The Andean Group: Institutional Evolution, Intraregional Trade, and Economic Development

Article excerpt

A simple statement motivates this paper: "1996 stands as the year of institutional reform." The statement comes from Monica Rosell (2002) of the General Secretariat of the Andean Community. She referred to recent reforms of the Cartagena Agreement and the economic integration group it instituted in 1969, the Andean Group. (1) The Trujillo Protocol, signed in 1996 and implemented in 1997, is the source of the reform. To discuss this reform and see whether the Andean countries have moved toward meeting their joint goals during the early years of reform is the goal of this paper.

The Andean Group

The Andean Group was created in an atmosphere of distrust and disappointment. In the post-World War II era, Latin American economic thought and policy turned away from standard economic models and instead adopted the view that the existing international trading system had worked to retard industrial development in the region. One response to this distrust was regional economic integration aimed at expanding the size of and access to regional markets and industrialization through import substitution. The Latin American Free Trade Area (LAFFA), formed in 1960, was the most ambitious attempt at integration, eventually involving Mexico and virtually all the South American nations (Garman et al. 1998). The disappointment came when the Andean nations realized that most of the benefits of LAFTA were accruing to its largest members, Mexico, Brazil, and Argentina. One result of the disappointment was the signing of the Cartagena Agreement and the formation of the Andean Group (2) in 1969 (Middlebrook 1978; Hojman 1981 ).

Many of the goals set out in the Cartagena Agreement were consistent with LAFTA goals--to accelerate growth, to create employment, to reduce external vulnerability, and to promote capital formation by changing the existing pattern of trade flows. The agreement also set the goal of "balanced and harmonious development." Because of the LAFTA experience, the Andean Group sought to assure a distribution of benefits that would close the economic gap between the smaller and larger member nations in the group (Cartagena Agreement, chap. 1, art. 1). That the group was serious in its intentions is evident in the special consideration given Bolivia and Ecuador as group policies evolved over the years. In addition to policies specifically aimed at changing and controlling trade flows, industrial policies were adopted to promote industrialization at the regional level. The most ambitious was the policy of sectorial development, wherein the group was to assign member nations the exclusive rights to develop selected indust ries that, owing to economies of scale, were potentially economically viable at the group level but not economically viable for any individual nation (Middlebrook 1978). In the early years of the group, member nations were firm and consistent in their support of the general integration effort, although their support of specific aspects varied according to their national interests (Avery 1983).

The failures of the group were many. David Hojman (1981) argued that, given the mechanisms in place in the Andean Group and the different starting points of member nations, the group would be unable to meet its goal of balanced development. Khashayer Khazeh and Don Clark (1990) concluded that more Andean trade was created than was diverted during the 1968-1997 period, but George Garman etal. (1998) found no evidence that the Andean Group had been effective at promoting intra group trade in the 1975-1992 period. Similarly, Juan Echavarria (1998) claimed that the sectonal development program mentioned above had still not been effectively implemented and that other group policy goals--regional liberalization and a common external tariff--were not implemented until the 1990s. Whatever the specific reasons, by many measures the Andean nations were worse off during the two decades from the early 1970s to the early 1990s than they were in early years of the group's formation (Adkisson 1998). …