Brazil expected to lead Latin America’s economic integration

Creation of a common environment is fundamental for nations in the region to survive changes in the global economy, says Facamp and Unicamp professor Luiz Gonzaga Belluzzo.

By Elton Alisson

Agência FAPESP – Growing overseas investments on the part of businesses from economic powers in peripheral nations over the last 30 years have led to an unprecedented polarity in the global economy. On the one hand, groups of nations such as those in East Asia have benefitted from the flow of capital and have become industrialized. On the other hand, developed nations such as the United States and the member countries of the European Union, as well as emerging nations such as Brazil, are currently going through a process of de-industrialization.

To survive these shifts in the dynamic global economy, Latin American nations must join economic forces. This process can—and should—be led by Brazil.

This is the assessment of Luiz Gonzaga Belluzzo, professor at the Universidade Estadual de Campinas Institute of Economics (IE/Unicamp) and the Faculdade de Campinas (Facamp), presented during the Fourth Latin American Advanced Programme on Rethinking Macro and Development Economics (Laporde), held January 7–11 at the Fundação Getúlio Vargas (FGV) in São Paulo.

Organized by the FGV São Paulo School of Economics’ Center for Structuralist Macroeconomics Development Studies (Cemacro/EESP/FGV), the event was part of the FAPESP São Paulo School of Advanced Science (ESPCA) and provided a forum for discussions on the macroeconomics of development from several perspectives.

Participants at the meeting included professors Ha-Joon Chang and Gabriel Palma from Cambridge University (England), Jan Kregel from the University of Missouri (United States) and Jan Priewe from HTW University in Berlin (Germany). The Brazilian speakers, in addition to Belluzzo, were Luiz Carlos Bresser-Pereira from FGV and Nelson Barbosa, executive secretary of the Ministry of Finance.

According to Belluzzo, the reconfiguration of the global economy that we are witnessing today—in which some countries such as China have made economic leaps and are now home to most of the world’s production—has no parallel in history.

This is the case because, unlike events in the 19th century, when countries such as the United States and Germany emerged as isolated industrial powers that changed the direction of the global economy, what we are seeing in Asia today is the unprecedented formation of a regional economy with a high degree of integration in manufacturing production.

“The Asian economy has transformed itself into a highly productive and integrated manufacturing hub where some nations, such as China, produce parts and components for consumer goods, whereas others, such as Japan, provide capital goods. This is amazing and historically unprecedented. There are still 2.6 billion people in the region available for use [in the workforce] in this productive system,” noted Belluzzo, who is a member of the FAPESP Board of Trustees.

China already exports more consumer goods, such as clothing, to the U.S., Canada and Mexico than all 27 nations in the European Union combined. In addition to producing and exporting products of lower aggregated value, China is moving into more advanced fields of technology, such as electrical machinery and computer components and equipment.

Through mechanisms for technology absorption, China has already attracted a significant share of the R & D systems associated with large European and North American companies.

“If this trend of technological ranking and regional integration in Asia continues at its current pace, there will most likely be a tremendous polarization of global manufacturing production by the countries in the region, which is unbearable from the point of view of development in other nations, including the already developed ones,” affirmed Belluzzo.

Belluzzo says that joining economic forces is the best thing that Latin American nations can do to confront the growth of the Asian regional economy, which is beginning to develop its own regional monetary and financial institutions.

According to Belluzo, Latin American countries don’t have the production scale to survive on their own as modern industrial economies.

“The only nation in Latin America that has the conditions to take on the Asians by increasing its production scale is Brazil. But Brazil won’t survive either if it doesn’t move ahead together with other Latin American nations. Because of this, and because it is the economy with the most qualifications in the region, it will have to lead this process,” said Belluzzo.

According to the professor, Mercosur made it possible to move forward on the question of commercial integration of the nations within South America. However, to broaden this project to include Latin America, the creation of financial institutions must be thought out—a bank, for instance, to fund investment projects within the region and help drive growth toward a single economic space, similar to what is being created in Asia.

“Latin America’s economic integration is inevitable if the countries in the region are to survive the rise of the new economic space that has emerged in Asia because of a new competitive movement,” affirmed Belluzzo.

“Nations today no longer compete with one another. It is corporate or productive systems that do the competing. Because of this, nations must adopt policies to defend their national economies, which are very different from the ones that existed in the past,” said Belluzzo, who served as the Secretary of Economic Policy for the Finance Ministry from 1985 to 1987 and the Secretary of Science and Technology for the State of São Paulo from 1988 to 1990.

Origins of the phenomenon

According to Belluzzo, this new way in which the global economy is functioning, with productive investments flowing from central nations to peripheral ones, began in the 1980s and grew in the 1990s. The trend coincided with changes in economic policy in developed nations.

Beginning in the 1990s, changes in economic policy in the United States caused the American capital account (which registers all transactions of funds, loans and transfers in the country) to operate at a surplus.

In contrast, its current account—which registers deposits and spending related to the sale of goods and services and transfer payments, such as company financing for overseas investment—began to run systematically in the red, or at a deficit.

Meanwhile, the Chinese current account, which oscillated between small deficits and small surpluses until the beginning of the 1990s, began to run at a strong surplus.

“This happened at the same time that American capital started going overseas. During this time, there was a huge rush of American companies to China,” explained Belluzzo.

The economist says that since then, North American and European investments in Asia, especially China, have intensified. As a consequence, the economies of the nations where these investments originated, and the economies of nations that compete with China (such as Brazil), are undergoing a de-industrialization process.

“Clearly, the European and Brazilian economies are de-industrializing themselves as the American economy did. Brazil is losing important links in its industrial chain, such as the capital goods sector, which is shrinking,” said Belluzzo.

In the economist’s opinion, however, the country is not condemned to a devastating de-industrialization process. “Brazil has great potential for developing certain sectors related, for example, to the pre-salt layer and for playing a protagonist role in the integration of Latin America,” he noted.

FAPESP funding

The LAPORDE program has been held since 2008 by FGV and is based on experience from the Cambridge Advanced Programme on Rethinking Development Economics (CAPORDE), promoted by Cambridge University from 2002 to 2008.

The event, funded for the first time by FAPESP, brought together 40 post-graduate students—half from Brazil and the other half from other countries. The Foundation paid all travel, room and board expenses for the participants.

“The support from FAPESP meant more foreign students were able to attend from different parts of the world and more qualified students were able to participate than in previous years,” said event coordinator Bresser-Pereira to Agência FAPESP.

“We had to turn down a large number of Brazilian and foreign students because of the increased number of applications. This was thanks to FAPESP,” said Bresser-Pereira.