive.  This, in turn, fully restructures the national monopolistic and oligopolistic markets of the pre-union period.  That is to say that market structure inefficiency will effectively be eliminated by the induced competition at a regional level.

 


Problems of Demand-side Dynamics

In all sorts of integration attempts between diverse and heterogeneous set of elements, it is quite natural to face some difficulties.  The major ones with regard to demand side dynamics might be as follows:

1)         Transportation and communication.

2)         The market structure.

3)         Artificial limitations (such as different national policies).

4)         The scarcity of capital.

 

The first three difficulties are likely to exist before the integration attempt and may continue to exist at different levels during initial stages of integration.  Some changes are expected to occur in transportation and communication starting from the stage of free trade area.  Significant changes in the artificial limitations are expected to occur in different stages depending on the kind of limitations.  In the case of the national policies such changes are expected to be widely enforced starting from the stages of common market and economic union.  While some changes  in market structure might occur in early stages of integration, changes in market structure occur usually on the long run and are expected to continue to occur even after later stages of integration are realized.

The scarcity of capital is a major problem that faces most development attempts.  However, this problem is more likely to be eased through integration especially if some members were capital abundant, and these capital resources are invested within the union.  In the case OIC, as we shall see later, some members are capital abundant while others have a great potential for investments if capital is provided.  The declared stand of such capital rich countries during the different OIC meetings has always been that they are willing to move towards investing in other OIC countries[27].  Therefore, an integration between OIC countries might not seriously suffer from the problem of capital scarcity if rich members are to fulfill their promises.


Supply-side Dynamics: Capital Accumulation and the Use of Excess Capacity

One of the determinants of income generation is the investment which, in turn, is a function of savings.  If the level of savings is low, investment and thereby national income will be limited and its rate of growth will be low which again generates low level of savings.  The demand side dynamics, however, assume that a sufficient level of savings is to be available throughout the process to run all business activities properly.  The less developed member nations are, in general, unfortunate in savings on a national basis.  Regional integration efforts are, therefore, expected to bring some relief and help to break up the vicious circle from the supply side since some of the members may have the potential and capacity to invest.

 

Capital Accumulation

Following the collective decision and actual implementation of integration measures, capital accumulation takes the form of internal and external savings.

 

i)          Internal sources of capital accumulation: It is expected that the static effects of integration, namely trade diversion and trade creation will lead to lower prices within the union.  Internal competition is another force to increase productivity and reduce prices.  In addition, if the terms of trade turn out to be favorable for the union as a whole, prices of imported commodities will fall.

Consequently, the real income of consumers will be increased even though no change will be recorded in their nominal income.  Depending upon price elasticities of the goods, and marginal and average propensities to consume, the level of personal savings will increase.

Other elements of the internal sources of capital accumulation are related to changes in income distribution following integration and favorable terms of trade.

 

ii)         Capacity increase to import capital goods: Economic development is a function of capital goods.  In the case of less developed countries, capital goods are mostly imported from the advanced nations.  Static and dynamic forces of integration may or should actually function to provide an environment to produce some of the capital goods within the union after integration, even though it may be unreasonable in the short run.  That will force the member countries to save foreign exchanges to import those capital goods which cannot be regionally produced.

 

iii)        Foreign capital inflow: Capital flow and mobility among the members is considered as an intra-union phenomenon.  In less developed countries, internal capital sources are already limited.  Foreign capital inflow, therefore, deserves more attention.  Being behind self-sufficiency, developing countries really need to consider attracting foreign private capital into those industries for which they themselves have no ability to carry out.

 

Although the case of capital scarcity is a common problem among many developing countries, this may not be the case for OIC countries.  Therefore, the previous argument might not be totally applicable to our case.

 

Unless some concessions are provided, direct Foreign investments do not give high priorities to invest in less developed countries.  A movement towards integration may change the outlook in favor of the union as a result to the enlarged markets and higher profitability of large scale production.

Integration creates a union market that is larger than national market and that is protected by common external trade policy.  That is, not only the market size has been enlarged by integration, but it is also protected.  This is one way of attracting foreign capital and requires union wide policy measures.  In addition, local investors who will otherwise invest in external markets may be diverting their funds towards the region because of the advantages provided by the unionization.

It should be pointed out, however, that the continuity and the stability of the union must be maintained if all of the above are to be realized[28].

 

The Problem of Excess Capacity

Less developed countries including members of the OIC may have excess capacity in certain industries like textile and petrochemicals.  The most important factor creating this problem is the difference between the most efficient firm size and the internal and external market size available to the union.  Small market sizes in most developing countries originate from fragmentation and disintegration among them regarding the level of demand for a particular good.  On the other hand, production units are being established beyond the level of existing demand due to technical indivisibilities and unfeasibilities.  In addition, direct foreign investment may further contribute to the capacity  to produce[29].  As a result, unit costs and prices are expected to be high.  Since it is protected by trade restrictions, industry may still enjoy certain degree of profitability.  Each member might have established such an excess capacity in certain industries in the pre-union phase.

Following integration, those capacities in excess of domestic market size may pose a problem as the combined total will be too large and, therefore, may require its utilization in close coordination and cooperation among the members.

 

Summary

Economic Integration: Costs, Benefits, and Obstacles

 

We mentioned earlier in our discussion that development strategies for different nations should be drawn according to what they themselves define as priorities.  The assumption of the existence of universal economic objectives for different nations that can be defined without distinguishing between ideological and cultural factors for different nations is just wrong.  While there are commonly accepted measurements for costs and benefits, the very definition of costs and benefits can be different from one nation’s perspective to another.  For example, standard economic analysis of benefits centers around consumer welfare.  The wider the consumer choice and the higher the possible level of consumption due to an increase in his real income, the higher is the welfare of that consumer.  In some ideologies, including Islam, consumer welfare is defined by satisfying his basic consumption needs, and any excessive consumption beyond that point is viewed as extravagance and waste of resources that is discouraged.  In situations where there is poverty and discrepancy in wealth distribution, this excessive consumption or spending becomes even unlawful.  On the other hand, short term costs can be unavoidable to attain a long term benefit, but who is to say whether that benefit in the long run justifies the cost in the short run?  The rule “The end justifies the means” is acceptable in many cultures, but in others, including Islam, both the means and the end, each by itself, should be justifiable.  In some cases a social benefit occurs at an economic cost.  In integration, higher output can be forsaken for higher rate of employment, but who is to say whether priority should be given to higher output or to higher employment rate?  Well, that is dependent on the social view or definition to the real cost and the real benefit of each.  According to many Muslim scholars, for example, higher employment takes the precedent over higher output, especially, if output was already above what is defined by subsistence level in the Islamic terms.  In addition, increasing income of the poor through employment may generate a long term economic benefit that exceeds the cost accrued earlier.

All in all, standard economic analysis for integration concludes that benefits and costs for integration can be divided based on two time intervals; the short run and the long run.  For the sake of argument, costs and benefits for each time span are, hereby, presented without using value judgment which determines how beneficial is the benefit and how costly is the cost.

 

Benefits

Short Run

a)         Higher efficiency in production and lower prices because of the possible more optimum reallocation within the union.

b)         Higher consumer welfare because of a higher real income and a wider consumer choice.

 

Long Run

a)         More efficient use of resources and higher efficiency of production due to the large market size and the potential for large scale production.

b)         Higher consumer welfare because of the lower cost-lower priced products.

c)         More investments because of the increased economic capacity and efficiency.

 


Costs

Short Run

a)         Lower efficiency of production and higher prices because of substituting lower cost non-member producers with higher cost member producers.

b)         Lower consumer welfare and real income due to replacing low cost-low priced non- member products with high cost-high priced member products.

 

Long Run

Under integration, union is viewed as a unified economy.  On the long run, the free mobility of factors and the adequate distribution of gains offset any negative effects on any individual member.

 

Problems

There are some problems that can be viewed as costs to integration:

a)         Unequal infrastructural development of regions.  Such factor can represent a cost, i.e., transportation, that might offset the comparative advantage of a less developed region, at least in the short run.

b)         Policy and ideology differentials among members.  Unless compromises  and   concessions are made on the part of the members to achieve mutually beneficial goals, such differentials can threaten the success and survival of the integration.

c)         Unwillingness of rich members to assume short term costs for long term benefits.  Equal distribution of gains might reduce gains of a rich region to increase gains of a poor one.  Higher income in poor regions is expected to accelerate its development and contribute to the union’s increase in welfare on the long run.

d)         Retaliatory policies of non members can increase the cost of importing capital goods into the union.  In the long run integration is expected to provide a bargaining power to the union because of their increased share in the international market which might offset such retaliatory policies.

 

 

 

 

 

 

The Andean Pact: A Case Study

 

Many developing countries turn to economic integration in their endeavors to accelerate development.  This study aims to examine the case of the Andean pact experience as an example to some of the issues involved in economic integration.

As discussed earlier, stages of economic integration vary according to their levels of intensity.  In a free trade area, intra-trade barriers such as tariffs and quotas are abolished, while each member in the integration is allowed to retain its own set of foreign trade regulations.  A customs union is a free trade area combined with common foreign trade policies.  A common market is a customs union with free mobility of factors of production among members.  An economic union is a common market with some degree of harmonization of national economic policies.  Finally, under a total economic integration, all fiscal, monetary, and counter-cyclical policies are unified, and a supranational authority which decisions are binding to all member countries is formed.  The Andean Pact experience does not fall precisely into any of these categories, and it can be best described as a customs union with some degree of policy harmonization[30].

The Andean Pact was formed in 1969 with the signing of the Cartegena Agreement by Bolivia, Colombia, Ecuador, Peru, Venezuela and Chile as a result of these countries’ dissatisfaction with the “Latin American Free Trade Association” (LAFTA), due to the uneven distribution of the gains attributable to economic integration among member nations.  Chile withdrew in 1976; Bolivia Contemplated withdrawal in 1980 but that turned out to be simply a threat.  Most member countries of the Andean Pact are at an intermediate level of development with Bolivia and Ecuador at a lesser level, which were accordingly given special status.

The aims of the Andean Pact can be stated briefly.  The members pledge themselves to pursue industrial development of the ‘region’ through joint programming to achieve, among other objectives, the following:

 

i)          Greater expansion, specialization and diversification of industrial production;

ii)         Maximum utilization of resources available to the ‘region';

iii)        Stimulation of greater productivity and more efficient use of factors of production;

iv)        Advantageous exploitation of economies of scale; and

v)         Equitable distribution of the benefits derived from economic integration.

 

From these objectives, we notice that AP countries aim to attain a set of gains that can be reached through integration, without distinction or reference to certain evolutionary stages.  The first three objectives are long run or dynamic effects to a situation where free mobility of goods and services along with factors exist.  In theory, free mobility of goods and services is achieved through the stage of free market, while free mobility of factors does not occur until the stage of a common market.  The fourth objective is a general dynamic effect to any stage of integration that is not likely to occur without at least achieving the stage of customs union.  Equitable distribution of benefits from integration occurs usually by applying a set of national and monetary policies among the members which starts by the stage of economic union.

The case of AP indicates that while the theoretical frame work helps to provide an outlook on integration and its effects, application does not have to literally follow the theoretical sequence.  Some overall benefits of integration can not be achieved through a particular stage, and interaction between different stages has to occur for certain benefits to be realized.  For example, more efficient use of resources is not expected to fully occur as a result of trade liberalization under a free trade area unless the free mobility of resources is provided, which occurs under the stage of a common market.

The Andean Pact pledges itself to equity of distribution and commits itself to this aim by acceding to the principle of equality of membership.  This is to be ensured through the provision of an industrial planning program, a code for foreign investment, and through a special treatment to Bolivia and Ecuador.  If market forces were to operate freely, these countries being the least developed members of the Andean Pact could be completely by-passed particularly with regard to investment in plant and capital equipment.  In other words, the natural tendency would concentrate industry in the areas where industrialization had already commenced[31].  In fact, the distribution question is vital if members are to continue their participation in the pact.

 

Institutions 

The main institutions responsible for the running of the Andean Pact are the Commission and the Junta.  The Commission Comprises two representatives from each member state and is responsible for keeping a close watch on national positions, determining common policies, coordinating development policies and furthering regional goals.  It is also responsible for acting as a watch-dog on the administrative and technical operations of the Junta and for initiating modifications to the Cartegena Agreement.  The Junta is the secretariat and plays an active role in planning regional industrial development and supervising the trade liberalization program.

In addition, there is the Andean Development Corporation which is responsible for the economic integration of the member countries in terms of national specialization and equitable distribution of investment within the region taking into consideration the need for effective action to benefit the relatively less developed members of the scheme.  The Andean Development Corporation began operations with a subscribed capital $25 million, wholly provided by all members.  The Andean Development Corporation is free to operate in several countries and is, therefore, international in character.  This institution was given the power to study, prepare, and carry out projects, without having to wait for projects to be submitted for its consideration.

A considerable amount of decision making power was vested in these institutions.  The institutional role of these supranational institutions can be summarized as follows:

a)         The junta acts as the administrative body that acts on behalf of the interest of the group.

b)         The commission acts as a supervisory and consultative body to decide common policies to further regional goals.  In addition, the commission is responsible for monitoring the administrative and technical operations of the Junta, and for suggesting modifications to the Cartegena Agreement.

c)         The Andean Development Corporation is the organization responsible for smoothing obstacles facing the integration such as unequal development  and for fostering an adequate distribution of gains among the region.

 

Bolivia and Ecuador

The Andean Pact countries adopted their ambitious scheme because they were adamant that they could maintain their national sovereignty only if they preserved a definite equality among themselves[32].  This equality takes the form of concentrating the natural process whereby development is concentrated in the regions which are already more developed than the rest of the area.  The less developed regions were to be given the chance to develop at a faster rate than others to reach a state of equitable levels of development among members.   Bolivia and Ecuador, the least developed members of the Andean Pact, were granted special treatment in the agreement on the industrial planning program, the foreign investment code, and in the Andean Pact’s institutions.  According to the special voting procedures and special treatment within the Andean Development Corporation, the objective of the Andean Development Corporation is to enhance the economic integration of the group in the context of rational specialization and an equitable distribution of investment within the area taking into consideration the need for effective action to benefit the relatively less developed countries.

Hence the Andean Pact is distinctively ambitious in that it is practically unique in the global experience of economic integration among a group of developing nations for pledging its members to this even and harmonious development process.

 

Progress in Major Features

Intra-regional Trade Barriers

The Cartegena Agreement distinguishes between three commodity groups:

a)         Imported goods

b)         Goods produced in all member nations, and

c)         The remainder, which are goods that are produced in some but not all member nations.

Intra-Andean Pact tariffs on imported goods have been completely eliminated while the dismantling of tariffs on goods produced on all member countries is postponed pending negotiations on production rationalization.  The remainder constitutes about 60 per cent of the Andean Pact tariff schedule.  These tariffs were reduced to a maximum of 100 per cent in 1971, with a further 10 per cent annual reduction until 1976 and 6 per cent annually thereafter.  Hence, the maximum tariff on the remainder in 1980 was 26 per cent.  This means that tariffs on the remainder should be completely eliminated by 1985 except for those of Bolivia and Ecuador which are accorded more time for adjustment as a part of the “special treatment” clause.

Non tariff barriers on intra Andean Pact trade were eliminated at the start of the automatic Intra Andean Pact trade liberalization program.  The automatic dismantling of intra Andean Pact trade barriers was accompanied by an eleven-fold increase in intra area trade during 1969-1980 and this has frequently been advanced as an evidence of the success of the Andean Pact.


The Common External Tariff

The Common External Tariff is very important particularly for a group of developing countries since it determines the degree of effective protection afforded to local industry.  In theory, the application of common external tariffs signals implementing the stage of customs union.

The Common External Tariff should have been established in 1980.  However, successive meetings during that year were to no avail due to the differing positions of the member nations.  Peru wanted a rate not exceeding 40 per cent but was willing to accede to the Colombian proposal of 60 per cent; Ecuador and Venezuela wanted no less than 80 per cent.

The reasons behind these differing positions can be attributed to three inter-related issues:

1)         The protection afforded to import substituting industrialization,

2)         Anti inflationary policies and oil exports, and

3)         The availability of foreign exchange.

The combined effect of these factors is different for each country and, therefore, it should not be surprising that each nation has a particular stance with regard to the common external tariffs since it occupies a particular and differing role within each nation’s general strategy.  More specifically, Ecuador and Venezuela have the lowest inflation rates of the group.  Venezuela has a relatively developed but highly inefficient industrial sector facing an insufficient national market and chronic recession.  Ecuador is less industrialized and now wants to use the income from oil to carry out an accelerated industrial development program.  Peru has been self-sufficient in oil only since 1978 and also has the highest inflation rate within the Andean Pact.  Hence massive subsidization of industrial imports or inflationary protection afforded to domestic industry are not policies that Peru will willingly accede to[33].

These different positions on a common issue due to variation in individual economic interests can be used as an example to what we described earlier as the obstacle of policy differentials.  If short run-national interests of individual members have a precedent over mutual regional interests, policy differential, as we see here, can become a factor of disintegration.  Failure in this area can be blamed mostly on the lack of effectiveness of the Commission and the Junta to reach a uniform policy on external trade restrictions, because of lack of cooperations on the part of members.

 

Decision 24

Decision 24 is concerned with the treatment of foreign investment.  Originally, only a maximum of 14 per cent of profits could be remitted abroad, but this was later increased to 20 per cent.  The decision also stipulates that foreign companies are allowed to operate until 1989 in Colombia, Peru and Venezuela, and until 1994 in Bolivia and Ecuador.  Foreign firms must then turn either national by selling locally 80 per cent of their shares or mixed by 51 per cent or more locally owned.  Other clauses state that banking and insurance, the media, marketing, transport, and public services are reserved for national companies.

However, there are some exceptions:

a)         In Bolivia and Ecuador, foreign investment is allowed for a longer duration in mining, oil, forestry and agriculture.

b)         Investment by international organizations is exempt from decision 24.

c)         Foreign companies which sell more than 80 per cent of their total output outside the Andean Pact are also exempt.

d)         A company can be declared mixed if the local government owns at least 30 per cent of its shares.

In addition to these provisions, it should be pointed out that some member nations seem to apply regulations much harsher than decision 24 while others would be prepared to welcome any foreign investment particularly where it is forthcoming.

Broadly speaking, external loans have continued to increase but direct foreign investment has fallen abruptly since 1975.  The total decline in direct foreign investment between 1975 and 1978 for the Andean Pact was 700 million US dollars.  Since Chile withdrew from the Andean Pact in 1976, it would seem that the decline can be partly attributed to that factor not only because of the reduced market size of the Andean Pact but also because of the possible future instability of the pact which is a very important consideration for any foreign investor.

Stability of the integration and the power to enforce its resolutions are important requirements if integration is to fully attain its benefits.  All benefits from integration such as large markets are fully dependent on the integrity of the union.  In the case of foreign investments, inflow of funds is primarily dependent on the stability and strength of the integration.

 


The Sectoral Program of Industrial Development

Before the formation of the Andean Pact, most member countries operated national import-substituting industrialization programs.  The objective of the sectoral program of industrial development was to rationalize industrialization by allocating plants in such a way that optimal utilization in the context of even development is ensured.  What is happening in reality is far removed from this noble ideal.  For example, in the car and metal-working SPIDs production was allocated to member countries where production facilities were already in existence.  Allocations were easier to make on a regional basis only with regard to industries that did not exist at all within the Andean Pact, and little has actually materialized here.  By mid-1980 production was in progress in more than 60 per cent of units assigned and this involved 65 firms.  However, these firms had come into existence well before the SPID.

In short, the notion of equal distribution of industry has been greatly undermined.  This is because of the varying levels of development of the countries concerned and the inability of the relatively less developed to exert any influence on decision making in the face of resistance to the closing of existing plants because of fear of reductions in employment levels.  Hence the pledge of equal distribution of production plants for even development remains simply a pledge.

Apparently, the AP failed to overcome the problems related to the need to compromise national sovereignty for the sake of integration.  In addition, concerns of negative short term effects seem to have affected the transitional adjustments into a longer lasting stages which in turn hinder any progress towards economic integration[34].

 

The Andean Pact is now virtually defunct; the Bolivian government who threatened withdrawal in 1980 is no longer recognized by the other members of the group and in early February 1981, the president of Ecuador announced that in view of the boarder disputes with Peru, he could no longer consider Ecuador to be a member.  If this withdrawal by Ecuador is genuine, the Andean Pact is effectively restricted to Peru, Colombia, and Venezuela, a situation which is unworkable.

One could argue that the demise of the Andean pact was inevitable given the earlier withdrawal of Chile and the general nature of the membership since with the single exception of decision 24, there is nothing original about the Andean pact.  The concern with equal distribution of benefits and the Sectoral Industrial Programs had already been anticipated by the Central American Common Market (CACM) and the Andean Pact does not seem to have learnt very much from the CACM experience.  Even in the case of Decision 24, the number of loopholes is now so great as to make it somewhat ineffective.

 

It would seem that the Andean Pact was always unworkable: the duplication of efficient plant before economic integration had gone too far to justify it as an instrument of industrialization, so the main benefit which could have been achieved through economic union was net trade creation; this would have benefited the relatively more developed members only, hence it was never a real option.

 

It is evident that the task the Andean Pact set for itself is quite ambitious and is arguably unique with regard to its objective of balanced, even, and equitable development.  The discussion in this chapter clearly demonstrates the erosion of this ideal in the face of the harsh reality that those who have will resist any pressure on them to part with what they have even when they pledge themselves to the contrary.

 

Finally, one could argue that lack of political will and the absence of adequate policy instruments are major factors in the demise of the Andean Pact.


Summary

The Andean Pact: Successes and Failures

 

 

To evaluate the Andean Pact experience, one should start with analyzing its objectives.  Most of the objectives the Andean members pledged themselves for are considered, according to our earlier analysis of integration, long term objectives.  Such objectives are not expected to occur remarkably unless actual integration is allowed to exist for a relatively long duration.  Providing the mechanism for integration transitions to take place is a prerequisite for the occurrence of these long term benefits.  On the other hand, the Andean Pact seemed to have succeeded to a degree in institutionalizing integration to facilitate achieving its objectives.

The major problem that faced the Andean Pact was the differing positions of members on common external tariffs.  As indicated in the earlier theoretical analysis, applying a common external tariff is a property of the stage of customs union.  By analyzing the reasons behind the failure to agree on common external tariffs, we notice that they were mostly related to problems that are addressed at a later stage of development.  The need to protect import substituting industries in some countries can be attributed to a lack of mobility of either protected goods, resources, or both.  If such protected industries were equally available to all members without restrictions, such differences on tariffs against similar imports are not expected to occur among members.  The mobility of intra-traded goods is a property of the stage of customs union, while the mobility of factors is a property of the common market.   The differing anti inflationary policies is an issue that is solved through harmonizing national policies under economic union, while the issue of availability of foreign exchange can be related to any stage.  Possible explanations for the emergence of these problems can be related to inadequate application in the earlier stages of free trade area and customs union, inapplicability of the evolutionary sequence of the theory or both.  It can be also partly related to insufficiency in the proposed equitable distribution of gains among members.

Another factor to the failure of the Andean Pact was the failure to implement its pledge for equal distribution of production plants.  This can be attributed to two main reasons, a short term and a long term ones.  Member countries resisted reallocation of plants because of the fear of unemployment in the regions where plants close due to their lower comparative advantages.  Lower comparative advantages can be natural in which case unemployment can be offset by free mobility of factors, a property of a common market.  It can also be due to infrastructural factors which can, theoretically, be overcome in the long run.  The other main reason can be the lack of confidence on the part of member governments of future stability and survival of the Pact.

In the final analysis one can say that failure of the Andean Pact can be attributed to different reasons ranging from unwillingness of members to assume some of the costs of integration, to the differing positions and policies of member governments on issues that are related to their national economies.  A simple cost-benefit analysis may not, adequately, explain the demise of the Andean Pact, since remarkable economic gains were realized in some areas; such as higher intra-trade.

 

 

Conclusion

 

Economic integration occurs when two countries or more move towards elimination of their intra-trade barriers and the restriction on mobility of factors of production.  A new larger market with higher levels of demand will occur as a result of merging markets of member countries.  Consumers will demand the goods at relative low prices.  Less efficient producers with relative high cost of production will assume losses on the long run and will not be able to compete and will eventually withdraw from the market.  Only producers at relatively low costs with more efficient use of resources will survive and, as a result, the social welfare and surplus will increase.

Economic integration requires first and foremost a true willingness of member countries to give up some of their sovereignty through reducing  barriers on their intra-flow of products and factors of production.  Further concessions are to be made when member countries move towards policy harmonization at a later stage of integration.

There are different stages of integration that start initially by eliminating trade barriers under free trade agreements.  In addition to removal of intra-trade barriers, common external trade policies for member countries are required for the second stage; custom union.  In the third stage; common market, restrictions on mobility of factors of production are removed.  Under economic union, policy differences among member countries are removed and a more sophisticated level of policy harmonization is introduced.  Monetary union occurs when member countries move towards common fiscal and monetary policies and a unified currency is introduced.  The ultimate stage of integration occurs in the form of total union between member countries.

This theoretical framework proposes a logical gradual path of transformation from independent economies to a unified economy through what is called the evolutionary stages of development.

Costs of integration are mostly short term in nature, due to short term transitions, and are related to losses in consumers welfare.  Benefits of integration occur on both short and long runs.  Costs of integration occur mostly on individual national level while benefits occur on both national and regional levels.

 

In the case of the Andean pact (AP), we notice the ambitious objectives for integration among its members.  The Andean Pact can be best described as a customs union with some degree of policy harmonization, a property of the economic union stage.  However it should be noted that such objectives are found in almost all integration attempts.  The AP moved to institutionalize integration by creating its institutions.  It paid attention to the variation in development levels between member countries and granted the least developed ones (Bolivia and Ecuador) a special treatment to assist them in getting equitable benefits from integration.  This concept of wealth redistribution and the equitable distribution of economic gains is very important especially for integration among LDCs and Muslim countries in particular.  The proposed structure of trade barriers and common external tariffs seems to have received a careful study to achieve the best interest of the group and individual countries, although it contributed significantly to its eventual demise.  Perhaps the biggest success in the AP experience can be summarized in the removal of intra-trade barriers.

In reference to the economic integration theory, the AP proposed what we can call a customs union with some degree of policy harmonization.  The AP seems to have achieved a moderate success in moving towards the stage of free trade area.  Failure of the AP to apply common external trade barriers was the major reason for its demise.  The AP also failed in making a significant progress in some other areas of policy harmonization.  Based on this analysis, it can be argued that the AP would have been a successful example of integration if it aimed, only, at creating a free trade area among its members.

 

 

 

 

 

 

Chapter II

                   –        The Organization of the Islamic Conference

                   –        The Islamic Development Bank

                   –        Foreign Trade Financing

                  
The Organization of the Islamic Conference

 

Introduction

In the first chapter, we discussed the importance of the historical experience of the human societies in analyzing their contemporary economic problems.  Mutual history between a set of countries can serve as a unifying factor that further supports the association around mutual economic interests.  The existence of mutual economic objectives for a group of countries may be insufficient, by itself, for integration especially if disparity in wealth exists among members.  As we saw in the case of the Andean Pact, a substantial increase in intra-trade between members by itself was not enough to keep the integration intact.  Therefore, it can be argued that an association around factors that are more than merely economic may have better chances of success and survival.  That is because a dissatisfaction of a member country in one area is more likely to be offset with a progress in other areas which justifies its continued membership.  The historical background of the OIC and its evolution have a particular significance.  Since most Muslim countries are going through massive transitions, political and otherwise, examining the foundation of the OIC serves to predict the potential for survival of the Organization in the face of these transitions.  The historical evolution of the OIC also helps to analyze many of the existing problems since they are related, more or less, to the historical experiences of its members.

 

History and the Birth of the OIC

Ever since the dismantling of the Ottoman Islamic Empire after WWI, there have been different attempts to establish unity among Muslim nations, and revive the Islamic concept of Ummah.  Such attempts started in a form of a popular conference that was held in Cairo in May 1926 and was followed by a number of conferences attended by Muslim leaders from different parts of the Muslim regions.  After WWII, a number of newly independent Muslim countries expressed the achievement of Muslim unity as their next target. Muslim leaders from different parts of the world encouraged the newly independent Muslim states not to recognize each other as separate states.  Among others, the Pakistani leader Chaudhary Khaliquzzaman expressed this view in 1950 when he said:

 

“If the Muslims started recognizing Pakistan, Egypt, Saudi Arabia, Syria, Iraq, Iran, Turkey, or Afghanistan, which are Muslim States, as Islamic states, they would be guilty of dividing Muslim polity for all time to come and making further progress in the direction of the unification of the Muslim states into any form of association, federal or otherwise, an impossibility.  It is the duty of Muslims all over the world to work for the establishment of the Qur’anic state through political associations, social contacts, economic cooperation and linguistic changes, so the Muslim genius in statecraft may be able to evolve a central authority for the Muslim World through democratic federation or otherwise, not for aggression, not for exploitation, but to discharge the duty which has been cast on them by the Divine Will[35].”

 

Muslim efforts and meetings were not to succeed in forming any form of a unified Muslim action until 1962.  In 1962, Saudi Crown Prince Faisal invited governmental and non-governmental representatives from the Muslim World to a conference in Mecca which resulted in the establishment of “the Muslim World League.”  On August 21, 1969, Muslims all over the world were outraged to learn that extensive arson damage had been caused to Al-Aqsa Mosque in Jerusalem under “Israeli” military occupation.  In response, The first Islamic Summit Conference, with representatives from 24 countries, was held in September 1969 in Rabat, the Moroccan capital.  In that conference, The foundation was laid for “the Organization of The Islamic Conference”, which was to be officially declared in 1972.  The primary objective of the OIC was to liberate the Muslim land of Palestine from the Israeli occupation.  Successive meetings were to take place later between official representatives of member countries to introduce the organizational structure and develop the OIC bodies and committees.

Membership of the OIC has grown from 24 countries to 46 in 1986.  Among its members there are Islamic republics, monarchies, military dictatorships, national democracies, democratic socialist republics, scientific socialist republics and people’s democratic and socialist republics.  By world economic standards, its members include countries from the lowest per capita income group as well as from the highest per capita income group.  Some members have extreme labor abundance and capital poverty, others financial capital abundance with land scarcity, while others have land abundance or relative abundance of specific skills.  In general, Muslim countries as we shall see later, enjoy a wide diversity of economic resources and possess high potentials of comparative advantages.  Their combined resources have potential for high economic growth.

Although the OIC was established with a political goal as its primary objective, namely to free Jerusalem and Palestine from alien occupation, the leaders of the OIC countries were aware of the potential for economic cooperation from the inception of the organization.  This awareness is reflected in the OIC Charter.  Article II A 2 defines, as an objective, of the OIC: “to consolidate cooperation among member states in the economic, social, cultural, scientific and other vital fields of activities, and to carry out consultations among member states in international organizations.”

The first concrete proposal to this end, establishing an Islamic Bank, came during the Second Foreign Ministers Conference in 1970.  At the Third Foreign Ministers Conference in 1972, a Financial and Economic Department was created within the OIC General Secretariat to act as the nucleus of a specialized agency in the financial and economic fields of interest to member states.  Activities of the OIC were expanded to include cooperation in the areas of economics, health, information, Islamic jurisprudence, international law, science and technology, and others.

By way of realizing its economic and financial goals, the OIC prepared a draft statement called the “General Agreement for Economic, Technical and Commercial Cooperation Among Member States of the Islamic Conference.” The Agreement, originally submitted by Saudi Arabia in the Sixth Conference of Foreign Ministers 1975, took effect in 1983, after it had been signed by thirty-six and ratified by the twenty-five member countries.  This move was intended to promote the socioeconomic development of all Islamic countries, and to open up new avenues for the optimum utilization of the economic resources available within the Islamic world.

Among OIC members, there are financial capital abundant countries such as Saudi Arabia, U.A.E., and other oil-rich countries of the Gulf, and there are capital-scarce, labor-abundant countries such as Bangladesh, Egypt, Pakistan, and Turkey.  Among its members, there are food-importing countries such as Saudi Arabia and other similar economies, and there are food-exporting countries such as Malaysia, Pakistan and Turkey.  There are nation-states among its members which export manufactured goods and machinery, and there are others which import them.  Geographically, most of these countries are quiet close, at least compared to their non-OIC trade partners.  Most importantly, there are member countries which possess significant potential for economic growth but lack resources for development, including Pakistan, Sudan, Turkey, Malaysia, and Indonesia.  On the other hand, some members of the OIC have turned into financial giants in the international money market during the last decade.  In short, there is potential for economic flexibility among the member countries of the OIC.

Cooperative areas of economic activity among Muslim countries can be divided into ten different fields.  They are: 1) food and agriculture; 2) trade; 3) industry; 4) transport, communication and tourism; 5) financial and monetary questions; 6) energy; 7) science and technology; 8) manpower and social affairs; 9) population and health; and 10) technical cooperation.

The OIC is considered a supranational authority since its resolutions are presumably made and observed by member countries.  This supranational organization has been establishing different multilateral agencies to further the achievement of its goals and resolutions.

 

Institutions   

As in the case of the Andean Pact, the OIC seems to have paid attention to the importance of institutionalizing economic cooperation.  Subsidiary and affiliated organs were formed, by the OIC to foster further economic cooperation among its members in the ten areas discussed above.  Subsidiary organizations include, among others, “The Islamic Solidarity Fund” which was created in 1974 in Lahore, Pakistan, to provide relief to Muslim regions in case of emergencies, a form of redistribution of resources.  “The Islamic Foundation for Science, Technology, and Development” was created in Jeddah, Saudi Arabia, in 1975, to consolidate cooperation in these vital areas to development.  “The Statistical, Economic, and Social Research and Training Center for the Islamic Countries” was created in 1977 in Ankara, Turkey.  “The Islamic Center for Vocational and Technical Training and Research” was established in Dhaka, Bangladesh, in 1978.  “The Islamic Center for the Development of Trade” was created in Casablanca, Morocco, in 1981.  Affiliated organizations include, among others, “The Islamic Chamber of Commerce, Industry and Commodity Exchange” which was created in 1978, and is located in Karachi, Pakistan.  The Standing Committee for Economic and Commercial Cooperation (COMCEC) was activated in 1984, to further the implementation of “The Plan of Action to Strengthen Economic Cooperation among the Member States of the OIC.[36]”  The “Islamic Development Bank” was created in 1975, and is located in Jeddah, Saudi Arabia.  Functions of these organizations can be summarized by acting as agents to consolidate cooperation for mutual development in the different areas.  Such an approach is expected to enforce interdependency among members which in turn necessitates integration at least in some areas.  From that perspective, the OIC seems to have succeeded in providing an extensive institutionalized structure to further its economic objectives.  However, the levels of success in reaching its goals ranged from little success in some areas of cooperation, to a modest success as in the case of trade.

 


Trade

Many Muslim economists argue that most of the success of the OIC can be seen through the impact of its activities on expanding intra-trade among its members.  The General Agreement of the OIC recommended efforts via bilateral or multilateral trade arrangements to develop exchanges through trade liberalization and by reducing or removing customs or other restrictions that applied to export and import activities.  The Agreement also recommended that member states give consideration to the special circumstances of the least developed member countries, and proposed that a center be established to encourage trade among member states.  The agreement endorsed the suggestion that efforts be made to try to organize exhibitions and fairs to aid in marketing products in the member states and to make products of the member states known, both at fairs in OIC countries and in other international settings.

On various occasions, the OIC has discussed the possibility of forming a member-state common market.  At the Twelfth Conference of Foreign Ministers held in June 1981, Bangladesh submitted a study, “Toward an Islamic Common Market,” for the consideration of the OIC.  Turkey also had expressed a strong desire for an Islamic Common Market.  The OIC resolution on the subject referred the Bangladeshi proposal to the Ankara Center for further study.  It also ordered that the study then be referred to the General Secretariat for examination by a group of experts in order to decide whether or not the study should be referred to “the Islamic Commission for Economic, Cultural and Social Affairs”.  The subject has not been raised in any subsequent OIC conference.

Turkey submitted a related proposal to the Islamic Development Bank, recommending the free flow of goods, manpower, technology, and capital among the member countries.  The proposal stressed the Turkish intention to “place its industrial and technological expertise and experience at the disposal of the Islamic countries.”  Although nothing substantial was achieved in the 1982 IDB meeting where the proposal was submitted, the IDB has attempted to support such ideas by investing a major part of its resources in financing trade among member countries.  By 1983, the Bank had financed 167 operations in foreign trade involving $2,403.66 million of which $1853.00 million or 77%  was spent on trade among member countries.  The member countries’ dealings have involved crude oil, refined petroleum products, fertilizers, cement, gypsum, clinker, sulfur, rock phosphate, paper and pulp, vegetable oil, sugar, juice products, cotton and cotton yarn, and industrial goods.  No tariffs are imposed by members of the OIC against most imports of raw materials including those financed by the IDB, except for goods that are produced domestically.

 

Integration in the OIC

 In this section, I intend to discuss the case of the OIC with reference to the earlier discussion of integration and the case of the Andean Pact.  First, we notice that the OIC is not an organization that is formed, merely, on economic basis, as in the case of the Andean Pact.  Instead mutual economic objectives were to be realized through the OIC among other objectives.  The foundation of the OIC is based on mutual strategic interests of its members.  Two major implications can be observed from such foundation.  First, extensive mutual objectives require a high level of coordination and agreements between members.  Various types of political ideologies in member countries, with their implications to different trade regimes, make it difficult  to reach such level of coordination.  On the other hand, mutual strategic interests, that go beyond a specific area such as economics, help to provide a greater possibility of survival for the organization.  Members may tolerate failure to coordinate in one area as long as a progress can be achieved in other areas.  The large number of members introduces another problem.  That is with more members being mostly ex-colonies, the influence of non-members, such as the ex-colonizers on the organization is expected to be high.  Chances of survival, on the other hand, are expectedly higher with many members.  Withdrawal of a member or few members is not expected to lead to the demise of the organization, as in the case of Chile with the Andean Pact.  With higher levels of coordination, large number of members can provide a considerable power to the organization on both the regional and the international levels.  Moreover, the declared Islamic principle of Muslim unity provides the necessary foundation for acceptability among Muslim nations.  The OIC seems to have the variety of resources, production, and comparative advantages among its members that make integration feasible.

The economic objectives of the OIC can be best described as general in terms of integration.  Resolutions of the OIC call for cooperation on different levels, as in the AP case, that goes beyond any specific stage of integration that were discussed earlier.  The OIC moved to create specialized institutions to coordinate among members in various types of economic activities, such as research, training, industry, fiscal policies, in addition to trade.  In theory, the OIC proposes a level of integration that occurs at the level of the common market or beyond.  The OIC called for trade liberalization and for removal or reduction of intra-trade barriers, but so far failed to present a concrete timed proposal to achieve it on a general level.  However, as we saw in the AP case, trade liberalization can be gradual and does not have to be instantaneous.  Trade in many items of goods produced in member countries is virtually liberated, and financed by the OIC through the IDB.  As developing countries, tariffs against imports for development purposes by OIC members are virtually low or non existent, especially if such goods are not produced domestically.  Free mobility of labor is not generally possible from poor members to the rich ones except in the cases were bilateral arrangements are made.  Other factors of production are relatively more mobile among the OIC members.

Because of the existing coordination between its members in many fields, if attempts to form an integration such as the Turkish and Bangladeshi proposals succeed the OIC will be at a fairly advanced level of integration from the start.  If the OIC is only moderately successful in achieving its objectives in the different areas of cooperation, that we mentioned, an Islamic Common Market would be a reality.  Furthermore, it can be argued that if the attempts by some members for integration among the OIC member countries were to succeed, the OIC can be used as another example where integration can occur without necessarily following the proposed evolutionary path of integration.

Perhaps most of the success of the OIC can be seen in the Islamic Development Bank and its role as a supranational, or multilateral agency, a property of the stage of a monetary union.  Its supranationality is derived from the authority and influence vested in the Bank and its operations.   This supranational agency became the most successful and active organ of the OIC.  The Bank introduced and actually uses the Islamic Dinar as a unified currency for its transactions, which is another property of the stage of a monetary union.  Proposals for economic cooperation and integration among members are now being referred to this active organization which is playing a significant role towards a Muslim economic integration instead of merely cooperation.


The Islamic Development Bank     

The most important and active institution within the OIC is the Islamic Development Bank (IDB).  The idea of the Bank was conceived at the Second Conference of Foreign Ministers (1970), and the Bank itself was established in 1975.  The Bank serves to “foster the economic development and social progress of member countries and Muslim communities individually and jointly in accordance with the principles of the Shari’ah (the Islamic law)[37].”  Its functions are:

a.         To participate in equity capital and grant loans for productive projects and enterprises.

b.         To provide financial assistance to member countries in other forms for economic and social development.

c.         To establish and operate a special fund for assistance to Muslim communities in non-member countries, in addition to setting up trust funds.

d.         To accept deposits and to raise funds in any other manner.

e.         To assist in the promotion of foreign trade, especially in capital goods, among member countries.

f.          To extend training for personnel engaged in development activities in Muslim countries to conform to the Shari’ah.

 

Membership of the Bank is open only to members of the OIC.  In 1990, there were forty-four members of the Bank.  The authorized capital of the Bank is two billion Islamic Dinars (ID), divided into 200,000 shares having a value of 10,000 IDs each.  One ID is equal to one Special Drawing Right (S.D.R.) of the International Monetary Fund.  The subscribed capital of the Bank as of May 1990, was ID 1,960.87 million ($2654.60 million)[38].  The head office of the Bank is located in Jeddah, Saudi Arabia.  The Bank is equipped with a library and a “Research and Training Institute”, in which it administers its own training programs.

A Board of Governors supervises the Bank activities[39].  Each member state nominates one governor and an alternate governor to the Board of Governors of the IDB.  The legal representative and the head of the Bank is the president of the Bank.  The president is elected for a five-year period by the Board of Governors.  There are 355 staff members at the Bank, of whom eleven have been recruited from Muslim communities of non-member countries.

 

Operations of the Bank can be summarized as follows:

1.         Loan Financing.

2.         Technical Assistance.

3.         Equity Participation and Profit Sharing.

4.         Leasing.

5.         Installment Sale.

6.         Finance Credits.

7.         Foreign Trade Financing.

8.         Emergency Aid Operations.

9.         Scholarship Program.

10.       Sacrificial Meat Utilization Project.

 

IDB operations are basically aimed at providing financial and technical support for development of the member countries.  The IDB seems to have paid attention to the importance of the social dimension of development as demonstrated in its operations of the “Emergency Aid” and the “Sacrificial Meat Utilization” which are mostly directed towards the poor Muslim regions.  Since IDB operations are jointly financed by member countries, such operations represent an attempt for a more equitable distribution of resources.  The scholarship program provides scholarships for students from the poor regions to pursue studies in technical and academic areas that are needed for the development of their regions.  Many measures were taken to facilitate the IDB operations in creating a wider economic cooperation among member countries.  Such measures include, among others, a “Preferential Treatment to Contractors and Suppliers from Member Countries”, the “Accounting Standards Organization for Islamic Banks and Financial Institutions”, the “Collective Food Security”, and “Aid to Depressed Areas”.  In March 1991, the IDB held its third annual symposium with the theme of “The Promotion of Joint Ventures Among OIC Members”.  The theme emphasizes the importance of joint ventures in the realization of integration in production structures among member countries through both deepening and widening process of the common production and marketing base while also taking into account economic specialization, optimal size and increased production which is in accordance with international development.  This emphasizes the Bank’s policy of promoting economic cooperation among member countries[40].

Most resources of the IDB are directed towards foreign trade financing.  This program aims to increase levels of intra-trade among member countries.  Expanding trade among members can be considered as a step towards trade integration, theoretically; an early stage of economic integration.  In the next section, we will discuss operations of the IDB in foreign trade financing to promote intra-trade among member countries of the OIC.


IDB and the Promotion of Intra-trade

Trade promotion has been the cornerstone of the IDB’s policies and is regarded as one of the most effective ways in which the Bank can help member countries.  Ever since its inception, the IDB has been trying to expand trade cooperation among the OIC member countries and has been searching for additional ways and means of expanding intra-trade.

While implementation of a common trade strategy is important to enhance integration, it does not remove the need for concrete and specific measures at the micro level that aim at the gradual elimination of major obstacles to trade.  For developing countries, major obstacles to trade may not be limited to intra-trade barriers.  Various schemes designed specifically to remove such obstacles and to promote trade have been developed by the Bank.  Among these is the Foreign Trade Financing Program, which includes Import Financing, Export Financing, and the Portfolio of Islamic Banks.  These three schemes aim basically to provide financing for intra-trade operations, and to direct Muslim investments to fund such operations.  Other schemes that are at advanced stages of preparation include the Export Credit Insurance Scheme, the Trade Information Network, the Trade Preferential System, the Multilateral Islamic Clearing Union, and the Islamic Trading Company.  These schemes aim at removing obstacles that are related to differentials in trade policies among member countries, some of which were discussed in the earlier chapter.  Final studies have been prepared for the last three schemes, of which some is already in operation while the others are expected to start operation in the early nineties[41].

 


Foreign Trade Financing.

The IDB emphasized trade exchange between Muslim countries as an important avenue to their economic development[42].  In 1977, a program was established to finance imports to member countries[43].  This program provides financing for imports that are needed for development purposes.  The import financing program received wide support among member countries, especially, in financing short term development programs with easy terms[44].     By the end of 1987, two additional programs for trade financing started operation: the Portfolio of Islamic Banks, and a longer term-export financing program[45].  The Portfolio of Islamic Banks provides financing needed for capital and non-capital goods in both imports and exports.  The portfolio includes twenty-one member banks in addition to the IDB, which assumes management of the portfolio as a speculator.  The Portfolio operations are mainly directed towards importers and exporters in the private sector[46].  The export financing program acts as a supplementary to the import financing program to increase trade among member countries.  This longer-term trade financing provides financing to exports of non traditional commodities by participating member countries to other OIC member countries.

In 1990, the amount of foreign trade financing exceeded 73% of the total financing provided by the Bank through all of its operations[47].  Being in operation for the longest time, import financing represents the largest operation of the Bank while the other two trade financing schemes are still in their early stages.  Table 2.1 shows a summary of trade financing operations for each scheme for the period 1987-1989.

 

Table 2.1[48]

Trade Financing Operations: Some Recent Trends

            No. of              No. of                         Amount

Year                operations                   beneficiary                   approved

                                      countries                    (US$ million)

____________________________________________________________________

 

IMPORT TRADE FINANCING

 

1987                            60                                12                                577.00

1988                            59                                15                                531.00

1989                            72                                18                                600.80

____________________________________________________________________

 

LONGER-TERM TRADE FINANCING SCHEME

 

1987                              2                                  3                                    8.43

1988                            24                                  6                                  46.14

1989                            25                                  8                                  46.48

____________________________________________________________________

 

ISLAMIC BANKS’ PORTFOLIO

 

1987                              2                                  2                                  10.00

1988                              5                                  4                                  18.66

1989                            14                                  9                                  60.41


I.          Import Trade Financing Operations.

The import financing program started in 1977 as a quick channel to invest excess funds available to the Islamic banks.  Import financing was chosen as an alternative investment channel to other Islamically-unlawful investment banking[49].  In addition, import financing was found to be feasible for investing banks in terms of duration, liquidity, and revenue, besides its positive impact on a wider trading between member countries[50].

The total amount of import trade financing provided until 1990 by the IDB amounted to $ 6,600 million.  Of the total import financing, $5299.46 million or 80.29% was to finance intra-trade, as shown in table 2.2[51].  Based on these figures, the success of import trade financing operations in the promotion of intra-trade among member countries is obvious.

Import Trade Financing represented more that 71% of the Bank’s financing between 1986-1990.  In 1989,  72 import operations were financed at ID 461.74 million (US$ 600.80)[52].

 


Table 2.2

Performance of IDB Import Trade Financing

Among Member Countries[53]

 

                                                          Financing between IDB member countries

Year

A. H.*

________

1397

1398

1399

1400

1401

1402

1403

1404

1405

1406

1407

1408

1409

1410

________

Total

No. of countries

________

4

9

13

18

14

12

11

14

13

14

12

13

15

NA

________

28

Total Trade Financing

___________

50.52

155.82

338.09

456.99

453.44

400.30

519.50

704.42

655.40

620.38

536.34

577.00

531.00

600.80

___________

6,600.00

No. of

Operations

__________

5

11

22

32

31

27

28

42

37

56

49

63

65

NA

________

468

US

Dollar

__________

27.98

99.10

272.86

371.09

342.64

316.30

430.50

520.64

554.00

546.39

421.50

522.50

508.9

445.0

___________

5,299.46

%

of Total

__________

55.4

63.6

80.7

81.2

75.7

79.0

82.9

73.9

84.0

86.3

79.7

88.7

84.8

74.1

___________

80.29

 


Eligible goods for import financing.

Goods have to be needed for development purposes in order to be eligible for import financing.  The Bank has made a list of such goods that are shown in table 2.3.  Member countries can submit a proposal to finance imports of other goods as long as they serve development, subject to the Bank’s approval.  The future possibility of financing consumer goods depends on the availability of excess funds[54].

 

Policies of import financing.

The main objective of the import financing program is to encourage mutual trade among Muslim countries.  For that reason, source of financed commodity should be from a member country in the IDB.  Imports from non-member countries can be financed only if the commodity is not available from any member country, or if import conditions, including price, are not competitive to imports from non-member countries[55].

When an international tender is opened in a member country to import a commodity, the Bank informs potential producers in the member countries about the required specifications.  If a producer from a non-member country wins the tender, potential producers from member countries are informed of his conditions and tender can be given to whoever accepts better import conditions.  In other words, the priority for import financing is given to producers from member countries.

 

 

 


Table 2.3

Import Trade Financing Operations by Commodity[56]

(US$ million)

____________________________________________________________________

 

Commodity                                                1990                                             Total since 1978

________________

 

Crude Oil

Industrial Intermediate Goods

Refined Petroleum Products

Petrochemicals

Vegetable Oil

Cement

Fertilizer, Phos. Acid & Potash

Jute

Cotton

Sulfur

Iron Ore

Rock Phosphate

Ammonia

Clinker, Kaolin

Plywood

Copper Rods

Capital Goods

Bicycles

Others

_________________________

T o t a l

Amount

_________

 

138.400

174.300

40.000

48.500

65.500

5.000

15.000

5.000

43.000

13.500

0.000

0.000

0.000

0.000

12.000

9.450

0.000

0.000

31.150

______________

600.800

%

__________

 

23.04

29.01

6.66

8.07

10.90

0.83

2.50

0.83

7.16

2.25

0.00

0.00

0.00

0.00

2.00

1.57

0.00

0.00

5.18

______________

100

$

__________

 

2,875.720

1,353.506

585.900

75.500

555.000

174.680

175.930

166.868

194.800

122.000

15.000

36.340

31.500

36.000

30.000

83.950

24.400

1.760

61.150

______________

6600.00

%

____

 

 43.57

 20.51

   8.88

   1.14

   8.41

   2.65

   2.67

   2.53

   2.95

   1.85

   0.23

   0.55

   0.48

   0.55

   0.45

   1.27

   0.37

   0.03

   0.93

_______

100


Exchange Rates.

The currency used in finance operations is the Islamic Dinar “ID”.  Exchange rate of the ID is determined according to exchange rate of Draft Rights of the International Monetary Fund “DR”,  in the day before the date of actual payment.  The Bank uses major international currencies that are exchangeable with the “DR”s, for import purchases, and for payments by the beneficiary on the due dates[57].  Although the Islamic Dinar is not subject to trade in the international exchange markets, it can be arguably considered a step towards a unified currency.  In theory, the unified currency is a property of the stage of a monetary union.

 

Procedures of Import Financing.

Because of the short term for import financing, the IDB decided certain procedures that include the maximum term for finance[58]:

a)  For member countries with free exchange rates’ system, finance term starts by sending a letter of credit within three months of informing the governor of benefiting country of the Executives Managers Board’s decision to approve the finance.  If a member country fails to send the letter of credit within the mentioned period, the financing becomes cancelled.

b)  For countries which use the financial compensation system instead of free exchange, disbursement of finance funding starts within six months of informing the governor of the beneficiary country.  If disbursement does not start within six months, the Bank reinforms the governor and the disbursement period is extended for three more months before finance is cancelled.

These different procedures of import financing help to lessen the negative effects of the existing policy differentials regarding exchange rates among member countries.  The different disbursement periods are decided according to the different payment arrangements under each exchange system.  Procedures of import financing can be seen as a policy to offset payment difficulties among members, which can arguably be considered as a transitional alternative for payment integration.

 


II.        Longer-Term Trade Financing (Export Finance Program).

Over the last ten years, member countries in the OIC have faced, as well as other developing countries, a decline in demand for their exports.  Consequently, their revenues from exports to industrialized countries have declined seriously.  Decline in exports can be explained as a result of the deteriorating trade terms with industrialized countries, and increasing trade barriers by industrialized countries against imports from developing countries.  Nevertheless, there have been strong indications of wide marketing possibilities in developing countries.  These market advantages can be utilized by increasing intra-trade among developing countries.

In its first meeting in 1986, the Permanent Committee for Economic and Commercial Cooperation “PCECC” recommended establishing a special program for export finance.  The Governors Board approved the “PCECC” recommendation, and a longer term export finance program was established in March 1986[59].  The Export Finance Program has been in operation since late 1987.  By July 1990, the number of OIC member countries participating in the scheme increased to 21.  The total amount committed by these members was ID 151.5 million, which together with the IDB’s participation of ID 150 million, raised the total committed capital to ID 301.5 million.  Over the three years of its operation, the export financing program has financed 61 operations at a total of $ 101.05 million.   In 1989, the governing body of LTTFS approved 25 operations for a total of $ 46.48 million for eight member countries[60].

 

 

a.  Objectives.

The export finance program aims to increase intra-trade of non traditional goods among member countries[61].  Finance periods for export finance are from 18 months to 60 months long[62].  Export finance functions as a complementary to the import finance program that was established in 1977[63].  By targeting non traditional goods, export financing provides a chance for non oil exporting countries to increase their exports and their share of intra-trade among member countries.  Therefore, the export financing operation can be seen as a way for more equitable distribution of gains from cooperation among member countries of the OIC.

 

b.  Membership.

All member countries of the OIC have the right to join in the export finance program.  The member country can participate directly or by authorizing a representative agency.  The minimum subscription for a member country is 1.5 million ID as a part of the program’s normal capital revenues[64].

Table 2.4 shows a list of the subscribing countries with their amounts of subscription.  We notice that many of the largest subscribing countries are not among the oil-exporting member countries, due to the fact that export financing is aimed at increasing intra-trade in non-traditional goods.  The large subscription by non-oil exporting members seems to support the evidence that the IDB operations are moving towards providing a more equitable distribution of gains through its operations.

 

Table 2.4

Subscription to Export Finance as of March 1988[65].

___________________________________________________________

Country

_________________________

Algeria

Bangladesh

Brunei

Egypt

Gabon

Indonesia

Jordan

Kuwait

Libya

Malaysia

Morocco

Niger

Pakistan

Saudi Arabia

Senegal

Somalia

Sudan

Tunisia

Turkey

Uganda

____________________________

Total

IDB’s Contribution

Grand Total

Subscription (in million ID)

____________________________

4.5

1.5

2.0

5.0

1.5

1.5

1.5

5.0

1.5

21.5

1.5

1.5

6.0

25.0

1.5

1.5

1.5

6.0

60.0

1.5

____________________________

151.5

150.0

301.5

 


c.  Resources and Use of Resources[66].

Export finance program resources are made of the subscribed capital from the Bank and member countries.  Resources are also made of subscription from private and public organizations, and from investors who seek to invest their money in an Islamic way.  Contributions from public and private organizations in member countries and individual investments make also a part of the resources, in addition to profits from operation.  The Governors Board determines, annually, how net revenues from operation should be distributed.

The Executive Managers Board acts as the managing board of the export finance program.  It decides yearly ceilings of finance for each of the member countries.  The country’s subscription is considered when deciding its ceiling of finance.  The Board also sets the guidelines to ensure investing resources of the program in the most feasible way available.

 

d.  Eligibility.

Eligibility for export financing is restricted to the organizations operating in exporting from subscribing countries[67].  Eligible exporters can export to a non subscribing member country in the OIC[68].

Eligible goods are described as the non traditional goods which are produced in subscribing countries and available for shipping to a member country in the OIC.  The Managing Board, however, has the right to consider traditional goods if the interest of member countries in the OIC requires so.

Eligible goods have to be originated, produced or manufactured in a subscribing country.  Inputs used in production have to be produced domestically, or in a member country of the OIC.  The minimum amount of such inputs combined for the eligibility of the good has to be at least 40% of value of the final exported product.

 

e.  Finance periods, Amounts, and Back Payments[69].

The program provides finance for 18 to 60 months periods.  Back payment periods vary depending on whether a financed good is a consumer, an intermediate, or a capital good.  Back payment periods for consumer goods can not exceed 24 months from the date of paying the price of the shipped goods.  Intermediate, and primary goods have maximum back payment periods of 36 months.  Capital goods’ back payment periods can not exceed 60 months.

The current amount of exports finance constitutes from 30% to 40% of the financed good.  The Managing Board has the right to exceed these amounts depending on market conditions.

 

f.  Finance Terms.

Finance is provided for exports on the basis of profit sharing, or installment sale.  The Bank buys the product directly from its origin or through a domestic agency in the subscribing country.  The Bank, in turn, sells the product at a margin of profit assigned for each case individually through negotiations.  The currency used to conduct the deal is agreed upon by parties involved.

Benefiting parties have six months from the date of their approval to conduct the deal.  This period can be extended to six more months with the same or agreed different terms, after which the finance agreement becomes invalid[70].  Back payment period is decided individually by the resale agreement[71].

 

The export financing program can be seen as a joint venture among member countries to expand their intra-trade, a step towards trade integration.  The eligibility conditions for export financing encourage production of the non traditional goods in member countries through the emphasis on the minimum amount of member inputs.  The policies and terms of export financing are designed, as in the case of import financing, to facilitate intra-trade given the existing difficulties in payments and transactions.  Such difficulties, as indicated, are mostly related to policy differentials in regard to foreign exchange systems.

Table 2.5 shows the net of export financing operations approved during the period 1408-1410 A. H. (Mid. 1987-Mid. 1990).  Manufactured and basic manufactured goods constitute about US $ 114.3 million or 87% of total export financing.  Based on these figures, export financing encourages the establishing of new industries in member countries by helping to provide an expanded market to these industries on the long run.

 

Table 2.5[72]

Export Financing Operations Approved During (1408-1410)H[73]

                                                (US $)

______________________________________________________________________________________

Exporting                             Si.                                                           Importing                                              Amount

Country                                No.          Commodity                          Country                                              Approved

______________________________________________________________________________________

(1408)

 

Saudi Arabia

 

 

Turkey

 

1

2

 

1

2

 

Copper Rods

Copper Rods

 

Steel Billets

Steel Billets

 

Turkey

Algeria

 

Algeria

Algeria

5,000,000

5,000,000

5,000,000

5,000,000

 

 

 

Tunisia

 

 

 

 

 

Sub Total

 

 

 

(1409)

Egypt

 

 

Malaysia

 

 

 

Morocco

 

 

 

 

 

 

Turkey

1

2

3

4

5

 

 

 

 

 

 

1

2

 

1

2

3

 

1

2

3

4

5

6

 

1

2

3

4

5

 

Telephone Sets

Insulated Truck Bodies

Semi-trailors

Cement Pipes

Concrete Pipes

 

 

 

 

 

 

Sanitary Wares

Electric Cables

 

Blackboard

Plywood

Blackboard

 

Seeds

Seeds

Seeds

Seeds

Seeds

Chickpeas

 

Napalm Film

Pens, Pencils

Wheat

Tiles

Trucks

Morocco

Algeria

Morocco

Algeria

Algeria

 

 

 

 

 

 

Iraq

Iraq

 

Iraq

Iraq

Iraq

 

Algeria

Algeria

Algeria

Algeria

Algeria

Algeria

 

Iraq

Iraq

Algeria

Iraq

Uganda

 

1,927,905

297,600

345,000

3,033,892

4,438,751

___________

30,043,148

 

 

 

 

3,441,663

4,000,000

1,113,196

2,736,000

1,441,701

2,904,480

565,520

958,800

257,890

1,768,000

657,600

436,800

352,592

8,000,000

399,000

2,400,000


Table 2.5 (continued)

(US $)

_________________________________________________________________________________

Exporting                             Si.                                                           Importing                                      Amount

Country                                No.          Commodity                          Country                                      Approved

_________________________________________________________________________________

 

Saudi Arabia

 

 

 

 

 

Tunisia

 

 

 

 

 

 

 

 

 

Sub Total

 

 

 

(1410)

Egypt

 

 

 

Jordan

 

 

Kuwait

 

Malaysia

 

 

 

Morocco

 

 

 

 

Saudi Arabia

 

 

Tunisia1

2

3

4

5

 

1

2

3

4

5

6

7

8

9

 

 

 

 

 

 

1

2

3

 

1

2

 

1

 

1

2

3

 

1

2

3

4

 

1

2

 

1

2

 

Electric Cables

Electric P. Cables

Steel Towers

Electric Cables

Lighting Poles

 

Medical Beds

Leaf Springs

Leaf Springs

Leaf Springs

Filters

Filters

Medical Lenses

Paper Rolls

White Cement

 

 

 

 

 

 

Aluminum Wire Rods

Aluminum Wire Rods

Aluminum Wire Rods

 

Cement

Green House

 

Urea

 

Palm Oil

Plywood

Timber

 

Vegetable Margarine

Chickpeas

Lentils

Cotton Yarn

 

Crown Corks

Bogies

 

Semi-Chmeical Paper

Bi-Calcium PhosphateIraq

Iraq

Egypt

Iraq

Iraq

 

Algeria

Algeria

Algeria

Algeria

Algeria

Algeria

Morocco

Iraq

Algeria

 

 

 

 

 

 

Algeria

Algeria

Algeria

 

Sudan

U. A. E.

 

Sudan

 

Yemen A.R.

Yemen A.R.

Algeria

 

Algeria

Algeria

Algeria

Algeria

 

Iraq

Iraq

 

Iraq

Algeria

 

3,120,000

2,128,000

4,200,000

2,360,000

3,033,600

 

348,000

190,000

100,000

472,000

600,000

400,000

301,742

1,200,800

4,800,000

_____________

54,687,384

 

 

 

 

1,600,000

1,600,000

1,600,000

1,440,000

234,200

3,120,000

1,400,000

3,027,000

2,515,000

1,680,000

445,120

1,309,680

790,325

1,593,600

2,914,835

1,969,000

1,000,000

 

Table 2.5 (continued)

(US $)

_________________________________________________________________________________

Exporting                             Si.                                                           Importing                                      Amount

Country                                No.          Commodity                          Country                                      Approved

_________________________________________________________________________________

 

Turkey

 

 

 

 

 

 

 

 

Sub Total1

2

3

4

5

6

7

8Tires

Copper Rods

Copper Rods

Flour Mill Equipment

Buses

Copper Wires

Copper Wires

X-Ray EquipmentAlgeria

Iraq

Iraq

Algeria

Sudan

Algeria

Algeria

Sudan

3,200,000

2,400,000

2,400,000

749,443

2,596,800

2,000,000

2,000,000

3,120,000

_____________

46,476,913

 

__________________________________________________________________________________________

TOTAL                                                                                                                                        131,207,445

 

 

 


III.       Islamic Banks’ Portfolio for Investment and Development.

Numerous efforts took place to increase intra-trade among member countries.  The IDB helped to foster intra-trade by providing finance for imports and exports.  Financing of these foreign trade operations was mainly provided by subscription of member countries through their governments.  The OIC and the IDB called upon their members to pool their resources together to support their mutual development.  Efforts were also directed towards the private sectors and financial institutions in member countries to direct their investments towards mutually beneficial schemes such as intra-trade financing.  As a result, The Islamic Banks Portfolio was established in February of 1987.  The portfolio is administered by the IDB as a speculator, and it includes a number of commercial banks as members.  The portfolio accepts dealing with all capital and non capital goods that are Islamically accepted, and which qualify for the portfolio finance.  Islamically unaccepted goods can be summarized by goods that are either unlawful in Islam, such as liquors, or that are used for Islamically unaccepted purposes.

The portfolio was established by the IDB and twenty-one commercial banks, and with an initial capital of 65 million US dollars.  The assets of the portfolio are kept separate from the Bank’s assets.  There is a partners committee for the portfolio with thirteen members chosen from the founding banks.  The partners committee draws policy guidelines for the portfolio, and channels its resources towards financing trade among Muslim Countries.  The committee also finances other operations, such as leasing, according to the Bank’s regulations regarding its normal operations.  However, the portfolio directs its resources towards importers and exporters mainly in the private sector of Muslim Countries[74].

The portfolio is considered an investment directed towards encouraging trade among Muslim Countries.  Membership in the portfolio is initially limited to Islamic banks and financial institutions, and it can be changed later to an open portfolio[75].

Over three years of its operation, the Portfolio financed 23 operations which mounted to $ 93.41 million, by July 1990.  In 1990, the Portfolio covered 13 operations for seven member countries amounting to $ 55.91 million, as shown in table 2.6.  Net realized profit during this period was $ 5.66 million which represents a net return of 8.65 percent per annum for the Portfolio[76].

 

a.  Objectives[77].

The Portfolio aims at mobilizing the resources available to Islamic banks, and organizations, and personal savings towards long term trade financing among Muslim Countries.  The Portfolio also develops Islamic financial instruments in the form of circulated certificates.  Such certificates provide liquidity to its owners, and the Islamic financial institutions  as a first step to establish a Muslim Financial Market.  Investing the resources of the Portfolio aims at generating a reasonable revenue.  It also aims at providing the needed liquidity to enable the Portfolio to handle its obligations, as a way to reduce the risk factor.

 

Table 2.6[78]

Operations Approved By The Islamic Bank’s Portfolio in 1410H

(US$ million)

____________________________________________________________

S.No         Beneficiary Country                Commodity            Amount

____________________________________________________________

1

2

3

4

5

6

7

8

9

10

11

12

13Ghee Corp. of Pakistan

Govt. of Uganda

Exim Bank Sudan

Saudi Cable Co.

Misr Gulf Oil Co. Egypt

Rice Export Corp. Pakistan

Samir, Morocco

Al-Fao Est. Iraq

IDB Unit Investment Fund

Al-Fao Est. Iraq

Al-Fao Est. Iraq

Guiding Light Pharmaceuticals, Nigeria

Guiding Light Pharmaceuticals, NigeriaPalm Oil

Trucks/Tractors

Wheat

Aluminum

Palm Oil

Rice

Petroleum

Cables

Equity

Wall+Roof Panels

Reinforcing Bars

AC Compressors

Cement

10.000

  0.930

   2.000

10.000

6.000

1.500

10.000

5.000

5.000

1.750

1.728

0.880

1.120

 

_____________________________________________________________________

Total                                                                                                               55.908
b.  General Conditions for Finance[79].

a)         All capital and non capital Islamically-accepted goods are eligible for Portfolio finance.

b)         Finance is limited for all operations as long as both parties (exporters and importers) are member countries.  Exceptions can be made for operations with a non member party if the good is needed for development purposes.

c)         The Portfolio considers different factors to determine its contribution.  These factors are such as whether the good is capital or non capital, and if importers and exporters are financially sound.  The Portfolio keeps the right to participate in finance operations as a partner to one of the participating banks.

d)         Guarantees for finance operations are preferred to be Financial.  In some cases, guarantees by a government of a member country or its central bank are accepted.

 

c.  Finance Procedures.

After reaching an agreement between parties involved, contracts are made on the basis of profit sharing.  Due dates, draw rights, and others are also determined according to the Islamic guidelines of profit sharing.


Summary

After many attempts by Muslim leaders to substitute for the Muslim unity under the Ottoman Empire, the Organization of the Islamic Conference was established primarily for political objectives and based on the unity of the Muslim Ummah.  Member countries realized the high potential for Muslim economic cooperation.  The OIC encouraged Muslim countries to pool their resources together for mutual economic development.  Many organizations were established by the OIC to coordinate different policies and activities among members.  The OIC urged its members to eliminate or reduce their intra-trade barriers, and to integrate their economies.  Proposals for economic integration were raised by member countries and referred to OIC committees.  Such proposals were not rejected, yet no resolutions have been made in that regard so far.

The OIC founded the Islamic Development Bank as a supranational agency to encourage trade and development in Muslim countries.  The IDB became the most active and successful organization of the OIC.  Operations of the IDB extend to cover different areas of social and economic development.

Most of the IDB resources (more than 70%) are used to finance intra-trade among OIC members.  Trade financing operations are aimed at both increasing levels of intra-trade, and removing obstacles that are related to trade policy differentials among member countries.

The foreign trade financing program of the IDB is made of three schemes that are complementary to each other, and provides financing for  trade in goods that are needed for development.    Priorities in financing are given to goods produced in member countries.  Certain conditions are used for financing in each of these schemes.  The development of foreign trade financing schemes has been gradual.  A short term import financing scheme was first developed to finance imports within Muslim countries.  A longer term financing for exports was established later to finance exports of non traditional goods among member countries.  A code for minimum member input to the sale value of the good is assigned for export finance eligibility.  The Portfolio of Islamic Banks was formed later to attract investments to finance trade between Muslim countries, among others.  The Portfolio is projected to be the nucleus of an Islamic Financial Market in the future.

Unlike the Andean Pact, the IDB seems to have followed an approach of removing obstacles to trade such as the lack of financing capital and moving towards policy harmonization without depending on a progress to be made in the area of removing the intra-trade barriers or imposing common external ones.  Since no protection is granted to member producers against other member or non-member producers under trade financing policies of the IDB, growth in intra-trade can be all attributed to the existing comparative advantages and potentials of economic integration among member countries of the OIC.

Although specific resolutions for a Muslim economic integration have not been taken, IDB operations seem to have succeeded in creating a wider Muslim economic cooperation.  In spite of the lack of a uniform free mobility of goods and services and common external tariffs among OIC members, financing by IDB seems to have increased intra-trade substantially both in absolute terms and in relation to total foreign trade of members.  Such increase can be used as a further confirmation to the existence of comparative advantages among OIC members.

The IDB seems to have paid attention to different obstacles to trade integration.  Many programs have been developed to increase flow of trade among member countries.  Trade financing programs aim to increase intra-trade, given existing policy differentials, while trying to coordinate policies among its members to eliminate such obstacles.  Institutional development of the IDB seems to be gradual and responsive to the needs for more cooperation as they occur.  The new schemes and institutions are developed to complement existing programs by either removing obstacles facing them or by making them more effective, or both.

 

 

 

 

 

 

Chapter III

Trade Among member countries of the OIC

- Actual Effects of IDB Operations

                        – Potential for Intra-trade  

(The case of Industrial Raw Materials & Fuels)

                       

 


Introduction

Trade integration is viewed by many economists as a necessary step towards economic integration.  Trade integration is achieved by eliminating the obstacles to intra-trade among member countries.  In theory, obstacles to intra-trade are referred to as the trade barriers.  The theoretical discussion of trade barriers is centered on tariffs and quotas.  This emphasis on tariffs and quotas can be partly explained by the fact that the theory has been initially projected for industrialized countries facing such barriers as their main obstacles to intra-trade.  In addition to these obstacles, many developing countries face problems that are related to the costs of intra-trade.  Being capital-poor, most developing countries face difficulties in financing their foreign trade including imports of goods that are needed for development purposes.  Many of them also face difficulties in meeting the costs of exporting their products, which makes their goods less competitive in the international markets.  For many developing countries, the costs of importing and exporting overweigh any other barriers as obstacles to trade.  Imports of goods that are needed for development are not likely to be subject to tariffs and quotas by most developing countries, especially if such goods are not produced domestically.  Therefore, this financing can be considered an approach to eliminating a major trade barrier facing intra-trade among member countries, that is the lack of financing capital.

Most of the Muslim countries depend heavily, and some times primarily, on raw materials and primary products as their exports.  As developing countries, exports serve mainly to attract foreign currency needed to finance domestic developmental and service projects.  The success of the intra-trade financing schemes of the IDB can be analyzed on two different levels.  The first is in the light of the actual effects of the IDB foreign trade financing schemes on intra-trade in both absolute and relative terms.  The second is by examining the existing potential for intra-trade in the goods that are financed by the IDB intra-trade financing operations.

 


I.          The IDB and Actual Effects on integration

In our earlier analysis to economic integration and the case of the Andean Pact, we found that policy differentials were the main reason for the demise of the Andean Pact in spite of its success in increasing intra-trade levels.    In the case of the OIC, evolution towards integration seems to follow a different path where both policy harmonization and intra-trade are fostered while proposals for formal economic integration are still under consideration.

 

Integration Effects

Our analysis will be mostly based on the data in table 3.1 that shows an increase in intra-exports from 6.4% to 11.8% of total exports, and in intra-imports from 8.3% to 12.2% of total imports in the period 1978-1988 since foreign trade financing of the IDB started operation.  We assume that this increase occurred mostly as a result to the effects of the IDB foreign trade financing operations.  Such assumption can be partly supported by the figures for the period 1970-1978 where the trend on both intra-imports and intra-exports does not show a systematic increase.

As far as welfare effects of integration are concerned, we need to distinguish between the short run or static effects and the long run or dynamic effects.  Although the data available is partial in that regard, we can still make the analysis based on what is available.

 

Static Effects

Analysis of integration in the first chapter assumes the stage of customs union where restrictions on intra-trade are eliminated, and imposed against imports from non-members.  Positive static effects occur when trade is diverted from trading with non-members to intra-trade with members as a result to the free intra-trade, which results in a trade creation among members.  Such a diversion is expected to reflect on higher member production and subsequent positive welfare effects on members.  Negative static effects occur mostly because of the restrictions or common external barriers against trade with non-members when less efficient-higher priced member producers replace more efficient-lower priced non-member producers.  In other words, if no common external barriers are imposed against trade with non-members, then negative trade diversion effects will not occur.  Since no restrictions are imposed against non-members, in the case of IDB member countries, then low price imports from more efficient non-members will remain cheaper than the high priced less efficient member producers, simply because no protection is given to the union producers.  Looking back at foreign trade policies, whether they were for exports or imports, we notice that priority is given to member producers with the stipulation that the price of the member production is competitive to that of the non-member production.  It says under policies of import financing discussed earlier “Imports from non-member countries can be financed only if the commodity is not available from any member country, or if import conditions, including price, are not competitive to imports from non-member countries[80].”  Under such circumstances, less efficient member production is not expected to occur or, at least, replace more efficient imports, and consequently no negative trade diversion effects are expected to occur.  Under our welfare analysis of integration, we mentioned that the negative effects of integration occur in the short run and are expected to be
                                                            Table 3.1

Flow of Trade Among IDB Member Countries[81] (Percentage)*

Country        Exports to Member Countries     Imports from Member Countries

                        1970    1973    1978    1982    1988    1970    1973    1978    1982    1988

Afghanistan    9.0       16.9     21.5     16.6     1.4       3.4       5.0       6.6       3.0       3.4

Algeria                        0.1       1.8       0.0       0.5       2.4       2.0       3.1       0.4       2.0       5.9

Bahrain            9.7       20.6     28.2     40.7     10.9     45.8     43.9     40.8     57.3     48.5

Bangladesh     –           6.0       21.2     19.9     12.7     –           4.3       11.8     19.9     12.9

Brunei             –             –         –           0.4       0.1       –           –           –           4.3       5.5

Cameroon        4.5       3.3       1.8       2.7       5.0       8.1       4.0       2.8       7.8       6.4

Chad               4.1       10.6     5.1       13.9     0.9       7.7       7.2       6.1       15.0     10.5

Comoros          –           –          –           –           0.0       –           –           –           –           17.4

Djibouti           –           –          –           86.6     77.9     –           –           –           9.1       30.6

Egypt              6.4       7.4       8.6       7.5       6.9       7.3       8.3       3.0       3.1       5.9

Gabon             5.3       3.1       3.8       2.4       2.5       2.2       1.0       4.7       3.3       6.7

Gambia            0.4       0.4       1.6       12.6     5.3       3.8       4.0       1.1       7.4       2.4

Guinea             0.6       13.3     7.6       9.2       9.2       2.1       10.8     7.1       3.2       6.0

Guinea Bissau –           –           9.3       5.1       1.1       3.7       5.2       3.1       6.8       4.9

Indonesia        3.3       1.1       1.3       1.5       4.3       2.1       3.6       4.5       9.1       8.4

Iran**               –           –           –           –           11.6     –           –           –           –           10.6

Iraq                  12.1     7.5       8.1       19.9     20.0     12.9     10.5     5.4       10.0     26.6

Jordan             6.9       54.5     49.5     65.8     42.8     20.3     20.8     19.9     19.8     27.3

Kuwait                        3.6       7.0       9.6       23.0     19.3     10.4     10.9     3.7       8.1       17.9

Lebanon          60.3     50.9     77.7     10.3     38.1     16.0     13.0     16.5     14.8     12.4

Libya               0.4       1.4       2.5       6.5       2.1       8.8       8.1       3.5       4.5       6.5

Malaysia          2.3       2.0       2.9       3.9       6.1       8.0       5.3       6.9       6.1       3.8

Maldives         –           –           7.7       –           0.3       –           –           17.7     1.0       1.5

Mali                 20.3     14.8     5.8       2.5       26.4     10.9     9.8       3.0       9.5       6.7

Mauritania       2.5       0.1       0.3       0.2       6.0       7.8       6.2       8.4       9.9       16.1

Morocco          4.9       5.7       3.8       9.6       9.2       4.1       4.0       6.2       20.9     11.0

Niger               2.0       3.6       2.0       0.3       1.1       7.7       5.3       6.7       3.9       2.7

Oman              0.5       0.4       0.5       0.7       1.3       2.3       29.1     16.9     23.6     23.6

Pakistan           11.1     19.9     29.9     32.5     16.9     5.9       10.9     18.9     35.4     21.8

Qatar               1.8       2.5       6.1       5.5       11.0     17.5     18.1     9.1       6.5       14.1

Saudi Arabia   8.7       6.5       5.1       9.8       13.5     24.4     25.1     7.2       5.2       7.0

Senegal            1.9       14.7     8.8       14.5     11.1     3.0       4.9       2.7       8.7       4.5

Somalia           64.3     60.0     51.4     77.1     64.5     6.0       2.9       9.3       21.5     16.3

Sudan              8.9       12.6     10.2     41.0     25.6     8.2       8.8       12.9     23.4     25.1

Syria                29.9     22.9     14.2     17.7     20.0     18.7     16.8     18.5     24.5     13.8

Tunisia             14.6     11.0     10.4     7.0       11.5     2.3       6.1       7.3       6.5       9.0

Turkey             8.7       12.9     13.7     35.7     38.2     6.6       10.1     14.7     34.6     20.7

Uganda           3.2       4.6       15.2     2.8       8.7       2.4       1.1       0.6       1.4       10.3

U. A. E.           7.9       2.3       3.8       8.1       11.6     8.3       8.9       10.2     14.7     13.1

Upper Volta    1.3       3.8       4.1       3.2       –           6.6       6.4       4.2       1.6       –

Yemen  Rep.     –          –           –           10.7     9.6       –           –           –           25.0     21.3

Total               6.2       6.6       6.4       10.6     11.8     9.2       9.7       8.3       11.9     12.2

 

 

offset by the positive dynamic effects in the long run.  Therefore, we can assume that the effects of any increase in intra-trade that results according to the IDB policies are all positive.

Based on the data in table 3.1, intra-exports have increased form 6.4% in 1978, the year foreign trade financing started operation, to 11.8% in 1988.  That represents a relative increase close to 100% in intra-exports.  Since this increase is a ratio, we can safely assume that this represents a net increase in the exports of members.  In other words, percentage increase is in relation to total exports including exports to non-members.  This increase occurred, by assumption, as a result of providing finance to intra-imports, and is irrelevant to other previously existing exports.  Export financing operations started in 1988, therefore, we cannot assume that this increase in exports replaced the loss in exports to non-members, because of deteriorating trade terms with industrialized world, as a result to the export financing operations of the IDB.  Whether this increase in exports is viewed as a net increase, or a diversion from trade with non members to intra-trade with members, it is still an increase in the members production that has positive implications on member countries.  This increase in production leads to positive trade diversion effects, positive trade creation effects, or both.

Over the period 1978-1988, intra-imports increased from 8.3% to 12.2%; a relative increase of almost 50%.  Such imports, as we explained earlier, are not expected to have been replacing low priced-more efficient imports from non-members.  Therefore, negative trade diversion effects resulting from this increase in intra-imports are expectedly eliminated.

Table 3.2 provides some data that helps to further investigate the implications of changes in the rates of intra-trade.  From the table we notice that total exports of member countries increased by 29.7% over the period 1978-1988[82].  While intra-exports increased by about 100% as a percentage of total exports, total exports themselves increased by only about 30%.  From both tables 3.1 and 3.2, we can compare the changes in the actual amounts  of both trade and intra-trade.  In actual amounts, intra-exports increased from $7861 million in 1978 to $18801.3 million in 1988, an increase of 140%.  This means that intra-exports grew at much faster rates than total exports.  Given the fact that growth in intra-exports represents around 30% of the growth in total exports, we can conclude that the increase in intra-exports represents a significant net increase in total exports of member countries, which is a net trade creation.

On the imports side, the actual amount of imports increased from $104940.95 million in 1978 to $162931.1 million in 1988, an increase of about 55.3%.  The amount of intra-imports increased from about $8710.1 million to $19877.6 million, an absolute increase of $11167.5 million which is a relative increase of about 128%.  This also means that intra-imports grew at much faster rates than total imports.  The growth in intra-imports represents around 20% of the growth in total imports, which is a net trade diversion.  From this analysis of both exports and imports, we conclude that intra-trade is growing at much faster rates than the foreign trade of member countries.  Member countries are becoming more interdependent in their foreign trade and less dependent on non-members.  Given the fact that the period analyzed has seen a deterioration in trade terms between the industrialized countries and the developing countries in general, these changes become even more significant.  Such increases can not be analyzed solely based on the changes in GNP of member countries simply because the increase in intra-trade may have compensated for the deterioration in foreign trade terms with the industrialized countries.  For example, the increase in intra-exports may have compensated for a loss in exports to the industrialized countries instead of representing a net increase in GNP of the exporting country.  Whether the increase in intra-exports represents a net increase in GNP or prevents a drop in GNP because of losing an export market, the positive impact of this increase on the exporting economy is still significant.  Given the fact that no protection is afforded to member producers through common external trade barriers or IDB trade financing policies, we conclude, based on the earlier analysis, that the short run effects of the increase in intra-trade as a result to IDB operations are all positive.

 

Table 3.2[83]

Performance of Foreign Trade of IDB Member Countries (US $ million)

(1978-1988)

 

                                                     1978  1988                                   1978                1988

 

Country

Afghanistan

Algeria

Bahrain

Bangladesh

Cameroon

Chad

Egypt

Guinea

Guinea Bissau

Indonesia

Iraq

Jordan

Kuwait

Lebanon

Libya

Malaysia

Mali    

Mauritania

Morocco

Niger

Oman

Pakistan

Qatar

Saudi Arabia

Senegal

Somalia

Sudan

Syria

Tunisia

Turkey

Uganda

U. A. E.

Yemen  Rep.

Total

   Total          

     Exports

244.38

6,240.00

1,688.40

539.50

866.42

102.11

2,660.70

293.61

10.62

11,476.00

10,988.00

283.80

9,805.00

811.30

9,403.00

7,412.60

133.28

140.91

1,679.70

158.32

1,512.10

1,487.00

2,355.00

36,568.00

390.75

90.11

674.40

1,102.80

1,090.01

2,288.30

376.06

9,819.00

139.29

122,828.56

  Total          

Exports

988.3

8,216.0

2,944.9

1,291.1

1,702.6

343.4

4,285.1

487.9

9.5

19,376.0

9,304.0

957.6

8,745.0

816.4

6,793.0

21,125.0

137.7

456.1

3,374.2

375.5

3,174.2

4,509.3

2,088.6

28,400.0

853.8

147.3

735.9

1,344.6

2,244.7

10,080.0

328.2

12,655.0

852.0

159,333.3

 

 

 

 

 

 

   Total

Imports

381.55

7,843.10

2,043.90

1,412.00

1,030.13

192.38

6,599.90

234.27

52.70

6,916.00

5,842.00

1,528.10

5,184.00

2,165.90

5,986.00

5,928.50

312.57

227.11

3,658.90

346.15

1,024.00

3,261.20

1,207.40

22,060.00

787.57

346.10

1,422.40

2,546.80

2,119.50

4,598.20

307.99

5,742.00

1632.63

104940.95

   Total

Imports

1,241.0

8,036.0

3,000.9

2,988.9

1,305.2

195.7

13,650.7

451.8

98.8

13,489.0

10,183.0

2,843.3

6,252.0

2,374.8

6,225.0

16,567.0

522.9

518.5

4,612.4

401.4

2,735.4

6,588.6

1,365.5

25,619.0

1,210.6

310.0

1,821.4

2,222.8

3,696.2

11,284.1

521.5

8,526.0

2,071.7

162931.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Dynamic Effects

The earlier analysis shows that the IDB operations are merely eliminating some  obstacles to intra-trade by providing finance to trade.  By providing finance for development and production through its other operations, the IDB encourages production to take place based on the comparative advantages among members.  Therefore, the effects of the IDB operations can be summarized by increasing intra-trade, while contributing to the reallocation of resources among members based on their comparative advantages.  This should lead to a more efficient use of resources and other dynamic effects.

By 1988, the IDB foreign trade financing has been in operation for about 10 years, therefore, it can be argued that it is too soon for member countries to realize many of the dynamic effects of integration, which occur on the long run.  Nevertheless, we can still investigate if any structural changes have occurred in the economies and foreign trades of member countries.

We start by analyzing foreign trade policies of the IDB that stipulate that financed goods have to be needed for development purposes.  By looking at table 2.3 we notice that as a percentage, finance is shifting from certain commodities to others.  Commodities with the highest decline in financing are crude oil and refined petroleum products, which are mostly used for energy.  Energy is used for industry and production, but also a significant amount of energy is used for consumption purposes.  Higher relative use of  energy is allocated for industry the more the country is developed.  Conversely, when the country is less developed the energy allocated for consumption purposes such as household consumption is expected to be higher in terms of total domestic energy use.  Although, goods have to be used for development to be financed by the IDB, it is difficult to investigate how much of these commodities are allocated to consumption, especially with crude oil.  On the other hand, we notice that decline in finance for these commodities is accompanied by an increase in finance of trade in intermediate industrial goods, and other primary industrial goods.  These data can be interpreted as that financing is moving towards items needed for industrial purposes, while moving away from items with high consumption purposes.  It also means that the benefits of imports financing are becoming more adequately distributed, since some imports from oil exporting members are being replaced by imports from other member producers of industrial materials.  Given the total increase in rates of intra-imports and intra-exports among member countries, benefits of foreign trade financing would be moving towards more efficient reallocation of resources.

To investigate any possible impact of import financing on foreign trade of member countries, we examine changes in the exports share of GNP in a sample of member countries.  Table 3.3 shows that for the used sample of 14 member countries, exports as a share of GNP has declined from 26.7% in 1978 to 21.5% in 1988.  However, we notice that the decline occurred mostly as a result to the drop in exports shares of the oil-exporting members in the sample, while most non-oil exporting members have actually witnessed significant increases in the share of their exports to GNP.  The increase in the exports share of GNP for the non-oil exporting members in the sample was about 19%.   The biggest relative increases in the exports share of GNP were recorded in Jordan and Yemen, the smallest exporters and producers in the sample.  This increase can be partly viewed as a result of a more equitable distribution of gains from the integration through the IDB policies.  It should be noted, however, that the decline in exports of oil exporting member countries can be mostly attributed to the decline in the value of oil exports as a direct result to the fall in oil prices during this period.  Although the data used are partial, they seem to indicate that the exports’ share of the GNP is increasing for most of the non-oil exporting members.

 

Table 3.3

Changes in Exports as a Percentage of GNP (1978-1988)

(US $ million)

____________________________________________________________

                                                   1978                                         1988

                                      _______________________          _________________________

Country               Exports[84]     GNP[85]             %          Exports[86]     GNP[87]              %

____________________________________________________________

 

Algeria

Bangladesh

Egypt

Indonesia

Iraq

Jordan

Kuwait

Malaysia

Morocco

Pakistan

Saudi Arabia

Syria

Turkey

Yemen Rep.

 

6,240.0

539.5

2,660.7

11,476.0

10,988.0

283.8

9,805.0

7,412.6

1,679.7

1,487.0

36,568.0

1,102.8

2,288.3

139.3

 

34,103.8

7,708.5

15,982.2

53,449.2

23,752.2

3,244.5

18,910.3

14,497.0

13,044.9

18,363.2

62,365.9

7,765.5

53,172.0

3,783.6

 

18.3

7.0

16.6

21.5

46.3

8.7

51.9

51.1

12.9

8.1

58.6

14.2

4.3

3.7

 

8,216.0

1,291.1

4,285.1

19,376.0

9,304.0

957.6

8,745.0

21,125.0

3,374.2

3,261.2

28,400.0

1,344.6

10,080.0

852.0

 

53,056.5

20,086.2

33,403.5

87,322.9

N. A.

4,524.8

27,633.6

36,934.2

22,113.0

40,681.5

89,961.2

20,173.6

74,664.0

7,280.0

 

15.5

6.4

12.9

22.2

_

21.2

31.6

57.2

15.3

8.0

31.6

6.7

13.5

11.7

 

____________________________________________________________

Total     81682.7*  306390.6*   26.7   111307.8*   517835      21.5

 

Foreign trade financing operations are completely financed by members contributions, which represents an increase in internal investments; a form of capital accumulation from internal sources.  Over the period 1974-1989, investments from internal sources through the other operations of the IDB amounted to $28,869.51 million, of which 17.4% for industry and mining, 18% for agriculture and live stock, 27.9% for energy, and 20% for transport and telecommunication[88].  The IDB also seems to start to pay attention to the importance of the adequate allocation of resources.  IDB figures for financing approved for the least developed member countries in the period 1986-1990, show that the amount approved was $ 2437.68 million; a 26% of total financing by the Bank[89].

Operations financed by export financing also seem to support the evidence that resources are moving towards financing intra-trade in manufactured and basic manufactured goods[90].  If this trend of growth in intra-trade of manufactured commodities continues, more dynamic effects are expected to take place in the member countries.  By providing foreign trade financing, markets of the financed products are enlarged, since some products of member countries reach markets that were out of reach before financing.  This market enlargement is a step towards reaching economies of mass production especially in industrial intermediate goods.  Other IDB operations help to eliminate obstacles of integration by providing financing for transportation and infrastructure projects.  The creation of the Portfolio of Islamic Banks and other multilateral investments represents another dynamic effect of integration among the OIC member countries.

 

II.        Potential for Intra-Trade

To examine potential for trade among Muslim countries, we will analyze trade in a sample of major foreign exchange earners for member countries.  Fifteen items of raw materials are used in the sample because of their proportional significance in foreign trade structures for Muslim countries.

Many of the Muslim countries are primarily fuel exporters, therefore, fuel is used as a separate commodity in our sample.  On the other hand, fuel imports to some other Muslim countries represent a very high percentage of total imports.

In addition to the proportional significance of these items in foreign trade of member countries, they represent more than 50% of the IDB foreign trade financing[91].  While trade in this sample may not be representative to trade in other items, it still can be used to investigate different factors related to trade among Muslim countries.  The analysis of the potential for trade will be later used to examine both the feasibility of trade integration among the OIC member countries, and the success of the IDB foreign trade financing operations.

 


a)         Industrial Raw Materials

It is a well known fact that most member countries of the OIC are primarily exporters of industrial raw materials.  When the IDB foreign trade financing started operation in 1978, industrial raw materials were the only category of goods which shows a positive and growing trade balance in the joint balance of payments of member countries, apart from fuels[92].  Consequently, primary products are the main foreign exchange earners, hence the constant pressure for each member country to increase its share of the export markets.  The erratic fluctuations of prices of such commodities as cotton, jute, rubber, tin, etc., are well documented.  Bangladesh is almost entirely dependent on the jute exports.  Cotton is the prime export of several West African countries, Pakistan and, to a lessor extent, Egypt and Turkey.  With the growing pressure of contracting export markets and rising populations, there is acute awareness of the need towards exporting larger quantities of manufactured jute products.  Morocco and Tunisia are also a long way towards achieving similar results with their raw fertilizers[93].

The need to export a large share of these raw materials to finance development will remain for a long time to come and any policies which can increase intra-trade between member countries would be more than welcome.  Clearly, the entire surplus of $6.6 billion worth of raw materials cannot be absorbed by the member countries, given their lower overall level of industrialization.

In the sections below, we explore the extent to which exports in this category can be diverted towards member countries’ markets.


Trade in Raw Materials[94]

As pointed out in the IDB’s Eighth Annual Report, the main features of the member countries trade structures in 1980 were:

–           “Export is dominated by primary commodities which constitute not less than 50% of the exports of each reported country.

–           The share of primary commodities to total imports does not exceed 50% except for a few countries.[95]

To illustrate this point further and to isolate the most likely candidates for increasing intra-trade between member countries, the following 15 commodities were chosen for further analysis[96]:

Raw Hides, Skins, Furs, etc.

Seeds for Soft Oil

Natural rubber, Gums

Pulpwood, Chips, Woodwaste

Shaped Wood, Sleepers

Cotton

Jute, other Textile Based Fibers

Crude Fertilizers

Other Crude Minerals

Iron Ore Concentrates

Base Metal Ores

Uranium, Thorium Ore

Crude Vegetable Materials

Fixed Vegetable Oils, soft & non-soft

 

              Table 3.4[97] 

Direction and Value of Trade in Fifteen Main Industrial Raw Materials (1980)

_________________________________________________________________

                              Imports of 15 Commodities           Exports of 15 Commodities                                                  ___________________       ___________________

 

 

 

Country

 

 

__________

Algeria

Bahrain

Kuwait

Libya

Saudi Arabia

U.A.E.

Egypt

Jordan

Morocco

Tunisia

Turkey

Indonesia

Malaysia

Bangladesh

Pakistan

Gabon

Senegal

Cameroon

Niger

Burkina Faso

Sudan

Somalia

Yemen AR.

 

Total

 

 

 

From

MCs*  

$M

 

______

 

66.1

2.1

-

4.5

56.6

31.9

12.2

11.4

29.6

3.9

58.2

15.9

45.6

86.5

281.7

0.95

-

5.5

2.4

0.9

0.3

1.9

4.8

 

724.0

 

 

 

All

sources

$M

 

______

 

490.1

22.6

-

238.9

505.0

163.0

349.8

50.5

277.1

66.4

254.3

305.6

434.6

223.6

377.6

9.7

27.4

15.9

12.0

10.1

17.9

39.0

17.3

 

3908.4

 

 

 

 

MC

(%)

 

______

 

13.5

9.4

-

1.9

11.2

19.6

3.5

22.6

10.7

59.0

22.9

5.2

10.5

38.7

74.6

9.8

-

34.7

20.0

8.9

7.3

4.8

27.8

 

18.5

 

 

 

To

MCs

$M

 

______

 

3.1

0

1.9

0

0

0

4.7

49.5

21.1

16.9

30.3

71.0

289.9

0

48.2

0

32.2

2.2

37.0

3.9

46.3

1.6

0

 

659.6

 

 

All

Destin-

ations

$M

 

______

 

45.8

0

4.2

0

0

0

467.2

164.5

814.7

121.3

550.4

3735.5

5368.5

0

518.3

0

171.0

217.0

494.0

53.2

396.0

10.1

0

 

13131.7

 

 

 

 

 

MC

(%)

 

______

 

6.8

0

45.2

0

0

0

1.0

30.1

2.6

13.9

5.5

1.9

5.4

0

9.3

0

18.7

1.0

7.5

7.3

11.7

15.8

0

 

5.0

 

 

Imports of 15

commodities

as a (%)

 of all

merchandize

 imports

__________

 

80.8

68.9

-

94.9

73.0

93.0

62.5

72.5

56.5

22.2

60.9

61.1

87.4

74.7

63.5

62.2

19.2

66.3

52.6

61.6

75.5

99.5

72.4

 

As explained earlier, at least one of these 15 commodities is a major export item of one of the member countries in the sample.  Table 3.4 gives their 1980 directions and value of trade.  As the final column shows, these 15 items constitute a very high percentage of all raw materials imported by individual member countries.  Senegal with 19.2% and Tunisia with 22.2% are the only two exceptions.  In all other cases their import value is at least 50% of all imports in this category, in some countries they account for 99.5%.  For the majority of member countries the figures are between 60% to 70%.

 

Direction and Value of Trade in Raw Materials[98]

A commodity-wise breakdown of total member countries supply and demand of industrial raw materials is presented in Table 3.5.  Only for 3 out of 15 items there is a trade deficit, for the others, there are obvious surpluses.  To a great extent this is just a reflection of the underdeveloped nature of the economies, as industrial raw materials are not among their main imports due to very small or non-existing industrial bases.  Needless to say, for the surplus commodities priority ought to be given to meet the member countries needs from Muslim countries.

For rubber, the largest suppliers are Malaysia and Indonesia, whereas the main demand comes from Turkey, Pakistan, Morocco and Egypt.  Turkey only imports 18% of its demand from member countries, Pakistan only 5.6%, and the figures for the other two are lower.

 

 

 

                   Table 3.5[99] 

Value of Member Countries’ Exports and Imports of 15 Industrial Raw Materials (1980)

____________________________________________________________

Commodity

______________________

Raw Hides, Skins, Furs, etc.

Seeds for Soft Oil

Natural Rubber, Gums

Pulp Wood, Woodwaste

Shaped Wood, Sleepers

Cotton

Jute, Textile Based Fibers

Crude Fertilizers

Other Crude Minerals

Iron Ore Concentrates

Base Metal Ores

Uranium, Thorium Ore

Crude Vegetable Materials

Fixed Vegetable Oils, Soft

Fixed Vegetable Oils Non-soft

Exports

_____________

58.0

193.4

3303.2

2874.0

907.0

1582.0

135.3

1070.8

203.0

5.0

859.8

592.1

239.1

167.5

1678.3

Imports

_____________

19.7

193.2

192.9

220.9

1107.2

403.1

46.2

108.5

237.8

88.7

182.7

0.5

184.0

686.8

581.6

Exports – Imports

$M (1980)

______________

38.3

0.2

3110.3

2653.1

-200.2

1178.9

89.1

962.3

-34.8

83.7

677.1

591.6

55.1

-519.3

1096.7

 

After rubber, cotton supplies show the largest surplus with Pakistan, Egypt, Turkey and Sudan among the leading exporters in that order.  Yet the two main importers Indonesia and Malaysia meet only 7 and 14% respectively, of their needs from member countries.  In the case of pulpwood, Saudi Arabia, Morocco and Egypt are the main importers.  The leading exporting countries are Indonesia and Malaysia, yet trade between them in this item is non-existent.  Bangladesh as a leading supplier of jute, could also benefit significantly from a favorable treatment in exporting to the main importers; Pakistan, Tunisia, Algeria and Egypt.

Morocco, Jordan, Tunisia and Senegal are leading exporters of crude fertilizers, but only 10% of their total supply would be sufficient to meet the entire import needs of the other member countries, namely Turkey, Malaysia, Bangladesh and Pakistan.  There is not too much potential for trade diversion in this case unless growth picks up to a level higher than experienced in the past.

For the other minerals and metals the demand and supply patterns are quite intricate, with small amounts being traded.  Of considerable strategic significance are the exports of uranium and thorium ore by Niger and Gabon.  This mineral is bound to be extremely useful in the long run for meeting the energy needs of the Islamic countries.

Malaysia and Indonesia are also the main suppliers of shaped wood, for which there is excess demand in the member countries.  Their combined exports and imports show a deficit of $ 200 million.  The major importers are Egypt, Saudi Arabia, Algeria, and other Middle East countries.  Given the suppliers low export penetration of the member countries, 11% in the case of Indonesia and 14% for Malaysia, there is reasonable potential for directing trade in wood towards member countries.  Finally, in the case of soft vegetable oils, there is a pressing need to divert trade to member countries consumers.  The largest being Pakistan, Libya and Turkey, which together consume 50% of the total member countries imports.  Tunisia, Senegal and Morocco are the main suppliers.  However, the total member countries supply of this item does not exceed 25% of their total import requirements.

For non-soft vegetable oil, member countries export nearly twice as much as they import.  Once again, the main exporters are Malaysia and Indonesia, with the most significant importers being Pakistan and Algeria.  Pakistan imports nearly all of its requirements from Malaysia, but for Algeria, member countries supply only 2% of its demand.

 

 

 


b)         Trade in Fuels[100]

It is well known that member countries as a group have a vast exportable surplus of fuels.  This is particularly true for crude petroleum and natural and manufactured gas.  However, for different member countries the situation is most unsimilar.  Even within the same region (e.g., Jordan in the Mediterranean), large trade deficits exist side by side with other member countries experiencing large surpluses in the same item.

 

Direction and Value of Trade in Fuels

In table 3.6, the aggregate surplus on trade in this item was $180.3 billion in 1980.  Member countries’ fuel exports are 13 times greater than their joint imports[101].  The largest exporters are in the Gulf and Mediterranean regions, while the importers are situated in South Asia and Africa.

Several interesting observations can be made from the data in table 3.6.  On the import side, the average intra-trade between member countries in fuel at 68% is the highest for any group of commodities.  However, there are vast differences between member countries; Jordan imports around 95% of its fuel needs from member countries, whereas the West African states of Cameroon, Burkina Faso, Niger, and Gabon record the lowest percentages.  This fact implies that, even in fuels, there is a scope for further trade diversion of about $ 4.74 billion.  In several instances, especially in the case of larger importers such as Turkey, and some of the crude oil exporters such as Indonesia and Malaysia, a significant portion of the demand is for refined petroleum products.  Member countries have become more or less self-sufficient in these items only recently, although this fact is not satisfactorily   


Table 3.6[102]

Direction and Value of Trade in Fuels

(1980)

_____________________________________________________________

                                              IMPORT                                                  EXPORT

                          _____________________      ________________________

 

Country

 

__________

 

Algeria

Bahrain

Kuwait

Libya

Oman

Saudi Arabia

U.A.E.

Egypt

Jordan

Morocco

Tunisia

Turkey

Indonesia

Malaysia

Bangladesh

Pakistan

Gabon

Senegal

Cameroon

Niger

Burkina Faso

Sudan

Somalia

Yemen AR.

 

TOTAL

 

From

MCs

$M

_______

39.6

2030.0

0.8

654.2

388.5

775.6

317.6

2191.2

968.3

904.0

65.3

1389.7

0.06

102.3

0.5

5.4

0.6

174.2

0.9

102.7

10111.4

 

Import

All Sources

$M

_______

 

198.9

2030.0

44.5

12.0

870.0

25.2

408.1

981.8

704.2

3627.8

1747.8

1620.0

176.6

1429.7

9.3

263.0

179.3

158.2

47.3

189.4

2.6

133.7

14858.8

MC

(%)

_______

19.9

100.0

6.4

75.2

95.2

79.0

45.1

60.4

55.4

55.8

3.7

97.2

0.6

38.9

0.3

3.4

1.3

92.0

30.8

76.9

68.0

To

MC

$M

_______

30.7

962.8

3540.5

898.3

6168.8

248.4

28.0

4.6

80.0

37.1

0.8

5.1

 

12005.5

 

Export All

Destin-ations

$M

________

 

1538.2

3552.8

18156.4

21910.0

3603.0

108225.0

1956.2

106.0

1172.5

38.6

15740.0

4628.3

184.4

89.5

405.2

6.5

5.6

6.4

195167.6

MC

(%)

________

0.2

27.1

19.5

4.1

5.7

12.7

72.5

0.1

43.4

41.5

0.2

79.7

6.2

 

reflected in the 1980 figures.

It appears that the larger fuel exporters such as the Gulf States are almost all experiencing negative growth in their revenues mainly because of the fall in prices.  At the same time, imports have not remained at the high level of 1980.  This is particularly true for the larger and more diversified economies of member countries.

 

Summary

The Potential for trade integration among OIC member countries in the case of Industrial Raw Materials and Fuels

 

Trade Creation

The short run effects of the integration are examined in the light of the positive effects of trade creation and the negative effects of trade diversion.  As we concluded in the case of the IDB and member countries of the OIC, are negative trade diversion effects are isolated because no protection is granted to the intra-exports of member countries through common external trade barriers.  Therefore, feasibility of integration among OIC member countries in the short run can be analyzed in the light of potential for trade creation among member countries.  While the data used in the case of the fifteen raw materials and fuel is partial, the sample may be considered fairly representative to the existing potential.  Most member countries, as we mentioned earlier, are primarily exporters of raw materials and so the potential for intra-trade in other items is expected to be even higher.

In the case of raw materials, table 3.4 shows a difference between imports from all sources and imports from member countries of $ 3184.4 million.  Table 3.5 shows that a surplus exists in external trade in each of these items except in the case of 3 of them.  That means that a potential exists to meet all member countries’ imports of these items except for the amounts of deficit.  In other words, exports of member countries in these items could cover all of their imports except for the amounts of trade deficit in items of which members’ supplies do not meet their entire demand.  The amount of potential trade creation in these items, consequently, should equal the value of their imports from all sources after subtracting their existing intra-imports, and the amounts of trade deficits in the three items.  Subsequently, the potential for trade creation in these fifteen industrial raw materials in 1980 was $ 2430.1 million.  This obvious potential has a particular significance not only because many member countries depend primarily on these items for their exports, but also because these items represent, in the average, more than 50% of their imports of raw materials needed for their development, as shown in table 3.4.

Potential for trade creation in fuel is easier to find since member countries enjoy surpluses of external trade in this item.  In 1980, potential for trade creation in fuel was $ 4747.4 million; the difference between imports from all destinations and imports from member countries.  Therefore, the potential for trade creation in both fuel and industrial raw materials in 1980 was about $ 7.2 billion

 

Trade Diversion

Since almost all of the items discussed are traded based on natural comparative advantages related to the endowment of natural resources, possibilities of trade diversion are virtually non existent.  Existing potential for trade creation is mostly dependent on the diversion of imports from non-members to members in the amounts that can be met by members supply.

 

Implications

Although potential for trade creation exists in these items, significant positive effects are not expected to occur based only on trade.  Based on our analysis, trade integration, by itself is may not to increase the welfare of members simply because especially if it does not result in any net increase in production.  A positive result for trade integration in the analyzed items is that intra-trade helps to isolate the negative effects of deteriorating trade terms with the industrialized trade partners of member countries.  Perhaps the most important implication of these results is that a huge potential exist does exist for integrating industrial production that uses these raw materials in member countries.  Resources can be allocated based on the existing comparative advantages in factor endowment that are fairly-adequately distributed among members.  If such integration is to occur, enormous advantages can be achieved  that include significant welfare increasing effects for members countries in both the short and the long runs.  In reference to our discussion for unity among the Muslim Ummah, the economic factors seem to further support the argument of the Muslim common interests.

These conclusions can be used to evaluate the success of the IDB in relation to the potential of trade in raw materials and fuels.  In the second chapter, we noticed that the concentration in import financing by the IDB is shifting towards the industrial raw material and the industrial intermediate goods, as shown in table 2.1.  This trend is certainly welcome since it further exploits the potential for intra-trade in these areas, in addition to creating interdependency among member countries in utilizing their resources.  Although data is not available for IDB financing of intra-imports since 1980 for all items, the IDB figures for trade finance in these items were about $390 million or 5.5% of the existing potential in 1980[103].

Clearly, these figures reflect the success of the Bank in helping member countries to benefit from the potential for intra-trade.  It can also be argued that these figures demonstrate the limitations of the Bank’s resources compared to the economic potential for integration through its operations.

 

 

CHAPTER IV

The IDB and Economic Integration Among OIC Member Countries

Introduction

In the first chapter of this thesis, we presented the theory of economic integration.  The first chapter also included an analysis to the effects of integration in both the short and the long runs, as well identifying some of the problems of integration.  The second chapter included a historical review to different attempts to establish a Muslim Unity, which is an ultimate form of integration within a framework of unification.  The evolution of the Organization of the Islamic Conference was also included in the second chapter with an emphasis on its subsidiary and affiliated organs to foster economic integration among its members, particularly, the Islamic Development Bank.  The second chapter also included an overall review of the IDB functions and operations with an emphasis on the foreign trade financing schemes.  The actual impact of the IDB foreign trade operations on member economies as well as the potential for intra-trade in goods with the largest share of financing were the topic of the third chapter.  This fourth chapter should be an overall review to all of the previous parts of the thesis, and a conclusion based on our earlier findings about the IDB and economic integration among the OIC member countries.

 

Economic Integration

In theory, economic integration occurs when a number of countries move towards liberalizing their intra-trade by eliminating tariffs and quotas on intra-traded goods among them.  By definition, the theory of economic integration emphasizes tariffs and quotas as the intra-trade barriers that represent the major obstacle to trade integration.  We mentioned earlier that this emphasis on tariffs and quotas can be partly attributed to the fact that the theory was first proposed for western economies that were facing such barriers as their main obstacles to intra-trade.  This definition can still be applicable to other economies but not before modifying the definition of obstacles to include those that are facing such economies in reality.

The theory of economic integration evolved at a period when western economies were all classified as industrialized countries.  Industrial production of some commodities was taking place in more than one western economy in spite of the different levels in their comparative advantages to produce the same commodity.  Industrial countries imposed tariffs and quotas to protect their domestic industries from competition by the more competitive foreign imports.  The key point in this analysis is that tariffs and quotas were imposed by industrialized countries to protect already developed industries.  The removal of tariffs and quotas would free the movement of goods and services, allow competition, and eventually production will be reallocated to an optimum allocation that will lead to a reduction in costs and prices and an increase in consumer welfare.

The standard analysis of economic integration centers on the effects of integration on consumer welfare in the member countries.  These welfare effects are analyzed based on the stage of customs union where free movement of goods and services among members is provided, and common external trade barriers against trade with non-members are imposed.  The short term welfare effects of the integration are analyzed in the light of positive effects of the increase in intra-trade, referred to as the trade creation effects, and the negative effects of replacing more efficient imports with less efficient member production, referred to as the trade diversion effects.  The increase in intra-trade is expected to introduce positive trade creation effects  as a higher competition among member producers that leads to a more efficient member production which leads to lower prices and a higher consumer welfare.  Negative trade diversion effects occur when a more efficient-low priced non-member production is replaced with a less efficient-high priced member producer as a result to the common external trade barriers.

Long term welfare effects are related to the transformations that take place in the member economies such as the enlargement of the market size and its effects on both the demand side and the supply side.  Welfare effects of the integration in the long run are expected to be positive and to offset any negative short term effects, since protected industries are expected to develop and become competitive to the non-members’.

This earlier analysis may need some modification to be applicable for many developing countries among which are the member countries of the OIC.  Developing countries in general, including the OIC member countries, are primarily exporters of raw materials and primary products.  In their attempts to develop an industrial base, most developing countries do not impose restrictions on imports that are needed for development purposes, such as raw materials.  Trade in raw materials and primary products among developing countries is not likely to be hindered by external trade barriers such as tariffs and quotas.  For many developing countries, obstacles to trade are internal and are mostly related to the lack of capital to finance their foreign trade operations.  In such cases eliminating intra-trade barriers and imposing common external trade barriers might not be instrumental in introducing the welfare increasing effects of integration that are concluded in the theory.  In other words, a customs union between a group of developing countries may not lead, by itself, to significant increases in their levels of intra-trade, production, and consumer welfare.  In addition, the higher is the required level of policy coordination among a group of countries for any stage the less likely are the chances of success to achieve that stage.  In the example of the Andean Pact, we noticed that its demise was mostly blamed on the failure of its members to coordinate their foreign trade policies so common external trade barriers can be imposed against non members.

The validity of the theory of economic integration for developing countries, however, can still be saved as long as its terms, assumptions, and conclusion can be redefined.  For instance, the definition of tariffs and quotas as the trade barriers can be redefined to include the different obstacles in the different cases of integration such as the lack of trade financing for developing countries.  In the next section, the relevance of the theory to the case of trade among the OIC member countries will be briefly examined while indicating the areas where redefinitions have to be made.


The Organization of the Islamic Conference

Realizing their economic potentials, the OIC called upon its members to remove restrictions on their intra-trade and to pool their resources for a joint economic development.  A number of proposals for an Islamic integration, i.e., an Islamic Common Market, were submitted by more than one member country to the OIC which in turn referred such proposals for further study.

The OIC moved to form different organs to foster a Muslim cooperation in the different economic, political, and social areas.  The organs of the OIC were established for wider cooperation among member countries in these different areas.  The objectives of such organizations included, among others, the introduction of higher levels of policy harmonization among member countries in different areas including their mutual economic development.

Although no specific resolutions were made regarding a Muslim integration, higher levels of economic cooperation and intra-trade seem to have occurred as a result to operations of the OIC and its organs.  The evolution of such higher levels of cooperation seems to have followed a different approach than the evolutionary path to integration that is proposed in theory.  The OIC is by no means unique in following such an approach since other examples of integration, such as the Andean Pact, also followed a different path than the proposed theoretical approach.

 

The Islamic Development Bank 

The Islamic Development Bank was established by the OIC to foster economic and social development of member countries.  Resources of the Bank are all drawn from its members while its operations are mainly directed at providing financing for the development of its members.  Most of the financing of the IDB is directed towards increasing the levels of intra-trade among member countries.  The IDB financing for intra-trade is limited  to the goods that are needed for development purposes.  Evolution of foreign trade financing of the IDB was gradual and responsive to the increase in members demand for finance in related areas.   The foreign trade financing operations of the IDB are made of three schemes that are complementary to each other.  The first scheme is a short term import trade financing to finance imports to member countries.  The second scheme provides a longer term financing for member exports of the non traditional goods.  The third scheme is the Islamic Banks Portfolio that aims to attract investments from member countries to finance the intra-trade operations among member countries.

Since the foreign trade financing operations of the IDB started operations in 1978, significant increases were observed in the levels of intra-trade between member countries.  On the exports side, intra-exports increased by 140%, while the share of intra-exports to total exports increased from 6.4% to 11.8%.  On the imports side, intra-imports increased by 128%, while the share of intra-imports to total imports increased from 8.3% to 12.2%.  Over the period of analysis (1978-1988), the exports’ share of GNP has increased for most of the non-oil exporting member countries of the OIC.  The decline in the exports’ share of GNP in the oil exporting members can be mostly attributed to the decline in oil prices over the same period.  The volume of finance provided for trade financing by the IDB until 1988 was about $5.5 billion, while intra-imports increased by more than $11.1 billion and intra-exports increased by about $11 billion.  By 1990 and after including the new schemes of export financing and the Portfolio, the total foreign trade financing by the IDB increased to about $6.8 billion.

 

Effects of Integration on the OIC member Countries

According to the policies of trade financing of the IDB, the priority in finance is given to member production as long as that production is competitive to imports from non-members.  Under such policy, member producers are not given any protection from imports of non-members.  In addition, there is no common external trade barriers imposed against non-members by the OIC member countries.  Therefore, the role of the IDB can be summarized by removing obstacles to intra-trade among member countries to allow the flow of intra-traded goods according to their existing comparative advantages.  Flow of intra-trade in this case is not accompanied with external barriers against trade with non-members.

In our earlier discussion to the effects of integration, the positive short-term welfare effects were related to trade creation represented in the increase of intra-trade as a result to eliminating the intra-trade barriers.  In the case of the OIC, intra-trade increased as a result to removing the obstacles to trade represented in the lack of financing capital while commercial barriers against the financed goods are mostly non existent.  In theory, negative welfare effects of integration result from trade diversion by replacing a more efficient non-member producer with a less efficient member producer due to the common external trade barriers.  The feasibility of an integration is determined by weighing the positive trade creation effects against the negative trade diversion effects.  Accordingly, no negative effects can be cited in the case of the OIC and economic cooperation through the IDB since the more efficient non-member producers are not being replaced by less efficient member producers.  Instead, the IDB operations seem only to exploit some of the existing potentials for integration and trade among member countries.

This part of the analysis was mainly aimed at examining the actual effects of the IDB operations on the member economies in the theoretical framework.  The success of the IDB can be further analyzed in the light of the existing potential for intra-trade among member countries.

 

IDB and the Potential for Intra-Trade

The analysis of the potential for intra-trade among member countries is based on the comparative advantages of member countries and does not assume any protection for member producers against competition by non-members.  Examining the IDB under such assumptions assumes away any negative effects of integration that are discussed in the theoretical analysis.  The analysis of potential for trade is limited to the goods that received most of the trade financing by the IDB until 1990, which are Fuels and the industrial raw materials.

Potential for trade creation is derived merely by finding the possibilities for trade diversion of imports from non-members to imports from member producers in the items with a surplus in foreign trade balances. The foreign trade balances of member countries show a surplus in most of the items analyzed in a sample of 15 industrial raw materials.  This surplus also exists in the foreign trade balances of member countries in fuels.  In 1980, the potential for trade creation in fuel was $4.74 billion, while the potential for trade creation in industrial raw materials was about $2.5 billion.  Potential for trade creation in both categories was about $7.2 billion in 1980.  In 1980, the total foreign trade financing provided by the Bank was $476 million, of which about $390 million were directed to finance trade in these items.  This means that the IDB trade finance operations helped to exploit only about 5.5% of the existing potential for trade creation in that year.  Based on these figures we can conclude that a huge potential does exist for trade creation among Muslim countries in the goods of the sample, in spite of the fact  that these items are primary products and raw materials.  These figures also clearly reflect the severe lack of resources available to the Bank.  Given the huge financial resources available to some member countries, such lack of resources can be attributed to a lack of cooperation on the part of the rich members.

If a free flow of the goods in the sample is allowed, trade in these items may take place based solely on the comparative advantages of member countries.  Therefore, an integration that is based on trade integration in these items is not expected to have any negative welfare effects.

 

Conclusion

Positive effects of economic integration from removing trade barriers occur as a result to the competition among member producers, increase in their efficiency in production, and the increase in member production.  In the case of raw materials and fuels, there is not much competition that is expected to occur mostly due to the difference in the natural endowment of these resources among member countries.  Although potential for trade creation exists in most of the items that are financed by the IDB, significant positive effects are not expected to occur based only on trade unless production is increased.  Based on our analysis, such trade integration, by itself, is not expected to increase the consumer welfare in member countries simply because it does not necessarily include any net increase in production.  However, there are other positive effects for trade integration in these items.  Such trade integration helps to isolate the negative effects of deteriorating trade terms with the industrialized trade partners of member countries.  An important implication of these results is that there is expectedly a potential for integration in the industries that use these raw materials in member countries.  Resources can be allocated based on the existing comparative advantages in factor endowment that are fairly-adequately distributed among members.  If such integration is to occur, enormous advantages can be achieved  that include significant welfare increasing effects in both the short and the long runs for member countries.  The new trend in concentration of trade financing by the IDB seems to move in that direction by providing more finance for trade in industrial intermediate materials and non traditional exports of member countries.  In reference to our discussion for unity among the Muslim Ummah, economic factors seem to further support the argument of the Muslim common interest.

From the earlier analysis we conclude that:

1.         An enormous potential does exist for intra-trade among member countries in their traditional exports.

2.         The foreign trade financing operations of the IDB seem to exploit some of this existing potential.

3.         The new trends in the IDB financing seem to be moving towards a further exploitation for potentials in other areas such as intermediate industrial goods and the non traditional exports.

4.         Volume of the IDB operations is extremely low compared to both the existing potential for trade and the financial resources available to member countries.

5.         Any Muslim integration that is based on the existing comparative advantages and according to the IDB policies of no protection for member producers will only have positive welfare effects on member countries.

 

The Theory of Economic Integration: Some Final Comments.

Economics is a discipline that is aimed at solving the economic problems facing the human societies.  The economic theory is based on assumptions and definitions that are derived from the problem which the theory aims to address.  While there are some universally accepted rules and principles in economics, many economic problems can not be addressed by universal solutions.  Economic solutions for a problem in a certain country or group of countries may not solve the very same problem in another country or group of countries.  For some theories, terms, definitions and assumptions have to be modified from one case to another, while for other theories, relevance to the different cases can not be established even after redefinition.

 

The assumptions of the theory of economic integration can be summarized as follows:

I.          The obstacles to trade are defined  as the intra-trade barriers of tariffs and quotas, and the lack of policy harmonization among member countries.

II.        The positive welfare effects are related to the increase in competition and production of members.

III.       The negative welfare effects are related to the protection of member producers against more efficient non-member producers.

The conclusion of the theory can be summarized by that the elimination of the obstacles to trade and integration will lead to the proposed welfare effects.

 

Most of the OIC member countries are primarily exporters of raw materials and primary products.  Goods that are needed for development, including raw materials and fuels, are not likely to be subject to trade restrictions by either exporters or importers.  Exporters depend heavily on their exports to attract foreign exchange to finance their development, while the importers use their imports as inputs to their industrial development.  If the obstacles to intra-trade were defined as the restrictions on trade imposed by member countries, then trade integration among OIC members in these items does not face any obstacles.  According to the theory, trade integration should automatically occur in this case simply because there are no obstacles to integration that need to be removed.  Unless the obstacles to intra-trade are redefined in this case, the theory  may seem irrelevant to a Muslim trade integration.  The relevance of the theory can not be established in this example unless obstacles to trade are redefined to include the lack of financing capital for trade.  The theory attributes the negative welfare effects to imposing common external barriers against non-member producers who are more efficient than member producers.  Primary exports of member countries are mostly based on the comparative advantages that are based on the natural endowment of factors.  The need for protection against non-member imports simply does not exist for most of these items or their manufactured products such as textile, fertilizers and refined petroleum products.  Therefore, the definition of negative welfare effects may not be applicable to the case of OIC.  Positive welfare effects of integration are mostly attributed to the increase in member production and the enlargement of market size.  In the case of the OIC, effects of integration can not be viewed based only on the internal factors of the integration.  All member countries of the OIC are developing countries.  Because of the generally-less developed production structures of member countries, most of the primary exports are directed towards the non-member industrialized countries.  In return, most of the exports of capital and manufactured goods are imported from the non-member industrialized countries.  Here, trade terms are defined by the relation between the prices of the primary exports of the developing member countries, and the prices of the industrial imports from the industrialized non-members.  Over most of the period of the Bank’s operation, trade terms of members against non-members deteriorated significantly.  In some items such as Jute, cotton and crude fertilizers, the world demand has declined.  In other items such as refined petroleum products, imports to the industrialized non-members were restricted and a price war has been waged in the world market against member exports.  The deterioration in trade terms affected member economies in two major ways.  The first, is the decline in relative prices due to the monopsony power of the industrial non-members in the markets of primary goods, and their monopoly in the markets of manufactured and capital goods.  The second major effect of deterioration in trade terms on members was the decline in world demand to some of their exports.

Trade integration in such case may not lead to a net increase in member production in many items, nor to an increase in competition among member producers.  Nevertheless, trade creation may compensate for some of the loss in export’s markets.  Trade creation among members may also lead to the decline in the members supply to non-members which may ultimately lead to increase in the prices of member exports and improve their trade terms.  Under such circumstances, the theory does not predict any positive welfare effects since production does not increase.  The positive welfare effects that are related to either the compensation for a loss of markets, or to improving trade terms are by no means less significant even if the net production does not increase.  Furthermore, positive trade creation effects can still occur even with a decline in net production that could have been worse without the increase in intra-trade.  Such situation may occur if the decline in exports to non-members was greater than the trade creation among members.  Based on this discussion, we conclude that the positive effects are not limited to a net increase in gains, and that an effect of preventing or compensating for a loss is still a positive effect.

Finally, the theory of economic integration has to be modified by redefining its assumptions, terms, and conclusions to be relevant to the different cases of developing countries, including the OIC case.  The intensity of this modification is expected to decrease with higher levels of industrial development in member countries.  The diminishing need for modification of the theory is related to the increase in economic similarities between the developed countries and the developing countries, as the later become more industrialized.

 

 

Bibliography

 

 

INTRODUCTION       

 

Browning E., Microeconomic Theory and Applications, Third Edition, 1989.

 

Held C., Middle East Patterns, Westview Press, 1989.

 

Meier, G., Leading Issues in Economic Development, Fifth Edition, 1989.

 

Todaro, Michael P., Economic Development in the Third World, Fourth Edition.

 

 

CHAPTER I       

 

1.         Theory of Economic Integration

 

Balassa, B., Towards a Theory of Economic Integration, 1961.

 

Johnson, H. G., Money Trade and Economic Growth, Harvard University Press, Cambridge, Mass., 1962.

 

Vajda, I., Foreign Trade in a Planned Economy, Cambridge University Press, 1971.

 

Wexler, I., Fundamentals of International Economics, Second Edition, 1971.

 

Walter, I., International Economics “Theory and Policy”, 1968.

 

2.         The Welfare Effects of Economic Integration

 

Balassa, B., The Theory of Economic Integration, George Allen and Unwin Ltd., London, 1961.

 

Brada, Joseph C., Mendez, Jose A., “An Estimate of the Dynamic Effects of Economic Integration”, Review of Economics & Statistics (Netherlands), Vol: 70, Issue: 1, February 1988.

 

Caves, R. and Ronald, J., World Trade and Payments, second edition, 1977, (little, Brown).

 

Dunning, J. International Investment, penguin Books Ltd., Middlesex, 1972.

 

Frank, I., Foreign Enterprise in Developing Countries, John Hopkins University Press, Baltimore and London, 1980.

 

Lipsey, R., “The Theory of Customs Union: Trade Diversion and Welfare”, Economica, Vol. 24, No. 93 (Feb. 1957).

 

Lipsey, R., “The General Theory of Customs Union: A General Survey”, Economic Journal, Vol. 70, No. 279 (Sept. 1960).

 

Machlup, F., A History of Thought on Economic Integration, Columbia University Press, New York, 1977.

 

Meade, J., Problems of Economic Union, Amsterdam, 1955.

 

Reidel, J., “Trade as the Engine of Growth in Developing Countries, Revisited”, The Economic Journal, Vol. 94 (March 1984).

 

Tinbergen, J., International Economic Integration, Elsevier Publishing Co., Amsterdam, 1965.

 

3.         The Andean Pact

 

Brown, A., “Economic Separatism Versus a Common Market in Developing Countries”, Bulletin of Economic Research, 1961, Vol. 13.

 

Jones, A., Theory of Customs Union, Oxford: Philip Allan, 1981.

 

Morawetz, D., The Andean Group: A Case Study in Economic Integration among Developing Countries.  Cambridge, Mass.: MIT Press, 1974.

 

Vargas-Hidalgo, R., “The Crisis of The Andean Pact: Lessons for integration among developing countries”, Journal of Common Market Studies, vol. 17, no. 3, March 1979.

 

 

 

CHAPTER II

 

1.         The OIC and the IDB

           

Chaudhary Khaliquzzaman, “My Conception of a Quranic state”, Islamic Review, Jan. 1950.

 

IDB, Charter of the Islamic Development Bank.

 

IDB, the 15th Annual Report (1989-1990).

 

2.         Foreign Trade Financing of the IDB

 

IDB, The IDB Charter.

 

IDB, Foreign Trade Finance Operations.

 

IDB, The Guide to Import Financing.

 

IDB, Operation Instructions.

 

IDB, Policies and Procedures of Finance.

 

IDB, The Portfolio of Islamic Banks regulations.

 

IDB, the 2nd Annual  Report (1977-1978).

 

IDB, the 11th Annual Report (1985-1986).

 

IDB, the 12th Annual  Report (1986-1987).

 

IDB, the 13th Annual Report (1987-1988).

 

IDB, the 14th Annual Report (1988-1989).

 

IDB, the 15th Annual Report (1989-1990).

 

IDB, Special procedures for longer term trade finance.

 

 

 

CHAPTER III     Trade Among Member Countries of the OIC

 

1.         Actual Effects of IDB operations

 

IDB, the 4th Annual Report.

 

IDB, the 5th Annual Report (1979-1980).

IDB, the 14th Annual Report (1988-1989).

 

IDB, the 15th Annual Report.

IMF, Direction of Trade Statistics Year book, 1989.

 

2.         Potential for Intra-trade Among OIC member Countries

 

IDB, The Guide to Import Finance.

 

IDB, the 5th Annual Report (1979-1980).

 

IDB, the 8th Annual Report (1982-1983).

Neinhaus V., “Economic Cooperation Among Muslim Countries and their Membership in Established Cooperation and Integration Groupings“, a study prepared for IDB. February 1983.

Shaker M., Economies of the Muslim World, fourth edition, 1984.

 

The World Bank, World Development Report, 1980.

 

UNCTAD, UNCTAD DATA TAPES (1980).

 


[1]              Meier, G., Leading Issues in Economic Development, Fifth Edition, 1989, pp. 5-6. & p. 82.

[2]              Browning E., Microeconomic Theory and Applications, Third Edition, 1989, pp. 4-6.

[3]              Todaro, Michael P., Economic Development in the Third World, Fourth Edition, 1989, p. 13.

[4]              Ummah is the Islamic term to describe the entire Muslim nation.

[5]              I.e., Arabic was replaced with French in the western Muslim regions (Tunisia, Morocco, and Algeria).  English replaced Arabic in Asian Muslim regions such as Pakistan, Malaysia, and Indonesia.

[6]              Held C., Middle East Patterns, Westview Press, 1989, pp. 26-185.

[7]              Meier, G., Leading Issues in Economic Development, Fifth Edition, 1989, pp. 426-430.

[8]              Satiroglu, A, “The Theory of Economic Integration and its Relevance to OIC Member Countries, IDB, 1987, pp. 1-37.

[9]              Balassa, B., Towards a Theory of Economic Integration, 1961, pp. 1-14.

[10]            Vajda, I., Foreign Trade in a Planned Economy, Cambridge University Press, 1971, pp. 28-44.

[11]            Vajda. I., ibid, p. 35.

[12]            Wexler, I., Fundamentals of International Economics, Second Edition, 1971, pp. 341-354.

Walter, I., International Economics “Theory and Policy”, 1968, pp. 535-542.

[13]            Johnson, H. G., Money Trade and Economic Growth, Harvard University Press, Cambridge, Mass., 1962, pp. 45-74.

[14]            For example, see equity of distribution in the Andean Pact on page 56 of this thesis.

[15]            See Introduction of this thesis.

[16]            Meade, J., Problems of Economic Union, Amsterdam, 1955, pp. 41-41.

[17]            Lipsey, R., “The Theory of Customs Union: Trade Diversion and Welfare”, Economica, Vol. 24, No. 93 (Feb. 1957), pp. 40-46.

[18]            Lipsey, R., “The General Theory of Customs Union: A General Survey”, Economic Journal, Vol. 70, No. 279 (Sept. 1960), pp. 496-513.

[19]            Lipsey, R., Ibid, p. 504.

[20]            Caves, R. and Ronald, J., World Trade and Payments, second edition, 1977, (little, Brown), p. 237.

[21]            Caves, R., ibid, p. 238.

[22]            Brada, Joseph C., Mendez, Jose A., An Estimate of the Dynamic Effects of Economic Integration, Review of Economics & Statistics (Netherlands), Vol: 70, Issue: 1, February 1988, pp. 163-168.

[23]            Reidel, J., “Trade as the Engine of Growth in Developing Countries, Revisited”, The Economic Journal, Vol. 94 (March 1984), pp. 56-73.

[24]            Machlup, F., A History of Thought on Economic Integration, Columbia University Press, New York, 1977, p.15.

[25]            Tinbergen, J., International Economic Integration, Elsevier Publishing Co., Amsterdam, 1965, p. 3 and 95.

[26]            Balassa, B., The Theory of Economic Integration, George Allen and Unwin Ltd., London, 1961, p. 107.

[27]            See chapter II of this thesis.

[28]            Dunning, J. International Investment, penguin Books Ltd., Middlesex, 1972.

[29]            Frank, I., Foreign Enterprise in Developing Countries, John Hopkins University Press, Baltimore and London, 1980.

[30]            Morawetz, D., The Andean Group: A Case Study in Economic Integration among Developing Countries.  Cambridge, Mass.: MIT Press, 1974, p. 1.

[31]            Brown, A., Economic Separatism Versus a Common Market in Developing Countries, Bulletin of Economic Research, 1961, Vol. 13.

[32]            Vargas-Hidalgo, R., The Crisis of The Andean Pact: Lessons for integration among developing countries, Journal of Common Market Studies, vol. 17, no. 3, March 1979.

[33]            Jones, A., Theory of Customs Union, Oxford: Philip Allan, 1981, Chapter 5.

[34]            See “Forms of Integration”, Chapter I of this thesis.

[35]            Chaudhary Khaliquzzaman, “My Conception of a Quranic state,” Islamic Review, Jan. 1950, p. 22.

[36]            IDB, the 15th Annual Report (1989-1990), p. 15.

[37]            Charter of the Islamic Development Bank.

[38]            IDB, the 15th Annual Report (1989-1990), p. V.

[39]            Governors Board of the IDB is made of Governors of central banks in member countries.

[40]            IDB, ibid, p. 76.

[41]            IDB, ibid., pp. 43-70.

[42]            The IDB Charter, p. 6.

[43]            IDB, the 2nd Annual  Report (1977-1978), p. 14.

[44]            IDB, the 12th Annual  Report (1986-1987), p. 134.

[45]            IDB, ibid., p. 145.

[46]            IDB, ibid., p. 134.

[47]            IDB, the 15th Annual Report (1989-1990), p. 80.

[48]            ibid., p. 72.

[49]            IDB, The Guide to Import Financing, p. 2.

[50]            The IDB Charter, p. 6.

[51]            IDB, the 15th Annual Report (19189-1990), p. 101

[52]            IDB, ibid., p. 80.

[53]            IDB, the 15th Annual Report (1989-1990), p. 101.

*              After Hijra Of Prophet Mohammed (Peace Be Upon Him), The Islamic lunar Calender.  The Hijra year is lunar, about 14 days shorter than the solar, and currently starts around June.

[54]            IDB, Policies and Procedures of Finance, p. 4.

[55]            IDB, The Guide to Import Financing,  p. 4.

[56]            IDB, the 15th Annual Report (1989-1990), p. 102.

[57]            IDB, ibid., p. 9.

[58]            IDB, ibid., p. 12.

[59]            IDB, the 11th Annual Report (1985-1986).

[60]            IDB, the 15th Annual Report (1989-1990), pp. 102-103.

[61]            Non-traditional goods are defined as all goods that represent less than 20% of any country’s total exports during the last three years, valued at their “F.O.B.” value.

[62]            IDB, Foreign Trade Finance Operations, p. 15.

[63]            IDB, ibid., p. 15.

[64]            IDB, ibid., p.16.

[65]            IDB, the 15th Annual Report (1989-1990), p. 74.

[66]            IDB, Foreign Trade Finance Operations, p. 17.

[67]            IDB, Operation Instructions, p. 2.

[68]            IDB, Foreign Trade Finance Operations, p. 3.

[69]            IDB, ibid., p. 18.

[70]            IDB, Special procedures for longer term trade finance, p. 4.

[71]            IDB, ibid.,  p.5.

[72]            IDB, the 13th Annual Report (1987-1988), p. 131, the 14th Annual Report (1988-1989),

p. 75, and the 15th Annual Report (1989-1990), p. 103.

[73]            Mid. 1987- Mid. 1990.

[74]            IDB, Foreign Trade Finance Operations, p. 23.

[75]            IDB, ibid., p. 2.

[76]            IDB, the 15th Annual Report (1989-1990), p. 104.

[77]            IDB, The Portfolio of Islamic Banks regulations, p. 2.

[78]            IDB, the 15th Annual Report (1989-1990), p. 104.

[79]            IDB, Foreign Trade Finance, p. 24.

[80]            See Chapter II of this thesis under policies of import trade financing of the IDB.

[81]            IMF, Direction of Trade Statistics Year book, 1989, and Annual Reports of the Bank

*              Percentage of intra-exports to total exports (f.o.b.) & intra-imports to total imports (c.i.f.).

**            Iran became a member in 1988.

[82]            This table does not include members who joined after 1978 many of which have high rates of intra-trade, such as Iran and Djibouti.

[83]            IDB, the 4th Annual Report, pp. 30-32, & the 15th Annual Report, p. 25.

[84]            IDB, the 4th Annual Report (1978-1979), pp. 30-32.

[85]            IDB, the 5th Annual Report (1979-1980), pp. 114-115.

[86]            IDB, the 14th Annual Report (1988-1989), pp. 184-185.

[87]            IDB, the 15th Annual Report (1989-1990), pp. 208-209.

*              Excluding Iraq

[88]            IDB, the 15th Annual Report (1989-1990), p. 59.

[89]            IDB, the 15th Annual Report (1989-1990), p. 95.

[90]            See table 2.5 in chapter II.

[91]            See table 2.1 in chapter II.

[92]            The World Bank, World Development Report, 1980.

[93]            Neinhaus V., “Economic Cooperation Among Muslim Countries and their Membership in Established Cooperation and Integration Groupings”, a study prepared for IDB. February 1983.

[94]            Kazim, A., “Prospects For Cooperation Through Trade Among OIC Member Countries, IDB, 1985, pp. 49-55.

[95]            IDB, the 8th Annual Report (1982-1983), p. 37.

[96]            IDB, The Guide to Import Finance, p. 4.

[97]            UNCTAD DATA TAPES (1980)

*              Member Countries

[98]            Shaker M., Economies of the Muslim World, fourth edition, 1984, pp. 109-228.

[99]            UNCTAD DATA TAPES

[100]          Kazim, A., “Prospects For Cooperation Through Trade Among OIC Member Countries, IDB, 1985, pp. 59-60.

[101]          See Table 3.3

[102]          UNCTAD DATA TAPES

[103]          IDB, the 5th Annual Report (1979-1980), pp. 66-70.

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