Macroeconomic coordination in Latin America: does it have a future?

Abstract

For most developing countries, open regionalism has emerged as quite a sensible response to the undergoing turbulent and asymmetric process of economic globalization. Moreover, the successful experience of the countries which are now part of the European Union, has made regional integration an increasingly attractive option for the developing world. Whenever regional integration is intended to go beyond merely a free trade agreement, macroeconomic coordination becomes a key issue. Theoretically, the underlying idea of the macroeconomic coordination is the interdependency between economies: when economies are interdependent, the events that take place and the policies implemented in each of them will affect the performance of all the rest, through different real and monetary transmission channels. Therefore, if there is interdependence between the economies, then the macroeconomic coordination appears to be a means of internalizing the effects of reciprocal inter-relationships on decision-making in each economy, and improving the results for all concerned. After the introduction, this paper examines the macroeconomic coordination and its perspectives in Latin America through four sections). The first one shows the reasons for macroeconomic coordination from a theoretical viewpoint, trying to determinate the degree of economic interdependence in Latin America. The second section analyses the experience of MERCOSUR in terms of macroeconomic coordination, while the third one focuses on the obstacles and opportunities of macroeconomic coordination in the region. Finally, the fourth section concludes. This research shows that in Latin America the progress achieved on macroeconomic coordination has been poor. Demand for coordination is weakened by the lack of synchronization between economic cycles in the different countries. The heterogeneous productive structures in the region explain in part this situation; but one of the main reasons, is the low level of trade interdependence. Moreover, since financial integration virtually does not exist in the region, the reciprocal externalities present on this front are exclusively due to the contagion effects generated by the frequent shocks that are brought about by the highly volatile nature of globalized financial markets. This last fact tends to lead countries to try to differentiate themselves from their neighbors in times of crisis rather than to seek macroeconomic coordination. Therefore, it is clear that macroeconomic coordination and convergence in Latin America entails greater difficulties than those confronted by Europe in its early stages of the integration process. These difficulties reinforce the importance of gradualism in the approach to macroeconomic coordination in the region. The complexity of the factors involved and the need to generate confidence and mutual understanding between the parties involved make this inevitable.