The Political Economy of Integration Agreements and the

Crisis: Coping Strategies for Small States

Carol WiseUniversity of Southern California

Summary Burden of the crisis has fallen on

international trade Financial sectors and GDP growth took a hit

but are rebounding quickly The crisis has helped to highlight reform

success and effective strategies already underway

My focus: Chile & Peru

Summary: Chile & Peru Unilateral trade liberalization (Chile 1970s,

Peru 1990s) Pro-active approach to bilateral & mini-lateral

trade negotiations/agreements Simultaneous reform and modernization of

services Liberal FDI regime

Export-led Development Model Chile:

FTAs with Australia, Canada, China, Colombia, Costa Rica, El Salvador, Honduras, EFTA, Japan, Mexico, MERCOSUR, Panama, Peru, Republic of Korea, U.S.

Economic Association Agreements with Brunei, New Zealand, Singapore, EU

Partial Preferential Agreements: India, Peru, Ecuador, Colombia, Venezuela, Bolivia, Argentina

Export-led Development Model Peru:

FTAs: Canada, Chile, Singapore, U.S., (Signed but not yet in force: China, Thailand)

Framework Agreements: MERCOSUR-Peru, MERCOSUR-Andean Community

Partial Preferential Agreements: Andean Community – Argentina, Andean Community – Brazil, Chile, Cuba, Mexico

Merchandise Export Growth(percentage change in US$, seasonally adjusted annual

rates)

Developing Countries East Asia and the Pacific China Eastern Europe South Asia Latin America

-80

-60

-40

-20

0

20

40

60

80

100

1Q08

2Q08

3Q08

4Q08

1Q09

ECLAC – Latin America: the missing financial crisis p.12

International Bank Loans Outstanding

(change in billions of US$ adjusted for exchange rate changes)

Developing Countries Asia China India Eastern and Central Europe Russia Latin America Brazil

-250

-200

-150

-100

-50

0

50

100

150

200

1Q08

2Q08

3Q08

4Q08

1Q09

ECLAC – Latin America: the missing financial crisis p.12

Latin America's GDP Growth Deceleration

(percentage)

Latin America Mexico Argentina Peru Brazil Chile

-15

-10

-5

0

5

10

15

2007

2008

2009F

Cumulative Deceleration

ECLAC – Latin America: the missing financial crisis p.17

Chile vs LAC-7 GDP Growth and Investment Growth

2004 2005 2006 2007 2008

0

5

10

15

20

25

30

Chile GDP Growth (%)

LAC-7 GDP Growth (%)

Chile Investment Growth (%)

LAC-7 Investment Growth (%)

IADB - Latin American and Caribbean Macro Watch Country Table

Peru vs LAC-7 GDP Growth and Investment Growth

2004 2005 2006 2007 2008

0

5

10

15

20

25

30

Peru GDP Growth (%)

LAC-7 GDP Growth (%)

Peru Investment Growth (%)

LAC-7 Investment Growth (%)

IADB - Latin American and Caribbean Macro Watch Country Table

LAC-7, Peru, Chile: GDP per capita

2000 2001 2002 2003 2004 2005 2006 2007 2008

0

2000

4000

6000

8000

10000

12000

LAC-7 Average per capita GDP

Peru per capita GDP

Chile per capita GDP

IMF - World Economic Outlook Database

Chile vs LAC-7 External Accounts

2004 2005 2006 2007 2008

-8

-6

-4

-2

0

2

4

6

8

Chile Current Account (% of GDP)

LAC-7 Current Account (% of GDP)

Chile Capital Account (% of GDP)

LAC-7 Capital Account (% of GDP)

IADB - Latin American and Caribbean Macro Watch Country Table

Peru vs LAC-7 External Accounts

2004 2005 2006 2007 2008

-4

-2

0

2

4

6

8

10

Peru Current Account (% of GDP)

LAC-7 Current Account (% of GDP)

Peru Capital Account (% of GDP)

LAC-7 Capital Account (% of GDP)

IADB - Latin American and Caribbean Macro Watch Country Table

Chile vs LAC-7 FDI and International Reserves

2004 2005 2006 2007 2008

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

Chile FDI (Millions of US $s)

LAC-7 FDI (Millions of US $s)

2004 2005 2006 2007 2008

-3

-2

-1

0

1

2

3

4

5

Chile International Reserves (% of GDP)LAC-7 International Reserves (% of GDP)

IADB - Latin American and Caribbean Macro Watch Country Table

Peru vs LAC-7 FDI and International Reserves

2004 2005 2006 2007 2008

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

Peru FDI (Millions of US $s)

LAC-7 FDI (Millions of US $s)

2004 2005 2006 2007 2008

0

2

4

6

8

10

12

Peru International Reserves (% of GDP)LAC-7 International Reserves (% of GDP)

IADB - Latin American and Caribbean Macro Watch Country Table

Coping Strategies with FTAs Pragmatically negotiating over “old” & “new” trade

agenda within these agreements Prime example: each had negotiated separate

bilateral FTAs with the two largest markets in the world---the U.S. and China

In each case, the FTA with the U.S. focuses on the new trade agenda (investment, services, intellectual property)

While each country's China FTA is primarily about the old trade agenda (market access for primary goods)

What accounts for this dual approach?

In China, complementary endowment factors and the very simplicity of these agreements

With the U.S., ability and willingness of these countries to negotiate the new trade agenda

In both countries, policy makers are looking to reap gains from previous liberalization and reforms in areas that top the new trade agenda

Economic Freedom Ranking

Row 1

0

10

20

30

40

50

60

United States

Chile

Peru

Row 1

0

20

40

60

80

100

120

140

China

Chile

Peru

Heritage Foundation – 2009 Index of Economic Freedom

• United States: 6 Chile: 11

• Peru: 57 China: 132

Doing Business

Ease of Doing BusinessStarting a Business

Dealing with Construction PermitsRegistering Property

Protecting InvestorsEnforcing Contracts

0

20

40

60

80

100

120

140

LAC-7 average

Chile

Peru

The World Bank Group – Doing Business Economy Rankings

What lies beneath these indicators?

“Chile's financial system is among the region's and the world's most stable and developed. Banking is efficient, with strict limits on lending to a single debtor or group of related companies. Reforms that include capitalization requirements and shareholder obligations have increased competition and widened the range of operations for banks and other financial services.”

Heritage Foundation – 2009 Index of Economic Freedom

What lies beneath the indicators?

“Peru's financial sector continues to grow, becoming more competitive in providing a wide range of financial services for domestic business activity. The banking sector has undergone a transformation through consolidation. Credit to the private sector has increased steadily, and non-performing loans have declined to less than 5 percent of total loans. The government has strengthened prudential standards and disclosure requirements. Credit is allocated on market terms, and foreign investors can obtain credit in the domestic market.”

Heritage Foundation – 2009 Index of Economic Freedom

Conclusions, Coping Strategies• Countries in the region are reaping the gains

from prior liberalization, deregulation, reform

• In the case of Chile and Peru, we see a pro-active approach toward advancing on both the old and the new trade agenda

• Bilateral FTAs with China and the U.S. have proved to be effective coping tools vis-a-vis the recent crisis

In the medium run.....

• This is the most effective way for these states to counter the stagnation in trade negotiations at the multilateral level

• Could this be a possible path forward for other small open growing economies on the move?