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Civil Society Versus the Negative Heritage of World

Statism Since 1989: Mexico and Romania in the Era


of Globalization
by
Olga M. Lazin, Ph.D.
Smashwords Edition

Copyright 2011 Olga M. Lazin

Here I begin with two of my favorite quotes:


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"Socialism, communism, fascism and Nazism are all but dead now. They
have failed miserably. But they have been replaced by what is merely
another more watered down form of collectivism that may be called
"interventionism."
Indeed, interventionism is the predominant economic system in the
world today"
Richard M. Ebeling - The Free Market and the Interventionist State, 1997

The Crisis of Statism


Although since the process of globalization begun (since the
seventeenth with Reagan and Thatcher,) has been widely studied and the
new role of civil society has been addressed, serious analysis about the legal
framework for civil society has been ignored.
My contribution is to remedy this failure of analysis to the
Mexican and Romanian case studies in an era of globalization. Especially
since the collapse of the Berlin Wall, thousands of NGOs have sprung up.
Many have hoped in vain to receive funds from domestic donors, but merely
by their existing they are not eligible to receive funds from abroad.
Most of these aspirations have been in vain because the lack of any global
philanthropic standard for giving.
As globalization is about creating global standards, ironically this
happens only in the profit making side (like banking, accounting, transfer
pricing etc.).
Most of the literature on NGOs has recognized that the NGO can
serve as an antidote to the state power, but has failed to realize that without
funding, NGOs are toothless (helpless).

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Regrettably, the literature has neither defined how NGOs fit into the
structure of each societies in any country nor how a legal framework that
exists in the US for making tax-deductible donations can support civil
society.
This proposal is organized in two major parts:
In order to understand the globalization of the nonprofit side, I will
also analyze the existing free trade blocs.
Here is my chapter's titles:
I. The Globalization of Free Trade Blocs.
II. Globalization of Nonprofit Funds. The Mexican and Romanian
Cases.
III. The Fourth Sectors of the Society
IV. Why the US Mexican Model is Important
VII. Why Romania is Interested?
VIII. The impact of "Open Society Foundations" on the Civil
society

The Globalization of Free Trade Blocs

Beginning in the 1980s, processes of creating globalization


through creation of free trade blocs based upon the free flow instantly of
information, communication, and funds not only brought pressures to bear
on statism but made clear to the world that the failures of excessive central

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power could no longer be hidden behind the rhetoric that state ownership
was being carried out in the name of the masses.
The opening of the world trade has broken down old barriers and
boosted development of global civic society to prevent or limit dictatorships
although many critics of globalization have argued that it moves people into
poverty. They failed to realize that there is a positive side to it. The break
down of trade barriers and the rise of telecommunications has enabled the
rise of civil society.
They are both against statist power. It is the rise of the state that
stunted civil society in the world.
In its expansive phase, the state rose against real nations who wanted to
associate against the amorphous system of state domination and voluntary
servitude, trying to create alternative cultures, independent public spheres
and attempting to change and confront official structures.
The processes of economic globalization, which have included
pressures on country's to end protectionism and to adapt to the information
revolution, had highlighted the increasing crisis in community life as the
world's systems of state ownership proved to be inefficient, corrupt and
bankrupt. Ironically, many observers wrongly see the decline of statism as
being the cause of crisis in community life, not the result, as I will show
here.
Globalization of Nonprofit Funds: Mexico and Romania

This work focuses on Mexico's NGO legislation and its unique nonprofit
standing as having achieved mutual recognition by the U.S. Treasury
department thus facilitating the flow of funds. Romania aspires to follow the

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Mexican model of working closely with the U.S. treasury to facilitate the
inflow of U.S. funds.
The years 1917 and 1989 offer the benchmarks for understanding the rise
and eclipse of centralism, analyzed here in case studies for Romania in
Eastern Europe and for Mexico in Latin America. World statism was
generated simultaneously by the Mexican Revolution's Constitutional Model
of 1917 and the 1917 Russian Model of Revolutionary Terrorism, both of
which encouraged the rise of state monopoly that distorted economic,
political , and social systems. In Russia and Mexico one-party political and
economic systems came to define the dimensions of statist corruption that
became prevalent in so many countries worldwide.
With the problems of excessive centralism manifest by the
1980s, statists in Mexico and Romania took very different paths to save their
power. In the Mexico of 1983, the new President Miguel de la Madrid began
to bring to a halt the expansion of state power by beginning to permit large
private land holdings of production for export even as he began to close or
sell some money-losing factories and service companies.
In Romania of 1983, the brutal dictator Ceausescu (1963 to 1989)
attempted to deepen his control, thus accentuating the crisis in statism that
within six years saw his bloody fall. Ceausescu's drive to increase state
income by expanding food exports to the world caused crisis in central
government financing of local welfare as well as shortages of staple goods
needed by the masses. Thus, Ceausescu's dictatorship of extreme state
centralism of power at the national level left Romania's thousands of
communities in poverty, with civil society unable to think for itself after 40
years of failed central planning.

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In Mexico, by 1983, the statist solution had left civil society


and communities in poverty, albeit , as in Romania, with subsidies from the
central government to support the country's corrupt one-party political
system. With the collapse in demand for oil and raw materials owing to the
world downturn after the Arab oil embargoes and quintupling of energy
prices in the 1970s, Mexico was unable to borrow international funds, thus
"bankrupting" efficient private industry as well as highly inefficient
subsidized statist enterprises. Subsequent shrinkage of subsidies caused
increasing crisis in the living standards for the thousands of Mexico's
communities in which the only basis for funding had been the central
government. With the decline in size of state economic power, then, the state
itself has barely been able to cope with the series of recurring economic
collapses caused by earlier central government mismanagement of
nationalized industries.
Incapacity of the statists to maintain their corrupt systems
changed dramatically after the fall of the Berlin War in 1989. The
unmasking of the Soviet system and its 1991 collapse revealed it to be a
negative development model, not ideal model that ideologues believed to
have existed. Now free to act, anti-statists unleashed rapid change in the old
Communist World.
As central government has been "downsized" to end its
economic distortions, civil societies and its communities (figurative as well
as literal) in all countries subsequently have faced a shortage of what little
funds centralism had allocated leaving a shortfall in the safety net in
relatively wealthy countries such as the USA and Sweden. Even the rich
Germany faces the need to cut welfare benefits in order to reduce its labor
costs or see the further flight of factories to such countries as Romania.

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"Anti-statism" in Mexico and Romania took different routes


from 1989 to 1997. In Mexico, anti-statism started under de la Madrid but it
was very timid, namely through deregulation. President Carlos Salinas de
Gortari (1988-1994) was aided by events in Russia, which paralyzed his
opposition and permitted acceleration of decentralization of state activity as
well as sale and closure of inefficient industry. Another important aid was
the rise of civil society in the 1980s as it had to cope with problems clearly
beyond government to solve. A series of events like the rise of independent
civil movements, beginning with student's revolt of 1968, and the women's
rights movement, continuing with the mobilization of the entire population
to provide relief from the devastating 1985 earthquake that hit Mexico city
(Sáiz, México 75 años de Revolución, 1988, p. 564.) In trying to reconstruct
the city, housing, providing medical care, employment, the civic
organizations took their own decisions and sometimes they just went beyond
and ignored the government.
Romania, meanwhile, officially took the view from 1989 to
1997 that some statism could prevail, albeit in disguise. Although Ceausescu
was overthrown and executed, those actions may have been led by his
cronies, who sought to save themselves from the growing anger of the
populace.
Simultaneously, the globalization of free trade markets
espoused since the 1980s by U.S. President Reagan and UK. Prime Minister
Margaret Thatcher gained force by 1989. The Reagan-Thatcher policy drew
upon the jet passenger and air cargo shrinking of geographical distances
(triumphant in the 1970s) to capitalize on the instant telecommunications via
private telephone, fax, and computer (triumphant in the 1980s) to breakdown
national barriers. Those barriers have become increasingly irrelevant with

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the rise of Internet connectivity and the privatization of airline and telephone
communication systems triumphed in the 1990s.

The Concomitant Rise of Civil Society and the Role of NGOs

To match the demise of statism, civil society has arisen in its own right to
assume growing importance depending on the country, the USA providing
the strongest example mainly because the state never gained the power that
it came to hold in Europe and England.
The basic notion of civil society is that the people can and should
prevent the state from becoming authoritarian by keeping watch on it while
at the same time demand that it work properly for the general population.
By definition civil society should also develop non-state activities.
The rise of civil society in Western Europe and the USA had been set
back by World War I and world economic depression between 1929 and
1939. To face these emergencies, state power was seen as necessary for
political and economic defense. In the USA, the New Deal’s mixed
capitalism and its expansion of state activity offered an alternative to the rise
in Europe of statist fascism and statist communism.
In Eastern Europe, the Western concept of civil society had
only partially penetrated by the early twentieth century. There, however, it
existed in widely varying degrees ranging from incipient democracy in
Poland to monarchy in Romania. In the latter, civic responsibility was
exercised by the nobles and the small middle class.

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Expansion of civil society in Eastern Europe, which was


disrupted by World War I and remained weak during world economic
depression of the 1920s and 1930s, saw its basis for action decapitated by
coordinated German-Russian actions and German invasion by the early
1940s. Both Germany and Russia ruthlessly suppressed civil society.
Germany did set up the Vichy France government but it was a fake civil
society designed to win acceptance of German occupation.
With victory over Germany in 1945, Russia set out to break
nascent civil society by Stalinizing Bulgaria, Czechoslovakia, Poland,
Romania, and Hungary. Thus, Bolsheviks and some Socialists conducted a
deliberately destructive and brutal campaign to liquidate associations,
independent trade unions and artisan guilds, community groups, churches,
and social movements (Tismaneanu, 1996, p.63). Among other values, the
communists erased the notion of noblesse oblige and middle class social
responsibility as they broke both the nobility and the bourgeoisie.
Because World War II had expanded the role of the state in all
spheres worldwide, the post-war era in the West had to contend with
reinvigorating civil society. By the second half of the 20th century, the
concept of quasi-autonomous government organizations (QUANGOs)
emerged in England, but most recently the QUANGO has come to be seen
as seriously flawed, because it operates without the oversight of the central
government or the responsibility to report to NGOs. The NGOs implicitly
solves the English dilemma now faced by countries such as Romania,1

1 This analysis of the QUANGOs grows out of my 1992 discussions with Thomas
Carothers at USAID Mission in Bucharest. Carothers (author of Assessing Democracy
Assistance: The Case of Romania, 1996) is concerned that the QUANGO (known in
the USA as the GONGO--government organized NGO) offers incentives that NGOs
cannot, e.g. connection to the government, free benefits from the QUANGO, etc.

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wherein the QUANGO is responsible neither to the government nor to the


citizenry. In establishing a space separate from the government but
responsible to the citizenry, the NGOs mediate between citizens and state.
In society’s four sectors, NGOs constitute the fourth.2
NGOs are autonomous free associations of individuals and groups who may
or may not depend on income from the state (society’s first sector) or from
private individuals and businesses (the second sector) and which may or may
not depend entirely on volunteer participation and/or paid staff. NGOs
usually attempt to register with the government in order to achieve a tax-free
status that allows them to receive donations deductible against the income of
the donors--hence the incentive to donate. NGOs include grant-making and
grant-receiving foundations as well as not-for-private-profit operating
organizations such as hospitals, orphanages, universities, and churches.
It is important to distinguish between the NGO and the
QUANGO. Where the NGO falls into the first sector of societal
organization, the latter falls into the first sector because it is dependent upon
and reports to government and because it operates autonomously with its
own budget. The QUANGO often involves activities such as operation of
national museums, schools, and research institutes that compete with NGOs
for funding. The U.S. Agency for International Development prefers to fund
NGOs and not QUANGOs but face problems in doing so because
governments in Eastern Europe are short of funds to operate the QUANGOs
thus try to channel funds to them. For this reason, governments often make
the registration and operation of NGOs difficult, thus reducing competition
2Many analysts of charitable activity mistakenly think that the NGO sector is the
“the third sector” in society which supposedly has only two others: the private and
public sectors. In reality, the mixed private and state sector constitutes the third
sector.

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for funds. That civil society defines the sphere of activity separate from
the state clearly emerges in the burgeoning literature on the role of citizens
in East Central Europe. Recent books have theorized in different ways about
how civil society is defined by the dynamic of and tensions between the
state and non-state activity. These authors include Ernest Gellner (1994),
Jean L. Cohen, (1992), Andrew Arato (1992), and Adam Seligman (1995).
In this literature the strand of the civil society tradition that is
most relevant in Eastern Europe is the one that calls for intellectuals to
oppose the ruling intelligentsia who blindly support statist power. Its main
feature is that it separates civil society sharply from the state. That is why it
was so attractive to intellectuals who have not wanted to end the state's
heavy hand that too often stands for the status quo rather than change. The
majority of Eastern European political dissidents (such as, Miklos Haraszti,
Kis Janos, and Victor Orban) argued that civil society, in its traditional
forms, has been endangered by collectivism, etatization of social structures,
and regimentation (Stokes, 1996: passim).
The so called intelligentsia who sought simple communist
solutions justified its role as the 'vanguard of society.' They helped the
communists to construct a new class of bureaucratic apparatchik and ruling
elites later defined as nomenklatura (Gellner, 1991: 495). In the meantime,
humanist intellectuals who questioned power and opposed censorship were
allowed to go on working in peripheral positions, but only so long as they
did not overtly challenge the state’s authority.
In its early stages, the process of collectivization and heavy
bureaucratization was justified by the intelligentsia who helped the
communists preach to the workers that nationalization would benefit the
masses. This type of “associatedeness” resulted in the destruction of

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intermediary networks. Thus, the complicity of the statist-oriented


intellectuals helped destroy the societal networks that promoted civic
articulation between the state and society. In destroying the interstitial
“tissue” of the social construct in different degrees in all Eastern European
countries, pro-state intellectuals did so because they knew that civil society
threatened the very nature of the communist ideology upon which they fed,
literally and figuratively.
Although, when the communists had seized power in the
Eastern Europe of the late-1940’s, anti-state intellectuals (including writers,
philosophers, and sociologists) had theorized about idealistic future society,
that impractical approach later gave way to realism about how to make day-
to-day life livable. For example the Polish dissident Adam Michnik, one of
the founders in 1978 of KOR , called for a strategy of "self-organization" in
the Community for Social Self-Defense. This dissident movement was
established originally to provide legal and material assistance to the families
of workers imprisoned after the 1976 strikes (Jan Jósef Lipski, KOR A
History of the Workers’ Defense Committee in Poland 1976-1981, 1985:
183). Later KOR became the base for a strategically coherent movement of
mass organized protest that would become Solidarity.
The emergence of several independent organizations began
implicitly to challenge the state power such as the Polish chapter of Amnesty
International (ROPCiO, the Polish acronym), the Nationalist Confederation
for Independent Poland, and the incipient Free Trade Union, each with their
own publications, .
In Czechoslovakia, two important political dissident thinkers
emerged by the late 1970s. Vacláv Havel called for people to "live within
the truth," independently of official structures, and even to ignore the official

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political system (Havel, The Power of the Powerless, 1990: 45). Vacláv
Benda called on population to "remobilize" within the civil society (The
Parallel Polis, 1978: 15). The break with the régime was implicitly contained
in dissidents rhetoric, but it never reached maturity under these repressive
regimes. Only later did it constitute itself into a serious challenge to the
state.
In Hungary, philosopher György Konrad argued in his 1976
book Antipolitics that all power is antihuman, and therefore so is all
politics. He called for destatification and an antipolitical, democratic
opposition in his analysis of the issues of transition in East-Central Europe.
By the late 1970s the so-called remobilization of the population
(especially including intellectuals) to work for the good of the state had run
into trouble in Eastern Europe, as can be seen in the social and political
science literature from Hungary. Studies of that time begun to observe the
cleavage and interaction between the official and the alternative or “second
society” (Hankiss, 1990: 147).
The emergence of an embryonic civil society in the 70s and the
80s with semi-autonomies and semi-liberties were possible mostly in the
relaxed communist environment like that of Kadar, or Edward Gierek's
Poland, but it could never develop into a truly autonomous alternative
(Tismaneanu, 1996:144).
Political stirrings in Eastern Europe took off gradually, then,
first in rather ensconced forms such as "flying university" lectures and
writings in Samizdat publications (Berend, 1983:10). Later came
participation in informal self-educational groups. The rise of organizations
that pursued independent activities and the assumption of individual
responsibility first became evident in Poland where the churches led in

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creating independent space for thought (Jan Jósef Lipski, KOR A History of
the Workers’ Defense Committee in Poland 1976-1981, 1985: 90).
Championing the national rejection of communism, KOR and
Solidarity in Poland embodied a full-fledged and convincing alternative to
the communist regime, contributing to the collapse of communist ideology
even before the system imploded politically and economically in 1989 (Jan
Jósef Lipski, KOR A History of the Workers’ Defense Committee in Poland
1976-1981, 1985: passim).
Rise of alternative society beyond the reach of authorities had
eroded the credibility of the ruling communists, implicitly destroying the
monopoly of the state over the society and individuals (Hankiss, 1990: 164).
Such society had shown a spark of life after the 60s, provided the civil nuclei
that eventually became a serious challenge to the state (Tismaneanu,
1996:145).
In Czechoslovakia, political activists seized upon Chapter 77 of
the Helsinki Human Rights Accord to anticipate a new type of politics
(Tismaneanu, 1996:144). They used Chapter 77 to demand human rights,
open dialogue and plurality of opinions as well as alternative structures, all
of which eventually subverted the communist ideology at its weakest spots.
Chapter 77 bolstered demands for free speech, free press, freedom from
arbitrary search and seizure, freedom of movement, and judicial recourse
against illegal arrest by the police and military.
In Romania, Ceausescu’s extreme repression stunted
intellectual protest against abusive state power. Only few individuals such as
Mircea Dinescu, Paul Goma, Doina Cornea, and Radu Filipescu took the
risk to openly protest the regime in the late 70s (Griffith, 1990: 172), and no
organized urban socio-political activity took place in the 1980s.

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Once the communists lost power in Romania, Iliescu


promulgated Law 42 in 1990 as his “moral duty” to reward those who had
helped defeat the dictatorship. The problem that arose, however, was that
former communists bribed their way into the reward system, thus creating
division and distrust in society and setting back the rise of consensus which
needed to make a qualitative shift from collectivism to individualism.

The Romanian Case


Under the Iliescu regime (1990-1996), debate about
modernization of civil society came to life, but effective results were not
possible to achieve without the development of a new legal framework
(Arato, 1990:14).
From 1990-1993, civil society benefited from pent-up demand
and expressed itself in an explosion of activity which simultaneously
differentiated and politicized itself during the relative vacuum of power as
Iliescu sought to establish his power. This initial explosion was partly the
consequence of the fact that political independence was in a sense political
opposition and partly an inclination toward a populist "bottom-up" approach
to democratic development (Carothers 1996: 67).
The first three year of Iliescu’s period were marked by the rise
of Western-style NGOs, most hopeful that their mere existence would bring
foreign grants. Romanian NGOs involved free association of autonomous
persons who volunteered to help raise funds to take up the immediate
decline in state social benefits. Only a few NGOs were able to gain foreign
funding for their plans which called for, among other things, the teaching of
democracy, the operation of orphanages, and the networking of ethnic
groups.

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By 1992 the profile of NGOs revealed an open separation


between political advocacy groups and civic advocacy organizations. All
NGOs, however, undertook qualitative changes in their activity to achieve
"institutional development, capacity building, and sustainability" (Samson,
1996: 129), the goal being to make the NGOs viable and effective.
The problems of Romania’s nascent civil society are complex.
First, there too few competent leaders to staff both government and NGOs so
that Romania can compete effectively in the globalization process. Second,
NGO leaders are tending to move into politics and business. Nevertheless,
notes Sandor (1994: 37), there is a chance that at least some of those who
leave the NGOs will use their influence to support the nongovernmental
sector.
Although in Romania the pre-communist 1924 Law 21 on
charities has been reinstated in the 1990s, it does not regulate in a specific
manner the nongovernmental bodies. Law 21 only provides a general, vague
legal framework and no categories to encompass modern institutions or
communities. This permits corruption and produces misunderstanding of
what civil society is meant to be (Lucian, 1994: p. 39).
Crystallization of NGOs in post-communist Romania
demonstrates the viable capacity of response to the challenges of transition.
Having initially appeared when the state was impotent and withdrew,
clusters of nonprofits and civil actors spontaneously filled the gap in an
effort to overthrow of crumbling old regimes (Sandor, 1994: 36.)
But the revolutionary changes seem to presuppose only very
quick extra-institutional mobilization. The transition of 1990-1992 allowed
the re-emergence of an entire spectrum of voluntary organizations,
groupings, and movements in the public life of East European societies. The

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voluntary sector is part of the “fourth sector” of societal organization


(following to the state sector, the private, the mixed private and government
sector) varies significantly from country to country in terms of its scope,
institutional type and mission.

My Participant Observers View at the Decentralized and National Levels in


Romania during the fieldwork I have completed in Romania in eight years
had been very fruitful.
In my role as participant-observer of social life as a folklore student
in the Department of Maramures during University years in Romania from
1983 to 1991 and since 1992 in my subsequent travels in Eastern Europe and
Russia on behalf of PROFMEX (Consortium for Research on Mexico), I
have been able to compare the impact on civil society of the destatification
and privatization processes.

What is striking to me is my personal experience as a student of rural


folklore is to realize that the peasants of Northwestern Romania were bound
together in matters of common self-concern. The peasants took decisions
and solved by themselves societal problems in so called "claca". The
"chopping tactics" of the socialist polity, did not always destroy but
reinforced individualistic energies in most Romanian villages. The primary
loci of resistance to collectivization at the village level, however, does not
provide a model for transition of Romania to a modern pluralistic society,
but does suggest that socially-based rural civil society is difficult to destroy
because of its dispersed nature. Thus, my observations directly contradict
those of Buchowski (1996, Chapter 4).

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My travels after 1991 took me throughout Romania and especially to


the capital and other urban areas. I realized that the NGO sector then in
formation had two levels: the well-organized foreign foundations with well
defined objectives (such as the Soros Foundation, with offices in the regions
of Romania) and the Romanian voluntary interest organizations that were
then that coagulated to solve immediate local issues. The latter are what the
Romanians call "form without foundation" or original versions of not-for-
private-profits that not only transfer the western models, but are mainly
based on genuine social projects, according to Steven Samson (in Hann &
Dunn 1996: 126).
At the national level, countries such as Romania have to create the
true diversity of organizations that operate with cross-cutting and
overlapping purposes. The latest law no. 32 of 1994 is not in accordance
with the requirement of necessities of reasonable functioning of civil
associations (Lucian in Regulating Civil Society, 1995: 76).
Even with imperfect law, the concept of civil society now
implies some kind of formal autonomous organization, made up of
thousands of constituent associations and charities organizations that
compete with the state.
Some non-governmental organizations and think-tanks keep
check on the power of the state (the Center For Political Studies and
Comparative Analysis, the Romanian Helsinki Committee, the Romanian
Society for Human Rights (SIRDO), the League for the Defense of Human
Rights (LADO), Liga Pro-Europa, Anti totalitarian Association - Sighet,
The Academy for Ethnic Studies, in Sighet, the Civil Protection Maramures,
the Titulescu Foundation, and the Association of Lawyers in Defense of
Human Rights (APADO), Academic Foundation, while others make

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demands on the state it to pave the roads, extend electricity to villages,


install telephones etc. Yet these foundations/organizations are specialized
and act as watchdogs to make sure that the state fulfills its promises.
What is evident from my consultations in Eastern Europe is that since
1993, after the initial post-revolutionary enthusiastic phase has passed,
international assistance and donations have trickled into the region at such a
slow rate that NGOs are disheartened. Without a tradition of being able to
raise funds in their own country, NGOs that mushroomed in Croatia,
Bulgaria, Hungary, the Czech and Slovak Republics, Poland, and Romania
in general have not received funds from abroad, as they had hoped.
The most acute problem faced by Eastern Europe’s NGOs,
then, is that of financing of their activities as they seek a place in the new
institutional order. Since privatization pace is, generally too slow, the access
of NGOs to private or corporate funding is not there and the law is not
modernized to make it feasible (Lucian, 1996: 70)
Given that the relatively well-funded Soros foundations of
Eastern Europe have concluded that foreign funding will not come in the
near future, if ever, in 1995 they determined at their regional conference in
Estonia to look inward for funding (Regulating Civil Society 1995: 76). This
decision was ironic because Soros has given his foundations in Eastern
Europe fifteen year before his funding ends. In the meantime, Soros, who
has been the lone consistent funder, is already shifting his available funds to
other battles such as legalizing marijuana in the USA and helping illegal
immigrants to the USA to legalize their status and to become citizens.
“Charitable activity,” as defined in the USA (which has the world’s most
comprehensive law as well as the largest and most important pool of
foundation funds), encompasses what I call the HEW-SEC-L spectrum:

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health, education, welfare, scientific, ecological, cultural, and literary


activity, be it in the USA or anywhere in the world. See the blue-prints
project.
Given the shortage of funds, some philosophers and
practitioners of nonprofit activity are looking to the volunteering of time, not
the volunteering of money, and they are narrowing the scope of their activity
to moral influence rather than charitable activity.3 More specifically Eastern
Europe's border areas, where the anti totalitarian sentiment was much
stronger, non-governmental associations (such as Alma Mater Napocensis,
Cluj-Napoca, the Academy for Study of Ethnic Conflict- in Sighet-
Romania) have sprung up to prevent and buffer ethnic tensions. Some NGOs
have succeeded as in Hungary and Romania (Soros Foundations For An
Open Society) by trying to eradicate ethnic hate by publishing minority
publications, such as Korunk in Transylvania.
Katherine Verdery, who, very much in the de Toquevillean
tradition, argues that the concept of civil society is linked to the political
processes and has become, in the Romanian case, interrelated to that of
reconnecting to the democratic Western European values (Verdery, 1996:
106). Her point is that ruling political elites which have achieved symbolic
capital through “resistance-based suffering” still dominate the public sphere,
thus overshadowing other forms of a pluralist civil society. In some ways
civil society still revolves around national symbols and symbolic values.
Romania, the former Soviet anchor of COMECON policy for the
south of Eastern Europe, now seeks to join NATO as the anchor for the EU
border on the Balkan states.

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The New Ethnic Role for NGOs in the Region

NGOs now seek to play a major role in resolving ethnic tensions.


Ethnic problems are exacerbated by the fact that most of the countries are
heterogeneous in their ethnic and religious composition. In Bulgaria, for
instance, about 1 million of the 9 million inhabitants are Turks; Romani
account for some 700.000 and another 400, 000 are Muslims. In Romania,
the shares of population are Hungarians 7.1%, Romani 7%; in Czech
Republic Slovaks are 3%, and Romani are 2.4%. In Slovakia, Hungarian are
10.7%, Romani 1.6%, Czechs Moravian, Ruthenian more than 2%
(Transitions, Open Media Research Institute, Vol. 3 and 7 February 1997.)
What is considered the next "hotspot", the Kosovo province (Turkey) is
comprised of 90% ethnic Albanians.
Where once existed the monolithic non-recognition of ethnic
differences sector as espoused by the Soviet optic, since 1989 there has
been radical change to multidimensionality. The idea is now to
accommodate regional differences in development, tradition, local
circumstances, and the current state of systemic transformations. As Andras
Biro, a Hungarian activist has put it: " For the first time in 40 years we are
reclaiming responsibility for our lives" (Salamon, Foreign Affairs, Vol. 73,
1994: 113).
In Romania, in the immediate aftermath of the 1989, in several
ethnically heterogeneous villages (Bolintin, Casin, Miercurea Ciuc) houses
of Gypsy ethnic minority were burnt and heinous killings occurred. On
March 15, 1990 the Romanian security in direct complicity with Ion Iliescu
brought busloads of Romanians from remote villages to Tirgu Mures. These
villagers were told that they were to save Romanians who were being beaten

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in the city, where the usual March 15 celebrations were in progress. When
the busses arrived, the villagers attacked the participants of the celebration
and besieged the Hungarian minority’s headquarters. It was there that the
playwright Andras Sütö lost his eye. Several Hungarians and Gypsies were
beaten and jailed for years. In a gesture of historic reconciliation, the current
president Constantinescu has released them (1996). Nobody has ever
investigated or publicly exposed this case. The Romanian government (as
the local government did not have much power) did not even try to quell the
situation. It is ironic that only in the USA, where the Non-governmental
sector has almost become an industry, that conferences take place on the
events that took place in the Romania but are totally disconnected from the
realities in the region.
These 1990 events could happen because autonomous mediating
institutions of NGOs did not yet exist to encourage the different ethnic
groups to understand each other and to address issues treated individual-to-
individual. That is why a new confrontation took place in Cluj and Targu
Mures in July 1990.
NGOs could play a crucial role in early prevention actions, in bringing
locally all the players in practicing dialogue and negotiation needed to
diffuse and deter ethnic hatred. As an effective non official way to solve
problems, NGOs facilitate preventive diplomacy.

The Controversial Impact of Foreign Aid in Romania and Other Issues

To what extent should Eastern European nations be copying or


moving toward a Western trajectory of development of nongovernmental
organizations? Some “rightist” thinkers demand that their countries return to

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23

their own organic evolutionary path with rebuilding of the dimensions of


social plurality (Sandor, 1995, p. 36.) They claim that the most basic force is
that of ordinary people who decide to take matters into their own hands to
improve their conditions or seek basic rights in post-communist East Central
Europe The well may be right that people need to rediscover the civic value
of associativeness and donating time, but the decline of state expenditure in
health and old-age protection is so dramatic that civil society must generate
funds. In this age of globalization, funds do not only come from abroad
(EU/PHARE or USAID) but also from foreign companies which set up
foundations, thus leaving some profits to benefit the host country.
Civil society is the integrative bond needed to maintain coherence and
it just begun to function. Even if in a very fragile stage, nongovernmental
organizations are trying to help fill the void created by the process of
restructuring devastated economies, in a capitalist environment. According
to Zbignew Brzezinski, the former U.S. National Security Advisor, it will
take well into the 2000s for East European countries to become pluralistic,
free-market democracies, mainly because of the failure of East Europeans
and Russians to completely demythologize the Leninist ideology
(Tismaneanu, 1996: 182.)
Paradoxically, in these cycles of complex statification and
destatification, "revolution from above" is needed now, because changes in
the nonprofit law can be made only from above. And this refers also to the
economic sphere where tax agents have become more efficient at collecting
ruinously high taxes, and racketeers become more ruthless in extorting
protection money, Eastern Europe's new rich have lost the incentive to seek
public recognition for doing good, (Los Angeles Times, February, 1997).
The state has to step back and has to recognize and allow the NGOs to

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24

operate. Incentive should be provided for donations to make them tax


deductible. NGOs in Eastern Europe generally limp along pathetically on
modest grants from abroad. This shows that the incentive for donation is
absent. Now, amid unstable economy, charity workers find internal fund-
raising hard to sell. The extension and consolidation of associativeness in
organizations' network is mainly articulated by the promotion of the interest
of these nuclei vis-a-vis the government (Sandor Dorel 1995: 37)
Although Dorel Sandor claims that the rebuilding and
reemergence of segments of Romanian civil society has played a crucial role
in the liberation from communist ideology, other analysts such Cohen and
Arato (1992) are skeptical, implying that only 15% of NGOs are active.
U.S. foreign aid to Romania has been marked by controversy
because assistance focused on democracy overemphasized the U.S. political
model and focused narrowly on NGOs involved in political education (such
as the Democracy Network program). Thus, Carothers (1996: 92) has argued
that U.S. aid has slowed real political reform in Romania, actually
prolonging the agony of the Romanian economic and political system. By
creating harmful dependency relations and not targeting environmental
societies, the ethnic associations, religious organizations, cultural diversity,
that are real basis of democracy, marked a great leap backward (Carothers
1996: 94).

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25

The Mexican Case

Although the term NGO has a complex meaning, in Mexico, as Sergio


Aguayo has pointed out, the idea of the NGO tends to be identified with
political protests and human rights groups.4
Now we know there are NGOs for biospheres, ecology, research centers,
protection of abused women: the term is not so limited as it is perceived by
the analysts.
There were various causes to the rise of Mexican NGOs.
First during the 1980s, dozens of NGOs tried to accommodate hundreds of
thousands of Central American immigrants who arrived fleeing authoritarian
governments in El Salvador, Guatemala, and Nicaragua.
Second the earthquake of 1985 accelerated mobilized and impelled
independent civil movements and NGOs, to become the backbones of the
civil society. The same year UNAM created the Defense of the Rights of
Faculty and in 1988, the Government of Aguascalientes established a
governmental Commission for Human Rights, at the suggestions of different
NGOs.
In an effort to provide for a modern legal framework, the Convergence
of Civil Organizations was born in the 1990s.
Simultaneously more networks of NGOs had emerged with different
purposes, and in 1994 they began to play a grand role at national level. The
Chiapas 1994 rebellion attracted the focus of civil rights groups and sparked
one of the most observed Mexican presidential elections in the country. In
both events the NGOs played a crucial role.

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26

In the networking of NGOs that reflect the political culture, then, we


can recognize features such as: collective action, consensual decisions and
implementation of the agreements through commissions.
The NGOs expanded by incorporating the theme of electoral
democracy on the agenda of social change and, for the first time in Mexico's
history, mobilized millions of Mexicans along with the members of NGOs.
Nowadays there are more than 400 NGOs in all states, 180 being
located in Mexico City. The states of Jalisco, Veracruz, and Oaxaca have the
most effervescent NGOs activities.5
Yet very much like Romania, Mexican NGOs are facing the same problems
of financing and a poor philanthropic tradition. But unlike Romania, Mexico
has succeeded in designing the first standard for non-governmental law
together with the U.S.
By adopting and adapting the U.S. model, Mexico has gained more
than direct access to the world’s largest pool of funds available from grant-
making foundations; it can now encourage U.S. companies investing in
Mexico to make donations tax deductible in both countries against their
Mexican profits. (Mexico has not yet established the U.S. NPPO “privately”
funded by a limited number of donors--[see Chart A, section 4-A-2] that
would allow a U.S. company to establish its own NPPO.)
Development of a standard legal framework to facilitate the transfer of
non-governmental funds is aimed at overcoming general confusion of
meaning in terminology, a problem in both hemispheres. Globalization of
tax-exempt funds is not possible unless all countries speak with the same
meaning of terms and model operating procedures for NPPO sectors.
The need is to revise the usage of such important terms as:
5

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27

NGO (Non-Governmental Organization) sector,


which too often is used mistakenly as a code word to cover
all NPPO activity. U.S. TEO law sorts out three types of NGOs:
one of which is an NPPO,
the second of which is an ATEO (discussed below),
the third of which is a GONGO or QUANGO
(discussed below).
NPO (Non-Profit Organization) sector and
NFPO (Not-For-Profit-Organization) sector,
which wrongly suggest that no profits may be accumulated. In
reality, both the taxable and non-taxable sectors can earn
profits, but the latter must use them for the good of society
rather than distribute them for private gain, as is discussed in
Appendix B. Use of the NPPO instead of NPO or NFPO
clearly tells us that profits can be accumulated (as is true for all
TEOs).
Globalization is possible since the 1989 fall of the Berlin Wall and the
subsequent collapse of the statist model in most of the developing world.
Former command economies such as those of Eastern Europe lack the funds
needed to decentralize economic and social decision-making and activity.
The problem facing former statist countries, however, is that
decentralization depends upon:
1. establishing civil society needed to provide the basis for
democratic politics, and

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28

2. generating local funding to makeup for the collapse of state


expenditure in such areas as education, research, and social
welfare.
The Mexican model for attacking the excessive power of the state is
of interest to countries worldwide that seek to:
(a) privatize industry and land,
(b) downsize the role of central government, and
(c) join into free trade.6
To this end, the Mexican model stimulates the inflow of both tax-paying and
tax-exempt funds from the United States.
Although most policymakers and observers are aware of the free trade
agreement methodology for achieving the flow from the United States of FPPO
investment funds into Mexico, few are aware of the model achieved by Mexico for
attracting the inflow of TEO grants
from the United States.
Given the importance of the U.S.-Mexican model, it is unfortunate
that U.S. tax law is written in verbiage difficult to understand. Interpretation
of American law is problematic because it usually follows U.S. legal jargon
too closely to be very clear. Indeed this problem has complicated Mexico's
adaptation of its TEO legal code that is intended to provide compatibility
with U.S. law but does not yet fully do so.
Mexico is interesting to countries trying to break the power of statism
because, although Mexico did not prevent the development of a tax-exempt
sector as in Eastern Europe, it did discourage the development of modern
TEO activity. Mexico is now attempting to undo the state’s direct and

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intrusively detrimental control over the finances of such TEO activities as


health and welfare.
To encourage globalization by developing in former statist countries
the model of tax-exempt legislation, then, let us stress that a global NPPOs
standard offers outward opening while encouraging:
a. inflow of massive U.S. NPPO tax free funds needed to
rebuild the citizen social conscience and responsibility
that was quashed by central planning;

b. establishment of modern tax exempt NPPOs funded by:


i. tax deductible donations from foreign as
well as domestic investors.
ii. tax free transfers of funds from foreign
NPPOs
In order to optimize income of foundation funds would be optimal
that Eastern European countries use the incentive of tax deductibility to
require that new domestic private firms and foreign firms contribute a
minimum share of their taxable income to establish NPPOs and/or donate
funds to NPPOs. This would assure that FPPOs leave a share of their profits
in the host country. The amount could be as low as one or two percent.
While many U.S. foundations are assisting TEOs around the world,
they do not necessarily focus on the need to change the tax-exempt tax codes
of individual countries. Without modern tax codes that mesh around the
world with the U.S. standards, such a major NPPO as the New-York based
Soros Foundation which is oriented almost solely to Eastern Europe, finds
itself to be in the unenviable position of having little competition.

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Competition among TEOs not only diffuses the disappointment and


potential political problems arising when funding decisions are made by only
one (or even a few) foundations but also gives alternatives for priorities to be
funded as well as varying opportunities to grantees. Competition among
NPPOs will be enhanced immediately in Romania as it is already in Mexico
by establishing the new legal framework.
To the end of helping countries develop an alternative TEO law that
regulates the raising, investing, and granting of tax-deductible funds, it is
appropriate here to synthesize and reword U.S.-Mexican NPPO tax law
because its concepts constitute the only standards approved by more than
one country. Synthesis and rewording is required to make clear the real
meanings “hidden” in the U.S. legal jargon of Section 501(c)(3) of the
Internal Revenue Code. Because the U.S. code is at once extensive and
complex in its provisions, in the USA the NPPO organizations that the code
includes are usually called "501C3s." Use of the concept “third sector” is so
misleading that it confuses tax writers in former statist countries as they seek
to move to a nonstatist economy.
Charts A and B show how distinctions are made between the “NPPO”
type of TEO (see also Table 1) and a special type of TEO called “Activist
Tax-Exempt Organization” or ATEO (see also Table 2). The ATEO is not
eligible to receive funds from the U.S. GMF.
TEOs are the “fourth sector” of society’s economic organization, in
my view, as is shown in Chart A. Although some analysts have called the
tax-exempt sector the "third sector," Chart A shows that in reality it is the
fourth sector, not the third sector. 7

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31

Table 1 lists examples of the NPPOs categorized in Charts A and B, 8


and it classifies them by main functions. Although these organizations are often
referred to as “NPOs” (Nonprofit Organizations) or NFPOs (Not-For-Profit
Organizations), neither of these two concept is not used here because they
misleading state that no profits may be made. That NPPOs range from
foundations to NGOs is shown in Table 1. The former usually make grants and
the latter receive grants, but such activities are not mutually exclusive. Further,
all NPPOs may receive donations and earn interest on their investment of
donations and grants in saving accounts or into stocks and bonds.

Conclusion to Mexico and Romania Compared

Because the concept of civil society is a dynamic concept and thus


will always be troubled by contradictions, its connotations must be
connected to practical actions and institutions, to all types of sociability, to
communities, and to organizations. Civil society must also go beyond the
textual discourse of elite groups. Political society is that element in de
Toqueville which constitutes a necessary supplement to dualist models that
contrast the state and its citizens.
The experience of some anthropologists who challenge the Western
model of civil society (see Hann and Dunn, 1996) yields, on the one hand,
the interesting insight that the dualist model wrongly casts civil society and
government in completely pure, contrasting categories. On the other hand,
their anthropological view is misleading because the core of its argument, as
summed up in the epigram by Buchowski at the outset above, is that non-
8

It is important to note that under U.S. TEO law, the NPPOs given in Charts A and B
and in Table 1 are all “501c3s.

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political, especially family life and village mutual self-help groups, offer an
Eastern European model to define civil society. They do not tell us how this
non-political model can achieve the organization of society at the local level
in order to democratically encourage the development of modern ways of
life capable of competing in a world reduced in size by instant
communications.
The irony in such an observation as that made by Michael Buchowski
(1996: 92) is that he himself suggests the fatal flow in communist thinking
wherein many in Central European societies long to return to communist
society because they seek to evade personal responsibility. He cannot escape
this flaw by wondering whether or not Poland is less “civilized” since the
fall of communism.
Despite the difficulties, Western civil society and its NGO model have
gained prominence as a fundamentally flexible and truth-worthy vehicle for
the realization of elemental human yearning for self-expression, self-help,
and mutual aid. NGOs not only are an instrument of grass-roots
independence, but they may perform an essential function of system
maintenance by performing socially useful projects. Buchowski’s social
society at the village level was not completely stamped out even in Romania
where the most repressive regime in Eastern Europe obliterated villages in
the south to break “peasant thinking.” While I can partly agree with
Buchowski, my participant-observation of village and folk society in
Transylvania, which survived the Ceausescu on-slought, contradicts his
conclusion that family and local activity can challenge the Western model
for development of civil society as it faces rapid urbanization.
That the attempt to create new civil society is well underway in
Eastern Europe is manifest in the numbers. As of 1995 I found in Romania

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33

3,000 more NGOs registered than in 1992. As of 1994, Salamon found in


Poland several thousand foundations that were registered with governmental
authorities, in Hungary some 7,000 foundations and 11,000 associations
(Salamon, 1994: 112).
That they can function without new laws and in the face of
competition from QUANGOs is not manifest.
In the US the state-civil society distinction was postulated as a democratic
norm and perceived as a necessary condition of democracy (The Economist,
18 January, 1997. p. 2).

The Changing Face of the American Philanthropy


America's non-profit sector is healthy and effective. It is build on a
compact between government and citizenry. In 1938 Congress noted that "
the exemption from taxation of money or property devoted to charitable...
purposes is based on a theory that government is compensated for the loss of
the revenue by its relief from financial burden ... and by the benefits of
promoting the general welfare." The contention that abolishing the tax
deduction, now going on in the US legislative sector is wrong. Elimination
of the charitable deduction under certain flat-tax proposals would not end
giving, but would reduce it by substantial amount. (Dorothy Riding, The
Economist, 18 April, 1997).
The American civic politics is being dramatically transformed by
fundamental shifts. Bill Gates has recently set the agenda of wiring the
nation's free-library (Carnegie), Soros enhancing drug policy in the US,
Milken and Annenberg are designing tactics that best serve the interests of
the benefactor, propelling therefore the entrepreneurial philanthropies.
( Schrage, Los Angeles Times, p. D4)

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34

The strength of America's non-profit sector lies in people's freedom to


choose the cause they want to support. As the experience of the East Central
European countries have proved, the government cannot be a better steward
of their generosity than the charities they sustain. The non-profit sector is in
essence being supported by the government and conscience synthesized,
characteristics that lead to
the functionality of foundations and civil associations, such as diversification
of group interests.

Globalization and Its Evolution from a Nascent Form

Globalization of trade goes back to the sixtieth century when sailing


ships left Europe to find exotic items such as sugar, spice, and silk. Such
trading led to mercantilist "unfree" trade between mother country and
colony, the latter being prevented from industrialization so that it could
supply raw materials to be processed in the motherland. Such restrictions
eventually led to the Liberal idea of free trade, which had already used
smuggling to largely defeat free trade by the 1830s.
The 100-year globalization of free trade was halted after the fall
of Wall Street as the stock-trading model of capitalism. The result was
extreme nationalism which attempted to seal off national borders from the
vagaries of capitalism's booms and busts. Tariffs were erected to promote
national industry, which soon joined with the government and some foreign
investment in an unholy alliance to split the high profits that resulted from

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35

not having to face foreign imports, let alone worry about instituting
expensive product improvement and quality controls. Too, the industrial
model was based in huge plants and heavy output such as tractors, tanks, and
cement.
The rise of Neo-Liberalism and the newest era of free trade
came early 1980s when smuggling could no longer obviate the ire held by
national consumers. With the possibility of consumers being able to buy
inexpensive and more modern goods that really worked, they refused to
believe any longer that they were "disloyal to their nation" if they managed
to purchase foreign goods.

New trade blocs have come to define themselves in terms of


inter -bloc trading, not intra -bloc as had dominated thinking from the 1950s
through the 1970s.
I will take up here the following free trade blocs: European Union,
NAFTA, MERCOSUR, the Visegrad countries, and The Economic
Cooperation in the Black Sea.
The technology revolution made it possible to break isolation of police
states all over the world.
Marketization and Privatization are preconditions of a mature civil
society.
As economic questions dominate political ones (Berend, Central and
Eastern Europe, 1944-1993, p. 218) the rejection of the old command
economy in all East Central European countries has been compile. The
major alternatives today are marketization and privatization. There is still
widespread acceptance of the interventionist role of the state, not only in the

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36

social, but also in the economic areas, as the state is still perceived as the
main author of economic changes, and not the enterprises themselves.
Contrary to the belief that the global economy ignores 'marginal'
countries (Robert Lyle, 1997), serious strides have been made in the
economic integration in the region.
Most (except for Albania) East Central European countries have
joined a free trade bloc.
In this thesis I will delve into the actual major free-trade blocs
namely: NAFTA and the European Union compared, MERCOSUR and
CEFTA (Central Eastern European Free Trade) also known as the Visegrad
countries.

Emerging World Trade Blocs: The North American Free Trade Area and the
European Union Compared

The European Union is becoming the blueprint for free trade in the world. In
the Europe of tomorrow, France intends to set an example of social and
political model in the necessary adaptation to the world as it is by
"deepening" and "widening" in the same time.
On EU institutions the real battle will be between small and big countries,
as Britain, France, Spain and Germany want to redress the over-
representation of the small countries.
The European single-currency, the euro is coming into being as
scheduled by 1998 .
It will be decided in April 1998 how many member countries would
be included in the first round of the monetary union. There are signs that

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37

budget deficits will be a problem for Germany and France for 1997 under the
Mastrich criteria for entry of 3% of GDP.
Receiving millions from the Brussels pot are Greece, Portugal, Ireland
and parts of Spain and Southern Italy. The beneficiaries of the Union grant
system (any region of the EU where the income per head of population is
under 75% of the average has a claim on the grants available) will than be
the Czech, Slovak Republic, Poland and Hungary.
If the number of countries will be big enough to make the euro
possible, Europe would be fit for globalisation despite unsolved problems
with its social security systems.
As the world moves into large trade blocs, the two most important to
date are the North American Free Trade Area (NAFTA) and the European
Union (EU), formerly known as the European Community. To begin, this
study compares the key legal and policy aspects of the two blocs and
outlines the salient features of each. The remainder of the essay presents
quantitative data on NAFTA and the EU as well as additional relevant data
on Japan, Eastern Europe, and other world trade units. The analysis focuses
first on population, GNP, GNP/C, and exports, as measured by export share
of GNP. The EU and NAFTA are then compared with respect to economic
strength, geographic coverage, and competitive potential.
In 1994 twelve countries belonged to the EU: Belgium, Denmark,
France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands,
Portugal, Spain, and the United Kingdom. Joining January 1, 1995, were
Austria, Finland, and Sweden. In a nationwide vote Norway's population
rejected its government's late 1994 bid to become the sixteenth member.

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38

NAFTA comprises the United States, Mexico, and Canada.


Argentina, Costa Rica, Chile, Colombia, Venezuela, and other Western
Hemisphere countries are seeking membership.

Free Trade "Fever"


With the process of "globalization" in which national trade and
finance seek to form mutually beneficial alliances, free
trade agreements among nations are reaching a fever pitch. The magnets
and models for free trade are NAFTA and the EU.
Countries either seek to join NAFTA and the EU or follow these
models in forming their own free trade agreement (FTA) leading to a free
trade area (FTA, depending on the context). In the Western Hemisphere
most countries want to join NAFTA, except Brazil, which is leading a
movement of its partners in the misnamed Mercado Comun del Sur
(MERCOSUR). As of January 1, 1995, MERCOSUR became almost a full
customs union, and seeks by the year 2005 to create an FTA such as
NAFTA. MERCOSUR does not expect to become a common market such
as the EU until the first or second decade of the twenty-first century. In the
meantime, it might better be called the "Mercado del Sur, " omitting the
concept of "Comun."
A common market is much more ambitious than an FTA. It goes
beyond free trade and investment flows to require all member countries to
live under the same laws and regulations. The EU has been successful in
providing for educational and labor mobility among its members. Yet the
EU includes aspects that have yet to be achieved: a common currency,
foreign policy, military command, and police activities (see Figure B:l).

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39

Although there is much discussion of FTAS, comparative analysis of


the provisions that govern them is almost nonexistent. Furthermore, there is
little consistently comparable data on the size of FTAs in terms of their
population, wealth,
per capita wealth, and trade flows among partner countries and with other
FTAS.
This study presents baseline data essential for understanding how the
EU and NAFTA models differ in purpose and size.
The provisions of the EU and NAFTA are summarized in Figure B:l.
The NAFTA model mainly involves freeing trade and investment flows,
although it also provides, in a limited way, for the movement of
professionals among its three countries. Meanwhile, the EU, knowing that it
is losing markets in the member countries of the North American Free Trade
Area, now seeks to recover access to these markets by signing free trade
agreements. In February 1995 the EU authorized negotiation with Mexico to
create an EU-Mexico FTA. (For details, see the preceding chapter in this
volume, "Mexico as Linchpin for Free Trade in the Americas.")
Tables Bl, B2, and B3 present data on population, GDP, GDP/C, and
export share in GDP for the EU, Eastern Europe, and NAFTA. Table B4
shows population, GDP, and GDP/C for major world trade blocs. Table B5
indicates the relative importance of the major trade blocs, using the United
States as a reference point. Table B6 profiles the economies of the United
States, Japan, Germany, the United Kingdom, Canada, and Mexico,
according to selected indicators.
One of the members of the EU, reunited Germany has the largest population
(81 million inhabitants). Italy and the United Kingdom follow, virtually tied
at 58 million. Germany's population is 207 times that of Luxembourg, the

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40

smallest European country, with a population of 389,000. And Germany's


GNP is 134 times that of Luxembourg (Table Bl).
Given such disparities in population size, is it "fair" that voting rights
in the EU give undo weight to small countries? (For shares of voting rights,
see Appendix A.) Despite its small population, Luxembourg has the highest
GNP/C in the EU (US$ 35,260) and the highest export share of GNP (94
percent). Spain, in contrast, has a larger population (39 million) but the EU's
lowest export share of GNP (17 percent). Clearly, weighted voting rights are
not as arbitrary as first glance might have us believe. In any case, countries
with the largest populations together constitute a "qualified" (decisive)
majority. In 1994 it took 23 "minority"' votes to block the majority. It now
takes 26 votes to constitute a blocking minority.'
Six countries in Eastern Europe seek to join the EU: Bulgaria, the
Czech Republic, Hungary, Poland, Romania, and the Slovak Republic.
Among these, Poland has the highest GNP (US$ 75 billion), much higher
than EU member Ireland (US$ 42 billion) . Poland, however, is weak in
exports, which amount to only 19 percent if its GNP. Hungary's GNP/C is
54 percent higher than that of Poland, owing to its previous leadership
position among the former Communist countries in carrying out economic
reforms (Table B2).
The relationship of Poland to "smaller" countries is interesting.
Although Poland has four times the population of Bulgaria (9 million), it has
the lowest export share of GNP (19 percent). Bulgaria has the second
largest export share of GNP (45 percent), after the Czech Republic, which
leads both Poland and Bulgaria in export share of GNP (58 percent) and also
in GNP/C (US$ 2,440) compared with the rest of the Eastern European
countries.

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With regard to Romania and the Slovak Republic, the two poorest
countries seeking to join the EU, the lackluster economic performance of
Romania is particularly noteworthy. Romania's GNP (US$ 24.9 billion) is
more than double that of the Slovak Republic (US$ 10 billion), yet the two
countries export the same percentage of GNP (28 percent) . Romania's trade
with Eastern Europe collapsed in 1991 along with the Council of Economic
Assistance for Eastern Europe (COMECON) trading organization.
Subsequent growth in trade with the West has been slow, and current-
account deficits of more than US$ 1.2 billion have been recorded each year
from 1991 through 1994. Romania's population is four times larger than that
of the Slovak Republic (5.3 million).
The legacy of high inflation and modest growth accounts for the
Romanian currency's minimal purchasing power. It is unlikely that Romania
will become a full member of the EU within the next ten years .3
How can the Slovak Republic, with its small population and weak
economy, hope to compete in an expanded EU? Although its population is
only 5 million and its GNP is only US$ 10 billion, the Slovak Republic has
the same high level of exports relative to GNP as the Romania.
The Five Constituencies of the European Union
Given the disparities in population, GNP, GNP/C, and export share of
GNP, the countries of the EU form five "constituencies" (see Figure B: 2) .'
1. The "Core": France and Germany. Belgium, the Netherlands, and
Luxembourg, too close geographically and too small economically to
avoid being drawn into the orbit of power, are appendages of the
Core. (In 1951 France and Germany founded the European Coal and
Steel Community, the precursor of the EU, to rebuild war-torn
Western Europe.)

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2. The "Free Traders": Great Britain and Denmark (members of the EU


since the early 1970s) . Britain is leading the way toward establishing
a common market for goods, services, capital, and people while trying
to prevent the rise in Europe of any singularly powerful country.

3. Greece, Portugal, and Spain: These poorer, newly democratic


members seek to modernize their economies to protect against a
resurgence of authoritarian rule. The admission of these countries into
the EU in the 1980s widened the gap between
rich and poor countries, the latter including Ireland and to some extent
Italy.
4. Eastern Europe: the Czech Republic, Hungary, Poland, and Romania.
The countries of Eastern Europe freed themselves from Russian rule
after 1989 and view admission to the EU, proposed for 2000 by
Germany, as insurance against the resurgence of Russian authority in
the region.

5. European Free Trade Association (Austria, Finland, Norway, and


Sweden): These countries, except Norway, have realized that they can
not afford to be left out of an expanding EU. Austria may even
become part of the Core constituency. For at least the next decade
Norway has petroleum and fish for export to non-EU countries, giving
the country a feeling of confidence that it does not need its neighbors
as much as they need it. Furthermore, the fact that Norwegians
defeated by slightly more than 50 percent the government initiative to
join the EU can be traced to the votes of the relatively large

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agricultural and fishing populations, both fearful of submitting to


common market policy that would limit food production subsidies and
open Norwegian fishing beds to the EU. The urban sector, some of
which also voted against joining the EU for fear of losing social
benefits, has been disadvantaged by Norway's failure to join the EU,
and some large Norwegian manufacturing companies are relocating
their
main offices to the EU, thus weakening the drive to modernize the
economy.5
In view of the diversity of the five groups, disunity in the Union
comes as no surprise. Two coping models have emerged to manage the
divergent interests: (1) the British model seeks to give more or less equal
weight to the concentric circles depicted in Figure B:2, encouraging
cooperation among the diverse constituencies; (2) the German-French model
favors moving forward with monetary union and a unified foreign policy
focused on the center circle in Figure B:2, the Core. The notion that Britain
may resist France and Germany and refuse to join the EU monetary union
prompted this comment in The Economist:
If Britain stays out, only to change its mind later [as it did about
the EU], its leaders may seem as silly as Churchill now seems, for this
comment on the founding of the European Coal and Steel Community
43 years ago: "I love France and Belgium but we must not allow
ourselves to be pulled down to that level .” 6

Population totals (Table B4) for NAFTA and the EU are now about
the same: NAFTA, 363.3 million; EU (15 countries), 368.8 million (1992
data) . Within the EU, Germany's economy is the strongest, followed by

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France and Italy. Among all countries in the two trade blocs, the United
States has the highest GNP and
the highest GNP/C within NAFTA. Overall, Luxembourg has the highest
GNP/C.
With respect to export share of GNP, Mexico ranks lowest in NAFTA
(14 percent) and Greece places last in the EU, with 23 percent. Even
Romania and the Slovak Republic rank above Mexico, with 28 percent each.
The index calculated in Table B5 shows the relative economic
strength of major trading units. For example, Mexico has one third of the
population of the United States, but Mexico's export share of GNP is only 5
percent of the U.S. export share of GNP. The table also shows why Japan, a
single country that has established a web of trade dependency worldwide, is
often seen as the economic "enemy" of both NAFTA and EU. Japan's
GNP/C is 21 percent higher than that of the United States. Many countries
have formed implicit trade blocs to compete with Japan and its accumulation
of world trade capital. NAFTA gives the United States, Canada, and
Mexico the opportunity to expand international trade at Japan's expense.
In the Western Hemisphere, the GNP of the United States far exceeds
that of other countries of the hemisphere, with the exception of Canada,
whose GNP is 84.3 percent of the U.S. total (Table B5). Although the
population of the EU is 48 percent larger than the U.S. population, its
GNP/C is only 89 percent of the U.S. figure.
Mexico has established itself as the linchpin for free trade in the
America S7 despite the fact that its population is only one-third that of the
United States, its GNP 5 is percent of the U.S. amount, and its GNP/C 15.3
percent of the U.S. figure. The NAFTA framework, along with the "defeat"

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of the Chiapas rebels in the August 1994 national elections, has increased
the attractiveness of Mexico for U.S. investment.
Mexico's new free-trade pact with Nicaragua (The News, September,
1997) will provide for new jobs and investment. The pact would provide
Nicaragua access to 90 million dollars in credit programs to promote trade
between Mexico and Central America, including expansion of Nicaragua's
export beef industry.
Most recently trading options with Italy and the European Union were
discussed. These will go into effect in 1998. The Mercosur free trade bloc
of South America also expects to sign a preferential trade agreement with
Mexico by years end ( See The News, "Mexico Pact Raises Nica Export
Quotas", September 21, 1997)
Mexico and Israel plan to sign a free trade agreement by early 1999. I
has been finally signed in 2011. In relation to the GNP/C of the United
States, Mexico ranks higher than Mercosur by 3.5 percent, while Germany,
with a population about equal to the U.S. population, has 95.7 percent of the
U.S. GNP/C, raising the average for the EU to 80 percent of the U.S.
GNP/C. This analysis is carried a step further in Table B6 in the Statistical
Abstract of Latin America (UCLA, 2005) and it was adapted from a
comparison published regularly by the New York Times of NAFTA
(Canada, Mexico, and the United States), the EU (represented by Britain and
Germany), and global competitors (represented by Japan).
The bottom line for global competition is shown in the manufacturing
wage gap (Table B7). The Western European countries with the highest
average hourly wage in manufacturing (1993 data) are forced to complete
under the burden of a wage of US$ 21.

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In Japan and the United States the figure is $16. The Asian "tigers"
(Taiwan, Singapore, South Korea, and Hong Kong), however, average
about US$ 5 per hour. These data illustrate Mexico's status as an attractive
locale for the establishment of manufacturing plants,
with its US$ 2.41 hourly manufacturing wage. Likewise, Eastern Europe,
where the hourly manufacturing wage is US$ .90, is Mexico's future
counterpart for the EU. Germany has already moved important
manufacturing funds into Romania, for example, but the EU has yet to
establish a formal relationship with Eastern Europe comparable to Mexico's
position in NAFTA. In general, Eastern Europe (except the Czech Republic)
awaits the opening of its economies, which remain largely nonmarket (see
Appendix B).
NAFTA is more equitably positioned in terms of internal wage gap
between countries than is the EU. For NAFTA, the U.S. manufacturing
wage rate is 6.8 times higher than the Mexican rate. For the EU, the present
gap between the highest wage (Western Germany) and the lowest one
(Portugal) is 5.4 percent, but the potential gap, once the EU expands into
Eastern Europe, is 36.6-an amount equal to the difference between Western
Germany and Bulgarian wages. Equity is not the only issue, however; in
this case, inequity may help Eastern Europe attract capital in the competition
for ever cheaper manufacturing sites in an era of globalization.
Under the NAFTA model, the process of opening markets to free
trade will occur over 15 years (Table B8) . Eastern Europe, in contrast, faces
a much more difficult mission of nearly immediate integration into the EU.
In keeping with the gradual removal of trade barriers, Mexico has eliminated
duties on all U.S. and Canadian products not made in Mexico, that is, on 43
percent of its purchases from Canada and the United States.

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Although the data suggest that Mexico purchases most of its goods
from the United States (63.4 percent in 1992) and very little from Canada
(1.0 percent), the reality is that much of the Canada-Mexico trade is "lost"
statistically when it passes through the United States, where the transactions
become incorporated into U.S. trade data. (See the preceding chapter in this
volume.)
Under NAFTA the United States immediately eliminated duties on
nearly 50 percent of Mexican imports and Canada did away with tariffs on
19 percent of its imports from Mexico, including a complete opening to
Mexican textiles (thread, cloth, and clothing), which in 1992 reached about
US$ 17 million in value. (Mexican textile exports to the United States were
56 times greater.)
Conclusion
When NAFTA and the EU are compared with respect to their
framework and policies, geographic scope, and leadership, three significant
points emerge.
1. Unlike NAFTA, the EU allows individuals, both workers and
students, to move about freely among the member countries. In
addition, a goal of the EU is eventual unification under one currency,
a common foreign policy, and military coordination.
• NAFTA has the potential to expand beyond Mexico into Latin
America. The United States and Mexico have extensive trade
experience in the region, in comparison with the EU's lack thereof in
Europe. Also, Mexico has entered into several multilateral and
bilateral agreements that make expanded trade possible. Canada has
far to go however, in establishing trade relations beyond those with
the United States. And both the United States and Canada face

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formidable competition from Japan. Under Mexico's leadership in


bringing about the integration of the Americas, however, NAFTA is
well positioned to compete with the EU, as it takes its first serious
steps to develop relations with MERCOSUR.

3. One country, the United States, functions as the "core" for NAFTA,
whereas France and Germany comprise the EU core. However, French
president Francois Mitterand's term is coming to an end and Jacques Delors,
retiring head of the European Commission, has decided not to be a
presidential candidate in France's May 1995 elections. Can Germany count
on France as its traditional ally in promoting ever greater EU unity or will a
new dynamic emerge?
Meanwhile, expansion of the EU into Eastern Europe is
delayed not only by the slow process of creating market economies with
modern laws and credit systems but also by Russia's argument that inclusion
of former Warsaw Pact countries in NATO could signal a new Cold War.
The European Union is becoming the blueprint for free trade in the
world. In the Europe of tomorrow, France intends to set an example of
social and political model in the necessary adaptation to the world as it is by
"deepening" and "widening" in the same time.
On EU institutions the real battle will be between small and big countries,
as Britain, France, Spain and Germany want to redress the over-
representation of the small countries.
The European single-currency, the euro is coming into being as scheduled by
1998 .
It will be decided in April 1998 how many member countries would
be included in the first round of the monetary union. There are signs that

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budget deficits will be a problem for Germany and France for 1997 under the
Mastrich criteria for entry of 3% of GDP.
Receiving millions from the Brussels pot are Greece, Portugal, Ireland
and parts of Spain and Southern Italy. The beneficiaries of the Union grant
system (any region of the EU where the income per head of population is
under 75% of the average has a claim on the grants available) will than be
the Czech, Slovak Republic, Poland and Hungary.
If the number of countries will be big enough to make the euro possible and
that Europe would be fit for globalization despite unsolved problems with its
social security systems.

The Visegrad Countries (CEFTA.) New accessions

The Central European nations of the Czech and Slovak Republics, Poland,
Hungary and most recently Romania, are actively seeking integration and
generally viewed as leaders in the process of transition from central planning
to market-based economies. There are prospects of the accession of the
Visegrad countries to the European Union in the long run (Rudziecki,
Conquest of Paradise). Having still not fully recovered from fourty years of
socialist rule, Poland and Hungary are the most likely to first join the
European Union. As a well functioning market economy is the main entry
condition, the biggest success. As competition heats up between the member
countries, the Czech government claims they are better prepared for the
accession than the rest and avoids using the Visegrad label and considers the
CEFTA label more appropriate,
But two World Bank economists say that while these nations have
come a long way, the four -- known as the Visegrad countries -- are

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plagued by "weaknesses" in such critical areas as property rights and


contract enforcement.
Writing in the current issue of the World Bank/International Monetary
Fund magazine "Finance and Development," World Bank Central European
division chief Michel Noel and consultant/financial analyst Michael Borish
say that to ensure the continued growth of the private sector all four "need
to push forward with reforms."
State ownership is still significant in both the banking and industrial
sectors in all four countries, they say, and "Poland and the Slovak
Republic, in particular, need to accelerate privatization."
Without question, the two economists point out, these four countries
have led the entire region in opening up the private side.
The Czech Republic has seen its private sector increase from 11
percent of GDP (gross domestic product) in 1989 to about 60 percent in
1995. Private sector employment jumped from 16 percent of the workforce
in 1989 to 65 percent in 1995, with the number of private jobs estimated at
about 3.2 million.
In Hungary, the private sector share of the economy climbed from 20
percent in 1989 to 70 percent of GDP in 1995, with about two thirds of the
Hungarian labor force now working in the private sector.
In the Slovak Republic, the private sector share of GDP rose from 27
percent in 1991 to 62 percent in 1995 while private sector jobs nearly
quintupled from 1990 to 1995, reaching 1.2 million.
And in Poland, the private sector share of GDP rose from 28 percent in 1989
-- the highest in the region at the time primarily because of
private agriculture under communism -- to just 59 percent in 1995,
with the private sector accounting for 66 percent of the country's

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labor force in 1995, compared with 47 percent in 1989.


But even in these successes there are problems.
In Slovakia, for example, private sector growth has been concentrated
in one sector of the economy -- services -- and in just one region
--Bratislava. They say that private sector growth since 1994 has been
"slowed by policies that, despite the growth of export industries, have
encouraged a gradualist approach to privatization."
In Hungary, they say, private sector growth is also primarily in the
service sector and that now nearly 75 percent of Hungary's GDP is
generated by financial, legal, consulting, tourism, entertainment and
other "nonmaterial" services.
The economists say that private sector growth in Hungary has been
"stunted" by high tax rates, high inflation and heavy government borrowing.
Overall, the economists say the Visegrad countries have made
progress in equalizing the status of private and public property and
improving protection of property rights. However, they say, "property rights
continue to be undermined by tenancy laws that restrict the rights of property
owners, incomplete property registries and weak legislation governing
collateral."
They write that in all four, "tenancy laws distort rental markets and
make repossession of mortgaged property difficult." Title to urban and
agricultural property is "often uncertain because of incomplete and
inaccurate records, multiple pledges on the same property, and
unsettled claims arising from demands for restitution and from
transfers" among state entities.
Similarly, say the economists, all four countries have improved their
commercial codes, but that "institutional weaknesses" such as a

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shortage of adequate courts and underdeveloped procedures for the


private resolution of contract disputes, are undermining contract
enforcement.
The flow of credit to the private sector has also been "mixed" within
the four nations, say the economists. New lending to the private
sector is growing, although public sector borrowing is growing faster
in all except the Czech Republic, where the private sector got 65
percent of total outstanding credit in 1995. In Hungary, Poland and the
Slovak Republic, on the other hand, private sector credit was at the low end
of the scale -- between 32 and 46 percent.
Instituted in 1992 and effective from 1993, CEFTA comprises the following
countries: Czech Republic, Poland, Slovakia, Slovenia and Hungary, and
most recently Romania. Romania has signed in 12th of April through the
Central European free Trade Zone that is going to be a complete free trade
zone by 2000-2001 (Mediafax, April 1997). For the industrial and
agricultural goods taxes will be gradually lowered by 1998 (Rudzieski,
1995). Trying to catch up with the pulse of globalization of free trade
markets is Romania which joined CEFTA in April 1997.
The issue causing the most anxiety for EU decision-makers is the
archaic agricultural structure in the region which would cost the Union a
substantial amount of money to bring to Western standards.
The cheap labor force is a mine gold for Westerners who are flooding in
with investment. As long-standing negotiations have begun in 1995 for
admission of Hungary Poland, Czech and Slovak Republic in 1999.

The Economic Cooperation in the Black Sea

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Besides the European Union, NAFTA, MERCOSUR, the


Visegrad countries, The Economic Cooperation in Black Sea area (BSEC)
was set up in 1992, at the initiative of Turkey, with the participation of
eleven countries: Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece,
Moldova, Romania, Russian Federation and Ukraine. BSEC initiated fields
of cooperation with MERCOSUR and relations with the EU and problems
concerning sea and river transport and reorganization of commercial
exchanges have been recently discussed in Bucharest (Daniciuc, Free
Romania)
All countries have to cope nowadays with the globalisation of
free trade. Flexibility is replacing the old immutable order as adaptability is
the major value. The growing integration of the world economy has been in
general an engine of mutual enrichment in the form of access to overseas
markets and has hoisted wages. Yet some Western and East-Central
European countries are seeking to protect themselves from the adverse
consequences of change showing a particular propensity for support on
acquired rights and entitlements in the workplace, as France, Sweden and
almost all East Central Europeans. One symptom is that the structure of
welfare state damages job creation. Countries with more flexible labor
markets do better in their fight against unemployment and lowering tariffs
within continuously enlarging free trade blocks is beneficent for their
economies. Striking a balance between state protection and freedom of
action is the model for future development in a globalized economy.

Mercosur and The Integration of The South

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If the strongest example of Globalization to date is found in NAFTA and the


EU which push standardization, the weakest example is that of MERCOSUR.
Although MERCOSUR claims implicitly to develop in the mold of Globalization,
in our view it represents Closed Globalization. Too many Brazilian leaders are
proposing to use Brazil's tariff-protected MERCOSUR market to dominate an
internally-oriented South American market that inhibits world competition.
Although those same Brazilian leaders claim that they favor joining the
U.S.-Mexico proposed Free Trade Association of the America (FTAA), the realize
that Mexico would be the bridge between north and south.
In implicit opposition to MERCOSUR, Mexico is using bilateral agreements
with Latin American countries to lay the basis for the FTAA, a basis that the USA
can not help to build because it is trapped in petty partisan political struggles
between the Republic Party and Democratic Party. In the meantime, Mexico has
signed FTAs with Venezuela and Colombia, Chile, Bolivia, Costa Rica, and is
developing such a union with the Caribbean and Central America.22
The rise of Globalization is complicated by two major factors. First, the
nationalist antipathy to foreign direct investment and inflow of portfolio funds has
vanished almost everywhere at once and there is not enough private capital to
meet all the demands for it. The change of world
*

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As How the World Bank and the IMF had been building the infrastructure in
many poor countries around the world, has changed, putting more into
education, stopped building bridges, dams and roads, which is very short
sighted.

The process of economic integration between Brazil and Argentina


that began in the mid 1980s has become the most successful attempt at
regional integration in modern Latin America. This process has contributed
to a fundamental departure from previous regional antagonisms and has
foster higher levels of economic interdependence. In 1991, Argentina and
Brazil were joined by the smaller neighbors of Uruguay and Paraguay
establishing the Southern Common Market or Mercosur.
Mercosur's members, with a population of more than 200
million people, represent over 55% of the total economic activity of Latin
America and its most industrialized region. Mercosur has a diversified and
modernized manufacturing industry and has excellent prospects in the
agribusiness and mining sectors. The consensus that Mercosur's initial stages
had been successful and the already high levels of intraregional trade led
Chile and Bolivia to join Mercosur as associate members in 1996. Peru and
the Andean Group, the other south American trade group, have began talks
on a formal agreement to be negotiated with Mercosur, an event that would
link South American economies in an unprecedented manner.
Mercosur has survived the unpredictability of hyperinflation, disci mil
exchange rates, and sharp fluctuations in demand and production. Moreover,

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institutional support continued despite drastic changes of government and a


profound turn in the strategy of integration. The evolution of Mercosur can
be divided in three stages: the sectoral agreements of the 1986-89 period of
bilateral protocols; the transition to Mercosur from the Buenos Aires Act of
1990 until the establishment of an imperfect custom union at the end of
1994; and the period of consolidation and expansion initiated in 1995.
In reviewing the evolution of regional integration since 1986 we also
analyze the main tools implemented in this process. I begin by placing the
origins of regional integration in a Latin American and global context, and
then follow to evaluate the first phase of integration under the Program of
Integration and Economic Cooperation (PICE). The second part focuses in
the debate over which strategy of integration to adopt and in the difficulties
and imbalances on the road to a custom union. Finally, I suggest some short
and medium term policy objectives for consolidating Mercosur and address
the dilemmas of expansion.

I - The Foundational Years

Economic integration between Latin American countries has been


advocated by technocrats and policy makers alike since at least the 1950s.
The United Nations Economic Commission for Latin America (ECLA),
under the leadership of Raul Presbich, begun advocating the expansion of
intraregional trade together with policies of import substitution
industrialization. The creation of the Latin American Free Trade Assosiation
(LAFTA) in 1960, sought to foster greater economic integration between
south American countries and Mexico. The twenty years that followed the
creation of LAFTA, brought only modest progress. Between 1960 and 1980,

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intraregional trade expanded from 7.9% of total trade to only 13.8% in 1980.
In an effort to resuscitate the integrationist project, LAFTA became the Latin
American Integration Association (LAIA) in 1980.
The debt crisis that erupted at the beginning of the 1980s brought to
an end an expansionary cycle propelled since the 1940s by import
substitution policies. Intraregional trade hit a bottom low in 1985 at 8% of
world trade, and it was not until 1989 that the region regained the levels
achieved nine years earlier. The burden of the foreign debt sharply decreased
the ability of Latin American countries to pay for imports, and although the
recession allowed for a favorable balance of trade, it also made extremely
difficult to comply with the necessary fiscal restrictions.
During the second half of the 1980s, Latin American countries
seeking to overcome the crisis, begin to adopt adjustment policies designed
to stimulate the economy through an increase in exports. As the pressures
brought about by the foreign debt begin to ease and governments experience
moderate success in the implementation of stabilization measures,
intraregional trade began to grow again. This process was also stimulated by
a important return of capital that had flown away during the debt crisis, that
allowed for the financing of a large deficit in the current account and an
increase in international reserves. In addition, a slowdown of the economies
in the industrialized nations at the end of the decade led to a reduction in the
demand for Latin American products and an increase in protectionist
measures from these markets. In 1994 intraregional exports between LAIA
was three times bigger than in 1985.

The Program of Integration and Economic Cooperation, 1986-1989

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It is within the previously mentioned context of economic uncertainty


that the governments of Brazil and Argentina decide on 1986 to establish the
Program of Integration and Economic Cooperation (PIEC). The PIEC
intended to establish a framework for the emergence of a common market by
promoting a gradual process of integration based on a series of commercial
agreements in selected sectors of the economy. These agreements,
established in the form of protocols, demanded a low level of coordination
required to define the scope and exemptions to the process of trade
liberalization, and to agree on rules to avoid unfair competition and
unwanted triangulation’s. This selective and gradual process, lacking
definite timetables and specified objectives, sought to achieve intra-industry
arrangements and to modify the asymmetries present in bilateral trade since
the beginning of the 1980s.

In addition to an increase in the general level of bilateral trade, which


was very low before 1986, the PIEC also addressed Argentina's concern of a
continued trade deficit with Brazil, and the inter-sectoral specialization of
trade in which Argentina exported agricultural and food products with little
value added, and Brazil manufactures of industrial origin. The PIEC chose to
concentrate on the capital goods sector, which members believed offered
significant opportunities for attracting investment and fostering cooperation.
The primary sector was thought to be unable to create intra-sectoral
equilibrium and growth. Additional benefits of the capital goods sector
included the stimulus that could have for the rest of the economy, and the
high degree of government autonomy over this sector, composed mainly of
small and medium size firms.

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The PIEC originated under favorable macroeconomic conditions. The


1986-87 period represents a moment of high compatibility in the political
and economic arenas. Both countries were new democracies trying to
implement stabilizing economic programs (the Austral Plan in Argentina,
and the Cruzado Plan in Brazil), and were seeking a common policy in the
GATT and ALADI rounds of negotiation. During 1986, Brazil experienced a
strong GDP growth of 7.6% and Argentina grew by 6.1%. Plans designed to
curb inflation were also initially successful. In Brazil inflation was reduced
from 228% in 1985 to 58% in 1986, while Argentina's inflation shrunk from
385% to 82% during the same period.
The goals of the PIEC were severely constrained after failing plans
pushed the economies into a recession. By 1988, the economic conditions
under which the PIEC had to operate became very difficult. The problems of
the Cruzado Plan and the troubles with the level of reserve deposits led to an
increase in import restrictions in Brazil which undermined support for
further integration. Between 1985 and 1990 GDP in Brazil grew by an
average of only 1.7% a year, and in Argentina by only 0.1% a year.
This was compounded by rising inflation and exchange rate
fluctuation. Inflation in the 1985-89 period averages 444% for Argentina and
383% for Brazil, almost twice as bad as the 230% for the rest of Latin
America. The difficulties that aroused from the lack of continuity in
macroeconomic policy at the end of the Sarney and Alfonsin presidencies
also contributed to a loss of momentum. The economic team of both
countries gradually moved apart, divided primarily by their approach to the
foreign debt. While Brazil was declaring a moratorium on debt services,
Argentina was closing a deal on a stand-by credit and a loan to cover for
losses on export revenues.

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Despite the severity of the economic problems in Argentina and


Brazil, the PIEC contributed to several important developments. Bilateral
contacts in many important sectors was originated. Between 1986 and 1989
agreements were negotiated in the areas of capital goods, food production,
wheat, iron and steel, energy, biotechnology, nuclear energy, automobiles
and transportation. A modest liberalization of trade begun in the second half
of the 1980s. Brazil began to restructure its tariffs in 1988-89, and in 1990,
the list of ban imports was abolished. Local content rules for intermediate
and capital goods were still maintained, as it was a ban for 47 computer
related products. In Argentina, the value of industrial output subject to
restrictions was reduced from 62% to 18% during 1987-88. the remaining
licensing restrictions were eliminated between 1989 and 1990.

Total bilateral trade significantly increased and almost doubled during


this period. Most of this growth was from Argentine exports that gained
access to the Brazilian market for the first time. The greatest progress in
bilateral trade was achieved in the capital goods sector, automobiles and
food products. Although short from original expectations and despite a lack
of investment and different industrial policies, the capital goods sector
captured a greater share of trade at 13%. In the food sector, 500 products
were added to a list of zero tariff between 1986 and 1990, and in 1988 Brazil
became Argentina's most important export market for wheat, capturing over
26% of wheat exports. Of significant importance was the growth of
industrial exports from Argentina that increased in 1989 to almost half of
total exports to Brazil from 20% in 1985. In the steel and iron sector,
preferential arrangements led to a steep increase in Argentine exports of
894% to reach $59 million dollars in 1989. Brazil's exports of steel and iron

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followed an irregular pattern but maintained a surplus at $194 millions in


1988 and then down to $87 millions the next year.

The PICE generated significant changes in the relationship between


the economies of Brazil and Argentina but fell short of achieving a clear
success. The project lacked the instruments and policies to allow for a
reconversion of the productive sectors and did not go far in implementing
industrial or technological programs of complementation.

As the decade came to an end, presidential elections and domestic


conflict dominated the political agenda in both countries. Lack of
investment, a crippled public sector and unprecedented high inflation
continued despite several attempts to revive the economy. At the end
of these two administrations that had to struggle with the return to
democratic rule and the aftermath of the debt crisis, further integration
lacked the enthusiasm of the 1986-87 period. In addition, it seemed as the
coalitions in power were going to be ousted, contributing to greater
uncertainty about the development of further bilateral commitments. The
process of regional integration had to wait until after the presidential
elections to regain importance and direction.

II - The Transition to MERCOSUR, 1990-94

The new coalitions that arrived to power after the Argentine and
Brazilian elections had to take on the major task of achieving economic
stability and renewed growth in a fast changing international context.
Changes in world politics significantly affected policies for regional

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integration. After the end of the cold war, it seemed that power competition
between nations had shifted its center of gravity from the political-
ideological realm to the economic realm. Two sets of events in particular
affected Argentina and Brazil. On the one hand, the competition for
investment posed by the emergent markets of Eastern Europe, protectionist
policies in the agricultural markets of the industrialized nations, and the rise
of China and East Asia in world trade, threatened the position of the South
America in world markets. On the other, the success of the European
integration, the proliferation of trade blocs, the United States Initiative for
the Americas, and Mexico's early moves towards a North American Free
Trade Agreement, gave support to regional integration as an important tool
to compete successfully in the world economy.

A crucial factor that distinguishes the process of integration in this


decade is the unilateral liberalization programs that began to be implemented
in South America. Argentina began to liberalize the economy in 1987 and
accelerated after Menem's arrival to power in 1989. Brazil began with a
program of liberalization of trade under Collor in 1990. Although there are
differences between these programs, unilateral liberalization helped to re-
inforce the flow of regional trade and to diffuse sectoral opposition to
preferential arrangements between both economies. The betterment of
conditions of access to regional markets induced by unilateral liberalization,
allowed for particular sectors to identify payoffs derived from the integration
process, and led to the formation of coalitions of support.

The simultaneous implementation of preferential agreements and


market oriented policies of trade liberalization induced a revision of the

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strategy of integration. Integration within the latter context has been called
open regionalism. Under this strategy, unilateral liberalization and
preferential agreements are seen as reinforcing each other. This is opposite
from previous attempts at preferential agreements in protectionist regimes of
import substitution industrialization that permitted influential sectors of the
economy to block integrationist attempts. Moreover, as Bouzas noted import
substitution programs of regional scope demand the ability to negotiate and
coordinate policies to structure and redistribute costs and benefits that
exceeds the technical and political capacity of closed economies.

The new strategy of open regionalism still allowed for different


interpretations. Integration in an open economy can be thought as an
intermediate step leading to the convergence between preferential and
general liberalization. Under this scenario, preferential treatment to regional
states acquires a temporary status to be followed by general openness
generated by ever growing free-trade areas. This has been the traditional
view from the United States regarding integration in the western hemisphere
and the most narrow interpretation policy makers derived from orthodox
economic theory. This commercialist view of integration that concentrates
on trade growth, suggests that regional groupings can stabilize the region
helping to smooth the transition towards the globalization of the local
economies.

An alternative position to the previous view approaches integration as


a complex interaction between the benefits of international competition and
regional complementation. Greater competition leading to improvements in
quality, price and variety of goods can be derived from a commercial policy

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towards third countries. In an expanded regional market, economies of scale,


better resource allocation and the development of specialization should lead
to the benefits of complementation: employment growth and greater income.
This strategy needs not only a precise and effective margin of
preference with low barriers to third countries, but should also avoid
frequent and sharp fluctuations between members currencies, while seeking
to harmonize policies for industrial and technological development and for
investment. The greatest source of certainty regarding the margin of
preference between members is the establishment of a common external
tariff (CET).
The latter understanding of integration as a development strategy
results in a preference for a custom union over a free trade area. Three
factors in particular, give support to this position. First, the elimination of
the diverse barriers for intraregional trade reduces administrative and
production costs and leads to better resource allocation. Second, a custom
union is better positioned to generate intra-industry integration and gives
greater certainty to access the extended market and to the development of
regional economic policy and investment. And lastly, a customs union
entails increased power for members that can negotiate in world markets as a
block. The interplay of these elements, in principle, should lead to the
creation of trade, both intraregional and total trade, and not to trade
diversions.
Therefore the Buenos Aires Act, signed in July of 1990, established a
new methodology of integration based on a general and automatic
liberalization of trade leading to zero tariffs to intraregional trade by
December 31st 1994. Although the Act allowed for the sectoral agreements

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of the past, the process of integration was now focused on the elimination of
barriers to trade.
This new strategy was formalized in the 1991 Treaty of Asuncion that
incorporated Paraguay and Uruguay to the integration process and legally
created MERCOSUR. At Asuncion, MERCOSUR members lunched the
Program of Trade Liberalization that implemented a linear and progressive
reduction of intraregional tariffs and agreed on the elimination of non-trade
barriers. The implementation of the Treaty of Asuncion resulted in four
years in which intra-MERCOSUR tariffs were lowered by 7% every six
months. Instead of the positive lists of goods that the PIEC had allowed
to be liberalized, the new strategy adopted negative listing that included
temporary exemptions to the rule.
This automatic and linear reduction of intra-MERCOSUR tariffs made
the evolution of the domestic economy of members increasingly influential
in determining the volume and direction of the flow of regional trade. As a
consequence, the politics that condition the competitiveness of the different
sectors of the economy became an important part of the agenda of
negotiations (Motta Veiga 95).
The coordination of macroeconomic variables and the level of
harmonization of microeconomics policies intended in the Asuncion Treaty
became difficult to implement. As countries become more interdependent,
the asymmetries between them demand attention to coordinate policies of
promotion and the national regulatory framework. This is a complicated
process considering there is a trade off between the structural relationship of
the economies that belong to a preferential trade agreement and the
necessity/capacity to harmonize policies. Without high interdependence
there is little demand for coordination, and without harmonizing policies is

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difficult to expand the structural relationship between the economies (Porta


96).
These elements became all the more important after the 1992 summit
at Las Leoas, when Mercosur members decided on the establishment of a
custom union to begin in 1995. This move gave less than three years for the
four nations to agree on a CET.

During the transition phase, the different development of the


economies of Argentina and Brazil made bilateral relations difficult and
threatened the consolidation of the custom union by the last day of 1994.
The Argentine economy grew almost four times faster than that of Brazil.
The cumulative real GDP growth between 1991 and 1994 was 10.5 % for
Brazil and 40 % for Argentina. Inflation was reduced drastically after the
Convertibility Plan applied in Argentina brought it down from 171.6 % in
1991 to 24.9 % the next year and then kept falling to 4.1 % in 1994.
The opposite happened in Brazil were the average inflation jumped
from 440.9 % in 1991 to over 1,008 % in 1992 and then doubled the next
year to end at 2,244.5 for 1994, the year the Plan real was lunched. In
addition, the development of the exchange rate between the Argentine and
Brazilian currencies followed different paths.
After convertibility, Argentina fixed the peso with the dollar and
experienced a reevaluation of the currency that had an important effect on
the flow of trade. Between September of 1991 until August of 1994,
Argentina accumulates a trade deficit with Brazil, partially compensated at
the end of 1992 with ad-hoc agreements over grains and oil (Lavagna 96).

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Since the end of 1992, the automatic process of linear liberalization


was complemented by a parallel process of ad-hoc intervention that sought
to compensate for the asymmetries produced by the lack of coordination.
These ad-hoc interventions were prominent in the automobile, machinery,
electronics, pharmaceutical, paper, iron and steel, and textile sectors.
The asymmetry of macroeconomic variables previously mentioned
resulted in an unbalanced distribution of costs and benefits that led to
sectoral dissatisfaction and unilateral restrictions in Argentina.
The Treaty of Asuncion included a safeguard clause that could be
used until 1994 to temporarily lift the preferential treatment negotiated if it
was proved that a massive inflow of imports was threatening to cause
serious problems. Between 1991 and 1994 Argentina utilized this
mechanism ten times against Brazilian imports. Argentina also adopted non-
tariff barriers such as the elevation of a statistic tax to Brazilian products
from 3% to 10% in October of 1992 and anti-dumping measures in 1994.
After 1993, when the average tariff for Argentina had surpassed that of
Brazil, negotiations resulted in concessions to facilitate the export of
Argentine energy, wheat and wheat flour. The vacuum provided by the lack
of sectoral or regional reconversion and adjustment designed to smooth the
transition towards a custom union was filled by these ad-hoc measures.
During the transition period, the economic establishment of Argentina
had serious reservations about the future of the Brazilian economy and
voiced support for a Chilean strategy of multilateral liberalization and
preference for an association with the United States. After President Clinton
failed to received fast track authority to negotiate Chile’s inclusion into
NAFTA from a Congress reluctant to approve further free trade agreements,
Argentine preference for NAFTA faded away.

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At the same time that the NAFTA option became less probable,
Mercosur continued to make members’ economies more interdependent and
politically committed to the fulfillment of the custom union.
Despite a context of divergent economic performance during the
transition phase, a series of factors contributed to diffuse the costs of
integration. The availability of abundant external financing until the end of
1993 reduced the conflicts generated by the uneven flow of trade. External
financing and the simultaneous process of automatic liberalization of trade
with ad-hoc interventions, helped to improve the management of sectoral
pressures arising from the rapid growth of intra-Mercosur trade (Bouzas 96).

Between 1990 and 1995, intraregional trade grew from 15% of total
trade to almost 19%. In 1994 Brazil became Argentina's number one export
market, capturing over 20% of total exports. Argentine exports to Brazil
increased at an annual rate of 32%, while Brazilian exports to Argentina did
so at 44% annual average. During this period Argentina became Brazil's
third market for exports and imports, after the European Union and the
United States. This rise in intraregional trade has gone hand in hand with the
growth of total trade. Mercosur's exports to the rest of the world continued to
grow. Also, total imports for Mercosur have been greatly outstripping the
growth of exports (180% vs. 50% in 1990/95).
The markets open by intra-group liberalization helped the exports of
manufactures, specially cars, car parts and machinery. This had been an
important goal when the process of integration began in 1986. By 1995, the
first year of the custom union, almost half of Argentina exports to Brazil,
and almost 85 % of goods sent in return were manufactures. Much of this

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intra-industry trade resulted from a methodology of integration that favored


intra-sectoral complementation in oligopoly industries.
The flow of trade within these sectors was characterized by managed
trade agreements fostered by the private sector. These sectoral agreements
provided firms with a way to lessen the effects of preferential liberalization.
The extended market offered opportunities for rationalization and
specialization, particularly to large firms with better lobbying capacity and in
search for protection from the process of liberalization. The Treaty of
Asuncion already provided a special treatment to the automotive industry.
The agreement stipulated quotas for the free trade of finished vehicles and
car parts, together with additional quotas for automobiles. Although the
automotive sector was an important part of the domestic industrial policies
of Brazil and Argentina, coordination was limited to the regulation of
bilateral trade. In fact, the only officially approved agreement on
complementation was in the iron and steel industry.
After the Real Plan was lunched in the second half of 1994, Brazilian
currency began to increase in value and Argentina again experienced a trade
surplus. The renewed growth experienced by the Brazilian economy during
1994, and the appreciation of the currency after the Real Plan of
stabilization, exerted great influence and offered incentives to other
members to continue negotiations for the CET. During the first year of the
Plan Real (7/94 to 7/95), the peso depreciated by 20% with respect to the
real (Ferrer 96).
In summary, the different evolution of the economic programs
generated macroeconomic and sectoral imbalances leading to an almost
chaotic treatment of conflicts “as they surfaced”. Although the Mercosur’s
methodology in transition to a custom union came short of achieving a high

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degree of complementation or harmonization between members’ economies,


it nevertheless deepened integration commitments.
Intra-Mercosur trade grew six fold between 1985 and 1995, at an
average of 22% each year. During those ten years, intraregional trade
jumped from 5% to 20% of world trade. Presidential summits and numerous
contacts between high and medium level officials was well under way by the
time the CET was reached. The difficult negotiations over a CET and the
constitution of a custom union demonstrate the importance that all Mercosur
members assigned to the fulfillment of the integration agreements.

III - Consolidation and Expansion

Mercosur began to function as a custom union on January 1st, 1995.


The common external tariff (CET) applied covered 85% of goods and had an
average of 14% and a maximum of 20%. The other 15% of trade has
different national tariffs that range from 0% to 35%. The exemptions to the
norm were in capital goods, computer related equipment and
telecommunications. Tariffs on capital goods were to converge at 14% in the
year 2001, while computer and telecommunications equipment should do the
same at 16% on the year 2006. There were also national lists that included
some products temporarily exempted from the CET.
Mercosur has led to the convergence of administrative norms
regarding product sanitation procedures and on the treatment of bi-national
companies. The opening of offices of representation, the purchase of stocks,
the establishment of subsidiaries and the creation of joint ventures have
incentive cooperation in the private sector. Net foreign direct investment in

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Argentina and Brazil has been growing since the beginning of the PIEC and
total almost 40 billion dollars between 1987 and 1996.
Brazilian companies, larger and with greater international experience,
have been more active in penetrating the extended market. In addition,
intraregional trade continued growing and by 1996, the Brazilian state of Sao
Paulo had displaced the United States as the largest single destination for
Argentine exports.
Mercosur has also helped to consolidate the political gains of military
détente, denuclearization, and democratization. The denuclearization
agreements reached in the first half of the 1990s represent a remarkable
change in Southern Cone politics.
The Brazilian-Argentine Agency for Accounting and Control of
Nuclear Materials (ABACC), a bilateral institution to overview a joint
accounting and inspection regime, has been in effect since 1991. Argentina
and Brazil now conduct joint military exercises, something unthinkable
twenty years ago. Soon both militaries will begin peacekeeping training.
Mercosur was a decisive force in preserving Paraguay from returning
to military rule after a rebellious general threatened President Juan Carlos
Wasmosey in 1996. In April of that year, Mercosur’s foreign ministers
arrived in Asuncion and threatened the general with diplomatic and
economic isolation. It is a prerequisite for members of Mercosur to have
democratically elected government.
One of the first problems found by the Mercosur after the
establishment of the custom union was aftermath of the collapse of the
Mexican currency in December of 1994. The large amount of capital pulled
away from Latin America, hit the region hard. Argentina, with the peso fixed
by law at par with the dollar, was hit hardest, experiencing a decline in GDP

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of -4.6%. Since 1996 both economies have been in low gear, with a 3.5%
GDP growth for Argentina and a 3% growth for Brazil.
The next objective for Mercosur will be to deepen the commitment to
the common market. Mercosur still needs to address several important
elements if it is to reach a true common market. Some of its most immediate
are: the harmonization of custom procedures; standardizing and streamlining
rules and regulations; improving transport links; the non-tariff trade barriers
that affect intraregional competitiveness; and labor and tax regimes.
Customs procedures, including rules of origin, are easier issues to resolve.
Non tariff barriers to trade offer greater difficulty because these are difficult
to detect and because of the constant changes in legislation and regulations
demanding agreement (Bouzas 96.)
The need to promote a convergence of standards and regulations will
contribute to the practical implementation of Mercosur’s objectives..
Brazil’s primacy in Mercosur is similar to that of the United States
over NAFTA. This structural situation has made Brazil the main force
behind the shaping of Mercosur. Brazil, reluctant to cede sovereignty, wants
a wider, rather than a deeper, union. Argentina, in turn, favors a European
Union style of integration and included the authority of supranational
institutions in the 1994 Constitution. Recently, President Menem
suggested, and President Cardoso agreed, on the need to discuss the
probability of a common Mercosur currency. For the smaller countries of
Paraguay and Uruguay, there is little choice but to follow the steps of their
main trading partners, although they clearly prefer a deeper union with no
rapid expansion that can threatened their competitiveness. The first
enlargement of Mercosur came in 1996. Chile was the first country to be
admitted as an associate member on mid 1996. Bolivia soon followed and

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also became an associate member that year. Peru and Canada have requested
association to Mercosur in 1997.
A crucial objective for Mercosur’s future will be to strike the right
balance between the sovereignty of the nation state and the need for
common market institutions. Brazil wants to see Mercosur’s methodology of
integration to continue with a minimal of supranational institutions, and with
decisions taken by consensus. This is certainly an innovation from the
previous Latin American experiences of excessive bureaucratic apparatus
and little ability to generate real economic integration. But the lack of an
stable and effective mechanism for dispute settlement has high costs.
So far, Mercosur’s decision making power rests with the inter-
governmental Common Market Council, made up of the foreign and finance
ministers of the four members. In reality, no Mercosur bureaucracy exists,
aside from a tiny secretariat in Montevideo. The most important and
controversial decision have been resolved by the Presidents themselves in
their twice a year meetings. The costs of this choice for “presidential
diplomacy” is that even smallest disputes have tended to escalate and ended
up being settle by the national presidents.
The establishment of the custom union have not stopped Brazil from
acting unilaterally in several occasions. The costs of rapid trade opening in
Brazil, like earlier in Argentina, have led to intermittent domestic pressure
for selective protection. These decisions raised serious concerns in other
members of Mercosur. First, in 1995, Brazil suddenly elevated tariffs on
some car imports; the following year, it required textile imports to be paid
for within 30 days rather than 180; and lastly in 1997 when Brazil,
concerned with a mounting trade deficit, limited credit to pay for imports.

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All Mercosur members were eventually exempt from these measures, but
only after difficult and sometimes embarrassing negotiations.
Brazil has also shown flexibility. It did not insist on a weighted voting
system inside Mercosur and agreed to a lower CET than originally thought.
Since the 1995/96 recession in Argentina, Brazil has had a trade deficit with
the rest of Mercosur. The opening of the Brazilian market to Argentine
lubricants on May of 1997 was a decision long-awaited for in Buenos Aires.
This measures allows for 100 to 150 million dollars of exports, that would
give Argentine companies 10% market share in Brazil.
Brazil has powerful motives for wanting a strong and committed
Mercosur. While Brazil’s weight in world trade has been declining for years,
south American markets represent the fastest growing market for Brazilian
manufactures. Brazilian companies have been the best suited to take
advantage of the expanded market and to prepare themselves for worldwide
competition. It is also true that Mercosur adds diplomatic weight to regional
interests.
Mercosur members now negotiate their commercial relations to third
countries as a block. Mercosur’s diplomatic role has visibly increased since
the first years of integration. Mercosur signed an agreement with the
European Union in December of 1995 that sets a tentative target for free
trade by the year 2005. The EU is Mercosur’s largest single source of
external trade and investment.
The Free Trade Agreement for the Americas (FTAA), if such an
project is to be achieved, will be based on an agreement between NAFTA
and Mercosur. This means that a precondition for FTAA will be an
understanding between the United States and Brazil. Brazil is interested in
preserving an open, multilateral world trade. Brazilian exports markets are

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well diversified, as the direction of trade in 1995 shows: 27% went to the
EU; 21% went to NAFTA; and 18% to Asia.
The discrepancies between the United States and Mercosur over the
steps to achieve a FTAA surfaced again in the 1997 meeting of foreign
ministers from the western hemisphere. The US pressure Mercosur to open
markets, without a compromise to reduce the domestic agricultural subsidies
the greatly affect Latin America. Mercosur and private business associations
from Latin America proposed a modality of negotiation based on three steps:
first, to facilitate business transactions by eliminating non trade barriers;
second, the harmonization of technical standards; and finally a reduction of
tariffs.
The United States insisted on the opposite sequence of steps. The
United States, through Commerce Secretary, W. Daley, conditioned the
lifting of trade barriers for such products as textiles, fruit juices, footwear
and cigarettes, to Brazilian agreement on a negotiation over tariff reductions
for Mercosur. Brazil answered with a call to gradual consensus. Finally, at
this meeting no agreement was reached.

IV – MERCOSUR’s Challenges

Mercosur’s first and foremost challenge will be to maintain


macroeconomic stability and growth while keeping an open trade regime.
Mercosur is still short of a full fledge custom union. The effective
implementation of the CET is still being worked out and free access to
intraregional markets continues to be affected by a number of local
regulations.

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The discussion over trade in services and negotiations over the


mobility of labor have not even began.
Further implementation of the CET could give raise to discussions over the
redistribution of custom procedures. Notwithstanding its lack of
institutionalization, Mercosur is a success story in economic integration
between developing countries.
The future of Mercosur depends on the simultaneous transformation
of the economies of Argentina and Brazil, and on the advancement around
this progress, of Paraguay and Uruguay. The formation of a homogeneous
pole of industrial and technological supremacy on Brazil threatens the
prosperity of all members. The managed trade agreements have had greater
importance for Argentina, particularly those in the wheat, oil and automobile
industry. Mercosur offers Argentina the possibility to re-industrialized,
change its traditional pattern of exports, and foster technological
improvements.

Mercosur’s consolidation will allow their members to become more


competitive in world markets. It will also give greater diplomatic pulling to
the region. This is already evident in the negotiations over a FTAA. The
enlargement of Mercosur to include other countries into free trade
agreements is already under way. The dynamic growth of intraregional trade
has persisted for the last twelve years and it will probably continue for a few
more.
Unlike the European Union, Mercosur has lacked a supranational
bureaucracy in charge of administrating the process of integration.
Mercosur’s reliance on contacts between high level officials and presidential
meetings, intended to avoid excessive demands on national governments.

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Nonetheless, the growth of interdependence between Mercosur


members demands attention to the establishment of a dispute settlement
mechanism and to the specification of members’ rights. the eventual
implementation of fair practice regulation and a safeguard clause will
demand the establishment of some sort of supranational institution. this is a
difficult arena of negotiations, where Mercosur members have been
particularly cautious.
The convergence of macroeconomic performance since 1994 did not
modify the divergent approach to fiscal and monetary policy in Argentina
and Brazil. The lack of mechanisms for coordination demands attention to
the exercise of better communication between officials and to greater
transparency in domestic objectives affecting the union at large.
Although the parity between the Argentine and Brazilian currencies
appears to be an important determinant of the flow and direction of trade,
coordination over this issue seems unprobable in the short-term.
The harmonization procedures should try to eliminate the distortions
to competition created by public policies that influence the advantage of
particular sectors. The technical competence and judicial objectivity of some
kind of supranational institution should replace the presidential ability to
make political deals. Instead of regional funds or a Mercosur parliament,
what the union needs is an institution, such as a regional tribunal, with
powers of arbitration similar to those of the World Trade Organization.
The progress achieved by the process of integration since 1986 has
been unprecedented in Latin America. Mercosur’s accomplishments extend
beyond impressive growth of intraregional trade, to include the formation of
a custom union, the coming together of private businesses, and a common

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external policy. The future requires Mercosur to simultaneously deepen their


commitment and enlarge their membership.
Within the next twenty years, a free trade area in the western
hemisphere will probably be established. Mercosur’s new role as a regional
model for integration and as a global trader will give South America greater
diplomatic power to negotiate a favorable insertion of the region in the
international economy.
Conclusion

The global economy links together the world community. The flow of
cross-border funds is private now - no government is involved, therefore the
bureaucracy is eliminated. China-related opportunities ( pension funds).
Movement of both investment and industry has been facilitated by
information technology.
Individual consumers are therefore more global in orientation . All
these four I's work just fine on their own, nation states more often just get in
the way (given their own troubles) and state intervention is absent.

Region states are Hong Kong, or the Kansai region around Osaka, or
Catalonia - where real market flourishes - global solutions correspond to the
more focused geographical units. The rise of the superregions as true natural
business units in today's global economy.

In today's borderless world, lines of demarcation on the political map


are irrelevant as the currents of global economy punishes twinging countries
by diverting investment and information elsewhere. The question that arises
is what are the consequences of the globalization? What are the fissures it
provokes?

Nobody argues more forcefully than Roderick that the world economy
faces a serious challenge in ensuring that international economic integration
does not contribute to domestic social disintegration. The three major
sources of tension between globalization and social stability that pose a

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challenge to the architects of the globalization remain: the transformation of


the employment relationship (unionization rights,) conflicts between
international trade and social norms, and the pressures brought to bear on
national governments in maintaining domestic cohesion and social welfare
systems.

Copyright Olga M. Lazin 2011


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