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|ECONOMIC RELATIONS BETWEEN MERCOSUR AND EU|
PROFESSOR: ARMANDO DI FILIPPO
The course means to consider and interpret the economic relations between MERCOSUR and the European Union (EU), in the fields of international trade and directs investments from Latin America into Europe. The aim is to provide a framework for the analysis of the globalisation processes of the world economy, according to a ‘Latin America view’. With reference to the theory of international trade and direct investments, the course will focus on the main issues emerging from current data and recent debates to discuss globalisation themes, by endorsing the perspective of the competitive development of firms.
The present approach to MERCOSUR EU economic relationships is systemic and multidimensional. It also employs the language, but no the formalized theory of games. The EU and MERCOSUR can be fruitfully considered and analyzed from these systemic and multidimensional view-points. The aim is to stress the fundamental difference between the regional integration schemes and approaches of USA in the western hemisphere (America) on one hand, and the regional schemes of the EU and MERCOSUR on the other hand.
Not only the regional integration agreements negotiated between EU and MERCOSUR can be better understood by this approach. Also the profound historical roots of the relations between Latin American Societies and European Societies can be better considered departing from this epistemological focus.
The present class notes combine elements from lectures previously given about similar subjects with some papers that directly related to the issues of this Master Program. The present classes will be founded in this material. Additional readings are recommended in the Program.
CHAPTER 1: International Position of Latin America 2
APENDIX TO CHAPTER 1: 26
CHAPTER 2: Information Technologies, globalization 31
CHAPTER 3: Empirical findings about economic relations UE-MERCOSUR 47
CHAPTER 4: América Latina: integración regional en la era global 53
CHAPTER 5: Two Types of regional integration processes 77
CHAPTER 6: Área de Libre Comercio de Las Américas 114
CHAPTER 7: Viabilidad y perspectivas de futuro de un acuerdo MERCOSUR-UE 136
CHAPTER I: INTERNATIONAL POSITION OF LATIN AMERICA1
Different approaches to the nature and functioning of capitalist markets
The economic rules of contemporary societies are those of the capitalist system based on market relations. The essential feature of market relations is their pecuniary nature, and the possibility of quantifying the economic value of the goods that become commodities.
The economic schools of thought can be classified taking into account our systemic approach previously spelled. The classification criteria can be the type of economic value theory that is sustained by each school. The labor value theory in the versions of David Ricardo and Karl Marx are holistic in the sense that they depend almost exclusively in the technological environment understood as a historical watershed that changes productive conditions. The neoclassical value theories are atomistic in the sense that they depend almost exclusively in the individualistic rational choices of economic agents. The institutional value theories are systemic in the sense that they depend heavily on the rules that directly or indirectly govern the economic transactions.
Only Institutional Economics makes an attempt to systemically link market operations and market prices determination with non economic institutions belonging to the cultural and political spheres. Institutions are political, cultural and economic rules that have a historical nature, and are permanently changing under certain historical patterns derived from technological change. Consequently, Institutional Economics generally disregards the concept of stable market equilibrium positions, and focuses on the political, techno-economic, and cultural factors that are permanently shaping and reshaping the conditions under which the markets are really operating.
When asked about the main determinant causes of the economic value of commodities expressed through their market prices, Marxian answer focalizes on the average amount of social abstract labor embodied on them. In essence is a technological approach because there is a direct proportional correlation among the amount of abstract labor embodied in a commodity and the average productivity of labor that corresponds to a certain level of technical progress. Using a game terminology we can say that technology acquires its material expression through the playing field and the playing tools. Using the system terminology, technology is the material environment artificially constructed that determine the options of laborers, entrepreneurs and consumers, through a correspondence between those technological possibilities and the know how of workers, the decisions of undertakers, and the choices of consumers. In this approach, the material aspect of technology embodied in the productive means is specially emphasized. In this option commodities are considered essentially as technological outcomes and products derived from human labor.
Neoclassic answer to the same question focalizes on the marginal preferences of individual economic agents that explain their choices accordingly with their individual or private rationality. Commodities are understood as economic goods that are scarce and useful. Scarcity and utility depend on individual decisions of economic agents acting through the market mechanisms. Using again the game terminology we may say the values of economic goods are determined by the individual players (economic agents) interacting through perfect competition markets. Using the system terminology we may say that the economic agents are the only real acting forces of the market system and through their individual rationality they determine the economic value and the market price of goods. In this option commodities are considered essentially as scarce and useful, accordingly with the individual independent decisions of economic agents.
Institutional Economics focalizes on the market transactions, on the power positions of the transacting parties, and on the economic, cultural, and political rules that institutionalize those power positions. Commodities are understood as the outcomes of economic transactions, and those transactions are shaped by institutions that are understood as political, economical, and cultural rules. Using again the game terminology we may say that economic values are a measure of the transacting power of the players, and this transacting power derives from the position of those parties in the rules of the game. Institutional approach is a historical one and those rules, especially the property rules, are redefined each time that a new wave of technical progress spreads through the society under consideration. But the key of historical change is the feedback between the strategies of the players and the rules of the game. The institutional approach includes the interplay among the technological environment (the playing field), the individual components of the system (the players), and the institutions (the effectively accepted and obeyed rules of the game).
The concept of economic transactions
Market transactions are a form of social relations based on the position occupied by the players in the patrimonial rights and obligations of the economic game and aimed to modify those positions within the generally known and accepted rules. As any other social relation, market transactions are based on reciprocal expectations of behavior by all the parties that participate in the transaction. These reciprocal expectations of behavior are based in the existence of the rules, and the knowledge and acceptance of those rules by all the players. Without these reciprocal expectation of behavior the most usual and simple transactions would be very difficult to perform.
Douglass North has emphasized the different meaning of institutions and organizations in social life. He uses institutions as a synonymous of rules of the game, and organizations as a synonymous of the teams that are playing the game. Under this approach he has remarked the essential role of institutions for the structuring of every type of transactions performed among the players (individuals or organizations alike): “Institutions reduce uncertainty by providing a structure to everyday life. They are a guide to human interaction, so that when we wish to greet friends on the street, drive an automobile, buy oranges, borrow money, form a business , bury our dead, or whatever, we know (or can learn easily) how to perform these tasks. We would readily observe that institutions differ if we were to try to make the same transactions in a different country – Bangladesh for example. In the jargon of the economist, institutions define and limit the choices of individuals”2.
We must add a point that, perhaps, is not so clear in the approach of North: the choices of individuals are limited by institutions in different ways accordingly with the position occupied by those individuals on the said institutions. These positions define the liberty and the power of individuals to exercise their choices. If the transaction that we are studying is a labor contract (collective or individual) that is going to define the real wage of a worker or a group of workers, then, the position occupied by the parties (employers and employees) on the institutions or rules of the game will determine, jointly with their choices, their effective contractual power. The economic measure of that power, (in these example the real wage or price paid by the employer to obtain the potential labor force of the worker) is expressed in units of general purchasing power. In other words institutions define and limit the choices of individuals, but this definition and limitation is not the same for every one, and differs accordingly with the positions occupied by the players on them.
We define institutionalized power as the position occupied by the persons that are the society components (players, strategists) in the working rules3 (of the game). The power is institutionalized as long as the reciprocal expectations of behavior of the parties accept the validity of the rules and act accordingly with their expected roles on those institutions. If they are breaking the rules, then their action is illegal and must be judged accordingly with another set of rules applied to transgressors of working rules. If the great majority is breaking the rules then those are not real institutions. This institutionalized power (or impotence4) can be exercised through different types of economic, political and cultural transactions. A transaction is a type of social relation. Social relations, as Max Weber has noted, characterize themselves as based on reciprocal expectations of behavior. These expectations express certain minimal degree of knowledge and acceptance, from the players, of the working rules of the game, and of the external (physical, chemical, environmental, etc) laws that can affect them. These expectations imply, also, certain knowledge of the respective positions and expected behavior of the transacting parties in connection with those rules.
Transactions express in their outcomes the power positions and the choices (rational or irrational, reasonable or unreasonable) of the transacting parties that are the players of the game. The substantive rationality or reasonability of the final ends pursued by the choosers is an ethical matter closely linked to the field of Political and Moral Philosophy5.
HOLISTIC, INDIVIDUALISTIC, AND SYSTEMIC THEORIES OF ECONOMIC VALUE
International economic theory and international political economy
Firstly, the holistic labor-value theoretical stream has elaborated different academic approaches that justify or condemn the effects of international trade in the welfare of nations. The most famous one is the Ricardian theory of comparative costs that provided the main justification for the advantages of international trade along the XIX century. The advantages to be considered are comparative and not absolute. The theory compares the relative prices of the same products in different countries and concludes that each country must specialize in the production and exports of the commodities that it produces in a relatively more efficient way. Departing from the labor value theory, this relative efficiency is measured in terms of labor embodied on each commodity. The labor law-of-value (essentially holistic) states that commodities are exchanged accordingly with the amount of labor embodied on them. So, if in Portugal one unit of cloth embodies three times more work than one unit of wine, then three units of wine will be exchanged for one unit of cloth. If in England one unit of cloth embodies only one third of the work incorporated to one unit of wine, then one unit of wine will be exchanged for three units of cloths. That means that wine is, comparatively speaking, more expensive in Britain than in Portugal and cloth is, comparatively speaking, cheaper in England than in Portugal. The practical conclusion suggests that Portugal must specialize in the production and export of wine, and Britain must produce and export cloth.
Another holistic approach to international trade also based on the labor theory of value comes from the Marxian school (not developed personally by Marx but by his followers). The holistic nature of this approach derives from the admittance that value is determined in the production process before commodities face the test of the market, and the determination of exchange values depends on the law of value already explained for the Ricardian approach to international trade. Authors like Arghiri Emmanuel and Samir Amin have developed international trade model based on the law of value6. It is not of the interest of this course to deepen on these types of theories because they impose a certain behavior to the market process that cannot be empirically verified.
Secondly, the academically most successful and extended approach for the explanation of the advantages of international trade derives from the atomistic (utilitarian individualistic) marginal neoclassical theory that developed another version of the comparative advantages, arriving to the same conclusions than Ricardian comparative costs but departing from another theory of value. The production and consumption of economic goods, is conceived as traded in national perfect competition markets (Heckscher-Ohlin model of international trade), and their prices are in inverse correlation with the relative abundance or scarcity of the productive factors employed in its production. If Argentina has plenty of fertile land to produce agricultural crops of temperate climate and enough not qualified labor force to work the land, but scarce amounts of industrial capital equipment and of qualified industrial workers, then the prices of manufactures will be relatively higher compared with the prices of wheat or corn. The opposite situation can be found in England, determining the convenience of an export specialization on primary products for Argentina, and on manufactures for Britain. In this case the valorization process takes place inside each trading country and respond to the relative endowment of productive factors. Now, the price theory that is implied in this model derives from the assumptions of the perfect market model under conditions of general stable equilibrium, and depends on marginal calculations under the static law of diminishing returns in the sphere of production. It depends, also, in the last resort on the map of marginal given and unmodified preferences in the sphere of consumption. In the last analysis the prices depend firstly on the relative endowment of productive factors, and secondly on the preferences shown in the individual maps of demand that guide the consumption purchases. This theory is individualistic and microeconomic because it departs from a set of individual preferences of consumers that, given the endowment of productive factors and the technology available, determine the relative prices of all goods. The external demand derived from international trade modifies marginally the conditions of stable equilibrium and under the static assumptions considered determines the prices as an outcome that depend, firstly, on natural endowment of resources and, secondly, on individual preferences.
Thirdly, the Institutional, Systemic theories of international trade depart from a very different point. This line of thought can be traced since the times of Adam Smith, and Robert Malthus in connection with the concepts of purchasing power and effective demand. Sometimes these classic authors are labeled wrongly as belonging to the same labor theory of value than Ricardo and Marx. But Smith and Malthus defined the value of a commodity as the amount of work that it can command (buy). That means that economic value is not determined in the field of production but on the field of market transactions; hence the concepts of purchasing power and effective demand take a primary place in this approach. In the 30’s these essential ideas were elaborated by John Maynard Keynes in his Treatise on Money, and in the 50’s they inspired the theories of the deterioration of terms of trade issued independently and simultaneously by Raul Prebisch and Hans Singer. The theory is macroeconomic because the purchasing power of the different national currencies is calculated through index numbers generally connected with the wholesale prices of the principal commodities traded in the international market. But is also microeconomic because these price indexes are compiled departing from individual prices at entrepreneurial and local levels. To understand this double condition (macro and micro) of these theories is necessary to understand the meaning of index prices and there connections with individual prices. The connection can be understood on conceptual terms without been necessarily engaged in mathematical procedures.
On international economic relations the answers given to the main causes that determine market operations and market prices also differ widely among these three epistemological approaches. The Marxian typical approach emphasizes the exploitation suffered by poor countries, through the mechanisms of unequal exchange that transfer huge amount of surplus to imperialistic rich countries. The neoclassic approach emphasizes the advantages of free market operations conducted by individual economic agents. This process leads to the general prosperity and to the equalization of living condition of laborers across the world. Institutional Economics confers only an instrumental role to the international market, and considers that its operation reflects the national and international distribution of technological, economic, political and cultural power positions of the main international and transnational players under specific institutional conditions.
After the collapse of eastern authoritarian centrally planed economies, we are facing a decadence of Marxian economics, a revision of epistemological foundations of neoclassical economics, and a reborn of Institutional Economics approach. This course tries to apply the conceptual tools of Institutional Economics to the understanding of the regional integration agreements under the rules of the globalization process that is unfolding on the 21st century. The globalization process is seen not only on their economic characteristics but also on their cultural and political aspects, and all of them are contributing to reshape the international and transnational global order. The Structural Economics that unfolded on Latin America during the second part of 20th century can be considered as a branch of Institutional Economics applied to the understanding of the relations between developed central nations, and underdeveloped peripheral nations. The contemporary Neo-Structural Economics linked to the research activities of ECLAC is emphasizing the need to consider, at the same time the political and cultural dimensions of international relations as a framework for a better understanding of the economic impact of globalization on Latin American Development7.
Departing from this conceptual approach we are going to apply those ideas to the regionalization process that is unfolding in a parallel way with the globalization of the international order. We shall differentiate between two types of regional integration processes using precisely the conceptual tools of the institutional approach schematized in previous paragraphs of this preface.
On one hand we are going to consider the market focused one-dimensional, regional agreements that are taking place between U.S.A and Latin American Countries. On the other hand we are going to pay very special consideration to the politically focused, multidimensional, regional agreements that are unfolding, under difficult and accidental conditions between Latin American countries. The first type of agreements can be exemplified with the North American Free Trade Agreement NAFTA and the Free Trade Agreement of the Americas FTAA, and the second type with the recent evolution of Mercado Común del Sur MERCOSUR, Comunidad Andina de Naciones CAN, Mercado Comun Centroamericano MCCA and Comunidad del Caribe CARICOM.
Taking into consideration the historical example of the European Union, the promotion of multidimensional agreements among Latin American Countries seems to be a promising strategy to reduce the international vulnerability of the Region and to strengthen its political influence at a global level8.