Brazil and Mercosul: Reasons to Think Twice About Venezuela

The Brazilian Senate is considering whether or not to ratify the decision by the Lula administration to extend to Venezuela full membership in Mercosul.  In the context of global financial crisis, any and all efforts to promote freer trade should be welcome.  In this case, however, the Brazilian government would be well advised to postpone its decision.  It and the other Mercosul members should insist on alterations in Venezuela’s economic policies and anti-democratic practices before blindly endorsing them with full membership.

The reasons for postponing full Venezuelan membership have to do with the alarming deterioration of politics and the economy in Venezuela.  They also are a consequence of Brazil’s aspirations to a position of leadership in global economic management consonant with its size and growing prestige.

With respect to Venezuela, Brazil finds itself in an unfamiliar dilemma of having to choose between universal values of democracy and more traditional considerations of national sovereignty.  This is clearly an uncomfortable situation for Brazil and for its business and diplomatic elites who have pushed for the deal with Venezuela which is a reasonably important export market.  But it is a situation that a country with Brazil’s global aspirations must be prepared to confront. 

Brazilian leaders know full well that admitting Venezuela now to full membership is unlikely to advance Mercosul’s goals of peace, democracy, and economic prosperity through trade and integration in South America.    Just in the last few weeks, events make clear how the rule of law is under siege in Venezuela through government practices that would be inconceivable in Brazil’s vibrant democracy.  The new electoral law under discussion in the National Assembly, for example, would assure that Chavez’ party would garner almost all of the seats in the new Assembly and would run roughshod over minority representation by eliminating traditional political organizations, new political groups, regional political parties, and even smaller parties who have been supporting Chavez.  The new electoral law may even allow the government to postpone the 2010 legislative elections.

Meanwhile, rather than pragmatism in the face of the devastating plunge in Venezuelan oil revenues, the Chavez administration has accelerated its push for state control through nationalizations in a wide variety of economic sectors.    In a move that shows evident disregard for Mercosul investment protections, some of the latest nationalizations affected three Venezuelan subsidiaries of Techint, Argentina’s most important multinational, thereby provoking howls of protest in the Buenos Aires business community.  (Adding salt to the wound for the Argentines, Chavez in a bid to curry favor assured Lula that Brazilian firms would be spared from similar nationalizations.)

According to independent analysts, the Venezuelan government’s madcap bet that oil prices will surge again is leading to huge expansion of the public deficit.  At the same time, living standards are deteriorating as inflation approaches 40%.  Meanwhile, the exchange rate is hugely overvalued, the oil company (PDVSA) is a case study in public sector mismanagement, and foreign exchange reserves are declining.  The so-called social programs in Venezuela are eroding as funding for them declines and inefficiencies mount.  The nationalizations and other forms of government intervention point to a economic scenario of weak growth, negligible private investment, shortages, rationing, and public deficits funded through inflation and borrowing wherever possible from abroad, including from Brazil itself. These economic policies, a direct outgrowth of the government’s misguided political project, seem likely to impose an especially heavy burden on the poor in Venezuela.  [1]

Even before absorbing such as problematic partner as Venezuela, Mercosul itself has for some time been experiencing serious strains of its own.  Argentina has turned from the most liberal economy in Latin America to its most protectionist one, a stance that is causing serious problems for slightly less protectionist Brazil in the WTO and EU-Mercosul discussions.  The smaller Mercosul partners, Uruguay and Paraguay, having paid a heavy price in trade diversion, are clearly unhappy with the trading arrangement.  Brazil’s plans to consolidate and deepen the Mercosul block have long since been placed aside.  All talk of policy harmonization has been put on hold.

To be fair to the Brazilian negotiators, the full admission of Venezuela could be seen as part of a valid Brazilian agenda to enhance cooperation in South America on foreign investment, infrastructure, energy, and trade while reducing frictions.  It might even be the case that Lula and Brazil could moderate some of the more radical tendencies of Hugo Chavez once Venezuela joins the Mercosul club of democracies . These would all be worthwhile goals and they may be achievable over a longer time horizon.

I suspect that the real reason for admitting Venezuela has relatively little to do with these sorts of objectives and more to do with the foreign ministry’s political strategy to de-emphasize meaningful trade agreements with the global North while shifting to more symbolic South-South understandings, for example, the Brazil-South Africa-India Initiative.    This strategy, much criticized in Brazil, is a relic of an earlier era of international economic relations in Brazil defined (in the minds of its business and government elites) by the North-South cleavage.  It is an outmoded stance rooted in the past and under pressure as structural changes in Brazil, especially the growth of agribusiness and the stabilization of the economy, propel democratic Brazil toward the status of a genuine global trader.  (See Tables 1 and 2 below.)

Mercosul can only really be understood as an essentially political, rather than economic, project.  Overall, trade with Argentina and Mercosul, while important, covers only 10% of Brazil’s trade; adding trade with Venezuela would bump this figure up by about 2%, not insignificant, but small.   Postponing full membership extension to Venezuela now would probably not reduce bilateral Brazil-Venezuela trade significantly, if at all, as it would remain covered under existing preferential agreements.

We can sum up the case for postponing Venezuela’s full membership in Mercosul along the following four lines.

First, Brazil and Mercosul would essentially be endorsing a political project in Venezuela that is clearly weakening democracy and spawning economic policies totally inconsistent with stable growth and human welfare in Venezuela in the medium-term. 

Second, incorporating Venezuela now would make it more difficult, rather than less, for Brazil to play a role mediating divergences in South America (e.g., in the Andean region) and promoting a positive economic agenda. 

Third, Venezuela as a full member of Mercosul (rather than an associated state) will complicate internal governance issues, including future efforts by the partners to strike trade accords with the United States and the European Union as well as WTO negotiations, not to mention settlement of investment disputes.

Fourth, the haste to admit a partner who is not ready for full membership could damage Brazil’s image in the eyes of the global community.  It will be legitimate to ask why Brazil is more focused on expanding its influence even at the cost of endorsing anti-democratic practices and obvious economic mismanagement in Venezuela.   If Brazil is so complacent in the management of its own regional trading arrangement, it could be argued, how reliable will it really be in future global issues, such as WTO and reform of the IMF?

Perhaps Brazil can indeed promote a positive agenda in the Americas through the inclusion of Venezuela in Mercosul.  But the wiser course for a true global leader would be to step back from this hasty decision even at the price of provoking the well-known ire  of the Venezuelan government. 

 

Table 1. Major Markets for Brazilian Exports in 2008
(in US $ MM)
  Value % Chge % Share
Latin America and the Caribbean 51196 22.5 25.9
 Mercosul 21737 25.3 11
 Other Latin America 29459 20.5 14.9
European Union 46395 14.8 23.4
Asia 37442 49.3 18.9
United States 27648 9.2 14
Africa 10170 18.6 5.1
Middle East 8055 25.9 4.1
Eastern Europe 5580 29.5 2.8

 

 

Table 2. Major Markets for Brazilian Imports in 2008
(in US $ MM)
    

Value % Chge % Share
Asia 47125 53.4 27.2
European Union 36192 35.4 20.9
Latin America and the Caribbean 28664 34.1 16.5
 Mercosul 14934 28.5 8.6
 Other Latin America 13730 40.8 7.9
United States 25810 36.6 14.9
Africa 15756 38.9 9.1
Middle East 6232 94.4 3.6
Eastern Europe 5338 92.6 3.1

 

 

Table 3. Major Export Markets by Country in 2008
(in US $ MM)
  Value % Chge % Share
United States 27648 9.2 14
Argentina 17606 22.1 8.9
China 16403 52.6 8.3
Benelux 10483 18.6 5.3
Germany 8851 22.7 4.5
Japan 6115 41.5 3.1
Venezuela 5150 9 2.6
Chile 4792 12.4 2.4
Italy 4765 6.8 2.4
Russia 4653 24.4 2.4
Belgium 4422 13.8 2.2
Mexico 4281 0.5 2.2

 


[1] See for example, Ruth de Krivoy et al:  “Venezuela Forecast: The Bane of Intervention”, June 1 2009.  (LatinSource).

One Response to "Brazil and Mercosul: Reasons to Think Twice About Venezuela"

  1. Anonymous   June 5, 2009 at 8:33 pm

    Hey how about mercosur adopting IsraHELL as a full blown member and take over south america!