A Window of Opportunity for MERCOSUR?

Recent developments in growth theory emphasize the importance of the factors that can induce growth accelerations. Among such factors, trade and the integration with the global economy play a prominent role. In particular, a number of studies point to the key role of exports in growth accelerations. When MERCOSUR was first created, it was expected to be instrumental in accelerating growth not only because it would increase the members’ degree of openness, but also because it would contribute to exploiting the growth-acceleration opportunities highlighted by economic geography, such as those associated with increasing returns to scale and spatial factors (distance).

After a significant increase in intra-regional trade in the 1991-97 period, however, the succession of macroeconomic crises produced a fall in intra-regional trade in absolute terms. It is not surprising that, in such a context, many observers and politician raised doubts about the future of the regional agreement. The changes that have occurred in recent years, especially in Brazil and Argentina, however, may have opened a window of opportunity for MERCOSUR to play its role in fostering regional growth.

A sine-qua-non condition for the revival of MERCOSUR is the increase in intra-regional trade. Although the rate of growth of intraregional trade has been higher than the increase of total trade in Argentina and Brazil, the level is still low. A vital question, then, is what the increase of trade depends on. Two factors have been important in the case of MERCOSUR: macroeconomic crises and low growth. In addition, the periods in which the two largest economies grew simultaneously have been shorter than in other regional agreements. The following graphs are illustrative.

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In the first place, the growth rate of the Brazilian exports to Argentina and of Argentine exports to Brazil are closely related with the destination country’s growth rate. The correlation coefficient between Brazilian exports to Argentina and Argentina’s growth is 0.8 while the correlation between Argentine exports to Brazil and Brazil’s growth is 0.7. This is in line with the export demands Heymann and Ramos (2005) estimate; they found that the elasticity of export demand in MERCOSUR with respect to the activity level is high. Second, we can see that during the 1999-2002 period in which there was a number of macroeconomic crises, there was a substantial fall in the level of trade (negative growth). Third, those periods in which the Argentine and Brazilian economies grew simultaneously (in the nineties and the current decade) showed an important increase in the intra-regional trade. The problem is that the probability that the two countries grow simultaneously has been only 0.6 since MERCOSUR was created. This probability is around 0.8 in the case of the Asian countries (Calderon and Fuentes, 2006). 

MERCOSUR’s situation is currently encouraging when assessed in the light of these facts: The two largest members are growing simultaneously and the probability that a crisis occur is much lower than in the nineties. Brazil and Argentina have accumulated large international reserves and are running current account and primary fiscal surpluses. In this context intra-regional trade is growing, although, of course, the rate is much lower than it was when some economies of MERCOSUR were recovering from the crisis in 2003. In addition, the resumption of growth has created opportunities to cooperate in the areas of energy and transportation infrastructure. We could say, then, that a window of opportunity has opened that could revitalize MERCOSUR.  

But, of course, growth theory also emphasizes the role of institutions. So, to be able to take advantage of the current opportunities, the most important task is to strengthen the efforts to build the institutional infrastructure that the regional agreement needs for the deep integration phase. And from this point of view, the current situation is also positive: Growing intra-regional trade means that the fixed costs to build institutional arrangements and common regulations are less relevant. Hence, if it is not the economy, it must be the polity…stupid.  

José María Fanelli

Heymann D. and A. Ramos (2005), Profundización del MERCOSUR y el desafío de las disparidades, Instituto para la Integración, Banco Interamericano de Desarrollo.  

Calderón, C. and R. Fuentes (2006), “Characterizing the Business Cycles of Emerging Economies”, The Central Bank of Chile. Mimeo.

5 Responses to "A Window of Opportunity for MERCOSUR?"

  1. Mary Stokes   June 5, 2008 at 5:39 pm

    Thanks for your post Mr. Fanelli! From your post, it seems like now should be a propitious time – ‘a window of opportunity’ as you mention – for Argentina and Brazil to further integrate via Mercosur, but you mention politics must then be standing in the way.How much do you think the traditional Brazil-Argentine rivalry to be the dominant regional power has stymied Mercosur? Do you think the fact that both these countries have similar resource endowments and are both resource-rich countries makes the idea of greater integration through Mercosur less appealing?