Regional integration of trade among less developed countries

World Oevelopmsm

Vol. i ho. 7July

1

1973

Regional integration of trade among less developed countries* FELIPE PAZOS, IDB, Washington D.C.

INTRODUCTION

In the last twelve years,

several groups

Latin America, the Caribbean into arrangements to integrate or less rapid at different formed economic common

of countries

in

and Africa have entered their economies at a more

pace. Most of the groups stages of industrialization,

include while

countries some are

by nations with relatively homogeneous some groups have adopted a structures; externai tariff and others not; some have relied

mainly on across-the-board tariff reductions and others on product by product negotiations; some have attained a relatively

close

had only moderate themselves. These

degree

of integration

and others

success in increasing different experiences

have

trade among show the

evolution of integration among less developed countries under different settings, circumstances, and economic policies, offering empirical evidence that permits a factual study of the process. In the case of some the empirical evidence makes it important issues, possible to test the alternative hypotheses that have been

in a recent report.’ Four of the groups have been in existence for a long enough time to show already their effects while two were formed in the late sixties and have had time to influence only the last two years for which figures are given in the Table.2 Of the four ‘old’ groups, in the

two had a phenomenal rate of intra-trade eight-year period 1960-68. Intra-trade

Central American Common compound rate of 28.8 per

Market cent per

growth in the

expanded at a year durmg the

eight-year period, having increased more than seven times, from US$ 33 million in 1960 to US% 247 million in 1568. In 1960, exports to other countries of the area represented 7.5 per cent of total exports from Central America and in 1968 they had increased to 26.0 per cent of the total.3 In the Central African Customs and Economic 23.2 US$

Union,

intra-trade

grew at a compound

rate of

per cent per year, from US$ 3 million in 1960 to 16 million in 1968. Exports to other members of

the group amounted to 1.7 per cent i960 and 4.0 per cent in 1968.

of tota! exports

in

debated, and are still debated, in academic circles. This paper examines the experience of the last twelve years with a view to elucidating the following issues: (1) whether or not integration among less developed countries fosters the rapid expansion of trade within the group; (2) whether the expansion, as far as it occurs, reflects a process of ‘trade creation’ or of ‘trade diversion’; (3) what are the effects of integration on the trade of individual member countries; (4) what are the effects of integration on the growth rate of individual member countries; and (5) what are the main obstacles that hinder integration. The four initia! topics are discussed in the first part of the paper under the heading ‘Effects of Integration’ and the fifth, in a second part, under

the heading

Ways

to Overcome

‘Obstac!cs Them’.

to Integration

and Possible

The effects

of integration are studied ma&y on the hasis of’ the groups that have made substantial progress in integrating their economies,

especially the Central American Common lllarket; and the obstacies, on the experience of those groups that have not advanced substantially in that direction, especially

the Latin American EFFECTS

hpansion

of trade

Table 1 shows groups for which

Free Trade

Association.

*This paper has been written in a persona! capacity and the opinions expressed in it are the sole responsibility of the author. 1. UNCTAD. Trade Expantion, Economc Co-operation and Regional integratron Among DevelopGag Countries, Annex 1. Dot. TD/llO, Third Session, Santiago, Chile, February 1972. In addition to the six groups included in Table 1, the document gives figures for the Maghreb permanent Consultation Committee (Algeria, Morocco, Tunisia) and for tbe Reponal Co-operation for Development (Iran, Pakistan, Turkey), that may not be properly considered as integration groups. The document does not give figures for the Arab Common &Market (Egypt, Iraq, Jordan and Syriai. 2. Both LAFTA and CACM were formed in 1960. CACEU was formed in 1964 but had been preceded by the Federation of French Equatorial Africa; and the common market among EAC countries has existed since colonial times. CARIFTA was formed in 1963 and the Andean Group in 1969.

OF INTEGRATION

among

member

intra-trade IINCTAD’s

countries

figures for six integration Secretariat has given data

3. The eight-year period 1960-8 is chosen instead of 1960-70, for which figures are avaiIable, because in mid-1969 a grave frontier conflict between two members induced one of them to withdraw from the Common Market. 1969 and 1970 are not therefore comparable with the preceding eight years.

Regional integration of trade among less developed countries

1. Intra-Trade

Table

. Incegracion

of‘lntegratiorl

Value of exporrs to the area ($ million)

group

1960

1968

1969

1970

564

999

1206

1254

‘;;’

247 (60)

250 (84)

27

52

66

-

3 63

16 116

21 122

142

Larin America LAFTAl. (a) Andean Group2 CACM3 Caribbean CARIFTA4

(109) 286

Groups,

1960-

70

Share of exports to the area in rota1 exports (?&/o) 2960

1968

1969

1970

3.5 (2.5) 7.5

10.7 (2.2) 36.0

11.7 12.9) 25.7

i0.6 (3.3) 26.1

5.0

5.9

7.2

4.0 17.1

4.6 16.8

1.7 4.6

Annual exports

; 1960-68

growth race of to the area (%) 1969

1970

7.4 C5.2) 28.8

20.7 (40.0) 1.2

3.9 (29.8) l-F.4

-

8.6

26.9

-

17.3

23.2 7.9

31.2 5.2

16.4

1

Source. UNCTAD, Trade Expansion, Economic Co-operution and Regional Integration Among Deueloprng Couvtries, Annex 1, DOC. TD/llO, Third Session, Santiago, Chile, February 1972. The document gives rhe following sources: United Nations, Monthly Bulletin of Stutistics, June 1971; IMF-IBRD, Direction of Trade,various issues; United Nations, Yearbook of international Trade Statistics, 1968; El Proceso de lntegracirjn en lo Asociacidn de Libre Comercio dei Caribe (CARIFTA) (C/CN.l2i886) 10 LMarch 1971; Office Statistiquc des Communauc& Europiennes. Commerce Exte’rieur, 1970, Volume II; UAR, Foreign Trade. Cairo, July 1970; and Statistical Service of Barbados. Overseas Twde 1969. Barbados, 1970. Notes. 1. Latin American Free Trade Association: Argentina, Bolivia, Brazil, Chile, Coiombia. Ecuador, Mexico, Paraguay, Peru, Uruguay, Venezuela. 3_, Andean Group: Bolivia, Chile, Colombia, Ecuador, Peru. 3. Central American Common Market: Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua. 4. Caribbean Free Trade Area: Barbados, Guyana, Jamaica, Trinidad and Tobago, Antigua, British Honduras, Dominica, Grenada, Montserrat. SC. Kitts-Nevis-Anguilla, St. Lucia, St. Vincent. 5. Central African Customs and Economic Union: Cameroon, Central African Republic, Congo, Gabon. 6. East African Community: Kenya, Uganda. United Republic of Tanzania. !a) Exports of Venezuela to Netherlands Antilles and Trinidad and Tobago are exciuded since they consist essentially of crude petroleum co be refined for subsequent re-export. (5) Figures for 1960 are nor directly comparable with those of 1968-70 due to improved reporting procedures.

Intra-trade

in the other two ‘old’ groups

showed

only

a moderate rate of growth that was, however, significantly higher than the rate of growth of total trade. Intra-trade in the Latin American Free Trade Association increased at a rate of 7.4 per cent per year during tie

period,

from

US$ 564 million

million in 1968. Since total of 4.4 per cent per year, the increased from 8.5 per cent lC.i per cent in 1968. In the exports

to member

countries

pee cent per year, from 116 million

in 1960 to USS 999

exports increased at a rate share of intra-group trade of total trade in 1960 to East African Community, increased

at a rate of 7.9

US$ 63 million

in 1960 to US$

in 1968. Total exports

expanded

at a slower

rate and the share of intra-trade increased from 14.6 per cent to 17.1 per cent of total trade. The Caribbean Free Trade Area removed, on 1 May 1968, the custom duties to all trade among its members, except for a reserved list of goods that in the preceding year had a value amounting to 9 per cent of trade in the area. Immediately, trade jumped from US$ 40 million in 1967 to US$ 52 million in 1968, an increase of 22.8 per cent, which compares with an average annual increase of

Cartagena

Agreement

was signed

in May 1969, the first

two measures of trade liberalization were not taken until one year later, in April 1970. From 1960 to 1968 trade among the countries that were to become members of the group increased at an average annual rate of 5.2 per cent; and jumped to 40.0 per cent in 1969 and 29 8 per cent in 1970. The increase in 1970 can be attributed to trade liberalization, but not the increase in 1969 which as said before, is not easy to explain. In the second half of the fifties, when the Latin American Free Trade Association and the Central American Common Market were in process of negatiation, most economists outside Latin America shared Kindleberger’s view that the small amount of commerce among countries of the area indicated the limited possibilities of reallocating production activities in a Latin American union and, hence, the poor prospects for intra-trade expansion.4 Balassa objected that the argument took as given the structure of the economies and added that the existence of excess capacity in various industries of the area gave promise to the race of enlargement of trade. 5 The extraordinary

5.8 per cent in 1960-67. In 1969, intra-trade surpassed its newly-gained high rate of growth, increasing by 26.9 per cent. The Andean Group also experienced a big jump in trade among its members in the year in which the group

4. Cf. C. P. Kindleberger’s restimony before Congress Foreign Economic Policy: Hearings before the Subcommittee Foreign Economic Policy of the Joint Econonn’c Committee the Economic Report (84th Congress, 1st sess.) p. 521.

was formed, but this increase cannot easily be attributed to the formation of the group because, although the

5. Bela Baiassa, The Theory of Economic George Allen and Unwin, 1962).

in on on

integration (London:

W&d

Develon.ment

Vol. 1 No. 7 July 1973

3

expansion of intra-trade in the Central American Gammon Market and in the Central African Customs and r’conomic Union fully supports Balassa’s reasoning.

have reached a much higher stage of development than the countries belonging to the two former groups, the slow expansion of their inn-a-trade is clearly due to the

The lack of rapid expansion of intra-trade American Free Trade Association and

maintenance tions, and

African

Community

does

not

refute

in the Latin in the East the

articles

argument,

which

to trade.

Furthermore

the fact that

among themselves. The extremely quick pace at which trade started to expand in CARIFTA and in the Andean immediately after they were constituted, is Group,

almost free trade existing at the beginning of the period, in the form of authorizations to the two less developed members of the group to protect some specific new industries. Since the countries in these latter two groups

Classified

with

of protective restricof capacity to produce

members of EAC carry almost one-fifth of their total trade within the area proves that they are able to trade

because in neither group has there been a significant degree of trade liberalization. In LAFTA, the agreed program of tariff reductions was only partially applied and in EAC there were departures from the situation of

Table 2. Central American

(or intensification) not to their lack

further

proof

of the capacity

to trade among

Common

Market:

by Tariff Sections,

Trade Among 1960-

of less developed

countries

themselves.

Members,

1968

(in US$ million)

1960

1968

Total increase Annua! iate during period of increase

0. Foodstuffs 1. Beverages and tobacco 2. Crude materials, inedible 3. Fuels and lubricants 4. Lard and edible oils (Sections 0 to 4) 5. Chemical products

Source. lnstituto para la Integracibn de Amkrica Latina. Ei Proceso Amkrica Latina, 1968-71, Buenos Aires, 1972.

Table

3. Central American

Total trade among members Percentage of total trade Rate of increase from previous year

Common Market: Totai Trade Among Members, (in US% million)

1 1962

1961

32.7

36.8

50.8

72.1

I

6.4

7.4

9.2

11.0

1 I

16.7

12.6

38.2

41.8

Latina, El Proceso

Table 2 shows that the buik of the increase in intratrade in the Central American Common Market was formed by manufactured goods. Of the total oxpansion in trade during the period, amounting to US$ 226 million, 74 per cent of the goods traded can be classified as manufactures and only 24 per cent may be considered or mineral

products.

1963

1960

Source. lnstituto para la lntegraci6n de Amirica Buenos Aires. 1972.

as agricultural

de Integracibn

Trade

in manufac-

tured cent, high that from that

en

by Years, 1960-1968

1964

1965

1966

1967

1966

106.1

135.5

174.7

214.0

258.3

13.8

15.2

18.6

20.8

47.3

27.6

29.0

22.4

de Integracih

en Amhica

Latina,

I I

24.7

f ’

I

20.7

IY68-71,

products expanded at an annual rate of 38 per and that in primary products at a rate only half as as that-though also extremely high. Table 3 shows the fast pace of expansion in intra-trade started the very beginning of the process, thus indicating industrial plants had unused capacity available.

Regional

integration

of trade among less developed

countries

Trade creation or trade diversion?

to obtain

Students of international trade theory may ask whether the enormous expansion in commercial inter-

trade within the area comes to substitute lower-cost products from abroad, or if part of it substitutes highercost national production. For example we may ask

change among members of the CACM has been the result of newly ‘created’ trade transactions or of imports ‘diverted’ from more efficient producers. The answer is not easy, for a variety of reasons. Viner’s concepts ‘trade creation’ and ‘trade diversion’6 are difficuit measure and, given their static character, appiicabie to rapidly changing economies.

not entire!y Furthermore

development involves, almost necessarily, the of trade from low-cost producers abroad to less

efficient

infant

at home.’

But without

Table 4. Central American

answers

we may inquire

if all additional

additional imports into Guatemala in El Salvador are displacing imports

of shoes from the

US or Guatemalan production. To the extent that this latter is the case we may further inquire whether Guatemala’s shoe industry is reducing overall output, or only the production of some types of shoes, e.g. highquality women’s shoes, and expanding other types, e.g. medium-price men’s shoes, which are exported to the other Central American countries.

of to

economic diversion

industries

whether produced

precise

trying

Common Market:

Change in Imports from Inside and Outside

the Area, Classified by Economic

Type of Goods, 1958-1968

(in CT!%million)

Imports from Area

i9S8 Non-durable consumer goods Durable consumer goods Fuels and lubricants Raw materials Building materials Capiral goods for agriculture Capital goods for industry Capital goods for :ransport Miscellaneous

9.0 0.7 0.1 7.1 1.2 1.1

z0.z

Toral

1968 114.6 15.0 4.0 99.2 20.0 2.9 5.0 0.1 -------252.0

Imports from Outside Area

Annual rate of change %

1958

29.0 36.0 47.0 29.0 32.0 20.0 13.5 10.9 -8.8 29.0

1968

Annual rate of change %

1958

89.2 66.8 32.1 156.3 31.3 15.1 61.9 9.9 2.2

97.6 86.9 16.3 348.1 38.6 22.9 136.0 45.5 2.2

0.9 2.7 -6.5 5.4 2.1 4.3 8.2 16.5 -

98.2 67.5 32.2 163.4 32.5 19.1 63.0 9.B 2.2

464.7

794.2

5.5

Source. Inoituto para la lncegracidn de America Latina, El Proceso de Integraci6n Buenos Aires, i972.

The answer

seems

to be that

additional

area trade

is

Total Imports

other

countries

of

484.9

212.2 101.9 20.3 447.3 58.6 25.8 141.0 45,6 2.2 1046.2

en A&&a

the

Annual rate of change 1968 % 8.0 4.2 -3.2 10.6 6.1 5.6 8.4 16.5 8.0

Latina, 1968-71,

area.

This

shift

explains

the

partly substituting outside imports and partiy substituting national production. Both types of substitution can be inferred from the figures of Table 4. In 1968 imports of non-durable consumer goods from outside the region

enormous increases, shown in Table 5, in the total volume of trade in shoes and textiles, that cannot be attributed to increases in consumption. Table 6 confirms

were only 7 per cent higher than in 1958, while the Gross Domestic Product of the five Central American countries was 71 per cent higher. Since total consumption of non-durable goods probably increased somewhat less-but not much less-than GDP, a large part of the potential increase of imports from outside the region was substituted with goods produced in the area. But since total imports of non-durable consumer goods, from outside and inside the area, increased by 116 per cent, much more than GDP, it is to be presumed that area

of cross-trade in the same products, presumably of different types. The figures indicate that integration has created competition among the producers of the five countries and has probably promoted industrial speciaiization by types of products, thus permitting larger production scales and lower costs.

trade has also displaced consumption of nationally produced goods. Part of the consumption that was formerly met by national production has come to be met by imports from the region; and part of the production that was consumed nationally is being exported to

the explanation

by showing

that there are large amounts

6. Jacob Viner, The Customs Union Issue (New Carnegie Endowment for International Peace, 1950).

York:

7. For a discussion of trade creation and trade diversion in another Latin .4merican integration group, see Carlos F. DihzAlejandro, ‘The Andean Common Market: gestation and outlook’, Center Discussion Paper No. 85, Economic Growth Center, Yale University, New Haven. May 1970.

World Deve!oprnent

Vol. 1 No. 7 July 1973

Table 5. Central American

Common Market: Changes in Imports of Shoes and Textiles from Inside and Outside the Area, 1962-1965 (in US$ thousand)

Shoes Yarn, cloth and clothing

1,069

5,381

70

656

3,931

15,385

58

12,180

Source. Secretaria de1 Tratado de Integration Comercio Exterior, several issues.

Total Imports

imports from Outside Area Annual rate of change 1962 1965

Imports from Area Annual rate of 1962 1965 change

Economica

1962

1965

Annual rate of change

1.725

5.761

49

16,111

28,146

20

-42

380

1.6

12,760

Centroamericana,

Anuario

Estadistico

Centroamericano

de

Table 6. Central American Common Market: Crossed Trade in Shoes and Textiles, 1965 (in US$ thousand) Guatemala Exports Imports Shoes Yam, c!oth and clothing Source. Comet&

Secretaria Exterior,

El Salvador Exports Imports

Honduras Exports Imports

1,511

851

2,181

883

371

1,589

5,739

4,624

8,848

3,386

( 104

3,227

de1 Tratado de lntegracibn several issues.

Econbmica

Centroamericana.,

-4 further indication of ‘trade creation’ is the small rise in average costs of living. Table 7 shows that costs of living in Central America have increased less than in the United States. Prices in the region have not increased in comparison with those in the country with which Centra! America mainly trades, in spite of the higher level of the new Common TarrifB and the increased amount of import substitution from outside the area. This is a most interesting phenomenon that deserves study; but in the absence of such study the maintenance of price stability seems to indicate that increased competition has not permitted producers to take advantage of the higher custom duties.9 Another factor that might possibly explain the maintenance of price

Anuatio

Estadiitico

Centtoamencano

de

stability in the presence of higher tariffs is the policy of tax exemptions as incentives to the establishment of new industries. This policy, justly criticized as excessive, has functioned as a subsidy to new industries that may have contributed to keeping down their prices. But if this is the reason it is not clear why the subsidy has worked. When several small industries have been established, competition would explain the effectiveness of the subsidy; but in the much more frequent case, when only one or two large (in relative terms) industries have been created, the maintenance of prices below the tariff margins is not easy to understand. As stated before, the problem requires study.

Table 7. Central American Common

Market: Annual Increase

in Consumer Prices, 1960- 1968

(in %)

Costa Rica El Salvador Guatemala Honduras Nicaragua United Stares

1960

1961

1962

1963

1964

1965

1966

1967

1968

1 0

3 -2 0 2 0 1

3 0 2 1 1 2

4 1 0 3 0 1

3 2 0 5 4 1

0 0 -1 4 314 214

2 -1 3 4

3 3

3 1 4 5 4 6

-2 -2 -2 1

Sotrrce. International Monetary Fund. international issues.

8. In a list of 83 tariff sub-items, selected as a representative sample of imports (excluding machinery), the new Common Tariff was found to apply rates of 70 per cent ad valorem or more to 34 sub-items, whereas an average of the old five national tariffs reached, or surpassed, the 70 per cent ieve! in only 15 subitems.

-1 -3 1 3

Financial Statistics,

several

9. In maintaining the thesis that integration in Central America has fostered comperition, I am closeiy following the ideas of Jose! A. Guerra, Senior Economist in the South America Departmat of the lntnnational Bank for Reconstruction and Development. who showed me his reports on the subject. and discussed them at length with me.

Regional integration of trade among less deveiooed countries

6

Trade, payments countn’es

balance and rate of growth of member

per cent

can be observed in Tables 8 to 11, all Central American countries increased their exports to the area at a very fast rate and all came to depend on the area for a large share

area absorbed

of their

exports.

17.1 per cent of Nicaragua’s

Table 8. Central American

Common

and

of Costa Rica’s, 39.8 per cent of Ei

in the area 19.8 per cent of its imports, Costa Rica 22.8 per cent, Nicaragua 24.9 per cent, Honduras 26.3 per

In 1968 the exports,

per cent

Salvador’s Correspondingly, all countries increased very rapidly their imports from the area and came to buy in it a large part of their supplies. In 1968 Guatemala bought

As

market

22.2 of Guatemala’s

of Honduras’s,

34.9 per cent

cent and El Salvador

17.5

30.4 per cent.

Market: Area Trade of Member Countries,

1960-

I968

(in US$ million) T

Guatemala Exp. Imp. Bal. 7.3 10.3

7.6 a.9

-0.3 1.4

2.2 1.1 3.6 6.9 21.2 23.6 28.1

13.4

11.2

20.8

19.7

30.0 38.4 55.1 65.7 77.5

26.4 31.5 33.8 42.1 49.4

El Saivador Exp. Imp. Bal. 12.7 14.4 18.5 28.7 35.2 46.2 57.5 75.2 84.9

13.5 14.6 22.0 27.9 39.2 42.4 52.0 54.5 65.2

-0.8 -0.2 -3.5 0.8 -4.0 3.8 5.5 20.7 i9.7

Source. lnstitwo para la lntegraci6n deAm&ica Buenos Aires, 1972.

Table 9. Central American

Exp.

Honduras Imp. Bal.

7.4 a.2 i3.8 14.0 18.3 22.2 21.5 23.5 31.3

5.3 2.1 6.3 1.9 8.9 “4.9 13.3 0.7 18.0 0.3 25.5 -3.3 34.0 -12.5 40.7 -17.2 48.7 -17.4

Lark,

Common

EI Proceso

ivarket:

Nicaragua Exp. Imp. Bal. 3.4 1.8 3.2 4.2 6.9 9.9 14.9 18.6 26.9

2.8 0.6 2.9 -1.1 5.3 -2.1 7.3 -3.1 14.3 -7.4 21.4 -11.5 31.7 -16.8 42.4-23.8 46.2 -19.3

f

1.9 2.0 1.9 4.4 15.8 18.9 25.8 31.0 37.7

I

3.5 -1.6 A.0 -2.0 3.3 -1.4 3.S 0.6 8.3 7.5 14.7 4.2 23.2 2.6 34.2 -3.2 48.8 -11.1

de Integrachz en Amdtica Latina, 1968-71.

Trade of Mtimbev Countries

with the Rest of the World, 1960-

1968

(in US$ million)

1960 1961 1962 1063 1964 1965 1966 1967 1968

Guatemala Exp. Imp. Bal.

El Salvador Exp. Imp Bal.

Exp.

110 103 105 133 138 149 171 132 145

104 104 117 125 143 143 132 132 128

56 65 67 69 77 105 122 131 148

130 125 125 151 176 198 173 205 200

-20 -22 -20 -18 -38 -38 -2 -73 -55

108 94 103 124 152 15P 168 170 I49

-4 10 14 1 -9 -16 -36 -38 -21

Honduras Bal. Imp 67 66 71 82 92 97 115 124 136

-11 -1 -4 -13 -15 8 7 7 12

Nicaragua Exp. Imp. Bal. 53 59 79 96 111 134 123 127 130

69 71 92 103 123 140 150 160 139

-16 -12 -13 -7 -12 -6 -27 -33 -9

Costa Rica Exp. Imp. Bal. 84 82 91 91 97 93 110 113 133

106 103 110 120 131 163 155 157 165

-22 -21 -19 -29 -34 -70 -45 -44 -32

Source. Tables 8 and 10.

In 1966-8 Guatemala and El Salvador had continuous export balances with the area; Honduras and Nicaragua, persistent import balances, and Costa Rica had a small surplus in 1966 and deficits in 1967 and 1968. Guatemala’s and El Salvador’s trade surpluses with the area permitted them to finance a large part of their

trade deficits with the rest of the world; conversely, Honduras financed most of its area deficit with its surplus with third countries; and both Nicaragua and Costa Rica had deficits with the area and with the rest of the world (except for the small Costa Rican sutFius with the area in 1966).

World Develcpmsnt Vo!. 1 No. 7 Jirly 1973

Table 10. Central American Common Market: Total Trade of Member Countries, 1960-1968 (in US$ million)

1960 1961 1962 1963 1964 1965 1966 1967 1968

Honduras exp. Imp. Bal.

Nicaragua Exp. Imp. Bal.

Costa Rica Exp. Imp. Bal.

63 73 81 83 95 127 143 154 179

56 61 a2 100 118 144 138 146 157

86 84 93 95 113 112 136 144 171

72 72 80 95 102 122 149 165 185

-9 1 1 -12 -7 5 -6 -11 -6

72 74 97 110 137 161 182 202 185

-16 -13 -15 -10 -19 -17 44 -56 -28

110 107 113 124 139 178 178 191 214

-24 -23 -20 -29 -26 -66 42 -47 -43

Source. International Monetary Fund, Inremational Financial Statisrics, various issues.

Table 11. Central American

Common

Market:

Share of Area Trade in Total Trade of Members, 19GO and 1968 (in %)

, Share of Exports to Area in Total Exports

Guatemala El Salvador Honduras Nicaragua Costa Rica Ares

Share of Imports from Area in Total Imports

1960

1968

1960

1968

6.2 10.8 11.7 6.1 2.2

34.9 39.8 17.5 17.1 22.2

5.5 11.1 7.3 3.9 3.2

19.8 30.4 26.3 24.9 22.8

7.5

26.0

6.3

24.7

Source. Instituto para la lntegracibn de Amkrica Latina, EI Proceso de lntepcibn en Amhica Latina, 1968-71, Buenos Aires, 1972.

The sign and size of intra-trade balances are sometimes considered to be a good measure of the benefits from integration, but they are not. A country may expand its imports from the area more than its exports to it but, thanks to these latter, experience an increase in employment and income and accelerate its rate of growth. The negative element in integration is not the volume of goods imported from the area, but the higher price paid for those goods. The benefits from integration may thus be measured by the increase in national product induced by the expansion in exports to the region,l O minus the higher payments made for area imports as compared imported from third

to their level if the goods had been countries. Following this criterion

all Central American countries have received able net benefits from integration.

consider-

10. This assumes that the country has unemployment and idle capacity, as is generally the case in less developed countries, and that ir cannot readily expand its exports to the world market. The presence of this second condition is not as easy to determine as the fvst one. It may be argued that many less developed counties could expand their exports to the world market by following better policies in relation to exchange rates, taxation and level of protection; but better export policies would seldom bring about as quick results as integration. Furthermore, given the margin of excess capacity existing in most countries, integration does not hinder the promotion of exports to the world market. Far from hindering export promotion, it facilitates it by fostering specialization, economies of scale and lower costs.

Regional integration

Table 12. Celltral American Common ‘Market: Rate (in % increase

1

of Growth of Gross

from previous

year)

j

1966

1963

1

1964

1965

10.0

/

6.2

7.3

1960

1961

1962

2.7 2.4

2.9

El Salvador

3.1 4.2

Honduras

0.5

5.3

7.3

Nicaregua Costa Rica

1.1

6.5

10.6

10.3 9.7

5.5

2.8

10.4

8.1

Area

3.1

3.3

6.6

Guatemala

:1.s

’

1 i 1 ) / j

6.9

9.1

9.1

Source. Inter-American Developmenr Bank, So&-Economic

7.5

Table 13. Central American Common Rate ofExpansion

Domestic Product,

j

7.3

countries

1960-1968

1967

7.1

6.2

Progress in Latin America,

of trade among less developsa

/

5.3

,

I 4.1

1

6.0

6.9

1969

Market: Average Annual

of Exports and GDP, by Countries, 1960-1968 iin %)

Exports

to

Area Guatemala El Salvador Honduras Nicaragua Costa Rica

34 27 20 29 4s

3.6 2.7 12.9 11.8 5.9

Area

29

6.9

Source.

Table an average

Total Exporrs

1

,;:i

(

13.7 8.9 10.1

Gross Domestic Product 5.7 5.8 5.9 6.3 6.9

/

6.0

Tables 8, 9, 10 and 12.

12 shows that the five countries annual

Exports Outside Area

rate of growth

of the area had

of 6.0 per cent during

the period under study. The average rises to 6.9 per cent if we take the period 196248, i.e. eiiminating 1960 and 1961, those years in which integration had not yet time to produce effects and in which also exports to the world market were practically stagnant. The rates of growth of individual Central American countries fell within a relatively narrow range from 5.7 per cent in Guatemala to 6.9 per cent in Costa Rica; and it was not those countries which experienced higher rates of growth that carried an area trade surplus, but rather those which grew more-though not much more-slowly. As may be seen in Table 13, Guatemala and El Salvador expanded their exports to the area at an extremely fast

rate, but their exports to the rest of the world increased very slowly, dampening down the rate of expansion of total trade and restraining somewhat the pace of overall economic growth. It might be argued that the growth of world exports of these countries was hampered by the fast expansion of exports to the area, but this could not have been the case because the products exported were different. It is possible, however, that efforts to promote world exports would have been stronger in these two countries if area markets had not been available. In any case the three deficit countries expanded their world exports relatively quickly (which explains their ability to import from the area more than they exported to it) and experienced a slightly higher rate of economic growth than the two surplus countries.

World Devel~p.wc?nt

9

Vol. 1 No. 7 July 1973

Table 14. Central American

Common Market: Rate of Growth of

Value Added in Manufacturing, (in % increase

1961 Guatemala El Salvador

Costa Rica

1 1962

1 1963

1 1964

5.8 7.7 13.1 7.9 10.6

1.0 8.8 6.0 14.5 10.6

13.5 9.2 2.0 14.5 9.6

12.6 13.1 16.3 12.7 4.4

8.0

7.8

12.3

12.1

Source. Inter-American Development Bank, Socio-Economic

Table 15. Central American Manufactures

12.7 15.2 12.2 12.4 16.1

Source. Inter-American Latin America, 1969.

Tables

14 and

15 show

1968

year)

) 1965

that all countries

13.0 15.1 12.6 12.7 16.8

Development

developed

1 1967

6.8 10.2 8.6 10.2 9.1

8.0

10.7

7.6

6.7

8.9

1969.

1964 11965 13.8 16.4 14.0 14.2 18.0

e

1960-1968

1966

14.6 17.7 13.9 12.8 17.7

14.6 18.8 14.4 14.6 18.3

Bank. Socio-Economic

Progress

in

OBSTACLES TO INTEGRATION AND POSSIBLE WAYS TO OVERCOME

their manufacturing industries very rapidly, which increased their contribution to the gross domestic product. in no country did competition from area

Fears of trade liberalization

imports industry.

appropriate

prevent

the

rapid

expansion

of

domestic

The rapid rate of economic growth of Central American countries in 1960-8 was not brought about by integration alone, but, as Table 16 Jhows, was to a large extent due to the boom experienced by their world exports in the years 1962 to 1965 inclusive, when they increased at rates above 10 per cent per annum. The export boom (experienced also by Guatemala and’ El Salvador) induced a rapid expansion of income in the five countries and softened the resistance of vested interests to integration, thus greatly facilitating the process. Integration, in its turn, helped to accelerate the expansion of income and, when the external boom ceased in 1966, the rapid increase in trade between member countries was able to maintain a high rate of income growth in the area.

AVerage 1960-68

5.1 6.5 8.4 9.6 7.1

Common Market: Share of

15.8 12.5 13.4 17.5

I

6.5 7.0 7.8 6.8 11.4

Progress in Latin America.

’ 13.1

1968

5.8 13.7 11.6 17.3 11.8

1

11961 11962 11963 13.2 15.5 12.7 12.3 16.0

1 1966

6.7 14.0 7.8 5.6 7.3

in the Gross Domestic Product, (in % of GDP)

1960

Guatemaia El Salvador Hon$uras Nicaragua Costa Rica

1960-

over previous

The experience

of Central

circumstances,

America the

THEM

shows that, under

elimination

of restric-

tions on the mutual trade of a group of developing countries brings about considerable expansion in their commercial interchange, fuller use of industrial capacity, specialization of production, economies of scale, increased industrialization and faster economic growth, without any rise in the number of industrial failures or in the amount of unemployment on account of the competition forthcoming from other member countries. But governments of developing nations are not generally confident that the positive results of across-the-board tariff elimination will be as large, nor that the negative effects will be so small; they are therefore reluctant to risk their protected industries or to renounce the possibility of creating new ones under protection. The short-term benefits of national protection are present

10

Regional

and certain,

whereas

those

of opening

new markets

in

neighbor countries are in the future and uncertain. In order to forego the short-term benefits of national protection, effects

countries

must have great faith in the future

of integration,

a firm conviction

or a strong

that

political

they cannot

own borders. Large developing countries motivated towards integration

motivation,

develop

within

or their

are not, as a rule, strongly because they believe that

their national markets are large enough to support industrial development; and small countries, generally less developed than the large, have strong motivations but are afraid to integrate with their bigger and more developed neighbors. Countries with high tariff wails fear

to expose

their

plants

to the

competition

of !ess

protected protective

industries; and those with low duties consider tariffs to be a status symbol of political and

economic resistance neighbors,

independence. For a variety of reasons, the made liberalization, even within a group of is srrong and widespread.

Deficiencies

in joint

If integration

industrial

is defined

establishment

of a

rational division of !abor among a group of countries, can be theoretically attained by the coordination economic

plans,

thus

failures and increases elimination of tariffs

avoiding

the

of trade among less developed countries

among member countries and to eliminate trade resrrictions to articles originating in the country to’which production is assigned, while maintaining restrictions to those produced in other member countries and in the rest of the world. The monopolistic advantages granted by the agreements are, however, only temporary because trade restrictions within the group have to be eliminated not later than 1980, except for some tariffs to protect Bolivian and Ecuadorian industries that will be maintained until 1985. In August 1972 the Andean Group countries approved the sectoral program on metal-working industries, which is the first one subscribed. The program assigns 7 types of products compressors, pneumatic tools, drills); (e.g.,

airplanes,

harvesters, surgical

risk

in unemployment may bring about.

of

it of

industrial

that the general The theoretica

to Bolivia (e.g., 23 to Colombia

mills, centrifugal pumps, small instruments, toys); 22 to Chile (some

common

to

different, equipment,

like electric fixed-focus

those

assigned

to

Colombia

and

some

generators and motors, railway photographic cameras!; 11 to

Ecuador (machinery for the ment and control instruments,

planning

as the

integration

dairy industry, measureclocks and watches); and

25 to Peru (most of them common to those assigned to some other country and some exclusive to Peru, like packing

machinery

and

machinery

for

the

ceramics

industry). As said before, such assignments involve the commitment by other member countries to immediately grant

free

entry

to

the

products

originating

in the

plan-

assigned countries, while maintaining restrictions for those produced in other member countries and in the

ning, with tariffs reduced only for planned industries, has permitted governments to reconcile their desire for integration with their reluctance to liberalize trade. But,

rest of the world. Also, as said before, the advantage given to the assigned countries is only temporary. In the case of existing industries, the monopolistic position will

unfortunately, joint progressed far beyond

cover a period of 8 years (13 years for Bolivia and Ecuador) because tariffs within the group will have to be eliminated not later than 3 1 December lP80 (31 December 1985 for products assigned to Bolivia and Ecuador) and, in the case of non-existent industries, the advantage will be substantially shorter, since the installa-

possibility

recent

of pursuing

report,

opinion regional

the

integration

through

industrial the intention

UNCTAD

that little significant planning, attributing

joint

planning has not of applying it. In a

Secretariat

expresses

the

progress has been made its lack of success to

in

’ . . the great difficulty that even a single country experiences in deciding on a long-term industrial plan involving both political and technical judgements on the feasibility and desirability of any given schedule of priorities and locations for regional industries. The dovetailing of national industrial plans, which are themselves the product of complex internal compromises at the national level, into a coherent regional plan has so far eluded the planning bodies of the regional groupings. composed as they are of representatives of sovereign States, each with a veto right concerning decisions affecting its own industrial development. Moreover, the absence in most regions of sufficient entrepreneurial and financial resources to ensure the implementation of a hypothetical regional industrial plan reduces the incentive for striking a comp:omise, since countries are understandably unwilling to forego the option of establishing given industries for which external financial and technical resources might become available in exchange for the right to establish other industries for which no such support is assured.‘11 The Andean integration liberalization manufactures, programs chemicals, electronics,

Group

agreement

countries partly

are carrying through

ahead their

automatic

steel, aluminum, automobiles and trucks, etc. The joint sectoral industrial programs to distribute

the location

the assigned

article

within

two

years

(three

for Bolivia

and Ecuador) or do not inscaI1 the plant within an additional period of 3 years, the advantage is lost a,>:! the product automatically becomes a free-trade item within the group. Since the Andean fledged

development

sectoral plans

programs but

only

are not agreements

fullyto

distribute the location of future industries, the reasons given earlier to explain the difficulties in negotiating and implementing joint investment plans may not be fully applicable to them. Furthermore, the successful negotiation of the program on metal-working industries seems to show the feasibility of these agreements. But the task

trade

in a large number of items, mainly light and partly through joint sectoral on basic industries-metal-working, petro-

are agreements

tion of a manufacturing plant takes a number of year When countries do not notify their decision to produce

of production

11. UNCTAD, op. cit., p. 29. In a footnote to the paragraph quoted, the document cites Brewster, ‘Industrial integration systems’ (TD/B/345) and ‘Trade expansion and economic integration among developing countries’ (TDIB185IRev.l). United Nations publications, Sales No. 67.11.D.20, chap. V.

11

World Development Vol. 1 No. 7 July 1973

ahead will be very far from easy and the programs in other ‘sectors will probably face more obstacles than those in the first one. The difficulties of distributing future industries among countries will be greater the greater the number of industries already operating in the region-which in the metal-working sector are few-and the greater the savings in costs that can be obtained by integrating production in large industrial complexeswhich in many metal-working industries do not seem to be large. Future sectoral programs will, therefore, present difficult problems that may induce the Andean countries to try new formulas. To this effect the experience acquired in the preparation and negotiation of the agreements on metal-working industries, successfully completed, and on the petrochemical sector, still under discussion, will prove invaluable. In theory, integration can be attained through negotiated tariff reductions, but in practice trade liberalization has to be applied across the board. This does not mean, however, that the schedules of tariff removals should be the same for all’member countries; nor that a program of trade liberalization should be launched without the necessary preparations; nor that the promotion of new large industries in an integrated group of countries should be left to the free play of the market, any more than it should in individlual countries. in developing countries, new large industries are seldom established without the concession of official facilitiei and the assistance of government financial institutions, that usually anaIyze their costs and their benefits to the country’s economy. In integration groups, both national and regional financial institutions must examine the role &At new large industries will play in the region’s economy, check that they do not come to duplicate capacity and encourage their location in the relatively less advanced countries. Differences

in the !eve! of development

When there are considerabie differences in the level of development as between members of an integration group, a program of uniform trade liberalization would give undue advantage to more developed countries, whose manufactures might invade the marker of the less advanced members and stifle their industrial growth. This may not occur, owing to differences in wages and other costs not inversely related to plant size, but less advanced members believe firmly that it will, and are therefore reluctant to join programs of automatic trade liberalization, and are prone to withdraw once they have joined them As shown above, the Cennal American Common Market accelerated the industrial growth of Honduras, but this may not be a good example because differences in levels of development in the CACM are much narrower than in other groups. But even if industrial growth in Honduras was not adversely affected by the Common Market, she had the subjective feeling of not receiving a fair share of the benefits; and this sentiment probably strengthened her decision to withdraw, a decision that was provoked mainly by the border conflict with El Salvador. Liberalization programs

should therefore comprise schedules for delayed tariff reductions for less advanced members. In this respect, the Agreements establishing the Andean Group and the Caribbean Free Trade Area have set excellent examples. Differences

in level and structure of protection

Another two important obstacles that must be overcome, or neutralized, before the removal or significant reduction of intra-trade restrictions, are: (a) differences in the level and structure of protection; and (b) differences in the rate of inflation. Both types of differences are extremely pronounced among LAFTA countries. According to Balassa, l2 the ad valorem average rates of nominal protection in Brazil, Chile and Mexico, in the years stated, were as follows: Brazil

Mexico

Chile

(1966)

(1961)

(1960)

Primary products

59

28

6

Intermediate products Non-durable consumer goods

92

53

22

140

204

/

25

Consumer durables Machinery

108 87

@ 92

I !

42;

Given these large tariff differences, their removal among partners without their unification vis-24s the rest of the world would give an enormous competitive advantage to countries with lower external tariffs. Free trade associations are functionally possible among countries with low rates of protection, but not among highly protected countries, where differences in tariffs tis-24s third countries are generally very large and create great divergences in cost and price structures as between member countries. External customs duties must be unified before intra-trade tariffs can be lowered. The LAFTA countries did not even think in unifying tariffs, because unification would have external involved-would still involve-gigantic changes in the foreign trade system and in the structure of prices and costs of each member country. But the maintenance of the different external tariffs prohibited any significant reductions in restrictions on intra-trade among members from being made. The practical conclusion seems to be thar the LAFTA countries should work gradually, but steadily, toward bringing their tariffs down to a lower uniform ievel; this should ideally be that of the lowest effective tariff (i.e., the lowest tariff not supplemented by other types of import restrictions). Since the large LAFTA countries are now embarked in a policy of promoting the export of manufactures, and since such

12. Bela Balassa and associates, The Structure of Protection in Developing Counrries (Baltimore: The Johns Hopkins Press, 1971). For rate of protection in former years, see Santiago Macario, ‘Proteccionismo e Industrializaci6n en Amkrica Latina’, in Hncia ltnn Twifa Edema Con&n en Amkricn Lntina (Buenos Aires: INTAL. 1969).

Regional integration

IL

policy

makes

it

necessary

(and

possible)

to

reduce

protection, this same process could be used to narrow the differences in customs duties to third countries, thus preparing LAFTA

the

ground

for

their

elimination

in intra-

of trade among less devekocrd countries

bors. As in the case of gradual tariff reductions to third countries, measures to facilitate integration coincide entirely with measures to promote exports to the world market.

trade. Concluding remarks

Differences

in yate of inflation

In the last three years price countries were as follows: l 3

in

LAFTA

1970

1971

6 3 22 29 11 6

21 4

39 5 20 22 14 7

Colombia Ecuador IMexico

18 35 4 8 8 0

3 3 6

Paraguay .Peru

3 6 8

5 21 3

15 2

Uruguay Venezuela

36 3

With such differences in the rate of inflation the total eiimination of trade restrictions among these countries would bring utter chaos, unless their rates of exchange were varied simultaneously in the amounts necessary to neutralize

price

rises.

Such

neutralization

would

have

been unthinkable a few years ago, but is now perfectly within the realm of possibility. The experience of Chile from 1965 to 19701 of Colombia since 1967, and of Brazil

since

1968,

show

that

a ‘crawling

peg’

is a

perfectly feasible exchange system-by far the best for a country with chronic inflation. If all members of integration groups adopted flexibility, differences obstacle years.

to trade because

policies of complete in inflation would

liberalization.

not

all countries

are yet fully convinced exchange-rate adjustments,

Our study of recent integration arrangements among developing countries shows that some groups have overcome

1969 Argentina Bolivia Brazil Chile

!

changes

exchange-rate cease to be an

This

may

with

chronic

take

a few

inflation

of the virtues of continuous but the delay will probably

the fears and obstacles

tion and commerce

have among

development Integration

of competition among member countries. not only facilitated import substitution from

third countries, but fostered and industrial efficiency.

mutual interests,

trade.

In addition

trade

obstacle schedules countries

is being met by the of trade liberalization, lowering

their

specialization have not been restrictions to

resistance

is

being

differences in levels of development, and rates of inflation among member

of vested

hindered

by

levels of protection countries. The first

application of different wirh the more advanced

barriers

at a faster

rate.

The

second is not being met by one of the groups, on account of the great disruptions that would be provoked by a rapid equalization of tariffs, but couid and should be attacked by a coordinated gradual reduction of the rate of protection; and the third would be neutralized if all member countries adopted a flexible-exchange-rate policy. Groups that are progressing towards integration are piacing themselves in a better position to trade with the rest of the world; and those making less progress would quicken their pace towards integration by following policies that would also serve to promote their worldwide exports. integration policies and world trade policies do not seem to be in conflict, but rather to

Stutistics, 25, 8 (August 1972).

their neigh-

to the

liberalization

than to facilitate

with

competition,

We have also seen that some groups entirely successful in eliminating the

reinforce

integration

trade liberaliza-

restrictions to mutual groups have experienced

a rapid expansion in their trade and a substantial acceleration in their rates of growth. Trade expanded at a much faster rate than overall consumption, thus indicating the

not be long. In any case, countries with chronic inflation need to adopt a flexible-exchange-rate policy in order to promote exports to the reSt of the world, even more economic

that hinder

eliminated them. These

each other.

13. International

Monetary

Fund,

International

Financial