The lowering of trade barriers in Latin America and the Caribbean has resulted in fast growth in the regional economy and wages, according to a new Inter-American Development Bank (IDB) report, Trading Promises for Results: What Global Integration Can do for Latin America and the Caribbean.
In addition, the report recommended policies that will ensure the region is in a better position to take advantage of trade liberalisation and make its benefits more real to citizens.
Edited by IDB researchers Ernesto Stein and Mauricio Moreira, Trading Promises for Results forms part of the annual Development in the Americas (DIA) flagship research publications series that analyses key development topics and advises policymakers on possible options.
“Trade liberalisation did not turn out to be the silver bullet that put us in the same growth leagues as some top-performing Asian economies…”– Inter-American Development Bank Chief Economist Eric Parrado
The research outlined that the average tariff cut of 56 per cent that took place in the region between 1990 and 2010 sped up the region’s average annual per capita gross domestic produc (GDP) growth by 0.6 percentage points.
However, while this is good news, there is still apprehension in the region about the benefits of more openness, in part because initial expectations were so high, the study showed.
“Trade liberalisation did not turn out to be the silver bullet that put us in the same growth leagues as some top-performing Asian economies,” said IDB Chief Economist Eric Parrado. “However, trade has clearly been a positive contribution [to] the region’s well-being and development, and we should resist temptations to return to our closed economic policies of decades past.”
Notwithstanding, the report said Latin Americans back more trade by big margins, though support drops sharply when presented with information emphasising negative consequences such as job losses in vulnerable sectors.
“Policies should be consistent with global integration rather than bolster uncompetitive sectors and firms…”– Inter-American Development Bank
As such, the IDB commissioned Latinobarometro to carry out a survey and an experiment to better understand how framing affects the level of support for free trade.
Almost three out of every four surveyed said they favoured increasing trade with other countries, with support running highest in Venezuela, Honduras, and Uruguay. Almost six out of every ten Latin Americans equate trade with more jobs. However, when providing information about potential job losses in vulnerable sectors support for trade reduced from 73 per cent to 46 per cent.
Even though liberalisation benefits the regional economy, it does have winners and losers, with special interest groups linked to import-competing sectors often blocking trade reforms.
To truly derive the benefits of trade liberations, the report recommends a type of ” institutional architecture” in the trade policymaking processes in the region that will lead to better outcomes.
“Policies should be consistent with global integration rather than bolster uncompetitive sectors and firms, and governments should seek successful strategies in sectors such as modern agriculture and services-two sectors with considerable technological progress in which the region has comparative advantages — and not just in manufacturing,” the study advised.
To this end, the report called on governments to look beyond the traditional agenda of trade agreements, trade facilitation, and foreign investment attraction. Rather, policymakers should work on ensuring labour markets are not only more flexible but also provide help for those who lose out to trade to transition to competitive firms and sectors, the IDB said.
“We are confident that governments can move into these new frontiers in order to facilitate access to more affordable goods and services, as well as to create new economic opportunities and well-being for more citizens.”– Manager of the Trade and Integration Sector in the IDB, Fabrizio Opertti
“We are moving into a world where competitiveness is determined not just by tariffs but by overcoming regulatory, logistics and information costs, as well as by incorporating new technologies,” said Fabrizio Opertti, manager of the Trade and Integration Sector in the IDB.
“We are confident that governments can move into these new frontiers in order to facilitate access to more affordable goods and services, as well as to create new economic opportunities and well-being for more citizens,” he added.