One of the main obstacles to development in Latin American countries and how to solve it – Business – 11/19/2021

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The meager intraregional trade exchange between the countries of Latin America, appears as one of the main obstacles to the development of their economies. This exchange does not exceed 15% of total exports, and has remained stable since the 1990s; In contrast, in Europe intra-regional trade has values ​​close to 60% of the total, while in North America it reaches 45% and in East and Southeast Asia 35%.

This is highlighted by the Economy and Development Report (RED2021) of CAF -development bank of Latin America, entitled “Pathways to Integration: Trade Facilitation, Infrastructure and Global Value Chains”, presented yesterday in Panama City.

The trade agreements implemented by the countries of Latin America in the last three decades, with reductions in tariffs and non-tariff barriers -which lowered 85% of the existing tariffs-, did not generate significant and sustained increases in intraregional trade.

Modest improvements.

The report warns that, although for the average of the region these policies have generated increases in trade and investment, their magnitude has been modest and does not match “with the expectations that were had about the impact of these initiatives on growth and wellness”.

“These not so encouraging results are partly explained because the regional market has not yet been a space that companies, especially medium and small ones, have been able to take advantage of to integrate commercially and productively, and that this provides opportunities to expand their sales and employment. The reasons for these failures are due to incomplete progress in several of the trade liberalization policies, “said Pablo Sanguinetti, vice president of Knowledge at CAF, and co-author of the report.

Sanguinetti told El País that the changes that urge the region need to be supported by public policies, and those policies occur if the issue is installed in the public debate between the different actors. “That is what the report seeks, to trigger the debate, generate an agenda and favor the necessary changes,” he remarked.

Reengineering of integration.

The RED2021 report proposes the need to apply “a reengineering of three pillars” on the way to the integration of Latin America and the Caribbean. The first is the reduction of unilaterally applied tariff levels, which in some cases are still high, “notably in the case of Mercosur”, as well as the reduction of customs and border costs through trade facilitation initiatives. The second pillar consists of providing the necessary transportation infrastructure to improve physical integration between countries, including that which favors energy integration. The third pillar of reengineering refers to domestic and regional regulations that promote productive integration between economies, promoting the participation of companies in regional value chains.

Containers in the Port of Montevideo.  Photo: El País Archive
Containers in the Port of Montevideo. Photo: El País Archive

In this sense, Lorenzo Caliendo, a Uruguayan economist at Yale University, who served as a commentator in the presentation of the report, warned of the existence of internal situations in each country, which require unilateral policy decisions to overcome them.

“Reducing internal barriers may have an even greater global impact than reducing external barriers,” he said.

Contrary to any claim based on the proximity of markets, “proximity does not pay as much” in Latin America as in other areas. The authors of the report highlighted that there is enough evidence to show that the effect of distance on trade is scarce in the region, where trade with neighbors is generally not a priority and freight costs “are more expensive internally than with areas. outside the region ”.

Shared single window.

Trade facilitation includes the simplification, standardization, digitization and harmonization of the different procedures and procedures that are required to carry out a foreign trade operation and that affect the final cost for the consumer. The comparison, included in the report, is conclusive: while border procedures take between 80 and 100 hours in Latin America and the Caribbean, the times are reduced to less than 10 hours in North America and the European Union.

A typical case of facilitation is the foreign trade single windows, which concentrate everything in a single platform and their positive effects have been demonstrated. “The countries have been incorporating them, but it remains for them to approve the procedures of their neighbors,” said Sanguinetti.

In terms of transport, the costs in South America for intra-regional trade are 15% higher than those of the European Union, but at the extra-regional level, the difference in costs is not relevant; “Without a doubt, transportation costs are a determinant of the low level of intra-zone trade,” where the land modality plays a preponderant role, said Lian Allub, CAF’s chief economist and also co-author of the report.

“The evidence discussed in relation to the transport infrastructure of Latin America shows significant lags in the amount of infrastructure available, as well as in the services provided, and the delay is particularly significant in land infrastructure, whether rail or road” Allub added.

Calculations made by CAF technicians on the implicit costs of slow roads with few services show that, if these problems were addressed and an average speed of 90 kilometers per hour could be ensured on the routes, access to goods would increase by 10 in some of the countries in the region.

Internalize “near shoring” to achieve more associativity

Regarding the reduction in trade costs, it is emphasized that at the global level this trend promoted the fragmentation and internationalization of production, promoting the creation and growth of global value chains. The report raises different possible actions to promote the integration of production on central issues such as rules of origin, policies aimed at promoting direct foreign investment or special import regimes, among others.

In this context, Pablo Sanguinetti specified that the growing trend that complementarity at the level of value chain is made between production units of the same company, “it does not seem to be the best solution, in terms of efficiency.” However, he admitted that this occurs because firms choose on certain occasions to “vertically integrate the chain in response to local uncertainties and risks of changes in the rules of the game, problems often present in our countries.”

The study raises the need to internalize the concept of “near shoring”, seeking a higher level of associativity and complementarity in the region. “They do not necessarily have to compete, based on similar production, countries may seek to specialize in different stages of the chain, in a process that requires compensation”, assumed Sanguinetti.

“The integration processes require an institutional framework and state capacities for their design and implementation. These should align the interests of sectors that will benefit from these initiatives and, at the same time, serve to reduce costs and reconvert those activities that could face greater competition. For this, resources are required, but also coordination capacities between different state agencies, with the private sector and with other governments that are partners in these initiatives ”, pointed out Sanguinetti, underlining that a change of orientation such as the one proposed needs“ leadership ”in the countries.

Bella Unión Bridge – Monte Caseros, a model to replicate

Project of the bridge between Uruguay and Argentina.  Photo: El País

The project of binational bridge between Uruguay and Argentina on the Uruguay River, joining the towns of Monte Caseros and Bella Unión, it was presented yesterday in Panama as “a model of what CAF wants to do” at various points in the region.

At the close of the seminar where the 2021 Economy and Development Report of CAF -development bank of Latin America was presented, the Foreign Minister of Uruguay Francisco BustilloTogether with the Secretary for Strategic Affairs of the Presidency of Argentina, Gustavo Béliz, they spoke about the initiative, which is financed by CAF for the pre-feasibility study that is underway.

For Sergio Díaz-Granados, executive president of CAF, to advance the integration processes in the region, it is necessary to investment in infrastructure that links countries, causing local impacts in areas, until now outside the usual trade corridors. “We want more projects like this,” he told El País, “and that is why we consider it important to present the future Monte Caseros-Bella Unión bridge to the region and encourage other countries to think about the key integration of this type of works.”

Foreign Minister Bustillo affirmed that “enough time has passed since the local forces of both cities expressed themselves in favor of a bridge over the Uruguay river in that border region. That pronouncement occurred in 2008, ”Bustillo recalled in dialogue with El País in Panama City.

Three years later, in 2011, the declaration of Buenos Aires was signed by both governments, committing to promote the work; In 2014, a feasibility study was carried out by the Uruguay River Administrative Commission (CARU), and the last milestone was the commitment of Presidents Alberto Fernández and Luis Lacalle Pou, in 2020 in the first meeting between the two as presidents. “We cannot continue delaying the beginning of the works,” he said.

The pre-feasibility study carried out in 2014 estimated a cost for the work in its entirety of US $ 130 million.

“This information must be updated,” Bustillo said, “with geotechnical aspects to reconsider and adjust the project to new construction techniques.”

The multilateral organization in which Uruguay is

CAF -development bank of Latin America- has the mission of promoting sustainable development and regional integration, by financing projects in the public and private sectors, providing technical cooperation and other specialized services. Established in 1970, it has 19 member countries -17 from Latin America and the Caribbean, together with Spain and Portugal- and 13 private banks, it is one of the main sources of multilateral financing and a generator of regional knowledge.

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