This paper is intended to explore the economic, political and social current situation of Venezuela in the context of the Regional Integration process in South America. We will focus in Venezuela as a member of the Andean Pact and its current relationship and expectations with Mercosur and the rest of the world.

Given the global trends towards regional integration and the emerging of Mercosur as a major growing trade region in the world, its expansion makes it imminent the incorporation of other countries of the region. Negotiations between the Mercosur and the Andean Pact (AP) are very complicated and no significant agreement has been achieved regarding the possible integration of the two regional groups, basically due to economic and social-political differences. Brazil has started negotiations with individual countries, particularly Venezuela. However, an agreement outside the AP doesn't seem viable, without the collapse of the northern group. Venezuela has the most promising economy out of all the Andean countries and with Colombia has a leading role in the AP, with over 50% of the trade volume.

Should Venezuela join the Mercosur? Why? Why don't? If, so, what is the better scheme of negotiation given the membership with the Andean Pact?, and how much the situation influence a possible South American Free Trade Area? Would Mercosur be interested in the participation of Venezuela?

The assessment will be centered on trading activities and economic integration, accounting for the nature of the class. However, some emphasis will be made on aspects such as the importance of social and cultural characteristics and some other personal views.

I will first make some comments on integration process in general and then focus on Regional Integration in the area. I will give some facts and analysis on the Andean Pact (AP) and Mercosur, to help us develop the big picture of the Regional Integration process in South America. Then, we will take a look to Venezuela, a brief historical review and description of the current situation, to better understand the perspectives and possibilities of the country. Much will be taken from Venezuelan recent news articles, out of Venezuelan newspapers, to assess a current insight of the situation within the country. Finally I will try to assemble the final discussion and conclusions.

Throughout the history of humanity, integration of different peoples and cultures has been present in a way or another. Cultural and economic integration occurred between neighbor tribes and clans, basically in respond to the need for exchange in goods, back since ancient times. Another kind of integration that we can see throughout history is based on territorial occupation and domination. This last scheme has been the most common, as well as the most influential in flattening differences among nations, with the consequence of creating cultural barriers and tensions that impede complete and harmonious integration.

The process of integration among nations involves deep and dynamic changes caused by the interaction of peoples and institutions, including economic, political, cultural and social transformation. The changes occur given the fact that the entities involved differ from one another. These differences determine how smooth and effective the process of integration can be at the initial stages. With time, some customs and practices prevail over others, causing an effect of homogenization.

Over the last few decades, technology has changed at an incredibly fast pace, facilitating communication among countries. The worldwide process of integration has been accelerated, so much so that now we talk about Globalization. However, although globalization has already started, we are still far from achieving it. The technological tools for globalization have been controlled by a few entities in the world, especially by the U.S. The tendency has been towards spreading the U.S. culture and way of life in the world with marked difference in quality of life, instead of promoting equal interaction and integration. This causes natural reactions and tendencies to oppose this process.

A real and complete integration requires, from more powerful and rich countries, a sacrifice to incentive the enhancement of quality of life in poor countries. But the motives for integration have always been, for industrialized countries, the need to expand their markets, without a real interest in achieving equality in the world. Too many factors tend to be left out of the equation. In general, the concept of country is so strong that it makes it very difficult to dismantle the existing borders and barriers for globalization.

The interaction is based on competition instead of harmonization, which makes it difficult to achieve integration. As an answer to that, regional integration is the current stage of the process. After reflecting on these general concerns, which I think, should be part of the mindset that negotiators and scholars have regarding this topic, we arrived to what the specific focus of this paper is. We will now center in the process of integration within South America.

Many are the papers and books that assess the topic of regional integration in general, and the specific process in Latin America. The difficult economic situation of the area, as well as political instability in many of the countries, has kept many major investors from allocating resources in South America. However, business people and scholars have been monitoring the region for its market potential and research opportunities. The participation of Venezuela in the process of integration in South America is quite important. Venezuela is a leading member in the AP and it is currently in negotiations with Brazil and Mercosur. For a better understanding of the Venezuelan perspective in South America, we will first take a look to the Mercosur and the Andean Pact individually.

One year after the signing of NAFTA (Jan 1, 1995), a Free Trade Area and Customs Union went into effect among Argentina, Brazil, Paraguay, and Uruguay (see map in figure 1). Chile and Bolivia joined Mercosur (Mercado Comun del Sur) as Associated Countries in 1996 and 1997 respectively. With a current market of 230 million people, Mercosur plans to create a common southern cone market. Analysts expect full integration to occur sometime around 2005 before linking up with NAFTA.

The Mercosur is experiencing rapid growth. Before the Asunción Treaty, it was worth US$ 3.6 billion. In 1990, the regional trade was $4.1 billion, representing about 8.8% of total exports of the area. By 1997 intra-trade was $20.3 billion and 24.6% of total exports. The growth potential of trade among the Mercosur member countries is vast, not only in the traditional area of product trade, but increasingly in the area of services, technology, investments and human resources (See Table 1 and Graphs 1 and 2 in the annexes to complement information). (CEI Mercosur 2000).

Out of Mercosur, Brazil is the largest economy with 65% of the trade, in fact the largest in Latin America being about 2.5 times as large a GNP as Mexico. Now that Brazil has been successful in containing its hyperinflation with the Real Plan, the country is bound to emerge as a leading market force in Latin America (Masaaki Kotabe). Brazil is an Oil importer, being Venezuela its second major supplier after Saudi Arabia. With the recent financial and monetary crisis, Brazil has stumbled, creating a difficult situation for Mercosur and indirectly affecting all South American countries. A collapse in Brazil would represent a collapse in all Latin America and even the world economy, therefore, it was able to reach an agreement with the IMF and other institutions. Now, it is important to extend its markets and, more over, strengthen its political position in the hemisphere. Brazil has started unilateral negotiations with Venezuela, which could be a good strategic alley considering! its energy potential and geographic situation. Venezuela is, furthermore, major member in the AP and has excellent relationships with the Caribbean (Caricom).

Mercosur has a flexible scheme of negotiations that allow especial treatment to sensible industries, especially those that are more sensitive for its major members (Brazil 65% and Argentina 32%), such as the auto and the computer industries. There is still a long way to go in terms of trade negotiation. Liberalization in service trade has not been negotiated yet. Also, transportation services and telecommunication services are not covered yet.

Mercosur is the fastest growing trade area in the world compared with the short time that it's been in action. Due to the great potential, not only for the market size, but also for the political influence in the area, Mercosur maintain excellent position and relations with the European Union and NAFTA as well as individually with the U.S. and countries in the Middle East. With the EU, Mercosur has signed several co-operation agreements in 1992, 1994 and 1995.

There have been no formal agreements between Mercosur and NAFTA. Brazil welcomes the idea of gradual integration between countries or groups of countries, so that the integration process may evolve towards the creation of a large free trade area. However, the negotiations are not very smooth due to the polarization of powers between the U.S. and Brazil. Countries like Chile and Venezuela may function as important joints due to the good multilateral relations and strategic positioning in the hemisphere.

The situation with the AP is not so clear. In the late 1990's other free trade agreements between Mercosur and the remaining Andean Pact member countries (Venezuela, Colombia, Peru, and Ecuador) were expected to be signed, but negotiations have not gone any further. Mercosur is currently in consolidating process of its institutions and has not striven for further expansion due to the fragility of this process and the current economic situation of the region. However, it can't withdraw from the existing relations with other Latin American countries. Mercosur has assumed a mechanism of negotiation 4+1 where they negotiate in bloc with individual countries of the region. Brazil has continued to pursue unilateral negotiations with Venezuela. We will go back to this topic, after a general assessment of the Andean Pact.

THE ANDEAN PACT

 

The Andean Pact is a Free Trade Area with common external tariff, formed by Bolivia, Colombia, Ecuador, Peru, and Venezuela (see map in figure 1). The agreement that involves a market of over 110 million people was signed in May 25, 1988 with the goal of establishing a free trade area, a common external tariff, and eventually a full common market (Masaaki Kotabe).

Trade and relations among the Andean Countries have a long history, basically since the independence from Spain in the 19^th century, when Simon Bolivar attempted to create a single country with the recently emancipated provinces. However, there had never been a clear understanding among countries even until recent years. Several determining historical factors have controlled this process.

There is a huge difference between the way Great Britain approached North American Territory and the way Spain did in South America. The Spanish occupation in the north of South America was characterized by exploitation of the natural resources and the people, without a real intention of the Spanish Crown to develop the area, in times in which Spain was steadily loosing its power in Europe and in the world.

Then, the process of independence in the region was a segmenting one. Several countries and centers of strong power were created in Venezuela and Colombia, and personal interests prevailed in a region with a majority of poor and illiterate population. Corruption and authoritarism have been constantly present in regional governments. The consequences of these facts remain today and it is very important to keep them in mind when approaching the area. We can see vestiges today in the tense situations between Peru and Ecuador, as well as the Colombian instability.

Still, in 1987 the nations committed once again to a custom union, during the Quito Modifying Protocol. But many factors have not allowed a deeper integration and effective development of the area. The development of AP members is very uneven, similarly to members of the Mercosur. Bolivia and Ecuador have a marginal part in the trade flows, while Venezuela and Colombia continue to dominate in GDP, total exports and intra-trade (see table 2). 'Peru suspended membership in 1992 and Ecuador reconsidering her position following the border war with Peru in 1995' (Victor Bulmer-Thomas).

Furthermore, unilateral treaties outside the group have reduced the importance of the AP to a mere bilateral relation between Colombia and Venezuela.

Since 1991, Venezuela and Colombia have strengthened their commitment to integration through the signing of the Barahona Act (1991) and the Maiquetia Declaration (1992). These agreements were aimed at establishing a free trade area between Venezuela and Colombia, which the other Andean countries could eventually join, eliminating internal tariffs by 1992, and introducing common external tariffs by 1994.
Colombia and Venezuela formed then the G-3 in a Free Trade Area with Mexico in 1994.

On the other hand, Venezuela itself has a close link with the United States. 'No other Latin American nation - especially in the Caribbean basin - has managed to so adroitly, or luckily, escape U.S. military and diplomatic intervention. Rather, Venezuela has felt the more gradual impact of a petroleum-driven cultural invasion bearing many superficial aspects of the "American way of life".' (Judith Ewell)

Negotiations in bloc, with Mercosur don't seem viable. The economic, political and social situation of the Andean Countries is not very attractive for the Southern neighbors. In particular, the poor economies of Ecuador and Peru as well as the political instability, plus the drug and guerrilla situation in Colombia are some of the major aspects that stand against an understanding between the two groups. On the other hand, Mercosur's political and economic situation is much better of than the AP. They would have to give much more space in a negotiation with the AP as a group and it would be more favorable to add the nations to Mercosur in a one by one basis.

A major aspect to take into consideration when we look at Venezuela is its position as one of the world's largest producers and exporters of petroleum. Oil revenues represent more than 90 percent of the country's exports. This fact, directly affect the performance of the economy, making it unstable and very vulnerable to the changes in the volatile oil business. The strong inflow of foreign exchange creates an artificial situation with little incentive for other industries, and the manufacturing industry in particular. Being Venezuela a country of about 23 million people, the market size is not a big incentive either for investing in manufacturing. Especially in times of high oil prices, Venezuela enjoyed an artificially strong change rate that favored imports and affected the national production (Elio Londero et al).

As a respond to that situation, the Venezuelan government has participated directly in industrial production and many other areas of the economy, providing controls and incentives to export. Just like in the rest of Latin America, Venezuela had a policy of ISI from the 50's up until the 80's. During all this time, The country enjoyed social and political stability, as a consequence of the overall performance of the economy. High oil prices helped sustained an average growth of 6% a year for the period as well as 3.1% inflation. The National Plan was to use the rents generated by the country's oil wealth to promote the development of other sectors of the economy, particularly manufacturing, with the idea that the domestic manufacturing industry could supply the local market and eventually begin to export.

In the early 80's, with the oil shock, the economy stumbled, entering in a non-growth and rising inflation period. Oil exports fell dramatically from $20 billion in 1981 to $13 billion in 1983 and bellow $8 billion in 1986. The bolivar collapsed gradually from an official rate of 4.3 bolivars per dollar in 1983 to 14.5 bolivars per dollar in 1988. The economic program included radical cut of public spending, import prohibitions to incentive non-oil economic growth, price control and a system of exchange with preferential treatment for certain sectors in a case by case basis.

By late 1988, inflation reached 45 % and real interest rates became increasingly negative. Real money declined even more, while the fixed rate remained at 14.5 bs/$, causing a 200% foreign exchange premium. Most portfolios had liabilities in bolivars and assets in dollars to benefit from the floating rate. The political and social situation of the country became critical and on top of that, the tight control of the economy opened a huge space for corruption in the government, which lowered even more the credibility of the political system.

In 1989, the new elected government of Carlos Andres Perez had to face several major problems. A very low liquid international reserve level ($300 million) with 200 percent exchange premium and huge fiscal deficit of about 12% of GDP. The financial system was severely repressed and suffering from growing desintermediation. The repressed inflation created a situation of speculative inventory accumulation, which caused a shortage in basic products. The government decided to launch a policy package based on liberalization of the economy, lowering of external tariffs, a floating exchange rate of 42 bs/$. Price controls were eliminated and public-sector goods and services were raised. Inflation passed the barrier of 100%. All this last factors were determinant in a social reaction that ended with generalized riots and a need for military intervention in February 1989. Perez administration's received very little support even from the government party itself. Two intents to overth! row the government followed and finally the destitution of the president in 1993 ended a period of extreme social and economic instability.

Following, from 1993 through 1998, the elected president Rafael Caldera, led a period of recovery of the stability and credibility of the democratic system. Caldera's administration did a good job in renegotiating with the IMF and recovering the necessary international credibility to promote FDI in Venezuela. The Oil sector was opened for foreign investment in several areas, which brought extra income that allowed the state to invest in the recovery from the financial crisis and economic stability of the country. The inflation was lowered and remained below 30% in 1998. The exchange rate reached 560 bs/$ in an open floating exchange system. However, the privatization process as well as liberalization of the economy followed a very slow pace, with a government that based its political and social stability on populist measurements. The educated part of the population was expecting deeper radical measurements and hoping a faster recovery of the economy, which caused a disconte! nt among scholars and several political sectors in the country. On the other hand, the populist measurements of the government were not enough to calm the thirst of the majority poor and uneducated population. Then the fall in the price of oil worsen the situation and set the stage for a dramatic change in the political arena in Venezuela.

The leader of the revolutionary movement that attempted to take the power in 1992, Hugo Chavez Frias, was elected president in democratic elections for the period 1998 - 2003. According to the minister of external affairs, Venezuela is at the beginning of a new stage in her history, a deep transformation of the democratic system. The new president was accused during his presidential campaign of many things by his oppositors that expected to remain in power after so many years of "traditional democracy". Chavez was seen as a threat to the democratic system and an international campaign of discredit was started against him. His evident strong temper and lack of "political correctness" added to the situation and the international business community took a position of wait and see.

Venezuela is going through one of the most critical times in her democratic history. Members of the congress that belong to the "old group" and that still remain with quotas of power are blocking the action spectrum of the new government. With this scenario, Chavez's administration is trying to handle a fragile transition in which a new constitution will be written and many new faces are leading the country. Ex-military individuals that supported Chavez, have an obvious participation in several sectors of the administration, and the active military forces are combining with civilians in several emergency programs to attend the immediate needs of the poor class. Only this passed weekend (04/25/99), a consult was made about the proposal that the new government introduced for a new constitution, and it was supported for a vast majority of the population (over 80%). Obviously, the new president enjoys a favorable political situation that can afford to pursue deep and difficult ! transformations. His credibility however, still remains questioned by international observers and the FDI needed to re-activate the productive apparatus of the country has not arrived yet.

Once said all these, let's focus on regional integration. Chavez has expressed his interest in promoting the process of regional integration and Venezuelan incorporation to the Mercosur. He has started conversations with Brazil and Argentina, and has manifested his intention of performing a leading role in the integration process of the hemisphere. However, he so far maintains the position of negotiating with Mercosur and the AP as a whole. Following there are several pieces of articles, found in local newspapers that may help us to clarify the internal panorama.

The research question stated in the introduction to this paper, was a multiple question that aims to the description of the current Venezuelan role in the process of Regional Integration in South America.

Should Venezuela join the Mercosur? Why? Why not? If, so, what is the better scheme of negotiation given the membership with the Andean Pact?, and how much the situation influence a possible South American Free Trade Area? Would Mercosur be interested in the participation of Venezuela?

After going through many aspects that relate to these questions in certain detail, it seems pretty complicated to come out with a single and simple answer (I would say yes). But it is, however, quite clear how the general panorama is developing.

Regarding the Andean Pact, it is quite difficult to reach an agreement between Mercosur and the AP as a whole. The structure of the AP is much more rigid that the Mercosur scheme. In the AP, negotiations are done in packages, while in Mercosur the agreement is more based on one by one negotiations. Venezuela has a very important role on the process and but the keys for a broader integration are still hidden.

There are many obvious reasons for Venezuela to wanting to joint the Mercosur. But most importantly, there are many reasons to integrate with Brazil. At times, I see a clear similarity between the Mexico-US situation and the Venezuela-Brazil relation. I won't elaborate much on that, but I will leave it open for your own consideration. Considering our experience on NAFTA along this course, to have this mental frame may be useful for all of us to comprehend and speculate about the Venezuela-Brazil situation.

From the point of view of Brazil, Venezuela represents a strategic partner. We already mentioned the convenience that it is for Brazil, an importer of Oil, to somehow have inference in the Venezuelan Oil industry or at least, preferential treatment. Even more important for Brazil is the need for a more intensive activity in the north. After the signing of Mercosur, the states of the north part of Brazil have been some how excluded from direct participation of the benefits of the agreement. The association of Venezuela to this mechanism of regional integration would allow the northern states of Brazil incorporate more fully into the dynamics of Mercosur. Based on these two major factors Brazil has lobbied for a preferential treatment to Venezuela as a member of the Free Trade Area.

Let's explore some of the advantages that incentive Venezuela to joint the Mercosur.

Brazil represents a huge market for a few sectors in which Venezuela has comparative advantage, especially in the energy and mine sector, with focus in the Venezuelan Orimulsion for the generation of electricity, but also in other smaller sectors such as the textiles and some agricultural products. Venezuela has, for example, a vast amount of mine reserves in the southern part of the country that is yet to be developed. The hydraulic resources are also concentrated in the southern part of the country.

Venezuela has a program called "The Conquest of the South" which consists in the development of the resources in the southern part of the country. However, the government has lacked the financial and technological resources to accomplish it. International parties have been kept out of the plan with the nationalization of the mining industries in Venezuela. High costs of transportation in the almost unpopulated area and several other factors related to national security were some of the limitations that showed up.

However, in the last several years, the transportation infrastructure has been improved substantially and the population in the north of Brazil has increased considerably. On the other hand, Venezuela has already opened its market to Colombia, U.S. and Mexico, with pretty low tariffs, and having Brazil entered more directly in the Venezuelan market wouldn't have such an impact on the domestic industry.

Furthermore, beside the FDI that may be coming from Brazil, being associated with Mercosur, Venezuela would be much more attractive for investors from the whole world that want access to this market. Venezuela has a cheaper labor, abundant and cheaper energy and a weaker monetary unit. Geographic location is another advantage, being the entrance to South America from European and U.S. coasts. Venezuela could be an important piece in the integration of The America, given its membership in the AP, G-3 and Mercosur.

Figure 1. Political Map of South America

Graph 1. Mercosur. Inflation Indicator (Consumer Price Index).

Graph 2. Mercosur. Trade Volumes (External Exports & Intra Trade)

Masaaki Kotabe. "The imminent Emergence of the South American Market" University of Texas at Austin 1998.

Summit of the Americas Center. "Report on Mercosur". Florida International University by AmericasNet. 1998.

Summit of the Americas Center. "Report on the Andean Pact". Florida International University by AmericasNet. 1998.

Archives of El Universal (Newspaper) 1996 to 1999. Caracas, Venezuela.

Archives of El Nacional (Newspaper) 1996 to 1999. Caracas, Venezuela.

"Economic Survey of Latin America and the Caribbean". United Nations. 1996.

Elio Londero and Simon Teitel. "Resources, Industrialization and Exports in Latin America". Great Britain. 1998.

Judith Ewell. "Venezuela and The United States". University of Georgia Press. 1996.

Victor Bulmer-Thomas. "Regional Integration in Latin America since 1985: Open Regionalism and Globalization". (class material)

Mercosur 2000. "Economic growth and new investment opportunities". Centro de Economia Internacional. Argentina. (class material)