Institutional Tangles, Deindustrialisation Hurt Mercosur

By Mario Osava Reprint | | Print | |En español

RIO DE JANEIRO, May 8 2013 (IPS) - July will mark the start of a new era for the Common Southern Market (Mercosur), when it will expand to five full members, if the South American bloc manages to overcome the commotion caused by the admission of Venezuela and the suspension of Paraguay.

But Mercosur’s underlying problems will continue to block progress towards integration, experts warn.

There is a “legal vacuum” surrounding Paraguay’s eventual return as a full member of Mercosur – South America’s largest trade bloc – said Tullo Vigévani, a São Paulo State University (UNESP) professor of political science specialising in international relations.

Venezuela’s admission as a fifth full member was approved at the Jun. 29, 2012 summit, when Argentina, Brazil and Uruguay took advantage of the absence of Paraguay, which was suspended at the same meeting because of the Paraguayan legislature’s ouster of then President Fernando Lugo earlier in June.

Lugo was impeached in what was considered a “summary trial” that violated the bloc’s democracy clause.

The Paraguayan Senate, which was blocking Venezuela’s inclusion by refusing to ratify the admission agreement signed in 2006, finally voted against it in August in a vote that was more symbolic than effective.

But a political agreement will likely be reached to sort out the institutional mess after Paraguayan President-elect Horacio Cartes takes office in August, since the bloc’s powerhouses, Argentina and Brazil, will exert strong pressure on Paraguay due to economic interests, Vigévani told IPS.

The new government, which represents the return to power of the rightwing Colorado Party that ruled Paraguay from 1947 to 2008, is expected to get Congress to ratify Venezuela’s admission.

However, Venezuela adds a new element of uncertainty in the bloc because of the opposition’s challenge to President Nicolás Maduro’s Apr. 14 victory, in the wake of Hugo Chávez’s death from cancer on Mar. 5.

But the challenges faced by Mercosur are mainly due to the “conflict-ridden relations” between Argentina and Brazil, which are both experiencing processes of deindustrialisation, according to Vigévani.

Argentina lost a large part of its industries in a lengthy process that began in the 1970s, he pointed out. Privatisation and trade liberalisation policies adopted in different periods, such as the 1976-1983 dictatorship or the administration of Carlos Menem
(1989-1999), led the country to disaster.

The problem is that Argentina is now trying to carry out “old-fashioned reindustrialisation,” protecting non-competitive sectors without the technological innovations that could help create a sustainable future for the country, although the pressure to generate jobs is understandable, Vigévani said.

Disputes between Argentina and Brazil have occurred constantly since Mercosur was created in 1991, such as in the case of attempts to achieve ambitious goals like macroeconomic harmonisation, complementary supply chains, free circulation of goods and services, and a common currency, which have proved elusive.

Trade between South America’s two giants grew 13-fold since the Asunción Treaty, which founded Mercosur, was signed. But it appears to have reached a limit in 2011, when Brazil exported 22.7 billion dollars worth of goods to Argentina and imported 16.9 billion, according to official figures from Brazil.

The imbalance in Argentina’s favour began in 2004. And last year, Brazil’s sales fell 20.75 percent, while Argentina’s only slipped 2.73 percent.

Bilateral relations have also suffered because large Brazilian investors have pulled out of Argentina.

Brazil’s state oil company Petrobras is selling its assets in Argentina, where it had a string of service stations, while Brazilian mining giant Vale, privatised in 1997, suspended a potassium mining project in Rio Colorado, drawing an angry reaction from Buenos Aires.

But Brazil is also caught up in its own process of deindustrialisation, although less dramatic and more recent than the one Argentina experienced in the past.

For that reason, it is trying to defend some industries with measures such as tariff hikes, minimum national content rules for government purchases, tax cuts, and reductions in energy prices, in order to sustain the near full-employment achieved thanks to the fast expansion of the services, agriculture and construction industries.

The industries that the Brazilian government is trying to shore up are, however, “backwards,” such as the metallurgical industry, while sectors with greater technological innovation, like electronics and chemistry, are not as strong, said Julio de Almeida, an economist with the Institute for Studies on Industrial Development (IEDI).

With China’s boom in the world economy, industrial output has shrunk as a proportion of Brazil’s GDP and exports.

In fact, this problem is faced by Mercosur as a whole, which has increasingly become an exporter of primary products and an importer of manufactured goods.

The challenge faced by the entire bloc is to develop “policies that strengthen members’ processes of innovation and training, to boost competitiveness in production that incorporates new technologies,” said Vigévani.

This view is more and more widely expressed by analysts. But no viable short-term solutions are in sight.

Venezuela’s incorporation as a full member of Mercosur doesn’t improve the outlook in this sense. With its growing trade imbalance and heavy dependence on oil exports and on imports for just about all other products, Venezuela is already a major importer of food and manufactured goods from Argentina and Brazil.

For example, Brazil exported 5.06 billion dollars worth of goods to Venezuela last year and only imported 997 million dollars, according to statistics from Brazil.

Brazil’s investment in Venezuela is also sliding, with several companies pulling out of the country.

Brazilian companies have only made four investments in that country in the last five years, compared to 20 in Colombia, 19 in Chile and eight in Peru, according to the Centre for Integration and Development Studies (CINDES) in Rio de Janeiro

The economic slowdown forecast for Venezuela – from last year’s 5.6 percent to 2.5 percent this year, according to the United Nations report World Economic Situation and Prospects 2013 – and a 20 percent inflation rate exacerbate the uncertainty of what Venezuela’s admission will mean for the bloc.

Nor does the negotiation of a trade agreement with the European Union, which is back on the table, promise many benefits, because it is basically a question of opening up that market to Mercosur’s farm products, as a counterpart to increased access by European industrial goods and services to South America’s two largest economies, which would merely aggravate the bloc’s problems.

In addition, the severe economic crisis facing the EU further limits the ambitions of the trade talks between the two blocs.