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.
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*Dr. Arnab Chakrabarty, Research Fellow, Indian Council of World Affairs, New Delhi.
Disclaimer: Views expressed are personal.
Endnotes
[i] In this context, Latin America refers to the entire region from Mexico till the southern tip of Argentina and the Caribbean Islands excluding the United States and Canada.
[ii] Organisations such as the SICA, Mercosur, DR-CAFTA, USMCA and the CARICOM highlight preference for geographic nearness, while the long-term goal of creating a hemispheric free trade area has long been overshadowed due to political and economic issues.
[iii] Charles A. Frankenhoff. ( 1962). The Prebisch Thesis: A Theory of Industrialism for Latin America. Journal of Inter-American Studies. 4(2). 185-206. Accessed 8th November 2023. https://www.jstor.org/stable/165226.
[iv] During the First and Second World War, the region experienced an economic boom due to export of commodities which however waned during the interval between the two Great Wars and subsequently after the end of the Second World War.
[v] Werner Baer. (1972). Import Substitution and Industralization in Latin America: Experiences and Interpretations. Latin American Research Review. 7(1). 95-122. Accessed 12th November 2023. https://www.jstor.org/stable/2502457.
[vi] Mauricio Baquero Herrera. (2005). Open Regionalism in Latin America: An Appraisal. Law and Business Review of the Americas. 11(2). 139-184. Accessed 12th November 2023. https://scholar.smu.edu/cgi/viewcontent.cgi?article=1203&context=lbra.
[vii] The CACM was initiated in 1958 under the auspices of the Economic Commission for Latin America (ECLA). Although it did lead to a spur in trade and economic cooperation, frequent disagreements among the member states and the political crisis between Honduras and El Salvador in 1969 led to its defunct status.
[viii] The Andean Community was established in 1969 by Peru, Ecuador, Colombia, Chile and Bolivia. Chile withdrew in 1976 and Venezuela in 2006. Currently it has 4 members.
[ix] The CARICOM was established in 1973 to foster regional integration and trade within the Caribbean region. Currently, it has 15 full members, 5 associate members and 8 observer states.
[x] Jose Briceno Ruiz & Andrea Ribeiro Hoffmann. (2010). The Crisis of Latin American Regionalism and Way Ahead. Financial Crisis Management and Democracy. Accessed 14th November 2023. https://link.springer.com/chapter/10.1007/978-3-030-54895-7_18.
[xi] Now known as the United States Mexico Canada Free Trade Agreement (USMCA)
[xii] Peter Hakim. (1993). Western Hemisphere Free Trade: Why Should Latin America Be Interested? American Academy of Political and Social Science. 526(1). Accessed 16th November 2023. https://journals.sagepub.com/doi/10.1177/0002716293526001010?icid=int.sj-abstract.similar-articles.9.
[xiii] Chile, Mexico and Colombia have the highest numbers of Free-Trade Agreements with other countries, followed by Brazil and Uruguay.
[xiv] Carlos Malamud. (2006). Venezuela’s withdrawal from the Andean Community of Nations and the Consequences for Regional Integration. Real Instituto Elcano. Accessed 16th November 2023. https://www.realinstitutoelcano.org/en/analyses/venezuelas-withdrawal-from-the-andean-community-of-nations-and-the-consequences-for-regional-integration-i-ari/.
[xv] The UNASUR was founded in 2008 under the initiative of former President of Venezuela Hugo Chavez as a means to draw ideologically inclined countries and engage in regional economic cooperation. The regional organisation had a left-wing orientation and since 2018 till 2020 Colombia, Brazil, Ecuador, Argentina and Uruguay withdrew from the organisation.
[xvi] Founded in 2019 under the initiative of Chile and Colombia, the PROSUR was created as a regional mechanism which was politically conservative with the aim to engage in regional economic cooperation.
[xvii] Pedro Silva Barros & Julia de Souza Borba Goncalves. (2021). Crisis in South American regionalism and Brazilian protagonism in Unasur, the Lima Group and Prosur. Revista Brasileira de Politica Internacional. 64(2). Accessed 20th November 2023. https://www.redalyc.org/journal/358/35866230012/html/.
[xviii] The ALBA was founded under the initiatives from Cuba and Venezuela in 2004 and had a left-wing orientation and aimed in economic regional integration and mutual economic aid. Currently it has ten member states of which Venezuela, Cuba, Nicaragua and Bolivia are prominent while Honduras and Ecuador withdrew.
[xix] The CELAC was founded in 2010 by the initiative of the Rio-Group and the CARICOM. It has thirty-three member states and the intention behind the creation of this forum was to engage in economic cooperation and assistance without involving the United States and Canada. As such it is an alternative to the OAS. Brazil under the Presidency of Jair Bolsonaro withdrew from the forum in 2020, however current Brazilian President Lula da Silva has reinstated Brazil as a member within it.
[xx] The Petrocaribe initiative aimed at supplying oil on concessionary terms with payments spread out over many years. This would enable member countries access to uninterrupted fuel supply without stressing their funds. However, since 2019 due to US sanctions the initiative has largely been unable to keep up with production and supply although Venezuela and other member states have discussed the possibility of its revival.
[xxi] Buran Lima et.al. (2016). The Pacific Alliance and its economic impact on regional trade and investment: Evaluation and perspectives. CEPAL. Accessed 22nd November 2023. https://www.cepal.org/fr/node/40621.
[xxii] It is estimated that the economic growth rate for Latin America will stand at 1.5 percent in 2024 indicating a continuation of slow growth.
[xxiii] Barbara Pianese. (2023). Latin America’s economic challenges for 2023. The Banker. Accessed 22nd November 2023. https://www.thebanker.com/Latin-America-s-economic-challenges-for-2023-1676625877.
[xxiv] Catherine Osborn. (2021). Will 2022 Reboot Latin American Regionalism? Foreign Policy. Accessed 22nd November 2023. https://foreignpolicy.com/2021/12/31/petro-lula-latin-america-regionalism-migration-covid-economy/.
[xxv] OECD. ( 2021). Regional Integration and productive transformation for a resilient recovery. Accessed 20th November 2023. https://www.oecd-ilibrary.org/sites/91aef103-en/index.html?itemId=/content/component/91aef103-en#sect-52.
[xxvi] There are three main reasons explaining the slow growth of intraregional trade in Latin America. Primarily, disproportionally high costs of trading due to weak transportation, infrastructure and logistics have a direct impact on trading. Additionally, complicated less transparent non-tariff barriers such as import licencing, price control measures, import subsidies, rules of origin, phytosanitary conditions lead to trade distortions. Thirdly, regulatory constraints to trade in services which aids in shielding against economic shocks and encourages competition among firms.
[xxvii] CEPAL. (2023). Economías de América Latina y el Caribe mantendrán bajos niveles de crecimiento en 2023y 2024. Accessed 23rd November 2023. https://www.cepal.org/en/pressreleases/latin-american-and-caribbean-economies-will-maintain-low-growth-levels-2023-and-2024#:~:text=In%202023%2C%20ECLAC%20forecasts%20that,(6.3%25%20in%202022)..
[xxviii] Export of intermediate goods is at 18.25 percent; export of consumer goods is at 19.24 percent and export of capital goods is at 33.25 percent.
[xxix] In comparison, digital transformation is highest in the Asia-Pacific region at 15.09 percent.
[xxx] UNCTAD. (2022). External Constraints, Sluggish Growth Cast Long Economic Shadow over Latin America and the Caribbean. Accessed 23rd November 2023. https://unctad.org/press-material/external-constraints-sluggish-growth-cast-long-economic-shadow-over-latin-america.
[xxxi] The Third EU-CELAC Summit took place in July 2023.
[xxxii] The 2023 South American Summit was convened by Brazil to enhance cooperation within the region to reposition South America on the global stage, enhancing economic cooperation, and reactivating the UNASUR.