March 2002

THE IDB AND INTEGRATION

IDB SUPPORT FOR INTEGRATION IN LATIN AMERICA AND THE CARIBBEAN

Programs to strengthen cooperation and boost competitiveness

The promotion of regional integration is one of the founding mandates of the Inter-American Development Bank, together with the economic and social development of Latin America and the Caribbean.

For the IDB, integration has many political and economic advantages. As a means of strengthening trust and cooperation among countries in the region, integration helps neighboring nations overcome old rivalries and misgivings. In the Western Hemisphere integration has even spawned mechanisms to defend democracy. Through regional integration participating countries improve their bargaining position vis-à-vis third parties in global negotiations.

In economic terms, regional integration is also an effective instrument for expanding markets and achieving economies of scale, two decisive factors in attracting capital and stimulating investments that help countries boost productivity and generate jobs. It also creates opportunities to diversify exports and reduces the risks of depending on the foreign sales of a few products whose price fluctuations Latin American and Caribbean countries cannot control or influence.

Over the past decade integration intensified at a regional level at the same time as countries in this region became increasingly interested in forging new trade agreements with industrialized nations in North America and Europe and in participating fully in the multilateral trade system. The IDB assisted in these efforts, supporting borrowing member countries’ preparations for negotiations, the implementation of agreements and the adaptation of national economies to changes at the regional and global levels.

Together with the Organization of American States and the U.N. Economic Commission on Latin America and the Caribbean, the IDB is a member of the Tripartite Committee that provides technical assistance to the groups negotiating the Free Trade Agreement of the Americas, a project to establish a hemispheric free trade zone by 2005.

The IDB pays special attention to the participation of small countries in trade negotiations. Its Trade Sector Facility offers fast and flexible financing to help borrowing member countries strengthen their technical capabilities to negotiate trade agreements and improve their capacity to draft, analyze and evaluate trade policies. In May 2001 it approved its first loan under this facility, a $5 million operation for Guatemala.

Currently the IDB is supporting two ambitious regional integration ventures, Plan Puebla Panama in Mesoamerica and the South American Infrastructure Integration initiative, which entail not only closer trade ties but also joint development and physical infrastructure projects.

A Mesoamerican Plan

Plan Puebla Panama was launched last year by Belize, Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua and Panama to accelerate economic and social development and consolidate integration among the seven Central American countries and Mexico’s nine southern and southeastern states, a region covering more than 1 million sq. kilometers and 65 million people.

This region known as Mesoamerica has higher levels of poverty than the rest of Latin America. Its deficient infrastructure hampers the region’s economic performance. Its geography exposes its people to all kinds of natural threats, from hurricanes to earthquakes.

By launching Plan Puebla Panama the Mesoamerican governments chose to work together to solve long-standing structural problems and forge, as Mexico President Vicente Fox said, an alliance for development.

The eight participating countries agreed on eight key areas or "Mesoamerican initiatives" in which they could cooperate fruitfully. The selected areas include sustainable development, human development, natural disasters prevention, tourism, trade facilitation, highway integration, electricity interconnection and telecommunications development.

The region’s leaders stipulated that Plan Puebla Panama projects must be clearly regional in scope, practical, environmentally sound and respectful of local communities’ wishes. Projects will be supported by a consultation program to encourage civil society participation in its various phases.

To date, Plan Puebla Panama’s portfolio includes 29 project profiles. One of the first ones to advance was the Electricity Interconnection System for Central American Countries (SIEPAC), a project that had first been proposed nearly three decades earlier. In November 2001 the IDB reformulated a $170 million financing package to support the creation of a regional wholesale electricity market and a more reliable regional power transmission grid that will join Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama. SIEPAC is expected to encourage investments in modern and efficient power plants that will help cut the high cost of electricity in the region. Under the regional integration plan, this grid will eventually connect to transmission grids in Mexico and Belize.

Plan Puebla Panama goes beyond trade and infrastructure integration. Its initiatives foresee projects to boost economic and social development in rural, indigenous and Afro-Caribbean communities where poverty is deeply ingrained. These projects would include community participation in environmental conservation and sustainable management of natural resources and the strengthening of local government institutions.

Earlier in 2001 the IDB approved a $300,000 technical cooperation and established a special unit within its Regional Operations Department II to support Plan Puebla Panama.

South American Integration Initiative

In September 2000 the presidents of 12 South American countries agreed on a regional infrastructure integration initiative know by its Spanish acronym, IIRSA, which was launched to improve coordination of their infrastructure development plans, modernize their regulatory frameworks and harmonize their policies for three key sectors: transportation, energy and telecommunications.

IIRSA seeks to bring to a regional level the intense process of physical and economic integration that took place at binational and sub-regional levels in South America over the past decade as a means to raise productivity and competitiveness.

The South American initiative is based on 12 "integration axes" or development hubs and six "sector integration processes" that are not limited to upgrading the highways, ports and airports that connect this region with the rest of the world. IIRSA is aimed at improving the regulations for the energy and telecommunications sectors and the markets for services such as shipping, insurance, warehousing and licensing. IIRSA also supports the formation of regional electricity markets as a step towards regional power integration. Its projects will seek to improve living standards and create economic opportunities in the communities along the integration axes, taking into account the environmental and social impact of public works and including consultation and participation mechanisms.

To date, implementation of three of the 12 axes is underway: Mercosur-Chile, Andean and Inter-oceanic, which include 10 of the 12 countries in IIRSA. The process of integration of South America’s electricity markets has also begun. Four more axes and the remaining five sector integration processes are scheduled for implementation this year.

The IDB, along with the Andean Development Corporation and the Financial Fund for the Development of the Plate Basin, has provided technical and financial support to IIRSA. In January 2002 the IDB approved a $750,000 grant for the initiative’s secretariat to finance the organization of meetings, seminars and technical studies, as well as the work of the technical groups that coordinate IIRSA projects. The IDB’s Regional Operations Departments I and III have established a special unit to support the South American initiative.

Integration and Regional Programs Department

The IDB’s Integration and Regional Programs Department provides technical support to the region’s trade and integration initiatives, including, among others, Plan Puebla Panama and IIRSA. It also supports the FTAA negotiations and the strengthening of sub-regional pacts. Through its Integration, Trade and Hemispheric Affairs Division, it works on the IDB’s regional projects, the implementation of the new Trade Facility and other integration projects.

The department also organizes the Regional Policy Dialogue on Trade and Integration and carries out studies on these issues. The department’s Buenos Aires-based Institute for the Integration of Latin America and the Caribbean (INTAL) has contributed to the region’s integration for more than 30 years through its research and by providing technical support and training. INTAL works with the World Trade Organization in financing WTO training courses for trade negotiators in the region.

INTAL also manages the INTAL-Mercosur Rules Database, the INTEG Bibliographic Database and the DATAINTAL System of Trade and Statistics of the Americas.