Cambridge Review of International Affairs, Volume 18, Number 3, October 2005

Bounded by the Reality of Trade: Practical Limits to a South American Region*

Sean W. Burges Carleton University, Ottawa
Abstract This article argues that regionalism in South America will meet with limited success because continental and subregional integration projects lack the necessary economic underpinnings. The result is an incomplete form of regional integration that, while offering some rewards to the participating countries, predominantly serves the energy security needs of the regions major players. Brazil, in particular, benets from this process and also is the prime reason that regionalism in South America will not deepen. Without a major state to absorb the costs of region-building the process will stall. As the evidence in this article implies, Brazil is not willing to absorb these costs, placing severe limits on the region and regional acceptance of Brazilian leadership.

South American integration is again an issue in New World political economy. Despite the failed Latin American Free Trade Area in the 1960s and the Latin American Integration Association of 1980, attention has returned to integration, putatively as a response to international economic and political pressures (van Klaveren 1997). And it is political pressure, especially in the form of presidential diplomacy (Danese 1999), that is driving contemporary continental integration initiatives such as the South American Union launched in December 2004 at a Cuzco, Peru presidential summit. But is there an economic fundament to these political proclamations of integration? This article argues that joint presidential declarations are not matched by the wider dynamics necessary to sustain integration processes. Propositions that continental region formation continues to be about the collective economic growth of the early 1990s appear reasonable, but overlook the underlying intentions driving initiatives such as the South American Regional Infrastructure Integration programme (IIRSA). A central strut of the argument is that the conventional economic basis for a deeply integrated South American region is, at best, thin. An examination of intra-continental trade ows and the factors inuencing them calls for an alternative explanation of continued attention to integration, particularly by the regions dominant players. In short, South American regionalism emerges as a project lacking a leader willing to absorb the costs of
*The author would like to thank Jean Daudelin, Gian Luca Gardini, Andres Malamud, and the two anonymous reviewers for their comments and encouragement with regard to this paper. Research was supported by Canadian Social Science and Humanities Research Council Postdoctoral Fellowship #756-2004-0074. All errors, oversights, and omissions are, of course, attributable to the author.
ISSN 0955-7571 print/ISSN 1474-449X online/05/03043718 q 2005 Centre of International Studies DOI: 10.1080/09557570500238076

438 Sean W. Burges providing the necessary public goods, but nevertheless is pushing forward in directions that serve the interests of the country that could ll that role: Brazil. Two theoretical propositions will be developed by drawing on the new regionalism literature. First, a deep integration project requires a transfer of ownership of the region from the policy elite to economic, civil, and cultural society. Although such deepening has been discussed in the context of Mercosur and macroeconomic as well as institutional coordination (Pena 1997; Grandi & Schutt 1996; Preusse 2001; Ferrari Filho 2001), proposals remain more an ambition than the recipe for a realistic future. Empirical examination of intra-continental trade ows as well as lacunae in technical questions such as trade facilitation suggests that South American regionalism is distinctly limited in character. The second proposition is thus that there is more to region formation than trade ows. Central to the South American case is a non-traditional aspect of securityenergy securityand the unwillingness of Brazil to assume the costs associated with its leadership ambitions. On an empirical level this paper provides data demonstrating that there is insufcient economic pressure to support a deep South American region. In the case of Mercosur the data puncture suggestion that the bloc is a prelude to an EUstyle union. (de Oliveira 2000; Bajo 1999). Evidence is organised under six headings: the character of intra-continental trade; the size of trade ows; the role of trade in South American economies; the paucity of transnationalised production; low intra-continental foreign direct investment (FDI) ows; and transnational infrastructure networks. Two of these factors, FDI ows and transnational infrastructure, are key elements for understanding the emerging nature of South American regionalismi.e. its focus on energy. Although traditional security concerns were important to the origins of Mercosur, there is now minimal fear of intra-continental state-state conict; hence, external threat management is not addressed here (Mera 2005). A more detailed treatment of Brazilian attempts at costless leadership (Burges, forthcoming) are largely left implicit in this article due to space restrictions, with the subject assuming greater resonance in the conclusion. Regionalising: Why and How? Hettne and Soderbaum (2002) describe region formation as a political process guided by formal governmental policies. A conscious decision is made by a series of countries to group together, whether in reaction to perceived erosion of the Westphalian system, the rise of unipolarity, or globalisation-induced competitiveness concerns. The goal is to create a larger, supranational space collectively transforming or protecting existing structures. Regional initiatives are thus simultaneously political, economic, and social projects designed to collectively protect national sovereignty and autonomy. Discussion about which actor creates the initial regionalist impetussome argue the market, others the stateis not of immediate importance to an examination of regionalisms trajectory in South America; what matters is that deepening and extending a region requires increased contacts between previously separate groups. As Acharya (2002, 25) suggests, regional progress depends on non-state-level interaction providing economic substance through trade, which precipitates shifts in public opinion.

Practical Limits to a South American Region 439 The argument in this paper is that the economic substance of a South American region will not generate the necessary integrative pressures. Cable (1994) notes that the major difference between rst- and second-wave regionalism is that market considerations drive contemporary region formation, particularly capital movements and multinational corporations decision making. Tussie (1998, 82) points at this factor in her examination of regionalism in the Americas, highlighting a desire for expanded market access as a bottom-up push for integration. Yet a contradiction remains embedded within this market-seeking approach, namely the concentration on market access as opposed to regional disaggregation of production structures. Ethier (2001) points to this conundrum by stating the obvious: convenience suggests that countries trade with their neighbours. But this does not necessarily tell us why or how far countries will pursue integration. A simple boost in trade may tell us little about the sustainability of a region (Thomsen 1994). I will thus consider what is traded as well as the nature of transnational investment ows and their impact on the integrative impetus of trade. Thomsen posits that it is intra-rm trade, and I will also include investment, which is key because much international trade serves the geographical distribution of production, implying that regionalism involves the evolution of a truly integrated economic space, not just an increase in commercial exchange. This is the network of economic, cultural, scientic, diplomatic, military, and political linkages that Mace and Therien (1996, 3) place at the core of regionalism, precipitating what Baldwin (1997, 877 78) labels a domino theory of regionalism. The benets from small preferential trading agreements create incentives to not only deepen but also enlarge the bloc in search of greater advantage. An inherently protectionist logic is implicit, one that should prompt participating states to establish institutional frameworks protecting the advantage gained through the bloc. The issue is one of control: a state seeks to preserve autonomy by ceding a limited degree of sovereignty to the region. Again, pressure for institutionalisation comes from economic and civil society interests becoming increasingly embedded in the region, creating domestic pressure for expanded collectivisation of sovereignty. Such is the suggestion from the European experience (Baldwin 1997). In a South American context the process is fundamentally more defensive, with regionalism becoming a protectionist tool for globally uncompetitive industries. The critical consideration is whether or not states feel that the payoffs from participation in the project are sufcient to justify the surrender of sovereignty and the effective collectivisation of some aspects of policymaking. Bulmer-Thomas and Page (1999, 77) as well as Gamble and Payne (1996) suggest that a state might pursue the regional integration path independent of market pressures to force economic liberalisation and seek the integrationist growth possibilities long mooted by the Economic Commission for Latin America and the Caribbean (ECLAC). To a signicant extent this is what happened in South America (Baumann and Lerda 1987; Manzetti 1990). Here the embedded neoliberalism that Mittelmann (2000, 128 29) nds in the resurgence of regionalism underpins a belief that trade expansion will perforce bring economic growth. This assumes rst that trade is important to the national economy, and, second, that trade with neighbouring countries is on a signicant scale. As repeated relaunchings of Mercosur demonstrate (Phillips 2001; Cason 2002),

440 Sean W. Burges pressure for deeper integration in Mercosur and the wider South America has remained a presidential political imperative that appears to lack substantial domestic economic or political demand. Those areas where interaction has expanded, most notably in the energy sector, reect a far more pragmatic approach that reveals more about energy security concerns than economic integration. The pragmatic and defensive nature of regionalism in South America has two important implications for the future of the continental project. The mercantilist approach to integration that sees countries engage in tit-for-tat trade spats to protect domestic rms actively retards the creation of transnationalised economic space and the recruitment of efciency-seeking FDI. Second, the inward-oriented focus of South American regionalism sees major players such as Brazil using the process predominantly as a self-serving device to secure access to essential inputs for their national economies. While a political element does overlay these defensive and pragmatic considerations, the daily reality is, not surprisingly given the lack of sustained incentives, far less cooperative. The Character of Continental Trade Implicit in the market-led approach to regionalism is the assumption that the goods exchanged have a wide enough impact to mobilise popular and/or elite group pressure for regional deepening. This in turn accepts as unquestioned two crucial propositions. First, that a variety of goods are traded, bringing the benets of expanded regional market access to more segments of the national economy. Second, that the participants in the regional project are exporting products of interest to each other. As the gures in Table 1 demonstrate, the pattern of South American national exports is highly concentrated, with just ten products accounting for over half of
Table 1. Top ten exports as a percentage of total exports 1995 Mercosura Mercosur 2b Andean Communityc Argentina Bolivia Brazil Chile Colombia Ecuador Paraguay Peru Uruguay Venezuela
a c b

1996 26.5 25.3 69.7 48.4 68.5 33.5 62.0 66.9 82.3 78.6 61.3 51.1 88.3

1997 29.2 28.3 67.8 49.6 69.9 35.3 63.2 66.2 83.4 79.5 62.6 48.3 86.0

1998 27.5 25.5 62.0 47.0 65.8 34.4 58.9 63.9 83.5 79.5 60.3 48.5 80.7

1999 25.2 25.2 68.0 44.3 66.9 33.2 59.8 68.1 82.9 78.0 64.6 49.1 88.6

2000 29.5 29.4 72.5 47.3 66.0 34.4 63.0 65.1 84.2 76.0 64.9 51.0 91.4

2001 31.2 29.1 67.7 49.6 70.8 34.3 59.5 58.6 80.9 79.6 64.0 49.7 89.3

2002 33.5 31.0 66.4 50.4 74.9 34.8 59.3 60.0 82.1 80.3 65.6 53.9 88.2

24.8 25.5 66.3 43.0 70.5 33.8 64.7 64.5 85.1 78.4 61.6 51.7 85.1

Argentina, Brazil, Paraguay, Uruguay Argetnina, Brazil, Paraguay, Uruguay Bolivia, Chile Bolivia, Colombia, Ecuador, Peru, Venezuela Source: ECLAC 2003, Statistical Appendix, tables 83 108.

Practical Limits to a South American Region 441 exports in most countries. Figures for Mercosur, which at rst glance appears a model of diversication, are skewed by the value of Brazilian exports. Where Brazilian and Mercosur gures are roughly equal, with the top ten products accounting for approximately a third of exports, there is a markedly higher pattern of concentration in Argentina and Uruguay, rising from the higher midforties to over 50% in 2002. Paraguay has levels consistently over 75%. Andean Community (CAN) countries display less diversication than Mercosur, with approximately two-thirds of bloc exports coming from ten products. While these gures are useful for making the macro case about a lack of export diversication, the data do need expansion. For example, the 88.6 91.4% concentration in Venezuela between 1999 and 2002 is partially due to international oil prices: petroleum products consistently accounted for 80% of exports. In Paraguay soya has dominated since 1996, ranging from 31% to 43.4% of exports. The trend displayed throughout South America is for exports to concentrate in a few subsectors of traditional extractive industries. Brazil emerges as the only real exception to this trend, with iron ore top at 5.1 6.4%, followed by soya at 3.3 5.0%, and then aircraft at 2.3 6.3%. By contrast the CAN is an archetypical structuralist economic study: exports one through six in 2003 were crude petroleum, gold, petroleum products, bananas, coal, and coffee. Since 2001 natural gas has emerged as crucial for Bolivian exports. Value-added entries for the CANcut owers, meat/sh fodder, rened copper, and unwrought aluminiumdo not point to the economic sophistication often attributed to integration. Setting aside the debate about the long-term impact that resource exports have on national economic growth, populist presidents and recent popular uprisings in Bolivia, Ecuador, Peru, and Venezuela suggest that immediate, employmentgenerating results are desired. In terms of advancing a regionalist project this translates into a need to increase value-added exports such as manufactures and services or ensure widespread distribution of the gains from natural resource extraction. Table 2 suggests that the continental option is preferable to the sweeping global opening seen in Chile. For each country manufactures as a percentage of exports to South America outstrip the equivalent for world exports. South America emerges on this evidence as a important market for the regions more industrialised countries. Well over 40% of Argentine exports to South America are manufactures, Brazilian manufactured exports are consistently near 80%, Colombia 70%, and the petrol economy of Venezuela 25% to 37%, numbers up to four times those found in its world trade. There is, however, a problem with this analysis. Only Uruguay demonstrates evenness in its export composition to both South America and the World. Brazil has attempted to use regionalism to encourage an internationalist outlook in domestic rms and recruit FDI ows that bring technology and production techniques (Bonelli 1999). In contrast Argentine industry opted to focus on the bloc market instead of scaling up for international expansion (Cason 2002; Kosacoff 1999). With the exception of Colombia, the other South American countries demonstrate a disjuncture between global and continental exports, with manufactures rarely approaching 20% of world sales. Chile, the model of an export-oriented economy, has a steady 29-point difference between continental and international manufactured exports. Although neither the CAN nor Mercosur demonstrates the sort of internationalised surge in manufactured exports suggested by the open

442 Sean W. Burges

Table 2. Manufactured exports as percentage of total exports to the world and South America 1995 Argentina Bolivia Brazil Chile Colombia Ecuador Paraguay Peru Uruguay Venezuela South America World South America World South America World South America World South America World South America World South America World South America World South America World South America World 40.8 30.7 7.3 13.4 76.1 43.8 37.3 10.9 66.7 33.4 31.2 6.7 11.2 13.2 24.3 13.3 46.8 47.6 34.7 11.3 1996 39.4 27.0 11.5 20.3 78.1 44.1 41.3 12.6 71.2 27.4 31.4 7.7 15.7 16.2 28.1 13.9 43.0 45.4 36.1 8.7 1997 45.3 30.1 9.8 14.5 79.0 45.5 43.8 13.6 70.2 28.4 30.5 8.0 16.3 14.3 29.6 14.6 45.3 43.5 32.9 9.7 1998 48.2 31.8 8.2 13.1 78.2 46.7 44.0 15.7 68.8 30.3 35.2 9.5 13.7 13.0 38.5 19.5 43.3 42.7 43.9 13.9 1999 43.6 29.0 27.7 38.1 79.6 46.7 45.8 15.2 70.5 27.8 31.0 8.2 15.7 14.8 35.9 16.1 49.3 42.2 28.8 8.2 2000 40.2 29.1 12.8 27.0 80.0 50.9 41.2 14.8 76.1 30.1 28.4 8.4 14.3 18.4 32.2 16.4 52.5 45.7 24.8 6.1 2001 42.5 29.3 13.0 20.4 78.0 48.1 42.3 16.2 76.1 36.5 33.9 10.5 12.8 15.6 37.8 17.9 50.0 46.9 36.7 8.3

Source: Information System of External Trade, DATAINTAL, UNCTAD classication system.

regionalism literature, the higher level of these sales to the continental market is a useful political device that has been deployed at the three South American presidential summits to build the case for expanded regional integration. Economic Importance of Trade What happens if we look at the role of trade in the South American economies? Only two countries, Chile and Venezuela, consistently obtain close to a third of their GDP from international trade (Table 3). The largest economy in the region,
Table 3. Exports of goods and services as percentage of GDP 1995 Argentina Bolivia Brazil Chile Colombia Ecuador Paraguay Peru Uruguay Venezuela 10.5 22.5 8.2 27.7 14.5 19.9 37.6 12.5 19.7 29.4 1996 10.8 22.5 8.0 28.9 15.6 19.8 32.9 13.5 20.9 31.8 1997 11.4 21.0 8.7 30.1 15.6 20.3 30.2 14.3 21.9 32.2 1998 11.9 21.3 9.0 30.7 16.6 18.8 28.2 15.1 20.7 33.3 1999 12.0 18.5 9.7 33.1 18.3 21.5 20.6 17.0 20.2 31.5 2000 12.4 20.4 10.3 33.5 19.0 21.1 17.6 18.2 21.7 32.5 2001 13.3 22.4 11.3 34.4 19.2 19.8 17.1 19.5 20.7 31.3 2002 15.2 24.5 12.0 34.2 18.2 19.2 20.1 8.4 20.3 31.8

Source: ECLAC 2003.

Practical Limits to a South American Region 443 Brazil, has only recently surged past the 10% mark to hit 30% (World Trade Organisation [WTO] 2004, xiv), reecting attitudinal shifts in the Brazilian business community, a development President Lula has enthusiastically continued (Burges 2005). Chiles reliance on trade stems from the countrys export-oriented economic strategy. High Venezuelan numbers reect the countrys oil economy. Argentinas slow increase reects rising sales to Mercosur, rst due to the 1991 signing of the Treaty of Asuncion and then due to the real plans stabilisation of Brazils economy in the mid-1990s; the minor surge in 2002 points to the return of price competitiveness caused by devaluation of the Argentine peso. Table 3 reafrms the importance of trade to the South American economies (Bulmer-Thomas 2003). Indeed, economic ows have played an important role in Brazilian foreign policy since the 1970s, with ows to Bolivia, Paraguay, and Uruguay being strategically altered to draw those countries away from the potential power competitor Argentina (Souto 2001, 55 57). This pattern was duplicated in the 1980s and 1990s, with Brazil altering grain-purchasing patterns to address the trade imbalance with Argentina that threatened the 1986 bilateral economic cooperation accords; after the rst Gulf War attention was turned to Argentina and Venezuela as more stable, reliable, and localised oil sources. Construction of regional arrangements was not only about opening new markets for manufacturers, attracting new FDI ows, and consolidating regional peace, but also protecting Brazilian energy security by capturing South American sources of electricity, oil, and, latterly more importantly, natural gas (Barbosa 2001, 151; de Holanda 2001, 31-33; O Estado de Sao Paulo, 6 June 2005). The importance of energy in the Brazilian regional vision, born of the 2001 national energy crisis, points to continental export concentration in primary products and presents a challenge for the logic of regional integration, namely that the regional project will grow through an expansion of trade and deepen in response to political pressure exerted by interest groups beneting from the process. Apart from the need in Argentina, Brazil, Chile, and Uruguay for gas and electricity supplies, the relative homogeneity of continental exports makes it questionable whether there is in fact a regional market for the dominant exported goods and commodities, suggesting that it is the extra-continental dimension of trade that matters most. Alternatively, we might ask which sectors will precipitate pressure for expanded integration. Energy, as already stated, is one demand-side factor (O Estado de Sao Paulo, 7 June 2005). Manufacturing exports might create a supplyside push for regionalism. Table 4 sets out manufactured exports to South America and the world as a percentage of GDP, highlighting the importance of primary products to regional exports. Boosting trade in manufactures has traditionally driven Latin American integration (Ocampo and Martin 2003). Yet Table 5 shows a decline in the proportional contribution of manufacturing to GDP in all four of the main Mercosur countries. An interpretative comparison of Tables 3, 4, and 5 suggests that the export of primary products is more important than manufacturing. In part this can be explained by the return of Mercosur members as global agro-industry exporters, the rise in service industries, and the articulation of an increasingly integrated continental energy matrix. The resultant suggestion indicates that not only is there likely to be little substantial pressure for deeper integration, but also little political gain in strenuously pursuing it.

444 Sean W. Burges

Table 4. Manufactured exports to South America and the world as a percentage of GDP 1995 Argentina Bolivia Brazil Chile Colombia Ecuador Paraguay Peru Uruguay Venezuela South America World South America World South America World South America World South America World South America World South America World South America World South America World South America World 1.6 2.7 0.4 2.3 1.1 3.1 1.5 2.5 1.7 3.5 1.1 1.5 0.7 1.3 0.3 1.3 2.9 5.7 1.5 2.8 1996 1.7 2.6 0.8 3.7 1.2 3.1 1.5 2.5 1.6 3.1 1.2 1.8 1.3 2.0 0.4 1.5 2.9 5.8 1.5 2.8 1997 2.0 2.8 0.7 2.5 1.4 3.4 1.6 2.8 1.9 3.4 1.4 1.9 1.2 1.9 0.5 1.7 3.4 6.0 1.5 2.9 1998 2.2 3.0 0.5 1.9 1.4 3.4 1.5 2.7 1.8 3.3 1.3 1.8 1.0 1.5 0.5 1.9 3.6 5.7 1.7 3.1 1999 1.6 2.5 1.9 6.9 1.1 3.2 1.4 2.8 1.5 3.4 1.1 1.6 0.6 1.3 0.4 1.6 2.8 4.8 0.9 2.3 2000 1.8 2.9 1.0 5.0 1.2 3.8 1.4 3.0 2.0 4.1 1.3 1.9 1.1 1.9 0.5 1.8 3.0 5.4 1.0 2.6 2001 1.9 3.0 1.3 3.4 1.1 3.7 1.3 3.1 2.4 4.6 1.4 2.1 0.9 1.8 0.7 2.0 2.5 5.1 1.1 2.8

Source: ECLAC 2003; IADB INTAL Dataweb.

Business and civil society ambivalence towards deeper integration in Argentina and Brazil, not to mention active Brazilian government disinterest, reects the lower actual importance of regional markets and the persistence of protectionist impulses. Those sectors desirous of greater integrationlargely the energy and construction sectors (Economic Commission for Latin America and the Caribbean [CEPAL] 2005)do not need widespread or deep regionalism to pursue their business plans. Pragmatic regulatory convergence and expanded state nancing constitute a far more signicant factor for trans-Latins such as construction rm Norberto Odebrecht and the Brazilian national oil company Petrobras.

Table 5. Manufacturing as a percentage of GDP 1995 Argentina Bolivia Brazil Chile Colombia Ecuador Paraguay Peru Uruguay Venezuela 17.2 16.7 21.2 18.0 14.6 11.3 15.6 15.1 19.7 17.2 1996 17.4 16.8 21.1 17.4 14.1 10.7 15.1 15.0 19.5 16.6 1997 17.6 16.3 21.0 17.1 13.7 11.0 14.8 14.7 19.6 16.4 1998 17.3 15.9 20.3 16.1 13.5 11.6 15.0 14.3 19.2 15.6 1999 16.4 16.4 19.6 16.1 12.9 9.4 15.0 14.1 18.2 15.5 2000 15.9 16.3 19.8 16.1 14.0 6.3 15.3 14.5 18.2 15.2 2001 15.5 16.3 19.6 15.7 13.7 7.3 15.1 14.5 17.4 14.7 2002 15.4 16.2 19.9 15.8 13.5 7.0 15.0 14.4 16.8 14.3

Source: ECLAC 2003.

Practical Limits to a South American Region 445 Regional Production Chains? This discussion of manufactured and total exports overlooks Cables (1994) emphasis on multinational corporations as agents of trade, particularly the elaboration of transnational production chains. Almost completely absent from discussions of intra-continental and intra-Mercosur trade is reference to intra-rm trade. Instead, attention in academic and policy studies is concentrates on total trade ows (Phillips 1999, 79 82; Hasmi 2000, 43; Bouzas 2001; Kosacoff 1999) and the barriers that prevent an expansion in the regional distribution of nished goods and raw materials (da Silva and da Rocha 2001; Hasmi 2000; UNCTAD 2000; Magarinos 2001; Kuwayama 2005). Given the importance attributed to transfer pricing in the host MNC literature of the late 1980s and early 1990s, the almost complete failure to examine intra-rm regional trade ows suggests that there is very little to study, a proposition supported by the character of the investment ows discussed below. There are preliminary indications that the literature has overlooked the subject because there simply is not much to study. The dramatic increases in internal trade ows experienced by Mercosur make the bloc the most likely place in South America to nd evidence of transnational integrated production structures. Indeed, trade between the industrial powerhouses of MercosurBrazil and Argentinareveals an increasingly complex range of products exchanged. But suggestions of integrated production structures only really emerge in the automotive industry (SECEX 2005), which is itself the subject of an extensive series of bilateral and regional agreements independent of the Mercosur treaties. Instead, commercial exchange in value-added sectors has been marked by a succession of unilateral protectionist trade restrictions on goods ranging from shoes to refrigerators and ovens (Malamud 2005; Phillips 2001). The pattern found in Mercosur is one of mercantilistic conceptions of market access seeking to preserve intact each nations producers. With the bloc again in crisis due to persistent commercial discord, the Mercosur presidents have at least tacitly recognised the need to transform economic relations. The 24th Mercosur Meeting Declaration of 18 June 2003 reiterated the blocs importance as a mechanism for pursuing new international opportunities and blessed the new Wood and Furniture Production Chain Competitiveness Fora (Mercosur 2003). The object was to encourage region-wide distribution of competitive value-added production aimed at extra-bloc markets, giving renewed political impetus to the creation of transnational production chains. Although much importance was attached to this initiative in 2003, it has yet to cause similar agreements in other sectors, most notably in the processing of agricultural products and the automotive industry. Moreover, the initiative is not an original venture, being but a more sophisticated version of the voluntary production restrictions that competing business councils establish to ensure that efforts to protect their member rms do not precipitate trade wars. The mercantilistic nature that has historically plagued regional integration plans in South America is thus perpetuated, with each participating country seeking to retain full capacity in a whole range of industries at the expense of developing the region-wide distributed production systems that would cause pressure for deeper integration.

446 Sean W. Burges Investment Flows One important factor contributing to the paucity of transnational production chains in Mercosur and the wider South America is the nature of intra-continental investment ows. Following Dunning (1994, 3540) the type of FDI owing into and throughout the continent can be divided into four main categories. The two dominant types found in South America are resource seeking and market seeking. Very little of the investment stocks and ows are efciency seeking or strategic asset seeking in nature (CEPAL 2004, 1518; Chudnovsky and Lopez 2000). Investment, whether by an intra- or an extra-continental rm, is thus focused on either exploiting deposits of natural resources or circumventing market-access restrictions by establishing branch plant operations. The lack of efciency-seeking investment points to the low level of extra-continental trade in higher value-added goods and services and the integration of production chains. Indeed, with one or two exceptions, such as the 2004 merger of brewing giants InterBrew and AmBev, very little of the investment or mergers and acquisitions activities that have taken place aim to capture economies of scale for export to third countries or exploit proprietary technology and production processes on a multinational basis. As the 2004 CEPAL report on FDI in Latin America notes (2005, 42), the emerging trans-Latin rms not only are predominantly based in Mexico, Chile, Brazil, and Argentina, but also are concentrated either in food industries or resource extraction, sectors that are dominated by resource-seeking and market-seeking FDI. In one of the few detailed studies of Latin-American-sourced FDI, Chudnovsky and colleagues (1999, 22 32) highlight two important points. First, the vast majority of intra-regional FDI comes from Argentina, Brazil, Chile, and Mexico. The size of these outows, both in terms of a percentage of total FDI ows and as a percentage of GDP is minimal. In the time period examined by the authors, 1986 97, regional FDI ows rarely surpassed 0.1% of global FDI ows, and the total value of each countrys resultant FDI stocks did not surpass 1% of GDP until 1996 when Chile suddenly registered a level of 5.4%. A sense of the importance that regional governments give to the foreign investments made by companies established in their countries comes from the authors (1999, 25 26) warning that they had to rely on UNCTAD data and that detailed gures from each government were difcult to obtain. Indeed, it was not until 2001 that the Brazilian central bank actually began to seriously accumulate statistics on the countrys private overseas investment activity. The most detailed and readily obtainable FDI statistics for a South American country remain those provided by the Brazilian Central Bank. Two things are immediately apparent from the gures set out in Table 6. First, Brazilian FDI outows can hardly be classied as domineering. Indeed, the wider South American market remains of limited interest to Brazilian entrepreneurs despite repeated assertions of its political importance by both Cardoso and Lula. Those investments that do take place lack the integrated intra-rm character necessary to support the evolution of the production chains feted at the 24th Mercosur meeting. The exception is in the energy sector, where the Brazilian state oil company Petrobras is being deployed as a device to secure regional energy supplies for Brazil (CEPAL 2005, 51 52), a strategy that is different from the elaboration of transnationalised production chains. Chief among the Petrobras investment activities are the elaboration of a natural gas pipeline system to

Table 6. Brazilian FDI ows in South America (US$ million) 2001 Intrarm FDI FDI outow 1 503 53 168 26 96 29 47 1 547 19 43 397 3.46 0.12 0.39 0.06 0.22 0.07 0.11 3.56 0.04 121 12 2 2 4 5 4 693 16 0.28 0.03 0.00 0.00 0.01 0.01 0.01 1.60 0.04 1 549 52 203 42 45 59 52 2 810 13 44 769 3.46 0.12 0.45 0.09 0.10 0.13 0.12 6.28 0.03 100 11 2 5 11 11 2 831 6 FDI outow 164 16 2 1 1 18 10 482 13 0.39 0.04 0.00 0.00 0.00 0.04 0.02 1.13 0.03 Intra-rm FDI as % of total Ouow as % of total Intrarm FDI Intra-rm FDI as % of total Ouow as % of total Intrarm FDI 2002 2003 Intra-rm FDI as % oftotal 0.22 0.02 0.00 0.01 0.02 0.02 0.00 1.86 0.01

FDI outow

Ouow as % of total

Argentina Bolivia Chile Colombia Ecuador Paraguay Peru Uruguay Venezuela Total

1 625 36 158 130 71 40 40 3 121 27 42 584

3.82 0.08 0.37 0.31 0.17 0.09 0.09 7.33 0.06

Note: Intra-rm FDI includes loans and nancing. Source: Banco Central do Brasil/Departamento de Capitais Estrangeiros e Cambio (Decec).

448 Sean W. Burges Bolivia, a parallel system to Peru in the wake of political instability in Bolivia (O Estado de Sao Paulo, 11 June 2005), and formation of the integrated energy company Petrosur to strategically pool resources with the Argentine and Venezuelan state oil companies. This last venture points to the centrality of energy in Brazils vision of regionalism, securing access to new oil and gas supplies by providing funds to capital-poor Argentina and helping Venezuelan oil giant Petroleos de Venezuela SA deal with the suggested collapse of its own production system (Stratfor 2005). The second point evident in the Brazilian statistics is that Thomsens (1994) argument about regionalism encouraging FDI would appear to have a strong measure of validity. Brazils FDI outows, especially intra-rm ows, are heavily concentrated within Mercosur. Yet, these same data deviate from Thomsons proposition. Levels of intra-rm FDI within the bloc are signicantly lower than the gross levels of investment, a difference that points again to the paucity of transnationalised production chains in the region. Signicantly, Brazilian FDI into Mercosur also appeared to plateau in 2003. More important is the overall nature of these capital outows, which include nancial investment transfers by Brazilian rms. Investment in Argentina and Uruguay is dwarfed by sums sent to the Bahamas ($5.9 6.9 billion), the Cayman Islands ($14.7 16.4 billion), and the Virgin Islands ($5.4 7.1 billion), money that is either engaged in nancial speculation or being sheltered from regional economic instability. On a sectoral basis, energy is again a central theme for Brazilian FDI, which is dominated by Petrobrass continental energy integration strategy. Perhaps more revealing is the nature of the extra-continental ows of FDI coming to the Mercosur countries, which focus on resource-seeking and market-seeking ventures, not the efciencyseeking activity that would point to production for other continental markets. Another aspect of the character of intra-continental FDI is also signicant and points to the importance of region-building initiatives for the areas major economies. As Chudnovsky and colleagues (1999, 32) note, the vast majority of regional investment ows are concentrated in the energy sector, with particular emphasis on petroleum investments and other major industrial ventures. Brazilian purchases of Argentine rms in the wake of the 2002 economic crisis point to an emphasis on resource- and market-seeking investment. Indeed, Brazils then newly appointed ambassador to Buenos Aires, Jose Botafogo Goncalves, publicly suggested that the Brazilian Development Banks (BNDES) funds be used to underwrite the acquisition of Argentine rms embattled by their countrys economic crisis (O Estado de Sao Paulo, 11 January 2002). Although BNDES nancing for such ventures was not extended until very recently, a number of high-prole investments did take place, including the Belgo Mineira takeover of steel producer Acindar, drinks company AmBevs purchase of the Quilmes brewery, and Petrobrass absorption of Argentinas second largest integrated energy rm, Perez Companc (MSNBC.com, 28 February 2005). Similar phenomena can be observed with Chilean purchases of Bolivian transportation companies when the creation of bi-oceanic corridors resurfaced as a politically desirable idea after the 2000 Braslia South American presidential summit. Even in the example of the 1998 Ecuador-Peru peace treaty, where integrationist impulses played a strong role in ending the 45-year conict, the emphasis was on expanding bilateral trade, not seeking methods of integrating national production structures (Herz and Nogueira 2002).

Practical Limits to a South American Region 449 Infrastructural Interference The almost autarkic nature of the state in South American regionalism and the market-seeking nature of FDI in the region are not especially surprising if we focus on the logistical issues central to geographically disaggregated production systems, in particular the time-critical nature of just-in-time production techniques. The shortage of integrated production systems within Mercosur, despite the dramatic increases in intra-bloc trade since 1991, points to a central problem with the regional vision espoused by political gures. Technocrats within the transportation ministry in Brazil are clear that highway linkages between major industrial centres are capable of carrying the trafc that would be created by transnationalised manufacturing systems.1 Rather, the issue is regulatory. Researchers in ECLACs transportation division estimate that the busiest Argentina-Brazil frontier points see approximately 650 trucks crossing the border each day. Yet at some of these crossing points it can take 3036 hours for a truck to clear the customs regulations (Sanchez and Tomassian 2003, 4951), presenting a signicant level of unreliability for businesses attempting to establish JIToperations. Added to this are the variable quality of the roads on either side of the border away from the main trunk route, which can add up to 40% in transportation costs (Taccone and Nogueira 2004, 101), and the different railway gauges used in each country, requiring freight trans-shipment at each border crossing (CEPAL 2003). The regulatory dimension remains a critical question when assessing the future of a South American region. While the CAN has seriously addressed some of the major regulatory details involved in intra-regional transportation (CEPAL 1999), trade between the bloc members remains depressed by the parlous state of the road network along the Andean cordillera. In Mercosur, where the volume of intra-bloc trade is signicantly higher and transportation interlinkages are of a considerably better standard, national governments have yet to back presidential commitments to bloc deepening with a consolidation of regional regulatory structures that have long been seen as necessary (Bouzas 1996).2 Indeed, Argentina has gone so far as to actively retard the development of regional trade by imposing severe restrictions on transiting trucks. Brazil Chile shipments were conned in 2004 to a single route, which added some 2,000 km to the existing corridor between Santiago and Uruguayana, the dry dock for some 70 80% of land-based Brazil Chile trade. This blockage of trade between Argentinas regional partner Brazil and Mercosur associate member Chile was matched by a December 2003 decision to stop Uruguayan trucks transiting Argentine territory on the way to Paraguay (Taccone and Nogueira 2004, 103). Poor transportation infrastructure has been highlighted as an important factor deterring FDI ows and retarding socioeconomic development (UNCTAD 2000; Benitez 1999). The 2004 CEPAL (2005, 22) report on FDI in South America expanded this theme to the energy sector by noting that elaboration of an integrated gas and electricity matrix requires continued investment in the necessary physical infrastructure as well as regulatory alignment. This theme of
Interview with Francisco de Paulo Magalhaes Gomes, Director, GEIPOT, Ministeerio dos Transportes, Brazil, 21 September 2001. 2 Paraguays ambassador to the WTO outlined the conceptual problems aficting intrabloc trade and summarised them neatly as unresolved issues of trade facilitation (Gauto Vielman 2005).
1

450 Sean W. Burges addressing infrastructural deciencies was addressed in the Avanca Brasil programme implemented by Cardoso in Brazil and expanded to a continental level at the 2000 Braslia South American presidential summit. Indeed, the resultant regional organisation, the Initiative for the Integration of Regional Infrastructure in South America (IIRSA), has emerged as a central building block in regional integration processes. Rather than focusing on the political goals of opening markets, IIRSA concentrates on creating the underlying conditions that will encourage trade, providing ten main corridors of transportation, telecommunications, and energy infrastructure linking major population and production centres throughout the continent. While hundreds of projects have been proposed and in some cases initiated,3 the most substantial progress has been made in the energy sector, particularly the construction of pipeline networks to supply natural gas to the industrial heartland of Mercosur and Venezuelan electricity to the northeast of Brazil. Although the IIRSA infrastructure plan is supposed to direct signicant investment to the upgrading of the Andean region transportation system, the overarching problem again remains the shortage of products to trade, discussed earlier, the market- and resource-seeking nature of FDI in the continent, and Brazils concentration on using these networks to exploit new markets without necessarily having to absorb more imports. Moreover, the item that has attracted the most attention is the construction of bi-oceanic corridors to provide Brazils agro-exporters with access to a Pacic port (Burges 2004, 193208). Again, the emphasis has been placed on creating trade and trans-shipment routes to extracontinental markets, not establishing the synergies necessary for the integrated production structures that will create domestic pressure for expanded political as well as economic integration. Conclusion The evidence presented in this article demonstrates that the future of regionalism in South America is bounded and limited by the possibilities of intra-continental trade. Although not a revolutionary proposition, the detailed examination of the issue has pointed to a more revealing question: what exactly is driving the regional impetus in South America? Discussion of where trade has expanded, the nature of investment ows, and progress on infrastructure integration suggests an emphasis on the energy sector, the activities of the Brazilian state oil company Petrobras pointing to a clear and sustained strategy of securing the oil and gas supplies necessary to fuel Brazils economy. While this should by no means discount the importance of growth in the trade of manufactures throughout the region, the point is that it is energy demand, coupled with Brazilian leadership ambitions, that is driving regionalism, not cooperative economic growth. Questions of leadership, and in this case Brazils emerging desire to be a leader, matter to the formation of vibrant and deep regions. As Mattli (1999, 55 66) explains, formation of a region requires one or two states to absorb the costs of creating and stabilising the region, generally by absorbing less-than-competitive imports from other participants in the project. This cost-bearing function is much the same as the sense of stability-inducing leadership that Kindleberger (1989) found missing in his study of the Great Depression and points back to the
3

See the IIRSA website: ,www.iirsa.org . .

Practical Limits to a South American Region 451 proposition at the start of this article that a region will not fully integrate if it does not offer returns of a sufcient magnitude to incite political pressure for deepening from economic and civil society actors. With these theoretical guides in mind the relevant point becomes one of what is not happening in South America to bolster regionalism. Integrated production chains are not forming. Investment remains in resource- and market-seeking mode. Intra-continental transportation and trade facilitation linkages are modernising very slowly. The problem outlined elsewhere (Burges 2005; forthcoming) is that, while the South American regional project has a leader in the shape of Brazil, the country that relaunched the continental integration movement with the 2000 Braslia summit of South American presidents, the evidence in this article suggests that the leader is unwilling to assume the costs alluded to by Mattli as necessary to deepen the project. Brazilian investment in the region stands as the example for other countries, remaining tightly focused in a resource- or market-seeking mode. The resultant theoretical lesson is a reminder that regionalism is not strictly about economic growth, but also about using a collective body to advance national interests, a venture that can be decidedly one- sided. Areas where regionalism is making solid progress in South America are increasingly being seen as giving benets to only one side. Sustained mass protests in Bolivia against Brazilian exploitation of gas reserves, including the bombing of Petrobrass Santa Cruz ofce (O Estado de Sao Paulo, 14 May 2005), as well as Argentinas May 2005, unilateral decision to drastically reduce gas exports to Chile are but two examples. Dissatisfaction with South America as a regional entity and Brazils highly cost-averse leadership style became clear at the 2005 Arab South-America Summit, where presidential attendance was not just sparse, but also decidedly barbed; Chilean President Lagos quietly left midway through the event and his Argentine counterpart, Nestor Kirchner, stormed from the meeting with loud complaints about acquiescence to a measure of Brazilian leadership not being equivalent to acceptance of Brazilian hegemony (Oxford Analytica, 17 May 2005). As this article has suggested, the economic potential of a South American region lacks the attraction necessary to elicit support for an enthusiastic pursuit of the project. Indeed, the unilateral nature of the benets arising from the elements of the regional vision enacted to date are bringing the political future of the project into question as the other South American states become increasingly dissatised with a largely Brazilian-led venture that offers few immediate benets and may herald a future of dependence on an emergent regional Brazilian hegemony. References
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