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Latin America

Latin America

Economic Integration in Latin America

The process of economic integration in Latin America has played an important role in the economic history and development of the region, specially after the Second World War. As from the second half of the 20th Century, the degree of progress attained by national industries made it difficult for manufactured products to compete in markets of both developed and developing countries. Thus, an expansion of the market through a process of integration of the Latin American economies was considered. The formation of a common market, supplied mainly by regional industries, would provide economic solutions to many of Latin AmericaЎ¦s problems.

Because of this, the first treaties of economic integration started appearing and evolving accordingly with the political and economic development of each nation. Economic growth geared bilateral commerce relations, while economic and political crisis lead to international isolation and delayed the integration processes.

After the Second World War, integration assumed concrete form in plans of varying degrees of success, the Central American Common Market, the Latin American Free Trade Agreement, and the Andean Pact, to list some. Since the 1980s, integration schemes have developed with greater force, perhaps encouraged by the formation of the North American Free Trade Agreement (NAFTA), which in 1994 added Mexico as its third member, along with the United States and Canada. In a parallel development, the governments of Argentina, Brazil, Paraguay and Uruguay formed the Common Market of the South (Mercado Comun del Sur, MERCOSUR), with Chile and Bolivia as associate members. By these means, perhaps in altered form, economic integration will certainly continue to develop on the countries of the region.

In this paper, I will analyze the creation and success of one of this treaties, MERCOSUR, and look at some of its advantages and disadvantages.

In general terms, economic integration can be both beneficial and disadvantageous. On the one hand, it opens markets of member countries to member country firms, it allows firms to lower their average production and distribution costs, and it permits firms to become more competitive outside the trading bloc. Nevertheless it may also hurt some sectors of the economy because it exposes a firmЎ¦s domestic market to competition from firms in other member countries, and thus less efficient firms can be threatened.

In 1991, after several integration approaches between Argentina and Brazil , the Asuncion Treaty was signed by Argentina, Brazil, Paraguay, and Uruguay, and the MERCOSUR was created. The purposes of MERCOSUR include:

„h Free transit of production goods, services and factors between the member states with inter alia, the elimination of customs rights and lifting of nontariff restrictions on the transit of goods or any other measures with similar effects;

„h Fixing of a common external tariff (TEC) and adoption of a common trade policy with regard to nonmember states or groups of states, and the coordination of positions in regional and international commercial and economic meetings;

„h Coordination of macroeconomic and sectorial policies of member states relating to foreign trade, agriculture, industry, taxes, monetary system, exchange and capital, services, customs, transport and communications, and any others they may agree on, in order to ensure free competition between member states; and

„h The commitment by the member states to make the necessary adjustments to their laws in pertinent areas to allow for the strengthening of the integration process. The Asuncion Treaty is based on the doctrine of the reciprocal rights and obligations of the member states. MERCOSUR initially targeted free-trade zones, then customs unification and, finally, a common market, where in addition to customs unification the free movement of manpower and capital across the member nations' international frontiers is possible, and depends on equal rights and duties being granted to all signatory countries. During the transition period, as a result of the chronological differences in actual implementation of trade liberalization by the member states, the rights and obligations of each party will initially be equivalent but not necessarily equal. In addition to the reciprocity doctrine, the Asuncion Treaty also contains provisions regarding the most-favored nation concept, according to which the member nations undertake to automatically extend, after actual formation of the common market, to the other Treaty parties any advantage, favor, entitlement, immunity or privilege granted to a product originating from or intended for countries that are not party to ALADI (Latin American Integration Association).

MERCOSURЎ¦s early years saw remarkable economic growth and achievement of some of the pactЎ¦s initial goals. It gave its member countries a stronger and more powerful position in the international arena by presenting them as a bloc. Also, it opened the possibility of exchange amongst markets and levels of protection on behalf of regional industries.

Nevertheless, MERCOSUR witnessed stagnation after the significant growth earlier in this decade. It has suffered from tensions among its member countries because of the contradictory macroeconomic developments and fluctuations in their real exchange rates. Mainly, internal economic crisis in member countries have prevented economic integration to be entirely successful.

For instance, the pressing problems and uncertainty created by the Argentinean crisis and the smaller interest in MERCOSUR integration shown by Argentina diverted MERCOSURЎ¦s attention from the economic coordination plan. The crisis in Argentina also signifies that Argentina is unlikely to meet some of the targets that were previously agreed upon.

Several alternatives and plans have been proposed to improve the process of economic integration amongst the countries of Latin America. The eventual establishment of a monetary union among the MERCOSUR countries is one of them. Nonetheless, monetary integration is far from becoming a reality because of the divergent views MERCOSURЎ¦s members have on the proper exchange rate regime. The idea thus remains preliminary and vague.

Also, there is a plan to establish the FTAA (Free Trade Area of the Americas) founded on the functioning of NAFTA and comprising 34 other nations. The FTAA would eliminate trade and investment barriers on virtually all goods and services trades by member countries, reducing prices for consumers and creating new markets for producers throughout the continent. Also, it could empower countries by presenting them as a bloc.

Although the process of economic integration is very complicated in Latin America due to the problems of economic development for which the region is characterized, there has been vast progress in the last few decades. Only the creation of the several integration agreements have had evident effects on the attraction of foreign capitals. However, tensions between member countries still exist. In order to relieve them and thrive integration, domestic integration and stability is needed in member counties. Stable currencies, work opportunities, and attraction of foreign investments in a larger scale are required.

Even though Latin America is a intricate region in terms of political, social, and economic stability, it has proven to be willing to achieve economic integration. As complex and problematical as it may be, the nations of Latin America have started to work towards this aim and will eventually attain their goal successfully.


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