-Caveat Lector-
Brazil/Venezuela
GLOBAL INTELLIGENCE UPDATE
Venezuela and Brazil Step up Latin American
Integration Efforts
May 19, 1999
SUMMARY
Venezuelan President Hugo Chavez and Brazilian
President Henrique Cardoso have agreed on concrete
measures that would lead to the establishment of a
Latin American free trade zone. Their stated objective
is
to create an economic bloc that could counterbalance
U.S. economic power in the region. Because the grand
vision of regional economic integration is practically
unattainable, given the current circumstances in Latin
America, its only real objective is to serve the
domestic
political objectives of its populist and nationalist
creators.
ANALYSIS
During his recent visit to Brazil, Venezuela's
President
Hugo Chavez received Brazilian President Henrique
Cardoso's support for the idea of integrating two Latin
American regional economic groupings -- the Common
Market of the South (Mercosur) and the
Community of Andean Nations (CAN). The two
politicians agreed on concrete measures that would
lead to establishment of a free trade zone in Latin
America. As part of their effort to create a Latin
American economic bloc, the two countries agreed to
establish a continental-wide company for exploration
and development of oil by merging parts of national oil
companies of major Latin American oil producers. The
stated purpose of their efforts is to counterbalance
the
United States' economic power in the region. While the
plan for regional economic integration is significant
in
intent, its realization, demanding the delegation of
individual state's powers to supra-national bodies, may
prove impossible in the current Latin American
economic environment.
At their meeting, Chavez and Cardoso agreed to
establish a preferential tariffs agreement between
Mecrosur and CAN, stressing that the measure would
enable a speedy creation of a free trade area. Cardoso
said that the integration between the Mercosur member
countries (Argentina, Brazil, Uruguay, and Paraguay)
and the CAN member countries (Bolivia, Colombia,
Ecuador, Peru, and Venezuela) would produce one of
the most powerful economic blocs in the world. The two
leaders openly defined the objective of the economic
integration, which would be to prevent the Latin
American countries from becoming "increasingly
dependent on the United States." Reportedly, certain
Brazilian diplomats expressed their hope that such an
economic bloc would have "greater autonomy to
negotiate with the European Union and counterbalance
the United States' economic power."
As part of the Caracas-initiated effort to integrate
Latin
American economies, Brazil and Venezuela plan to
establish a new continental-wide oil company called
Petroamerica. Venezuela's Energy Minister Ali
Rodriguez said on May 11 that the two countries intend
to merge part of their state-owned oil companies --
Petrobras and PDVSA -- to form the new company,
Petroamerica, likely be created before the end of this
year. Consequently, other Latin American companies
would be invited to join the international enterprise.
Chavez had also introduced his Petroamerica proposal
during his recent visit to Colombia. With regard to
future
members of Petroamerica, Chavez emphasized that the
venture should not be limited only to the South
American continent, but that an important North
American oil producer, Mexico, should also join the
negotiations.
Venezuela, Brazil and other Latin American countries
are stepping up their integration efforts as a
consequence of and in an attempt to deal with their
dramatically declining economic performance in 1998
and the first part of 1999. Venezuela's oil-dependent
economy was particularly hard hit by low oil prices
last
year and the future prospects are grim. According to
the
latest figures released by the country's central bank
on
May 17, Venezuela's economy is expected to shrink by
7.9 percent in 1999, which would be the economy's
worst performance in a decade. Specifically,
Venezuela's petroleum sector is expected to shrink by
12.1 percent, and the non-petroleum sector by 6.4
percent. Brazil, according to an OECD report published
on May 18, will suffer "a severe recession" in 1999,
with
the economy contracting 3.0 percent and inflation
increasing to 15.0 percent from 1.7 percent last year.
According to the OECD report, Brazil "remains the key
source of uncertainty" for South America. The OECD
forecasts that most countries in the Latin American
region are headed for recession this year.
Facing a grim economic reality and its possible
political
implications, Latin American leaders are looking for
someone to blame. In the case of Venezuela, the
rhetoric of a nationalist Chavez is directed against
the
United States, a primary consumer of Venezuela's oil.
Chavez claims that the main reason for his country's
economic troubles is Venezuela's economic
dependency on the U.S. Chavez is offering his nation a
solution in his vision of an economically united Latin
America that would be able to counterbalance the
economic power of the U.S. and expand into new
markets. The idea of a unified and strong Latin America
is, undoubtedly, appealing to an economically
struggling
population. The question is, however, whether Latin
American nations, with
their diverse economies and limited mutual trade, are
able to create a viable supra-national economic body.
In
other words, it remains an open question as to whether
the creation of a successful supra-national economic
body precedes or follows the emergence of commercial
ties among nations.
The idea of a continent-wide oil company may, in fact,
pose the first serious problem for Latin American
integration. Currently, oil-dependent countries, such
as
Venezuela, are surviving economically only due to the
fact that they are able to secure foreign loans backed
by the state oil company's assets. This, however, would
not be possible, in the case of an international merger
between several oil companies. The oil-dependent Latin
American economies simply cannot afford to give up the
control over their own oil companies or the profits
that
those companies generate in favor of a multi-national
venture. This would result in declining confidence and
potentially in economic collapse.
Similarly, the creation of an independent economic
grouping is extremely difficult due to deep structural
differences among the individual Latin American
economies. Moreover, mutual trade and specialization
of production have not proceeded far enough among
the Latin American nations to make them potentially
independent of the United States. Because the grand
vision of regional economic integration is practically
unattainable in the current Latin American
circumstances, its only objective is to serve the
domestic political objectives of its populist and
nationalist creators.
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