The Decay of the Andean Group

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Heldt, Sven

Article — Digitized Version The decay of the Andean Group

Intereconomics

Suggested Citation: Heldt, Sven (1977) : The decay of the Andean Group, Intereconomics, ISSN 0020-5346, Verlag Weltarchiv, Hamburg, Vol. 12, Iss. 3/4, pp. 72-78, http://dx.doi.org/10.1007/BF02928696

This Version is available at: http://hdl.handle.net/10419/139453

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The Decay of the Andean Group

Sven Heldt, Kiel *

The creation of the Andean Group in 1969 and its ambitious program had been accompanied by opti- mistic expectations of its members who now have become disappointed. Regarding the conflicts within this Group the withdrawal of Chile plays a prominent part - a withdrawal which will probably have negative effects on this country, but also for the rest of the Group it represents a painful shrinkage.

he creation of the Andean Group in the year the integration of the whole Latin American re- T 1969 by Bolivia, Chile, Colombia, Ecuador and gion. The essential objectives of the Andean Per(~ 1 was the result of the difficulties encoun- Group were therefore defined as follows: to reach tered within the Latin American Free Trade Asso- a persistent improvement of the standard of liv- ciation (LAFTA), due to a lack of common inter- ing of the inhabitants of the subregion through ests and an insufficiency of instruments designed a process of economic integration leading to a to prevent an unbalanced distribution of the ben- balanced and harmonic development of the part- efits expected from the integration process. It ner countries, to facilitate its participation in the were therefore those members of LAFTA classi- process foreseen by the Treaty of Montevideo and fied as having restricted markets 2 or whose econ- to establish favourable conditions for the conver- omies were relatively less developed 3 that prin- sion of LAFTA into a common market. cipa~ty showed interest for a change. They were The strategy of subregional economic integration convinced that only through the creation of a of the Andean Group provided measures to be close economic unit it would be possible to coun- executed by specific instruments and within a terbalance the economic weight of the remaining fixed timetable that would touch almost every three big members within LAFTA, namely Argen- tina, Brazil and Mexico, and by this way facilitate field of the economic life of the partner countries. These basic mechanisms were a harmonization of * Institut f~r Weltwirtschaft, Kiel. This artlcle Is part of e proj- ect (SFB 86) sponsored by the Deutsche Forschungsgemeinschaft. the economic policies of these countries, a com- Venezuela adhered only [n the year 1973, although it partic- mon agricultural and industrial programming, the ipated in the initial negotiations. liberalization of the reciprocal trade, the adoption 2 This group of countries comprises Chile, Colombia, Per~ and Venezuela. of a common external tariff, special measures 3 The relatively less developed countries of LAFTA are Bolivia, designed to reduce the differences in the level Ecuador, Paraguay and with restrictions also Uruguay. But only Bolivia and Ecuador are members of the Andean Group. of economic development between the partners,

72 INTERECONOMICS, No. 3/4, 1977 INTEGRATION the canalization of financial resources and the dustrial development of each country, the size of physical integration. the import coefficient and the dependence of the State on tariff revenues. The liberalization proc- Special Features of the Andean Group ess is then most favourable for those countries which can successfully reduce the production The Andean integration scheme was character- costs through economies of scale and a better ized by special features like the establishment allocation of production resources. The size of of a common treatment of foreign investments, the import coefficient is decisive for the imme- trade marks, patents and licenses and the har- diate possibilities to export to the regional mar- monization of economic policies as a special ket, a low coefficient being an indicator of an tool for establishing a preferential treatment to- advanced import substitution process. Countries wards the relatively less developed members, with a high import coefficient might therefore be Bolivia and Ecuador. By the first of these mea- forced to import now goods from partner coun- sures it was intended to secure that the potential tries which they formerly imported from third benefits generated by the integration process countries most probably at a lower cost. This would be retained in the area. The purpose of the development has an impact on the tariff revenues second was to distribute them adequately among of the State, depending upon the degree that the the members. An additional instrument, the sec- subregional imports substitute third country im- torial industrial programming, was designed for ports or national production. According to these predetermining the production location of a fixed considerations the potential benefits of the liber- list of products, therefore substracting the deci- alization process were expected to be greatest sion of where to produce from the market mecha- for Colombia and Chile s. nism. By this way, the specialization of the partner countries in certain product lines was to be The setting of a common external tariff deter- determined by the way of negotiations. mines the general incentive given to the production destined to the subregion and indirectly also These unusually far reaching measures adopted determines the stimulation granted to the exports by the Andean countries were only possible as a going to third countries. The structure of this result of a strong commitment of the governments tariff decides upon the relative protection given of the participating countries in favour of regional to the different types of products. The bigger the cooperation. The leading personalities of that similarity of the present tariff level and structure time were the presidents of Colombia and Chile. of a member country to that proposed for the integration community, the bigger will be its bene- When the agreement was signed in 1969 and dur- fit from it. According to the minimum common ing the first years of functioning the governments external tariff already adopted, Colombia was in power were characterized by strong national- closest, while Bolivia und Ecuador had practically istic attitudes 4. The majority of the member coun- no benefit. Their national tariffs on manufactured tries, namely Bolivia, Ecuador, Chile, Colombia goods were significantly lower than the common and Venezuela were following a traditional devel- tariff showing almost no home production in in- opment strategy, with priority for industrialization termediate, capital, and some durable consumer through an import substitution process under goods. The latest proposition of the Junta of the intermediate levels of protection. Per(J, on the Treaty of Cartagena for a definite common ex- other side, favoured a planned development strat- ternal tariff structured according to the labour egy, where the integration was thought as a ve- intensity of production and fixing lower rates is, hicle for a national autonomous development. therefore, a more acceptable solution. According to this strategy the trade liberalization process within the region received less impor- In relation to the joint regional planning of dy- tance compared to the regional industrial pro- namic industries, it is important to avoid that for- gramming under relatively high and differenti- eign competitive pressures are completely elimi- ated tariffs to develop strategic industries, reserv- nated so to prevent excessive regional costs for ing for the foreign capital a restricted and regu- these industries. It is, therefore, a question of the lated role. This position received additional back- price the Andean countries are willing to pay for ing when President Allende assumed power in having a more diversified industrial structure, Chile in 1970. since inefficiencies in these industries, especially

4 Specially the presidents Allende in Chile, Torres in Bolivia, Economic Implications of the Integration Velasco in Peru and Rodriguez Lara in Ecuador. Instruments s The intra-subregional trade has developed very dynamically, from US $ 86 mn to 468 mn between lg6g and 1974, but still represents only about 6 p.c. of the total foreign trade of the The effects of a trade liberalization program like region. Chile and Colombia have maintained their share of about 55 p.c. in total regional exports in this period, if we sub- that of the Andean Group upon the individual stract the exports of crude petroleum of Ecuador in the year partners depend basically on the degree of in- 1974, which started to grow dramatically.

INTERECONOMICS, No. 3/4, 1977 73 INTEGRATION in intermediate and capital goods industries, will where economic benefits were expected, the ra- affect the efficiency of all other Andean indus- tionale being the sharing of the rents originated tries that need these products as inputs. Coupled by the creation of the common market. with this question arises the problem of a fair distribution of the new industries among the The promoters of FDI commonly stress the follow- partner countries, since inefficient infant indus- ing benefits: positive employment effects, trans- tries will be to the benefit of those countries fer of technological knowledge and managerial where they are located at the expense of the skills without lengthy negotiations, a rapid trans- other partners, as long as the exporting country fer of capital to capital-scarce regions, positive does not subsidize these exports by the amount balance of payments effects through either export of the higher production costs. And this conflict- promotion or import substitution, the introduction ing situation will persist until these new industries of new products, the achievement of economies mature and thus make regional protection super- of scale and the stimulation of additional domes- fluous. In order to avoid this risk, regional import tic investment through forward and backward substitution should then only be promoted in linkages. those activities where acceptable levels of effi- But in fact one can find on account of numerous ciency through learning by doing can be reached examples a quite different picture, the employ- after a reasonable number of years. ment effect being quite limited due to the utiliza- tion of rather capital intensive technologies 9, the If costly trade diversion arises for those countries remittance of profits being excessive and chan- which have traditionally had lower levels of pro- nelled through the way of transfer pricing for in- tection (Bolivia, Ecuador and Venezuela) attempts puts coming from the parent firm, the net inflow to offset this disadvantage by locating inefficient of new capital being reduced, since the greater investments in these countries in the framework part of the investments is commonly financed by of regional industrial programming will not en- the reinvestment of local profits and local credits, courage growth in the subregion. In effect, the the payment for patents being excessive, register- Andean subregion needs an expanding volume of ing even payments for not utilized technologies, exports to the rest of the world for guaranteeing the net effect on the balance of payments being a rapid and efficient growth and, consequently, rather weak on account of high import contents for financing a rising amount of imports of capital in import substituting activities and weak export and intermediate goods whose production in the promoting effects, which even in successful cases subregion may still be uneconomical 6. tend to increase dependency on export markets 10, the introduction of new products tending Differing Aspects of Foreign Direct Investments to satisfy the limited demand for conspicuous With respect to the role of foreign direct invest- goods of the high income classes and thus pre- ments (FDI) opinions are very divergent as to the venting the achievement of economies of scale. benefits they may bring to the host countries. On top of it, a conflict of interests was visualized The common measures toward FDI adopted by between the host country and the foreign investor the Andean Group 7 actually reflected a rather mainly due to the fact that foreign investors fol- sceptical view of these benefits. They comprised low policies that tend to maximize the benefits a limitation for the remittance of profits up to a of the whole multinational company, not always maximum of 14 p.c. of the invested capital per leading to the maximization of the benefits of the annum, a forced divestment policy within a period particular subsiduary. Although the defenders of varying between 15 years for Chile, Colombia, an international laissez-faire system point out Perl3 and Venezuela and 20 years for Bolivia and that the negative experiences with FDI are the Ecuador, a prohibition to invest in certain sectors result of the application of wrong economic poli- like transport and communications, limited ac- cies in the host countries, the experience in the cess to domestic credit, the elimination of pro- Andean countries does not confirm this in numer- hibitive export clauses, limitations for licensing ous cases. agreements, a prohibition for the acquisition of 6 The only tariffs that can be so far considered as rather high existing industries and others. are those fixed for some productions assigned to Bolivia and Ecuador and those under discussion for the automobile industry. These rules were the reflection of the results of 7 The common rules toward foreign direct investments are con- some investigations undertaken by that time in tained in Decision 24 of the Commission of the Treaty of Car- tagena, adopted as early as 1971. Latin America to measure the effects of direct 8 See f.e.C. V ait s o s, Patents revisited: their functions in foreign investments 8. They supported the con- developing countries, in: Journal of Development Studies, Vol. 9, Oct. 1972, No. 1, and Intercountry income distribution and multi- viction of many politicians and technocrats that national enterprises, Oxford 1974. these effects were in many cases negative. It was, 9 This tendency is supported by distorted factor prices for labour due to minimum wage legislation and other measures. nevertheless, not intended to cut the flow of FDI, lO See H. W. V a I I e, Las industrias de exportaci6n, in: Desar- but to control it and direct it to those activities rollo Econbmico, Vol. 14, No. 54, July-Sept. 1974.

74 INTERECONOMICS, No. 3/4, 1977 INTEGRATION

The Common Foreign Capital Statute was, there- significantly. And this was not present anymore fore, designed to prevent these negative effects when important political changes had occurred in as well as to improve the bargaining position of almost every member country and the new politi- these countries vis-&-vis foreign investors, seek- cal leadership realized the implications of the ing to attract only those investments that are in Treaty of Cartagena for the new economic poli- accordance with the national interests of the host cies followed thereafter by some of them. country. For this purpose, the external tariffs and The most important event was the overthrow of the direct allocation of industries to particular the Allende-government in Chile in September countries according to the sectorial programs of 1973, after President Torres of Bolivia and Presi- industrial development (SPID) are important ad- dent Rodriguez Lara of Ecuador had also been ditional tools. In exchange for the restrictive replaced by conservative military governments. clauses, stable investment rules, a guarantee Thereby the nationalistic element strongly present against unforeseen expropriations and an expand- in the first years after the creation of the Andean ed protected regional market were offered to po- Group, favouring industrial programming and tential foreign investors. It was then a question strict control over foreign investments, was deci- of how foreign investors would react to these un- sively weakened. Further, the conditions in the precedented behaviour of a group of countries, world economy have radically changed, reversing how powerful their lobby would be in an attempt the political interest in favour of the primary sec- to liberalize these rules and how attractive the tor. In view of a growing scarcity of these goods, Andean market would be for investors in relation a tendency towards the formation of cartels of to alternative investment opportunities. primary products producing countries developed A complement to Decision 24 on the regional including some of the countries forming the inte- basis was Decision 46, which provided a uniform gration community. And finally, the admission of regime for the creation of regional multinational Venezuela to the Andean Group changed the companies and common rules for the treatment dimension of the Community through its enorm- of subregional capital. There, capital coming from ous oil wealth, providing it with a strong financial the subregion is treated as being national and not power seeking a corresponding political influence subject to the restrictions for foreign capital 11 in the subregion. and projects where cost, magnitude or technological complexity surpass the possibilities of a Conflicts within the Andean Group single country are encouraged through the creation of regional multinational companies. These The adoption of an extremely liberal economic would commonly take the form of public Andean policy by the military government in Chile signal- enterprises. ized the beginning of serious conflicts within the Andean Group. Chile began to contemplate re- The Andean multinational enterprises could at gional integration as a second best, favouring least partially replace extraregional transnational low and uniform common external tariffs, giving companies and they would be closely related to preference to the market mechanisms for the as- the sectorial programs of industrial development signment of resources and behaving sceptical where import substitution on a regional scale was about the SPIDs and finally adopting an ideologi- planned in such sectors as important as metal cally founded position against any regulation for working, chemical products, petrochemicals, fer- FDI. This behaviour was, therefore, in strict oppo- tilizers, automobiles and electronics. sition to the nationalistic spirit of the founder Through the creation of these companies it was years of the Andean Group. also hoped to help the relatively less developed First difficulties arose when Chile promulgated members, Bolivia and Ecuador, to utilize the spe- in the year 1974 a decree (Decree-law 600) per- cial customs concessions and to build up fac- taining FDI which secured no discrimination tories under the sectorial programming agree- against foreign investors and which was in contra- ments. But it should be kept in mind that through diction with the most important provisions of the creation of Andean multinational companies Decision 24. Only the strong and close opposition the errors committed at the national level with of the other member countries, specially in view import substitution policies are not repeated at of the fact that Chile would be in a better com- an international level and under the cover of in- petitive position to attract foreign investors by tegration and joint enterprises 12 having adopted more liberal measures, that even 11 The rules pertaining to the transfer of capital remain subject Changing Political and Economic Conditions of each individual country. 12 For example the joint public enterprises Mon6meros Colombo- The ambitious program of the Andean countries Venezolanos have been facing continuous difficulties. See C. F. Dfaz Alejandro,lnversi6n extranjera directa por needed a strong political leadership and a high latinoameriCanos, in: Integraci6n Latinoamericana, Vol. 1, No. 4. measure of consensus and solidarity to advance July 1976, p. 8.

INTERECONOMICS, No. 3/4, 1977 75 INTEGRATION gave MNCs a more favourable treatment than investors legitimized the Chilean policy followed national enterprises, forced Chile to promulgate so far and signalized that the region was ready a second decree (Decree-law 746) securing the to be flexible in the discussion about foreign in- full implementation of Decision 24. In exchange vestments. for it, a discussion about Decision 24 was fore- So far the crisis seemed to be overcome. But seen, specially about those subjects pertaining when the XX ordinary session period of the Com- to the repatriation of benefits and the fading out mission of the Treaty of Cartagena took place in principle, as well as about the problem of the August 1976 in Lima, Chile was the only country big differences in the application of these rules that did not sign the protocol modifying the Treaty in the individual countries, which diminished the on the ground that an agreement on the reform effectiveness of this mechanism to create a stable of Decision 24 should be reached first. The ex- investment climate. pected division of the member countries in two In fact, the problem of interpreting the clauses opposed groups did not become true and Chile and concepts of Decision 24 uniformly was ac- was confronted with the united front of the other knowledged by the Junta of the Treaty of Carta- five partners who gave it a time limit of 60 days gena as early as 1972, but the discussions about to sign the protocol. its harmonisation were interrupted and delayed In the meantime the other five partners met in first by the constitutional crisis in Colombia in Colombia, where they discussed a loosening of 1972, later by the entry of Venezuela in 1973 and the rules concerning foreign investments as a finally by the submission of the controversial gesture of good will toward Chile. The so-called Decree 600 by Chile in 1974. Sochagota Declaration provided that capital com- In the meantime the deadline (December 1975) ing from Andean partners and other Latin Amer- set for implementing a common external tariff ican countries should be considered as national and such important industrial programs as petro- for the classification of industries, that capital chemicals and automobiles was fast approaching. coming from international organizations be clas- The discussions encountered serious difficulties sified as neutral, that the remittance of profits be on account of the Chilean desire for freer trade increased from 14 p.c. to 20 p.c. of the invested and as by the end of 1975 only an agreement for capital annually and that the automatic reinvest- the petrochemical industry could be reached, ment limit be widened from 5 p.c. to 7 p.c. Also after the first one on metal-mechanical industries the upper limit for the external tariff was fixed was signed in 1971, and the election of a new at about 80 p.c. three-man Junta, also due for that time, had to But these results were not enough for Chile, since be postponed by another six months, the Andean it was asking full liberty for the transfer of profits Group faced its gravest crisis. and a limit for the common external tariff between 10 p.c. and 30 p.c., stating its unwillingness to Intense negotiations ended in April 1976 with a finance further protection for the regional indus- compromise (Decision 100) in the form of a pro- try. The negotiations went on, and it was protocol modifying the Treaty of Cartagena. There- posed to offer Chile a leave period of about two after, agreements on products to be included in years from the obligations of the Treaty. Finally the industrial programs and the implementation on October 5, the six members constituted a of the common external tariff were postponed by special commission to elaborate rules for a set- two years to 1977 and the trade liberalization tlement of the problems. It was agreed that if process between the partners was extended by till October 30 no agreement could be reached, two years till 1982, reducing the annual tariff cuts Chile would withdraw from the Andean Group from 10 p.c. to 8 p.c. Also the unanimity rule in and this was what happened. Only those partic- the decision making pertaining to industrial pro- ular agreements pertaining to double taxation gramming was abolished, so that now only four (Decision 40), Andean multinational enterprises members were needed to implement such a pro- (Decision 46), international traffic agreement (De- gram unless no other partner categorically cision 56) and road network in the Andean re- vetoes it, the non-signatory members having the gion (Decision 94) were to remain in force. option to join the program in the future. While the slowing down of the trade liberalization pro- Motives for the Chilean Withdrawal gram was a concession on the part of Chile and Colombia, which were in favour of a rapid tariff One may ask about the motives Chile had to re- cutting, the reform on the side of the industrial vise its position with respect to foreign invest- programming was a concession of the other part- ments in the year 1974 (Decree-law 600) and to ners particularly toward Chile. Finally, an addi- adopt such a firm standing against the position tional decision authorizing the Chilean Govern- of the other five partners in the year 1976. Did it ment to sell public sector companies to foreign hope for support from at least one partner or had

76 INTERECONOMICS, No. 3/4, 1977 INTEGRATION the economic and political conditions improved most probably maintained during 1975, since total so much that a possible withdrawal from the An- manufactured exports increased by almost the dean Group could be risked or even wanted? same rate as the exports to the Andean Group. But if we take into account the dynamic evolution In favour of the first supposition speak the words of the trade exchange within the Andean Group of President Lopez Michelsen from Colombia and considering the prospects for developing shortly after the Declaration of Sochagota, who key industrial sectors by the way of industrial expressed understanding for the position of Chile programming in a more efficient way, one may and proposed fundamental changes in the rules come to the conclusion that the potential benefits pertaining to foreign investments and in the com- forgone are not negligible. mon external tariff, as a way to solve the conflict. In favour of the second supposition speaks the It is true, that the traditional trade connections slowly improving economic situation of Chile, with Argentina and Brazil are far more important especially reflected in better international pay- than those with the Andean countries ~6 and they ment conditions and in rising exports of non- should continue to receive high priority. This is traditional goods to third countries. But more intended through a closer participation in the than this, it was the consequent following of eco- River Plate Basin System 17 by bilateral agree- nomic ideas leading to a better use of compara- ments with these countries as well as through a tive advantages on a world scale and away from stronger participation in the complementarity a model of accelerated industrialisation that de- agreements of LAFTA. The question is, if this termined this decision ~3. These ideas embodied, strategy would have necessarily been in conflict consequently, free access for foreign capital to with a participation in the Andean Group. And the Chilean market and low protective barriers. the answer is no, since we have the example of Bolivia, which is member of both communities. A closer cooperation with the countries of the southern zone, especially Argentina and Brazil, Negative Effects of Chilean Decision Probable which also corresponds more to the geographicar location and the traditional trade flows of Chile, Even thinking about the proposition for a common and the fact that only about 20 p.c. of the exports external tariff of up to 75 to 80 p.c. which going to the Andean market were subject to cus- Chile rejected with the argument of bearing too toms preferences, were additional official argu- high levels of inefficiency, we can see that coun- ments. This would imply that the bulk of the trade tries like Brazil or Argentina, with relatively wide with the Andean countries would take place any- domestic markets and good export performance, way in the future without any preferential agree- have external tariffs also ranging around 80 p.c. ment. But looking at the figures~4 one can see in many cases. Therefore, the Chilean withdrawal a quite different picture, namely that of the cannot be founded on these arguments, taking Chilean export increase to the Andean partners into account that those sectors, where Chile has between 1969 and 1974, nearly 60 p.c. was cover- comparative advantages on a world scale, are ed by products included in the automatic liberali- limited, e.g. mining, forestry and related indus- zation list and that in the year 1974 nearly 74 p.c. tries, food processing and temporarily some of the products exported were manufactures. labour-intensive production processes on ac- Consequently, one can ~egitimately expect that count of the depressed real wage level. as a result of the withdrawal from the Andean Treaty it will be the exports of manufactures with Considering the bulk of the export potential, the preferential access to the Andean market that two most important sectors, namely mining and will be most seriously affected ~s. In 1975 the ex- forestry, were subject to exceptions in Deci- ports to the Andean countries increased by an- sion 24 so that for these sectors no restrictive other 40 p.c. and it can be assumed that the ex- rules were foreseen for foreign investments. Also port pattern did not change. banking and insurances were eligible for more

Compared to the total exports of manufactures, 15 Colombia recently (February 2, 1977) introduced customs tariffs for the traditional agrarian exports coming from Chile, with those going to the Andean countries still played the effect of increasing on the average the prices by 20 p.c. in the Colombian market for these products. Consequently, the ex- a minor role (1974:19 p.c.) and this relation was port volume is expected to decline in the future. ~6 In 1974 the exports to and imports from Argentina and Brazil 13 The Economist described the division of the Andean Group amounted to US$ 169 mn and US$ 324 mn, and US-$ 144 mn as follows: "The gangrenous limb of a Chicago-university-ad- and US $ 85 mn respectively, compared to exports of US $ vised Chile has fallen off the Andean Pact", The Economist, 59 mn and imports ~f US $ 166 mn for the Andean region, ex- London, Nov. 13, 1976. cluding Venezuela. 14 See Junta des Acuerdo de Cartagena, Evaluaci6n de la 17 This community was created in the year 1~9 by Argentina, marcha del proceso de integraciOn, March 1976, published in: Bolivia, Brazil, Paraguay and Uruguay and focuses on the com- Integracibn Lat(noamericana, Vol. 1, No. 5, Aug. 1976, tables mon use of the resources of the River Plate Basin as well as No. 4 and 6, p. 68-69. on projects of common interest.

INTERECONOMICS, No. 3,4, 1977 77 INTEGRATION favourable treatment and foreign investments in region and through its participation as a group those activities exporting more than 80 p.c. of vis-a-vis third parties, one may be inclined to their production to third countries were also not say that the Chilean decision will have negative subject to restrictions. Therefore the other im- effects. Through the participation in the Andean portant argument that Decision 24 hinders the Group Chile was also linked to the only two re- flow of foreign capital so much needed for the maining democracies of South America, Colombia economic development of Chile would only apply and Venezuela, and to its neighbours, Bolivia and to food processing and some labour intensive Per~, towards which latent conflicts resulting from processes, since investments in chemical, petro- the armed conflict of 1879 still are present. The chemical or metal working industries would be cut with the Andean Group represents finally an uninteresting without the access to the Andean interruption in the long integration tradition of market and without a certain degree of protec- Chile which can be hardly replaced by a loose tion. Further, the Comit~ de Inversiones Extran- participation in the group of the La-Plata-States, jeras approved between October 1974 and May where Chile has to compete with such economic 1976 foreign investments totalling US-$ 314 mn, and political giants like Argentina and Brazil. while between 1964 and 1973 investments to the amount of only US-$ 261 mn were registered. In Prospects for the Reduced Andean Group the other Andean countries it was also observed that the flow of FDI continued, showing even an For the rest of the Andean Group the withdrawal increase in comparison to the past 18. of Chile represents also a painful shrinkage. In- deed, the immediate conflicts have been so far While the major part of the newly approved for- settled and the protocol to the Cartagena Treaty eign investments in Chile went into the mining as well as the reforms of Decision 24 are already sector, a considerable amount was in chemical, in force. But difficult decisions lie still ahead, petrochemical and metal working industries, like the sectorial industrial programming, the where despite the restrictions imposed by Deci- redistribution of the products assigned to Chile sion 24 they were attracted by the access to the under the metal mechanical and petrochemical Andean market. Unless industrial cooperation agreements and the reorientation of the preferen- agreements are signed between Chile and other tial trade flows coming duty free from Bolivia countries of the La Plata Basin, these investments and Ecuador to the Chilean market, which will run the risk to be lost and it is difficult to say if exert more pressure on the markets of Pere, they can be compensated by others in those sec- Colombia and Venezuela. tors where Chile has a comparative advantage. In- vestments destined to the national market are at And depending on the future Chilean experience least in the short run also unlikely on account with foreign investors, especially Bolivia 2~ which of the depressed market situation. also participates in the La Plata Basin, and to a lesser extent Colombia, may be tempted to follow The loss of the Andean market will also affect the same way. But as the investment climate for very strongly some existing industries in the foreign capital is becoming in general more fa- metal working sector which already depend very vourable in Latin America, it is unlikely that a highly on the subregional exports. One way to country like Chile will be in a better competitive tackle this problem is by going into the Andean position than Argentina or Brazil in its race for market using the open door of the Andean multi- attracting investments. Therefore, the conditions national companies (Decision 46), replacing trade for the reduced Andean Group to attract foreign flows, with the result of losing working places investors, despite some restrictions which are at in Chile, where the unemployment rates are run- least partially equated by stable investment rules ning at high levels. Further, Chile will be getting and access to a preferential regional market, are in the future only limited financial resources from not bad. But it is unlikely that the Andean Group the Andean Development Corporation (CAF), will ever regain its former dynamism, not least, which was founded by the six Andean countries because a possible rejoining of Chile may be- in the year 1968 to support the integration effort 19 come very difficult and be subject to costly negotiations, the only link being the constitution of a On the balance, adding the loss of influence on mixed Andean-Chilean Commission. political and economic matters within the sub- 19 A recent decision (Decision 29) of CAF provides that credits will be given only to members of the Andean Group. ;8 This constitutes an evidence that Decision 24 did not impede 2o Bolivia has been continuously expressing its disappointment the flow of FDI but contributed to regulate it. While it appar- with the results of a membership in the pact. In January 1977 it ently has so far failed to reduce "dependency" it seems to have announced that a company manufacturing oi~ drilling bits with been a good instrument to review and renegotlate technology foreign assistance, a product assigned to Bolivia under the sec- contracts. See L. K. M ytelka, Direct foreign investment, torial agreement for the metal-mechanical industry, will have to technology transfer and the Andean integration, paper prepared be closed down since similar industries have been started in for the International Political Science Association Meeting, Venezuela and Perl~. Consequently, exports to the Andesn coun- Edinburgh, Aug. 15-20, 1976. tries have been impossible.

78 iNTERECONOMICS, No. 3/4, 1977