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The integration imperative
By Paul Constance

Should people in Latin America still care about regional integration?

With media attention focused on fiscal crises, terrorism, rising poverty and contentious elections, does it really make sense to talk about obscure negotiations concerning fitosanitary standards or taxes on auto parts?

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The answer to both questions, according to Beyond Borders: The New Regionalism in Latin America, is an emphatic yes. Released in early October, the 2002 edition of the IDB’s Annual Report on Economic and Social Progress in Latin America and the Caribbean offers a detailed analysis of the wave of integration agreements that revolutionized the region’s economies during the 1990s.

More importantly, the study argues that Latin America’s future economic and social prosperity will depend in large measure on how the region handles a crucial series of integration negotiations that will come to a head in the next few years. Only by embracing a much more ambitious level of integration in trade, finance, regulations and physical infrastructure can Latin America unleash its potential for development, according to the report.

Speaking to reporters during a presentation of the report, IDB President Enrique V. Iglesias underscored the urgency of this task. “We are on the threshold of a very important time for Latin America because decisions will be made that will affect the life of our region and our development opportunities for many years,” he said. “We have to be ready to identify problems, the cost and the benefits of each one of these options, and then we have to ready ourselves, as the Europeans well know, for the structural reforms that are implicit in Latin America's international insertion into these new schemes.”

The notion that integration initiatives both require and reinforce broader structural reforms in Latin America’s economies is one of the themes explored in the new study. “There are a number of benefits that the countries are looking for from regional integration,” Robert Devlin, deputy manager of the IDB’s Integration and Regional Programs Department and one of the principal authors of the study, said at the presentation of Beyond Borders. “It’s seen as an integral part of the structural reform process, helping countries to further open up their economies to the world, to ‘lock in’ their policy reforms, and to change institutions.”

Integration for laymen. Beyond Borders offers an accessible and highly practical overview to a subject that is often obscured in abstract technical jargon and impenetrable statistics. The introductory chapter provides a snapshot of where the region stands amid the thicket of global, hemispheric, regional and subregional integration agreements, along with an overview of the pending integration agenda.

Part I of the study focuses on the various dimensions of regional integration. After reviewing the results of the “new regionalism” that took hold in Latin America in the 1990s, the authors look beyond trade integration and related market access and consider other important dimensions of the subject. These include the institutional requirements necessary for integration agreements to run smoothly, and the urgent and unfinished work of financial and infrastructure integration.

Part II of Beyond Borders discusses the challenge of macroeconomic coordination. After reviewing the costs and benefits of different types of macro coordination, the obstacles that make it difficult, and the region’s experience in this area until now, the study considers the particular problems of exchange rates and monetary policies. In a timely analysis of an issue that has recently hampered the Mercosur customs union, the authors analyze what happens when countries bound by trade agreements have exchange rate disagreements. They also consider the potential for the deepest possible form of exchange rate coordination: the formation of currency unions.

The third and final section of the study is devoted to exploring the effects of regional integration on foreign direct investment, productivity, and inequality. The authors consider whether different types of regional integration agreements (for example, so-called “North-South” vs. “South-South” agreements) produce different impacts. Using concrete examples from Latin America and other regions, they consider the potential consequences of regional integration agreements with industrialized countries.

The road ahead. Beyond Borders offers a detailed assessment of the 1990s, when many Latin American governments concluded that the benefits of regional integration could be enhanced by linking up with industrialized countries in reciprocal free trade agreements. Mexico led the way by joining NAFTA. Several other countries struck bilateral accords with Canada and the European Union, and nearly all the hemisphere’s countries are participating in negotiations leading toward the Free Trade Area of the Americas (FTAA).

However, the study warns that “the easy stage of integration is now over,” and that countries will have to work on multiple fronts in order to preserve and expand the benefits of recent regional initiatives. Subregional blocks—including Mercosur, Caricom, the Central American Common Market and the Andean Community—must proceed to deepen their trade relationship if they want to remain relevant within the framework of the FTAA. “None of Latin America’s subregions is near to being a true customs union,” the authors write. “The imperfect status of the region’s customs unions has created precisely the type of costs that the system is supposed to eliminate.”

Beyond Borders argues that the completion of a balanced and comprehensive FTAA agreement by 2005 is a crucial strategic objective for Latin America and the Caribbean. Such an agreement promises to provide more secure market access to North America, reduce trade diversion within the subregions, improve productivity, stimulate foreign direct investment, and strengthen cooperation with North America, among other benefits. The authors also maintain that the increasing number of bilateral initiatives under development in the region can function as building blocks for the FTAA, so long as agenda-setting countries take into account the needs and preferences of all countries rather than catering to narrow commercial interests through “hub and spoke” trade arrangements.

See the links at right to read more about Beyond Borders, including the full text of the first chapter. A print version of the full study can be ordered by clicking on the link above.