Economic Regional Integration in Latin America / Dr. Arnab Chakrabarty

The process of economic regional integration in Latin America can be divided into four phases which span from developing a sense of coming within the folds of a region comprising of geographic continuity, culture and practices to the creation of regional organisations. A debate between Latin American[i] integration and hemispheric integration consisting of the United States and Canada has always taken place along with the preference of countries to integrate with their immediate neighbours to form sub-regional organisations[ii]. Factors such as the intent of governments to form regional trading blocs and adopt common practices such as lowering tariff rates and enabling free movement of labour and capital along with the scale of economies and trade relations with extra-regional actors, are important.

On a larger scale, regional integration in Latin America sought to fulfil certain goals such as creating intra-regional trade, reducing transactional costs, and boosting manufacturing and employment. While the entire process of integration witnessed changes and varying results, certain challenges require addressing. The pandemic and the subsequent Ukraine crisis led to supply chain disruptions, the closure of businesses, and a rise in the prices of commodities. The dependence of countries in the region on internationally determined commodity prices and on countries such as US, China, Japan, and South Korea and the inability to achieve viable economic diversification are other factors that affected the process of integration in Latin America. At this juncture, the focus of governments in Latin America is to instill economic growth and discipline to overcome challenges.

The Phases of Economic Regional Integration in Latin America

The First Phase of Economic Regional Integration in Latin America

The post-Second World War phase led to the first phase of regional economic integration in Latin America, which was mainly sponsored by the Economic Commission for Latin America (ECLA), which undertook a structuralist approach. ECLA’s first Secretary General, Raúl Prebisch was instrumental in pointing out the region’s experience during the interwar period which led to a slump, decreasing income, and high levels of unemployment. Consequently, the ECLA concluded that Latin America’s structural dependency[iii] on global markets had turned it into a region that exports lower-valued commodities and raw materials followed by imports of high-end and finished products[iv].  

Recommendations were laid out which stressed structural transformations and better productive capacities that would lead to development and economic autonomy. It led to the acceptance of the Import- Substitution Industrialisation model[v], which led to the creation of a large regional market, specialisation of products to avoid duplication and encourage complementation. Preferential treatments were awarded to smaller countries and protective trade barriers were created against extra-regional actors. As the region was still developing there were certain key sectors in individual countries that were awarded with protectionist measures from external influences. For instance, the coffee and fruit processing industries in Central America and the agriculture sector in Argentina, Brazil and Mexico are examples of key sectors that were shielded through protectionist measures. Contrary to the idea of absolute free trade, these protectionist measures were installed to protect domestic industries and enable product specialisation, enlarge the regional market and promote self-sufficiency.

This period witnessed the creation of the Latin America Free Trade Association (LAFTA)[vi] in 1960 and the Central American Common Market (CACM)[vii] in the same year. In 1969 the Andean Community[viii] and in 1973 the Caribbean Community (CARICOM)[ix] were created. While some of the objectives such as extending market sizes and intra-regional trade received a boost, political crises led to a slump in the process of integration.

The Second Phase of Economic Regional Integration in Latin America

The second phase since the 1990s in contrast to the earlier one, led to the insertion of Latin America in the global economy and it contrasted with the Import Substitution Industrialisation model. In this period which coincided with the process of globalisation the key focus was on adopting developmental strategies that were outward-looking and competitive in nature. Thus, Latin America sought to become an integral part of the global economy, adopt trade liberalisation, and end protection to stimulate competitiveness. In this phase apart from focussing on increasing intra-regional trade, Latin American countries engaged in developing economic linkages with other extra-regional countries that involved removal of trading barriers and entering into trade agreements with them[x]. During this period, the System of Central American Integration (SICA) was established along with the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA), the Mercosur, and the North American Free Trade Agreement (NAFTA)[xi]. In 1994 after the first Summit of the Americas, a proposal was placed to create a Hemispheric Free Trade Area of the Americas (FTAA)[xii]. Despite such progress, there were certain obstacles. It became difficult to realise a hemispheric notion of free trade owing to economic and political differences. Countries in Latin America also signed bilateral free trade agreements with different countries[xiii]. Economies in the region had yet not realised their competitiveness vis-à-vis other global actors and the idea of turning Latin America into a regional economic powerhouse did not materialise due to internal political and economic differences. For instance, in 2006 Venezuela withdrew from the Andean Pact[xiv] citing differences, while the formation of the NAFTA and the DR-CAFTA exhibited sub-regional preferences for trade agreements. In terms of economic development, Brazil, Mexico, Argentina, Chile, and Peru exhibited strong growth rates while the rest of the region including the Caribbean experienced slow economic growth.  

The Third Phase of Economic Regional Integration in Latin America

Along with the second wave of regional integration, there was a new development, which may be characterised as the third wave of regional integration in Latin America, and certain countries such as Venezuela and Bolivia sought to challenge the prevalence of the United States in the region. Initiatives such as the Union of South American Nations (UNASUR)[xv], Forum for the Progress and Integration of South America (PROSUR)[xvi][xvii], Bolivarian Alliance for the Peoples of our Americas (ALBA)[xviii], and the Community of Latin American and Caribbean States (CELAC)[xix] came up. In 2005 Venezuela launched the Petrocaribe[xx] initiative with the intent to supply oil on concessionary terms to Caribbean countries, it also tied up with the ALBA to engage in economic cooperation. The focus of these regional organisations was to augment cooperation among countries that had similar views, to deal with global problems in a common voice, and to increase the bargaining power of Latin American countries on the global stage. Hence, during this period political considerations preceded economic rationalism.

The Fourth Phase of Economic Regional Integration in Latin America

During this brief interlude, a parallel development occurred which may be characterized as the fourth wave of economic integration in Latin America, which stressed diversity and engaging global economies on a larger scale. For instance, in 2011, Colombia, Chile, Mexico, and Peru established the Pacific Alliance[xxi] to create outward-oriented trade liberalising policies and achieve the free movement of labour, goods, and services among the members. Mexico, Peru, and Chile joined the Asia-Pacific Economic Cooperation (APEC) to broaden their economic aspects. Following the path of open regionalism, the fourth phase marks a shift away from political considerations towards pragmatic economic engagement not only within the region but also beyond it. It was during this period that many Latin American economies increased economic cooperation with external actors bilaterally to secure their interests.

Current Trends and Challenges

Over the past few years, Latin American economies have been subjected to fluctuating international commodity prices, which have left a deep impact on their performance. The increasing demand for commodities led to modest economic growth in the region at 2 percent per annum in 2019 and subsequent projections were at 2.5 to 3 percent in 2020, however, the Covid-induced pandemic resulted in a completely different picture. The growth rate in the region was a negative -6.5 percent per annum in 2020, which increased as the pandemic receded in the latter half of 2021. In 2022, the region grew economically at a pace of 2.6 percent per annum and in 2023 it stands at just 1.1 percent per annum[xxii], reflecting a slowdown. Argentina, Mexico, and Brazil are experiencing an economic slowdown with the economies contracting by almost 8 percent[xxiii]. On the other hand, the Caribbean and Central American region are growing at an average of 4.1 percent while the rest of the region grows at 3.1 percent per annum.

Fluctuating commodity prices in global markets have led to skewed returns in Latin America. For instance, the increased demand for commodities during the interceding period of 2021-2022 led to a rise in income received that waned during the onset of the Ukraine Crisis[xxiv]. Latin American countries have not been able to diversify their export basket and shift towards high-end products, and the over-dependence on the export of raw materials and intermediate goods[xxv] remains. Lower economic growth led to volatility in major economies in the region and a trend towards inflation. Consequently, the challenges faced are not just limited to dependence on external markets but also addressing inflationary tendencies and addressing unemployment.

Intraregional trade stands[xxvi] roughly at 19.2 percent compared to other regional blocs such as the European Union which is at 59 percent and the ASEAN at 49 percent. Exports from Latin America to the rest of the world stand at only 6 percent. Export of intermediate goods is at 18.25 percent; export of consumer goods is at 19.24 percent[xxvii] and export of capital goods is at 33.25 percent[xxviii], which highlights the region’s slow integration into the global value chains. Latin America’s digital transformation is at 4.5 percent[xxix], and low when compared to other regions in the world even though the pandemic had shown the requirement to adapt to digitisation of production, marketing and trade. Digital transformation of the economy in Latin America could aid in the betterment of services, production and competitiveness in the global market. Hence, despite potential, Latin America remains a major supplier of raw materials with the shift towards specialisation in sophisticated products growing at a slower pace[xxx].

To address the capital deficit and gain access to international finance, many countries have engaged in bilateral trade agreements with external actors such as the United States and, the People’s Republic of China and currently the Mercosur has negotiated a trade agreement with the European Union which awaits ratification. While China and the United States are major participants in the region, other countries such as India, Japan, and South Korea are making inroads to develop better economic ties. Currently, countries in Latin America seek economic revival, reduce dependence on commodity exports and adopt economic diversification, which may address issues such as unemployment and periodic economic cycles. Although the tendency to adopt protectionist measures are strong, the willingness to invite capital and diversify the export basket of these countries are means to increase trade and cooperation.

Conclusion

Tracing the growth of regional economic integration in Latin America brings out certain points for consideration. Primarily, despite cultural and economic similarities in addition to geographic continuity the presence of sub-regional organisations such as the Mercosur, SICA, USMCA, and the CARICOM highlight preferences of countries to cooperate based on geographic proximity and at a sub-regional level. It is indeed noteworthy that Argentina and Brazil on one hand and Mexico, Canada, and the United States on the other have different cultural orientations and yet are members of the Mercosur and USMCA respectively. The same can be said about the DR-CAFTA which is made up of five Central American countries along with the Dominican Republic and the United States.  

Political ideologies and orientation still play a major part in forming regional organisations as exhibited by the formation of the ALBA, PROSUR, and UNASUR. In this regard, Venezuela has been suspended from the Mercosur since 2016, while Chile in 2022 withdrew from the PROSUR. While Latin America shifted its orientation from the Import Substitution Industralisation model to open regionalism, it has also led to a slew of bilateral and cross-organisation trade agreements such as the EU-Mercosur Agreement and Chile, Mexico and Peru’s Agreement with the APEC, which highlights the tendency of individual countries or within a sub-regional level to cooperate with external actors. The exceptions to this may be the regular EU-CELAC Summits[xxxi], the South American Summit[xxxii], and the Summit of the Americas which aim to strengthen cooperation at a pan-regional level.  

Due to slow economic recovery and gradual economic diversification coupled with low intraregional trade, Latin America faces various challenges towards achieving stronger economic integration. While countries in the region look towards extra-regional partners for better opportunities, it may compromise the idea of pan-Latin America regional integration.

Origin: https://icwa.in/show_content.php?lang=1&level=3&ls_id=10270&lid=6539