Title The treatment of asymmetries in regional
and subregional integration processIII. The traditional treatment of asymmetries
in Latin America and the Caribbean
The treatment of asymmetries in Latin America and the Caribbean has been governed by the principle of special and preferential treatment for relatively less developed countries1.
The Montevideo Treaty of 1960, which constituted the Latin American Free Trade Association (LAFTA), provided for differential treatment according to levels of development.
In 1969, one of the objectives of the Cartagena Agreement, which constituted the Andean Pact, was "to promote the balanced and harmonious development of the Member Countries" (Article 1) which "should lead to a fair distribution of the benefits derived for the integration process so as to reduce the differences existing among them" (Article 2). "Preferential Treatment" mechanisms, among others, were to be used for this purpose.
Differentiated treatment according to levels of development is also established in the Caribbean Community (CARICOM). Barbados, Guyana, Jamaica, Trinidad and Tobago and Surinam are formally considered "more developed countries". The other members of the community are considered "less developed" countries. This distinction is made because one of the specific objectives of the community is to fairly share the benefits of the integration process by bearing in mind the special needs of the less developed countries.
In 1975, the Panama Agreement, which constituted the Latin American Economic System (SELA), highlights that one of the five objectives of the System is to: "provide, within the context of the intra-regional co-operation objectives of SELA, the means for ensuring a preferential treatment for the relatively less developed countries and special measures for the countries with limited markets and those whose mediterranean condition affects their development".
The Montevideo Treaty of 1980, through which the Latin American Integration Association (ALADI) is constituted, reaffirms the same principle and ratifies the grouping of countries into three categories. Article 3 (d) of this treaty lists one of its principles as: "Differential treatment established as determined in each case, both in regionwide mechanisms and those with partial scope, on the basis of three categories of countries that are set up according to their economic-structural characteristics. Said treatment shall be applied to a certain extent to countries that have reached an intermediate level of development and in a more favourable way to relatively less economically developed countries".
The Central American Common Market does not formally contemplate differentiated treatment among its member countries on the basis of their level of development. Under its Common External Tariff, however, Nicaragua and Honduras are authorised to impose a 5% higher tariff in general, and Honduras is authorised to impose an additional 8% on certain items.
MERCOSUR has not incorporated special and differentiated treatment for relatively less developed countries in its operations, but the Treaty of Asunción (1991) which establishes MERCOSUR is drafted within the spirit of the Montevideo Treaty. Moreover, the whereas clauses of the Protocol of Ouro Preto (1994) state the following: "By reaffirming the principles and objectives of the Treaty of Asunción and in awareness of the need to grant special consideration to the less developed countries and regions of Mercosur". This special consideration is present in the Bolivia-Mercosur agreement and is under discussion in the negotiations Mercosur is currently holding with the Andean Community.
The Group of Three (1995) does not formally establish distinctions among its members according to their level of development, but the differences between the participants were in fact taken into account when it came into effect. Mexico granted a preferential average tariff of 35% to Colombian and Venezuelan products, and these two countries granted average preferential tariffs of 21% to Mexican products.
Venezuela also signed an agreement with CARICOM which grants tariff preferences without demanding reciprocity in light of the level of development of the member countries of this community. Colombia signed a similar agreement with CARICOM which does demand a certain amount of reciprocity, but grants differential treatment to the members of this community.
In 1993, Venezuela and Colombia started negotiations with the countries of the Central American Common Market with a view to creating a Free Trade Zone. These negotiations, which were not successfully concluded, contemplated differential treatment for the Central American countries.
Special and differentiated treatment is applied at the extra-regional level in Latin America and the Caribbean. The United States grants preferences under certain specified conditions to the countries of Central America and the Caribbean through the Caribbean Basin Initiative (CBI) (1990). Canada has set up a similar scheme with the countries of the Caribbean (CARIBCAN). The Andean Community countries also receive special treatment within the framework of co-operation in the fight against drug trafficking. All the countries of the region (except Cuba) benefit under the Generalized System of Trade Preferences applied by the United States.
The European Union also grants differentiated treatment to the countries of Latin America through the GSP as well as preferential treatment to the countries of the Caribbean through the IV Lomé Convention. It also grants special treatment to the Central American countries and the members of the Andean Community.
Despite the application of preferential treatment in the region, its effect has been very limited. This is revealed by the persistence of asymmetries and the fact that the relative levels of development among countries have not changed.
The lack of results obtained through the preferential treatment has been due to the development difficulties of the countries of the region and the weaknesses of the integration schemes rather than due to the characteristics of the mechanisms adopted.
Intra-regional trade has had little influence on the foreign trade of most of the countries of the region, and this has meant that these mechanisms have had minimal effect on their development. The problems that beset all the subregional integration schemes up until the beginning of this decade affected their credibility and their predictability. The frequent failure to comply with the commitments assumed and their postponement or modification meant that the trade which could have benefited from the treatment agreed upon was not generated.
This situation arose largely as a result of the widespread crises that rocked the economies of the region during the nineteen-eighties. The notable decline in intra-regional trade during that decade prevented the benefits that were expected to be obtained from the special treatment that had been agreed upon from actually being exploited.
Furthermore, the lack of operability of the region-wide mechanisms and the poor link-ups between the various subregional integration schemes limited the scope of the trade preferences. The countries with the larger markets did not participate in the subregional agreements, and the agreements themselves had limited markets on their own. Moreover, the subregional schemes were composed of countries with relatively similar levels of development, and the principle of preferential treatment was therefore often not applicable. The different groups remained isolated from one another, and therefore no preference mechanisms were set up between them.
In the case of extra-regional preferences, the experiences are not easy to assess. The GSP has been applied to a large proportion of exports, and it is difficult to determine what would have happened if this had not been the case. Its effectiveness, especially with respect to of the United States, has been limited by its contingent nature and its lack of predictability. Moreover, the developed countries implemented protection mechanisms that counteracted its effect, and the system itself does not cover several important export items (cereals, textiles, leather, etc.).
It is also difficult to evaluate the Caribbean Basin Initiative. It has not boosted the exports of most of the island nations, but it has stimulated those of the Central American countries and the Dominican Republic. The radical changes underway in the political and economic situation of Central America during the past decades also makes it impossible to establish a causal relationship between this mechanism and increases in the region’s exports.
NAFTA’s entry into effect and the relative advantages Mexico obtained in terms of export-oriented investment weakened the effectiveness of the CBI. The CBI has in any case been linked to certain conditions, and it should be assessed as a whole and not just in terms of its trade aspects.
The preferential treatment granted among Latin American countries has by contrast not been subjected to conditions of any kind. When a country is classified in one of the categories of relatively less development under the various schemes, the benefits granted are in principle automatically applicable. It has not been possible to assess the possible advantages of this approach due to the little use made of the mechanisms in which it has been applied.
Another possible explanation for the little impact of the preferential mechanisms in the region is the low level of development and structural insufficiencies of the countries that could potentially benefit from them. This is particularly true in the case of the small Caribbean economies.
Little as their effect may have been, we should also consider what would happen to the countries of the region if the existing preferences were eliminated.
Preferential and differentiated treatment has been granted mainly, but not exclusively, in trade relations. It has also been granted in financing, investments and development co-operation.
In 1965, the "Proposals for the creation of Latin American Common Market" presented by four economists, upon the request of the Chilean President, to the Presidents of the continent stated the following: "The success of integration depends on all the countries effectively having an equal opportunity to benefit from the establishment of a common market. The relatively less developed countries therefore require preferential attention and special treatment, particularly in three fundamental areas: regional trade policy, technical and financial assistance and investment policy"2.
In the "Charter of the Economic Duties and Rights of States", approved by the United Nations in December 1974 and mainly promoted by the countries of Latin America and by Mexico in particular, the following principle is consecrated: "Article 19. With a view to accelerating the economic growth of developing countries and closing the economic gap between developed and developing countries, the developed countries shall grant a generalised special treatment, without reciprocity and without discrimination, to the developing countries in those areas of international co-operation where this is feasible".
One of the areas in which the principle of preferential treatment has been applied at both the international and the Latin American level, is finance. Through the San José Agreement, Mexico and Venezuela finance part of the oil bill of all the Central American and some Caribbean countries. The Andean Development Corporation (ADC) has set up special financing programmes for Bolivia and Ecuador, the two relatively least developed countries of the Andean Community. The Fondo de Desarrollo del Plata (FONPLATA) also grants preferential treatment to Bolivia, Paraguay and Uruguay3.
At the hemispheric level, the Inter-American Development Bank (IDB) grants loans exclusively to Latin American and Caribbean countries and classifies countries according to criteria that could be considered based on their levels of development. List A includes the largest economies of the region plus Venezuela. List B includes those countries traditionally considered at an intermediate level of development (Colombia, Chile and Peru); list C, the small economies with a relatively higher income level; and list D, the relatively less developed countries. Only the countries included in list D currently have access to the concessional loans granted through the Special Operations Fund (SOF).
At the international level, the World Bank only finances developing countries and grants concessional loans through the International Development Association (IDA) solely to low income countries. The International Monetary Fund (IMF) does not include preferential treatment in its statutes but has in over twenty years only ever implemented assistance programmes in developing countries or economies in transition. Both institutions recently created a financial support facility for highly indebted poor countries (HIPC).
Then there is also the Official Development Aid (ODA) and technical assistance which is granted specifically to low income countries.
The subject of the special or preferential treatment granted in the area of investments requires special consideration that is beyond the scope of this work. Suffice it to say that the impact of asymmetries in the case of investments has a potential significance that is difficult to quantify. The possibilities different countries hold for investment (even if we limit ourselves to considering developing countries only) vary considerably. Furthermore, the concentration of investment in one location generates economies, which explains the predictability of the trend towards concentrating investment in a just a few countries.
1 Panama Agreement. Article 5.
2 Raúl Prebish, José Antonio Mayobre, Felipe Herrera and Carlos Sanz Santamaría. "Hacia la integración acelerada de Amércia Latina". Fondo de Cultura Económica. Mexico, 1965, page 32.
3 SELA. "The most important technical and financial co-operation mechanisms of Latin America and the Caribbean". 1997.
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