REVIEW 2000-MERCOSUR: Economic Growth Eases Trade Tensions

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Dec 28 2000 (IPS) - The Southern Common Market (Mercosur) is looking ahead to more tranquillity within the trade bloc in 2001, largely the result of economic growth, especially in Brazil, which represents two- thirds of the four-nation market.

The international financial assistance Argentina obtained this month, to the tune of 39.7 billion dollars, opens the possibility of escaping the stagnation that has plagued the country for the last two years. Brazil, meanwhile, begins the new year with a basic interest rate of 15.75 percent, its lowest since it tamed inflation in 1994.

Expectations are that Brazilian economic activity will see higher growth next year than its 4.5 percent expansion in 2000, according to forecasts by Central Bank president, Arminio Fraga.

With inflation this year running close to six percent, according to official data, and on a downward trend, interest rates could drop further still, stimulating economic activity and improving other related indicators.

Brazil could comfortably meet the macro-economic goals set by Mercosur, says Fabio Giambiagi, economist at the National Bank of Economic and Social Development and author of a study on the conditions necessary to establish a common currency for the trade bloc.

Mercosur’s four member-nations – Argentina, Brazil, Paraguay and Uruguay – agreed at their presidential summit, held Dec 14 and 15 in the Brazilian resort city of Florianopolis, to set shared goals to be met beginning in 2002, similar to those the European Union adopted as requirements for its monetary unification.

One of the commitments consists of containing inflation below five percent in the 2002 to 2005 period, and reducing it to three percent in the following years. Brazil must cut its inflation to four percent in 2001, stipulated in a prior agreement with the International Monetary Fund (IMF).

Another objective is to limit the fiscal deficit of the four countries to a maximum of three percent of each one’s gross domestic product (GDP), with flexibility for Brazil to 3.5 percent, but only in 2002 and 2003.

Sanctions for non-compliance were not defined, but any member that surpasses the limits as a result of uncontrollable factors will have to present its partners with a programme of corrective measures that will allow the country in question to return quickly to the agreed schedule of timeframes and goals.

For the net public debt, negotiators also set a limit of 40 percent of GDP, but it does not take effect until 2010. It is an extensive period of time, but will require the continued efforts of Argentina and Brazil, whose current debt in this area nears 50 percent each.

Everything points to growth, given that the objectives require GDP to expand faster than debt and, especially in Brazil, a decline in interest payments, the principal source of the country’s fiscal deficit and therefore its government debt.

This year, with an average of 17.5 percent, public sector debt has a cost running higher than seven percent of the GDP, estimates Giambiagi. Increased tax collections and cuts in expenses allowed Brazil to reduce the deficit to 4.02 percent of the GDP by November, only slightly higher than economic growth.

Conditions should improve in 2001, when the base rate falls to 14.5 or 15 percent, the economist predicted. If the goals are met, Mercosur will be home to economies that are “more solid and stable within a few years,” Giambiagi said.

“The general lines are defined and they are realistic,” he assured, though he acknowledged they will present some negatives for the regional bloc in the immediate future.

Financial assistance alone will not ensure the recovery of the Argentine economy, whose growth will depend, says the Brazilian economist, on unknown factors such as the play of political pressures and consumer and investor attitudes.

In addition, there are pending trade disputes, such as the sugar issue – which is emblematic of the state of affairs -, a commodity whose exclusion from agreements deeply affects Mercosur’s free trade regimen, maintains Giambiagi.

One proposal by Brazilian entrepreneurs for advancing negotiations is a broader approach to the energy question, in response to Argentina’s refusal to remove tariffs on Brazilian sugar because it is subsidised through a fuel alcohol production programme. Sugarcane serves as the raw material for both sugar and the fuel.

Alternatives are currently under consideration, such as exporting the fuel alcohol as a gasoline additive that reduces air pollution and encouraging technology transfer and modernisation of the sugarcane industry in northern Argentina, where social crisis would most likely erupt with the loss of the internal sugar market.

According to Brazil’s special ambassador to Mercosur, Jose Botafogo Gonçalves, this is not necessarily a solution, but opens a window for this powerful trade bloc that represents nearly 85 percent of South America’s combined GDP.

One way to overcome trade conflicts is to advance a common agricultural policy with coordinated production, storage and marketing, says lawmaker Julio Redecker, president of the Mercosur’s Joint Parliamentary Commission, who emphasises his agreement with the business leaders’ proposals.

Regardless of outcomes in these areas, the coming year will see growing pressure to set up a permanent tribunal to settle trade disputes. Only Brazil continues its opposition to the creation of the body and of other supra-national institutions for Mercosur.