TRADE-LATAM: Fiscal Discipline, New Key to Mercosur Integration

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, May 10 2000 (IPS) - Fiscal discipline is the new key to enhancing and deepening integration in South America’s biggest trade bloc, Mercosur (Southern Common Market), agreed participants in the bloc’s “economic summit”, which ended Tuesday in this Brazilian city.

A common currency for the four members of the bloc, Argentina, Brazil, Paraguay and Uruguay, can only be envisioned as the “coronation” of a lengthy process that must begin with fiscal coordination, followed by convergence in monetary policies, said Argentine foreign minister Adalberto Rodríguez Giavarini.

“It is encouraging that both Argentina and Brazil have passed laws on fiscal responsibility, putting caps on the level of indebtedness and size of the fiscal deficit,” said the minister, who also pointed out that Paraguay and Uruguay, as well as associate members Bolivia and Chile, had posted indicators compatible with a balanced economy.

At the three-day meeting sponsored by the World Economic Forum, both Giavarini and Brazilian finance minister Pedro Malán pointed out that the current “relaunching” of Mercosur’s integration process was based on the recent decision by the bloc’s two biggest members to harmonise their statistical methods as of September, and to set fiscal targets and timeframes in March.

There are principles of public administration that are being accepted as “values” above and beyond ideologies, political parties or governments, such as “economic stability, budget restrictions and public sector solvency,” said Malán.

Low inflation and fiscal austerity benefit everyone, and are thus objectives to be sought by all governments and are ceasing to be issues of political debate, he added.

Malán said Latin America’s progress towards accepting these values was reflected in the fact that the centre-left coalitions that triumphed in the recent presidential elections in Argentina and Chile were both committed to macroeconomic equilibrium.

But there is no one single road to that objective, concurred Malán and Chilean minister of finance, mines and energy, José de Gregorio.

“There is no single recipe,” said De Gregorio, who pointed out that the means depended on the history, circumstances, resources and shortcomings of each country, and that a past of high inflation, financial crises or possibilities for privatising public assets could alter strategies.

Success can be achieved through different routes, such as Argentina’s currency board, which fixes the peso to the dollar, and the floating exchange rates adopted by Brazil and Chile, he said.

But Argentina’s currency board was slammed by University of Buenos Aires economy professor Eduardo Conesa, who described it as “unsustainable.”

The currency board or “convertibility plan” has had a high social cost, reflected by the fact that 28 percent of the economically active population is under- or unemployed, Conesa maintained.

A more “realistic” exchange rate, in his opinion, would be two pesos against the dollar, which would mean Argentina’s gross domestic product (GDP) in dollars would be half of the official level.

The currency board thus obscures much more serious economic imbalances, such as an external current accounts deficit that would actually be twice as large as the official deficit, or eight or 10 percent of GDP, according to Conesa.

Conesa said suggestions to “dollarise” the Argentine economy were “ridiculous.” He added that a common Mercosur currency would also be a difficult goal, only possible in the long-term, perhaps 15 or 20 years from now.

Monetary unification is only feasible among countries with a strong two-way flow of trade as well as free cross-border movemet of workers – conditions that do not exist in any part of South America, argued Conesa.

Without sufficiently strong reciprocal flows of trade and workers, Mercosur countries follow different economic cycles, and thus need different monetary policies in any given period, which makes currency unification impossible, he added.

But foreign minister Giavarini argued that Argentina’s currency board would be maintained in the foreseeable future as “the best exchange system” for the country, one that not only responds to national interests but enjoys the backing of a majority of Argentines, and of President Fernando De la Rúa’s centre-left Alliance.

The imbalance between Argentina and Brazil’s exchange rates “is of less concern than the devaluation of the Euro,” the European Union’s single currency, which has already lost 25 percent of its value against the dollar, said Giavarini.

Fiscal performance also conditions the efficacy of exchange policies and the competitiveness of countries, stressed the minister.

He underlined the need for convergence in fiscal questions as a first step towards macroeconomic harmonisation in Mercosur, followed by agreements to move towards common exchange policies and a unified currency.

Mercosur is in a good spot right now, “with a total change of mood since late last year,” when it was suffering a spate of conflicts and trade disputes triggered by the January 1999 disorderly devaluation of the Brazilian currency, the real, said the foreign minister.

Signs of economic recovery and the recent Argentine-Brazilian agreement to start working towards macroeconomic coordination contributed to that change of mood, he said.

Minister Malán, meanwhile, said the performance of the Brazilian economy should not be evaluated by stock market swings.

A more effective indicator, he said, is the fact that direct foreign investment in Brazil mushroomed from two billion dollars in 1994 to 30 billion dollars in 1999. He pointed out that eight billion dollars in direct foreign investment had already flowed into Brazil this year, reflecting the international market’s confidence in the Brazilian economy.