Agribusiness in MERCOSUR: Building new institutional apparatus

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  • The present study discusses market integration from theapproach of the agribusiness chain, focuses on commodi-ties and value-added products, and also includes the roleof the institutional environment as a boundary limitationfor the depth and speed of the process of market integra-tion. The analysis of the data on trade evolution betweenArgentina and Brazil shows a different pattern if value-added data are analyzed as a distinct category fromcommodities, indicating important scenarios for cor-porate planning in the region. 1998 John Wiley & Sons, Inc.

    Introduction

    On March 26, 1991, Argentina, Brazil, Paraguay,and Uruguay signed the Treaty of Asuncin, whichdefined the path to establish a future common mar-ket in the region, that was named MERCOSUR.The objective was to shape a more globalized andcompetitive economy in the region, motivatingmember countries to reorganize their economies ina more efficient manner after many years of highlyprotectionist policies.

    It is well known that the economies of the signato-ry countries of the treaty are experiencing internaladjustments intended to curb long-lasting inflation-ary regimes and strengthen democratic institutions.Each of the three processes of political reforms,economic stabilization, and market integration aredifficult matters with which to deal and show a rea-sonable degree of interdependence and result in

    Requests for reprints should be sent to D. Zylbersztajn, University of

    So Paulo, Agribusiness Program, 908 Cidado Universitria, So

    Paulo, Brazil. E-mail: dzilbers@usp.br

    x Decio Zylbersztajn is an Associate Professor and Chairman of PENSA-USP, Programa de Estudos dos Negcios doSistema Agroindustrial.x Marcos Sawaya Jank is an Assistant Professor, PENSA-ESALQ-USP, Programa de Estudos dos Negcios do SistemaAgroindustrial.This article benefited from presentations at workshops at The University of So Paulo, at the Board Meeting of RabobankArgentina, and at the

    Congress of the International Food and Agribusiness Management AssociationMexico. Helpful comments from workshop participants and from

    Elizabeth Farina and Hector Ordoez, and the editorial support of Andre Meloni Nassar, as well as the referees and the editor of this Journal,

    are gratefully acknowledged.

    Agribusiness in MERCOSUR: Building New Institutional Apparatus

    257

    Decio Zylbersztajn

    Marcos Sawaya Jank

    Agribusiness, Vol. 14, No. 4, 257266 (1998) 1998 John Wiley & Sons, Inc. CCC 0742-4477/98/040257-10

  • Zy lbersz ta jn and Jank

    258

    Tabl

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    grou

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    1996

    1990

    1996

    1990

    1996

    1990

    1996

    1990

    1996

    1990

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    Pop

    ulat

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    1934

    .665

    149.

    045

    163.

    976

    13.1

    7314

    .462

    4.27

    75.

    025

    3.09

    53.

    203

    201.

    908

    221.

    331

    9.6%

    Rat

    io P

    opul

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    n (%

    )16

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    15.7

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    5%2.

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    .

  • very dramatic economic reforms. To deal with thesechanges all at once and in a short period of time is asocial and economic process that has yet to be fullyunderstood.

    The economies of the MERCOSUR countries aremarkedly different, as can be seen in Table I. Notonly do they vary in size, but there are also institu-tional differences that have been neglected in therecent literature on the topic of market integrationin Latin America.

    The first round of economic adjustments followingthe Treaty of Asuncin has already been completed.Some direct and predictable impacts on specificagricultural products were observed; there was aspecial effect on Brazilian wheat production, alongwith some regional impacts on corn, rice, beef,milk, onions, potatoes, and wine. On the Argen-tinean side, the most important adjustments werenoted in the sugar, tobacco, timber, poultry, andhog sectors.

    Little thought was given to effects on processedfood and value-added products, except in ex-ploratory studies such as Zylbersztajn and Farina.Other studies have focused on the impacts on farmproduction.27

    The present study discusses market integrationfrom the approach of the agribusiness chain andalso includes the role of the institutional environ-ment as a boundary limitation for the depth andspeed of the process of market integration. Bothconcepts are important, because impacts are ampli-fied over the agribusiness chains and affect not onlyfarm production, but also the strategies of input in-dustries, food-processing industries, and distribu-tion at the wholesale and retail levels. The institu-tional aspect is important because there is growingpressure imposed by the United States on Braziland Argentina to integrate the Free Trade Ameri-can Area (FTAA) in a fast-track motion, which isbeing criticized by local agents from both the gov-ernment and private sectors.

    After the work done by North,8 it became a neces-sity to consider the institutional environment as anonneutral device to shape economic performance.Williamson9 and Zylbersztajn10 adopted the con-cept, the latter focusing on the importance of insti-tutions in agribusiness coordination.

    When studying market integration and when con-sidering agribusiness systems as the focus of theanalysis, it is critical to closely follow how institu-tions are being built (or not) in order to provide theframework to support the process of integration.The capacity to build an adequate institutionalframework becomes a key issue in dealing with mar-ket integration, especially in facilitating the opera-tions of the private companies.

    One can envision the typical adjustment path asdeparting from the provision of preferential tariftreatment, evolving first into a free-trade area, theninto a customs union, progressing into a commonmarket, and finally an economic union. Each of thesteps causes a specific sort of distributive impact;therefore, reactions against its implementation areexpected. The final type of resistance is placed atthe governmental level, given the abandonment ofits autonomy to define monetary policy and its limi-tation in defining fiscal policies after the economicunion is established.

    In fact, while any integration process is takingplace, the shape, role, and size of governmental bu-reaucracy will change and move toward a complete-ly new state design and function that is rarely everanticipated by economists.

    So far, the history of Latin American countries hasnot provided insights or shown a desire for a newintegrated form of government. On the contrary,the tradition shows a concept of state that is eagerfor power and designed to be the only promoter ofprosperity.

    Evolution of Agribusiness Trade in MERCOSUR

    On January 1, 1995, an incomplete customs unionwas created with exemptions in place for many sec-tors, albeit very few for agribusiness. Some yearsafter the Treaty of Asuncin, one can say thatMERCOSUR has reached its short-term objectives.Between 1988 and 1994, while exports outside theblock grew by about 20%, trade within the blockshowed a growth rate of 290%.

    Until 1990 trade among member countries repre-sented only 10% of total exports. In 1994 this figure was an average of 20% for the four countries

    MERCOSUR Agr ibus iness

    259

  • and reached more than 40% for Paraguay andUruguay, 30% for Argentina, and 14% for Brazil.

    The more distinct and complementary theeconomies of a trade block are, the easier the ad-justments expected from the free trade. Severalagribusiness products are strategic for most of theMERCOSUR members. Adjustment impacts arequite strong but differ, depending on the specific re-gions of the countries as shown by Jank.5,6 The ob-servation of the trade flow within the economicblock shows how sensitive agribusiness activity is inthe face of the integration process.

    Figure 1 presents the evolution of agribusinesstrade between Brazil and other countries within theblock. An increase in Brazilian imports is observedafter 1988. After the Plano Real in 1994, Brazil-ian imports showed a significant jump due to theimpact the decline in the inflation rate has on thereal income of significant parcels of the population.After 1991 Brazilian exports to Argentina showed agrowth trend, this time resulting from the economicimpacts of the Plano Cavallo in Argentina. It wasnot enough, however, to erode the trade deficit.

    The importance of agribusiness products in totalBrazilian trade within the block is presented in Fig-ure 2. Of the total imports from MERCOSUR coun-

    tries, about 55% are agribusiness products. Whenlooking at the export figure, 20% of the total corre-sponds to agribusiness products.

    In 1985 the share of Brazilian imports of agribusi-ness products from MERCOSUR members repre-sented about 30% of total agribusiness imports,reaching 50% in 1996, leading to the conclusionthat Brazil is concentrating its sources of agribusi-ness trade with the MERCOSUR members (Fig. 3).

    The most significant products imported by Brazilare grains (basically wheat, corn, and rice), beef,dairy, cotton, and some intensive crops such as gar-lic, potatoes, onions, grapes, and apples. Figures 4and 5 present the information of the evolution ofBrazilian trade in the named products.

    An interesting question is what the limits of ad-justments are in the face of the comparative advan-tages of each member country. It seems that there isstill room to increase exports of Argentinean grains,beef, and dairy products to Brazil and increaseBrazilian exports of pork and poultry products toArgentina, especially considering the trend of in-come growth in Brazil.

    The total trade impact of the market integrationhas been negative for Brazil so far. However, whenwe look deep into the dichotomy of commodities

    Zy lbersz ta jn and Jank

    260

    Figure 1. Market penetration of retailer own-branded grocery products from 1977 to1995.

  • and value-added products, the prospects seem quiteinteresting. Figures 6 and 7 present the evolution oftrade for the three categories of products of com-modities, value-added products, and semi-value-added products, following a classification of the

    Brazilian trade and commerce bureau (includescakes, meals, and products from first processing).

    Brazilian imports have been concentrated in com-modities since 1987, but the figures are not signifi-cant in the other two categories of products. How-

    MERCOSUR Agr ibus iness

    261

    Figure 2. Number of new food and drink products in the United Kingdom from 1994 to1996.3

    Figure 3. Perceived costs associated with systems of control in the supply of retailerown-branded food products.

  • ever, Brazilian exports showed a first round posi-tive impact in value-added products, especially af-ter 1990.

    Several insights can explain the figures presentedabove as existing at the beginning of the process of

    integration. One candidate is the large scale of theBrazilian agrifood industry, its updated technology,and the level of subutilization typical from the pro-file of market structure and competitive strategies.At the beginning of the process of integration, ad-

    Zy lbersz ta jn and Jank

    262

    Figure 4. Transaction costs associated with food safety controls in the supply ofretailer own-branded products.

    Figure 5. Costs to food retailers of own-branded product safety failure.

  • vantages are expected from the more efficient scaleinstalled in the larger market. This has been thepredominant characteristic in the Brazilian food in-dustry, wheich was shown to be important at theinitial steps of market integration.

    In the future rounds of economic integration bothtrends can be challenged. On the one hand, Brazil

    is moving its production of grains to alternative ar-eas and the processing industry is moving as well. Abetter transport system, especially the new routethrough the Amazon and Paran river systems andthe recently deregulated coastal trade, can shape acompletely different situation in the future that willaffect the capacity for MERCOSUR products to

    MERCOSUR Agr ibus iness

    Figure 6. Systems of food safety control in the supply of own-branded food products.

    Figure 7. Voluntary food safety standards in the UK food industry.

    263

  • reach distant markets in northeastern Brazil. Onthe other hand, new investments in Argentina,Uruguay, and Paraguay are expected to be made inthe food industry that aim to harvest the economiesof scale that the common trade area allows. A deep-er look into the new projects of the food industry ofthose countries can signal how much agribusinesscompanies trust in the future of market integration.

    The figures shown above are usually the ones usedin discussing the results of market integration. How-ever, the real question becomes how to progressfrom here. The first round of market adaptations isabout to be completed, especially in agribusinessproducts, but other impacts are expected to showup. The next section will evaluate some of the keyinstitutional variables that interfere with theprocess of integration.

    Institutional Design and Market Integration

    The progress of MERCOSURs departure from afree trade area and progress into a common marketand an economic union will depend on the capacityto build new institutional apparatuses and reshapethe existing ones. Institutions cannot be taken asneutral devices; on the contrary, they are the keysto reach economic efficiency, as proposed byNorth.8

    The design of institutions is a slow process boundby the cultural and social characteristics of thecountries. Institutions not aligned with the econom-ic needs do not promote economic efficiency. Bycontrast, private agents will have to deal with thelack of institutional support to perform their tasks.As mentioned by North,8 institutions are the rulesof the game and organizations are the teams play-ing the game. We can easily modify the team, but we cannot change the rules while the game is pro-gressing.

    European Experience

    If we look at the process of building the EuropeanUnion, we note that it was conceived and born dur-ing the 1950s, more specifically in the Italian town

    of Messina in 1955. Since then multiple blocks havebeen built to reach the stage of discussing monetaryintegration and the steps to get there, as was the fo-cus of the Maastrichts Agreement.

    In fact, three important aspects of the economicintegration in Europe have been the slowness of theprocess, the exceptions considered in order to mini-mize the distributive impacts resulting from theprocess, and the shape of a specific institutional ap-paratus that is replacing the role of traditional gov-ernments step by step. Let us consider each one ofthese concepts and contrast them with the LatinAmerican experience.

    The first aspect deals with the speed of the adjust-ment process. This has to do with the bargaining as-pects of the distributive impacts on the market inte-gration process. The integration in Europe waspreceded by a sizable number of studies aiming toanticipate the expected impacts in order to mini-mize or at least provide support to the losers.

    The speed of adjustments is low when the issue isagricultural policy reform. This slowness hasmarked the international markets with distortedprices affecting, in particular, the adjustment inLatin America. The recent discussion about build-ing bridges between MERCOSUR and EuropeanCommunity is hard to carry on without Europepromoting the expected adjustments.

    The second issue is the exemptions adopted in Eu-rope, particularly in agriculture-related issues. Theexplanation is based on the high costs of adjust-ment, turning this aspect into an important politicalquestion. Policymakers in Europe still have tosearch for votes in their countries of origin.

    The most important aspect related to the adjust-ment is seen in the support programs that havebeen put in effect to deal with the impacts of eco-nomic integration. Examples are programs such asthe Mediterranean Integrated Program, the Agri-cultural-Industrial Reconversion Program, and theCommon Agricultural Policy in operation since1958.11

    The implementation of MERCOSUR treaties didnot take into account the costs of adjustments inagriculture. The understanding of the impacts wasnot as profound as expected, and reconversion pro-grams cannot be mentioned as important devices indealing with the adjustment costs.

    Zy lbersz ta jn and Jank

    264

  • The third point is related to the institutional appa-ratus needed to deal with the new integrated market.If the place to lobby in Europe is Brussels and theparticipation of the private sector is very intense, inMERCOSUR a specific bureaucracy has not yet beenbuilt to deal with institutional harmonization. Theefforts are concentrated in the existing local govern-mental bureaus, but the participation level of theprivate sector has been small and erratic.

    Future of Market Integration

    The data analyzed in this article showed that thefirst round of economic adjustments in MERCO-SUR countries has already been completed. Adjust-ments that resulted from the lower levels of tariffsbenefited the sectors with higher comparative ad-vantages. The figures also show that Argentina ben-efited from the market adjustment in general termsand in agribusiness products specifically. A deeperlook into the figures pointed to the advantage of Ar-gentina in terms of commodities, in contrast with aBrazilian advantage in value-added products.

    As the process of adjustment advances, the initialfactors determining the advantages tend to be dilut-ed and replaced by the capacity of governments andfirms to build competitive advantages.

    The second round of adjustments will be closelyrelated to the capacity of the participating countries

    to build a specific institutional apparatus to ad-vance with the integration process further. This ar-ticle compared the path of adjustments in Europeand MERCOSUR, pointing to a very rapid adjust-ment in the latter, with fewer measures to protectthe losers. in facts, the slower path of adjustmentsin Europe is one important barrier to the progressof the implementation of MERCOSUR, becausemarkets are needed for the efficient production ofgrains, meat, and other products originating fromMERCOSUR countries.

    To build a new institutional apparatus, the activeparticipation of the private sector is a sine qua noncondition. Market integration has a very importantimpact on local governments, namely, the decreaseof political power. Step by step integration leads toa better behaved government that is adjusted tomultilateral boundaries that limit the traditionalforms of conducting local policies.

    A question remains as to the capacity of local governments to understand the trend of decliningpower of traditional bureaucracies. Market integra-tion is a huge change in which unexpected opportu-nities are created for economic agents. After thetwo levels of adjustments are completed, more andmore the efficient strategic design at the microlevelof firms will be the way to explore the new opportu-nities derived from the process of market integra-tion.

    MERCOSUR Agr ibus iness

    265

    References

    1. D. Zylbersztajn and E.M.M.Q. Farina, A Questo daAgroindstria, MercosulImpasses e Alternativas, Vol.3, Srie Assuntos Internacionais, Instituto de EstudosAvanados, So Paulo, Brazil, 1991, p. 29.

    2. L.H.M. Villwock, Os Impactos Econmicos do MERCO-SUL Sobre as Cadeias de Produo de Trigo, Soja, Milho,Sunos e Aves, MS thesis, Universidade Federal do RioGrande do Sul, Rio Grande do Sul, Brazil, 1993.

    3. IPEA, MERCOSUL: Base de Dados da Integrao Agrcolae Agroindustrial, Estudos de Poltica Agrcola, Braslia,Brazil, 1994.

    4. M.R. Carrequiry, Polticas Agrcolas e IntegraoEconmica: O Caso do MERCOSUL, Polticas Agrcolas eo Comrcio Mundial, Instituto de Pesquisa EconmicaAplicada, Estudos de Poltica Agrcola, Braslia, Brazil,1994.

    5. M.S. Jank, MERCOSUL: Efeito das Polticas PblicasSobre a Competitividade, in Comrcio Internacional eComercializao Agrcola, E.C. Teixeira and D.R. Aguiar,Eds., Viosa, UFV, Impr. Univ., 1995. Chap. 11.

    6. M.S. Jank, O contexto do MERCOSUL: Harmonizao dePolticas e Competitividade, Frum IPEA Brasil 1995:Competitividade do AgribusinessFatores de Inibio eNova Poltica Agroindustrial, Instituto de PesquisaEconmica Aplicada, Rio de Janeiro, Brazil, 1994.

    7. M.S. Jank, R. Rodrigues, and A. Nassar, O Mercosul e oAgribusiness Brasileiro, So Paulo, Brazil, 1996.

    8. D. North, Institutions, Institutional Change and EconomicPerformance, Cambridge University Press, New York,1985.

    9. O.E. Williamson, The Economic Institutions of Capital-ism, The Free Press, New York, 1985.

  • 10. D. Zylbersztajn, Governance Structures and AgribusinessCoordination: A Transaction Cost Economics Based Ap-proach, in Research in Domestic and InternationalAgribusiness Management, Vol. 12, R. Goldberg, Ed., JAIPress Inc., London, 1996, p. 245.

    11. IPEA, Poltica de Reconverso: Critrios e Parmetrospara a Formulao de um Projeto de Reconverso, Estu-dos de Poltica Agrcola, Braslia, Brazil, 1994.

    Zy lbersz ta jn and Jank

    266

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