Which Regional Integration?

South America is one of the least commercially integrated regions in the world. Only 15% of local exports are destined for neighboring countries, a pattern comparable to that of Sub-Saharan Africa. Numerous efforts have been made in recent decades to promote integration, including logistics plans and trade agreements, but progress has been limited. The reasons for this frustration are varied and include high infrastructure costs, fiscal and institutional constraints, protectionism, and a lack of political will.

However, profound changes in the global economy may be giving new momentum to fostering regional business. Consider the already high and rising protectionism and discrimination from developed countries, along with escalating geopolitical tensions. These dynamics are driving market fragmentation, trade wars, investment controls, and even a slowdown in global trade.

The renewed push for integration emphasizes logistical corridors. Initiatives such as the bioceanic route connecting ports on the Atlantic and Pacific, railways, waterways, highways, and bridges are all part of this agenda. Estimates point to significant economic impacts, particularly for the production and export of grains and other commodities. However, creating logistics corridors to serve extraregional markets differs from developing corridors that encourage regional value chains and productive complementarities.

Is Physical Connection the Only Answer for Regional Integration?

The answer is no. There are ample reasons for the region to consider not just one but a coordinated set of solutions to expand and accelerate regional business. Consider sectors like services, the digital economy, energy, and environmental services—areas with immense business potential rooted in local realities and needs.

Services, by far the largest economic activity in the region, account for 65% of South America’s GDP. Urbanization, rising incomes, and an aging population will further boost the sector's share. Yet, currently, only 11% of the region's service exports are destined for neighboring countries, far below the global average, highlighting the significant untapped integration potential.

For a glimpse of the potential and scope of this agenda, take Brazil as an example. The country boasts large and sophisticated financial, capital, insurance, and venture capital markets; world-class research and development centers; regional headquarters of international funds and major multinational companies; and competitive, scalable markets in various fields such as IT, legal services, consulting, equipment maintenance and repair, marketing and communication, healthcare services, and many others. Brazilian service companies could play a catalytic role in reducing costs, increasing efficiency, fostering investment, and providing solutions for businesses across the region.

Digital Integration

The digital agenda offers immense business opportunities. E-commerce, which is rapidly expanding in the region, could gain new momentum through the formation of a regional marketplace, enhancing consumer options, opening new business frontiers for companies, and fostering the development of regional value chains. The development of high-speed regional digital infrastructure would facilitate participation in global digital value chains and enhance the region's competitiveness. Moreover, integrating digital payments would streamline intraregional digital transactions, creating an interoperable payments ecosystem to lower transaction costs and facilitate cross-border trade and investment. Developing a regional market for digital and tech services could also boost the region's competitiveness in software development, data analytics, and IT outsourcing.

Energy Integration

Creating a regional energy market that leverages each country's significant comparative advantages could optimize resource use, reduce costs, and enhance resilience and energy security. More importantly, it could help convert the region's unique renewable energy advantages into international investments in powershoring. This agenda represents the region's most important bet for economic growth, integration into global value chains, and job creation. Successful examples of energy integration include Itaipu, the Andean Electric Market, and the Southern Gas Pipeline.

Environmental Integration

Integrating the environmental agenda could focus on initiatives promoting cooperation, investment, and sustainable development, thereby strengthening the region's privileged position globally. These could include the creation of a regional carbon market, regional programs to protect and leverage biodiversity, ecotourism, bioeconomy initiatives, and low-carbon agriculture. Joint action could bolster the region's leadership in global climate negotiations and attract significant external investments.

The Value Proposition

A broader and more ambitious integration agenda could significantly contribute to building a more sophisticated and diversified pattern of trade and investment, with enormous socioeconomic impacts. Many of the activities mentioned above are among those that generate the most jobs per dollar exported and heavily involve youth, women, and a myriad of small and medium-sized enterprises, including dynamic and innovative startups.

The Challenges

This agenda comes with challenges, including complex regulatory issues and the harmonization of standards, certifications, taxation, investments in interconnection infrastructure, the creation of regional financing funds, and the development of regional projects and institutions to plan, monitor, and coordinate policies and actions. Nevertheless, the potential benefits are immense and timely. As a popular saying in the region goes, "El que quiere celeste, que le cueste."

This article was originally published at Valor Econômico, December 12, 2024.