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MERCOSUR: Potential Dwarfed by Politics

Publié le 1 octobre, 2007 | Pas de commentaires
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In the 1980’s, an era of rapid globalization, South American countries joined together to form the “Mercado Comun del Sur” (MERCOSUR), the “Common South Market”, in an attempt to strengthen their position in international trade (1). However, political disruptions and asymmetries have been holding back the bloc’s potential growth. How is MERCOSUR to remain a relevant player in international trade?

Make trade fair « dumping » campaign
Christian Guttier, Make trade fair
« dumping » campaign
, 2006
Certains droits réservés.

The close commercial and political ties between Argentina, Brazil, Paraguay and Uruguay were the cornerstone of MERCOSUR, an economic bloc established to improve the economies and promote development in the four South American countries. By November 1985, Brazil and Argentina had reached a mutual agreement (“Foz de Iguaçu Declaration”) that set the foundations for the economic bloc. Three years later, Uruguay joined and in March of 1991, MERCOSUR was officially created in Paraguay (Asuncion City), also to become a constituent member of the bloc. Since the late 1990’s, other South American countries have associated themselves to MERCOSUR, but not necessarily as full members. These nations include Chile, Bolivia, Venezuela, Colombia, Ecuador, and Peru and among them Venezuela, Bolivia, and Ecuador are currently negotiating to obtain full membership.

During its inception, the four founding MERCOSUR countries agreed to three main goals:

  • Free circulation of goods, services and production factors within the block’s 13 Million sq. km territory and the elimination of internal customs fees and restrictions;
  • A fixed fee for products from other countries or blocks and a coordination of common foreign policy with regard to other International bodies; and
  • Macroeconomic policy coordination in order to ensure adequate free market behaviors among member countries.

Unfortunately, these objectives are not feasible in the short term. Although the Council has diligently worked on the establishment of a customs union, which ensures free market conditions, its progress is stymied by discord among member states. Originally, all member states believed that MERCOSUR would bring economic stability to the region. However, these shared ideals were quickly dashed for two reasons: first, political stability in the region depends on the autonomy of each member state more than it does on the development of MERCOSUR, secondly, some unavoidable asymmetries exist that make it difficult for members to reach a consensus.

In spite of Uruguay achieving a degree of political stability, the same cannot be said for Argentina, Paraguay and Brazil. Widespread corruption together with an enduring breach between the rich and the poor brings about political uncertainty, which, in turn, affects foreign investment to these countries. Argentina, for instance, still suffers the consequences of the last economic crisis (2000-2003), which brought about the early departure of President De La Rua (2). In the case of Paraguay, its democracy suffered severe setbacks in the 1990’s. Brazil, if compared to Argentina and Paraguay, showed less political and economical disruption but nevertheless, political scandals in the government and an extremely high poverty levels, have affected the credibility of the government. All in all, these countries have a lot to do in order to quell social unrest and violence.

Brazil, the most populous country on the continent, has 186 million inhabitants; Argentina has 39 million, Paraguay 6.7 million and Uruguay only 3.5 million. This enormous population disparity has a severe impact on economic factors, such as market volumes, workforce sizes, and productivity.

Brazil has a large territory, bordering almost all South-American countries (in fact, Chile is the only country not adjacent to Brazil). Although Brazil does not have access to the Pacific Ocean, its unique geographic location facilitates commerce not only within South America but also with other continents. Though Argentina is not as vast as Brazil, it is still a large country and borders five countries. This may not seem to be a disadvantage within the South American context. However, when it comes to commerce with overseas countries, Argentina’s location, in the south of the continent, makes trade with Argentina more expensive than with Brazil. On the other hand Uruguay and Paraguay combined, barely surpass half a million sq km in area. Their geographic location forces them to concentrate their trade transactions on Argentina and Brazil. These asymmetries raise the question of the bloc’s relevance for a nation like Brazil, which does not need MERCOSUR to meet its economic needs. Brazil has a huge industrial base and sustainable trade relations with nations outside South-America. Argentina and Uruguay, though on a much lower scale, possess a thriving agricultural sector that Brazil cannot match, given its soil and climatic conditions. Paraguay, for one, is important to the common market as it benefits from a vast, unexploited hydro energy resource.

Argentina and Brazil: A Perfect Alliance?

Brazil and Argentina are the natural leaders of the region, not only because they played a key role in the creation of MERCOSUR, but also due to their large economies and resource pools. (3) Brazil and Argentina share the important responsibility of ensuring the success of the bloc. Further the consequence of their actions and their observance of MERCOSUR’s directives set crucial precedents for the whole economic bloc. So far, both countries have adequately managed to keep the bloc afloat by creating regulating transactions that help to smooth commerce and improve the condition of various industries. However, despite an excellent diplomatic relationship, commercial strains between the two partners remain. For instance, while Brazil’s strong industrial output could significantly decrease Argentina’s fiscal and commercial balance, Argentina, which has considerably lower population, is not capable of ensuring levels of consumption that would profit Brazil’s industry.

Unfortunately, both countries are unable to come up with the appropriate macroeconomic mechanisms to coordinate their trade activities. Such mechanisms would regulate the free interchange of goods and services, maintaining the fiscal and commercial balance of both countries so that commerce remains flexible. These mechanisms also need to correlate with joint investment policies and ensure that the cyclical issues of the individual parties do not greatly affect the potential of the bloc. In other words, how Argentina and Brazil manage currency exchange and monetary policies, while synchronizing economic cycles, is vitally important.

What about the others? Uruguay and Paraguay, on the other hand, are demanding more flexibility from Argentina and Brazil. Uruguay has a notable agricultural output conveniently positioned between Brazil and Argentina, linking both countries and extending their natural frontier. Uruguay has also been politically stable since 1985, a critical attribute when it comes to dispute arbitration. Paraguay, on the other hand, is not showing signs of stability, and has a less developed economy compared to the other members. Unquestionably, Paraguay and Uruguay carry the heaviest of the bloc’s asymmetries given their size, development and geographic location.

New Partnerships: Strategic Alliance or Political Disruption?

Venezuela, Bolivia and possibly Ecuador are the newest members to the bloc. It is clear that Venezuela’s rich oil reserves would greatly benefit the economic union. But, what about stability? South America has taken a notable turn to the left of the political spectrum with the democratic election of many leftist parties. Currently, Colombia and Paraguay are the only countries with a conservative government. The political left has had a varying impact throughout South America. Uruguay, Brazil, Peru, Chile, and Argentina are ruled by moderate left (socialist) governments, meaning they respect private property and free market principles. However, Ecuador, Bolivia and Venezuela have adopted “radical” leftist (i.e. communist) governments, which have weakened their diplomatic relationships outside MERCOSUR. These governments have a negative impact on the entire region, isolating them from the international community at large. Bolivia, for instance, is attempting to expropriate foreign owned oil companies, which are partly owned by Brazilian corporations. Such a move is not congruent with its attempt to join MERCOSUR. Similarly, Venezuela is critical of the Brazilian government, while Ecuador is aligning with Venezuela’s radical position (4).

Although Venezuela’s oil and Bolivia’s gas and minerals could add fuel to MERCOSUR and spur economic growth in South America, their radical governments could also cause great political unrest within the bloc.

New Horizon, Same Challenges

MERCOSUR’s potential is undeniable, and it’s just a small example of South America’s enormous economic prospects given the continent’s resources and diverse population. At this stage, it is crucial for the member states to harmonize their economic policies and political perspectives while respecting one another’s autonomy without regard to the nature of the political party that rules each member state. Most importantly, MERCOSUR must harmonize asymmetries in terms of population, geographic location and transaction volume according to its great resource potential.

At this point in time, Brazil and Argentina need to show their leadership, not only by solving their deep asymmetries and displaying political maturity, but also by synchronizing the appropriate mix of macroeconomic policies in order to propel the block, and South America as a whole, to a path of sustained growth. Once stability ceases to be an issue, MERCOSUR’s main objectives will be more feasible. Perhaps South America will then reach the necessary level of development and the world will be ready to do business with MERCOSUR.

References

(1) This Council was created by the original four members of Mercosur (Brazil, Argentina, Uruguay and Paraguay) in order to create a definitive structure for the block. 7 August 2007 <http://www.portalargentino.net/merco.htm>
(2) “Convertibility Era” refers to a fixed exchange rate in Argentina (1 Argentinean Peso equaled 1 American Dollar) which lasted approximately 10 years. This era abruptly came to an end after useless attempts of sustaining this artificial parity and Argentina declared its debt in default.
(3) In terms of GDP Brazil reaches $ 1.7 Trillion while Argentina $ 621 Billion, ranking 1st and 2nd places in South America. Former Uruguayan President Julio Sanguinetti, expressed in the Argentinean media all the challenges that MERCOSUR (and specially Brazil and Argentina) may still have in the future. « Lets be sincere about MERCOSUR » 29 August 2007 <www.lanacion.com.ar>
(4) Through radical changes in Venezuelan Constitution Chavez concentrated more power. In fact, he has now Legislative Power contradicting Democracy principles. « Chavez, Morales and the absolute power» 22 August 2007 <www.lanacion.com>

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