A deeper economic integration among Latin American countries will make the region more competitive in international markets and boost long-term growth, according to a new World Bank report.
Better Neighbors: Toward a Renewal of Economic Integration in Latin America argues that a renewed integration strategy that takes advantage of the synergies between regional and global economic integration can contribute to growth with stability. This is particularly relevant for a region that is just coming out of two years of recession.
“Regional economic integration offers a way forward to reactivate the economic growth needed for reducing poverty and boosting shared prosperity,” said Jorge Familiar, World Bank Vice President for Latin America and the Caribbean. “A more robust regional integration will make the region more competitive globally. Effective integration will require investment in infrastructure, connectivity and logistics, which will offer an additional boost in economic growth.”
Latin America has been pursuing regional integration since the 1960s with efforts intensifying since the mid-1990s. But regional exports remain at 20% of total exports, much less than the 60% and 50% regional exports in the European Union and East Asia Pacific, respectively.
The World Bank report proposes an “open regionalism” that reaps unexploited synergies between regional and global economic integration, on the premise that pro-growth integration with the world cannot be achieved without first strengthening the region’s own neighborhood. To do so, the report lays out a five-pronged strategy:
• Further reduce external tariffs. This can stimulate local economic activity, attract foreign investment, enable knowledge-sharing among regional neighbors, and ultimately facilitate collective entry into global export markets.
• Deepen economic integration between South America, Central America, the Caribbean, and Mexico. Through new preferential trade agreements (PTAs), these sub-regions can obtain additional gains from trade.
• Harmonize rules and procedures. Allowing firms to use materials from other countries without losing preferential access, as is often the case with existing PTAs, can help the region attain higher gains from these agreements.
• Focus efforts to reduce high trade costs. Lack of quality infrastructure and challenging topography make distance much costlier to Latin America’s trade. The share of unpaved roads in the region is around 70%, causing land transport to drive up trade costs. Low port efficiency also makes the region’s connectivity to global maritime and air transport networks comparatively weaker and costlier.
• Integrate labor and capital markets. There is room for improving regional efficiencies through freer migration and capital flows in Latin America, according to the report. Labor market integration across borders can help countries become more productive and boost growth through cross-border knowledge transfers.
The report concludes that, in order to be successful, the region will need to design and implement smart but complex policies to enhance regional economic integration while also lowering barriers to international trade with the rest of the world.
While it will not be simple, the report argues that the time is ripe to bring these efforts to the forefront.