Friday, June 17, 2011

Historic Antecedents of MERCOSUR and the Challenge of Liberalization

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Historic Antecedents of Mercosur and the Challenge of Liberalization

Shortly after the creation of the European Community, Latin America started its process in working toward regional integration. To remove trade barriers, and ensure the free circulation of goods in 160, the treaty of Montevideo established the Latin American Free Trade Association (ALALC). Liberalization was starting to flourish; however it proved to be controversial and difficult. The end of 178 needed a restructuring of the Association.

The market liberalization programs starting in the 170’s (and continuing in the 180’s in Mexico and 10’s in Brazil and Argentina) adopted by a number of Latin American countries were meant to improve industrial efficiency which was hampered from developing due to the inward looking Import Substitution Strategies faced by many of the Latin American Governments. Trade reforms were implemented and many of these countries not only joined treaties of regional integration but also engaged in substantial trade liberalization. Privatization and deregulation were measures on the government agendas to increase domestic competitiveness and proceed with the liberalization of trade.

Not all agree however with the rapid transition of trade liberalization. In Chile, for instance, one of the first countries to start adopting Neoliberal policies, many of its domestic industries suffered. During liberalization, an effect contrary to stabilization was taking place as more and more firms went to bankruptcy. The costly social effects of such move was taken upon the government, who was unable to meet the with the social burden. The question of how transition should be made is still depending on how fast trade liberalization proceeds.

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Under protectionism, Latin America was not totally stagnant economically . However Neoliberal doctrines and the shift to a more dynamic and integrated trade pattern has revived the region . Import substitution was definitely being questioned as the belief that it had gone too far in restricting an open economy in countries.

Regional integration was backed by many as a way of deepening economic integration in the hemisphere. The dynamic integration process was revived by political change underway in Southern countries. Democratization of Latin America, disdaining the national security doctrine, a loosening of foreign debt tension were effects in the renewed economic values .

Deepening integration therefore was successfully followed with structural reforms and programs that stabilized and increased the international capital mobility. Domestic producers were more exposed to international competition from imports and policy makers had their freedom reduced in respect to designing targeted responses to economic restructuring. Political and security concerns play a decisive role in trade arrangements taking in consideration the many net economic losses there could be.

The main incentive to design a common market in preferential agreements is the dynamic gains obtained from liberalization. Regional integration is definitely a constructive way to improve allocation of resources and higher economic growth through the use of scale economic production. Higher technology and investment are gains that are brought by the larger markets. Other gains involve the bargaining stance against other trade partners and credibility in domestic policies implemented by the Government.

Trade liberalization was extremely limited under the Latin American Free Trade Association (LAFTA), which was established in 160 . Greater problems for unbalanced terms of trade arose due to the wider range of size and economic development of the eleven countries in LAFTA. Because of LAFTA’s intention in deepening Import Substitution strategies (which in a way is opposed to free trade) among country members, many of the protective tariffs were kept, and the attempt of integration was unsuccessful.

In 180 LAFTA was ended and the Latin America Integration Association (LAIA) was then created in order to promote bilateral trade between member countries through bilateral and multilateral agreements, with the objective of achieving regional free trade. In the last 40 years, Latin America countries have participated to the creation of new

economic blocks (free trade areas, customs unions and common markets) as they responded to the demands of new dynamics to the world economy. An economic preference zone was established and regional integration was stimulated by the growth of bilateral and multilateral agreements.

However as previously mentioned, because of the sizes of the eleven countries’ economies other factors led to the frustration in this attempt. Because of the overly ambitious definitions of commitments like the establishment of a free trade zone, and later the establishment of a Latin America common market. It caused an imbalance between the broad geographic territory and the objectives of deepening. It generated a big distance between the articulation of commitments and the actual conventional commitments.

In 186 respective presidents Afonsin from Argentina and Sarney from Brazil agreed to form a committee in order to achieve economic integration. A “Preferred association” was proposed by Argentina and Brazil displayed an interest in pursuing the economic integration with Argentina .

In 186, Brazil and Argentina started negotiations in the Integration Program for Economic Cooperation (PICE) that had as its objectives the improvement of their countries’ economies by enlarging their markets and accelerating economic development. More efficient use of resources and the preservation of the environment were also addressed. Communication improvement, coordination of macroeconomic policies and harmonization of different sectors of the economies such as capital goods, automobile, wheat industries were among the objectives of the program . Technology and energy supply were also included in the regulation of numerous industries and thus economic integration . The twenty four protocols signed during PICE’s first three years of existence was meant to expand trade, encourage bilateral investment flows, foster cooperation in areas such as nuclear energy and biotechnology and facilitate transportation. The idea of an economical and political past was met with a lot of skepticism and many doubts because of the history of such pacts in Latin America. In 186, the only viable economic pact in the world was the European Common market. PICE successfully restored Argentinean and Brazilian trade flows reached prior to the external debt crisis of the early 180’s , but the liberalization process did not proceed with the same velocity especially after the non-conflicting phase of reciprocal trade liberalization process was worn out. The establishment of a common market moving to stabilization was still the long-term objective.

It can be said therefore that regional integration was a fundamental requirement to insure and speed up economic development

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