In­ter­na­tion­al fi­nanc­es

There are THREE ma­jor is­sues con­cern­ing IN­TER­NA­TION­AL as­pects of­ the fi­nan­cial sit­u­a­tion in the De­vel­op­ing World.

# FOR­EIGN DI­RECT IN­VEST­MENT (FDI)

The fi­nan­cial re­sourc­es from abroad form an im­por­tant (in­ some cas­es, ma­jor) com­po­nent in the for­ma­tion of the IN­VEST­MENT FUNDS which ANY de­vel­op­ing coun­try can use. How­ev­er, SOME coun­tries get PLEN­TY of for­eign di­rect in­vest­ment, and SOME get NONE at all. It is con­nect­ed BOTH with OB­JEC­TIVE fac­tors (like their re­source base, ge­o­graph­i­cal con­di­tions, pop­u­la­tion stock, etc.), and with SUB­JEC­TIVE ones (like the po­lit­i­cal or­ien­ta­tion of their gov­ern­ments).

For ex­am­ple, the FLOW of for­eign di­rect in­vest­ment (FDI) to all of Af­ri­ca in 1996 amount­ed to $2.5 bil­lion (of which 80 per­cent went to South Af­ri­ca), while In­dia alone re­ceived the same sum of FDI ($2.5 bil­lion) that very year.

At the end of the century, the ac­cu­mu­lat­ed STOCK of FDI in de­vel­op­ing coun­tries amount­ed to about $300 bil­lions, or ONEFOURTH of the world's to­tal. About HALF of these FDI was placed in then dy­nam­ic and al­ready main­ly in­dus­tri­al­ized ASIA, while the LEAST DE­VEL­OPED coun­tries, for ex­am­ple, could at­tract less than 2 per­cent on­ly. The share of the lead­ing TEN de­vel­op­ing coun­tries hous­ing FDI amount­ed to ex­act­ly TWOTHIRDS, an in­di­ca­tor of VERY HIGH con­cen­tra­tion of PRI­VATE FOR­EIGN BUSI­NESS in the most at­trac­tive plac­es in the De­vel­op­ing World.

On the eve of Asian crisis, in 1997, ac­cord­ing to the World Bank, the cur­rent AMOUNT of pri­vate longterm re­source flows to de­vel­op­ing coun­tries (in­clud­ing some oth­er forms of fi­nanc­ing be­sides FDI) rose to $256 bil­lion, from $247 bil­lion in 1996 and $189 bil­lion in 1995. In 1998, when Asian cri­sis was in full swing, the fig­ures char­ac­ter­iz­ing such pri­vate fi­nan­cial flows went slight­ly down. On the back­ground of­ a strong over­all in­vest­ment surge, the share go­ing to de­vel­op­ing coun­tries dropped sharp­ly to 28 per­cent from 37 per­cent in 1997. Some similar phenomena have been observed also during the recent GLOBAL CRISIS.

It is in­ter­est­ing to no­tice that now­a­days the MOST SUC­CESS­FUL of the De­vel­op­ing World coun­tries (in­ East Asia and Lat­in Amer­i­ca) have their own TNC with their own FDI en­gaged most­ly in ELEC­TRON­ICS and oth­er MAN­U­FAC­TUR­ING. How­ev­er, the DE­GREE of IN­TER­NA­TION­AL­I­ZA­TION char­ac­ter­iz­ing their ac­tiv­i­ty, i.e., the shares of FOR­EIGN as­sets, sales and em­ploy­ment, were con­sid­er­a­bly LOW­ER than those of TNC rep­re­sent­ing the cap­i­tal of in­dus­tri­al (de­vel­oped) coun­tries.

In 2005, the INTERNATIONAL INVESTMENT FLOWS in the world surged to almost $900 billion, an increase of about 29 percent over 2004. The biggest rise (of 38 percent) characterized the FDI going to WEALTHY (RICH) nations. The most successful region of the developing world – Asia – received an investment of $173 billion, a rise of 11 percent over the previous year. China alone received about $60 billion of new FDI (same level as in 2004). India saw inflows jump 12 percent to estimated $6 billion, while the new investment to South Korea and Malaysia went slightly down. All in all, the distribution of the new FDI in the world remains very UNEVEN, with the developing countries taking only a rather MODEST share, while some of them going on receiving NO foreign investment at all.

# IN­TER­NA­TION­AL DEBT

Dur­ing the last decades of the 20^th century, the sit­u­a­tion on the IN­TER­NA­TION­AL LOAN MAR­KETS was ex­treme­ly FAVORABLE for the de­vel­op­ing coun­tries to BOR­ROW on a MASSSCALE (let us name one fac­tor on­ly – vir­tu­al­ly giant re­serves of the socalled "PET­RO­DOL­LARS" which asked for op­por­tu­ni­ties for their "RE­CY­CLING", i.e. for their use as in­vest­ment funds prom­is­ing good prof­its).

By the end of the 1990s, the CU­MU­LA­TIVE DEBT of the De­vel­op­ing World ex­ceed­ed $2 tril­lion. Among the BIGGEST debt­ors were Bra­zil and Mex­i­co be­long­ing to the group of the socalled "se­vere­lyin­debt­ed middleincome coun­tries" (SIMIC).

How­ev­er, in the WORST po­si­tion were 41 "high­lyin­debt­ed poor coun­tries" (HIPC). Here, debt re­pay­ments were eat­ing up most of the mon­ey that such poor­est bor­row­ers earned abroad. Ugan­da's debt was THREE times its an­nu­al ex­port in­come, Ethi­o­pia's 10 times, Mo­zam­bique's 13 times. In SubSa­ha­ran Af­ri­ca, where 33 of the 41 HIPC were lo­cat­ed, gov­ern­ments were spend­ing FOUR times as much on DEBT RE­PAY­MENT to rich coun­tries as on HEALTH and ED­U­CA­TION ser­vic­es for their own peo­ple. Most of the HIPC have al­ready paid back MORE than the TO­TAL of orig­i­nal loans in IN­TER­EST, but stay deep in debt nev­er­the­less.

Ap­prox­i­mate­ly HALF of the IN­TER­NA­TION­AL DEBT of the de­vel­op­ing coun­tries is the re­sult of the socalled "of­fi­cial bor­row­ing" (in­tergov­ern­ment loans and loans of MUL­TI­LAT­ER­AL ec­o­nom­ic or­gan­i­za­tions, like the IMF and the World Bank with all its af­fil­i­a­tions).

How­ev­er, at the end of 1997, BANKS in rich coun­tries (main­ly Eu­rope, the Unit­ed States and Ja­pan) had al­most $1 tril­lion in LOANS to poor coun­tries (their banks, firms and gov­ern­ments), es­ti­mates the Bank for In­ter­na­tion­al Set­tle­ments (BIS). Spe­cif­i­cal­ly, this PRI­VATE part of IN­TER­NA­TION­AL IN­DEBT­ED­NESS grew dra­mat­i­cal­ly on the eve of the fi­nan­cial cri­sis in Asia, i.e., in 199697.

As early as in the mid­dle of the 1980s, it be­came clear: the in­ter­na­tion­al debt is NOT on­ly VERY BIG and RAP­ID­LY GROW­ING, but it is most­ly NON­RE­PAY­A­BLE (in oth­er words, over time the amount of the socalled "BED DEBTS" has grown dra­mat­i­cal­ly).

If you owe the bank a SMALL AMOUNT of mon­ey and you can't pay it, then YOU are in trou­ble. How­ev­er, if a COUN­TRY owes the bank an ENOR­MOUS AMOUNT of mon­ey and it can't pay it, then the BANK is in trou­ble.

Ex­act­ly that hap­pens right now, and BOTH SIDES – the de­vel­op­ing coun­tries (debt­ors) and the de­vel­oped coun­tries (cred­i­tors) – are look­ing for COM­PRO­MIS­ES and even­tu­al JOINT SO­LU­TIONS of the whole set of prob­lems con­nect­ed with the phe­nom­e­non of IN­TER­NA­TION­AL IN­DEBT­ED­NESS. All in all, there are 45 “SEVERELY INDEBTED” countries in the world (2005 figures), 43 – “MODERATELY INDEBTED” and 47 “LESS INDEBTED”.

It is the socalled "Par­is Club", where of­fi­cial cred­i­tors meet to RE­SCHED­ULE the LONGTERM DEBT pay­ments that forms the cen­ter of ac­tiv­i­ty aimed at the so­lu­tion. (For private creditors/debtors negotiations such role is played by the London Club.) Some parts of the official and private IN­DEBT­ED­NESS are be­ing sold and re­sold by the cred­i­torcoun­tries (banks) on the cap­i­tal mar­ket (for ONETHIRD of the debt's sum, and LESS). Some parts of debt are be­ing con­vert­ed to EQ­UI­TY SHARES of pub­lic and pri­vate en­ter­pris­es in the debt­orcoun­tries (the socalled "DebtForEq­ui­ty Swaps", wide­ly used in Lat­in Amer­i­ca).

Still, IN­TER­NA­TION­AL IN­DEBT­ED­NESS re­mains one of ma­jor fac­tors bur­den­ing the new­lyemerg­ing na­tionstates and hold­ing back their in­dus­tri­al de­vel­op­ment. It is al­so "BIG HEAD­ACHE" for West­ern cred­i­tors.

On the eve of the year 2000, the Group of Sev­en, or the G 7 (which, as you know, in­cludes the Unit­ed States, Can­a­da, Brit­ain, France, Ger­ma­ny, Ita­ly and Ja­pan), made a de­ci­sion con­cern­ing rad­i­cal DEBT RE­LIEF meas­ures for the ma­jor­i­ty of­ the afore­men­tioned HIPC – "high­lyin­debt­ed poor coun­tries". Real­ly, to set the POOR free from their un­bear­a­ble debt bur­den seemed to be an ap­pro­pri­ate way to cel­e­brate the turn of the cen­tu­ry. How­ev­er, it was agreed to write off on­ly $50 bil­lion of debt owed by 36 HIPC, while the to­tal amount ac­tu­al­ly owed by all HIPC was es­ti­mat­ed at $219 bil­lion. The next big step has been taken only in 2005, when the socalled Heavy Indebted Poor Countries Initiative has been jointly proclaimed by the Group of Seven, the World Bank and the IMF – offering (however, on a strictly selective basis) a DEBT RELIEF of up to 100 percent to some of the world’s POOREST nations.

# IN­TER­NA­TION­AL AID

Of course, the FOR­EIGN DI­RECT IN­VEST­MENT is ma­jor fac­tor as­sist­ing ec­o­nom­ic de­vel­op­ment around the world. But the in­ter­na­tion­al LONGTERM AS­SIS­TANCE in dif­fer­ent forms may NOT be dis­re­gard­ed as well.

The MAIN form of mod­ern FI­NAN­CIAL AID is rep­re­sent­ed by the socalled OF­FI­CIAL DE­VEL­OP­MENT AS­SIS­TANCE (ODA) – GRANTS and LOANS to the de­vel­op­ing coun­tries is­sued on BI­LAT­ER­AL ba­sis. The most sub­stan­tial con­tri­bu­tions of this kind are usu­al­ly made by Ja­pan, the Unit­ed States, France and Ger­ma­ny – the lead­ing mem­bers of­ the so­called De­vel­op­ment As­sis­tance Com­mit­tee (DAC) in­clud­ing 22 in­dus­tri­al na­tions. After several decades as No. 1 on the ODA donors list, recently Japan has slid to the SECOND position, while its ODA donations in 2004 amounted to$8,859 billion.

The ab­so­lute sums of BI­LAT­ER­AL AID are rath­er BIG, but FAR from the even revised (more moderate) GOAL set by the UNO: ac­cord­ing to its rec­ommen­da­tions, each ma­jor in­dus­tri­al coun­try should de­vote to in­ter­na­tion­al aid NOT LESS than 0.7 per­cent of its GNI. However, on­ly Nor­way, the Neth­er­lands, Swe­den and Den­mark have come close to this share or even overstep it. Until lately, Ja­pan's ODA has rep­re­sented on­ly about 0.2 per­cent of its GNI, and in 2004 it has even gone down to 0.19 percent. For a comparison, in Amer­i­can case, this ra­tio has been even much low­er – about 0.12 per­cent, actually.

The BIGGEST share (about ONETHIRD) of all ODA is usu­al­ly be­ing re­ceived by the POOR­EST coun­tries of SubSa­ha­ran Af­ri­ca – and this mon­ey comes most­ly from Eu­ro­pe­an do­nors. As for Ja­pan, it sup­plies more than HALF of all ODA re­sourc­es go­ing to Asia and about ONEQUAR­TER – to Lat­in Amer­i­ca, while in fi­nan­cial as­sis­tance to oth­er re­gions (Mid­dle East, Af­ri­ca, Ocea­nia) its share is more MOD­EST.

The SEC­OND most im­por­tant form of in­ter­na­tion­al FI­NAN­CIAL and TECH­NI­CAL AS­SIS­TANCE is rep­re­sent­ed by com­mit­ments of MUL­TI­LAT­ER­AL FI­NAN­CIAL IN­STI­TU­TIONS like In­ter­na­tion­al Mon­e­tary Fund (IMF), like In­ter­na­tion­al Bank for Re­con­struc­tion and De­vel­op­ment (IBRD, or World Bank). The "World Bank group" in­clud­ing sev­er­al in­ter­na­tion­al agen­cies act­ing in close coop­er­a­tion with the IBRD, as well as sev­er­al "Re­gion­al De­vel­op­ment Banks and "UN Op­er­a­tion­al Agen­cies" (see Top­ic 6) dis­trib­ute con­sid­er­a­ble sums of­ fi­nan­cial aid on RE­GION­AL and WORLD­WIDE ba­sis.

In the course of Asian cri­sis, the In­ter­na­tion­al Mon­e­tary Fund played an es­pe­cial­ly im­por­tant, al­beit con­tro­ver­sial, role in fight­ing the re­gion­al "FI­NAN­CIAL MELT­DOWN" and pre­vent­ing fur­ther DE­VAL­U­A­TION of Asian cur­ren­cies by pooling to­geth­er con­sid­er­a­ble "BAIL­OUT" pack­ag­es, al­so called "RES­CUE" pack­ag­es, for In­do­ne­sia, South Ko­rea and Thai­land. In contrast, during the recent GLOBAL CRISIS, financial assistance to the developing nations has been regretfully negligent in size.

In February 2001, the 15nation European Union decided to completely ELIMINATE tariffs for ALL imports – both INDUSTRIAL and AGRICULTURAL – from LEASTDEVELOPED COUNTRIES (LLDC, at that time estimated at 49 in number), excluding tariffs for ARMS imports alone. By the way, it annoyed Japan whose preference tariff system for LLDC does NOT include a huge chunk of FARM imports.

In May 2001, a UN Conference on Least Developed Countries, cohosted by the European Union, has gathered in Brussels. It was the THIRD such conference, following TWO previous which had taken place in Paris in 1980 and 1991. The conference has drawn delegates from 157 nations, including all 49 LLDC, 114 nongovernment organizations, and the World Bank, IMF and WTO. It adopted a 10year PROGRAM aimed at finishing the cycle of poverty and despair of the world’s poorest countries and bringing them into the economic mainstream. However, the program amounted mostly to “broad strokes”, i.e., BASIC PRINCIPLES, while SPECIFIC MEASURES were SPARSE (very FEW, actually).

* Re­gion­al Ec­o­nom­ic Coop­er­a­tion. Try­ing to UNITE their ef­forts in achiev­ing main na­tion­al goals typ­i­cal for any de­vel­op­ing coun­try (like in­dus­tri­al­i­za­tion, de­vel­op­ment of mar­kets, crea­tion of in­dus­tri­al and so­cial in­fra­struc­ture, sta­bi­liz­ing pric­es for pri­mary prod­ucts, etc.), neighboring states in dif­fer­ent re­gions of­ten un­der­take JOINT ac­tions. Typically, it hap­pens on a per­ma­nent ba­sis, through the crea­tion of RE­GION­AL AS­SO­CI­A­TIONS – most­ly of the FREE TRADE AR­EA type.

*This mode of ec­o­nom­ic be­ha­vi­or and pol­i­cymak­ing on a RE­GION­AL (or SUBRE­GION­AL) ba­sis has be­come ES­PE­CIAL­LY TYP­I­CAL for Lat­in Amer­i­ca where sev­er­al GROUP AR­RANGE­MENTS are in ac­tion with dif­fer­ent de­gree of suc­cess.

LAT­IN AMER­I­CA IN­TE­GRA­TION AS­SO­CI­A­TION (LAIA / ALADI)

The FIRST, and at­ one time the most am­bi­tious, of­ Lat­in Amer­i­can ar­range­ments, the Lat­in Amer­i­can Free Trade As­so­ci­a­tion, at­ the be­gin­ning NOT as­ suc­cess­ful as­ an­tic­i­pat­ed, has been substantially re­or­ga­nized in 1980 and re­named the Lat­in Amer­i­ca In­te­gra­tion As­so­ci­a­tion.

Nowadays, the Latin American Integration Association / Asociación Latinoamericana de Integración / Associação LatinoAmericana de Integração (LAIA / ALADI) is an international and regional scope organization. It was created on 12 August 1980 by the 1980 Montevideo Treaty, replacing the Latin American Free Trade Association (LAFTA / ALALC). Currently, it has 13 member countries, and any of the Latin American States may apply for accession.

The integration processes within the framework of the LAILA / ALADI aim at promoting harmonious and balanced socioeconomic development of the region, and its longterm objective is the gradual and progressive establishment of a LATINAMERICAN COMMON MARKET. So far, how­ev­er, LAIA rep­re­sents merely an "AR­EA OF EC­O­NOM­IC PREF­ER­ENC­ES” – NOT even a "FREE TRADE AR­EA".

One of the more im­por­tant as­pects of this trea­ty is the dif­fe­ren­tial treat­ment of mem­ber coun­tries ac­cord­ing to their lev­el of ec­o­nom­ic de­vel­op­ment. There are THREE lev­els un­der the LAIA frame­work:

"MOREDE­VEL­OPED COUN­TRIES" (MDC) – Ar­gen­ti­na, Bra­zil and Mex­i­co

"LESSDE­VEL­OPED COUN­TRIES" (LDC) – Chile, Co­lom­bia, Ven­e­zue­la, Pe­ru and Par­a­guay

"LEASTDE­VEL­OPED COUN­TRIES" (LLDC) – Bo­liv­ia, Ecua­dor and Uru­guay.

The dif­fe­ren­tial ben­e­fits are des­ig­nat­ed for the LLDC and LDC by ap­pli­ca­tion of the "prin­ci­ple of NONRE­CIP­RO­CAL treat­ment" when they sign BI­LAT­ER­AL trade ar­range­ments with the MDC.

As for MDC, their most im­por­tant ben­e­fits con­sist in pos­si­bil­i­ty to use more CHEAP sourc­es of im­ports and in open­ing new ex­port mar­kets.

Ob­vi­ous­ly, this ar­range­ment has led to im­proved ec­o­nom­ic re­la­tions among the mem­ber states. Ne­go­ti­a­tions have low­ered TAR­IFFS on se­lect­ed prod­ucts and eased trade ten­sions over such NONTAR­IFF TRADE BAR­RIERS as quo­tas, lo­cal con­tent re­quire­ments, and im­port li­cens­es.

There exist some lists of market openings offered by the richer countries in favor of the Relatively Less Economically Developed Countries (the new name for the former LDC and LLDC); special programs of cooperation (business rounds, preinvestment, financing, technological support); countervailing measures in favor of the landlocked countries, the full participation of which in the integration process is sought. The LAIA includes in its legal structure several subregional, plurilateral (multilateral) and bilateral integration agreements arising in growing numbers on the continent. As a result, the LAIA / ALADI – as an institutional and legal framework or “umbrella” of the regional integration – develops actions in order to support and foster these efforts for the progressive establishment of a common economic space.

The 1980 Montevideo Treaty is open to the accession of any LatinAmerican country. On 26 August 1999, the first accession to the 1980 Montevideo Treaty was executed, with the incorporation of the Republic of Cuba as a member country of the LAIA. On 10 May 2012, the Republic of Panama became the thirteenth member country. Likewise, the accession of the Republic of Nicaragua was accepted in the Sixteenth Meeting of the Council of Ministers (Resolution 75 – XVI), held on 11 August 2011. Currently, Nicaragua moves towards the fulfillment of conditions for becoming a member country of the LAIA.

The LAIA opens its field of actions for the rest of Latin America through multilateral links or partial agreements with other countries and integration areas of the continent (Article 25). It also contemplates the horizontal cooperation with other integration movements in the world and partial actions with third developing countries or their respective integration areas (Article 27).

AN­DE­AN COM­MU­NI­TY OF NATIONS (CAN / AN­COM)

The Andean Community (Spanish: Comunidad Andina, CAN) is a customs union comprising the South American countries of Bolivia, Colombia, Ecuador, and Peru. The trade bloc was called the Andean Pact until 1996 and came into existence with the signing of the Cartagena Agreement in 1969. Its headquarters are located in Lima, Peru.

The Andean Community has 98 million inhabitants living in an area of 4,700,000 square kilometers, whose Gross Domestic Product amounted to US$745.3 billion in 2005, including Venezuela, who was a member at that time. Its estimated GDP PPP for 2011 amounts to US$902.86 billion, excluding Venezuela.

AN­COM is char­ac­ter­ized by some IN­TER­NAL ec­o­nom­ic aid to the weak­est coun­tries and sec­to­ral de­vel­op­ment pro­grams. How­ev­er, in the FIRST pe­ri­od of its ex­is­tence, ­in the 1970s (when it was still called An­de­an Com­mon Mar­ket, how­ev­er with the same ab­bre­vi­a­tion – AN­COM), ex­ces­sive RE­STRIC­TIONS on FOR­EIGN IN­VEST­MENT have caused CONFLICTS among the mem­ber states and seriously un­der­mined their weak fi­nan­cial base.

There was a rule which stip­u­lat­ed that FOR­EIGN COM­PA­NIES were lim­it­ed to the even­tu­al RE­PA­TRI­A­TION of on­ly 20 per­cent of their DI­RECT IN­VEST­MENT CAP­I­TAL and could NOT free­ly par­tic­i­pate in the An­de­an mar­ket UN­LESS they agreed to CON­VERT to "mixed" or "na­tion­al" stat­us by tak­ing on GOV­ERN­MENT part­ners (prac­ti­cal­ly, with­in a year). Lat­er, this rule was SOF­TENED, al­though GRAD­U­AL tran­si­tion from FOR­EIGN to MIXED or NA­TION­AL own­er­ship (a typ­i­cal ele­ment of the na­tion­al­ist "DO­MES­TI­CA­TION" pol­i­cies) is still re­quired.

How­ev­er, in the last dec­ade, the ELIM­I­NA­TION of all in­traAn­de­an TAR­IFFS and the IN­TRO­DUC­TION of a COM­MON ex­ter­nal TAR­IFF – meas­ures which trans­formed the AN­COM in­to a CUSTOMS UNION –are the two im­por­tant fea­tures in the AN­COM ac­tiv­i­ties that may en­cour­age MORE TRADE with­in this "An­de­an pact" and away from the "third" coun­tries.

Recently, with the new cooperation agreement with Mercosur, the Andean Community gained four new associate members: Argentina, Brazil, Paraguay, and Uruguay. These four Mercosur members were granted associate membership by the Andean Council of Foreign Ministers meeting in an enlarged session with the Commission (of the Andean Community) on July 7, 2005. This moves reciprocates the actions of Mercosur which granted associate membership to all the Andean Community nations by virtue of the Economic Complementarity Agreements (Free Trade agreements) signed between the CAN and individual Mercosur members.

MER­CO­SUR

Mercosur or Mercosul (Spanish: Mercado Común del Sur, Portuguese: Mercado Comum do Sul, Guarani: Ñemby Ñemuha, English: Southern Common Market) is an economic and political agreement among Argentina, Brazil, Paraguay, Uruguay, and Venezuela; with Bolivia becoming an acceding member on 7 December 2012 to be ratified by member state legislatures. It is a rel­a­tive­ly NEW trade group­ing of South Amer­i­can states. Bolivia, Chile, Colombia, Ecuador, Guyana, Peru, and Suriname currently have associate member status. Chile is an­ ex­treme­ly suc­cess­ful NIC of the "sec­ond gen­er­a­tion" char­ac­ter­ized as "ex­port pow­er­house" in Amer­i­can press.

The purpose of Mercosur is to promote free trade and the fluid movement of goods, people, and currency. The official languages are Spanish, Portuguese and Guaraní. It has been updated, amended, and changed many times since. It is now a full customs union and thus a very effective trading bloc. Mercosur and the Andean Community of Nations are customs unions that are components of a continuing process of South American integration connected to the Union of South American Nations.

The mechanism of Mercosur aims at the coordination of macroeconomic and sectorial policies of member states relating to foreign trade, agriculture, industry, taxes, monetary system, exchange and capital, services, customs, transport and communications, and any others they may agree on, in order to ensure free competition between member states.

The commitment by the member states to make the necessary adjustments to their laws in pertinent areas to allow for the strengthening of the integration process. The Asunción Treaty is based on the doctrine of the reciprocal rights and obligations of the member states. Mercosur initially targeted freetrade zones, then customs unification, and finally a common market. The common market will allow (in addition to customs unification) the free movement of manpower and capital across the member nations, and the grating of equal rights and duties to all member countries. Because member states will implement the trade liberalization at different speeds, during the transition period the rights and obligations of each party will initially be equivalent but not necessarily equal.

In addition to the reciprocity doctrine, the Asunción Treaty also contains provisions for the mostfavored nation concept. Accordingly, after the common market is formed, member nations are to automatically extend to the other members any advantage, favor, entitlement, immunity or privilege granted to a product originating from or intended for countries that are not party to the Latin American Integration Association (LAIA).

It seems that Mer­co­sure has good chanc­es to sur­vive and to be of much use for de­vel­op­ment of SUB­RE­GION­AL trade. It is very ac­tive po­lit­i­cal­ly: for more than a decade, Mer­co­sur has been ne­go­tiat­ing a FREE TRADE AR­EA (FTA) ar­range­ment with the Eu­ro­pe­an Un­ion. Ob­vi­ous­ly, Mer­co­sur re­gards the EU­ as­ a MODEL for its own fur­ther de­vel­op­ment, which may in­clude a joint (sin­gle) cur­ren­cy some­time in­ the fu­ture. European INVESTMENT in Latin America has been growing rapidly and Mercosur looks like its preferred destination. From other countries, main trading partners of Mercosur are Israel and Egypt.

By the end of 1990s, it was al­so en­gaged in ne­go­ti­a­tions with its neighbors from An­de­an Com­mu­ni­ty about an even­tu­al FTA. There are signs that an unprecedented MERGER of the two trade groups is in the making.

Mer­co­sur pays spe­cial at­ten­tion to build­ing up­ coop­er­a­tion with Ja­pan and oth­er Asian coun­tries in­ the frame­work of the APEC. In December 2007, Mercosur has concluded an FTA agreement with Israel. Also, an FTA with South Korea was in a preparation stage.

As for Chile, it has signed its own FREE TRADE AGREEMENT with the European Union in November 2002, slashing TARIFFS on twoway trade (almost $9 billion in 2001) and providing for increased POLITICAL COOPERATION.

* The Andean Community (CAN) and Mercosur comprise the two main trading blocs of South America. In 1999, these organizations began negotiating a merger with a view to creating a "South American Free Trade Area" (SAFTA). On December 8, 2004, the Andean Community (CAN) signed a cooperation agreement with Mercosur and they published a joint letter of intention for future negotiations towards integrating all of South America in a Union of South American Nations (USAN), patterned after the European Union. It was formally established by the May 23, 2008, Constitutive Treaty of the USAN signed in Brasília.

During 2005, Venezuela decided to join Mercosur. Venezuela's official position first appeared to be that, by joining Mercosur, further steps could be taken towards integrating both trade blocs. CAN Secretary General Allan Wagner stated that the Venezuelan Foreign Minister Alí Rodríguez had declared that Venezuela did not intend to leave the CAN, and its simultaneous membership to both blocs marked the beginning of their integration.

However some analysts interpreted that Venezuela might eventually leave the CAN in the process. As Colombia and Peru signed free trade agreements with the United States, in protest the Venezuelan President Hugo Chávez indeed announced in April 2006 his country's withdrawal from the CAN, stating that the Community is "dead". Officials in Colombia and Peru expressed their disagreement with this view, as did representatives from Venezuela's industrial sector (Conindustria).

In spite of this announcement, Venezuela still had not formally completed all the necessary withdrawal procedures. According to Venezuela's Commerce Minister María Cristina Iglesias, the entire process was going to take up five years. Until then, Venezuela and its partners would remain bound by the effects of the community's preexisting commercial agreements.

During a visit to Colombia in August 2007, President Hugo Chávez was asked by the presidents of Ecuador and Bolivia to rejoin the Andean Community of Nations, and he responded that he would agree. Meanwhile, at that time the Mercosur's relations with Venezuela were weakening as Mercosur was not agreeing with some of the Hugo Chávez's proposals.

Eventually Venezuela achieved the full membership of the Mercosur in 2012, making for the first time the Mercosur bigger in number of members than the CAN.