World Applied Sciences Journal 17 (10): 1349-1355, 2012

ISSN 1818-4952
IDOSI Publications, 2012

Regional Economic Integration and its Effects on

Economic Growth and Economic Welfare
1
Mehdi Hosseiny Naveh, 2Toros Torosyan and 3Seyed Abdolmajid Jalaee
1
Economic Faculty, International Economics Section, Yerevan State University, Armenia
2
International Economic Relations, Yerevan State University, Armenia
3
Economic Faculty, Bahonar University, Iran

Abstract: World is transferring from the phase of nations struggle in business relations to a new phase of
multiple transactions and public cooperation in economic activities. In this article, the effects of regional
integration and extrovert policies on growth and welfare of Iran and northern neighboring countries were
analyzed and studied in an economic framework during 1995-2009. Results reveal that increased trade exchanges
among the studied countries and creation of regional integrations have had long-term economic integration
effects; and as time passes, various indexes especially economic growth indexes have had integration with each
other in these countries. Economic liberalization has also a positive effect on gross domestic production of
selected countries. Also, not only does increased domestic investment in these countries increase economic
growth but also it has a positive and statistical effect on economic welfare and increases it. In contrast, gross
domestic production in these countries hasnot increased simultaneously with foreign investment and thus the
relationship between foreign investment and grosses domestic production is negative with economic growth.
Moreover, the more trade plays a role in gross domestic production, the less society welfare will be. At the end,
some suggestions have been presented to improve the conditions of the studied countries.

Key words: Economic integration GDP growth GDP per capita Northern neighboring countries

INTRODUCTION Therefore, employing business arrangements and

economic-regional integration can be an essential action
The main element of economic globalization is to toward globalization and can help most developing
release business which leads to national economies countries enter the global field. Also, competitive benefit
competitiveness and then to movement toward integration fosters in various markets, results in increased investment
into global markets. Societies that have been able to adapt in the region, improves economic welfareprovides
their national economies with new competitive conditions economic growth and development through increased
and have taken a role in this global game have benefited mutual capital volume.
from economy globalization phenomenon. Some of Moving toward regionalization helps economics of
passive actions these country have done to face these countries prepare for globalization and thus
globalization include entering economic-regional improved investment and growth in the region is
integration. Indeed, adopting business arrangements and obtained. It can also help countries overcome world's
economic-regional integration can be one of necessary financial crises including recent financial crisis which
actions in globalization and can protect economy of most started from America's housing market and affected all
developing countries against global competition [1]. world's financial markets; moreover, it enables the
Relying on relative benefits and various economic members to make unique policies to avoid such threats
potentials and obtaining different resources from [2].
different economic-regional integrations, Islamic Republic Generally, integration can be viewed in two economic
of Iran can also increase its capability to move toward and socio-political aspects. Considering economic view,
globalization trend. integration theory is considered a series of policies that

Corresponding Author: Mehdi Hosseini Naveh, Central Melli Bank, Iran.

Tel: +00989133976412.
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remove or minimize business constraints, obstacles and continue. Near unity values, however, are more frequent
prejudices available in international economies relations. among the Mediterranean countries, indicating fewer
The aim of this kind of integration is to develop global opportunities for further trade integration with the
production and subsequently to specialize in domestic EU [5].
production, to obtain exchange revenues, to decrease Sousa (2011) studied Market Access in Global and
production expenses in regional level, to increase Regional Trade and develops a new method to measure
business, to save rare domestic resources, to distribute dif?culties in market access over a largesample of
optimum incomes, to increase efficiency in production and countries (both developing and developed), industries
business, to increase foreign investments and to make use and years. It also offers a renewal of the assessment
of comparative advantages [3]. of the impact of regional trading arrangements.
There are a lot of research about integration and They use a micro-founded gravity-type model of
globalization; some of them are as follow: trade patterns to estimate in particular the impact of
To study the effect of regional integration on national borders on revealed access to Northern
attracting foreign capitals, Najarzadeh and Shaghaghi markets by Southern producers. Also they found that
(2006), used generalized pattern of attraction for 8 dif?culties of market access for Southern producers
members of MENA during 1995-2000. Results showed that have experienced a noticeable fall during the last thirty
regional integration among Islamic countries of MENA years [6].
would increase the volume of mutual foreign direct Fidrmuc (2011) analyzed globalization and the
investments among the mentioned countries. This can be business cycles in China and selected OECD countries
considered a cause for more cooperation among region and used dynamic correlation analysis. They show that
countries [1]. dynamic correlations of business cycles of OECD
To study globalization and regional business countries and China are negative at the business cycle
integrations in Islamic countries of Middle East and north frequencies and positive for the short-run developments.
Africa, Elahi and Nahavandian (2005) considered demand Furthermore, trade and financial flows of OECD countries
isotropy (like Linder's theory and unlike classical business and China lower the degree of business cycle
theories e.g. HeksherUhlin theory) the main factor in synchronization within the OECD area especially at the
forming and developing business. Consequently, business cycle frequencies. Thus, different degree of
integration and disintegration of per-capita income plays participation in globalization can explain the differences
the most important role in increasing or decreasing between business cycles of the OECD countries [7].
business [4]. Raymond Mac (2006) studied the relationship
Stack (2011) Examined the trade prospects for the between business-regional agreement (e.g., AFTA) and
new European Union (EU) member states and the EU direct foreign investment. He showed that business
associated partner countries is an important issue in the integration encourage and improve direct foreign
context of European eastward enlargement and greater investment [8].
economic integration with its immediate neighbors. Willem (2011) in one paper with the title Regional
An out-of-sample approach to project trade volumes for Integration, Growth and Convergenceexamine empirically
twenty countries of interest is adopted using a gravity whether and how regional integration leads to
equation for a panel data set of bilateral export flows from convergence and growth amongst developing countries.
twelve EU countries to twenty OECD trading partners Using standard growth models for nearly 100 developing
over the 1992-2003 periods. The potential trade volumes countries over 1970-2004. He cannot establish robust
were calculated from a gravity model of new trade theory growth effects of regional integration as such at the
(NTT) determinants. The selected twenty countries aggregated level of analysis even after using alternative
prospects for further trade integration vis--vis the EU measures of regional integration. However, because he
can be gauged by expressing the trade volume projections finds that trade and FDI promote growth and because
as a ratio of actual trade volumes for each pair of regional integration tends to increase trade and FDI,
countries. The projected trade ratios for the ten new regional integration still has a positive impact on growth
member states are found to be multiples of actual 2003 in its members through the effects of increased trade and
levels, indicating that trade expansion looks set to investment on growth. Further, country-specific growth

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diagnostics do suggest that regional integration can be a GDI

binding constraint to growth as "deep" regional it

GROW = B + B LOG GDP + B +
approaches can help to address crucial rail, road, air and it 0 1 it 2 GDP
energy links amongst countries (e.g. in the East African
it
Community). His findings also suggest that initially high
DEBT FDI
levels of regional income disparities will lead to greater TRADEit
it it
decreases in disparities. B + B +B + it
3 GDP 4 GDP 5 GDP it
Findings of this article show that business behaviors
it it
of members of this statistical universe with both members
of Islamic Conference Organization and other countries
before and after globalization conform to Linder's Theory In model (1):
[9]. GROWit: Economic growth rate of country i in
In this article we will survey the effect of economic time t
integration between Iran and its northern neighboring Log(GDPit): Logarithm of Gross domestic production
countries on economic growth and welfare during of every country at the beginning of
1995-2009. period
Hypotheses proposed in this research include: GDIit/ GDPit: Ratio of gross domestic investment to
Economic integration of northern neighboring countries GDP of country i in time t
increases economic growth of these countries; Economic DEBTit/GDPit: Ratio of total foreign debt to GDP of
integration of northern countries increases direct foreign country i in time t
investment in these countries. FDIit/GDP it: Ratio of direct foreign investment to GDP
According to the obtained results, the mentioned of country i in time t
hypotheses will then be examined as follow andmaterial, TRADEit/GDPit: Ratio of trade to GDP of country i in
methods, results and discussions will be explained too. time t (business openness level)
it: The residual or waste
MATERIALS AND METHODS
In the second scenario, the dependent variable is
In this study to evaluate the effect of integration on countries GDP per capita and explanatory variables are
the long term economical growth of Iran and northern indexes like logarithm of GDP at the beginning of the
countries (Armenia, Azerbaijan, Turkmenistan, Russia and period, GDI to GDP, DEBT to GDP, TRADE/GDP which
Iran), the integration of time series and cross sectional represents trade liberalization degree and finally (TOT)
statistics during the years of 1995 and 2009has been (obtained from price index of exported goods divided by
used. The used statistics are from different sources price index of imported goods).
especially the statistical tables of WB (World Bank) [10]. The final form of this model to supply the effect of
To evaluate the gravity model, the software Eviews 7 was factors affecting economic growth is as follows:
used.
In this dissertation, after reviewing theories and GDI
literature, to determine the relationship between regional it

GDP = c + c LOG GDP + c +
integration and long-term basic economic it 0 1 it 2
growth,statistics time series based models are used. GDP
it
In this model, the dependent variable is GDP growth (2)
DEBT TRADE
which represents economic growth in the countries;
it it
Azerbayejani, 2002, Willem, 2011, Bamou, 2006 and Yin, c +c + c TOT + it
3 GDP 4 GDP 5 it
2003 also have used this variable for indicating economic
it it
growth [2, 9, 11, 12]. explanatory variables indexes are
logarithm of GDP at the beginning of the period,GDI to
GDP, DEBT to GDP, FDI/GDP and finally TRADE/GDP RESULTS AND DISCUSSION
which represents trade liberalization degree. These
explanatory variables in this model reflect the role of Two scenarios were proposed in this research. In the
integration, extrovert policies and trade liberalization first scenario, the effect of integration role, extrovert
degree. policies and trade liberalization level on economic growth

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Table 1: Test cross-section fixed effects of Iran and northern countries has been examined. In the
Statistic effect test First model Second model
second one, dependent variable is per capita gross
Cross-section F -0.72 183/59
production of countries; in this research, Eviews 7
Prob (%) 1 0
Software was used to assess gravity model.
Table 2: unit root test results To differentiate between Pannel or Pool models,
Null: unit root (assumes common unit root process) cross-section fixed effects test was used and results are
First model Second model shown in Table 1.
------------- ------------------
Method Unit Unit
As observed here, this test is not statistical in the
Levin,Lin& Chu t Test -4.81*** -5.53*** first model while it is very statistical in the second one.
Breitung t-stat 4.45 4.54 Thus, according to description of the above software, the
Null: unit root (assumes individual unit root process) first model is pool and the second one is panel.
Im, Pesaran& Shin W-stat test -3.74 -3.12***
Due to nature of variables used in this model and its
ADF- Fisher Chi-Square test 95.90*** 90.15***
PP- Fisher Chi-Square test 64.82* 44.23 nature in the form of time series, at first reliability of these
*&***Shows meaningfulness in level one and 10 variables were examined and then reliability test was used
as sufficient condition for model reliability in Table 2.
Table 3: Effect of integration on long-term economic growth of Iran and
Results of this table show that the calculated amount of
northern countries (Armenia, Azerbaijan, Turkmenistan, Russia),
scenario 1
the pattern is more than the critical figure in all tests and
Pattern variables Factor evaluation Standard deviation T standard thus the resultant pattern is a reliable pattern. In terms of
LOG(GDPit) -0.38 0.13 -2.83*** Breitung Test, null hypothesis also reflects reliability of
GDIit
0.30 0.10 2.98*** variables and since they are not statistical, null
GDPit
hypothesis is accepted. Therefore, this test also reflects
DEBTit
-0.20 0.04 -4.47*** lack of unit root in the model.
GDPit
After the models are recognized and no unit root is
TRADEit
0.13 0.02 6.47*** found, the models were evaluated (Table 3 and 4).
GDPit According to table 3, logarithm factor of gross domestic
FDI it
-0.36 0.12 -3.11*** production is -0.38 at the beginning of the period and is
GDPit meaningful in 1% level. Negative sign of this factor
AR(1) 0.56 0.08 7.10*** emphasized integration hypothesis; that is, increased
R-SQUARE =81%R-SQUARE ADJUSTED = 80%DURBIN-WATSON trade exchanges among studied countries and long-term
= 1.9
regional integration have some effects on economic
***Shows meaningfulness in level 10
integration and as time passes, various indexes especially
Table 4: Effect of integration on economic welfare of Iran and northern economic growth index gets integrated with each other.
countries, scenario 2 Ratio of gross domestic investment to GDP conforms
Pattern variables Factor evaluation Standard deviation T standard
to this theory and is completely meaningful; that is,
C0 -51193.74*** 3919.68 -13.06
domestic investment is of great importance in these
LOG(GDPit) 2289.206*** 166.02 13.79
GDIit countries and can cause economic growth. One unit
18.63*** 3.45 5.40
GDPit increase in this ratio can increase economic growth up to
DEBTit 0.3.
-6.43*** 1.71 -3.76
GDPit It is obvious that ratio of total foreign debt to gross
TOTit -4.20*** 0.87 -4.82 production is -0.20 and is meaningful in level 1%. That is,
TRADEit
-12.10*** 2.02 -5.97
if foreign debts of studied countries increase by 1%,
GDPit economic growth decreases by 20%.
Fixed effects (cross) Another variable used in this model is ratio of foreign
Armenia, destination latitude 4072.25 trade to gross domestic production. This variable reflects
Azerbaijan, destination latitude 1604.50 trade liberalization level in economic literature. Its factor
Iran, destination latitude -4538.77
in table 3 has positive sign and is highly related to
Russia, destination latitude -4682.17
Turkmenistan, destination latitude 3544.190 dependent variable (economic growth rate); that is, the
R-SQUARE=95% R-SQUARE ADJUSTED = 94% DURBIN- higher trade liberalization level is in studied countries, the
WATSON=1.99 ***Shows meaningfulness in level 10 higher economic growth will be.

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The ratio of foreign direct investment to GDP is also CONCLUSION

negative and is highly meaningful; that is, increased
foreign direct investment (new foreign investments minus Therefore, with regards to research method and the
expenses and loss of capital and asset) has had negative results obtained in tables 3 and 4, summary of results of
effects on economic growth of these countries. It means this research, as explained in details, is as follows:
that increased GDP in these countries hasnt increased Establishing regional integrations will, in long term,
simultaneously with foreign investment. However, have economic integration effects; over time, various
increased GDP in this case has ascended simultaneously indexes especially economic growth index will be
with trade. In some studies it has been showed that free integrated in these countries.
trade or foreign investment always has not have a Domestic investment between Iran and its northern
positive effect on economic growth. Gorg, 2002 showed neighboring countries is of great importance. However,
that at first, free commercial, had negative effect on gross domestic production in these countries hasnt
economic growth but after years it can help to increase increased simultaneously with foreign investment and it
economic growth. Bailliu (2000) found that capital flows has caused increased direct foreign investment to have a
can only enhance economic growth in countries with negative effect on economic growth of these countries.
sufficiently-developed financial sector [13, 14]. Thus, the role of domestic investment on economic
Thus, this study shows that the role of domestic growth of these countries is more important than that of
investment on economic growth of region countries is of foreign investment.
great importance in comparison with foreign investment. Also, the more trade freedom level is in the studied
Also, to remove self-correlation of this model, the variable countries, the more the economic growth will be.
AR was added to the model. Regional integration causes economic growth
In the second scenario, in table (4) after testing lots integration in region countries but it doesnt have a
of model with various variables, the best econometrics significant effect on integration of economic welfare level
model has been chosen. The effects of extrovert policies in these countries.
and global and regional integration on per capita gross Ratio of trade to gross domestic production has a
domestic production, which reflects economic welfare negative and meaningful relationship with economic
level in countries, have been studied. Studying the factor welfare. That is, as consumed, governmental and
related to GDP logarithm in this case reflects that although investment expenses decrease, economic welfare
regional integration cause economic growth integration in decreases too.
region countries, this issue hasnt had a significant effect It was recognized that extrovert policies have
on integration of economic welfare level in these positive meaningful effects on economic growth.
countries. Another difference is that the ratio of trade to Therefore, region countries must, to achieve stable
GDP has a negative meaningful relationship with economic growth and development, pay more attention to
economic welfare. That is, the lower the denominator development of regional trade arrangements so as to
(includes peoples consumption, government expenses strengthen investment trend and establishment of
and investment) is, the higher the given fraction is and occupational opportunities. As an example, regarding the
thus the lower economic welfare will be. Therefore, the important position of Armenia as a member of Iran and
higher trade role is in GDP, the lower society welfare will northern countries and its location in North-South
be. Trade transaction rate and debt level to per capita GDP Corridor and the fact that its imports is higher than its
has also a negative relationship with per capita GDP. exports, there is suitable field to recognize target markets
Thus, it can be said that the higher the import unit value in this country.
is in the denominator of trade transaction rate variable Economic liberalization has a positive effect on GDP
(consisted of ratio of export unit value index to import unit growth of the selected countries. The more the economic
value index), the higher economic welfare will be. Also, openness increases, the more the international trade
increased debt levels to GDP decreases per capita GDP. volume increases because they will enjoy effectiveness
In this scenario, not only does increased domestic resulted from specialized production. In other words, the
investment in these countries increase economic growth opener the economic is, the more mutual capital increases;
(table 4), but also it has positive meaningful effects on and members must increase interaction among themselves
economic welfare. by reducing limitation especially in the field of trade

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policies. Also, countries, in globalization trend, must Regarding the second model (Armenia, destination
design more balanced policies so as to improve altitude), Armenia has a better condition in terms of
international competitiveness and markets openness. economic welfare in comparison with other countries
Its worth mentioning that removing competition barriers around the Persian Gulf. Therefore, this country can be a
is now a main issue in the world and is considered as a suitable pattern for the studied countries to improve their
tool to achieve desirable economic growth and stable socio-economic conditions.
development. Reviewing time and statistical series of economic
According to results of Table (4), decreased share of indexes of Iran and Armenia reveals the fact that
trade from GDP increases peoples welfare. Thus, policies economic relations are in a good position; however, there
must try to increase their GDP which includes government are a lot of fields for investment and these investments
expenses, consumption and investment in spite of should be direct so that they can double economic growth
increase in trade among Iran and northern countries. rate.
Increased foreign investment has reduced economic Concerning important position of Armenia and its
growth and thus countries tend to absorb domestic location in north-south corridor, it is recommended that
investment. For, as observed before, the ratio of domestic necessary fields must be provided for performing
investment to GDP has a positive and meaningful interactions among free trade and industrial zones of
relationship with economic growth and welfare. Therefore, these two countries.
trade policies in these countries must attract domestic There are a lot of important elements in integration of
investment. these two countries. Thus, necessary fields must be
Also, increased foreign investment among these provided to introduce investment opportunities by these
countries is said to, due to various reasons including rule two countries through holding scientific meetings.
limitation and various viewpoints, increase prices,
Nowadays, Iran direct foreign investment act isnt as
establish monopoly and damage savings and thus capital
easy as that of Armenia. Thus, it is recommended that
in long term. These people believe that foreign investment
an opportunity must be provided for Armenian
decreases savings and investment in developing
merchants to invest in free trade zones and industrial
countries by creating a monopoly and preventing
areas based on special governing rules. In this case,
competition; because most part of profits resulted from
attractiveness of attracting foreign investment will
foreign investment exits the country instead of re-
increase significantly and will cause economic growth of
investment. Moreover, income of these investments goes
both countries.
to some groups who have fewer saving. Foreign
Since northern neighboring countries have different
investments reduce investment rather than increasing it
features (regarding selection of trade partners), it is
and thus increase prices through increased demand.
suggested that, by emphasizing Iran-Armenia relations,
Foreign investment opponents believe that entrance of
other northern countries will be taken into consideration
foreign investors destroys competition market, creates
monopoly and finally makes the society get accustomed in trade transactions.
to useless consumption. In terms of improvement of Since importing goods in Armenia is more than
exchange status, its opponents believe that this exporting goods, there is a suitable field for recognizing
condition is temporary and will act in a reverse direction target markets in Armenia for Iranian merchants. Thus,
in the long-term. Economic bipolarization is another Iran Trade Development Organization should try more in
reason why opponents dont like foreign investment. this field.
That is, these investments cause a limited number of
people to work in modern economic sections and receive ACKNOWLEDGMENT
relatively good incomes and thus there will appear a big
difference between their salary and that of other Prof, Toros Torosyan: Head of International Economics
employees. department, Economics faculty, Yerevan State University.
With regards to the relationship between trade
transactionsRate with economic welfare in studied Dr, SeyedAbdolmajidJalaee: Head of Department of
countries, increased import unit value increases economic Economic and ManagementbahonarUniversity.
welfare. Thus paying attention to this topic can improve
per capita national gross production. Ms. Hivaasadikia: for her statistical helps

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