André M. Biancareli Cecon – IE/Unicamp

1. The financial dimension of South American Integration: an assessment of the initiatives and a tentative quantification André M. Biancareli Cecon – IE/Unicamp Colóquio Internacional “O capitalismo com dominância financeira”. Campinas, October 2nd, 2009

2. Rationale and objective • Among the various dimensions of regional integration process, the financial is one of the less studied • The South American recent experience is rich in terms of institution and ambitions, but few attention have been paid to the quantification of financial linkages • The main objective is contrasting the institutional side and the actual level of the financial integration process in South America • How much financially integrated are, in fact, South American economies? The financial dimension of South American Integration

3. Methodology • To this task, 3 sections: • A short introduction summarizing the arguments for regional financial integration • A brief description of the initiatives for financial cooperation operating in the region • A tentative quantification, by means of 3 sets of indicators The financial dimension of South American Integration

4. Arguments for regional financial integration • Firstly, the whole regional integration process requires financial support • This support is better provided when controlled/adapted to members • The asymmetries and imperfections of the international financial system • Mainly the relationship between multilateral financial institutions and developing countries • Need of competition and complementarities of these two levels • “Sense of ownership” in regional institutions and initiatives • Collective protection and help The financial dimension of South American Integration

5. Levels of financial integration • According to the literature, the initiatives for regional financial integration can be organized in 3 levels: • Short-term financing and payments facilitation • Long-term financing • Macroeconomic cooperation • The paper is concerned with i. and ii. • Regarding iii., the common currency issue is subject to a lot of controversy, and there are too few formal initiatives for macro cooperation in South America • Clearly, it would be the last step The financial dimension of South American Integration

6. Institutional framework of financial integration in South America • Major initiatives of the first level: • Agreement on Reciprocal Payments and Credits (CCR) • Payments facilitation system, aiming at intra-regional trade fostering and foreign currency saving, under the auspices of ALADI (12 country members) • System of Local Currency Payments (SML) • Clearing of bilateral trade in reais (Brazil) and pesos (Argentina) • Latin American Reserve Fund (FLAR) • Reserve pooling comprising Bolivia, Colombia, Costa Rica, Ecuador, Perú, Uruguay and Venezuela The financial dimension of South American Integration

7. Institutional framework of financial integration in South America • Major Initiatives of the second level: • Andean Development Corporation (CAF) • Regional development bank, controled by 16 Latin American countries (+ Spain); focus on financing of infrastructure projects • Financial Fund for the Development of Prata Watershed (FONPLATA) • Regional development bank, controled by 4 Mercosur members (+ Bolivia); also focused on financing of infrastructure projects The financial dimension of South American Integration

8. Institutional framework of financial integration in South America • Major Initiatives of the second level: • Bank of the South (Banco del Sur) • Planned to be a stronger regional development bank; some disagreements (mainly from Brazil) • Constitutive Treaty signed in December 2007 • Argentina, Bolivia, Brazil, Ecuador, Paraguay, Uruguay and Venezuela • Incorporation charted signed last week • Chile as observer member • Total authorized capital: $ 20 billions ($ 10 bi subscribed) • Increasing role of Brazilian BNDES in the infrastructure integration • Total portfolio of projects: more than $ 15 bi The financial dimension of South American Integration

9. Institutional framework of financial integration in South America • To sum up, there is no lack of institutions, in both dimensions • Some of the institutions need to be reformed, readapted, broadened etc. • The framework seems to be coherent with the high level of ambition presented in official rhetoric and documents • The same can’t be said to the quantitative dimension… The financial dimension of South American Integration

10. A tentative quantification • The term “tentative” is due to the various sources of difficulties to measure the phenomenon • Theoretical controversies about indicators, data availability and quality etc. • Empirical literature based on 2 kinds of indicators: price-based and quantity-based • Here, 3 sets of indicators calculated (despite a lot of problems…): • Institutional integration indicators • Quantity indicators • Price indicators The financial dimension of South American Integration

11. Institutional integration indicators • Quantification of initiative’s performance in achieving its specific integration goals • Examples: the amount of foreign currency saved by CCR or SML; the liquidity assistance provided by FLAR; amounts and profile of CAF’s and FONPLATA’s loans etc. • In general, results can be considered more a signal of the potential than the effectiveness of the existing institutions • Disappointing results of CCR (new role?) and SML (starting and focus on SMEs…) • Active role of FLAR (but limited geographically so far) • Increasing disbursements by regional development banks (large room for improvement and new institutions like Banco del Sur) The financial dimension of South American Integration

12. Institutional integration indicators: CCR The financial dimension of South American Integration

13. Institutional integration indicators: SML The financial dimension of South American Integration

14. Institutional integration indicators: FLAR The financial dimension of South American Integration

15. Institutional integration indicators: CAF and other development banks The financial dimension of South American Integration

16. Quantity indicators • Using data from CPIS-IMF (Current Portfolio Investment Survey) and national sources, indicators trying to quantify financial stocks interpenetration: • Portfolio external assets and liabilities; • Other external assets and liabilities (for Brazilian case) • Always the share of South American economies out of the total external assets and liabilities of each country The financial dimension of South American Integration

17. Quantity indicators • General results: very low levels of financial integration • The only exception is the case of Brazil’s loans and export financing, maybe signaling an important regional role played by Brazilian banks (private and state-owned) • Sharp contrast with higher levels observed in some Asian integrated economies The financial dimension of South American Integration

18. Quantity indicators: portfolio assets Source: author’s calculation based on CPIS – IMF. The financial dimension of South American Integration

19. Quantity indicators: portfolio liabilities Source: author’s calculation based on CPIS – IMF. The financial dimension of South American Integration

20. Contrast: portfolio assets (Asia) Source: author’s calculation based on CPIS – IMF. The financial dimension of South American Integration

21. Quantity indicators: other external assets (Brazil) Source: author’s calculation based on CBE – BCB. The financial dimension of South American Integration

22. Price indicators • Economic meaning very controversial • Derived from the “law of one price” • Weaknesses and peculiarities of financial markets in the region • Very poor quality of data • Correlation indicators from three sources: • Money markets • Bond markets • Stock markets The financial dimension of South American Integration

23. Price indicators • General results: higher levels of correlation in bonds and stock markets • Sign of integration? Or contagion? • International investors unable to differentiate among South American markets • Low correlation in money markets • Maybe an indication of low monetary coordination • This is certainly another big problem of the integration process in the region The financial dimension of South American Integration

24. Price indicators, correlations The financial dimension of South American Integration

25. Contrast: correlation indicators (Asia) The financial dimension of South American Integration

26. Concluding remarks and questions • General result: there is a huge gap between the official intentions and the actual level of financial integration in the region • It seems to be more a diplomatic project than a market trend • These facts support the idea of a more politically-driven integration in South America, also seen in other dimensions • Contrary to the trends observed in Asia • In this sense, some similarities with European experience? The financial dimension of South American Integration

27. Concluding remarks and questions • Challenge: how to deal with this gap, aiming at the deepening of the integration? • How to involve the private sector in the process? • Is it possible to strengthen integration without this support? • Despite the historical and structural differences, which lessons can be learned from Asian and European differences? The financial dimension of South American Integration