South America: Brazil v. everyone else?

Peru, Colombia, Chile and Mexico are set to form a new regional economic block. But given that all four countries already benefit from free trade agreements, where's the need for such a pact? The answer lies in Brazil's recent - and projected - boom.

    On Sunday, Alan Garcia, the president of Peru, said that his country, along with Colombia, Chile and Mexico would form a new regional economic bloc.

    Garcia said the presidents of all four countries would meet in Lima on May 2 to hammer out the final details and make the formal announcement.

    But all four countries - which have market-oriented economic priorities - already have individual free trade agreements amongst themselves. The stock markets of Colombia, Peru and Chile were even recently integrated.

    There are currently no major barriers to free trade between them.

    So what is the point of a formal economic block?

    The point is simple: Brazil.

    Mauricio Cardenas, the director of the Latin America Initiative at Brookings, told me: “The economic agreement between Colombia, Peru, Chile and Mexico is not anti-Brazil. It’s just their way of saying what is good for Brazil is not necessarily good for them.”

    There is quietly mounting anxiety in the halls of power in South America about Brazil’s rapid economic development in recent years. And there is a growing sense that Brazil’s monster economy keeps growing at the expense of neighbouring countries.

    It’s hard to overstate what has become of Brazil in the last five years, but suffice to say that the country will likely become the planet’s fifth largest economy in the coming decade if all holds to form.

    Brazil has shed its economic underachiever label and become the South American version of what China is to the world: The place everyone wants to be.

    It doesn't matter if it's for the purpose of tourism, construction, engineering, oil and gas, IT, publishing, or selling hamburgers – Brazil might be the most complicated market in South America to do business in, but also clearly has the most medium to long term upside - think World Cup 2014 or Olympics 2016.

    Investors know this and that is why they are suddenly tripping all over each other to get here.

    And because of that, Brazil’s economy is sucking up the oxygen from the region - albeit unintentionally. Brazil’s economic policies are not purposely intended to take away from its neighbours. It’s just that Brazil no longer considers its neighbours as economic competitors and shouldn’t because they aren’t.

    Brazil’s eyes for several years now have been sharply focused on China, Russia, India and Europe. That is how the Brazil of 2011 measures itself these days.  

    Colombia, Chile, Peru economic aspirations 

    Juan Manuel Santos, Colombia’s president, is business-friendly and with his expensive tailor-made shirts and silk ties, he looks the part of a jet-setting CEO.

    In a previous life, Santos represented the Colombian coffee growers federation in London, before growing into the role of minister of defence. As president, he is now trying to capitalise on his country’s growing security stability by putting a sign on the door that says “Open for Business”.

    So far, the results have been mixed.

    Peru is a country currently in the final days of a hotly contested presidential election where the main candidates are in a virtual dead heat.

    Whoever wins the election will have the good fortune of inheriting a country with some of the highest growth rates on the planet  over the past decade (over eight per cent last year) but still uneven (less than one per cent in 2009). Peru has a ton of promise, but is being held hostage by commodity exports and badly needs to diversify.

    Nevertheless, Peru has a lot of economic success stories to talk about. The problem they are having is getting people to take their ear away from Brazil in order to listen.

    Chile is the longtime darling of market-oriented economics of South America, with its success being labeld the 'Chilean Miracle'.

    But by her sheer lack of scale in a region where bigger has become better, Chile is finding itself often living off her economic image and made-up slogans rather than her economic reality. The country's leaders know Chile can only go so far by going alone. They are reaching out to all corners of the globe, and this is one more step in that direction.

    For Chile, it's a simple matter of: Why not?

    Stronger together

    So where do these three countries find themselves? Here is the key stat: The GDP of Chile, Peru and Colombia combined last year was about $967bn - only a couple hundred billion more than just the state of Sao Paulo alone and still less than half the GDP of Brazil (2.19 trillion).

    And that is where Mexico comes into play. Add in Mexico’s GDP ($1.5 trillion) and the new economic block will have a combined GDP slightly larger than Brazil. 

    As far as the new economic pact is concerned, Mexico is the most interesting case.

    It is a country with a highly advanced economy (in some ways more advanced than Brazil's) that normally looks north, and its interest in the south usually extends to Central America but no further.

    As the southern neighbour to the country with the largest economy in the world, Mexico has never had to bother with much with South America. So what does Mexico see in the deal?

    "Mexico sees the deal possibly as a new market for manufactured goods it’s an opportunity for Mexico to diversify its economy,” Cardenas said. "Mexico relies too much on the US now."

    For Colombia, Chile, and Peru including Mexico is a coup like adding a true economic heavyweight into a formal pact.

    The challenge for these countries will be deciding what to actually do now that they will all be wearing the same uniform, as they all have free trade agreements already. A common currency? Tax agreements? Simple bargaining power?

    As Cardenas said, perhaps the pact is not so much about economic weight as it is simply a “political move to create a counterbalance to Brazil”.  

    Meanwhile, as all this is happening in its own neighbourhood, Brazil is seriously studying the idea of buying all of Portugal’s debt. A cynic might say the move would be the ultimate symbolism of the formerly colonised, buying off their former coloniser once and for all. Or, perhaps, Brazil throwing a life vest to Portugal right before she goes under. 

    Brazil’s neighbours are watching closely, forming pacts now, so it doesn’t come down to that for them, because from the standpoint of economic perception, South America is quickly becoming the continent of two parts: Brazil and everybody else.

    Follow Gabriel Elizondo on Twitter @elizondogabriel

    Al Jazeera headlines in Portuguese on Twitter @AlJazeeraBrasil 


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