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The Americas In Transition: The Contours of Regionalism, by Gordon Mace, Louis Bélanger, and contributors
10. Business and Integration in the Americas:
Competing Points of View
The private sector is driving economic integration, and governments are responding in an appropriate manner.
Thomas “Mack” McLarty,
Mexico Chamber of Commerce, May 1996
International relations within Latin America and between Latin America and the United States are undergoing a revolution. After decades of effort in pursuit of economic integration and only limited success, a handful of new initiatives less than ten years old appear to have fundamentally modified the dynamics of the integration process in the Western Hemisphere. On one side, there is the U.S.-sponsored Free Trade Agreement of the Americas (FTAA), which seems to be progressing against all odds, and on the other, the remarkable case of the Southern Cone Common Market (Mercosur).
At a time when integration efforts had essentially ground to a halt in the face of accumulated failures, the launch of Mercosur in the early 1990s seemed a bold move, with more skeptics than believers. Since then, not only has Mercosur proved itself a remarkable success by any standards in achieving the economic integration of its member states, but it has also injected new energy into integration processes in the rest of the hemisphere, including those involving the United States itself. It has done this in two different ways: first, by rapidly assimilating neighboring states into the Mercosur alliance 1 and, second, by becoming the standard by which the success of other initiatives such as the Andean Pact/Andean Community, the Group of Three (G3), and the Central American and Caribbean integration processes are measured. In fact, Mercosur is so successful that it has now become a pole of attraction for business and integration efforts throughout the whole Southern Cone, 2 much like the North American Free Trade Agreement (NAFTA) (albeit in a somewhat humbler fashion) in North America.
Mercosur’s economic success should not come as a surprise. It is the second richest regional development pole in the Americas and the richest south of the Rio Grande, with a population of some 200 million and a gross regional product of over $600 billion. 3 It is also the fourth largest (in terms of gross regional product) and richest (in terms of per capita income) integrated market in the world after NAFTA, the European Economic Community, and Japan. 4 As a result, other Latin American integration experiments have initiated a dynamic process of restructuring and renewal while preparing to associate themselves with either Mercosur or NAFTA, or both. Starting in 1988, the Andean Pact, originally founded in 1969, initiated a far-reaching restructuring process that went public in March 1996 under the new name of the Andean Community. 5 The Caribbean Community and Common Market (CARICOM) undertook a similar course of action beginning in 1993.
The FTAA is tentatively scheduled to come into effect in 2005. Originally launched by President George Bush as the Enterprise for the Americas Initiative in late June 1990, the FTAA was formulated at the Summit of the Americas in December 1994 and enthusiastically adopted by President Bill Clinton. The 1990 Bush initiative came at virtually the same moment as the agreement in principle to launch the Mercosur initiative, which was signed by Brazil, Uruguay, Chile, and Argentina in Brasilia in early August of the same year. It is interesting to note that two of the three initiatives (the FTAA, Mercosur, and NAFTA) that are changing the economic landscape of the continent were born almost simultaneously.
Since 1994, President Clinton has taken to visiting Latin America (and particularly the Mercosur countries) to actively promote the FTAA. Although clearly a much more complex undertaking than either Mercosur or NAFTA, the FTAA has received an unambiguously positive and constructive response from Latin American governments. Negotiations are progressing remarkably quickly and with a smoothness astonishing to any reasonably well informed observer of the historically bumpy relationship between the United States and Latin America. In fact, opposition to the process is currently stronger in the United States—where Congress refused to grant fast-track approval for free trade negotiations to President Clinton in late 1997—than it is in Latin America.
The consolidation of regional integration processes (Mercosur, the Andean Community, NAFTA, etc.) and FTAA negotiations should be seen as two complementary and converging processes, one from below and the other from above. The simultaneity of this bipolar process is perhaps the best guarantee of the kind of results that have eluded all previous attempts at continental integration, including the U.S.-sponsored initiatives Latin American Free Trade Association (LAFTA) and the Latin American Integration Association (ALADI) as well as the anti-U.S. Latin American Economic System (SELA). By the time the FTAA becomes a reality in 2005 or later, something like a South American Free Trade Zone will most likely be in place, extending many of Mercosur’s achievements to the entire Southern Cone. Signs of this happening are already starting to appear. In fact, certain countries see the creation of such a zone as a precondition for hemispheric integration with the United States through the FTAA. 6
How can we explain this change in climate? What has been fueling this flurry of negotiations on regional and continental integration? Although a full accounting of this political process would require a chapter all its own, political will, government leadership and opportunity have all played important roles. But there is more to it than that. Current integration efforts could not succeed without strong coalitions of interests ready to support them politically, as well as corporate interests ready to carry them through by engaging in the actual trade that makes integration processes a reality.
Throughout this chapter, I will use the term “coalition” to refer to associations of social forces or groupings that agglutinate around a particular set of objectives or in opposition to some political or economic process. These coalitions may take on some formal institutional structure but are more often than not loose arrangements held together by a particular objective or opposition target. Coalition members may represent a variety of societal forces, including business groups, entrepreneurial syndicates, labor organizations, political parties, church factions, the military, and others.
For a coalition to exist and act coherently, there is no need for explicit agreement between the parties, even though such agreements may exist between some of the members. Nor do national coalitions need to be limited to national forces; they may find natural international allies prepared to join their cause and bring additional political resources to bear in support of specific coalition objectives. Like previous initiatives, recent integration initiatives would have eventually failed in the absence of such coalitions, either at the agreement design and negotiation stage or during the subsequent implementation phase.
The objective of this chapter is to provide a description of the role and attitudes of the Latin American business community 7 with regard to the integration efforts launched since 1985, particularly the FTAA and the earlier U.S. initiatives. I will analyze the positions adopted by the various coalitions of business interests that have dominated the Latin American scene since the late 1960s. This analysis will provide an opportunity to explain how various business groups supported or opposed integration efforts at different times over the period, the reasons for their positions, and the factors that have contributed to the shifts occurring today. Indeed, the importance of business participation in the integration process should not be underestimated, as a recent report released by the American Business Forum emphasized (1996).
Only a naive observer would attempt to use purely ideological or ethical arguments to explain how economic groups and interests position themselves with regard to the major economic and political developments in a nation. Similar reasoning applies when analyzing the attitudes of business interests toward issues such as international trade and economic and political integration. To introduce a measure of realism into the analysis of the motives underlying business group actions, it is essential to investigate the extent to which a particular process benefits or affects the economic interests of these same groups. The same holds true when examining how the Latin American business community regards modern-day efforts at regional integration.
To better understand contemporary business attitudes toward the integration process, we must look back at the origins and evolution of both the integration process and the Latin American business community itself.
The Latin American Business Community: A Heterogeneous Lot
The Latin American business community is a heterogeneous lot, and its members’ origins, interests, and politics can and do vary substantially. A North American observer would undoubtedly be able to identify differences in business interests and political alignments within, say, the United States or Canada. However, these differences pale in comparison to those observed since the late 1940s in Latin America, where integration is one of the focal points of dispute. The Latin American business community is much more politicized than its North American counterpart. I will not discuss the reasons for this distinction in detail here, but differences in the institutional structures framing economic life (North 1995; Kalmanovitz K. 1997) and the way economic rents are appropriated (Fischer, Ortiz, and Palasvirta 1994) in North and South America play a key role. Although a Latin American subsidiary of a multinational corporation may, under certain circumstances, ally itself with a major domestic industrial group, medium-sized manufacturer, or major grain exporter on certain matters of national interest, they are all more than likely to be in total disagreement on many others. In fact, different business interests often have their own separate organizations, adopt opposing positions on issues of national interest, and align themselves with different political parties. The roots of these contradictions lie in the origins of these companies and the markets they serve. For the sake of clarity, let me propose this somewhat rough classification of Latin American businesses into three distinct categories:
Although the third category is self-evident, it is useful to define the other two in more detail. The traditional exporters and merchants category refers to businesses involved in the export of raw materials and semiprocessed goods (mining, forest, and agricultural products) to the industrialized nations and the importation of manufactured goods from those same countries for local consumption. These importers and exporters have been classified in the same category because, although they play different economic roles, they represent two sides of the same coin. They are the agents of the neocolonial international division of labor under which Latin America, Africa, and Asia were assigned with the function of supplying raw materials and primary products, and the industrialized nations with the role of producing manufactured goods for the world economy.
The new industrialists are business interests that originally developed as suppliers of locally manufactured goods to Latin American markets, either because transportation costs or explicitly designed import barriers protected them from international competition. Companies in this category benefited considerably from the import substitution policies that dominated the developing world, and Latin America in particular, from the late 1940s through the 1980s.
Since the late 1970s, this group has evolved further into two subcategories that I have labeled (1) political rent or market segmentation-dependent national businesses and (2) Third World multinationals (TWMs) of Latin American origin. The first grouping is made up of companies that still depend on the exploitation of rents associated with barriers either of natural origin or imposed by the state for their survival, hence the name. These firms are largely incapable of operating in a competitive international environment because the cost and quality of the goods and services they produce are most often unacceptable for international markets. Their survival depends on the continued segmentation of national markets to exclude competing imports or the artificial inflation of import costs through tariffs and other barriers. The second category is composed of the more successful of these businesses, which in some countries (mostly those with a relatively large domestic economy) have become known as Third World multinationals. These corporations compete with MNCs in low-level or easily adaptable technology sectors such as transportation, agrifood (notably beverages), steel and glass production, and, more recently, the manufacture of highly standardized high-tech products (e.g., Acer Inc., Taiwan’s largest maker of personal computers, has rapidly expanded production in Latin America). By and large these enterprises developed economies of scale during the protectionist era of import substitution and were then able to internationalize operations, usually either by exporting a substantial portion of their output or through foreign direct investment, joint ventures with First World multinationals, and so on. Examples of Latin American businesses that have achieved TWM status are Grupo Bunge & Borne of Argentina, Bavaria of Colombia, and Grupo Alfa of Mexico (Monterrey).
Arguably, the distinction between these various groups is somewhat artificial and there is frequent overlap. Indeed, licensing agreements, joint ventures, import-export contracts, and supply agreements, among other things, often mean that their interests do converge. However, the political reality is that these groups have all played an important role in Latin American economic and political life. In some cases, they have actually established separate organizations to actively promote their members’ respective interests.
One of the most explicit institutional manifestations of such interest group activity occurred in Argentina. There, traditional exporters and merchants joined forces in the Industrial Union of Argentina (UIA), an organization that also became a formal voice for foreign MNCs, whose strategic interests often coincided with those of the UIA. In the meantime, Argentina’s new industrialists, most of them medium-sized and large companies in the import substitution sector, set up the General Business Confederation (CGE). 8 Confrontations between these two national business organizations were not unusual, and sometimes strident.
Over the years, business interests in the three categories (four, if we consider the split in the new industrialists category) have taken different positions on issues of national interest and have often actively sought to influence the course of events. Their positions have frequently diverged, sometimes radically. Economic integration, like many other international issues, has been one area in which views have diverged sharply and different groups have aligned themselves with opposing political forces and parties. In the next section I will take a detailed look at the positions that businesses in the different categories have adopted with regard to international trade, as well as their primary economic motivation for doing so.
It could perhaps be argued that MNC subsidiaries are not a Latin American business group. However, in the last half of the nineteenth century their presence in Latin America—especially that of U.S.-based MNCs—has been very significant, in terms of both their share of regional gross domestic product (GDP) and the political influence they have exercised (usually with the full support of the U.S. government and its entire arsenal of pressure tactics).
Business Interests and International Trade
The origin of the different business categories has a significant bearing on the various positions that Latin American business interests have adopted with regard to international trade and regional economic integration. Understanding the role of trade in the economic activities of companies in each category helps us understand their posture with respect to various integration processes. Let us first look at the role trade has played for each of these groups over the last half of the nineteeth century. I will then complete the analysis with an examination of their ideological evolution during the globalization era, from the early 1980s to the present.
The Traditional Exporters and Merchants
The traditional exporters and merchants import manufactured goods for local consumption and exploit major natural and agricultural resources (mostly cash crops, livestock, and some mineral resources) for export to the industrialized world. They are the national producers of sugar, coffee, cocoa, wheat, beef, forest products, bananas, and other fruits. They are the landowners and, often, latifundists. They are often, albeit not always, both merchant and exporter at the same time. For them, international trade to and from the industrialized “center” 9 has always been essential for survival. Regional trade, however, is of no interest to them. Products from neighboring countries are at best of no use and at worst a source of competition for their own primary product exports to the industrialized economies. Their ideology is predominantly mercantilist and coincides largely with that of their business associates in the industrialized world. Their revenue is sensitive to the trade policies of local governments with respect to Europe and the United States, not with respect to neighboring countries.
Not surprisingly, merchants and traditional exporters greeted regional integration initiatives with everything from mild indifference to virulent opposition, depending upon the type of regional integration process proposed. They often enjoyed active support from economic and political powers in the industrialized world and made liberal use of the well-developed ideological arguments elaborated by free mercantilists and Western liberal economists to justify the division of labor on the principle of comparative advantage. In extreme cases, these groups would not hesitate to convert themselves, quite conveniently, into self-appointed defenders of “Western Judeo-Christian civilization,” moving the economic battle onto moral and religious grounds in defense of their particular set of narrow interests, often with the support of the hierarchy of the Catholic church. A good Christian could not, after all, support high tariffs on foreign imports with a clear conscience!
Their principal objective, expressed and pursued through their political activities, was the integration of local markets into the world economy according to the international division of labor. Communication, transportation links, and political barriers to trade with regional neighbors were of no direct concern. Regional integration processes that did not impede the critical North-South flow of trade (such as LAFTA and ALADI initiatives) were met with benign neglect. But regional integration processes that sought to develop a local industrial base capable of competing with MNCs or industries in the developed countries (as was the intention of SELA and the original Andean Pact) were more than likely to be the target of active condemnation and virulent opposition.
The rapid globalization of the economy (with accelerated communications and financial flows) since the early 1980s and the extensive reductions in trade barriers that have followed have changed little the interests and objectives of the merchants and traditional exporters. On the contrary, they see globalization as a historical vindication of their position and do not hesitate to support political parties that were once their archenemies but are now staunch advocates of free trade. The current dominant model of integration, with its indiscriminate elimination of trade barriers between regional markets (e.g., Mercosur) and selected markets in the industrialized countries (like NAFTA or the future FTAA), does not conflict with their interests. Thus, their position as a group is one of benign tolerance.
The New Industrialists
In the past the new industrialists generally viewed international trade as at best an unavoidable nuisance. On the one hand, North-South trade was the source of much needed inputs into the productive process (technology, machines, technical personnel, specialized raw materials, etc.). On the other hand, it was also a source of dangerous competition for their often poor quality and expensive local manufactured goods. As for regional trade, it was of little or no interest to this group. Neighboring countries had no role to play in supplying inputs and were another potential source of competition for local manufacturers in the import-substitution business. The most successful firms in this category developed into large business conglomerates that sometimes dominated entire segments of a single country’s economy. Notable Latin American examples of such conglomerates, better known as “industrial groups,” are Mexico’s Grupo Alfa, Argentina’s Grupo Bunge & Born, and Colombia’s Sindicato Antioquia and Grupo Santo Domingo, to mention just a few. 10 These groups dominated local business interests and often played a highly visible role in domestic politics and decisionmaking.
The new industrialists shared something of a Boston Tea Party ideology. In many cases their profitability—indeed their very survival—was dependent on trade barriers that kept foreign products out and ensured them an effective local monopoly. This group also formed the social base for the reformist economic programs proposed, perhaps most notably and coherently, by such people as Raúl Prebisch and Aldo Ferrer. Governments implementing these programs rejected the international division of labor and supported the development and protection of local industries with a pragmatism that often led them to seek trade relations with any economic block that suited their interests, even if it meant being labeled “pink” by the hawks at the U.S. State Department. Barriers to trade were essential to the economic health of the new industrialists, who actively lobbied for their imposition and conservation by the state in both North-South and regional trade. The anti-trade position of the new industrialists often led to confrontations with European and U.S.-based MNCs, as well as with the merchants and traditional exporters.
On the issue of regional integration, this group traditionally adopted a stance of qualified opposition. In their eyes, regional integration meant the elimination of national reserve markets and an end to state-protected monopolies. The potential for competition from industrial groups and manufacturers in neighboring countries was particularly feared. Barriers against imports from industrialized countries could easily be justified on the grounds that local industries needed protection to develop the economies of scale, research and development capacity, and technological excellence that allowed the industrial economies to produce superior products at a lower cost. But protection from competition originating in neighboring countries was not so easily justified. After all, manufacturers in neighboring countries were in the same predicament.
As a result, the new industrialists generally offered little support for regional integration. However, in cases where integration initiatives were politically inevitable—as they often were—they were ready to play a role in order to protect their local interests. They did so using two different strategies. The first of these was to insist on an integration process based on selective tariff reduction. This involved producing lists of selected goods with the purpose of restricting tariff reductions solely to those that would not compete with locally available products. 11 Obviously, this was a very efficient way to stop real integration in its tracks. The second strategy was much more elaborate and also more constructive. It required that regional integration be accompanied by regional planning for the development of capacity based on comparative advantage and taking into account preexisting capacities in each country involved.
The most notable and well-developed model of this type was the original Andean Pact, with its relatively sophisticated structure and ambitious regional planning objectives. The Andean Pact was designed to take advantage of member country complementarities to build a regional industrial powerhouse possessing the scope and economies of scale necessary to compete with foreign MNCs. 12 Here again, the objective was to identify complementarities and avoid direct competition between different national import substitution industries in the same market. As with the selected product list approach, however, the process was extremely difficult to put into practice and produced limited results.
Using these two strategies, the new industrialists consistently undermined attempts to establish a true integration process capable of encouraging competitive and efficient economic development. In fact, but for a few exceptions, they were the most consistent and relentless opponents of regional integration initiatives through the late 1990s. And in many cases, they have joined forces with trade unions and left-leaning political groupings to become the most strident opponents and critics of the integration model dominating Latin America today. The political dominance of this coalition in Colombia and Venezuela largely explains the limited success of the G3 initiative and, in particular, the reticence of the Colombian and Venezuelan governments to open their markets completely to Mexican goods. 13 The G3 has had enormous difficulties in shaking off the item-by-item bargaining approach characteristic of the oldtime integrationist/protectionist tradition.
Opening up markets is, of course, a two-way street. It is, as Jack Edwards and Werner Baer (1993) have correctly noted, a precondition for becoming competitive and efficient, and many companies are now successfully competing against other products in foreign markets or against foreign products in their own markets. However, others are not, and a deep restructuring of industry is taking place. Numerous firms are disappearing under the pressures of foreign competition, unable to restructure and ensure their viability under the new market conditions. The Argentine toy industry offers a particularly dramatic example of this situation. Between 1991 and 1996, the share of imported toys on the Argentine market rose from 6 percent to 80 percent. As a result, 170 out of the approximately 200 toy manufacturers in operation in the country in 1991 either went bankrupt or were forced to close manufacturing facilities by 1996.
Eventually, some of the larger corporations in the new industrialist category evolved into Third World multinationals. One example is the Grupo Alfa, which has become the largest manufacturer of glass products in the world since teaming up with Corning of the United States. In its domestic market, it remains a conglomerate of loosely knit companies covering a wide range of industries. Argentina’s Grupo Bunge & Borne (B&B) outgrew its domestic market and expanded its investment interests, mainly into Brazil. It eventually grew into one of the world’s major maritime grain transport companies. Domestically, B&B, like Alfa, remained a diversified conglomerate. It is only in the face of the drastic economic liberalization measures of recent years, including the virtual elimination of most trade barriers, that B&B has been forced to refocus on its domestic core business—food products—and rapidly divest itself of peripheral operations.
The relative success of national corporations in internationalizing their operations (that is, in overcoming their dependence on rents originating with state-created market segmentation) largely influences their attitude toward modern-day integration initiatives. As it turns out, TWMs are on the forefront of the new wave of integration efforts in Latin America. These successful corporations are going through the same historical transformation experienced by U.S. businesses when they gradually abandoned the Boston Tea Party mentality to become staunch worldwide advocates for free trade. In fact, it would be no exaggeration to state that the successful Mercosur venture is the brainchild of a quintessential Latin American TWM: Grupo Bunge & Borne, which was first based in Argentina, then Brazil. 14 Perhaps it is no coincidence that these two countries are the focal point for the Mercosur initiative.
Subsidiaries of Multinational Corporations
MNCs, by definition, depend heavily on international trade to conduct their business. However, they are also versatile and resourceful and often capable of adapting to different situations, from economies that are wide open to international investment and financial flows to environments that are hostile and unfriendly to MNCs. North-South and intraregional trade plays a completely different role for MNCs than for other businesses. To some extent, North-South trade is essential to the survival of MNC subsidiary operations in a developing country, either as a channel for exports (if the subsidiary’s role is to extract raw materials for use or consumption in the industrialized world) or as the source of crucial inputs (if its role is to manufacture goods for the local market). Even so, many MNCs are capable of operating under the most adverse trade conditions by increasing or reducing local content—within the limits of technology and economies of scale—in their finished goods. 15 Those exploiting natural resources for consumption in the industrialized world must deal with a different set of difficulties altogether. They typically face trade restrictions in the form of export duties designed to procure the host country a greater share of resource revenues. The host country, however, is limited in its rent expropriation capacity by the existence of alternative sources of natural resources in other countries and the rent expropriation practices there.
The MNCs’ dependence on North-South trade makes them logical and natural allies of businesses in the merchants and traditional exporters category. Despite occasional minor and generally circumstantial conflicts of interest between the two groups, MNCs together with merchants and traditional exporters have formed one of the most solid and stable political coalitions in Latin America, capable of wielding enormous power through the use of domestic and international political and financial resources.
Regional trade is relevant only to MNCs whose goal is to supply local markets with some kind of manufactured good. MNCs involved in resource extraction have no need or use for it. For the first group, however, regional trade, which may be essential in a few cases where large economies of scale are desirable or even necessary, is a definitive advantage. It allows MNCs to plan their capacities more efficiently with the goal of serving a larger market (consisting of several countries) rather than operate a scattered group of smaller, less efficient plants. This is why MNCs have been the most active and enthusiastic supporters of regional integration processes. But the kind of integration MNCs had in mind was quite different from that envisaged by other national business groups, particularly the new industrialists.
Models of Integration and Their Historical Evolution
The Latin American integration process, like others elsewhere, has not been linear. Although it would be possible to analyze the forces shaping and influencing contemporary integration initiatives in the region looking only at current events, such an analysis would lack richness and historical perspective. It would also make the role of Latin America’s business community less clear. That is why it is important to look at the roots of the integration efforts launched in the 1960s. In this section I will examine these roots and include specific information about the coalitions (including the specific business sectors) behind each of the initiatives and the role of business as both a force in and a beneficiary of the integration processes. The majority of these integration efforts—including ALADI, SELA, and the Andean Pact—could, by any objective measure of achievement, be considered failures, and therefore unworthy of further consideration. However, they represent the accumulated collective experience underlying current efforts and, as such, can help us better understand what is happening today.
There has been no shortage of philosophies and models for regional and international integration. In fact, three distinct currents can be identified, each distinguished by its approach and the particular form of integration desired. Business groups have played an important role in articulating these models and providing the necessary political support for their implementation. Although some models have endured in certain regions over longer periods of time, up to recently no single model has dominated, and both the first and the second model contributed to the failure of the third. This may explain, at least partially, the numerous and overlapping efforts at market integration that have coexisted on the Latin American political scene. The only potential exception to the scenario is the most recent model, which appears to have superseded all other integration currents. It also appears to have unprecedented, though not unanimous, support from the three business groups defined earlier. Obviously, this convergence is essential to the success of the most recent integration initiatives.
I have labeled the three currents as follows:
The first two models were in competition throughout much of the 1970s and the 1980s and were, for all intents and purposes, exhausted by the end of the 1980s. The third model was launched with the Mercosur initiative as the others were failing. It is unquestionably the dominant integration philosophy in Latin America today, and the only model that has yielded any significant progress.
The three apparently disparate and contradictory labels describe quite accurately the underlying motivations and objectives of the models they represent. Let us look at each one more closely: its objectives, the role of business and the other political forces supporting it (the coalitions), and its institutional manifestations in the region. Each model is presented in some detail in Tables 10.1–10.3, including the policy instruments that are associated with it. The purpose of the tables is to facilitate the rapid identification of differences and similarities between the three models. In the tables are embedded many details that help explain the functioning of the models. To avoid repetition in the text, I will simply emphasize a few central ideas.
| Table 10.1 Model: Secessionist-Protectionist | |
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Examples
“Old” Andean Pact (Bolivia, Colombia, Ecuador, Peru, Venezuela, and, initially, Chile), SELA |
Objectives
Strong regional integration (possibility of a customs union covering goods but excluding services, no attempt to harmonize labor, monetary, and fiscal policies) within Latin America and (temporary) disengagement from world (industrialized country) markets. The purpose of the strategy was to establish a strategic regional industrial and technology base to foster economic development and develop the capacity to compete, ultimately, with MNCs. Modeled on past Japanese and U.S. protectionist periods. |
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Policy Instruments
High common external tariffs and trade barriers (to protect local industries) accompanied by relatively low intraregional barriers to trade (to protect, in some cases, national interests) Extensive industrial and development planning aimed at exploiting comparative advantages and regional complementarities and economies of scale Strong state presence as a substitute to the private sector in two situations: strategic investments (including nationalization of foreign interests when necessary) and investments considered too big for the private domestic business sector Subsidized project financing, with a strong role for development financing institutions (development banks and corporations) Heavy taxation of the rent available to traditional sectors (agriculture, mining, etc.) in order to finance the development of nontraditional industries Heavy financial restrictions to control the price and allocation of capital in the economy |
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Before Integration 
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After Integration 
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Coalitions
Domestic: Nationalist political forces (political parties and portions of the military); new industrialists, mostly medium-sized and large companies in the import substitution sector; labor unions; workers and peasants International: Nonaligned movement; regional and international development financing institutions |
Role of Business
The model was supported by medium-sized and large companies in the emerging manufacturing sector that saw the protected market environment and cheap credit policy as an opportunity for growth. Both the barriers to trade and the credit policies provided a substantial rent to nontraditional industrial enterprises that facilitated growth. |
Of course, none of these definitions, objectives, and policy instruments are explicitly identified in the charters of the various integration agreements. Rather, they reflect the fundamental ideological currents at the basis of the coalitions behind each model.
The “Secessionist-Protectionist” (S-P) Model
This model represents the implementation at a regional level of the import substitution and directed development model first popularized in the 1940s. Examples of this model are the Andean Pact (Bolivia, Colombia, Ecuador, Peru, Venezuela and, initially, Chile) and the Latin American Economic System, which now has twenty-seven members in Latin America and the Caribbean. SELA was created in October 1975 through the Panama Convention as a response to a call by then-president of Venezuela Carlos Perez to initiate a continent-wide effort at integration to compete with the U.S.-led LAFTA and the MNCs. After twenty-three years of ups and downs, SELA is now working to adapt the organization to changes in the region’s dominant ideology and the new realities of the world economy. 16
The central idea behind the S-P model was to disengage the region temporarily from integration into the world market in order to establish a strategic regional industrial and technology base, foster economic development, and, ultimately, compete with MNCs. Supporters of this model often pointed to protectionist periods in Japanese and U.S. history as successful examples of this strategy. In policy terms, these integration models essentially sought to block the importation of industrial goods that could be produced locally and to engage in a comprehensive planning process to develop a regional industrial base on the basis of local comparative advantages. The state was to play a leading role in this process by influencing resource allocation and subsidizing selected industries that were considered essential.
We have synthesized these ideas in the figures incorporated in Table 10.1. The figure labeled “Before Integration” represents the starting position in which individual Latin American countries (DC) trade predominantly with the block of industrial countries (IC). At the same time a high degree of segmentation exists between countries in the region. The figure labeled “After Integration” represents the objectives of the model: to increase barriers for imports from the industrialized countries with the clear objective of discouraging trade with industrialized countries and to encourage strong integration within the region. Table 10.1 also includes a list of the main policy instruments used for the implementation of the model, the characteristics of the coalition that supported it, and the role business played in the process.
The domestic coalitions favorable to this model were made up of nationalist political forces (political parties and portions of the military), new industrialists—mostly medium-size and large industries in the import substitution field—labor unions, and workers and peasants. The resulting political fronts included a diverse mix of entrepreneurs, workers, peasants, and intellectuals and were often confused with European fascist movements. At the international level, the movement received political support primarily from the nonaligned movement and institutions involved in regional and international development financing. Medium-sized and large companies in the emerging manufacturing sector supported the model because they saw a protected market environment and cheap credit policy as an opportunity for growth. Both the barriers to trade and the credit policies were a source of substantial rents to nontraditional industries that facilitated and financed growth.
In contrast, MNC subsidiaries and merchants and traditional exporters vehemently opposed the model. The major irritant for companies in these two categories was that supporters of this model for integration (and national development) were intent on expropriating a substantial portion of their rent through (1) taxes (on income, capital, land, and revenues from exports and imports) intended to finance the development of other industrial sectors and social infrastructure that would benefit the industrial working class and (2) tariffs and other barriers that would transfer rents to protected business sectors, help eliminate traditional imports, and explicitly exclude preferential credit policies. In the case of MNCs, the model explicitly attempted to exclude or expropriate their economic interests and develop a sector capable of competing with them directly.
This complicated mix of politics and entrepreneurial support made this model difficult to implement and vulnerable to circumstance. This was the case with the Andean Pact, which was founded at a time when like-minded nationalist coalitions held power in all the countries involved. The pact soon ran into trouble when one of its members—namely, Chile—withdrew (for reasons explained earlier) four years after its creation and later when opposing political forces came to power in member countries.
The “Integrationist-Protectionist” (I-P) Model
Initiatives based on this model enjoyed the blessing of the United States and were among the earliest regional ventures in economic integration. It is fair to say that the United States played a leading role in promoting economic integration in Latin America, although its efforts did not always produce the intended results. In fact, the alternative models of integration presented here (like the S-P model just described) were often a reaction on the part of Latin American leaders to the models promoted by the United States. The most important initiatives in the I-P model are the ALALC and ALADI at the continental level, and CARICOM and the Central American Common Market (CACM) in the Caribbean region and Central America, respectively.
The objective of the I-P model was to foster weak regional integration within Latin America and weak Latin American integration into the markets of the industrialized world. The model sought to exploit regional complementarities whenever possible and to facilitate regional market integration for products manufactured by MNCs, which had the resources to implement economies of scale at the regional level. Policy instruments were relatively moderate and designed to provide the emerging regional industrial base with a relatively protected environment. In terms of intraregional trade, the model focused primarily on eliminating barriers to the movement of industrial goods.
The starting point shown in the figure labeled “Before Integration” in Table 10.2 is identical to the one described in the same figure in Table 10.1. The I-P model had some similarities to the S-P model in that its objective was a strong integration within the region. However, whereas the S-P had as an explicit objective to exclude MNCs, the I-P model was largely designed to create economies of scale for these corporations. It therefore should not be surprising that this sector was the most active supporter of the model. Barriers to North-South trade played less of a role in the I-P model than in the S-P model because the I-P model clearly preferred a lowering of these barriers. The versatility of the MNCs and their capacity to adapt (e.g., through local assembly lines and joint ventures) allowed many of them to circumvent a large number of these barriers. (Those MNCs extracting raw material were generally not affected by the barriers.) Table 10.2 includes a list of the main policy instruments used for the implementation of the model, the characteristics of the coalition that supported it, and the role business played in the process.
| Table 10.2 Model: Integrationist-Protectionist | |
|
Examples
ALALC, ALADI, CACM |
Objectives
Weak regional integration within Latin America and weak integration into world (industrialized country) markets. The main purpose of this strategy was to exploit regional complementarities whenever possible and facilitate market integration for the benefit of the MNCs and their products. |
|
Policy Instruments
Relatively high external tariffs and trade barriers (but generally lower than in the S-P model) to protect local industries, relatively low intraregional trade barriers, selective reduction (through multilateral and bilateral negotiation) of barriers to take advantage of complementarities while protecting national industries. Low barriers to MNC products Weak state presence in the economy to allow private sector to decide on resource allocation. Presence of the state in strategic economic sectors considered of military importance or where private capital was insufficient Subsidized project financing with strong role for development financing institutions (development banks and corporations). Not directed by the state Low taxation of the rent available to traditional sectors (agriculture, mining, etc.), with most financing coming from international development aid institutions and through foreign direct investment Moderate financial restrictions to influence the price and allocation of capital in the economy |
|
Before Integration 
|
After Integration 
|
|
Coalitions
Domestic: Traditional, landowner-based political forces; frequent military support; merchants and traditional exporters; MNC subsidiaries International: United States; multilateral development finance organizations (IFC, World Bank); the IMF |
Role of Business
The model was supported by the merchants and traditional exporters (mining and agricultural products), who saw it as a means to maintain their land- and trade-based rents. MNCs viewed the model, with its provisions for unified regional markets, as fundamental to developing economies of scale and greater efficiency in their manufacturing operations. |
The domestic coalitions that supported the integrationist-protectionist model were predominantly made up of traditional landowner-based political forces, merchants and traditional exporters, MNC subsidiaries, and, quite often, the military. Internationally, the United States, multilateral development finance organizations (the International Finance Corporation [IFC], World Bank), and the International Monetary Fund (IMF) backed the model. Merchants and traditional exporters (mining and agricultural products) saw the model as a means to maintain their land- and trade-based rents. MNCs viewed it as fundamental to developing economies of scale and greater efficiency in manufacturing, notably through its provisions for unified markets. Not surprisingly, the model was strongly opposed by local industries, which stood to lose a substantial portion of the rents they derived from state-induced market segmentation.
The “Integrationist-Competitive” (I-C) Model
The main objective of the integrationist-competitive model, the current dominant model, is the extensive integration of national markets within Latin America (the possibility of a common market in products and services and the harmonization of labor, monetary, and fiscal policies) and strong integration into markets in the industrialized world. The main purpose of the strategy is to foster competition within the region and to exploit regional comparative advantages in international markets. To a large extent, this model was a response—promoted by the IMF, the United States, and the World Bank—to the exhaustion of earlier, inward-oriented development models.
The prime example of the I-C model is Mercosur, but other groupings such as the G-3, the new Andean Group (Andean Community), and the new CACM and CARICOM are also evolving in this direction. The model is also the one most consistent with the FTAA. It has the backing of domestic coalitions dominated by the new intelligentsia, which increasingly controls both new and traditional political parties. This progressive political force has a wide social base, demonstrated by the successes of governments in Argentina, Bolivia, Brazil, and Peru. At the regional level, the model is supported by the TWMs, companies that have developed international operations as a result of their successful accumulation of capital in domestic markets and the subsequent need to diversify risks and markets internationally. MNCs also like the model because it provides them with the opportunity to develop regional economies of scale and improve efficiency in manufacturing. As for international support, it comes from the United States, international investors, multilateral development finance organizations (IFC, World Bank, and the Inter-American Development Bank [IDB]), and the IMF. As in the previous tables, in Table 10.3 many of the central ideas describing this model have been synthesized.
| Table 10.3 Model: Integrationist-Competitive | |
|
Examples
G3, Mercosur, Andean Community, the FTAA. CARICOM and the new CACM are also evolving toward an IC model. |
Objectives
Extensive integration of national markets (possibility of a common market for goods and services and harmonization of labor, monetary, and fiscal policies) within the region and extensive Latin American integration into world (industrialized country) markets. The main purpose of the strategy is to foster competition within the region and to exploit regional comparative advantages in international markets. |
|
Policy Instruments
Low common external tariffs and trade barriers (elimination of most protection for local industries) accompanied by low or nonexistent intraregional barriers to trade. Tariffs and barriers selectively maintained on certain products and services. Absence of discrimination between domestic industries and MNCs Increasingly weak state presence in the economy to allow the private sector to decide on resource allocation. State disinvestment (privatization) of former strategic or priority economic sectors Large-scale elimination of subsidized project financing. Role of development financing institutions (development banks and corporations) limited mostly to funding small and medium-sized private companies Low taxation of the rent available to all sectors (traditional and nontraditional), with financing determined by international and domestic market forces Financial liberalization with virtual elimination of controls over the price and allocation of capital in the economy |
|
Before Integration 
|
After Integration 
|
|
Coalitions
Domestic: Progressive political forces with a broad social base; major industrial groups with international exposure in manufacturing and markets; MNC subsidiaries International: United States; international investors; multilateral development finance organizations (IFC, World Bank, IDB); the IMF |
Role of Business
This model is supported by new industrialists who have developed international operations as a result of their successful accumulation of capital in domestic markets and their subsequent need to diversify risks and markets internationally. MNCs are also strong supporters because of the opportunities the model provides for economies of scale and more efficient manufacturing operations. Medium-sized and large companies in the emerging manufacturing sectors largely oppose the model. For them, the integration of national markets into the international economy spells the elimination of revenues derived from market segmentation and often the end of their business opportunities altogether. |
The model is widely opposed by medium-sized and large companies in emerging manufacturing sectors. For them, the integration of national markets into the international economy spells the elimination of rents derived from market segmentation and often the end of their business opportunities altogether. Traditional trade unions also vehemently oppose this model because their unionized employees absorb losses to domestic manufacturers. Traditional political forces with strongly nationalist economic policies are also opposed to the model.
Table 10.4 represents a classification of integration initiatives from the 1960s to Mercosur and the new Andean Community, as well as some comparative statistics.
| Table 10.4 Integration Initiatives in Latin America | ||||||||||||
| Andean Pact | CACM | CARICOM | G3 | Mercosur | ALALC, ALADI | |||||||
| Created | 1969 | 1960 | 1973 | 1990 | 1991 | 1960 (ALALC) |
||||||
| Type of Agreement | common market | customs union | customs union | customs union | customs union | customs union | ||||||
| Model | secessionist- protectionist |
integrationist- protectionist |
secessionist- protectionist |
integrationist- competitive |
integrationist- competitive |
integrationist- protectionist |
||||||
| Redefined | 1988 | 1993 | n.a. | n.a. | n.a. | 1980 (ALADI) |
||||||
| Model | integrationist- competitive |
tending toward I-C |
tending toward I-C |
n.a. | n.a. | integrationist- protectionist |
||||||
| Population | 94.5 mil. | 27.6 mil. | est. 6 mil. | 138.6 mil. | 194.6 mil. | 425 mil. | ||||||
| International trade (billions of dollars) |
1.6 | n.a. | n.a. | n.a. | 5.5 | n.a. | ||||||
| GDP (billions of dollars) (% of U.S.) |
149.8 (2.5%) |
27.9 (0.4%) |
est. 10.0 (0.1%) |
438.7 (7.4%) |
607 (10.3%) |
1,178 (20%) |
||||||
Conclusion
Regional integration experiences in Latin America and the attitudes of business toward them are varied and complex. Since 1990, a wave of new initiatives distinct from earlier models of regional integration has shaken the region and introduced a new dynamic into the integration process, transforming the continental economic landscape. Since the late 1950s, the United States, Latin America’s political elite, and the regional business community have promoted a variety of integration projects responding to three clearly distinct and sometimes strongly antagonistic models. Business attitudes toward these models have been equally varied, ranging from strong opposition and support to benign indifference. Business positions have largely been shaped by the sources of economic rents essential to company operations in various sectors of the economy.
In this chapter, I have identified three integration models and three major business sectors. Integration models are defined on the basis of several criteria: their objectives with respect to local and international markets, the main policy instruments they employ to achieve the desired level of integration, the political and social coalitions that support them, and the reactions they foster among different segments of the business community.
Business sectors are defined on the basis of their main source of economic rents. Analysis reveals how changes to markets served by different business sectors affect business perspectives on regional and continental integration. This approach makes it possible to identify the underlying economic forces behind each of the integration projects and to explain the reactions each project provoked in the business community. It also allows us to identify some of the reasons for the failure of earlier integration experiences such as LAFTA, ALADI, and the Andean Pact, as well as factors explaining the current and somewhat surprising success of Mercosur. In addition, the analysis is optimistic about the future of a particularly challenging initiative—the Free Trade Agreement of the Americas—a project dependent not only on the political maturity of the United States but also on the readiness and willingness of the Latin American business community to face a challenge of this order.
Finally, the analysis also sheds light on the leading role the United States has played in promoting Latin American integration since the late 1950s, even though U.S. initiatives have not always produced the results their sponsors intended. In fact, the alternative models of integration presented in this chapter were often developed by Latin American leaders in reaction to the models promoted by the United States.
Endnotes
Note 1: In June 1996, Chile signed a free trade agreement with Mercosur that became effective in October of that year. Chile’s double membership (or quasi membership) in NAFTA and Mercosur puts it in a very good position compared with other Southern Cone countries. In September 1996, Mercosur began free trade talks with Mexico. By February 1997, Mercosur and Mexico had exchanged preliminary lists of goods on which tariffs would be eliminated. In December 1996, Mercosur signed a free trade agreement with Bolivia that became effective in February 1997. All trade between Bolivia and Chile and Mercosur will be duty-free by 2014. Mexico is negotiating a free trade agreement with Mercosur for the year 2001 or later based on a “four for one” formula. Back.
Note 2: For example, in fall 1996, the former Andean Pact—now the Andean Community (CA)—started two-phased free trade talks with Mercosur, first, to settle regulatory issues and, second, to discuss actual tariff reductions. The CA hoped to conclude an agreement by December 1997, but disagreements due in part to Mercosur’s staunch pro–free trade stance and lingering CA protectionism have delayed progress. Bringing Mercosur and the CA together would create a market of 306 million people. Back.
Note 3: The next richest grouping is the G3, which consists of Colombia, Mexico, and Venezuela. The G3 has a gross regional product of slightly over $400 billion, or 7.4 percent of the GDP of the United States. In June 1994, Presidents Carlos Salinas de Gortari of Mexico, Rafael Caldera of Venezuela, and César Gaviria of Colombia signed the Group of Three free trade agreement in Cartagena, Colombia, thus linking 150 million consumers in the three countries. The agreement, reached after three years of difficult negotiations, was expected to increase trade in sectors such as energy, petroleum, and transportation. When the G3 agreement was signed in 1994, it was considered one of the most comprehensive trade agreements in Latin America, with its sections covering services, investment, and intellectual property rights. Other countries in northern South America also expressed interest in joining the G3. For example, during the Cartagena summit that followed the signing of the G3 agreement, Ecuadoran president Sixto Durán Ballén reiterated his country’s intention to join the group. Since then, however, protectionist sentiment, mostly in Colombia and Venezuela, has essentially put a halt to further progress. Back.
Note 4: This statement may raise some eyebrows. How did this regional basket of troubles suddenly become so successful? What about China and the Southeast Asian “tigers”? The fact is that there is no other regional economic unit with virtually no trade barriers that qualifies for the position, including China. Not that the Mercosur partners don’t have any conflicts or unresolved issues between them. As of this writing, members have disputes pending over a range of hotly debated issues, including trade in sugar, local content rules, and regional investment incentives (for the automotive and other industries). However, these conflicts are common to every trading bloc or common market, including NAFTA and the EEC, and have not prevented Mercosur from moving ahead more or less on schedule to achieve common market status. Back.
Note 5: On June 4, 1987, the ever sharp Christian Science Monitor celebrated the original Andean Pact’s turnaround with the headline “Yankee Come Back.” This was an unveiled reference to the “Yankee, go home” philosophy that the pact’s five founding members had espoused since the organization’s establishment in 1969. Back.
Note 6: Brazil is one of them and made its position clear as early as 1994, when Jose Arturo Denot Medeiros, then economic integration and foreign trade undersecretary at the Foreign Relations Ministry, said, “Brazil would only look for a coming together of the continental trading systems once a South American bloc is in place” (Reuters News Service 1994). Back.
Note 7: I refer here to the complete spectrum of business interests, domestic and foreign, that are active in one way or another in the economic life of the continent. Back.
Note 8: The CGE was sponsored by the Peronist movement in the late 1940s and played a predominant role under the first two corporatist Peronist governments. After Juan Perón was deposed in a military coup, the organization’s influence faded as the UIA gained favor during the years of military dictatorship and pseudo-democracy (1955–1973). The CGE regained its strength after democracy was restored in 1973 and was given responsibility for economic planning under the new democratic government regime, but it lost ground to the UIA again following the military coup of 1975. It would be naive and erroneous to discount the CGE as nothing more than a political tool of the Peronist governments. The organization crystallized a genuine set of business interests. As was the case with similar groups in other Latin American countries, the CGE represented the economic base of the nationalist-protectionist movement, whose main objectives were import substitution and national industrialization. Back.
Note 9: An expression borrowed from the antineocolonialist literature, which actively condemned the international division of labor between the industrialized “center” and the underdeveloped “periphery” succinctly described here. Back.
Note 10: For a detailed analysis of the factors that contributed to the development of this form of corporate governance as well as its corporate strategy, see Fischer, Ortiz, and Palasvirta (1994). Back.
Note 11: Preparing the lists of eligible goods that were to benefit from the complicated scales of falling tariffs was extremely inefficient and slow. As a result, integration processes based on the list approach bogged down in bureaucratic haggling and had no real effect on regional trade. This was, in a nutshell, one of the main reasons that LAFTA and ALADI failed to foster a significant increase in regional trade. Back.
Note 12: This explains why Chile quickly withdrew from the pact after General Augusto Pinochet’s military coup established a fundamentally pro–free trade government in Santiago. Back.
Note 13: Colombia and Venezuela have opposed the elimination of tariffs on a list of certain Mexican goods since September 1997, most notably products related to the automotive and petrochemical industry. One of the main arguments used by business representatives present at the G3 meeting in Medellín to justify this resistance was that “macroeconomic asymmetries” (including that of being the world’s twelfth largest vehicle producer) meant Mexican business would be able to compete under favorable conditions with Colombian and Venezuelan suppliers. Around the same time, automotive and automotive parts manufacturers in the Mercosur countries were pushing their governments to accelerate the integration process and to reach an agreement on common external Mercosur tariffs and rules of foreign and local content. Back.
Note 14: B&B’s chief financial officer was “borrowed” by President Carlos Menem and named the new administration’s first minister of the economy. Although the minister died a few months later, the main thrust of the economic policies launched during his first few months in office never changed. Fine-tuning later was performed under the skillful direction of the hugely successful Domingo Cavallo, minister of the economy and a member of Argentina’s Fundación Mediterranea. Back.
Note 15: MNCs engaging in international sourcing, such as Ford Motor Co., are a somewhat different case. They have large complementary manufacturing capacities in various regions of the world and their final products are assembled with components from several of these plants. Back.
Note 16: In 1996 the Latin American Council, the ministerial body of SELA, adopted a modernization and restructuring program. As part of this program, SELA is seeking to play a leading role in coordinating Latin America’s position with respect to the FTAA and negotiations with the World Trade Organization. It also seeks to promote the convergence of the various integration processes under way in Latin America and the Caribbean. Back.
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