The MERCOSUR was created by the Treaty of Asuncion, signed on 26 March 1991 by the Presidents of Argentina, Brazil, Paraguay and Uruguay. Five months later, the parliamentary ratification process was completed, and the Treaty was ready to be implemented.

The new common market is of clear relative importance in Latin America. In 1989, according to ECLAC figures, these four economies represented approximately 50% of Latin America's gross product, 50% of the region's industrial output and intra-regional trade, and 33% of its total foreign trade. The MERCOSUR today accounts for 43% of Latin America's total population and 59% of its surface area.

Southern Cone integration is not an isolated case. Currently in Latin America there is a tendency to reevaluate the concept of REI. It is likely that the emerging NAFTA will form the basis of the trade section of the EAI, along with the older integration schemes operating since the 1960s in the Andean region, Central America, and the English-speaking Caribbean.

The MERCOSUR is not simply an economic project. Originating in the 1985 PICAB, it has always had a clear political orientation based on the goals of peace and democratic stability in the Southern Cone. It has even resulted in significant agreements in the nuclear field. Hence, although its principle measures relate to trade, production and investment, it transcends economics and penetrates the broadest of political issues.

The notion of a common market is a popular one, and has had a marked impact on the respective societies. In Argentina, Paraguay and Uruguay, and in the states of southern Brazil, this is reflected in the interest of, and support from, all social sectors, and especially among the young. The Treaty has been ratified unopposed in the national parliaments. Intense debate continues among businessmen, unions and in academic circles, but in general, this serves to demonstrate a positive attitude towards the challenges and opportunities of integration. However, there is some concern that not all the necessary conditions for a common market can be met within the timetable laid down by the Treaty of Asuncion.

The MERCOSUR is linked with the conception that its respective societies have of the world around them as they approach the year 2000. It is associated with a perceived need to use an international framework to consolidate democracy and to carry out economic transformation, via technical progress and a competitive entry into world markets. This is the source of the MERCOSUR'S mass appeal: sub-regional integration is synonymous with change and the future.

It is, therefore, hard to interpret the rationale behind the new common market purely in terms of international trade theory. This would be akin to analyzing EC history, or the current Eastern European transformation process, solely in economic terms. In an unstable and unpredictable international arena, increased cooperation between a group of neighboring countries is of great political value. Containing fragmented forces will be a difficult problem in many regions over the coming years, even in large countries. Events in the Soviet Union demonstrate this. Multinational, essentially political, integration thus requires a methodology that is characteristic more of international relations than of economics.

Current events in Latin America and in Eastern Europe confirm something previously demonstrated, first in 1950s Western Europe, and then in 1970s Mediterranean Europe. It is only through democracy that market development can be sustained, based on competition, private enterprise, and trade liberalization. This is true of both domestic markets and of common markets between a number of countries.

REI is also a political process, in as much as the current global climate is conducive to competition and negotiation. It is clear that integration enjoys political support, at least in the MERCOSUR countries. These four respective societies have structures and attitudes that favour competition, and which coexist with further attributes that facilitate dialogue, negotiation, and community spirit. It, therefore, takes longer to establish a true single market among a group of countries, than it does to set up a simple customs union, or to create the other basic components of a common market and economic union.

Economic integration is a gradual process. Progress is made by consecutive steps, which are not necessarily strictly linear nor exactly as originally planned. Set-backs and stagnation may be relatively frequent, as shown by European integration in the 1960s. The nations of the Southern Cone have adopted just such a realistic framework in creating the MERCOSUR. The Treaty is pragmatic precisely because it reflects this approach, and not because its designers were ignorant of the most sophisticated methodology available for the development of an integration process; the Treaty negotiators were obviously well aware of the methods used in the European integration process. But, they were equally familiar with frustrated attempts at economic integration, particularly in the Americas. The latter often attempted to skip stages and, for example, to put into immediate use institutional mechanisms that are even more ambitious than those now used by the MERCOSUR.

Continuity and Innovation in the MERCOSUR Strategy: 1960-1991

The MERCOSUR has elements of continuity and innovation. The current integration process did not begin in 1991, but originated in a process begun at least three decades ago. Nevertheless, there are fundamental conceptual and methodological differences with earlier stages. The roots of the new common market lie in the creation of LAFTA in 1960, though it is possible to find even earlier antecedents. For example, there was an initiative to create a customs union between Argentina and Brazil in 1940, and there have been subsequent bilateral agreements.

Most of the present preferential tariff treatment between the four member states dates back to the LAFTA period. The same is true of the lists of exceptions incorporated into the respective sections of the Asuncion Treaty. The system of payments and reciprocal credits is also a valuable legacy of the LAFTA, and has been of enormous benefit to the development of intra-regional trade, including commerce between the MERCOSUR countries.

Equally, the integration process between Argentina and Brazil, and with Uruguay and Paraguay, arises from the LAIA. Article 7 of the 1980 Treaty of Montevideo introduced "partial" agreements - in other words, accords to which not all eleven LAIA member states were necessarily party to, and which are viewed as steps towards the ultimate goal of a Latin American common market. This instrument shows how regional integration may be achieved using different forms and at varying speeds. The LAIA is thus a "common house" for all the economic integration processes under development in the region. It includes the MERCOSUR, the Andean Group, the free trade agreement between Chile and Mexico, and dozens of bilateral and sectorial agreements. Assuming some modifications to the current Treaty of Montevideo, the LAIA might even become the "common house" for economic integration across the Americas. It is an almost ideal framework to develop the regional free trade system envisaged in the EAI.

The MERCOSUR is linked to LAIA precisely because it is a "partial" agreement of the type provided for in the Treaty of Montevideo. It took the form of an economic complementarity agreement (specifically provided for in Article 11), and was later ratified in Resolution 2, as passed by LAIA's Council of Ministers. In this sense, the MERCOSUR has the same juridical ties with LAIA as does the Cartagena Agreement, which created the Andean Group, and the recently-established free trade area between Chile and Mexico. By virtue of Article 44 of the Treaty of Montevideo, the MERCOSUR'S advantages are not extended to other LAIA members. Nevertheless, since the four member states also belong to LAIA, the MERCOSUR can use the technical services offered by LAIA's Secretariat General in the tariffs, customs, and statistical areas.

The MERCOSUR calendar is feasible precisely because of the continuous efforts made since I960! In this sense, if does not seem appropriate to brand LAFTA and LAIA as failures. It is apparent that the final objectives pursued were not reached, yet significant contributions were made towards expanding reciprocal trade, developing business links and services valuable to economic integration, and setting up customs and payments mechanisms. Furthermore, the latter two schemes have allowed Latin American nations to build up integration experience. Thanks to the accumulated frustration with both regional organizations, the MERCOSUR countries and their business communities now have a clearer view of the economic integration paths they should avoid.

The experience accumulated over thirty years by LAFTA and LAIA was apparent in the MERCOSUR'S major predecessor, PICAB. Bilateral integration between South America's two biggest economies was based on the premise that progress towards more ambitious objectives depended upon fewer countries being involved. Losses in width were compensated by increases in depth. The PICAB was formalized through the 1988 Integration Treaty between Argentina and Brazil, and came into operation in 1989. But, it is more than a mere precedent for the MERCOSUR given that it forms- part of the "backbone" of current economic integration in the sub-region. Its main instrument is the November 1990 Economic Complementarity Agreement (Acuerdo de Complementación Económica, ACE), which also falls within the permitted scope of LAIA. Under the ACE, Argentina and Brazil have undertaken obligations similar to those assumed jointly with Paraguay and Uruguay in the Treaty of Asuncion.

To understand the MERCOSUR, it is vital to bear in mind that there are two simultaneous processes with identical aims and timetables, but which remain formally separate. This reflects distinct economic circumstances. Argentina and Brazil, the two largest Southern Cone economies, account for 97% of MERCOSUR'S GDP, 98% of its industrial output, 93% of its trade, and 96% of its population.

From 1985-1989, Argentine-Brazilian integration took a gradual and selective approach. It emphasized intra-sectorial complementarity through sectorial agreements, particularly in the capital goods, food, and automotive industries. It also emphasized cooperation on advanced technology, especially in the nuclear and bio-technological fields. The methodology was also highly practical: it used very basic inter-governmental mechanisms, rather than common bodies, and enjoyed strong political support at the highest level, channeled through direct diplomatic contacts. The 1988 Integration Treaty set a relatively generous ten-year timetable for the establishment of a binational common market. This stage of bi-national integration gave a positive boost to prospects for trade expansion, especially for industrialized products. Above all, it created a favourable climate for political and business cooperation that greatly facilitated progress towards the MERCOSUR.

If MERCOSUR has strong elements of continuity with respect to the LAFTA- LAIA-PICAB process, it has in turn introduced marked innovations in both focus and methodology. Following the July 1990 Buenos Aires Act, Presidents Carlos Menem and Fernando Collor de Mello decided to accelerate the timetable substantially, cutting it by four years. They also introduced an automatic, linear tariff reduction programme (a tariff "shock"). NTBs were drastically reduced. Simultaneously, steps began to formally include Uruguay and Paraguay in the future common market. Chile preferred to wait before deciding whether to join the sub-regional process.

In retrospect, Uruguay's participation in the Mercosur process was inevitable and originates in the LAFTA-LAIA sequence. It is very relevant that both these basic treaties were signed in Montevideo, and both organizations have been based there. Furthermore, the then Uruguayan President, Julio Sanguinetti, and Foreign Minister Enrique Iglesias played a crucial intellectual and political role in launching and developing the sub-regional integration process initiated in 1985. Uruguay was linked to Argentina and Brazil through two partial-scope LAIA agreements: the Argentine-Uruguayan Economic Complementarity Agreement (Convenio Argentino- Uruguay o de Complementation Económica, C AUCE) and the Trade Expansion Protocol (Protocolo de Expansion Comercial, PEC) between Brazil and Uruguay. Most importantly, Uruguay had strong trade and economic ties with its neighbors as a result of a shared history and territorial proximity. In 1990,37% of Uruguay's total foreign trade was with Argentina and Brazil. Clearly, Uruguay could not be left out of a process that aimed to create a common market between its two principle trading partners by 1994. It fell to the government of President Luis Lacalle to take Uruguay into what was later to become the MERCOSUR.

In Paraguay's case, the restoration of democracy facilitated closer links with the sub-regional integration process. Paraguay lies at the heart of the River Plate basin and has strong political, commercial and energy ties with Argentina and Brazil. In 1990, 35% of its total foreign trade was with its two largest neighbors. Paraguay's gigantic hydro-electric projects (with Brazil at Itaipu, and with Argentina at Yacyreta) express a geographic and economic reality, full of political connotations. Thus, Paraguay could not be indifferent to events in neighboring states: it was vital that it joined the MERCOSUR.

MERCOSUR therefore implies continuity. It carries forward the efforts of LAFTA, LAIA and the PICAB. Moreover, it continues the notion of economic integration, though with fewer countries and in a profound political sense; the objective of a sub-regional common market, albeit using simple and pragmatic institutional methodology; the sectorial integration strategy inherited from the industrial complementarity agreements; and, with past efforts at physical integration, continuity is evident in terms of communications and transport. The important Hidrovia Paraguay-Panama project, to which both the IDB and the EC are closely tied, and in which Bolivia also participates, is still a principal vector of sub-regional integration. This particular project incorporates a vast area of productive land - rich in natural resources - through the generation of employment and the introduction of new inhabitants.

But MERCOSUR is also innovative: it includes Paraguay and Uruguay, and leaves the door open for the incorporation of those LAIA member countries that do not belong to any sub-regional scheme; it cuts the timetable for a common market to just four years; introduces a programme of automatic, linear tariff reduction; and envisages both a CET and macro-economic policy coordination.

The MERCOSUR: Assumptions, Instruments and Timetable

The MERCOSUR'S principal innovation, however, is its concept of "outward-oriented" integration, intended to help make the member states more competitive internationally. This allows a mutual and self-supporting relationship to be established between REI and the economic adjustments taking place in all four member states.

For a long time, Latin America regarded regional integration as an extension of the import substitution industrialization strategy. In the 1980s, however, the strategic replanning of economic integration reached its peak. Henceforth, REI was conceived as part of a wider process aimed at creating internal and external conditions favourable to the international competitiveness of national economies. Thus, economic integration is now associated with the phenomenon of "opening" economies and societies, which has been introduced to most Latin American countries over recent years.

The basic assumption underlying the MERCOSUR is that the four countries have chosen a path from which there is no turning back. This route leads towards the consolidation of democracy, economic transformation through the incorporation of technical progress under conditions of social equality, and competitive entry into world markets. These three phenomena are closely linked and are self-supporting.

In practice, the basic suppositions underlying the MERCOSUR are reinforced by the four member states' current market-liberalizing policies within a democratic framework. This endows the new common market with both viability and vitality. Yet, its success is also dependent on the success of these economic and political transformations. In other words, the MERCOSUR is an integral part of the profound changes occurring in its member countries.

The current working timetable seems short, but several factors should be kept in mind: this integration process is intended to be permanent; there is only limited time available to introduce the drastic economic changes needed by any country wishing to compete in the world economy; four years is not a short period of time if one considers the progress made between Argentina and Brazil in the run-up to the MERCOSUR, and particularly on trade over the past two years.

Argentina, for example, has substantially reduced its external tariffs and drastically cut its NTBs. Today, its economy is one of the most open in the world. In contrast to many industrialized economies, moreover, its agriculture is efficient even in the absence of subsidies and protectionist barriers. Brazil, for its part, is substantially opening its economy to world trade and has recently eliminated its market restrictions on the strategic computer sector. Both countries are undertaking bold economic deregulation, privatization, and legal reforms to be able to adapt to developed world norms.

The viability of the MERCOSUR timetable stems above all from macroeconomic stabilization policies now being implemented, which are aimed at fiscal and monetary stability, and at substantially reducing inflation. Despite the differences in form and pace, and despite problems or set-backs, there is a perceptible trend towards stability, economic growth and trade liberalization. This will facilitate structural competitiveness and, in turn, assist the efforts of the business sector. The MERCOSUR must then be seen as a sub-product of deeper internal processes, which have their own aims and dynamics. Relevantly, it is believed that the creation of a sub-regional competitive environment can foster substantial progress towards stability and economic growth.

Two practical corollaries may be drawn from the strategic planning behind the MERCOSUR and from its basic suppositions. One is that the four-year timetable for setting up a customs union, and for making progress on elements linked to it, should be viable. Certainly, a significant gap remains between Brazilian tariff protection levels and those of the other three member states. But progress is currently being made towards greater macroeconomic policy harmonization. This should make it easier to negotiate the CET, which must come into force by 31 December 1994. The Treaty of Asuncion reflects the member states' commitment to such a CET and to greater international competitiveness in each national economy.

But the Treaty also implies that it is feasible to coordinate macroeconomic policies, gradually, and in line with the programme to open up intra-regional trade. It is assumed that the four countries will manage to control inflation and achieve fiscal and exchange rate stability. If not, the basic suppositions behind the MERCOSUR would be called into question. In that case, neither the strategy nor its instruments would be completely viable, at least as currently set out in the Treaty of Asuncion. It is here that attention should be focused in trying to resolve the current problem of asymmetrical costs - particularly in terms of capital, labour, and energy - under conditions of relative competitiveness between the member states.

When considering timetable viability, we must bear in mind that the member governments assume the MERCOSUR integration process to be irreversible. This implies they have ruled out the possibility of extending the schedules for trade liberalization and for setting up a customs union. This does not necessarily mean that by the end of 1994 all major elements of the common market will be completely operational. The EC's own experience shows that this is a long-term task where, like democracy, only practice makes perfect. Nevertheless, it does mean that by the end of 1994, an essential phase in the task of shaping a single market will have been concluded. It also means that investors and other economic agents will be able to count on a sufficiently secure and stable legal framework upon which to base their decisions.

The second corollary is that the MERCOSUR is compatible both with the simultaneous insertion of member states' economies into the world market, and with their participation in other integration and multilateral cooperation schemes. This is particularly true of LAI A and the EAI, as well as the incipient concept of a hemispheric system of free trade. The "four plus one" agreement signed between the member states of the MERCOSUR and the United States creates a framework for bilateral consultation on matters of trade and investment. Clearly, this agreement is a first step towards what will probably later be full trade negotiations between the MERCOSUR and the NAFTA.

MERCOSUR can, therefore, be perceived as a lever to increase the member states' international trade capacity, forming part of a double-edged strategy to open up regional markets while gaining access to the world economy.

The Next Steps for MERCOSUR: Transition within Transition

The MERCOSUR process has to date been distinctly pragmatic and there is nothing to indicate that this will change in the future. It represents a new dominant trait in the political culture and foreign relations of most Latin American countries. In negotiating the MERCOSUR, governments have been very attentive to the requirements of, and the limitations imposed by, current circumstances. This link with the prevailing situation is ensured by very active private sector participation at all stages of negotiation.

The asymmetry of member states economies and, consequently, of the relative importance that each attaches to the MERCOSUR - especially Brazil - also invites pragmatism. A sound understanding of each member state's particular interests in sub-regional integration is a most valuable prerequisite for all economic analysts and agents seeking to predict the MERCOSUR'S evolution and prospects.

Until all member states achieve stable, sustained economic growth, progress towards the MERCOSUR has to be flexible enough to deal with unforseen situations. At the same time, however, this flexibility must not imply sending weaker signals to the market. The message remains clear: on 31 December 1994 there will be an integrated market, zero tariffs within the sub-region, a CET to facilitate competitive integration into world markets, and a suitable degree of macroeconomic policy coordination. The message means that complementary sectorial agreements can be used by businessmen as a basis upon which to restructure their own plans for new phase of economic development now underway in all four member states. The message goes beyond commerce. The MERCOSUR is not merely an instrument to facilitate trade expansion. On the contrary, it is oriented towards cooperation on investment and job creation. In essence, it is a tool for technological modernization and industrial restructuring.

Much of the task of building the common market will be carried out in the so-called transition period which ends in late 1994. Of course, much more work will subsequently be needed on ancillary elements of the common market. It will take a long time to perfect this market. In this sense, the 1991-94 period of the mercosur project is comparable to the years 1958-68 in the EC, when the customs union was established.

It is also possible to discern a period of transition within transition, covering the next two years. With the automatic advance of the liberalization programme, the MERCOSUR'S true parameters and the rules of the game will be agreed upon. This will be in line with economic stabilization in member states, and with the creation of new conditions for economic growth. Businessmen and investors will play a crucial role in determining the final shape of the common market. They will do so mainly by negotiating sectorial complementarity agreements. In this period, moreover, the transition towards a common market will be heavily dependent on economic performance indicators - particularly those of Brazil, the largest economy.

The trends towards stable, growing, open economies in Argentina and Brazil will be closely observed by foreign and domestic economic agents. Over the next two years, these trends will also determine the MERCOSUR'S degree of credibility. What issues will dominate the MERCOSUR agenda during this transition within a transition? At least three broad themes are apparent, though there are others.

First, rules must be set for intra-regional economic transactions such as trade, competition, technical norms, elimination of NTBs, facilities for trade and, in particular, a dispute resolution system to apply during the period of transition. The latter will have to be drawn up within one hundred and twenty days of the implementation of the Treaty. There are major precedents to draw from, particularly the US-Canadian FTA, and the mechanism created under the new Chile-Mexico FTA. It is also possible that member states will evolve a system of community law similar to the EC's, adapted where necessary to the specific requirements of Southern Cone integration. There could be an inter-governmental meeting prior to 31 December 1994, to lay down the final legal and institutional structure of the mercosur.

Second, suitable conditions for economic competition need to be created, through the coordination of macroeconomic and sectorial policies. Exchange rate, fiscal and credit policies will be priority objectives in the negotiations scheduled to take place in this initial transition phase. This also applies to their respective instruments, in so far as they relate to foreign trade and investment. Policy coordination will be conditional upon the degree of stability and transformation achieved in the national economies.

Third, sectorial agreements have to be prepared and negotiated. These aim at factor utilization and mobility, and at achieving efficient scales of operation. Work has already started in the steel, chemicals, petrochemicals, textiles, automotive, electronics, paper, and agro-industrial sectors, with the active participation of the industrialists themselves.

With respect to the remaining areas, priority should go to agreement on the CET and on transport deregulation. Significant progress has been made on deregulation of land transport. It is also hoped that a similar advance can be made on maritime and river shipping, and even on air transport. Substantial progress is also expected over the next two years in electrical supply networks, gas exports, and communications.

There are several institutional mechanisms available to be used as a channel for work on the creation of the common market. One is the Common Market Group, the executive organ of the Treaty. Each national delegation consists of four standing members and four proxies, coordinated by their respective foreign ministries. Meetings were held every three months in 1991, even before the implementation of the Treaty. In some cases, such as that of Argentina, the national Common Market Group meets weekly, with senior civil servants and technicians from different areas of government in attendance. Ten technical sub-groups report to the Common Market Group, which meets on a quarterly basis. The Common Market Group has an administrative Secretariat, made up of civil servants seconded from the government of Uruguay (Montevideo hosts the Secretariat), and the other three governments. This is undoubtedly the embryo of a technical body that, in a not too distant future, may grow substantially, and be provided with far more resources.

Moreover, there is a Council of the Common Market. This is the senior body of the MERCOSUR, responsible for its political management and for the adoption of those joint decisions needed to attain the goals laid down in the Treaty. It consists of the national foreign and economy ministers, who can invite other senior government officials to attend. The Council must meet at least once a year, and be attended by the four presidents. The first meeting of the Council is scheduled for late 1991, once the Treaty has come into force (in October 1991).

Finally, informal meetings take place between the ministers of the economy and central bank presidents. The first such meeting took place in Montevideo in July 1991. It is intended that these meetings be held regularly, perhaps every two or three months. The idea is for senior officials, charged with overseeing the economy, to supplement this framework with frequent informal meetings, to keep each other abreast of any relevant changes at home or abroad.

In addition to these three levels of inter-governmental contact, there is a Joint Parliamentary Commission, composed of members of the respective national parliaments. Moreover, businessmen have already taken the initiative and formed joint action mechanisms. At the national level, the member governments have set up offices or commissions charged with following-up MERCOSUR matters, and with facilitating interaction between government, businesses and trade unions. Brazil, for example, recently created the portfolio of minister for integration affairs to ensure that the country participates actively in the MERCOSUR.

Conclusions

The MERCOSUR and at the hemispheric level the EAI form part of a newly emergent reality in the Americas. Whatever the final outcome, this will lay down the conditions for business and investment in the region. Such a new situation is strongly influenced by the processes of domestic change taking place in Latin American countries, as they move towards more open and competitive societies. Equally, it is influenced by the dramatic innovations at the global level over the last few years - whereby world competition is growing for markets, natural resources, capital, and technologies.

MERCOSUR is an integration project open to world trade and to international investment. It will, nevertheless, only be feasible to the extent that international protectionist tendencies are controlled. Hence, the results of the current Uruguay Round cannot be a matter of indifference for current Latin American attempts to gain competitive integration into world markets.

Due to the MERCOSUR'S economic and political importance in Latin America, the mere fact that it has been launched can only be good news for a world affected by instability, disintegration and setbacks in the economic development of vast regions. Whether Rufin's pessimistic vision of world evolution (Rufin, 1991) or Dahrendorf s optimistic view (Dahrendorf, 1990) prevails, will largely depend upon the evolution of democracy, trade and investment in the Americas over the coming years.

The values that have enabled millions of individuals in the industrialized democracies to enjoy such unprecedented levels of freedom and well-being, are today struggling to take root in Latin America. This struggle is of interest to the industrialized world. The Southern Cone countries, in particular, offer attractive opportunities for productive investment. The MERCOSUR'S size, natural and human resources, competitive advantages, and trade liberalization efforts could make the sub-region a hot favourite among global economic agents - in their search for platforms from which to launch themselves competitively into world markets.

Further, the member states have, over time, developed a great capacity to absorb men and women from across the world, and particularly from Europe. The MERCOSUR nations have obviously mastered the social technology of the "melting pot". Large waves of immigrants of all origins have, at various times, helped populate the sub-region - particularly during times of economic growth.

One could almost say that growth and immigration have been synonymous in these countries.

Despite some bleak visions, it is legitimate to posit a more optimistic view: a MERCOSUR made up of growing economies, open to trade and to international investment, and able, as in the past, to absorb capital and immigrants with the resources and the will to work. MERCOSUR is not yet a reality. But the will to make it so is already there, as are the internal and external conditions necessary to achieve it. The Southern Cone integration process is bound to have a profound effect on the development of these four nations, and on their international economic relations, including those with the EC.