SUNS  4366 Wednesday 3 February 1999

Montevideo, Feb 1 (IPS/Dario Montero) -- Argentina's frustrated bid to obtain compensation for its devastated exports to Brazil and timid attempts by Uruguay and Paraguay to activate MERCOSUR mechanisms has called into question the strength of South America's largest trade bloc - and even its very existence, according to some analysts.

The Brazilian Central Bank's 13 January decision to widen the band within which the Real trades found the Southern Cone Common Market (MERCOSUR) with its defences down.

Even though Brasilia went even farther on Jan. 18, allowing the Real to float freely and in effect ending the 'Plan Real' which has gone a long way toward stabilising Brazil's economy since mid-1994, the four members of MERCOSUR still failed to act as a bloc.

MERCOSUR - of which Chile and Bolivia are associate members - has a combined gross domestic product (GDP) of more than one trillion dollars and accounts for 80 percent of South America's total GDP. Brazil is the world's eighth largest economy.

The Real's freefall heavily undermines the competitiveness of the exports of MERCOSUR's three smaller full members, which have been watching as their biggest market crumbles. But the bloc's institutional mechanisms have failed to kick in, as demanded by industrialists, entrepreneurs and analysts in the region.

Argentina, Uruguay and Paraguay, which place 50, 35 and more than 40 percent of their exports in Brazil, respectively, also fear an inversion of the trade flow, which would deal a coup de grace to their leading productive sectors.

So far each government has acted on its own. Buenos Aires tried to engage in bilateral negotiations with Brasilia through Secretary of Industry Alieto Guadagni, who flew to Brazil early last week full of
hope - only to return a few hours later with empty hands.

Montevideo responded by tardily calling a meeting of the Common Market Group - the bloc's executive organ - which will not take place until the middle of this month. And little to nothing was heard from Asuncion.

All three countries improvised internal adjustment measures - such as revising fiscal policies and public investment plans - and began, separately, to explore markets outside of the bloc, in an attempt to ease their dependence on Brazil.

The parallel paths followed by the three partners as they reeled under the impact of the crisis in Brazil has led some analysts to warn that MERCOSUR should be reformulated, while a few prophets of doom have even predicted its demise.

MERCOSUR "has an uncertain future," former Uruguayan foreign minister Alvaro Ramos - a contender for the co-governing National Party's presidential nomination - told IPS.

"With the death of the Plan Real, Brazil changed the rules of the MERCOSUR game: internally, by threatening the fate of its partners," and externally by demonstrating that the bloc is not a real common market, said Ramos.

"A responsible stance by all the bloc's members...would be to question the appropriateness of the customs union model, which is committing serious errors that hinder its consolidation and deepening," he added.

"The most direct route toward economic freedom is through trading freely with the world," said Ramos, who urged that Uruguay allow the entry of components, equipment, capital goods and intermediary products, without artificial extra charges, in order to produce, export, generate hard currency and draw investment.

Argentinian economist Miguel Bein took a similar stance in the Buenos Aires daily Pagina 12, arguing that authorities in Brazil had staked their bets on "producing a sharp expansion of their foreign trade" to check the crisis, and would "do nothing to curb their sales toward MERCOSUR."

Argentinian expert in integration issues Jorge Tedesca described his country's demand that Brazil take measures to prevent damages to third parties caused by the crash of the real as "ingenuous."

"It is not likely that country will make such decisions when its difficulties are immensely greater, which means Argentina will have no choice but to establish tariffs on imports and reimbursements for its exports," he added.

Members of Argentina's economic team have insinuated that the Brazilian government's strategy is focused on moving toward a monetary union that would revolve around a strengthened real - not of just MERCOSUR, as Argentinian President Carlos Menem has been pushing for, but South America as a whole.

The president of Brazil's Central Bank Francisco Lopes described Menem's suggestion to "dollarise" the free trade bloc as "sad and disastrous."

These days the word MERCOSUR has all but disappeared from the vocabulary of officials in Brasilia, except for those on the external front, like Brazil's ambassador to Paraguay, Bernardo Neto, who said his country would continue staking its bets on deepening the bloc in spite of the difficulties it was facing.

Not all of the predictions have been gloomy. Another former foreign minister of Uruguay, Sergio Abreu, told IPS he was optimistic regarding the future of MERCOSUR, and that the path to pulling out of the turmoil triggered by the Brazilian crisis lay in the bloc's institutional mechanisms.

He pointed out that the 1995 crisis in Mexico and the meltdown of the economies of Asia and Russia last year had already served as an acid test for the bloc, even though not as directly as the current trouble at home.

Abreu criticised the bloc's present inoperativeness, stressing that "it is important for the Common Market Group to meet now to reflect on the situation, exchange ideas and negotiate specific items. The biggest responsibility for this to occur lies with the smaller countries."

Abreu said that in the past few years the bloc's institutional mechanisms had gotten rusty, because the larger partners had moved ahead with unilateral or bilateral policies with the consent of Paraguay and Uruguay.

"We cannot use MERCOSUR institutions just to put out fires, not only because that doesn't work, but because the institutions should function as part of a style, of a community culture," essential for an integrationist process with economies as disparate as those of the Southern Cone region.

Those who do not believe the customs union will break down point out that when MERCOSUR went into effect in the early 1990s, Brazil was suffering runaway inflation that soared as high as 5,000 percent a year, which nevertheless did not stand in the way of the creation of the bloc.

"MERCOSUR runs no risk despite the crisis, because a weak bloc is no good for anyone, not even Brazil, even though it's the largest economy in the region," said Abreu.

It is only logical for Brasilia to first try to put its own house in order, and for Buenos Aires to seek direct negotiations in order to resolve the problems caused by its huge neighbour and leading trading partner, he maintained. "But we should not accept concrete proposals being formalised outside of the bloc's institutional organs," he warned.