| CONNECTIVITY, COMPATIBILITY, CONVERGENCE,
Conditions for productive integration in a regional space.
by Félix Peña
English translation: Isabel Romero Carranza
It has been noted that at least three conditions are
necessary to advance economic integration between countries that share
a regional geographic space. They are also conditions to advance production
linkages between companies from different countries in the same regional
space. These conditions are connectivity, compatibility and convergence.
They involve sequential steps which begin with physical connectivity,
including communications and everything related to trade facilitation,
followed by the compatibility of goals, perceptions and values and eventually
concluding with the convergence of systems, policies and concrete actions.
In this perspective, we can understand the efforts
made by the countries in the region or sub-regions within it, to generate
institutional mechanisms and common ground rules for economic relations,
not only as a means of increasing interactions and, therefore interdependence,
but also to regulate conflicts and to strengthen the elements of cooperation
in order to render such interdependence manageable, marking it with signs
of cooperation. All these are behaviors that prove functional for the
governance of a shared regional space.
However, there is a fourth condition, which is the
predictability of the ground rules. It is essential for the sustainability
of the integration agreements through time, as well as for the expectations
that can be generated in business sectors, especially at the moment of
making productive investment decisions.
It is in relation to this fourth condition, that the role of law and
institutional mechanisms become more relevant in the development of regional
interdependence in Latin America. This role is to help strengthen the
centripetal forces in a common space that given its own dynamics, eventually
could be characterized by the presence of powerful centrifugal forces.
Common rules and institutions then acquire a historical and geopolitical
sense, in the perspective of a strategy aimed at countering the natural
tendencies towards conflict that are present in the relations between
nations that share the same geographical area.
Latin American countries have gradually decreased the relative marginality
that long characterized their mutual relations. Additionally, the international
scenario, with the profound redistribution of relative power among nations
and the new geography of global economic competition, contributes to a
reassessment of the contiguous environment in the strategies for development
and international insertion of the countries of the region. This explains
why it is becoming increasingly difficult for these countries to be indifferent
to what is happening in their regional space.
Both conceptually and in practical concrete actions, in recent years
Latin American countries have recognized the existence of multiple means
adapted to the purpose of strengthening their mutual relations and promoting
cooperation and integration with their neighbors. These include those
instruments characteristic of formal processes of economic integration
as well as bilateral or multilateral ones, regional or partial (sectoral
or sub regional), governmental or social, cooperative with third parties
or intraregional. They include as well, multiple forms of joint ventures
and partnerships between companies from two or more countries of the region
(a subject previously addressed in the June
issue of this Newsletter, of which this is a continuation, on http://www.felixpena.com.ar).
The economic and political importance of developing joint projects and
undertakings involving two or more countries, often-contiguous ones, began
to be perceived at the beginning of the experience initiated in the region
in the late fifties with the signing of the first treaties that formally
established integration objectives. This idea was linked to the sharing
of space and resources, both for the construction of physical works or
for the development of productive activities, which due to their nature
and scope, required to be addressed in more than one country. A bridge,
a railway, a dam, a road, an electrical interconnection, communications
networks, the joint exploitation of natural resources, the joint development
of contiguous or common maritime areas, industrial undertakings or servicing,
have been typical cases. A very recent example, with a projection that
transcends the region, is the joint airline created by LAN Chile and TAM
The different types of joint ventures are one of the most effective ways
to generate "de-facto solidarity" -in the sense proposed by
Jean Monnet, one of the founding fathers of European integration and inspirator
of its existential and methodological dimension- between nations that
share a common regional space. Of these result concatenation effects that
may contribute to render permanent the economic and political ties that
are generated. Hence, their value to support, over time, the efforts to
facilitate the governance of a region, understood in the sense of the
prevalence of peace and political stability in the relations between countries
sharing a common geographical space.
Both in the construction of LAFTA (1960) first and the LAIA (1980) later
and in the sub-regional experiences, such as those of the original Andean
Group (1969), the Program for the Integration and Cooperation between
Argentina and Brazil -PICE- (1986), and then Mercosur (1991), the idea
of advancing through sectoral integration and joint ventures was present.
It has also been so in Central America and the Caribbean. In the case
of the Andean Group, it was reflected by Decision 46 about Andean multinational
enterprises and, in particular by sectoral programs of industrial integration.
In the case of the PICE and later Mercosur, it was reflected by the economic
complementation agreements, for example, those related with the automotive
sector, among others, and by Decision CMC 3/1991 regulating the seldom
used instrument of sector agreements, provided for in Article 5 d of the
Treaty of Asuncion.
In the original development of LAFTA, the instrument of industrial complementation
agreements, provided for in Articles 16 and 17 of the Treaty of Montevideo
of 1960, responded precisely to the idea of progressing through sectoral
approaches in the construction of a space of Latin American integration.
They had, indeed, a commercial purpose, but their underlying aim was to
promote productive linkages with preferential trade measures designed
to encourage investment. This figure may be perhaps the one which best
reflected the original concept that led to the negotiation of what would
become the LAFTA. It was external pressure that forced to insert that
first regional agreement into the framework of a free trade area provided
under Article XXIV of the GATT, altering the original ideas, in particular
of Argentina and Brazil. This is the basis of the subsequent failure of
the LAFTA and its transformation into the LAIA.
Already in the 1980 Montevideo Treaty, which created the LAIA, the figure
of the agreement of partial scope takes center stage, defined and regulated
in its different variants in Section Three of Chapter II and, with regard
to economic complementation agreements, by Article 11. Resolution 2 of
the LAFTA Council of Ministers, of 12 August 1980, regulated them (see
its text on http://www.aladi.org/).
They do not require the participation of all member countries. And in
order to harmonize the approach of the new Treaty with GATT rules, and
especially with Article XXIV, the countries of the region members of the
GATT played a leading role in driving the adoption at the Tokyo Round
(1979) of the so called "Enabling Clause". In the absence of
such clause, at the moment of the creation of the LAFTA, it was not possible
to reconcile the sectoral scope of the industrial complementation agreements
with the abovementioned Article XXIV of the GATT (on the original scope
of the LAFTA and, in particular, of the complementation agreements, refer
to the responses by the member countries to the questionnaire that, at
the time, was made by the GATT to the Contracting Parties and LAFTA members.
For the questions go to https://www.wto.org/,
and for the answers, to https://www.wto.org/.
Additionally, see the excellent analysis made by Bernardo Sepulveda Amor,
in his article on "The Regime of the most Favored Nation in GATT
and LAFTA" on http://codex.colmex.mx:8991/,
especially pages 351 et seq.).
In the current approaches of "convergence in diversity", especially
between the countries of Mercosur and the Pacific Alliance, what was mentioned
above may have much practical value. The main aim would be, precisely,
to facilitate joint ventures and production linkages between companies
in countries of the region and to take advantage of the increased demand
for goods and differentiated services by urban consumers of middle class
income, either in the region itself or in emerging countries from other
regions such as Asia, Africa and the Middle East. There could be productive
linkages that develop around specific projects, even including some countries
involved in various sub-regional integration schemes, as may eventually
be the case of agreements between countries that are members of Mercosur
and others participating in the Pacific Alliance (see the paper entitled
"Latin America, between convergence and fragmentation" on http://www.felixpena.com.ar/).
Other important elements, in relation with a strategy for productive
articulation at the sectoral level, are those referred to the regimes
of origin, technical standards and other regulatory frameworks. They can
also be addressed with a regional scope within the institutional and regulatory
framework of the LAIA.
It has been noted that at least three conditions are necessary to advance
economic integration among countries that share a regional geographic
space (they were raised, in due course, by Robert Erbes in an article
included as recommended reading of this Newsletter). These conditions
can also help promote the productive articulation between companies from
different countries in the same regional space. Such conditions are: connectivity,
compatibility and convergence. They involve sequential steps, beginning
with the physical connectivity, including communications and everything
related to trade facilitation; followed by the compatibility of goals,
perceptions and values and eventually concluding with the convergence
of systems, policies and actions.
In this perspective, we can understand the efforts made by countries
of the region, to generate institutions and rules for their economic relations,
as a means of increasing interdependence and to regulate conflicts, as
well to strengthen elements of cooperation in order to render such interdependence
manageable, through cooperation and solidarity. This means behaviors functional
to the governance of a shared regional space.
But there is a fourth condition to consider. It is the predictability
of the ground rules. It is essential for the sustainability of the integration
agreements, as well as of the expectations that can be generated among
businesses at the time of having to make productive investment decisions.
It is in relation to this fourth condition, that the role of the law
and of the institutional mechanisms for the development of a system of
regional interdependence in Latin America becomes most relevant. This
helps strengthen the centripetal forces in a common space that could eventually
be signed, given its own dynamics, by the presence of powerful centrifugal
forces. Common rules and institutions acquire then a historical and geopolitical
sense, in the context of a strategy aimed at countering the natural tendencies
towards conflict in the relations between nations that share the same
Indeed, the effectiveness of the results of the efforts to increase business
participation in the cooperative relations and economic integration of
Latin America has been limited by the effect of some factors. Among others,
we can mention that businesses have not always been able to develop expectations
of stability, especially with regard to the legal and economic conditions
that have characterized the opening of markets negotiated in the framework
of multilateral and bilateral integration and economic cooperation agreements.
This is because these agreements have often been conceived by governments
as instruments for the promotion of short-term trade, responding more
to the idea of cyclical loan markets or of trade surpluses and shortages,
than to the creation of real -and not just rhetorical- long-term conditions
to induce investments and promote the expansion and modernization of productive
The main factors of instability in the opening of markets that lead to
a situation of unpredictability, usually affecting the behavior of businesses
in intraregional trade, have been the legal precariousness of the preferences
granted, since they are often easily altered by unilateral actions or
behaviors from the granting country, or by the abrupt and erratic fluctuations
in exchange rates. The atmosphere of instability can have the effect of
discouraging businesses, often preventing them from making decisions that
would justify the cost of undertaking commercial or investment agreements
with long-term effects between companies in different countries of the
region. As it has been rightly pointed out, this precariousness may become,
in fact, the equivalent of a significant non-tariff restriction on regional
A concrete business may be viable when imagined in terms of the expanded
markets, as a result of the frameworks that are established by governments
and developed at the administrative level and by daily management. Businesses
will seriously consider such frameworks in their calculations only to
the extent that they perceive them as relatively stable and effective.
For example, would you as a Minister, run risks based on your own capital
and savings by investing in a new plant, expanding the production capacity
of the existing one, or incorporating new production or organization technologies
in view of the market apparently opened up by a preferential or integration
agreement signed with a colleague or colleagues from Latin American countries?
This is a key question that political operators must answer when materializing,
through agreements, their vision of the architecture of integration. If
the answer were negative or doubtful, why should a positive response is
expected from a local or foreign investor acting rationally? In order
to make an investment or to decide the participation in a transnational
production network, businesses will not only assess the seriousness of
the design of the integration process and its economic and political rationality.
They will also ask about its practical applicability when their products
arrive at the customs border of the other country. They will also relate
the promised opening of the market, with other internal and external economic
factors of the exporting and importing countries, that may affect the
calculation of the return of their investment in order to seize the business
opportunity that are offered.
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Félix Peña Director
of the Institute of International Trade at the ICBC Foundation. Director
of the Masters Degree in International Trade Relations at Tres de Febrero
National University (UNTREF). Member of the Executive Committee of the
Argentine Council for International Relations (CARI). Member of the Evian
Group Brains Trust. More