It’s physical: that’s the way to integrate in South America

About ten years ago, before the Euro was inaugurated, I attended an academic debate about the future of the new currency between two economists, one coming from a US academic institution and another from an Italian university. The former argued that the experience was doomed to fail, given the absence of those prerequisites for an optimum currency area outlined by Robert Mundell. The Italian replied by saying that American economists had an inner difficulty to understand the political nature of the process in course in Continental Europe, and that political will would ultimately generate Mundell’s criteria endogenously there. The Italian further remarked about pitfalls stemming from any assumption that processes of economic integration have to follow basically a same sequence of phases.

In hindsight, I think the Italian’s arguments had a sounder footing, provided that accompanied by a caveat that political will is absent or cannot succeed in an economic void, that is, without at least a bare sketch of Mundell’s preconditions. This caveat is important because I have seen many European analysts using the European experience as a benchmark to address the experiences of integration in South America – thus committing the mistake of treating integration as a same sequential process everywhere – and who very often explain the hurdles and sluggishness of trade negotiations within the region as a reflection of not enough political willingness by negotiators to push it forward.

However, there is no History of wars in South America intense enough to generate any European-like overwhelming desire of economic unity as a means to suppress political conflicts. By the same token, there has not been anything like the Asian manufacturing-export drive toward outside the region that in their case has led to an emergence of economic interests around “regional core networks of production”, “flying-geese” processes of industrialization and the like, prior to the recent talks about deeper integration.

As South America has neither the European political context, nor the previously blossomed production-network-driven integration of Asia, one cannot but naively expect any linear and grandiose process of institutional reshuffle and convergence in the region. Contrariwise, the tendency has been experimentation with different institutional designs and styles of public-private relationships in the recent past – see, e.g. Kenneth Roberts. Therefore, one may still have to wait for a stronger presence of outward-looking, regionally oriented domestic interests in most countries before one may expect to see a faster process of institutional overhaul toward cross-border consistency, as well as deeper macroeconomic integration.

Nonetheless, I believe there are currently two forces in action pushing in that direction:

(i) The recent dynamism of trade intra-region and with Asia, with the former taking place at a pace above the one featured by trade negotiations. Evidence on the increasing relevance of the intra-region trade and commerce with Asia, China in particular, can be tracked in the regular publications of the Institute for the Integration of Latin America and the Caribbean of the Inter-American Development Bank, particularly in its Monthly Newsletter (INTAL/IADB).

(ii) Simultaneously to that trade evolution, there has emerged a perception of how binding the lack of appropriate infrastructure investments is increasingly becoming in the region (for a recent uptake, see Gonzalez et al). Attention to the costly implications of an infrastructure in dire straits for growth and competitiveness has increased, as the possibilities of foregoing opportunities of trade within the region and with the rest of the world have become more visible.

In this regard, the October issue of INTAL Monthly Newsletter brought an interesting quantitative exercise made by Ricardo Carciofi and Romina Gaya that illustrates the widening gap between trade and infrastructure in South America. Chart 1 exhibits the discrepancy between the evolutions of physical volumes of trade and infrastructure in the region, whereas Table 1 shows how more acute the issue has become in the largest economies.

chart_1__infra__trade_south_america_640.jpgtable_1__infra__trade_by_country_640.jpg

Together those two movements – increasing trade and growing pressures on existing infrastructure – are creating a strong incentive for most countries to dedicate efforts toward developing networks of cross-border physical integration through cross-country projects of infrastructure investment. Later on, as those networks give birth and nourishment to regionally aligned local economic interests, faster advance in regional economic negotiations and higher institutional convergence will certainly become easier to obtain. Not the other way around.

This is a field where multilateral development institutions have been playing a fruitful supportive role. The Initiative for the Integration of Regional Infrastructure in South America (IIRSA) is a dialogue forum among South American countries that counts with the technical and financial support of the IADB, in conjunction with CAF and FONPLATA, and which has already generated a dense map of opportunities for physical integration (see Chart 2 – and click here if you want to look at it in more detail). Since the begiining of IIRSA the 12 South American countries have identified a portfolio of multi-sector projects in transport, energy and communication, with a significant effort toward the implementation of integration projects in the area of transportation.

otaviano_640.jpg The role of multilaterals may go much beyond the general coordination and secretarial work, as the multilateral institutions also finance and technically develop some crucial projects. Take, e.g., the Bi-Ocean Corridor linking Chile-Bolivia-Brazil – depicted in Chart 3 – that was object of a meeting of the Presidents of the 3 countries in mid-December in La Paz. The whole axis depends on the resolution regarding a certain 30-Km road portion (“El Sillar”) nearby Cochabamba that is often closed by weather events. The IADB has been developing a study on the options to dissolute this short but crucial bottleneck vis-à-vis the full development of the whole thing.

chart_3__biocean_corridor__640.jpg

Notwithstanding this role of multilateral institutions, the integration of transports, energy, and telecommunications will ultimately depend on the willingness to do it by South American countries themselves. Provided that trade and infrastructure needs become incentives enough to lead them to compromise on the more limited subset of institutional negotiations required for those cross-country physical networks, one may then expect further integrative steps in the future. In South America, physical contact tends to lead to deep integration.

5 Responses to "It’s physical: that’s the way to integrate in South America"

  1. allan   January 7, 2008 at 5:11 am

    Sequencing does not come down to politicall will vs Mundell criteria. With most Latin American currencies pegged to the US dollar, it comes down to Washington.

  2. mark turner   January 7, 2008 at 8:57 am

    Another case of “keeping the eyes on the prize”, FBO? Another tiptop note, sir.One thing in favour of a single currency that you didn’t mention; there’s little in the way of ‘currency nationalism’ in South America. The reason that many Europeans mourned the loss of their Francs, Marks and Lira (the very same block that stops the UK from saying goodbye to the pound sterling) does nor exist in any great measure in the region. Maybe by chance, as the occasional surges of “el hiper” have forced regular changes in currency in most countries, but all the same there are be few that feel viscerally attached to their Reais, Pesos, Soles and Guaranies.Anyone for the Panamerican locho :-) ?

  3. Otaviano   January 7, 2008 at 10:06 pm

    AllanIf it were true that most of the region lives under a dollar pegging, that would make macroeconomic coordination and some future monetary unification easier, as intra-region exchange rate stability would be granted! And even dollarization (much beyond pegging) does not mean dependence on decisions in Washington (that’s not the case of Ecuador, for instance).FBMarkYou are perfectly right in highlighting another factor of differentiation between Europe and SA. On the other hand, even if there is no linear and repetitive sequence of stages mechanically unfolding in every process of integration, monetary unification can only be thought of at a very advanced stage in any process of integration. And SA falls far short from completion of very basic steps (far-fetched free trade unions, full mobility of labor and capital etc.). Thus, SA is still incapable of reaping any advantages from the flexible monetary culture that you pointed out! Thanks as always for your kind reading!

  4. Allan   January 8, 2008 at 6:04 pm

    The point wasn’t about facility. Naturally US hegemony should facilitate monetary, even fiscal, policy, with the caveat – in whose favour? A hegemon will seek dependant blocks, not independent currencies. If anything, further dollarization, and further policy intervention in the form of expertise, and an open-ear to Washington’s own policy, are more likely.

  5. Vitoria   January 9, 2008 at 11:38 am

    Otaviano,1) The increase in trade within Latam is an important aspect for a currency board (or a common currency). Don’t you think that Latin countries are still too unequal and with too much poverty to have a common currency? 2) What are the macro and social improvements of a common currency that would foster this idea?3) Which country would the German of South America (financing the ‘poor’ countries)?Well, at least, we already have the Banco del Sur to be the common bank for the “el hiper” as Mark suggested. Great piece, thanks!Vitoria