The rise of the Latin American Pacific Rim

The integration of the stock markets of Colombia, Peru and Chile and the creation of the Mercado Integrado Latinoamericano (MILA) may prove to be the first step toward the economic integration of Latin America’s Pacific Rim. The first phase of the stock market integration makes the shares of each exchange available to investors in all three countries and is expected to increase trading volumes and create the critical mass needed to attract more foreign investment. The successful creation of the MILA—which many said would be delayed or never completed at all—is encouraging even more expansive integration projects.

Outgoing Peruvian president Alan García has been promoting a plan to create a zone for the free movement of goods, people and capital that would include Colombia, Chile, Panama and Ecuador. While the talk of a grand integration scheme is great for summits and state visits once you set aside some of your Pan-American fervor, you have to ask can something like this really work? The answer is: “well, maybe it has to”.

There are some obvious costs of this sort of integration but Latin America needs to find ways to take better advantage of the global economic shift toward Asia-Pacific while also improving competitiveness and speeding up the process of innovation. The commodity boom will not last forever and commodity exporting countries need to start developing other competitive advantages. However, any integration schemes will have to proceed cautiously. Without the proper regulations increased financial integration and the free movement of people could be a boon for the drug trade and other criminal activities. Historical differences between countries will also be difficult to overcome.

Fortunately, the financial authorities in Colombia, Peru and Chile have shown that incremental integration can be successful. Mr García’s suggested plan is much more ambitious and the inclusion of Panama and Ecuador, which is still a member of Hugo Chávez’s socialist ALBA, could prove risky. However, closer integration is important for attracting investment and spurring growth. While small, Panama has a dynamic economy (which expanded by nearly 6% per year in 2000-09) and a thriving financial sector. Bringing Ecuador back into the free market fold would further reduce some of Mr Chávez’s influence while boosting the economic zone’s oil output. All together, this “Zona del Arco Pacifico Suramericana” would have a population of 111 million and an economy worth US$1.1trn in purchasing power parity terms (just over half the size of Brazil). The zone would be a premier mining producer with an average daily oil production of 1.4 million barrels and access to at least eight ports pointed toward Asia. Chile’s well established rules and regulations would serve as an invaluable model for its partners. The free movement of capital would help to develop the innovation industries which are needed to compete and a united Arco Pacifico would more equally balance a rising Brazil and further reduce reliance on the US market.

While the odds are against the timely creation of such an ambitious grouping, the opening of the MILA this week reminds us that ambitious projects in Latin America can be completed. Panama, Colombia, Ecuador, Peru and Chile should not rush into an integration plan but perhaps they can follow the example of the MILA by focusing on mutual benefits and adopting a well-thought out and achievable plan on action. The need to adapt to the changing global economic and political landscape requires it.

Click here for the Spanish version in La Republica

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