Regional Transformation and Growth in Practice – It’s More than Money
Industrial Structure, Intra-Regional Trade and Financial Cooperation in South America: Challenges, Links and Hidden Opportunities
Introduction
The first decade of the 21st century was marked by important changes in the political and economic landscape of South America. The external bonanza, characterised by an extraordinary rise in international commodity prices, together with a “high tide” in the international liquidity cycle, was the basis for a period of higher growth rates. There was also a shift by national governments in ideological orientation and policy options following the failure of the liberalising reforms of the 1990s. Probably the most important outcomes of this period were the unprecedented developments in social issues. Moreover, in diplomatic terms, the regional integration process also gained a renewed impulse and meaning. The rejection of the United States-led Free Trade Area of the Americas (FTAA) and the creation of the Union of South American Nations (UNASUR, the Spanish acronym for Union de Naciones Suramericanas), among other initiatives, seemed to pave the way for a move towards a post-liberal regionalism, different from moves towards free trade areas that were so predominant in the previous decade. Regional blocs added some novel goals to their agendas, including the reduction of asymmetries between members, socio-cultural integration and financial cooperation.
Even in that favourable context, however, the economic aspects of South American integration faced limitations. The significant increase in exports and the relaxation of external constraints that had been a major problem confronting the region until the beginning of the 2000s also resulted in increased imports. Although part of this growth was directed to the regional market, a more significant share was associated with an increase in imports of manufactured goods from outside the region, especially from Asia. This reveals the difficulty in transmitting demand growth to intraregional trade. More than that, the share of intra-industry trade was also small in most sectors, revealing that integration of production and industrial complementarity in the region remains weak.
With the unfolding of the international financial and economic crisis and the development of a complex “post-bonanza” scenario, these challenges for the region have been significantly greater than during the commodity boom, both in financial and productive terms. On the one hand, financial flows are more volatile and very sensitive to adjustments in the monetary policies of central economies. On the other hand, due to more intense international competition in the production of manufactured goods, the industrial development of South American countries that are struggling to compete with extraregional imports, especially from China, is even more difficult.
In this challenging context, it is appropriate to consider whether regional integration could help countries steer through these difficult times with an agenda that fosters greater regional financial cooperation and complementarity of production, both commercially and in terms of regional foreign direct investment (FDI). In other words, it is important consider to what extent the various instruments of financial cooperation could help strengthen countries’ resilience to balance-of-payments crises and also contribute to productive restructuring. Increasing regional trade and complementarity of production (via trade and investment), promoting employment and incomes, and fostering regional competitiveness are goals that do not conflict with financial goals, such as ensuring short-term liquidity and, especially, long-term development financing. On the contrary, the former goals would support the financial goals.
In that sense, this chapter seeks to analyse, through an integrated approach, the productive/commercial and the monetary/financial challenges observed in the South American integration process. Coherent with the broader agenda of post-liberal regionalism, cooperation efforts need to go far beyond trade agreements or tariff reductions. However, the argument for monetary and financial cooperation efforts could (and should) be reinforced if it is linked to the productive situation of the region.
This chapter is organised as follows. Section 2 below paints a general picture of the challenging external environment that South American economies are facing today. Section 3 presents a quantitative description of industrial production as well as the productive structures of the countries of the region and their evolution. It reveals considerable heterogeneity and the threats of regression. Section 4 focuses on trade issues. It investigates extraregional and intrarégional trade in South America and its slowdown in recent years. Section 5 focuses on financial integration, assessed through quantitative indicators of FDI flows and stocks. It also considers the outlook for initiatives of regional financial cooperation in the region. Finally, alternative routes to enhance regional integration are identified, with a particular focus on the opportunities opened up by regional infrastructure projects.
