LATIN AMERICAN COOPERATION
LATIN AMERICAN COOPERATION
Economic integration in Latin America has taken some interesting twists over the years. As Map 11.2 shows, two of the original groups, LAFTA and C ARIFTA, have changed names and focus. In spite of the evolution, the initial reason for integration remains. The post-World War II strategy of import sub- stitution to resolve balance-of-payments problems was doomed because of Latin America's small national markets. Therefore the feeling was that some
form of economic cooperation was needed to enlarge the potential market size so that national firms could achieve economies of scale and be more competitive worldwide.
A study by the Inter-American Development Bank (IDB) identified three types of integration in Latin America: a free trade area, a common market, and a partial economic preferences model.21 The free trade model is best
illustrated by LAFTA and CARIFTA. LAFTA was formed in 1960 during the time when the EEC was being organized, and CARIFTA was formed in 1965. However, neither of these efforts endured, the major reason for failure being that the member countries traded more with the United States than with each other, so there was not as much incentive as exists among the members of the EC.
The second model came into existence in Latin America because of the failure of the free trade area model. The Andean Group was formed by several members of LAFTA that were close to each other geographically, as noted in Map 11.2, and felt that it was necessary to have more than just free trade. They included a common external tariff, restrictions on the inflow of foreign investment, and the integration of economic and social policies. These measures resembled the objectives of the Central American Common Market (CACM) and CARICOM. The Andean Group decided to develop subregional industries and allocate these industries among the members of the group, which would in turn enable more even development. However, political and economic problems of the region have kept it from achieving the full benefits of integration: Less than 5 percent of its total trade is intrazonal. In 1987 the Group relaxed its restrictions on foreign investment in hopes of attracting more outside capital. In addition, its original goal of establishing regional industries has given way to assisting small and medium-sized industries in the region.
The third model, partial economic preferences, is best illustrated by the Latin American Integration Association (LAIA), which consists of most of the countries originally in LAFTA. By 1980 it was clear that LAFTA was not working: Only 14 percent of annual trade among members was the result of LAFTA benefits, and most of the benefits were accruing to Mexico, Brazil, and Argentina. A major goal of LAFTA was to eliminate all tariff and non-tariff barriers among countries and gradually move Latin America toward a common market. However, that program proved to be too rigid and ambitious. As a result, the LAIA was established in 1980. LAIA is much more flexible and less ambitious than LAFTA, and it gives member countries an opportunity to establish a series of bilateral agreements that may be extended to other countries if desired. This allows countries with common interests to progress faster than might be the case when disparate members have to compromise, thereby diluting the effectiveness of the agreement. However, by 1988 only 10.7 percent of the trade of LAIA countries was intrazonal. Instead of across-the-board tariff cuts, LAIA set up a more flexible regional tariff preference and other forms of economic cooperation, but it did not set a timetable for the full establishment of a common market.22
A more ambitious goal of regional economic integration is the "Enterprise for the Americas," a dream of U.S. President Bush to establish a free trade area that includes all of the nations of North and Latin America. As will be discussed in the case at the end of the chapter, there is an initial attempt under way to establish a free trade area involving Canada, the United States, and Mexico. By the end of 1994, Brazil, Argentina, Paraguay, and Uruguay hope to eliminate all tariff barriers so that they can establish a limited free trade area. Tariffs are to be lowered by 20 percent a year until they are eventually eliminated, and the four governments also hope to eliminate exceptions to the general rule so that the tariff cuts become more widespread. It is hoped that these interim steps will pave the way to broader cooperation.
The "Enterprise of the Americas" is not an attempt to establish a European-style common market but to establish a more limited free trade area. Two things that have enhanced the possibility of such a union are first, the establishment of democratic forms of government in nearly every American country and, second, the move toward replacing state protectionism with import liberalization and the privatization of resources. The thirteen members of the Caribbean Community (CARICOM) have
strengthened their cooperation by aiming to remove most of their obstacles to integration by 1991. The plan calls for the free movement of goods and
capital within the region, a common external tariff, revised rules of origin, harmonization of investment incentives, coordination of policies relating to the location of trade and business, coordination of financial policies, and creation of a monetary union by 1995. The speed of change taking place in Europe and strong growth in Asia have made the CARICOM members realize that they need to move ahead quickly or be left behind.
Economic integration in Latin America has taken some interesting twists over the years. As Map 11.2 shows, two of the original groups, LAFTA and C ARIFTA, have changed names and focus. In spite of the evolution, the initial reason for integration remains. The post-World War II strategy of import sub- stitution to resolve balance-of-payments problems was doomed because of Latin America's small national markets. Therefore the feeling was that some
form of economic cooperation was needed to enlarge the potential market size so that national firms could achieve economies of scale and be more competitive worldwide.
A study by the Inter-American Development Bank (IDB) identified three types of integration in Latin America: a free trade area, a common market, and a partial economic preferences model.21 The free trade model is best
illustrated by LAFTA and CARIFTA. LAFTA was formed in 1960 during the time when the EEC was being organized, and CARIFTA was formed in 1965. However, neither of these efforts endured, the major reason for failure being that the member countries traded more with the United States than with each other, so there was not as much incentive as exists among the members of the EC.
The second model came into existence in Latin America because of the failure of the free trade area model. The Andean Group was formed by several members of LAFTA that were close to each other geographically, as noted in Map 11.2, and felt that it was necessary to have more than just free trade. They included a common external tariff, restrictions on the inflow of foreign investment, and the integration of economic and social policies. These measures resembled the objectives of the Central American Common Market (CACM) and CARICOM. The Andean Group decided to develop subregional industries and allocate these industries among the members of the group, which would in turn enable more even development. However, political and economic problems of the region have kept it from achieving the full benefits of integration: Less than 5 percent of its total trade is intrazonal. In 1987 the Group relaxed its restrictions on foreign investment in hopes of attracting more outside capital. In addition, its original goal of establishing regional industries has given way to assisting small and medium-sized industries in the region.
The third model, partial economic preferences, is best illustrated by the Latin American Integration Association (LAIA), which consists of most of the countries originally in LAFTA. By 1980 it was clear that LAFTA was not working: Only 14 percent of annual trade among members was the result of LAFTA benefits, and most of the benefits were accruing to Mexico, Brazil, and Argentina. A major goal of LAFTA was to eliminate all tariff and non-tariff barriers among countries and gradually move Latin America toward a common market. However, that program proved to be too rigid and ambitious. As a result, the LAIA was established in 1980. LAIA is much more flexible and less ambitious than LAFTA, and it gives member countries an opportunity to establish a series of bilateral agreements that may be extended to other countries if desired. This allows countries with common interests to progress faster than might be the case when disparate members have to compromise, thereby diluting the effectiveness of the agreement. However, by 1988 only 10.7 percent of the trade of LAIA countries was intrazonal. Instead of across-the-board tariff cuts, LAIA set up a more flexible regional tariff preference and other forms of economic cooperation, but it did not set a timetable for the full establishment of a common market.22
A more ambitious goal of regional economic integration is the "Enterprise for the Americas," a dream of U.S. President Bush to establish a free trade area that includes all of the nations of North and Latin America. As will be discussed in the case at the end of the chapter, there is an initial attempt under way to establish a free trade area involving Canada, the United States, and Mexico. By the end of 1994, Brazil, Argentina, Paraguay, and Uruguay hope to eliminate all tariff barriers so that they can establish a limited free trade area. Tariffs are to be lowered by 20 percent a year until they are eventually eliminated, and the four governments also hope to eliminate exceptions to the general rule so that the tariff cuts become more widespread. It is hoped that these interim steps will pave the way to broader cooperation.
The "Enterprise of the Americas" is not an attempt to establish a European-style common market but to establish a more limited free trade area. Two things that have enhanced the possibility of such a union are first, the establishment of democratic forms of government in nearly every American country and, second, the move toward replacing state protectionism with import liberalization and the privatization of resources. The thirteen members of the Caribbean Community (CARICOM) have
strengthened their cooperation by aiming to remove most of their obstacles to integration by 1991. The plan calls for the free movement of goods and
capital within the region, a common external tariff, revised rules of origin, harmonization of investment incentives, coordination of policies relating to the location of trade and business, coordination of financial policies, and creation of a monetary union by 1995. The speed of change taking place in Europe and strong growth in Asia have made the CARICOM members realize that they need to move ahead quickly or be left behind.
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