Larger economies will also benefit from The Regional Integration Fund

(Paper Presented by Odeen Ishmael, Ambassador of Guyana to the United States of America, at the Caribbean American Summit at Central Connecticut State University, New Britain, Connecticut, May 23, 1998)

Introduction

During April 1998, at the second Summit of the Americas in Santiago de Chile, thirty-four of the nations of the Americas formally announced that they would begin negotiations to establish the Free Trade Area of the Americas (FTAA) which is expected to be formalized by 2005. The FTAA will bring together the largest and smallest economies in the Americas. It will be driven by private business people seeking to maximize shareholders' profits in the global environment. Trade and investment will gravitate to and polarize in the centers and countries of greatest profitability.

The impending negotiations and the eventual setting up of this hemispheric free trade body in the early years of the new century will impact immensely on the smaller economies, particularly those of the Caribbean region. Indeed, the majority of economies in the Western Hemisphere can be classified as "smaller economies". (The definition of "smaller economies" will be discussed in more depth in Part I of this paper).

It is clear that the benefits of regional free trade cannot realistically come without certain costs. It has been proven that smaller economies have a disadvantage in an atmosphere of completely free trade. The significant disparities in the size and strength of hemispheric economies make this a problem that must be considered by the smaller economies before undertaking the decisive move into the hemispheric free trade area.

While free trade can bring with it significant benefits, it could be disastrous for the smaller economies if integration issues are not properly addressed. One of the primary proposed mechanisms to facilitate integration is that of an independent Regional Integration Fund (RIF), first proposed at the Miami Summit in 1994 by the late Dr. Cheddi Jagan, President of Guyana. This paper will discuss the benefits of an independent RIF and how it can help in the transition to the FTAA.

Part I: Smaller Economies and Their Difficulties

Economic Size and Dependence

The definition of a smaller economy has been explored in the diagnostic studies and other various documents and articles on the subject of integration into the FTAA. Land area, population, GNP/GDP and GNP/GDP per capita have all been noted as possible indicators. In reality, the best definition seems to be a combination of all these factors, and most smaller economies fall in the lower range of all of them.

Conversely, a small group of countries dominates the hemisphere in these indicators. The five nations of Canada, the United States, Mexico, Brazil and Argentina can be found to have substantial economic advantages as compared to smaller states. They are the five largest nations in the Americas by land area (these five combined comprise 82.4% of the land area of the Americas) and are five of the six largest by population, with a combined 76.78% of the population of the Americas (81.42% including Colombia, the fourth largest). Even more overwhelming is that the these five economies comprise 95.99% of the GDP of the Americas.

With the issue of "smallness" comes the issue of economic dependence. Smaller economies tend to be export-based with only one or two primary products. Again, the five economies mentioned above are more diversified, and thus not as reliant on trade. They are the five nations with the lowest reliance on trade taxes in the Americas. In fact, in none of these does more than 6% of revenue comes from trade taxes. One study (in which Argentina was not included) found Canada, Brazil, the United States and Mexico as four of the five countries with the lowest transport and freight costs for exports.

On the other hand, it has been found that smaller economies suffer from substantial export dependence at high costs to the economy. All of this has led to the calculation of a vulnerability index for the countries of the Western Hemisphere. The countries of the Caribbean and Central America dominate the top two-thirds (meaning the most vulnerable), whereas the large nations of North and South America comprise the bottom third. The "big five" are all in the bottom six. There is an almost perfect correlation between economic vulnerability and the size indicators mentioned above.

Part II: Policy Options and the Regional Integration Fund

The Regional Integration Fund was suggested to handle the difficulties of the transition of the smaller economies into the area of hemispheric free trade. The transition itself involves extremely significant disparities. For larger economies, the costs for such a fund will be minimal but the benefits will be substantial. For the United States in particular, free trade means more jobs, more wealth, and overall, a more robust American economy. As Europe integrates, and reaps the benefits of the European Union, it becomes apparent that, in order to remain competitive, the United States must continue to strengthen its economy through free trade.

The benefits of the FTAA and free trade with all of the nations of the Americas are evident, but the participation of the smaller economies is dependent on guaranteed financial assistance. The regional trade network can be strengthened to the mutual benefit of all by ensuring successful participation of all countries in the hemisphere. Certain short-term costs necessary to ensure this will be outweighed by the long-term benefits to businesses and consumers in all hemispheric countries. The benefits of free trade are proven by basic economic principles; however, other principles show the complications arising from disparities in economic size. In order to attain these benefits, then, it is necessary to take certain measures to ensure the full participation of all the nations of the Americas. Certainly, the benefits to the US economy, in particular, will be greatest in an FTAA that accords benefits to all members.

The Regional Integration Fund is not a completely new idea. Similar funds were set up to accompany the integration of the European Union (EU). The four structural funds include the European Regional Development Fund, the European Social Funds, the European Agricultural Guidance Fund and the Financial Instrument for Fisheries Guidance. It is important to note, however, that although the people of the Americas can look to the experiences of the EU for some evaluation of what integration issues must be addressed, they must bear in mind that the disparities have been far smaller for the Europeans. The problem areas for the FTAA are much more urgent as the hemispheric nations set about to pursue an effective and integrated free trade policy for the Americas. All the greater, then, is the need for the Regional Integration Fund.

An examination can now be made of the development of the smaller economies, the diversification of these economies, and the unique hemispheric emphasis of the Regional Integration Fund and the benefits which US business can accrue.

A. Development of the Smaller Economies

The most pressing and most widely recognized problem in the smaller economies is underdevelopment. Assistance with two areas of development would provide a considerable boost to the smaller economies. With time, the positive effects of this economic growth would provide benefits for US businesses, in particular, with enhanced opportunities for trade and investment in the smaller economies.

The first area of development is infrastructural development. This is essential to the economic prospects of the smaller economies. Funding infrastructural development, including development of telecommunications infrastructure, would provide a foundation for US private sector investment opportunities in the smaller economies.

The second area, also fundamental to these economies, is human resource and technological development. As with infrastructural development, this is a basic area of development which can propel the smaller economies to a more competitive level. The positive economic repercussions, too, will be felt throughout the hemisphere.

The benefits of providing funding for development, then, are manifold. First, the funding will spur economic growth within the individual countries, which would indirectly benefit the other FTAA participants. Second, the human resource, technology, and infrastructural development will all provide better opportunities for US investors in the smaller economies. Finally, the economic growth provided by the Regional Integration Fund can relieve pressure on US bilateral aid over the long run.

B. Export Concentration and Diversification Issues

Because of the homogeneity and high substitution elasticity of many of the primary exports of the smaller economies, diversification of these economies becomes a prerequisite for success in the FTAA. As has been stated above, a substantial number of the smaller economies rely on one or two primary product exports, and a number of them tend to rely on the same few exports. For example, many smaller economies rely heavily upon sugar, coffee or bananas. If certain nations that produce a primary export commodity are in a more advanced stage of entry into the FTAA, then the resulting disparities in trade and prices could have serious consequences for the other producers of that product.

The health of these economies is dependent on such factors as the world economy, international trade policy developments and the weather. A drop in price for a commodity, tariff adjustments or even a hurricane could devastate one (or likely more) of the smaller economies. In essence, whereas these few export goods constitute a substantial portion of total exports for each individual country, they are a small percentage of total world exports of those commodities. These economies are based on, and dependent upon, a commodity market over which they have little influence. A special emphasis on assisting these economies in the transition to diversification will help to avert the consequences of reliance on the export of a few goods.

C. The Hemispheric Emphasis

One key requirement of financial assistance is the uniqueness of the facility through which it is distributed. A hemispheric problem cannot properly be addressed through globally-oriented financial institutions. The intended functions of the existing facilities must be examined. They fail to address financial issues from a Western Hemispheric perspective, as they were designed in the context of worldwide lending. Integration into the FTAA is a region-specific issue which the current institutions, by their very nature, cannot properly address.

The Asian financial crisis of 1997 and which has continued into 1998 has done much to stretch thin the budgets of the major international financial institutions. The limited resources of these institutions and the vulnerability of the smaller economies demonstrate the need for the RIF which can help to stabilize the economic disparities of the region. Should another crisis hit, the RIF would be the best way to adapt the integration process to the new financial climate, without the baggage of dependency on any globally-oriented financial institutions.

It seems, then, unlikely that the existing institutions would be able or willing to handle such a project. The constraints on these institutions are already great, and the prospect of providing funding to help the countries of the Americas enter into a regional free trade association is not as savory for them as providing funding to help a nation enter the global market.

Financial assistance for integration into the FTAA is vitally necessary for the smaller economies of the hemisphere. By using current financial institutions, there is no guarantee. The RIF, however, by the very nature of its existence, will guarantee this. All parties will then be able to fully participate in, and fully partake in the free trade benefits of, the FTAA.

Conclusion

The world is no doubt entering into an era of regional economic integration. The European Union, Mercosur, and NAFTA are all examples of this. While protectionists have tried to slow the trend towards free trade in the United States, it has nevertheless continued. Ross Perot's promised "sucking sound" of jobs leaving the United States after the passage of NAFTA has turned out to be the constant jangle of cash registers in one of the longest eras of economic growth in US history. Free trade has only made the US economy more robust, and the Free Trade Area of the Americas promises to be a continuation of this trend. However, as has been shown above, because of the economic disparities in the hemisphere, the FTAA can only work with an attached fund. The smaller economies will be unable to participate (or will be forced to participate at a cost not only to their own economies, but to those of the rest of the hemisphere as well) without guaranteed financial assistance to help with the transition. Thus, there is the need for the Regional Integration Fund, US support of which will provide economic benefits for the entire hemisphere, including the United States itself.

Posted April 27th 1999.