All Together Now: The Challenge of Regional Integration

Martes 17 de abril de 2012

Autor: Lucio Castro, Luciano Cohan and Eduardo Levy Yeyati

INTRODUCTION: MISSING PARTS

It has been a good ride. After the dismal 1990s, which stigmatized Latin American and Caribbean economies as the paradigmatic emerging markets (a high-risk/high-return bet on inherently unstable countries doomed by the original sin of chronic mismanagement), the 2000s were something of a revelation. Dollarized external obligations shrank or were replaced by more manageable domestic debt issued in local currency, increasing tax revenues enhanced the fiscal capacity to reduce inequality and poverty, and policy continuity and consistency denied the stereotype of a region perennially oscillating between political extremes. Populism, all of a sudden, became smart pragmatism.

For many of the region’s countries –particularly those in South America– this progress was to no small degree aided by an exceptional external context of low inflation, declining financing costs, stable global growth and supportive terms of trade. If anything, the region’s governments took advantage of global tailwinds to reduce their long-dated financial vulnerabilities –an achievement that allowed them to implement, for the first time in decades, countercyclical policies that limited the depth and length of the contagion from the 2008– 9 global crisis, feeding the hope that the 2010s might be, for once, the Latin American decade.

Yet first impressions often overshoot reality. Much as the skeptical view prevalent at the start of the century may have exaggerated the irreversible nature of some of Latin America’s earlier flaws, the goldilocks picture of the region’s miracle overlooks a number of drawbacks that were temporarily dwarfed by the long bonanza. Now that the world has become less supportive, these drawbacks are returning to the foreground.

If anything, it appears that this decade, rather than marking the culmination of a virtuous process, poses a challenge. After working out the macrofinancial constraints that thwarted development policies in the past, can these countries address the pending tasks and issues that are critical to consolidate their gains and keep up the momentum?

We have tackled some of these tasks and issues in past editions of the Brookings Latin American Economic Perspectives. The region’s gradual primarization of exports, its inadequate investment in physical infrastructure and modest productivity growth, and its deficits in social development and education, all cast doubt on its growth prospects looking forward.

In this edition, we concentrate on another economic dimension on which the region is falling behind: commercial integration. Our comparative analyses reveal that, in both the depth and quality of regional integration, the Latin American and Caribbean economies are lagging from their emerging peers in Asia. And this is happening at a time when the missing intraindustry trade could provide the economies of scale needed to increase productivity in nonprimary sectors, and when regional markets offer a welcome counterpoint to the growing Chinese influence and to a global context that, even as the worldwide financial crisis subsides, will not be as stable and supportive as in the 2000s. Chapter 3 highlights several reasons why the wave of free trade agreements in the 1990s fell short of achieving true commercial integration, and it argues that a more proactive political agenda is needed to counter short-term economic incentives to diversify away from the region.

The chapter also tackles another topical aspect of regional integration: the pooling of financial resources to cope with the increasingly recurrent bouts of global financial distress. Now that the long debate about global financial safety nets –namely, multilateral liquidity facilities designed to mitigate the impact of financial contagion– seems to have reached its limit, can the discussion move forward at the regional level? It has been correctly pointed out that because the Latin American and Caribbean economies are all hit by global shocks in the same way, they cannot reduce the needed stock of aggregate liquidity by insuring each other. However, as we show in the pages that follow, regional cooperation in a reserve pool has additional advantages beyond the conventional diversification gains. Moreover, a regional pool is the natural vehicle for cooperatively mustering regional and multilateral resources, which is perhaps the missing link in the dysfunctional global safety net.

Trade and liquidity, external demand and financial stability—these are the two fronts on which the region can help itself in the next decade. Two varieties of integration important enough to be at the top of the regional agenda, and at the center of this report.