Sistema Económico Latinoamericano Latin American Economic System Sistema Econômico Latino-Americano Système Economique Latinoaméricain

Globalisation, free trade zones and international economic insertion: development challenges for Latin America and the Caribbean

XXVIII Regular Meeting of the Latin American Council Caracas, Venezuela 11 to 13 December 2002 SP/CL/XXVIII.O/Di Nº 12 - 02

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FOREWORD

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INTRODUCTION

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GLOBALISATION

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EXPORT PROCESSING ZONES (FREE TRADE ZONES) AND REGIONAL TRADE LIBERALISATION AGREEMENTS

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DEVELOPMENT CHALLENGES FOR LATIN AMERICA AND THE CARIBBEAN

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CONCLUSIONS

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BIBLIOGRAPHY

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The Permanent Secretariat submits herewith to the Member States of SELA this document on free trade zones and the international economic insertion of Latin America and the Caribbean, to provide an initial analytical approach to these issues, which have become increasingly relevant for the debate on the design of policies in developing countries. The first section summarizes some ideas on the process of globalisation and its relation with the development of free trade zones and the trade liberalisation processes in the region. The second section deals with the general characteristics of the development of free trade zones – as defined by the term “export processing zones” (EPZ). It also analyses some of the trends seen in the insertion process of the countries of the Greater Caribbean into foreign trade, which may be related to the development of the above-mentioned “export enclaves”. The third section presents the probable interrelations between the EPZs and the rationale of the regional trade liberalisation agreements. The study concludes with a summary of the elements that should be taken into account for the necessary reconsideration of the development models of the region. As part of its follow-up to the process of international economic insertion of Latin America and the Caribbean, the Permanent Secretariat of SELA will continue to conduct more in-depth analyses of the relations between the development of “free trade zones” and “foreign trade liberalisation”, in order to make relevant proposals to the governments of its Member States with respect to the formulation of policies in the future.

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I.

INTRODUCTION

Analysing free trade zones (“export processing zones”) and economic integration in a globalised environment is one of the most crucial areas in contemporary studies being conducted on the development issue. At the same time, it is also one of the current thorny areas clamouring for the attention of scholars, policymakers and international organizations alike. As an initial and preliminary response to the need to proceed with its analysis of these processes and with a view to defining the policies governing the insertion of Member Countries into the international arena, the Permanent Secretariat of SELA hereby presents a brief explanation of this complex set of problems, from the perspective of Latin America and the Caribbean, within the context of an analysis on both globalisation and its impact on social and economic development in our region. First, a synthesis will be given of the various factors to be considered in any analysis of the globalisation process. Next, a number of the characteristics and alleged effects of the free trade zones on socio-economic development will be examined, especially with regard to the generation of income, employment and exports, and a link will be established between the development of these export processing zones and economic integration schemes (trade liberalisation) within the region. Finally, a summary will be given of the primary factors determining the design of an effective, equitable and environment-friendly development model on the basis of the experiences gathered on duty-free zones within LAC and on the dynamics of regional exports. II.

GLOBALISATION

With regard to the current international environment, globalisation in itself summarizes or generates a whole new set of different global trends that may be observed today in the most diverse areas. Yet, while it is considered as a phenomenon or as a set of essentially technical and economic processes, its effects go beyond the scope of economic aspects.1 One of the prevailing – and, moreover, “self-interested” – notions expressed in any speech on globalisation is the one suggesting that globalisation has brought us on the threshold of a “new world economy“. Such a belief is directly linked to the neo-liberal way of thinking or theorizing according to which we are now witnessing the early formation of a “new capitalism”. While the changes taking shape at the level of the capitalist global economic system are at once innovative and significant, there is still no evidence underpinning the perception that globalisation marks a new phase of capitalism. At a more formal, rather than content-based level, certain surveys on “global economic history” propose that the current process of growing international economic integration possesses historical precedents. While it is true that, over the last 20 years, world trade has been marked by growth rates twice the amount registered for global output, and that foreign direct investment and 1

Baró, S. (1997). “Globalisation, Contradictions, Implications and Threats”. AUNA. An Analysis of Current Trends, No. 2; “Globalisation: Challenges in Today’s World”, Havana, August.

4 international stock market trading have risen three to ten times more quickly than production, it cannot be denied that the 50 years following the First World War were also characterized by a very dramatic increase in cross-border flows of goods, capital and labour2. There are obviously marked differences between these two periods in the global economy. The most outstanding of these differences are the following: 1. Prior to 1914, most of the countries of the world were by no means integrated in the “global economy“. 2. The technological base underpinning the process of growing “international economic integration” was at that time linked to the development of the railroad and of steam navigation, a situation that led to a marked decline in transportation costs. At present, globalisation is based on a complex process of technological change which, among other consequences, has led to a reduction in communications costs. All this, in turn, has produced discernible consequences at both the macro- and micro-economic levels. 3. Finally, it should be stressed that, in view of the much debated indicators used to measure today’s (relative) net flows of global capital, while such flows may be lower than those registered during the 1860-1914 period, gross international financial flows are currently much greater and, above all, reflect higher levels of sophistication and dynamism3. Regardless of the aforementioned factors and of the belief that the scope of globalisation is at times depicted with some degree of exaggeration4, what is indeed clear is that the current period of growing international integration is different from any other historical period. The present globalisation process is defined by the three fundamental – and noteworthy – factors or characteristics outlined below. a) Together with “globalisation”, another process is under way whereby income is becoming highly concentrated both nationally and internationally. The current gap between average income levels in developed countries as compared to those in developing countries has been widening. According to figures from the World Bank, in 2000, the average per capita income (in U.S. dollars) in low- and medium-income (developing) countries was equivalent to only 4.47% of the average per capita income in industrialized nations5. At the same time, while between 1947 and the mid-1970s, the difference in income between 5% of the richest and 20% of the poorest families in the United Sates had fallen by a ratio of 14:1 to 11:1, since then this difference has risen to a ratio of 19:1. Another illustration of flagrant socio-economic polarization in the major country in the system may be observed in the fact that while in 1974, the average income of top executives in the leading American companies was 34 times higher than the income of an average worker,

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The Economist, October 18, 1997, pp. 134-135. The Economist, October 18, 1997, pp. 134-135. 4 Ibidem. 5 See Table No. 1, based on data obtained from the World Bank’s “2000 World Development Report”, p. 233. As regards the gap between North and South, see Moneta, C. (1993). The Potential Scenarios of Globalisation, in Capítulos of SELA, No. 36, Caracas, July –September, 1993. 3

5 today’s most powerful executives at the largest North American enterprises earn an annual income up to 180 times higher than that of the average wage earner.6 b) Globalisation has been triggered by the strengthening of a theoretical concept that, today, exhibits certain signs of wear and tear. This conception, which is closely tied to the assumptions of deregulation, privatisation, greater openness and “institutional restructuring” has led to a realignment in the correlation among social and economic forces and agents (both nationally and internationally) by promising improved levels of living standards for ordinary people. Perhaps never before has any such effort been made with regard to the dissemination of a given intellectual doctrine. However, the 1997-1998 international financial crisis, the recent slowdown/recession in global economic growth that, up until the mid-2002, has not been fully overcome and the experiences gathered in almost two decades since the implementation of policies relating to the so-called Washington Consensus, have begun to change the debate. In various quarters – including certain mainstream circles – it is now being asserted that the basic concepts of such policies fail to harmonise the long- and short-term objectives set and to include variables of a socioeconomic or historic-structural nature, all of which must be taken into account with regard to any proposal for change. Several prominent international experts have therefore acknowledged that, “despite the fact that the Washington Consensus laid the groundwork needed for the proper functioning of markets, it did so insufficiently and, in certain cases, led to mistakes in the process”.7 c) Finally, it should be pointed out that the current economic globalisation process must be viewed as the axis of the New World Order that is now taking shape. In spite of the fact that the current historical period is marked by extreme instability and by growing asymmetries in the international system, there are elements that suggest that the existing rationale, logic and approach to regulating international relations are being supplanted by a new approach. This “transition” in the international institutional framework has taken on a definite shape in the degree at which power is concentrated within a limited group of nations and international and/or supranational institutions.8 Indeed, this “New World Order” includes myriad economic variables, but, in line with the ideas expressed earlier and unlike the developments that have taken place in the area of international politics, the new features of the present global economy should not be viewed as a radical break from the previous one. In this regard, there are visible signs of continuity of some of the main trends that have characterized the global economy for several decades. Globalisation, which has undoubtedly left its mark on both the economic and other environments in the last two decades, has had different effects on the countries of Latin America and the Caribbean:  First, the countries in the region have proceeded – usually at a high cost – to step up the process of closer integration with the global economy. Generally speaking, their expectations of achieving higher levels of growth, of obtaining increased job creation

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Faux, J. (1997) “The American Model Exposed”, The Nation, October 21, pp.18-22. Stiglitz, J. (1998). More Instruments and Broader Objectives for Development. Towards a Post-Washington Consensus. Economic Development. Magazine of the Social Sciences, Vol. 38, No. 151, Buenos Aires, October-December, pp.691-721. 8 Baró, S. (1997). Op. Cit. 7

6 opportunities and, consequently, of lowering poverty levels are closely tied to the alleged advantages to be derived from globalisation.  On the other hand, and as was pointed out earlier, since the mid-1980s a powerful consensus has been taking shape with regard to the idea of “appropriately aligning prices in accordance with the rationality of the market.” This has involved a dramatic rethinking of the concept of economic management in the countries in the region.  Greater integration into the global economy was pursued through rapid liberalization of trade, finance and investment flows, a strategy that was considered as the most appropriate path or prescription for preventing the reversals in the development process that have traditionally stemmed from recurrent payment crises. Trade liberalization would therefore ensure a more efficient allocation of resources in accordance with “comparative advantages”, by generating the export income needed to import goods and services essential to greater economic growth. For its part, financial liberalization would attract foreign capital in search of high returns to these “capitalstrapped” countries, allowing them to invest more than what they save without having to contend with the concomitant financial constraints. Increased flows of foreign direct investment (FDI) would help to fuel growth not only by supplementing domestic resources for the acquisition of capital but also by fostering the transfer of technologies and/or organizational skills. Indeed, the growth of world trade and, perhaps even more concretely, the renewed access of the countries of Latin America and the Caribbean to international financial flows in the early 1990s, were viewed as confirmation that a new era of prosperity was about to begin and that this prosperity would encompass a growing number of countries in the region. Yet, the perceptions and the dynamics of the global economy, as well as the international relations system – which are increasingly complex and contradictory – have shown noticeable signs of deterioration in recent years and have impacted adversely on economic growth and living standards in Latin America and the Caribbean. Hence, the expected positive effects of development efforts on the “global environment” are now being called into question to a considerable degree. In light of the experience gained over the last few years, it should be acknowledged that the different complex phenomena accompanying the globalisation process have demonstrated that development does not depend exclusively on the will of sovereign nation-states but, rather, that it is also contingent upon the globalisation process itself and upon the ever-widening implementation of different forms of local regulation.9 Nevertheless, the state should keep on playing a central role in defining the patterns of accumulation of wealth and the way to conduct economic and social processes. Such an influential role is pertinent – and even a practical one – in order to meet the need of creating an “institutional framework for globalisation”. The participation of the state is also crucial in defining the forms of regulation of territories and subnational spaces – under new modalities and ensuring the necessary degrees of “freedom”.

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Monreal, P. (2002). International Integration in a World of Global Productive Chains: Considerations on the Role of Territorial and Global Structures. A Paper presented at the International Seminar on “Growth and Development in Globalisation Conditions”, CIEI, University of Havana, 6 to 8 August.

7 III.

EXPORT PROCESSING ZONES (FREE TRADE ZONES) AND REGIONAL TRADE LIBERALISATION AGREEMENTS

Export processing zones (EPZs or “free trade zones“10) and regional (free-trade) integration agreements have been two of the “instruments” most widely used in recent years by developing countries desirous of reaping the benefits of globalisation. Under present circumstances, these two processes are closely related to the trend toward the two-pronged usurpation11 of the functions of the nation-state. The term two-pronged usurpation of the functions of the nation-state refers to certain processes which, as a result of globalisation, have started to “undermine” in a relative way the degrees of autonomy that States formerly had in defining their economic policies and strategies. On the one hand, it is evident that the emergence of international regulations, norms and disciplines, the greater interconnection among the various national economies and the “external environment”, and the relevance gained by other entities such as transnational enterprises have triggered a process in which the “global environment” and the “external commitments” are beginning to exert a strong influence on both the economic dynamics and the outline of policies in the majority of the countries. This is what has been identified as a usurpation of certain functions of the state by the “global environment”. But, on the other hand, some processes of a sub-national nature (which are associated with the segmentation of the value production chain at international level as a result of the technological and economic changes that have taken place lately) are gaining importance and relative autonomy within various countries. To a certain extent, the development of the EPZs accounts for the localisation process which explains the emergence of important sub-national regulation systems and which, strictly speaking, is neither a secondary phenomenon nor one opposed to globalisation. In any case, localisation is one of the major contemporary paths that are indicative of territorial logic in a globalised world. Meanwhile, the appearance and rapid development of regional agreements on “free trade” is usually classified as a trend toward regionalisation, which is another sign of the global/local paradox of the modern world. According to certain experts, regionalisation is a trend that makes the globalisation challenge a manageable one insofar as it allows for compatibility between both the homogenisation of spaces – an inherent factor of globalisation – and the creation of supranational regulatory systems that are relatively viable precisely because they relate to relatively compact territorial groupings12. EPZs may be defined as industrial zones enjoying special incentives, such as tax and tariff exemptions, which are granted to the enterprises established in such zones, with the purpose of ensuring that the goods processed in them will be largely, if not completely, geared toward meeting the demands of foreign markets. Given the expected potential of EPZs to attract badly needed foreign capital, to create employment and to generate exports, the benefits they are expected to generate are closely related to the degree to which they are capable of boosting economic growth and income levels in the “host country”. 10 There are several definitions for the term “free-trade zone”. Some are so broad that they include from taxfree ports and “in bond” warehouses for international trade to the so-called “tax havens” and international offshore financial centres. For the purposes of this document, the term “free trade zones” specifically refers to export processing zones, which others may identify as “maquilas”, “duty-free zones” or “industrial and technological districts”, among other terms. 11 Monreal, P. (2002), Op. Cit. 12 Ibidem, p. 20.

8 Research conducted on the structure and functioning of these EPZs have concluded that the enterprises set up in such zones are generally characterized13 by the following factors:  They assemble or manufacture standardized products that are already in a “ripe” stage with respect to the life cycle of the product itself.  As a result of the foregoing, both the products and the technological processes involved are virtually identical among all the competitors. This has led to intense competition with regard to costs. Consequently, the enterprises have few other options except to emigrate to developing countries paying low wages, in order to maintain their profit margins.  The products assembled and/or manufactured by enterprises situated in EPZs generally fall into the following categories: footwear, textiles, electrical equipment and electronic components.  With this industrial structure and very limited commitment to establishing “forward” and “backward” linkages with other productive sectors in the “host country”, transnational enterprises (TE), the “ultimate source” of companies set up in these zones, usually carry out detailed analyses of production and transportations costs in alternative EPZs before deciding to make fresh investments in any particular EPZ. If, for example, labour costs should rise in one part of the world but not in another, many medium-sized and large TEs would be able to easily redirect their investment to the EPZ offering greater advantages in terms of comparative costs.  In light of the above, governments in developing countries wishing to maintain or to develop their “free trade” sector normally have few short-term policy options at their disposal and are forced to offer the same standardized set of incentives being granted by the other countries in their respective EPZs. Over the last 15 to 20 years, a number of Latin American and Caribbean countries – especially several located in the Caribbean Basin (the Greater Caribbean) – have shown a rapid development of free trade zones. According to the International Labour Organisation (ILO),14 by the late 1990s, some 27 million people worked in these zones, in different countries such as China, Bangladesh, Malaysia, Philippines, Morocco and Kenya. In the case of Latin America and the Caribbean, it would be worthwhile highlighting the cases of Mexico, Costa Rica, Honduras, Guatemala, Dominican Republic and Haiti. By the end of the 1990s, more than one million people were working in the maquila industry in Mexico – where the maquiladora programme was started as early as in 1965. The maquila industry has grown at double-digit rate over the last few years, becoming a key element for the Mexican economy – especially in the states on the Northern border 13

These are actually general characteristics of Latin American and Caribbean EPZs. Nevertheless, in the case of Mexico some studies have made emphasis on the emergence of “second-generation maquiladoras”, which have developed production processes that incorporate state-of-the-art technologies, with intensive capital investment and skilled labour force, and with potentially positive consequences for the country’s insertion in the world economy, since they have already generated virtuous circles with national enterprises. 14 See International Labour Organisation (ILO) (1998). Labour and social issues relating to export processing zones. Geneva: International Labour Office.

9 which house more than 79% of the people working in that sector. 15 In the case of Costa Rica, there is no doubt that the investments made in an EPZ environment by INTEL, one of the most important U.S. information technology companies, have had substantial influence on certain sectoral transformations in the country, contributing to diversifying the nation’s supply of manufactured products. Meanwhile, of all the countries of the region, Dominican Republic saw the greatest growth in activity in its free trade zones in the 1990s. The remarkable boom in Dominican “industrial free trade zones” is clearly evidenced by their contribution to export income, which rose from US$117 million in 1980 to US$850 million in 1990, and to more than US$4.3 billion in 1999. Overall production in those industrial free trade zones grew in real terms (1970 prices) at an average annual rate of 4.5% between 1995 and 2000. The latter year the number of established enterprises in free trade zones totalled 491. 16 In other nations of the region such as Honduras and Haiti there was also an unprecedented expansion of this type of investments, basically associated with the textile and garment industries, during the second half of the 1990s. Employment in those sectors in both countries increased at an annual average rate of nearly 10% during the period. There is a clear, direct relation between capital flows of foreign direct investment (FDI) and the consolidation of the free trade zones or EPZs. It should be noted, however, that not all the enterprises that have been established in those enclaves are owned by foreign companies, because this depends on the legislation and conditions of each country. In addition, also due to the fact mentioned above, in many cases the development of activities in free trade zones is directly linked to the dynamics of foreign investment flows and the current economic situation of markets or of the fundamental markets for exports for the goods produced in the EPZs. Such markets are often the main source of inflows of foreign investment spurring production and export activities in this sector. According to recent analyses, the rise seen in these free trade areas points to certain changes in the export patterns of these countries of the Greater Caribbean during this period. Actually, any analysis of the foreign sector of Latin America and the Caribbean in the 1990s will reflect that, during this period, only eight countries in the region managed to make relative improvements in their “international competitiveness” in terms of increases in world market share. Mexico significantly increased its global market share from 1.55% in 1985 to 2.24% in 1998. Argentina and Chile made significant gains but from very small bases, and several countries of the Greater Caribbean (Costa Rica, El Salvador, Guatemala, Honduras and the Dominican Republic) achieved relative progress. The remaining 17 countries in the Latin American and Caribbean region either made no improvements whatsoever or lost ground in world trade during the period. Across Latin America and the Caribbean, there is also a marked differentiation in the progress made with regard to the gains derived from participation in international trade, a trend that is contingent upon whether countries are situated to the north or to the south of Panama. In Mexico and the Caribbean Basin countries (“north of Panama”), the relative success achieved with regard to conquering foreign markets is linked to the fact that 15

Gerber, J. (1999). Perspectivas de la maquiladora después del 2001. Comercio Exterior, Vol. 49, No. 9, Mexico, September. 16 Central Bank of the Dominican Republic (2000). Balance of Payments of Dominican Republic 1995-2000, Annex 7, p. 100.

10 these countries canalised their exports toward the most dynamic sectors of international trade. (Between 1985 and 1998, their share of non-natural-resource-based manufactured products jumped from 30.7% to 71.6%). Six of their ten main sales categories in international markets were dynamic, and, moreover, these countries were able to secure a share of the world market for eight out of these ten categories. However, the economies located “to the south of Panama” continued to specialize in non-dynamic categories in international trade17. This achievement in exportation made by countries to the north of Panama was in part due to the influx of foreign direct investment flows (FDI) coming most notably from U.S. enterprises that were established or expanded their international integrated production systems in the automobile, electronic or garment industry, so as to strengthen their competitiveness in their own domestic markets against exports from Asia. Many of these North American enterprises took advantage of the geographical proximity, the relatively low wages and the “flexible” domestic policies (tax- and tariff-free operations at the “maquiladoras” in Mexico or in free trade zones or “export processing zones” in the Caribbean Basin) to set up “modern” production plants in Mexico (for automobile, electronics and garment manufacturing), as well as in the Caribbean Basin (for garment, and, to some extent, electronics manufacturing). Yet, a more detailed analysis of the material structure of the export of goods between 1990 and 1999 in the case of the economies across the Greater Caribbean region reveals certain crucial elements indicating that the optimism surrounding the gains made by these countries in international competitiveness should be viewed with a certain degree of “caution”. The table shown below highlights the shifting weighting patterns of different “export items” within the foreign trade matrix of the respective national economies. In the case of several of the countries of the Greater Caribbean for which detailed data was available, the “industrial goods” exported have been broken down into four subgroups: traditional goods, which include dairy products, oils, sugar, fabrics, tools, furniture, footwear, printed material and leather, among others; goods exhibiting high economies of scale which normally include natural-resource-intensive goods generally destined for intermediate consumption, such as petrochemicals, paper, pulp, cement and basic metals; durable goods, which are products earmarked for intermediate or final consumption and which include electrical appliances, electronic consumer goods, vehicles and automobile parts; and, finally, goods for disseminating technological progress, which are capital or intermediate consumption goods and include machinery, instruments, high value added equipment and fine chemistry.

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Mortimore, Michael (2001). The Precarious International Competitiveness of the Region. ECLAC Issues, Nº. 16, May, pp. 4-5.

11 TABLE No. 1 Breakdown of Exports According to Categories (1990 - 1999) (Percentage of total foreign sales) COUNTRY

Latin Am. & Caribbean Barbados Belize Colombia C. Rica Dominica El Salvador Granada Guatemala Honduras Jamaica Mexico Nicaragua Panama St. Lucia Suriname Trin-Tobago Venezuela

1990 Primary Goods

Industrialized Goods A B C

43.0 1.5 17.7 63.4 53.6 65.1 50.8 75.2 55.2 75.3 16.7 46.9 52.6 53.5 62.8 17.0 37.7 83.2

19.3 40.8 82.3 21.0 23.2 11.1 29.8 21.4 30.7 16.9 22.1 8.6 40.1 35.9 32.8 0.7 7.9 3.4

24.7 39.1 0.0 13.4 8.6 23.7 12.2 2.8 7.2 7.5 59.9 17.3 7.0 3.7 0.5 82.2 52.1 11.4

5.0 1.0 0.0 0.2 0.2 0.0 0.9 0.0 0.2 0.1 0.1 13.1 0.0 0.6 0.5 0.0 0.4 0.6

D 7.4 15.8 0.0 1.4 5.7 0.1 6.2 0.5 6.7 0.2 1.2 13.8 0.2 5.1 3.4 0.0 1.8 1.4

Other Goods

1999 Primary Goods

Industrialized Goods A B C

0.7 1.7 0.0 0.7 8.7 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.1 1.2 0.0 0.1 0.1 0.0

22.7 1.3 36.2 59.6 24.2 43.7 26.4 69.5 47.9 52.4 15.8 10.4 62.4 62.0 64.2 63.0 22.4 56.2

21.5 55.3 63.7 18.1 20.3 5.6 43.1 26.9 31.6 36.6 32.3 19.3 32.3 20.7 29.6 1.1 13.3 2.9

17.1 21.2 0.0 17.4 5.5 37.0 20.6 3.6 13.0 7.6 51.1 6.9 3.6 12.9 1.2 34.3 60.2 39.0

14.0 0.2 0.2 1.2 1.6 0.0 0.9 0.1 0.7 0.4 0.0 24.2 0.4 0.1 0.0 0.3 1.1 0.9

D 24.0 20.3 0.0 3.8 48.4 13.7 8.9 0.0 6.9 3.0 0.7 38.9 1.0 4.3 5.1 0.7 3.1 0.9

Other Goods 0.7 1.8 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.1 0.0 0.2 0.2 0.0 0.0 0.6 0.0 0.1

Note: A. Traditional Goods (foodstuffs, beverages, tobacco, others), B. With high economies of scale, C. Durable Goods, D. Goods for disseminating technological progress. Source: Prepared by the author on the basis of data from the Statistical Appendix of the Panorama of the International Integration of Latin America and the Caribbean 1999-2000.

It may be concluded from the table that, in the 1990s, the economies of Latin America and the Caribbean made noticeable changes to their export matrices. The relative weight of primary products in regional external sales fell to almost a half of its original figure and, consequently, the general weight of “industrialized goods” rose to almost 80%. However, this situation changes substantially if Mexico is excluded from the data gathered on the region. It should be borne in mind that Mexico exported almost half of total foreign sales registered for the Latin American and the Caribbean region in the late 1990s. In the period analysed, the industrial products that accounted for 52.8% of Mexico’s total foreign export earnings in 1990, later accounted for 89.4% of the total in 1999. With regard to industrialized goods, the fundamental weight – excluding Mexico – toward the end of the decade was exhibited by highly natural-resource-intensive goods with high economies of scale followed predominantly by “traditional goods”. While between 1990 and 1999 the share of “goods for disseminating technological progress” increased twofold, by the end of the same period, such goods – with Mexico excluded from the total – accounted for scarcely 10% of the region’s total foreign sales. In the case of the countries located in the Greater Caribbean for which detailed data were available, the following observations may be made:  During the decade, Mexico underwent a significant shift in its exporting profile toward industrialized goods that helped to generate and boost technological progress.  Costa Rica showed an “exceptional” performance, most notably because of the decisive weight that exports geared toward “disseminating technological progress” had within its overall export matrix. This positive change seems to have essentially been facilitated by foreign direct investment flows (FDI) from the United States, which have

12 been channelled toward the creation of Costa Rica’s productive capacities in the area of information technology (INTEL).  The cases of Barbados and, to a lesser extent, Dominica, are noteworthy as economies where products for disseminating technological progress have increased in weight within the matrices of these two countries’ foreign sales, though to lower extent than in the cases of Mexico and Costa Rica.  One group of countries (Belize, Jamaica, Nicaragua, Panama, Saint Lucia, and Surinam) underwent a marked process of “re-simplification” in their exporting profiles during the 1990s.  Other countries, such as Colombia, Granada, Guatemala and Venezuela did not undergo any structural changes whatever in their exports during the 1990s. Overall, it may be concluded that, with the exception of Mexico and Costa Rica, and with the “atypical” cases of Barbados and Dominica, the vast majority of the economies of the Greater Caribbean failed to take advantage of the “boom in the global demand for goods in the 1990s”, which would have enabled them to make dynamic and positive changes to their exporting structures favouring high value added goods that include and help foster technological progress. Indeed, it should not be assumed that problems of economic development might be solved simply through the exportation of dynamic products. The “pull” effect, or the benefits to de derived from this dynamic export performance, on the local productive fabric and on social well-being is as vital as – and perhaps equally or more difficult to generate than – changes in the material structure of foreign sales. It would also appear that, in the 1990s, there was a noticeable rise in the relative weight of North America (the United States, essentially, and Canada) with respect to regional foreign trade, particularly where the economies of the Greater Caribbean are concerned. This is absolutely consistent with the remarks made above as regards the close relationships among the development of “free trade zones”, foreign investment and export markets.

13 TABLE No. 2 Geographical Trends of the Foreign Trade of Goods for Latin America and the Caribbean (1990-1999) (Percentage of Total Imports and Exports) 1990

1995

1998

1999

Exports to: (Percentage of Total Exports of Latin America and the Caribbean) Lat. America and the 12.4 19.0 19.6 15.5 Caribb. The European Union 21.7 16.5 13.9 13.0 USA-Canada 44.3 47.7 54.0 59.3 Asia 7.7 7.9 6.4 4.9 Other 13.9 8.9 8.5 7.3 Exports to: (Annual Growth Rate) Lat. America and the 9.0 19.5 -2.1 -16.9 Caribb. The European Union 11.1 15.3 -3.3 -1.6 USA-Canada 12.4 18.7 2.4 15.8 Asia 11.4 28.9 -27.7 6.9 Other 4.1 41.5 -22.7 2.5 Imports from: (Percentage of Total Imports of Latin America and the Caribbean) Lat. America and the 14.7 18.7 17.0 15.1 Caribb. The European Union 17.5 18.3 17.1 16.0 USA-Canada 42.5 45.3 49.1 52.5 Asia 6.8 10.6 9.8 9.4 Other 18.5 7.2 7.1 7.0 Imports from: (Annual Growth Rate) Lat. America and the 11.7 26.7 -3.1 -16.0 Caribb. The European Union 17.5 11.8 4.7 -11.6 USA-Canada 10.0 9.6 7.4 0.9 Asia 13.6 2.3 9.8 -9.4 Other 22.0 4.8 -7.9 -6.4 Source: Prepared by the author on the basis of Table 9 of the IDB (2000).

Average.9099 17.7 16.0 50.4 6.6 9.2 11.1 2.4 12.0 3.1 1.1 16.9 17.1 48.0 9.4 8.5 11.6 10.1 13.9 15.4 -0.1

During the 1990s, over 50% of foreign sales from Latin America and the Caribbean were destined for the American market, while imports from the latter market averaged 48%. During the same period, exports from the Latin American and Caribbean region toward the United States climbed to an average rate of 12% annually (the highest rate among the different geographical destinations for regional foreign sales), while the purchase of North American products during the 1990s grew at an average of almost 14%, a figure that was surpassed only by the annual increase in purchases from Asia. The high concentration of exports from the economies of the Greater Caribbean toward the United States may be observed in the following table:

14 TABLE No. 3 Exports to the United States. 1999 (In percentage terms) Primary Products * Latin America and 18.0 the Caribbean. Barbados 2.3 Belize 46.4 Colombia 74.3 C. Rica 23.6 Dominica 18.2 El Salvador 41.9 Granada 98.8 Guatemala 71.6 Honduras 55.4 Jamaica 24.5 Mexico 9.4 Nicaragua 70.2 Panama 72.1 St. Lucia 3.1 Suriname 69.3 Trin.-Tobago 38.8 Venezuela 64.3

INDUSTRIALIZED GOODS*

TOTAL TO U.S.A.**

A

B

C

D

19.1

10.5

19.1

33.2

57.4

28.4 53.5 10.4 20.9 25.6 49.3 0.7 22.6 39.6 62.9 19.7 26.3 14.9 63.2 0.6 2.7 0.9

0.9 0.0 14.8 2.9 54.5 7.2 0.4 5.1 1.9 12.3 5.7 2.1 11.1 0.0 26.5 55.4 33.0

0.1 0.1 0.1 1.9 0.2 0.0 0.0 0.1 0.6 0.0 24.8 0.2 0.0 0.0 0.1 0.4 1.3

65.6 0.0 0.5 50.8 1.4 1.4 0.0 0.6 2.4 0.2 40.3 0.9 0.2 33.7 2.6 2.7 0.3

19.7 48.7 50.2 51.9 4.8 21.2 16.8 34.3 57.2 32.6 88.4 32.3 44.8 15.0 19.1 41.4 48.8

Note: A. Traditional Goods (foodstuffs, beverages, tobacco, others), B. With high economies of scale, C. Durable Goods, D. Goods for disseminating technological progress. (*) As percentage of exports to the U.S.A. (**) As percentage of total foreign sales. Source: Prepared by the author on the basis of ECLAC data, Statistical Appendix, Panorama of the International Integration of Latin America and the Caribbean 1999-2000.

From the table above, it may be concluded that the weight of the United States as a destination market for exports from Latin America and the Caribbean was vital in 1999 and that the structure of the region’s exports toward this market possesses significant weight with regard to industrialized goods categorized as “products for disseminating technological progress”. In this regard, Mexico’s involvement, as indicated earlier, bears decisive weight in the overall panorama. With regard to the economies of the Greater Caribbean in particular, it may be observed that:  Of the 17 countries for which detailed data was available, only 11 had the United States as their most important, or as one of their most important export markets, provided that this market served as the destination for more that one-third of their total foreign sales.  Of the six remaining economies, Barbados, Dominica, and El Salvador had the “Greater Caribbean” as the most important destination for their own exports, with the region accounting for over 50% of their total foreign sales revenues. For their part, Saint Lucia, Granada and Surinam also maintained significant levels of trade with the European Union, which accounted for between 32 and 64% of their total exports.  The sales structure of the United Sates also reveals that the exporting profile of Barbados, Costa Rica and Mexico was dominated by industrialized goods for “disseminating technological progress”. However, the case of Saint Lucia is also

15 noteworthy. Over one-third of this country’s foreign sales to the United States fell into the category of “goods for disseminating technological progress”, but naturally, because of the weight of this country and of its very limited significance within the context of total sales to the United States, it proved to be peripheral within the overall table of the Greater Caribbean’s exporting matrix. Dominica, which, was also described earlier as a somewhat “atypical” case, in terms of its exporting specialization profile, is irrelevant to the U.S. market. This small insular Caribbean nation exports 99% of its goods for disseminating technological progress to the “regional” market.  With the exception of the four cases mentioned above, the 13 countries surveyed in Table No. 3 essentially exported primary products or low value added manufactured goods (“traditional” products or natural resources-based products exhibiting economies of scale) to the United States, toward the end of the last decade. As demonstrated by an ECLAC study, during the 1990s, the economies of the Greater Caribbean definitely adopted a trade strategy that was predominantly geared toward catering for the American market. Key to this strategy were the exploitation of “low wage” opportunities and the development of “assembly-related” operations. All said, the development of free trade zones in several LAC countries during the 1990s, which was one of the factors responsible for the eventual changes made to regional exporting matrices, has also called for other processes which, up to a certain point, have served as pre-requisites for strengthening the “appeal” that such zones hold for foreign investors. These processes include the following: a) Changes in the legal framework enacted by the authorities of these countries for dealing with foreign direct investment (FDI), whereby higher levels of “preferential treatments” are granted to investors localized in these EPZs. b) The process of opening up to foreign investment and efforts to foster greater subregional and regional “economic integration”, such as those undertaken by local governments over these years. Examples of such efforts include the negotiation process involving the Free Trade Area between the economies of Central America and Mexico, and the establishment of closer ties between Central America and CARICOM. c) Preferential access to the U.S. market – though this benefit has been showing some degree of erosion in recent times – granted to certain countries of the region, as illustrated by Mexico, in its capacity as NAFTA member, and by the other countries of Central America and the Caribbean, within the framework of the Caribbean Basin Initiative (CBI) as well as preferential access to Western Europe as part of the Lomé Convention and the Cotonú Agreement. Indeed, it cannot be denied that any analysis of the region’s integration in international markets must take stock of issues relating not only to commodity trading but also to the services trade. All in all, a critical analysis of the performance of EPZs – beyond the context of the exporting capacity and force pull generated by such zones – might lead to the following conclusions: 1. A classification of the types of exports generated in most EPZs reveals that all such exports tend to involve products assembled with a high degree of imported parts and that they are generally low in technological content but high in unskilled labour.

16 2. The kinds of relationships established between the firms operating in the EPZs and the main national or international “external actors” will have a decisive impact on the performance of EPZs and particularly on the development of the “host” economy. 3. The above factor is essential in assessing the impact of EPZs, in terms of innovation, specialization and productive linkage as, in the final analysis, this impact may be decisive in fostering improvements in economic growth patterns and quality on the basis of increased productivity and greater competitiveness of the domestic productive fabric. Generally speaking, because of the type of production involved, the very limited ties these firms have with local enterprises situated outside the EPZs and the voracious intake of imports typical of “free trade zones”, their potentially beneficial “multiplying” effects on self-sustained growth, the progress in expertise and innovation and the improvements in the quality of “social and human capital” have been very limited. 4. The degree of control exercised by the leading enterprises (generally transnational enterprises) over their associated companies operating in these free trade zones, as well as the manner in which governmental regulation functions in such zones, is particularly important in determining both the kind and the effectiveness of the impact that these “enclaves” will have on development. Free Trade Zones and Regional (Free Trade) Integration Agreements18 The regional trade agreements that have proliferated during the period of globalisation naturally follow a certain economic logic. By reducing or eliminating restrictions or barriers to the free flow of goods and services between the member countries of the agreement, the countries involved hope to boost growth and economic well-being to the same degree as local, high-cost producers are supplanted by more efficient and, consequently, less expensive producers in other member countries in the trading block (the “trade-creation” effect). One potential disadvantage of regional trade agreements, however, is that, given the terms of such agreements, certain efficient, lowcost foreign suppliers to the block might be replaced by less efficient regional suppliers with higher production costs (the “trade-deflection effect”). In view of the above, the relationship between free-trade area-related regional trade agreements and the free trade zones is a highly complex one. Unlike other regional integration-related trade agreements, such as customs unions or common markets, free trade agreements allow each member state to enforce its own set of tariffs (external tariffs) vis-à-vis the rest of the world while accepting goods and services produced in member states with preferential rights (hypothetically “nonexistent”). Enterprises situated within the trade block therefore have an incentive to import non-regional products via any country with a lower external tariff. In order to prevent this practice (which is described as “trade deflection” in specialized literature on the subject), the countries situated within the regional trade block are obliged to accept two vital modifications to their trade policies: adopt strict regional rules governing country of origin and eliminate the benefits of trade-barrier-free imports accorded the companies operating in EPZs.

18

Essentially based on the article by Sargent J. Y Matthews, L. (2001), “Combining Export Processing Zones and Regional Free Trade Agreements: Lessons from the Mexican Experience”. World Development, Vol. 29, No. 10, London, pp. 1739-1752.

17 The regional “rules governing country of origin” specify the conditions under which goods are considered as being “produced in the region”. For example, such rules may require that non-regional inputs earmarked for production should undergo some kind “substantial modification” (which typically involves some kind of assembly or manufacturing process) within the region before they can qualify under the terms of the regional trade agreement. Nonetheless, the “rules of origin” are not enough to eliminate possible “trade deflection”. For instance, the Mexican maquilas have managed to import their non-regional inputs into Mexico tax free (a practice that is virtually universal in all EPZs). If their assembled products possess a sufficiently high degree of “regional content” to qualify under the terms of the rules governing the NAFTA agreements, no fee will be imposed on the nonregional input when the assembled goods cross the American border, and so “trade deflection” will continue being a very real possibility. If this distortion is to be eliminated, extra-regional production inputs must be subject to external tariffs before they are processed and converted, according to the terms of NAFTA, into “North American products” (regional products). According to the NAFTA agreements, Mexico’s maquila industries were given a period of seven years during which they would continue to enjoy the benefits of “tariff-free imports”. Consequently, as of 1 January 2001, extra-regional inputs used by these industries have been subject to the country’s external tariff, as set forth in article 303 of NAFTA. The elimination of these benefits could very well seriously compromise the competitiveness of companies operating on the basis of the maquila system, should the host country enforce high external tariffs and/or significant anti-dumping fees on nonregional products. For instance, Mexican tariffs on non-regional products are normally set within a 0 to 30% range. In addition, Mexico imposes penalties and/or anti-dumping fees of as much as 129% on over 1,300 Chinese-made products. However, prior to NAFTA, the maquilas typically paid tariffs of 0 to 4% on non-American inputs whenever such products entered the United States after processing in Mexico. Given that Mexico has maintained a relatively high external tariff, the removal of tariff benefits from extraregional EPZ inputs could serve as an incentive for non-American assembly plants involved in the maquila system to move to EPZs outside the NAFTA block. In an attempt to prevent this from happening, the Mexican government has created what has come to be known as “sectoral programs”. If a maquila indicates that it is having difficulty in substituting inputs from the areas outside NAFTA, the Mexican government has stipulated that external tariffs on such inputs should be reduced to a 0 to 5% range. However, in spite of the limitations that they may tend to exhibit, the different analyses carried out to date on the specific case of Mexico’s maquilas argue that NAFTA has changed the “rules of the game” only for a number of special sectors (industries producing garments and televisions) but not for all industrial branches engaged in the maquila system. Certain authors have therefore concluded that the logic behind the EPZs is much more solid that that of regional trade agreements associated with “free trade areas“. If that were the case, then it would have to be concluded that the potential “technical” advantages to be derived from today’s free trade agreements might be limited in countries or in economic structures where “free trade zones” have achieved high levels of extension and development.

18 IV.

DEVELOPMENT CHALLENGES FOR LATIN AMERICA AND THE CARIBBEAN

The countries of Latin America and the Caribbean must essentially reconsider the models and policies they implement for promoting socio-economic development. Strategic solutions to the problems of development call for a conceptual approach with which to complement the undoubtedly decisive weight of the analytical dimension, which is represented by the nation-state, together with two other dimensions: transnational structures (at the global level) and the so-called subnational structures (at the local level).19 Development must be understood and viewed, above all, as a process conducive to improved living standards – and not merely in the material sense – of nations, an achievement that will necessarily involve economic growth. This is a necessary condition, though not a sufficient one, for fostering development. In addition to wise macroeconomic policies to ensure stable prices, high savings and investment rates and continued growth of exports based on gains in productivity and scientific and technological progress, economic reproduction must explicitly seek to bring about ongoing enhancements in income distribution profiles. This is highly justified for ethical reasons but also because, as today’s successful experiences have shown, equity, guaranteed social services and access to knowledge and information are essential conditions for sustainable growth. According to the analysis carried out by this paper, the micro- and meso-economic dimensions have taken on far-reaching relevance in the design of development strategies. Such dimensions are vital for converting potential competitive advantages into truly dynamic components of the productive machinery, of the social structure and of the economic structure, as well. Today, more than ever, development makes integration into the world economy an absolute necessity. However, it should be borne in mind that the current shape, sequence, scope and intensity of this integration process are not neutral toward development. Development of the “free trade zones” and region-wide economic (freetrade) integration processes are key elements in global integration strategies and, thus, the structure and impact of such processes are crucial in defining the possibilities for economic progress in today’s global environment. If region-wide free trade zones and free trade integration processes are to be functional and consistent with the development process, certain special conditions must be created in terms of the characteristics of these processes and of the ensuing interaction between both and the underlying social socio-economic structure. In order to make transnationalisation of world production and the segmentation of production processes increase social well-being and generate trends conducive to foster “economic progress” in developing countries, the two processes should lead to increased employment rates. It is also necessary that such processes contribute to strengthen industrial capacity by establishing linkages among national small- and medium-sized enterprises and transnational enterprises through the supply of components and other inputs. This would be the expected result from international economic insertion and development strategies based on an EPZ-type of investment. However, the “host country” 19

Monreal, P. (2002). Op. cit. p. 20.

19 must meet other conditions which go beyond ceding a territorial space for the “free trade zone” and providing for the mechanisms and measures inherent to a “foreign trade policy”. In order to successfully implement coherent development proposals in the region – whose elements would include some mechanisms that are typical of EPZs – it is necessary to review the main concepts related to management of the economy and the time frame of economic policies in Latin America and the Caribbean. In designing and implementing policies, long-term sustained growth should be considered as the explicit objective of economic policies. In addition, economic growth should be conceived as the result of the interaction among several dynamic factors, namely: the accumulation of capital, the accumulation of knowledge about production, structural changes and institutional development.20 Achieving higher rates of continuity in the educational systems of the region, improving quality of education, and undertaking structural modifications in income distribution profiles are key elements for any change aimed at ensuring development. These factors are also crucial to achieve progress in improving linkages between EPZs and national economies, and to increase the technological level of the production structure in “free trade zones” and in the national economy as a whole – since they are closely related to the type of production flows and supply structure generated in EPZs. Finally, with regard to their global integration strategies, the importance that developing countries, especially those in Latin America and the Caribbean, attach to the strategic alliance building process, and the undeniable necessity of such a process as a basic mechanism with which to foster economic cooperation, coordination and integration among related countries should also be recognized. This is perhaps also the only effective approach available to their countries to achieving concrete improvements in negotiating capacities in international forums and in negotiations with external actors as powerful as the transnational enterprises. V.

CONCLUSIONS

Among the various ideas included in this preliminary analysis of such complex problems relating to free trade zones, international integration and regional trade liberalization agreements and several others are noteworthy, and may be summarized as follows: 1. The complex trends stemming from the globalisation process have begun to highlight that development is not contingent exclusively upon the will of sovereign nationstates. On the contrary, development is a function of both the globalisation process itself and the ever-increasing appearance of different forms of local regulation. 2. The development of EPZs (“free trade zones”) is a manifestation of the localization process, as evidenced by the emergence of important subnational regulation systems. In addition, it is one of the primary ways in which the territorial logic surrounding the conditions of globalisation is expressed. At the same time, the appearance and rapid development of regional “free trade” agreements is proof of the so-called regionalisation process, which is yet another sign of the global/local paradox of today’s world. 3. Export processing zones (EPZs or “free trade zones”) and regional (free trade) integration agreements have been two of the “instruments” used in recent years by many 20

ECLAC (2002).

20 developing countries – particularly in the Latin American and Caribbean region – as part of their global integration strategies. 4. Generally speaking, the expected positive impact of the development of free trade zones within LAC has not been verified, even though the exporting structure of the countries of the “Greater Caribbean” region exhibited certain changes in the 1990s. These changes were largely associated with the expansion of “free trade zones” throughout the region, with subregional trade liberalization agreements and with advantages in the form of increased access to markets in the main industrialized countries, most notably the United States. However, a detailed analysis of the material structure of these economies’ foreign sales and of the very limited productive links to their socio-economic structures point to serious structural constraints and weaknesses in the existing institutional framework of these countries, all of which tend to undermine their ability to convert potential gains into concrete economic progress and social well-being. 5. It can therefore be seen that the countries of Latin America and the Caribbean must necessarily reconsider the models and policies they pursue to promote socio-economic development. In addition to redefining the bases for achieving macroeconomic balance and stability, they must acknowledge the importance of striving to achieve sound mesoand macroeconomic levels in economic reproduction. Furthermore, they must ensure that the social, political and institutional dimensions are coherently incorporated into their development strategies. It is only in this way that the development of “free trade zones” and of regional trade liberalization schemes may produce the beneficial effects expected of them, as part of the insertion efforts of these economies in the international system of integrated production. 6. Reducing the vulnerability of the economies of Latin America and the Caribbean to external factors must form part of any strategic redesigning effort. Doing this will require decisive progress toward the construction of an integrated block that should not be restricted to trade between and within Latin America and the Caribbean. Such a step is a necessary condition not only for making any changes in domestic structures viable but also for strengthening the region’s position at extra-regional negotiation forums and for bringing about positive changes in the today’s skewed international environment.

21 BIBLIOGRAPHY . Baró, S. (1997). Globalización, contradicciones, implicaciones y amenazas. AUNA. Análisis de Coyuntura, No. 2. “Globalización: desafíos en el mundo de hoy”, Havana, August. . Berlanga-Albrech, L. (1999). Maquiladoras japonesas en Tijuana: estructura productiva y cadenas mundiales de insumos. Comercio Exterior. Vol. 49, No. 9, Mexico, September. . ECLAC (2002). Panorama de la inserción internacional de América Latina y el Caribe. 2000-2001, Santiago, Chile, March. . ECLAC (2002). Globalisation and Development. LC/G:2157(SES.29/3), Santiago, Chile, April. . ECLAC (2002). La inversión extranjera en América Latina y el Caribe, 2001. LC/G.2178-P, Santiago, Chile, May. . Faux, J (1997). The American Model Exposed. The Nation, October 21, pp. 18 - 22. . Gerber, J. (1999). Perspectivas de la maquiladora después del 2001. Comercio Exterior, Vol. 49, No. 9, Mexico, September. . Moneta, C.J. (1993). Los probables escenarios de la globalización. Capítulos magazine of SELA, No. 36, Caracas, July-September. . Monreal P. (2002). Inserción internacional en un mundo de cadenas productivas globales: consideraciones acerca del papel de las estructuras globales y territoriales. Paper presented at the International Workshop “Growth and Development in an environment of globalisation”, CIEI, University of Havana, 6-8 March. . Mortimore, M. (2001). La precaria competitividad internacional de la región. Notas de la CEPAL, No. 16, May, pp. 4 - 5 . Sargent J.- L. Matthews. (2001). Combining Export Processing Zones and Regional Trade Agreements: Lessons from the Mexican Experience. World Development, Vol. 29, No. 10, London, pp. 1739 - 1752. . Sargent J. - L. Matthews (1997). Skill Development and Integrated Manufacturing in Mexico. World Development, Vol. 25, No. 10, London, pp. 1669 – 1681. . Stiglitz, J. (1998). Más instrumentos y metas más amplias para el desarrollo. Hacia el consenso post-Washington. Desarrollo Económico. Revista de Ciencias Sociales, Vol. 38, No. 151, Buenos Aires, October-December, pp. 691-721.