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Lagniappe
Venezuela
in Mercosur: 21st Century Neoliberalism?
By
Francisco Toro
Venezuela’s
entry to Mercosur as a full member of the trade block (but without
the right to vote) is confusing, if not irrational. Not two months
ago Chavez was denouncing Mercosur as a ‘‘failed neoliberal
experiment’’ and now the country is about to join
the block. Chavez surely has his political reasons for the move
– but economically, it’s hard to make sense of it.
Conventional economic theory has two basic things to say about
what happens when you liberalize imports. First: the economy as
a whole is made better off. Second, the gains are not evenly distributed.
While everyone is made a little bit better off, some are made
much worse off.
To see why, take a simple example. Say Venezuela’s farmers
can produce corn for Bs.100 per kilo while foreign farmers can
produce it for Bs.95. When you liberalize imports, the price of
corn to Venezuela’s consumers drops, so everyone is made
a little bit better off. At the same time, Venezuelan corn farmers
suddenly find they can’t compete, so they’re wiped
out of the market. In the lingo, gains from import liberalization
are diffuse, but costs are concentrated.
What’s to gain?
This explains why countries rarely liberalize unilaterally even
if economic theory shows that the diffuse gains are bigger than
the concentrated losses.
Governments, in general, pay more attention to organized groups
that mobilize to lobby for a given policy than they do to calculations
of overall welfare or economics textbooks. Since each consumer
is made only a little bit better off by import liberalization,
consumers as a group find it difficult to organize themselves
to petition the government for liberalization. But since producers
stand to lose a lot, they have a much easier time banding together
to lobby for protection.
Of course, that tells only half the story, because countries also
have sectors that stand to gain from trade. If, say, Venezuelan
producers can make neckties for Bs.95 a kilo, but it costs foreign
producers Bs.100 to produce that many neckties, Venezuelan necktie
producers obviously stand to gain a lot from access to their market.
Liberalization would make neckties slightly more expensive in
this country, but the costs to Venezuelan necktie consumers are
diffuse, while the gains to necktie producers in Venezuela are
concentrated. The equation is exactly reversed. In that case,
Venezuelan necktie producers have every incentive to lobby the
government for better access to foreign markets. But when the
Venezuelan government sits down to ask a Mercosur member government
to open up their necktie market, it has to offer something in
return. Since their corn producers are interested in better access
to Venezuela’s corn market, there’s a fairly obvious
bargain to be struck: Venezuela will liberalize its corn market
if Mercosur liberalizes its tie market. This, in extreme shorthand,
is the reason trade negotiations happen.
The whole point of trade negotiations, then, is to overcome a
problem of collective action by making sure someone in the home
country has a strong interest in seeing its own markets liberalized.
If Venezuela’s government tries to liberalize corn unilaterally,
corn farmers will work hard to block it, and there’ll be
no other group similarly organized to argue in favor of liberalization.
By bargaining off access to Venezuela’s corn market against
access to Mercosur’s tie market, trade negotiations engineer
a situation where local tie producers have a strong incentive
to push the government to liberalize Venezuela’s corn market
market – as an indirect way of gaining access to Mercosur’s
tie market.
This little framework is enough to explain why Chavez’s
decision to join Mercosur is puzzling, at least from an economic
point of view. In effect, Venezuela will be opening up its market
to Argentina and Brazil’s world-beating agricultural producers.
Not surprisingly, Venezuela’s agricultural producers are
none too happy about this. Venezuelan manufacturers are similarly
displeased. In exchange for their sacrifice, though, Venezuela
will get access to...um...to...what precisely?
Venezuela’s major export commodity is oil, but PDVSA already
has free access to Southern Cone energy markets. If there is some
Venezuelan export sector chomping at the bit for better access
to Southern Cone markets, VenEconomy hasn’t heard about
it. So, in effect, Chavez proposes to give them access to Venezuela’s
farm market in exchange for...nothing!
Potential vs. actual
It’s true that there are a number of sectors where Venezuela
has a potential comparative advantage, and joining Mercosur provides
new opportunities for those sectors. However, a pile of economic
research – most of it from left-leaning academics - argues
convincingly that better access to foreign markets is very rarely
enough to turn potential comparative advantage into actual export
success. To do that, one needs a whole raft of government measures
– from R&D tax credits and export credit to specialized
training institutes and improved property rights - to help boost
domestic producers’ competitiveness to the point where they
actually can crack foreign markets. Without those policies, liberalizing
imports tends simply to wipe out local producers. As Joseph Stiglitz
puts it, in the absence appropriate sectoral policies on the supply
side, measures meant to shift workers from low-productivity jobs
to high-productivity jobs often end up shifting workers from low-productivity
jobs to unemployment.
Needless to say, those supply side policies are not in place in
the Bolivarian revolution. One possibility is that the government
may be fully aware of the likely costs of the move for Venezuela’s
private sector producers, and has implemented it precisely for
that reason – just the latest weapon in Chavez’s ongoing
war on the private sector.
In practical terms, from Venezuela’s point of view, joining
Mercosur is a lot like liberalizing Venezuelan imports from the
Southern Cone unilaterally. Now, there’s an old and venerable
economic argument in favor of unilateral liberalization. Of course,
it’s an argument more closely associated with Adam Smith,
Milton Friedman and Jagdish Baghwati than with Ezequiel Zamora,
Jorge Giordani, or Martha Harnecker. How, exactly, the decision
to enter Mercosur fits in with Chavez’s abundant rhetoric
on food security, endogenous development, land reform, etc. etc.
VenEconomy hasn’t the slightest clue. It’s more like
neoliberalismo del siglo 21, really...
Francisco Toro
(franciscotoro@fastmail.fm) formerly wrote for VenEconomy full
time. He is currently a PhD candidate in economics at the University
of Maastricht. His dissertation will be on trade policy. Petroleumworld
not necessarily share these views.
Editor's
Note: This commentary was first published by Veneconomy on December
16, 2005. Petroleumworld reprint this article in the interest
of the readers.
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Petroleumworld 01/14/ 05
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