Sobering the euphoria behind the Pacific Alliance

Every day I receive dozens of articles praising developments of the Pacific Alliance.  Over time, I became disillusioned with what I read.  Each author seemed to regurgitate previous articles instead of critically analyzing new regional and global developments.

One transcending element of most reports is juxtaposing the Pacific Alliance with MERCOSUR. Arguments focus on GDP growth, future trade agreements, and foreign direct investment.

MERCOSUR has grown slow and steady, focusing first on integration within the regional trade block. Lately everyone is a critic of MERCOSUR. MERCOSUR is depicted as a “protectionist” block with socialist leanings. In reality, MERCOSUR has the scale it needs to truly develop from within and should develop strong regional industries.  My objective behind this post is to paint a sobering image of the Pacific Alliance in relation to MERCOSUR.

1.) When the economy is small, it is easy for it to grow in large percentage points.

Assumption: GDP growth is a reliable indicator for the general well-being of a country’s economy.

Suppose the following as the status quo:

Country A has one factory that produces “one unit” of GDP. This “one unit” also happens to be the only unit produced in the entire country.

Country B has four factories that each produce “one unit” of GDP. These “four units” also happen to be the only units produced in the entire country.

Suppose the following as the change to the status quo:

Country A adds two factories that each produce two more units. The first factory continues to produce the same unit as before. These are the only unit-producing identities in the entire country. The GDP effectively grew at a rate of 200%.

Country B also adds two factories that each produce two more units. The first four factories continue to produce the same units as before. These six factories are the only unit-producing identities in the entire country. The GDP effectively grew at a rate of 50%.

This growth rate may be interesting for a short-term investor, but this is less important for those committed to investing for longer periods. To get the pulse of the economy, it might be more important to know other quantitative data such as the number of new patents licensed, dispersion of factories over geographic area, and growth of median net disposable income.  Qualitative factors such popular fields of study at the university level or a happiness index rating might also be worthy of consideration.

2.) Mexico has the highest number of free trade agreements in Latin America, currently numbering twelve (Mexican Embassy in Singapore). Currently it also has preferential commercial status with the world’s largest economy, the United States.

This fact alone distorts the accomplishments of the Pacific Alliance and makes it hard to isolate which trade agreement leads to Mexican success, however you wish to define it. Mexico also acts as a Trojan horse for American or Canadian countries that seek to use Mexico as an export to countries with have free trade agreements with Mexico.

3.) Chile has been a model economy in Latin America since the 1990’s. It is well poised to guide the Pacific Alliance from the south.

However, what works for Chile may not be the answer for Colombia or Peru. When Pinochet allowed his country to transition to democracy, the Congress remained conservative. Economists were trained at the University of Chicago and returned to implement neoliberal policies. This occurred at a time when neoliberal policies were also being implemented in the “developed” world.

Historically Chile was also isolated from its Latin American neighbors. Argentina and Chile have had disputes over Patagonia and the extreme south. Chile also won a war and seized territory from Bolivia and Peru. The situation emerged since British guano businesses sought refuge in Chile as Bolivia and Peru sought policies that were more nationalistic.

Population density and social inequality in Chile now seem to be less problematic in comparison to its South American neighbors.

4.) What are the most important reasons for economic growth in Colombia?

The United States also has a free trade agreement with Colombia. Is this agreement more, equally, or less important than the Pacific Alliance?

President Santos has also taken efforts to make peace with the FARC and unite the country through infrastructure projects. The benefits from these initiatives are not observed in a bubble.

5.) There is a difference between economic development and exploitation.

As history has taught us, Latin America has often been the stage for the massive exploitation of natural resources. Today the developed world will continue to exploit the region and its labor, both skilled and unskilled.

It is rational for a country to seek to limit the perverse effects of foreign direct investment. There is a difference between long-term and speculative foreign investor. The first provides stability while the later creates the opposite. Stability has multiplier effects for society beyond the initial investment.

Any country with a coherent economic development strategy should recognize that fewer dedicated stakeholders are better than a thousand fickle ones.

6.) Some other questions include:

  • Does the Pacific Alliance partake in large development bank activity like Brazil? Is there a Banco do Desenvolvimento or BNDES? Does the Pacific Alliance seek to attract investment through foreign lenders, on its new stock exchange, or through the Inter-American Bank?
  • Will the Pacific Alliance loose its identity if it accepts extra hemispherical countries as full members that do not have cultural and linguistical similarities?
  • Will Chilean and Mexican companies dominate the investment projects in the other Pacific Alliance countries?
  • Is the group seeking neoliberal principles in an age where these are already out of use in much of the “developed” world?

I used the traditional measurement for economic growth, GDP, to determine how MERCOSUR and Pacific Alliance countries have grown over the last 15 years. The individual country data comes from the World Bank. The MERCOSUR countries include Argentina, Bolivia, Brazil, Paraguay, Uruguay, and Venezuela. The Pacific Alliance countries include Chile, Colombia, Costa Rica, Mexico, Panama, and Peru.

There are problems with the graph below. The first year of MERCOSUR is not included (1991). In contrast, there is a clear jump in 2011 when the Pacific Alliance was formed. It might be more appropriate to compare trade blocks with more equal maturities. An example would be to compare successes and failures of MERCOSUR to those of NAFTA or the European Union.

I also include all of the above-mentioned countries as if they were always members. We cannot appreciate the GDP growth in anticipation of joining an economic trade zone. I also did not account for the natural pro or anticyclical tendencies of individual Latin American economies in comparison to the United States. Weights or dummies would have been appropriate for a more thorough analysis.

10.19.15 annual GDP growth of all countries in current US$

Growth Rate Comparison Chart

 

Simple GDP data in Excel for individual countries and groups

Countries to watch in the future are Bolivia and Paraguay. It would be interesting to study the origin of foreign direct investment into these countries.

Bolivia GDP growth between 2000 and 2014

Paraguay GDP growth between 2000 and 2014

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