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Fta´s in Latin America: Has Economic Growth Really Been Achieved?

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Victoria Molina 105077444 January, 2017 Fall Semester 2016 NTHU

FTA´s in Latin America: Has economic growth really been achieved?

INTRODUCTION

Latin America opened up to trade in the nineties due to the devastating debt crisis in the 80´s. There is much debate on the impact of free trade agreements in the region as some experts state that economic growth has been achieved but others state that Latin America still needs to create better, more development-focused trade partnerships. So in this paper, through research of work by many economists, I try to explain to what extent FTA´s in the region have had an effect in their economies and the role of diversification in this matter.

Although FTA´s may bring several benefits such as: lower tariffs, creation of jobs, increased competitiveness as more efficient firms stay in the market and less efficient firms leave, promoting foreign direct investment, fostering innovation, and many others, it is not enough to actually achieve economic growth to all of its extent. We cannot assume growth merely by speculations; there are many other factors to take into account, especially in the region of Latin America, where we have big concerns such as low quality education, corruption, income inequality which is definitely not a sign of growth, weak institutions, economic and political instability. Another issue is that these agreements come to be pure formalities because most countries already had economic ties for reasons such as region and common language or for example being previous colonies.

Trade liberalization initiatives come with best interests, both from firms and governments, to actually make an impact on a macroeconomic level as they promote industrialization and domestic development. FTA´s are just a stepping stone in the road for economic growth. It´s necessary the participation and follow up by governments after signing these agreements to continue to take advantage of them. Their responsibility is to encourage and promote creation of new firms, building a suitable political and economic environment for firms to grow and to create the right policies that will accompany the relationships between the trading partners and their businesses together.

As I mention before, I´m going to describe the role of diversification in trading and why it is important in terms of increasing variety of goods and number of trading partners. As it is intended with trade agreements, to open up to new markets and offer new products (extensive margin). Trading of existing products to existing markets is a short term solution (intensive margin). More open economies grow faster than closed ones. For economic growth, a country or a region, in this case, must be integrated with the rest of the world. I don´t think any economy has grown while being isolated.

I would also like to add some points of view in comparison with Asia and how they have managed to become a more developed region, how they have achieved economic growth and finally suggest leaning more towards their 2 most prominent trading patterns that are: 1) intra-industry trade and 2) participation of value chains. I´m not suggesting that Latin America should copy or try to follow exactly Asia´s steps, we have to be aware of the limitations we have in terms of industry, while I´m not saying that Latin
America should export technology, the region may consider specialization in some industries and becoming part of supply chains by being able to produce or assemble parts of some devices.

For starters, I´m going to present an overview of trade in Latin America and some different points of views from several articles that I read.

AN OVERVIEW OF Latin America’s TRADE

Latin America has had ups and downs in terms of economic growth; also they have had positive outbursts followed by crises. For the region it has been very difficult to cope with scarce capital inflows, which personally I think it´s one of the major issues that I will like to address later and unstable environments for emerging markets. But efforts have been made, opening to trade is to be thought one of the biggest, most important steps but the real challenge here is not only to start but to maintain a process of sustained growth.

According to Perales (Perales, 2012), Latin American countries are among the most active participants in international trading system, due to participation in several FTA´s. In this article “The Hemisphere´s Spaghetti Bowl of Free-Trade Agreements”, he addresses the idea that this will not only strengthen individual economies but may lead to a more competitive position for the region. Although it is logical to think or expect that the more FTA´s a region sings, the more you´ll benefit from them, he doesn´t present any proof for this. He is just basing his ideas on commercial diplomacy among the participants.

“The passage of FTAs has helped Mexico and Chile become two of the world’s most globalized countries. Chile alone now has 21 agreements with 58 countries, covering 92.5 percent of all merchandise exports and giving its products preferential access to 4.2 billion potential customers.” (Perales, 2012)

But what does he mean with globalized? How does he prove that the number of free-trade agreements is directly proportional to an increase economic growth percentage? I think his actual point of view is more of what he expects or he thinks FTA´s should work. Which is valid, as I mentioned before, these agreements are in the best interests of the participants involved. And it is very important that FTA´s are well managed to create the right path towards boosting the region´s competitiveness, development, economic growth, inclusion to global markets and also improving the living conditions of the people by poverty reduction and generation of jobs.

However, the result of some calculations may not seem align to Perales ideas.

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Even after the 90´s, a substantial increase on rate of growth of GDP has not been achieved. In the case of Chile, it shows an actual growth between 1991 and 2001 of 4,6 but in the next years, it shows a decrease to 3,2 which proves the mentioned above issue of the region not being able to maintain sustained growth. On the other hand, the rate of growth of GDP in Mexico keeps decreasing after 1991 (Moreno Brid & Pérez Caldentey, 2009). Isn´t GDP an indicator of actual economic growth?

In their article for United Nations, Moreno Brid and Pérez Caldentey, they explained that export in Latin America would be better explained by comparing it to the rest of the world and showing its actual share of trade. And in the illustration bellow, it does not only show Latin America´s current share, but the behavior it has had since 1960 and the pattern even after trade liberalization. Latin America didn´t improve its export performance. So overall, the idea of signing FTA´s is not enough to make a contribution on a country´s or on a region´s economy.

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