The Political Economy of
Integration Agreements and the
Crisis: Coping Strategies for
Small States
Carol Wise
University 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$, seasonally adjusted annual
rates)
100
80
60
40
20
0
Developing Countries
East Asia and the Pacific
China
Eastern Europe
South Asia
-20
-40
-60
-80
ECLAC – Latin America: the missing financial crisis p.12
Latin America
1Q08
2Q08
3Q08
4Q08
1Q09
International Bank Loans
Outstanding
200
(change in billions of US$ adjusted for exchange rate
changes)
150
100
50
0
Developing Countries
Asia
China
India
Eastern and Central Europe
Russia
-50
-100
-150
-200
-250
ECLAC – Latin America: the missing financial crisis p.12
Latin America
Brazil
1Q08
2Q08
3Q08
4Q08
1Q09
Latin America's GDP Growth
Deceleration
(percentage)
15
10
5
0
Latin America
Mexico
Argentina
Peru
Brazil
-5
-10
-15
ECLAC – Latin America: the missing financial crisis p.17
Chile
2007
2008
2009F
Cumulative Deceleration
Chile vs LAC-7 GDP Growth and
Investment Growth
30
25
20
Chile GDP Growth (%)
LAC-7 GDP Growth (%)
Chile Investment Growth (%)
LAC-7 Investment Growth (% )
15
10
5
0
2004
2005
2006
2007
2008
IADB - Latin American and Caribbean Macro Watch Country Table
Peru vs LAC-7 GDP Growth and
Investment Growth
30
25
20
Peru GDP Growth (%)
LAC-7 GDP Growth (%)
Peru Investment Growth (%)
LAC-7 Investment Growth (% )
15
10
5
0
2004
2005
2006
2007
2008
IADB - Latin American and Caribbean Macro Watch Country Table
LAC-7, Peru, Chile: GDP per
capita
12000
10000
8000
LAC-7 Average per capita GDP
Peru per capita GDP
Chile per capita GDP
6000
4000
2000
0
2000
2001
2002
2003
2004
2005
IMF - World Economic Outlook Database
2006
2007
2008
Chile vs LAC-7 External
Accounts
8
6
4
2
0
2004
2005
2006
2007
2008
Chile Current Account (% of GDP)
LAC-7 Current Account (% of GDP)
Chile Capital Account (% of GDP)
LAC-7 Capital Account (% of GDP)
-2
-4
-6
-8
IADB - Latin American and Caribbean Macro Watch Country Table
Peru vs LAC-7 External
Accounts
10
8
6
4
Peru Current Account (% of GDP)
LAC-7 Current Account (% of GDP)
Peru Capital Account (% of GDP)
LAC-7 Capital Account (% of GDP)
2
0
2004
2005
2006
2007
2008
-2
-4
IADB - Latin American and Caribbean Macro Watch Country Table
Chile vs LAC-7 FDI and
International Reserves
5
100000
90000
4
80000
3
70000
2
60000
Chile FDI (Millions
of US $s)
LAC-7 FDI (Millions of US $s)
50000
40000
Chile International
Reserves (% of
GDP)
LAC-7 International Reserves
(% of GDP)
1
0
30000
2004
2005
2006
2007
-1
20000
10000
-2
0
2004
2005
2006
2007
2008
-3
IADB - Latin American and Caribbean Macro Watch Country Table
2008
Peru vs LAC-7 FDI and
International Reserves
100000
12
90000
10
80000
70000
8
60000
Peru FDI (Millions
of US $s)
LAC-7 FDI (Millions of US $s)
50000
40000
Peru International
Reserves (% of
GDP)
LAC-7 International Reserves
(% of GDP)
6
4
30000
20000
2
10000
0
0
2004
2005
2006
2007
2008
2004
2005
2006
2007
IADB - Latin American and Caribbean Macro Watch Country Table
2008
Coping Strategies with FTAs


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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
60
140
120
50
100
40
80
United States
Chile
Peru
30
China
Chile
Peru
60
20
40
10
20
0
0
Row 1
Row 1
• United States: 6
Chile: 11
• Peru: 57
China: 132
Heritage Foundation – 2009 Index of Economic Freedom
Doing Business
140
120
100
80
LAC-7 average
Chile
Peru
60
40
20
0
Ease of Doing Business
Starting a Business
Registering Property
Dealing with Construction Permits
Enforcing Contracts
Protecting Investors
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 nonperforming 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 proactive 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?