Brazil and its neighbors

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By PAULO NOGUEIRA BATISTA JR.*

It is important to resume regional integration with ambition and creativity

I'm talking about the future again. Today I would like to say a few words about Brazil's integration with Latin America and the Caribbean. It is important to resume it, undoing the damage produced in the governments of Michel Temer and Jair Bolsonaro and going beyond what we achieved in this area in previous periods.

The importance of Brazil’s integration with its neighborhood has grown with the so-called “deglobalization”, in the wake of the Covid-19 pandemic and the consequences of the war in Ukraine. After these two monumental shocks, countries that value their autonomy and security realized that they cannot continue to depend on long production chains, from one end of the planet to the other. Thus began a movement of nationalization or regionalization of the production of goods and strategic inputs. reshoring ou nearshoring are expressions in English. (I make a point of including the terms in English because that always helps a little to overcome resistance from national viralism).

Brazilian companies are already taking this course and will need to continue to do so in the coming years. One more reason to encourage closer ties with our regional surroundings. In many cases, it can be advantageous for us and other Latin American countries to regionalize and not just internalize production chains.

Regardless of these recent shocks, cooperation with our neighbors has always been important. Brazil has borders with almost all South American countries, with the exception of Chile and Ecuador. We share the Amazon with seven other countries on the continent, a fundamental biome for our future and that of the rest of the planet. We have every interest in having a prosperous and stable neighborhood. Their prosperity will feed ours and vice versa. Brazil, as the largest country in South America, has a special role to play.

And not just in South America. Brazilian regional action should not be, in my opinion, limited to or excessively focused on South America. During my time at the IMF, I was able to see how much demand there is for Brazilian cooperation in Central America and the Caribbean. With Lopez Obrador in the presidency, Mexico has also become an important partner for Brazil, insofar as it can act with some autonomy in relation to the United States. Together with Mexico, Brazil will be able to work fruitfully with Central Americans and the Caribbean.

In the Temer and Bolsonaro governments, due to incompetence, ideological prejudices and subordination to the United States, Brazil allowed or acted so that many of our previous achievements were undone or seriously undermined. It is necessary to redo what was undone and take new initiatives to strengthen relations with the countries of our region.

 

Limits of Latin American and Caribbean integration

One caveat, however. Latin American and Caribbean integration, or even South American integration, cannot be as profound as European integration. The formation of a European-style bloc and even less ambitious forms of integration are not viable and do not serve the Brazilian national interest. Our neighborhood, unfortunately, has advanced a lot in certain forms of integration subordinated to the United States. This occurred on both the commercial and monetary levels. And seeking deep integration with countries that have abdicated most of their sovereignty would mean leveling Brazil down.

On the commercial front, the difficulty is that the United States has negotiated agreements with several Latin American countries that establish not only the free circulation, without barriers, of goods and services, but also invasive norms in areas such as intellectual property, patents, government purchases, investments, investor/State disputes and other matters. This prevents us from contemplating the formation of a customs union with all of South America. Bolivia and Venezuela can join Mercosur, as they have not taken the fatal step of accepting agreements of this type with the United States. But negotiating a common external tariff with Colombia, Peru, Chile or Mexico would mean accepting low or non-existent import tariffs with the United States. If the negotiation also involved non-commercial issues such as those mentioned above, the damage would be even greater for Brazil.

Even a South American or Latin American free trade area would not be advisable. How to ensure that goods and services produced in the US do not take advantage of this free trade area to penetrate the Brazilian market and the other Mercosur countries without barriers? In theory, strict rules of origin could be established to avoid triangulation. In practice, these rules would be very difficult to implement and enforce.

On the monetary front, the problem is perhaps even worse. In recent decades, dollarization has advanced enormously in Latin America, with Brazil being the main exception. There were even extreme cases of total abandonment of the national currency (Ecuador and El Salvador). In most countries, what was seen was the internal use of the dollar, in parallel with the national currency, with the former playing an important or even preponderant role in a bi-monetary system. This is what happened in Argentina, Uruguay, Paraguay, Bolivia, Peru, Venezuela and several Central American countries.

Under these circumstances, there is no way to claim a monetary association between Brazil and these countries. What Brazil needs to do, on its own, is to take the necessary measures to preserve its monetary sovereignty at the national level.

 

The possibilities for cooperation are vast and still unexplored

For integration with the neighborhood to prosper, it is necessary to start from viable proposals, which take as a starting point what has been done or attempted in recent periods. Despite the aforementioned limitations, the possibilities for cooperation are vast and still unexplored. I give some examples, without claiming to be exhaustive or even to map the terrain.

To reduce the dollar's role and increase trade integration, one way is to start from what is already being done in intra-Mercosur trade: a payment system in national currency, which bypasses the dollar and reduces transaction costs. The mechanism covers, for the time being, the central banks of Brazil, Argentina and Uruguay. It is worth checking whether it is possible to expand it to other countries in South America and even other regions.

One could also consider the creation of a regional monetary fund to provide emergency balance-of-payments financing, similar to what exists in East Asia (Chiang Mai Initiative) and in the BRICS (Contingent Reserve Arrangement – ​​ACR) . Based on my experience in the BRICS, I tried to implement such an arrangement in our region, but I encountered stubborn resistance from the Central Bank, guardian of Brazil's international reserves and, understandably, always concerned about not putting them at risk. The way out, in my opinion, is to limit the monetary fund to Brazil and small countries in our region and elsewhere, setting strict access criteria. There are ways to do this without offending anyone.

It is very important to find ways to make infrastructure investments viable in the region, especially those that favor intra-regional trade – the so-called trade-enabling infrastructure (infrastructure enabling trade). For this, it is essential to recover Brazilian contractors, shaken by Lava Jato, and the BNDES' ability to operate internationally, emptied since the Michel Temer government.

There are also good alternatives for multilateral financing in the region, some under the control of our countries. One of them is the Development Bank of Latin America, still known by its old acronym CAF (Andean Development Community). It is an efficient and agile bank, which even served as a reference when we were creating the New Development Bank of the BRICS. And even multilateral banks that are not under our regional control can play an important role. This is the case of the Inter-American Development Bank (the IDB), notably.

The governance of the World Bank, as well as that of the IMF, and even that of the IDB, restricts our possibilities of acting in these entities. It was for no other reason that Brazil joined the other BRICS to create a monetary fund (the ACR) and a development bank (the NBD). To date, only Uruguay has joined the NBD as a partner. It is important to encourage more countries in the region to join the bank so that they can benefit from long-term financing at an attractive cost. Not only for infrastructure, but also for sustainable development projects.

This brings us to another core area – the Amazon. The Amazonian countries – Brazil, Bolivia, Peru, Ecuador, Colombia, Venezuela, Guyana and Suriname – must form, as far as possible, a common front to promote sustainable development and act in cooperation with other countries and in dedicated international forums and agreements to the environmental issue.

 

With ambition, but without illusions

The regional agenda is broad. The list above, as I mentioned, is exemplary only. It is possible to go much further. And it is important to resume regional integration with ambition and creativity.

No illusions though. Without disregarding the limitations resulting from strategic options, which are difficult to reverse, that our neighbors have taken in recent decades. The rapprochement with the neighborhood can, yes, be varied and happen on several fronts, but it is not in Brazil's interest that it be as profound as the one that occurred in Europe after the Second World War. Even less ambitious forms of regional integration become problematic in light of the advance of US-subordinate integration across much of our region.

Even so, much can be done with advantages for our countries, focusing on practical proposals, anchored in our recent experience.

If we do not commit the crime of re-electing the current President of the Republic, we will have the opportunity to advance a lot in terms of cooperation with our neighbors in the coming years.

*Paulo Nogueira Batista Jr. he holds the Celso Furtado Chair at the College of High Studies at UFRJ. He was vice-president of the New Development Bank, established by the BRICS in Shanghai. Author, among other books, of Brazil doesn't fit in anyone's backyard (LeYa).

Extended version of article published in the journal capital letter, on April 29, 2022.

 

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