The Political Economy of Integration

The Experience of Mercosur

Jeffrey W. Cason

• Publisher: Routledge
• Year: 2010
• ISBN:
  9781136932991
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book assesses South America's most ambitious attempt at economic integration, Mercosur. It explains the main—and inherent—weaknesses of the integration effort, through explicit comparison with the European experience with integration. Jeffrey Cason argues that the three main reasons for Mercosur's limited success are weak domestic political institutions in the member countries, vulnerability in the global political economy, and a serious imbalance in the economic and political weight of the member countries.

In addition to providing this overarching explanation for Mercosur's limitations, the book tells the story of Mercosur's genesis, development, and frustrations. This book provides both an explanatory framework for understanding Mercosur and a story. It considers how Mercosur emerged, why it was greeted with great enthusiasm (and huge trade growth), and how it hit stumbling blocks as it sought to be more than it was capable of being. The book also focuses on how and why developing countries are inherently limited in any economic integration project.

1
Understanding integration

The European model and a South American case

Without a doubt, Europe stands as the integration model for the rest of the world. It has moved, in fits and starts, up the ladder of integration, going from a free trade area to a customs union to a common market and now to a monetary union. This was not an easy task, and at numerous points in the process, it appeared that the European integration project would be derailed. Indeed, although there are still plenty of unresolved issues as the EU expands (and there always will be), the EU has remade the European political economy over the last half century. There is obviously a voluminous literature on this European project, some of which will be referred to here, but this book will not analyze that progress in detail.

Instead, it focuses on South American integration. In debates in the region about the direction that Latin American integration should take, Europe is a constant reference. Depending on the analyst, Mercosur is sometimes portrayed as lacking in key institutional areas when it is compared to Europe, while for others it is viewed as somehow superior, both because it has integrated much more rapidly and more “pragmatically” (see, inter alia, González-Oldekop 1997; Calvete 2000; Peña 1999; Casella 2000; Duina 2007).

Regardless as to how it is viewed in comparison, Europe is clearly a primary reference point for Mercosur. Some of the literature on the European integration process is in fact a good starting point for understanding Mercosur, even though the two processes are quite different. This chapter will make the case that Mercosur integration is fundamentally different in kind from European integration. In the introduction, I laid out the main arguments that led to these differences, and recapitulate them briefly here: a combination of weak political institutions and structural position in the international political economy has led to particular institutional choices and political practices in Mercosur. These institutional choices and political practices make Mercosur much more vulnerable to a wide variety of shocks that originate both outside the region and within the Mercosur countries themselves.

This argument will not rehash old debates on dependency that were popular in the 1960s and 1970s, particularly in Latin American studies. Indeed, one of the arguments here is that Latin American integration has been surprisingly successful, and the international political economy does not condemn poor nations to eternal poverty. Rather, it attempts to understand how structural position in the international political economy and different political institutions affect integration. Given the very different structural positions of Europe and Latin America— as well as their substantially different institutions—it would be surprising to find that integration would occur in both places with similar dynamics. As Ernst Haas noted in his classic study of European integration more than 50 years ago, “I would have little hesitation in applying the technique of analysis here used to the study of integration under NATO, the Scandinavian setting, the Organisation for European Economic Cooperation, or Canadian–United States relations. I would hesitate to claim validity for it in the study of regional political integration in Latin America, the Middle East, or South-East Asia (Haas 1958: xvi). Not only are Europe and South America in different places in the international political economy, but they have strikingly different political institutions and quite different civil society organizations. These differences make the dynamics of Latin American integration quite distinct. Indeed, I argue that Latin American integration simply cannot be like its European counterpart.

To get better leverage on understanding the case of Mercosur, this chapter considers how some of the debates on European integration inform the Mercosur process. The goal here is to establish a framework for the historical and political detail to follow. I am mostly concerned here with the incentives and disincentives to integrate, the role of international factors in the integration process, the role of civil society in the politics of integration, and finally, the institutions that support or impede integration. I turn to these specific issues after laying out the framework I use to compare integration processes.

A framework for comparing integration experiences

As noted earlier, a good bit of the work on Mercosur uses the EU as a frame of reference. Much of this work, however, does not go beyond noting that a) the experiences are different and/or b) that Mercosur should be more like the EU. While a) is certainly correct, it does not explain much, especially because the focus of analysis is so fuzzy. Here I present a framework that concentrates on what I consider the most important elements of the integration process. On the one hand, I try to explain particular political and institutional choices, and consequently focus on a number of key decision points in the integration process, as Moravcsik (1998a) did in his wide-ranging study of the EU. On the other hand, as noted in the introduction, I am interested in Keohane and Hoffmann’s broader “institutional” concerns, the ways in which political processes and practices change over the course of integration.

It is important as well to show how these variables are linked and affect one another. It is useful to illustrate their connections graphically, as in Figure 1.1. In the right section of the graph (labeled “The Array of Integration Outcomes”), I depict what is involved in an initial decision to integrate, as well as what happens when there is a decision to “go forward” in the integration process. Though obviously simplified, I break the integration decision down to the depth of the integrating ambition, the breadth of the issues covered by the integration decision, and the institutionalization that results from the integration decision.

Figure 1.1 A model of the regional integration process

Source: Author.

When I discuss depth, I refer to the overall goals of a particular regional integration agreement. In order of increasing depth, these would be 1) a free trade area (which provides for free exchange of goods and services between parties to the agreement); 2) a customs union (which includes the former but also has a common external tariff on goods coming from outside the parties to the agreement); 3) a common market (which has a customs union and also the free flow of factors of production, including labor); 4) an economic union (which, in addition to a common market has harmonization of economic policies among member countries); and 5) complete economic integration (which has complete unification of all economic policies) (Nye 1971a: 27–30; Balassa 1967).

Clearly, different economic integration schemes have different goals from the outset. Some, such as the North American Free Trade Area (NAFTA), as it name indicates, is only interested in the first level of economic integration, and the unrealized Free Trade Area of the Americas (FTAA) had similar goals. On the other hand, the European Community/Union and Mercosur were much more ambitious; Mercosur’s name—Common Market of the South—reflects this ambition. That said, the ambition of any integration effort does not necessarily match up to reality, as numerous failed attempts at integration indicate. In addition, leaders who sign such accords may be deliberately vague on what they intend and hope to accomplish, either because they disagree among themselves or because their constituencies in their home countries are divided on what integration should accomplish. Nevertheless, this depth dimension is important, as it is important to gauge the intentions (or the range of intentions) of countries that agree to pursue integration.

The breadth dimension is related to the depth dimension. By breadth, I do not mean the geographic scope of integration—a frequent use of the term—but rather the scope of policy areas that are subject to negotiation among integration partners. Most commonly, there is a distinction between strictly commercial negotiations and those that concentrate—in addition to commercial matters—on social issues such as labor, environmental standards, or broader economic cooperation. NAFTA, for example, brought in environmental and labor standards, though only in a weak and subsidiary way. The EU, in contrast, has found itself regulating such issues as a matter of course. And it is here that Mercosur begins to diverge significantly from the EU; nothing beyond commercial integration has ever been on the table. It has not been completely ignored in the politics of integration, as will become clear later, but these issues have never been incorporated into formal agreements among the Mercosur member states. In addition, while the EU nations regularly consult with one another on matters of macroeconomic coordination, and most have adopted a common currency, the economic turbulence of South America of the last two decades made this all but impossible in Mercosur.

Finally, the institutionalization dimension concerns the degree to which the integration process brings with it the creation of new entities to regulate the integration process. In this dimension I include the creation of supranational institutions that will a) have an interest in seeing the integration process move forward; b) have some power to influence the direction of integration; and c) take on some functions previously performed by sovereign national governments. It is in this dimension that we observe the degree to which sovereignty among integrating nations is pooled and/or given up. To qualify as “high” on the institutionalization dimension, it is not enough to have formed a transnational bureaucracy or to have assigned some national government bureaucrats the task of managing integration; institutions must have substantial power to affect the integration process or be able to speak for the nations making up the organization collectively. Here, again, the EU differs sharply from Mercosur. The former has seen the gradual growth—from the beginning of the integration process—of supranational institutions with influence; Mercosur, in contrast, has had no such institutions.

In analyzing integration, I am not concerned just with the initial choices made by policy makers, or just with their subsequent choices; I am also concerned with how initial and subsequent decisions affect political processes and how political practices change with integration. I attempt to incorporate both of these concerns in the third section (on the right) of Figure 1.1. In this section of the figure, instead of incorporating a decision tree, I present the context of the two alternatives to integration that I have identified. Above, the experience of the EU is represented. Decisions made earlier—to be broad in its integration focus and to institutionalize this integration with supranational institutions—led to a particular set of issues when it comes to “moving forward” in the integration process. When it comes to depth, the new issues included industrial policy and monetary policy, in effect moving toward economic union. Until economic integration advanced substantially, such issues were considered the province of national governments, and integration changed this. On the other hand, Mercosur, with its much less wellinstitutionalized and narrower integration focus, found itself concentrating on issues that were handled in the early stages of European integration.

When it comes to breadth, at subsequent stages there is a bit more commonality, as any ambitious economic integration project will probably confront two important issues: whether to expand to additional countries and how to coordinate foreign economic policy. Indeed, both the EU and Mercosur confronted these matters. Other matters of breadth, however, differ, since a more institutionalized and broader integration process will already have confronted them; here, most importantly, is the question of whether or not to include social issues on the agenda of integration, still in very early stages in Mercosur. The EU, by contrast, has matters such as security cooperation and common defense policy on the table. In Mercosur, they are not.

Finally, when it comes to the institutionalization dimension, the difference between the two integration patterns is especially stark: since the EU has already developed—and had developed from the beginning—supranational institutions, the question there is how far to take this process of supranationalization and to what extent the member nations will tolerate this process (Banchoff and Smith 1999). In Mercosur, which avoided any semblance of supranational institutions with authority from the beginning, the issue is very different and more vexing. Having succeeded, to a reasonable degree, with integration without such institutions, it is difficult to come to terms with the possibility of having them, given the costs for individual governments to giving such institutions greater authority.

On the left side of Figure 1.1, “The determinants of the integration process,” I focus on the variables that I identify as most important in influencing the path of integration chosen. Here, specifically, I focus on three independent variables. First, I focus on the position of the region in the international political economy. This encompasses three broad elements: a region’s dependence on foreign investment in key sectors of the economy, the region’s sensitivity to international shocks, and the international ideological context, which is transmitted through the advice of international financial institutions and its contacts with foreign countries and companies. Generally speaking, the more a region’s fortunes are influenced by happenings outside the bloc’s borders, the greater the likelihood of the regional integration scheme standing on shaky ground.

The second independent variable in this framework concerns the strength of domestic institutions in countries that are undergoing a process of regional integration. Here the focus is on the strength of state institutions and those in civil society. The general argument here is that stronger institutions in both arenas will lead to a more robust integration project. Conversely, weaker institutions will make it more difficult to come to agreements (since states will not necessarily be able to follow through on commitments that are made at the negotiating table), and will make them less sustainable in the long run, if groups in civil society are unable to provide a strong base of support for integration as it unfolds.

The final independent variable focuses in particular on the relative weight of the principle partners in an integration project. Here, the focus is twofold. First, we need to understand the specific interests of the key governments in any integration scheme, and specifically focus on their preferences when it comes to the depth, breadth, and institutionalization dimensions discussed earlier. We cannot necessarily read directly from those preferences to final outcomes, particularly since preferences may change during the negotiation process, and governments themselves are likely to be divided when it comes to those preferences. But we can get a fairly good understanding for how integration will proceed by considering these preferences. The second major dimension here concerns the relative weight of the major partners in an integration project. To the extent that there are partners with relatively equal economic weight, the greater the likelihood that there will be an integration that requires some devolution of sovereignty to supranational institutions. Conversely, the greater the weight of a single player in an integration scheme, the greater the likelihood that integration will not advance very far along the dimension of institutionalization.

It will help, at this point, to flesh out this more abstract discussion with some specific focus on the Mercosur process, with an eye toward constructing an argument about the inherent vulnerability of Mercosur as a regional bloc. To begin with the international context, there are three principal ways in which the international environment has increased the vulnerability and development of Mercosur. Developing countries continue to depend heavily on foreign investment in the most dynamic sectors of their economies. This is not to say that more developed countries do not depend on this sort of investment; of course they do. But the difference is qualitative. Attracting foreign investment from outside Europe has never been a driving motivation behind European integration. In Mercosur it has been, and the foreign firms that have invested in the Mercosur countries have become major players in the process. In Mercosur, integration has been part and parcel of an effort to avoid being marginalized in the international political economy. Leaders have made this point repeatedly, and policies have followed this search for outside capital. Indeed, some of the most important conflicts that have emerged in the Mercosur integration process have been over the distribution of foreign investment in the region. For example, one of the most contentious conflicts in Mercosur integration in the 1990s was policy in the automobile sector, as Brazil and Argentina competed over who would get more of the investment in the sector. Needless to say, there are no Brazilian or Argentine auto firms; all of this investment comes from outside the region.

The particular importance of international capital has a significant influence on the direction of integration: MNC firms are quite interested in integration, because it allows them to rationalize their producti...

Table of contents

• Routledge Studies in the Modern World Economy
• Table of contents
• Tables and figures
• Acknowledgments
• Introduction
• 1 Understanding integration
• 2 Along-standing dream
• 3 The launching of Mercosur
• 4 Mercosur’s day in the sun
• 5 Mercosur in slow-motion crisis
• 6 The future of Mercosur and the challenges of economic integration in the developing world
• Notes
• Bibliography
• Index