Mercosur: destination or momentary option?

A Argentina, a few years ago, was considered a development model. Even occupying a peripheral position in the world system, had enviable social indices, with a relatively high GDP per capita. Today, Little remains of that Argentina of yore other than good memories and a well-established capacity for social articulation.

In general lines, the Argentine crisis was the immediate result of the combination of the Menem government's economic policy with the emergence of new standards in the international economic system. An important external factor that contributed to triggering this crisis was the reversal in the transfer of global resources to Latin America throughout the 1990s., which allowed the increase in Argentina's international reserves while financing a growing deficit.

Following a “recipe” widely publicized in the region, Menem initiated a series of reforms that should lead to overcoming growing external dependence. Among these reforms was a strong privatization program, including public service companies. If, on the one hand, foreign investments in these areas led to an improvement in infrastructure, – necessary for economic growth – for another, the need for technological modernization and the search for competitiveness increased the demand for imported inputs. Besides that, the high rate of denationalization meant that 90% of the entire financial system was subordinated to external decision centers.

Foreign direct investments were followed by other accounts – royalties and profit remittance – which further harmed the situation of dependence on external capital. Currently, Argentina's external debt is four times greater than that found at the beginning of the 1990s., with debt services alone equivalent to 20% of consolidated fiscal expenditure.

A factor that particularly contributed to the Argentine crisis was the convertibility of the dollar into the peso – O currency board, deployed in 1991. At a time of destabilization, the Argentine government decided on parity – something that Brazil also did – however, given the scenario presented and the low outlook for acceptance by the world market, the Argentine government opted for the “legalization” of this rule, that is, to offer a sense of greater security to investors, the Argentine National Congress chose to transform the exchange rate parity provision into law. Thus, the market would not be surprised by devaluations, since these should be preceded by discussions in Congress and changes in the law, which would give investors enough time to take new positions.

This path made it impossible to have greater flexibility in the face of turbulence in the world economy. The measure achieved a certain success when Argentina was an emerging country, managing to attract a significant amount of investment, in addition to having an overvalued Real in Brazil, which contributed to a surplus bilateral trade.

With this convertibility remaining after changing the support variables, the scenario became unstable and nefarious. At the same time that it weakened the country on the global economic stage and promoted deindustrialization (especially in the interior provinces), created an unsustainable political situation in the long term: Externally, the Argentine government was under pressure to devalue the peso, otherwise the country would become unviable in the medium term.; domestically, like close to 60% of internal assets and liabilities were denominated in dollars, a devaluation could lead to a situation of monetary crisis, in addition to the possibility of widespread failure in the banking system.

The Argentine government has never officially positioned itself against Mercosur, However, fought – especially super minister Cavallo – Brazilian positions that they understood as protectionist policies or even the devaluation of the Real. However, with the worsening of the crisis, Even these positions were revised in order to promote greater rapprochement with the Brazilian government. Anyway, It should be noted that such an approach is much more pragmatic than normative., which could result in sudden and unexpected changes on the part of the Argentine government.

Social deterioration in Argentina (1973-2001)

.	1973	2001
External debt (em US$)	7,6 billion	132 billion
Unemployment	3%	20%
Nº of miserable	200.000	5.000.000
Nº of poor	1.000.000	14.000.000
Illiteracy	2%	12%
Functional illiterates	5%	32%

Source: Seitenfus, Ricardo. “Argentine metamorphoses: from silver to chaos” in Advanced Studies 16 (44), 2002

Largely, Brazil was caught off guard by the profound crisis affecting its partner and neighbor. He, on the one hand, Brazilians have become accustomed to seeing “panelaços” on the streets and new presidents sworn in, on the other hand, there is great uncertainty regarding the future of Argentina and Mercosur.

The responses of international investors to the Argentine crisis satisfy Brazilian interests in a very superficial and transitory way. It is not enough to just understand that the capital of Brazil is not Buenos Aires; It is not enough to understand that they are two countries with different macroeconomic structures.

Chancellor Celso Lafer stated, not long ago, that “Mercosur is a destiny and the FTAA is an option”. How can we now explain Brazil’s desire to free itself from its “destiny”?? Easy to do indoors, in the face of a population still unaccustomed to international issues and an elite attached to a first-world cosmopolitanism.

Much of Brazilian diplomatic rhetoric revolved around the Mercosur project – just remember that the country reserved an ambassador to exclusively take care of integration with its South American neighbors. The aim was to increase the elements of power, always directly linked to universal values.

The Argentines, Yet, decided to follow other paths to resolve their structural crisis – I refer particularly to the convertibility regime. It was certainly not the alternative that was in the best interest of Brazil. Now, unfortunately, international actors who could effectively change the traffic jams quo – USA and IMF – adopt very tough stances towards Argentina. To some extent, this could even be expected, particularly after the emergence of the republican government of George W. Bush. But that Brazil now decides to turn its back on its former partner is, no minimum, a rhetorical error, if not a geoeconomic conception error.

It should be noted that Argentina's structural flaws and political projection are not very different from those of many South American countries.. By moving away from Argentina, Brazil may be, in a way, moving away from your own problems.

As long as Mercosur is understood as a collection of markets and Brazil is unable to formulate a consistent foreign policy for the region, the country will continue to sail according to the tide and divert its small caravel from the super-tankers of the world economy.