Academic journal article Journal of Economic Development

External Vulnerabilities and Economic Integration: Is the Union of South American Nations a Promising Project?

Academic journal article Journal of Economic Development

External Vulnerabilities and Economic Integration: Is the Union of South American Nations a Promising Project?

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. INTRODUCTION

Economic integration, driven by the motivation to seek macroeconomic stability, seems to be a new global trend. The past two decades have witnessed the formation of several economic unions in Asia, Europe, Africa, and America, including the ASEAN+3 (Association of Southeast Asian Nations together with China, Japan, and Korea) in 1997, the Eurozone in 1999, the Economic and Monetary Community of Central Africa (CEMAC-EMCCA) in 1998, the West African Economic and Monetary Union (UEMOA-WAEMU) in 1994, the Southern African Development Community (SADC) in 1992, the East African Community (EAC) in 2000, and the Union of South American Nations (UNASUR) in 2008. The South American case deserves special attention because, unlike the other blocs above, UNASUR emerged as a political alliance. The UNASUR Constitutive Treaty, signed in 2008 and ratified in 2011, formalizes the union as a juridical entity that integrates 12 independent nations in cultural, social, economic, and political fields.1 Furthermore, UNASUR is conceived as a strategy for improving the socioeconomic conditions of nations that have a common history of economic instability and external dependence.

However, while common concerns and political willingness exist among group members, the question of whether that consensus is sufficient to ensure economic integration remains answered. For instance, economic integration as a strategy for macroeconomic stability seemed to work well in Europe after the euro was launched in 1999 (Sapir, 2011), until the eruption of the European sovereign debt crisis in recent years revealed the inherent weaknesses of an economic union that lacks a political union. This development suggests that the UNASUR project is likely to fail if the concerned economies do not converge economically. Nevertheless, economic and political aspects must go hand in hand for such an integration project to succeed.

This study assesses the UNASUR project from an economic integration perspective. It focuses on how external shocks influence member economies from the viewpoint of one of the motivations for instigating such a collaboration in the first place, namely the reduction of external vulnerabilities. More specifically, this study measures the degree to which three external shocks (i.e., monetary, commercial, and financial) affect the real, monetary, and fiscal economic sectors of seven UNASUR economies (Argentina, Bolivia, Brazil, Chile, Colombia, Peru, and Venezuela) and examines co-movement paths. Moreover, it quantifies the relative importance of external shocks for each studied country and compares the reactions of monetary and fiscal stabilization tools in order to elucidate future challenges for the UNASUR project.

The analysis presented herein proceeds in the following three stages. First, a structural Bayesian vector autoregression (SVAR) model is built for each studied economy and each of the three external shocks. Second, a correlation analysis is performed in order to detect patterns of real, monetary, and fiscal convergence. Finally, information on the forecast error variance decomposition is used to identify the principal sources of vulnerability and to provide comparative measures. The SVAR approach allows researchers to impose identifying restrictions on the relationships between the model's variables, with reference to economic theory (Sims, 1986), and thus ensures a better interpretation of the results. Furthermore, Bayesian estimation techniques avoid misleading results owing to the improper treatment of series with unit roots (Sims, 1988) and provide a robust measure of uncertainty (Sims and Zha, 1999).

The presented analysis extends existing research in three directions. First, this study covers some South American economies rarely considered by previous authors. Despite the fact that researchers have long been intrigued by the impact of shocks and convergence in South America, regional studies have particularly focused on specific subsets of UNASUR economies, notably MERCOSUR (i. …

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