Mercosur: Toward A Quasi-Common Economy Approach?

Includes: BZF
by: Otaviano Canuto

An editorial of the Financial Times this week (August 14th) stated the following:

"In 1991, when Brazil joined three of its neighbours to found Mercosur, the pact was hailed as South America's answer to European integration. It is a mark of its failure that, 20 years after the bloc began negotiating with the EU, Brasília is now trying to do its own deal with Brussels."

Regardless of any balance between achievements and shortcomings of Mercosur that one may offer, Brazil's recent move - like Paraguay's - points toward a search for more flexibility within prevailing commitments. One may wonder whether it may lead down the road to a relative shift from the European style of integration toward a more Asian-like process.

Europe and Asia provide two different models of integration and growth. The former relied on political willpower to create a unified common market; the latter based its integration on a buildup of regional trade, investments, and production networks -- eschewing a formal link-up in political or monetary terms. Interestingly, although economic integration has occurred along different lines, both regions have attained high internal trade intensity. Against this background, it is not possible to say that one model of regional integration is intrinsically more effective than the other. And, depending on circumstances, de facto cooperation may ultimately yield more results than de jure integration.

In comparison with its neighbors to the west, Asia can be said to have a quasi-common economy (QCE). As such, the region has a high level of physical integration, minimal barriers to intraregional trade, interlinked and interdependent production structures, and no formal or centralized body for coordination of the entire region's economic policies. Physical infrastructure investments and intraregional trade facilitation created an environment conducive to business-driven economic integration. Broader institutional convergence has been pursued only to the extent that a concrete base of economic interests was there to support it. Compared to "big bang" approaches and correspondingly high requisites in terms of political capital and complex diplomatic negotiations, like those in Europe, the amount of political capital necessary in the Asian QCE was kept to a minimum. The rise of the Asian QCE was neither abrupt, nor was it micro-planned. Rather, factors such as advantageous geography, high infrastructure investment, technological diffusion, an export-led growth model, and economic openness led to the development of the region's QCE.

This begs the question: Is there a way other regions can reap the benefits of integration, in the absence of supranational governance? In an issue of the Economic Premise series, Manu Sharma and I argued that such integration is indeed possible, and perhaps preferable, for other regions of the world, most notably Latin America. But does the shoe fit? How is the South American region better suited to a QCE approach, rather than ambitious, top-down, full-fledged economic unions?

In "Asia and South America: A Quasi-Common Economy Approach," our research indicates that a QCE would indeed be the best path to pursue. Despite the idiosyncratic geographic, political, and economic features of Asia and South America, there are lessons that South America can learn from its neighbors to the East. In an effort not to put the cart before the horse, we argue that South American governments should spend political capital on front-loading cross-border infrastructure investments, rather than on complex, detailed, treaty-like negotiations before the emergence of corresponding economic ties.

South American regional integration experiences have fallen far short of the levels of trade and macroeconomic interdependence achieved in Asia and Europe. Neither multilateral diplomatic efforts nor market-driven dynamics yielded expected results in terms of economic integration. If the overambitious top-down efforts implemented heretofore give place to a quasi-common market approach in Mercosur - and South America at large - chances of a more gradual but deeper and robust economic integration would be maximized.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.