WE are on the threshold of a new era in the economic development of Latin America. The newly awakened aspirations for a better standard of living of a fast-growing population cannot be satisfied by our inadequate economic system, which today is as dated as the Model T Ford. In order to make more efficient use of our natural resources we must apply technicology to agriculture, develop sound industrialization and create a common market, without which any program for development of agriculture and industry would have very limited possibilities.

To understand why a common or regional market is an essential part of a master plan for the acceleration of our economic growth we must look backward for a moment. After World War II the economic development of Latin America was progressing at a highly satisfactory rate; over-all production, income and consumption showed a constant upward trend. Economic growth during the decade 1945-1954 exceeded the United States performance for the same period. In the United States the gross national product increased about 30 percent, while that of Latin America rose 50 percent. Although the population of Latin America increased by 24 percent in the same decade (compared to 16 percent in the United States), nevertheless the availability of goods and services grew substantially even on a per capita basis.

We were able to attain this remarkable rate of economic development in spite of the fact that we are mostly producers and exporters of raw materials and foodstuffs. There were two principal reasons: first, with the war came a tremendous demand for our raw materials at prices unheard of in the past; and second, we were at last--through education, sanitation and better communications--breaking away from retarding factors of a social, cultural and geographical nature that for centuries had kept our economic growth at a painfully slow pace.

Unhappily, we have not been able to maintain this rate of development beyond the first postwar decade. In 1956 the rate of economic growth slowed down and gross income increased no faster than the population; since then the trend has been downward. The extremely favorable conditions for our exports have gradually changed as prices of metals, foodstuffs and other raw materials have dropped substantially. But there are other factors of greater significance that will retard our rate of development if we are to remain chiefly producers and exporters of primary commodities.

There is every reason to believe that the present rate of 2.4 percent yearly growth in population will continue. A parallel increase in gross national product will be necessary just to maintain present levels of per capita incomes. But treading water will not be enough. The postwar prosperity which made possible the enjoyment of better living conditions for a growing middle class hardly touched the great underprivileged masses, which are awakening to the fact that there is a better life and that they have a right to enjoy it.

The rapid increase in population, plus the upgrading of living standards for a very large segment of it, will make greater demands on an economic system which, even with much greater efficiency, would still be a low producer of goods and services. I have frequently asked myself this disturbing question: How can we improve the lot of all our people if there is not enough production to go around regardless of how it is distributed?

Nearly 60 percent of the total population in Latin America is dependent on agriculture, which in most cases is primitive. We could increase our production substantially by opening up new lands to production and by introducing better farming practices. Modern technology could bring us greater yields per acre, per machine and per man. Doubling our production with half the labor force would be quite feasible. Greater efficiency in agricultural production to serve a larger population would release an important segment of our labor force that would have to seek gainful employment elsewhere. The process of industrialization will be the only way to absorb this excess manpower. The following figures give a vivid picture of the problem: In 1955 the population of Latin America was about 175,000,000 and it is estimated that this figure will have increased by a further 100,000,000 by 1975. Of this number, approximately 38,000,000 will be added to the labor force. If the trends registered in the last 20 years continue, we can estimate that only 5,000,000 of these will be absorbed by agricultural activities--and fewer still if, as is greatly to be desired, technical progress in agriculture is expedited. Thus, about 33,000,000 workers will have to seek productive employment elsewhere.

Industry in Latin America must therefore fulfill the dynamic function of absorbing surplus manpower from primary producing activities. The second task of industry is to supply all those manufactured articles which the underdeveloped countries cannot afford to import because exports of primary commodities and foodstuffs tend to increase at a much slower rate than the demand for imports.

The problem of Latin America is therefore to import what it can pay for abroad with its own resources and to meet the remainder of its growing demand for manufactured goods from domestic production. This is already being done to a limited extent. And as long as this process involved only staple consumer goods for which there is a large national market, the industrialization of Latin America in 20 watertight compartments caused no great concern. But now that our countries are entering the more complex fields of producer goods and consumer durables, involving heavy capital investment, we must have markets of wider scope than those offered by individual countries. The need for a Latin American common market is thus evident.

The establishment of the European common market has stimulated our thinking on this subject because we feel it will have important repercussions on the Latin American economy. While closer economic integration in Europe should increase the demand for Latin American products, the preferential measures which the European common market may establish for overseas territories and the technological revolution to which this project will give rise in Europe, both in agriculture and in the synthetic production of raw materials, will probably have unfavorable repercussions on our economies.

However, there is no intention on our part to imitate what is going on in Europe. Although our goals are similar, there are different conditions peculiar to each region which should be handled in different ways. The idea of a Latin American common market actually preceded the European plan. For a long time many Latin American countries have been aware of the weakness of trade between them as compared to their trade with other nations. Moreover, they realize that, besides the European common market and the British Commonwealth, the United States, the Soviet Union, China and India are in fact regional markets of enormous magnitude. Only Latin America remains divided into 20 separate economic units.

We believe that by breaking down these watertight compartments through economic integration we will accelerate productivity, give the whole region free access to raw materials, and enable the resources of the continent to be better utilized for economic development. There are indirect benefits that may be equally important. Many governments today are aware of the unpalatable remedies needed to cure the economic infirmities of their countries, but for political reasons they are unable to put them into effect. A common market would demand from all member countries certain commitments, and the necessity of abiding by the rules of the economic community would strengthen the hands of individual governments in making needed changes in their fiscal and monetary policies.

What effect will the Latin American market have on the economies of countries outside the region? We believe that they will be favorable, because an increase in per capita income in Latin America will mean a greater demand for products--especially industrial commodities--from the other countries. Undoubtedly, world trade will benefit from the expansion of Latin American production and the new demands to which the common market will give rise. Certainly, at the beginning there will be difficulties of readjustment, but the powerful flow of international trade will eventually receive a new tributary which will swell its volume to incalculable proportions. Only the type of goods purchased will change. Latin America will cease to acquire some goods in order to buy others, which it is in no position to buy today.

Most of the great advances in international trade have followed the exchange of manufactured goods among the industrialized countries; by contrast, the share of less developed areas in total world trade has registered a continuous decline, not only as compared to the prewar period but also to more recent times. Between 1950 and 1956, it dropped from 41 percent to 31.5 percent, and the decline continues.

The Latin American countries must export manufactured goods to one another. However, in my opinion and in the opinion of well-known economists, it is quite possible to imagine Latin America competing in the industrial market with the rest of the world. It can be done through modernization and specialization of our industries.

Another argument in favor of the common market is the stimulus which it would give to foreign and domestic investment. Investors would be greatly attracted where today they are discouraged by narrow markets that are rapidly saturated. Thus the common market would not only provide opportunity for largescale investments but investors would have greater confidence in the future of their enterprises. Such incentives are essential in order to attract foreign capital in sufficient volume.

Present conditions are not conducive to a greater flow of foreign capital to Latin America. In recent years the average of foreign investment has fluctuated annually between $400,000,000 and $500,000,000. Most of this money is made up of private investment from the United States and part of it is not new capital but the profits of former investments which have been plowed back. About 30 percent of this investment is designed to promote export activities, mainly mining and petroleum. This amount is quite inadequate for the normal economic development of Latin America. Investments designed to develop transportation, energy and other services which form the major part of public expenditure are very low, yet they are essential to pave the way for private investment. This is one of the most serious obstacles impeding economic development in Latin America today. Of course, it is recognized that the development of this region has to depend basically on our own resources, but they are not enough. Foreign capital is urgently needed, until national savings are adequate to sustain a significant rate of growth. We hope that the common market will lead to much more attractive conditions for investment.

The national governments concerned will have to decide on the structure of the regional market but it will be for private enterprise to give it life. The economic development of Latin America depends to a large extent on the action of the private "entrepreneur." It is essential that the Latin American entrepreneur should be given access not only to the sources of international capital but also to international technical knowledge on a footing comparable with that enjoyed by others. International technical assistance should be given to Latin American industry on the same scale that it is being extended to our agriculture. We Latin Americans realize that the main effort will have to come from ourselves. But countries which are now advanced and prosperous should remember that not one of them has been able to develop without the help of foreign capital and technical knowledge during the initial period of their economic growth.

Economic integration within the hemisphere could be a realistic possibility once the Latin American common market is in operation. I believe that breaking down economic barriers within Latin America does not necessarily mean raising barriers around the perimeter. On the contrary, a successful Latin American common market should be able to lower barriers with the rest of the hemisphere and eventually with the rest of the world.

II

The idea of closer economic association among the countries of Latin America is not new. It has been present throughout their history, but it had little practical significance because our economies have been geared toward Europe and the United States. When World War II cut off our traditional sources of imports, the establishment of several consumer-goods industries was encouraged. This in turn served to create a consciousness of the benefits of industrialization.

A renewed and more realistic interest in integration started to germinate in 1949 when the United Nations Economic Commission for Latin America (E.C.L.A.) began to explore its possibilities. In 1952 the governments of Central America, with the close coöperation of E.C.L.A., began working on a five-nation system of economic integration which has achieved a large part of its goals. In November 1956 the member governments of E.C.L.A., at the first meeting of its Trade Committee, requested that studies be made of the possibilities of much broader integration embracing the whole continent. The following year the Secretariat of E.C.L.A. was requested to appoint a Working Group[i] to conduct these studies and to submit recommendations to the member governments. The Working Group held its first meeting in Santiago, Chile, in February 1958 and agreed on certain fundamental bases for a common market. At the Group's second meeting in Mexico City last February, it planned the over-all structure the common market should assume in accordance with the basic principles that had been set down the year before.

All the members of the Group were aware of the tremendous problems involved, of the very real limitations that exist and of the need to develop a broader and more diversified economic base with a reasoned balance between efficient agriculture and sound industrialization. With these conceptions in mind we set forth the following tentative principles for a common market.

First and foremost, membership in the common market must be open to all the Latin American countries. It is therefore essential that conditions acceptable to all of them be established from the outset. This does not mean that countries closely linked by geographical proximity or common economic interests may not enter into direct negotiations among themselves. But these negotiations must be effected within the framework of a general agreement and along such lines that the reciprocal concessions involved are not exclusive and may be automatically extended to other member countries, or to such countries as may become members in the future if all do not accede to the initial agreement.

The same principle of universality must be observed as regards the products to be covered by the common market. The ultimate aim is the inclusion of all the goods produced in Latin America, although the regional market need not become effective for all such goods immediately. What is required is an agreement that will stipulate procedures and time limits for the progressive abolition of those customs duties and restrictions which nowadays hamper or prevent intra-continental trade. In other words, the agreement must be immediate but its implementation gradual.

An essential feature of the common market is that the less advanced countries must be accorded special treatment to enable them, through progressive industrialization and the over-all strengthening of their economies, to share fully in the benefits of the regional market. If this were not the case the more advanced countries would be at a considerable advantage compared to the others and in the end would achieve a favored position.

A serious problem is that of the tariff system of the common market vis-à-vis the rest of the world. It is generally desirable to establish a single external customs tariff, but in some countries the tariff has been deprived of its protectionist role and has been superseded by restrictive measures of various kinds. Hence, an interim system will have to be established to ensure the progressive abolition of such restrictions to an extent equivalent to the tariff reductions effected by other member countries.

The specialization of industry and other activities, which is one of the objectives of the regional market, must be the outcome of the free interplay of economic forces within the market area. The arrangements would not preclude national investment policies that would further the aims of the agreement. In some cases, it may be wise to give specific countries the right to establish certain industries even if this entails some restriction of free competition. Since the Central American countries already have an integration program they should be considered as a single unit, if they so desire.

In the interest of greater efficiency, the regional market must have a special system of multilateral payments which will encourage the highest degree of reciprocity in trade within the continent. It is essential that the member countries be protected against all exchange risks. The Working Group foresaw that, although basic adjustments must come through monetary, fiscal and economic policies, member countries must also have the right to impose temporary import restrictions, in accordance with agreed rules. Such measures may be necessary, for instance, to combat a large and persistent disequilibrium in the balance of payments of one country with other members of the common market. Temporary import restrictions may also be needed to reduce unemployment resulting from the adjustment of each national economy to changing conditions. If the maintenance of normal agricultural production requires it, countries may be given the right to restrict imports of some commodities, perhaps by limiting them to a certain share of the increase in consumption.

To promote the smooth functioning of the regional market, steps must be taken to avoid unfair competitive practices in exporting. Members must also refrain from discrimination and offer their exports at prices that are the same regardless of destination. The regional market must have an effective credit system and must provide technical assistance, both to stimulate intraregional exports and to help in the establishment and development of industries. Provision is also made in these recommendations for the creation of an advisory body constituted by the member governments, as well as a system of arbitration.

Once the members of the Group had set down the basic principles which should govern the operation of the common market they proceeded to crystallize their ideas on its structure, so that nations which are already proceeding with sub-regional markets will all play the game according to the same rules, facilitating integration into one great common market in the future. Agreement was reached on 11 points which should be briefly stated in order to complete a sketch of what has been done to date.

The agreement setting up the Common Market is designed [the statement of objectives reads] to help expedite the balanced economic development of Latin America, its progressive industrialization and the introduction of improved techniques in its agriculture and other primary activities with a view to promoting higher levels of living for its peoples, through: (a) the establishment of a preferential system for trade between Latin American countries; and (b) the growth of its foreign trade as a result of the expansion of industrial exports and the promotion of exports of agricultural and other primary commodities, both within Latin America and the rest of the world.

To administer the agreement and facilitate the attainment of its ends, a Committee on Trade Policy and Payments will be set up with all member countries represented. The judicial form contemplated in the agreement is that of a free trade zone to be transformed gradually into a customs union. In order to establish the common market gradually and progressively for all products, the agreement will be carried out in two stages. During the first stage, lasting ten years, a substantial reduction of customs duties and other taxes will take place and other restrictions will be either converted into terms of customs duties or eliminated. Intermediate steps have been contemplated during this first stage so as to reach the established goals gradually. During the second stage the reduction will continue until the organization of the common market will be complete. The rate of progress during the first stage will determine the program to be followed in the second stage.

Products are to be classified in three categories: (1) primary goods; (2) capital goods, durable goods, and other manufactures for which there is a rapidly growing demand; and (3) manufactured goods for current consumption which are in less immediate demand. During the first ten-year period duties and taxes for goods in the first category will be abolished, with certain exceptions (primarily agricultural) to be agreed upon. For products in the second category the target will be to reach the lowest possible levels in order to intensify regional trade. Reductions for products in the third category will not be as large or as rapid, so that adaptation of existing industries to the new conditions can be carried out with as little difficulty as possible.

Countries have also been divided into three groups in accordance with their development, so that they may be given differential treatment; this will serve to encourage and accelerate industrialization. The least developed nations will thus gain more rapidly the benefits of the common market that the relatively advanced nations will enjoy from the outset. Group A is composed of those countries which are the most advanced economically. Group B consists of those countries which are relatively advanced in the manufacture of consumer goods and whose production of capital goods is incipient or nonexistent. Group C is made up of countries with an incipient capacity for manufacturing consumer goods but undeveloped in respect to the manufacture of capital goods. Procedures were outlined to establish preferential treatment to countries of incipient development in Groups B and C. It was feared that if these concessions were not granted, the common market might have a harmful effect by making the poor countries poorer and the rich richer.

With certain exceptions, the most-favored-nations treatment will be in effect. Hence all the reductions in customs duties, taxes or other restrictions which a country may make unilaterally, bilaterally or multilaterally will be extended to all.

All the studies carried out so far have been submitted in the form of recommendations to the Eighth Session of E.C.L.A. held in Panama in May 1959. After approval by this body, the next step for the E.C.L.A. Secretariat is to prepare, in close collaboration with the governments concerned, a draft of an initial agreement for the common market in an effort to put it into effect as soon as possible.

This concludes what has been done up to now toward the creation of a common market. Latin America is experiencing the beginning of a social revolution as the needs of a growing middle class and the expectations of the masses exert tremendous pressures on an economic system which is not up to the task. Unless we can bring about an economic revolution to satisfy the demands of this social revolution, our problems will overflow into the political field, with serious consequences for the whole hemisphere. Only economic integration through a Latin American common market can make more efficient use of our resources and meet the challenge successfully.

[i] The members of the Working Group invited by E.C.L.A., besides myself, were José Garrido Torres, Brazil; Rodrigo Gomez, Mexico; Flavian Levine, Chile; Eustaquio Mendez Delfino, Argentina; Juan Pardo, Peru; and Joaquin Vallejo, Colombia. For the second meeting, in Mexico City, Carlos Lleras Restrepo replaced Joaquin Vallejo and Professor Raymond Mikesell from the United States was added to the Group.

You are reading a free article.

Subscribe to Foreign Affairs to get unlimited access.

  • Paywall-free reading of new articles and a century of archives
  • Unlock access to iOS/Android apps to save editions for offline reading
  • Six issues a year in print, online, and audio editions
Subscribe Now
  • GALO PLAZA, former President of Ecuador; Chairman, Working Group on the Latin American Regional Market of the U.N. Economic Commission for Latin America; Ecuadorean Ambassador to the United States, 1944-46
  • More By Galo Plaza