Economic Integration and Economic Divergence

Abstract

As it is evident from the previous chapter, discrepancies in the movement of real exchange rates can undermine the efforts of MERCOSUR countries for achieving the objective of a customs union. This evidently makes out a strong case for the harmonization of related policies. A more difficult question is whether convergence of economic performance, meaning a narrowing of disparities in growth rates and/or income levels over time, can in itself promote integration and, if so, whether it can be facilitated by coordination of macroeconomic policies. There is no such thing as a simple answer to this question. Students of the European experience, for example, have repeatedly referred to the circularity of the debate about the relationship between convergence of economic performance and integration. They point to the fact that divergence is a general and permanent feature of all complex economic systems and it should not necessarily be perceived as a bad thing in all instances (cf. Hodges and Wallace, 1981). Hence, there is no reason to equate integration with attaining homogeneity and neither to judge economic divergence as something negative in itself. Really, what is relevant is to define criteria for managing divergence rather than for eliminating it. In this chapter, we examine some aspects of this discussion in relation to the experiences of the MERCOSUR and Andean Group (GRAN) countries. We furthermore look at recent proposal to fuse these two trade blocs into a South American Free Trade Area (SAFTA).