Posted March 16th.1999

BACKGROUND

Heads of State and Government of the Americas in the Declaration of Principles enunciated in the Miami Summit of December 1994, committed the countries of the Western Hemisphere to the immediate construction of a Free Trade Area of the Americas (FTAA) in which barriers to trade and investment would be progressively eliminated. The free trade area was a part of a wider strategy of Free Trade and increased Economic Integration which were seen as key factors for raising standards of living, improving the working conditions of people in the Americas and better protecting the environment.

2. All 34 countries which participated in the Summit of the Americas and signed the Declaration are committed and expected to participate in the FTAA but the Heads of State and Government recognized that economic integration and the creation of a free trade area will be complex endeavors particularly in view of the wide differences in the levels of development and size of economies existing in our Hemisphere.

3. The differences in economic size might be illustrated by the fact that based on 1993 data the countries ranged from the United States of America (USA) the largest and most highly developed economy in the world with a Gross National Product (GNP) at US$6,388 billion to St Kitts and Nevis, one of the smallest with a GNP of US$185 million; from the USA with a per capita GNP of US$24,750 (the highest in the world) to Guyana with a per capita GNP of US$350; from the USA with a population of 260 million in 1994 to St Kitts and Nevis with a population of 41,000; and from Canada with a land area of 9,976 thousand square kilometers to St Kitts and Nevis with an area of 269 square kilometers.

4. The disparities in levels of economic development might be gauged from the fact that two countries (Canada and the USA) are classified as industrial high income, developed market economies with a high level of human development, 31 are classified as developing countries and one as a Least Developed Country. Among the countries classified as developing, about 32 per cent are identified as primary agricultural exporters, about 26 per cent as primary service exporters and one country, Brazil, as a primary exporter with a diversified export base.

5. Production infrastructure and capacity; technological, scientific and education infrastructure and capacity; and transportation, information and marketing infrastructure and capacity all vary significantly among the prospective members of the FTAA. In addition, the smaller economies have very high trade dependency ratios and some have been very dependent on preferential trading arrangements for the survival of key industries.

HISTORICAL ANTECEDENTS

6. The historical experience of Free Trade Areas worldwide is that trade liberalization is generally accompanied by polarization of trade and investment in favor of the countries or geographic areas with the strongest and most competitive production base initially. The degree of the polarization depends on the extent of the differences in initial conditions and the measures built into the Free Trade Agreement to mitigate the polarization tendencies. The proposed FTAA has the potential to engender very significant polarization given the extent of the differences among the potential participants.

7. Most economic cooperation or free trade agreements build in arrangements to positively facilitate the growth of production and trade of the weaker economies. In the absence of positive mechanisms, countries often resort to negative measures to restrict imports even from partner States. One positive mechanism provided in or as a complement to most economic cooperation or free trade agreements is a financial facility. For example, the Caribbean Free Trade Agreement (CARIFTA) and later Caribbean Community (CARICOM) provided for the utilization of resources through the Caribbean Development Bank (CDB); the Central American Common Market created the Central American Bank for Economic Integration (CABEI); and the European Common Market, now the European Union created a set of Structural Funds which included the European Regional Development Fund (ERDF). The European Free Trade Area (EFTA), one of the oldest free trade areas, also incorporates a Fund from which less developed members such as Portugal still benefits.

8. One of the explicit mandates of each of the financial mechanisms is to strengthen the capacity of the less developed members of the arrangement. The Charter of the CDB, for example, charges that institution explicitly to contribute to:

"the harmonious economic growth and development of the member countries in the Caribbean and promoting economic cooperation and integration among them, having special and urgent regard to the needs of the less developed member countries (LDCs) of the Region."

In order to ensure that the CDB was in a position to discharge this mandate the More Developed Countries of CARIFTA/CARICOM decided not to access the concessionary resources for the first five years of the Bank's operations.

9. In the case of the European Union, the Structural Funds include four major financing mechanisms:

(i) the European Regional Development Fund;

(ii) the European Social Funds;

(iii) the European Agricultural Guidance Fund; and

(iv) the Financial Instrument for Fisheries Guidance.

All of these mechanism are intended to assist the less developed countries and or lagging regions to reduce the gaps in the level of development amongst the member countries of the Community. In the case of the European Union, for example, the overall objective of the financial mechanisms is to assist the less developed members achieve a minimum of 75 per cent of the average GDP of the European Union.

RECOGNITION WITHIN THE FTAA

10. The vast differences in levels of development, size and economic potential among the prospective members of the FTAA -- greater than among the members of any other economic integration or free trade area in history -- imply that polarization could be very severe. The Heads of State and Government recognized the potential for difficulty and undertook in the Declaration of Principles, to:

"Remain cognizant of these differences as we work towards economic integration in the Hemisphere."

In the Plan of Action they stated that:

"As we work to achieve the Free Trade Area of the Americas opportunities such as technical assistance will be provided to facilitate the integration of the smaller economies and increase their level of development".

11. The idea of technical assistance is illustrative. The level of disparities in the Americas and historical experience would suggest that the transitional costs and polarization tendency could be very significant. These would suggest that stronger measures will be needed if smaller, economically less developed and more vulnerable economies are to be stimulated in, and be a beneficial part of, the process. The Government of Bolivia has proposed that recognition should be given to the need to include technical assistance, transfer of technology, financial and other measures that would permit the full participation of smaller economies.

12. The current proposal is for an appropriately structured and resourced Regional Integration Fund (RIF) as one additional mechanism.

OBJECTIVE OF THE REGIONAL INTEGRATION FUND

13. In the effort to facilitate the integration of the smaller economies and increase their level of development, the main objectives of the proposed Regional Integration Fund (RIF) would be to:

(i) strengthen and diversify the productive base of the smaller economies of the Western Hemisphere through the promotion and facilitation of enterprise development and private sector participation;

(ii) foster infrastructural development, including telecommunications infrastructure, in these economies;

(iii) encourage human resource and technological development in the smaller economies; and

(iv) facilitate the competitiveness of the goods and services produced by the smaller economies and their access to the market of the FTAA.

Coverage of Fund

14. The coverage of the Fund relates both to beneficiary countries and to the areas of activity. These will, in the final analysis, depend on the size of the Fund and the precise objectives of the members.

15. The Ministers of Trade of the Americas have established a Working Group to define and examine the needs of the smaller economies in the Hemisphere. These economies when defined, will constitute the core of the economies which would benefit from the Fund.

16. The historical experience of integration funds, in particular the European experience, indicates however that the fund could be so designed that other economies could access all or special resources of the Fund.

17. The activities or sectors to be covered for support or facilitated by the Fund will depend on the analysis of the sectors which are likely to suffer the most significant adverse impact from the establishment of the FTAA.

Size and Structure of Fund

18. The size of the Fund will depend on the potential beneficiaries (i.e., the country coverage), the actual country-by-country needs (sectors to be facilitated) and the policy determination as to the extent of the fund's contribution to any particular project (proportion of Fund to beneficiary contribution).

Source of Funding

19. The Heads of State and Government in the Declaration asserted that,

"To advance economic integration and free trade, we will work, with cooperation and financing from the private sector and international financial institutions, to create a Hemispheric infrastructure".

20. Initial discussions suggest that there are several potential sources but the issue needs careful study. One potential source of contribution would be the participating States, possibility based on ability and potential gain from the FTAA.

Timing of Implementation

21. The Regional Integration Fund should be an integral part of the arrangements for the FTAA. The Heads of State and Government of the Hemisphere have agreed in the Declaration of Miami that negotiations for the FTAA should be concluded no later than 2005. Whilst not explicitly stated implementation would be expected to commence shortly thereafter.

22. The Regional Integration Fund is to assist the smaller and economically less developed economies build their infrastructure and adjust their production structure to participate in the more competitive environment of the FTAA. In order to minimize the dislocation the transition will need to commence in the period of negotiation of the FTAA. In that regard many of the smaller and lesser developed countries in the Hemisphere have been implementing unilateral programs involving deep structural adjustment. These reforms have in several cases resulted in reduction in public sector expenditures and have caused significant balance of payments deficits and foreign exchange shortages. These economies therefore confront a steep adjustment curve which could be exacerbated with the implementation of the FTAA. In that context the mechanism to reduce the high transitional costs and to prepare the economies for meaningful participation in the FTAA will be more effective if implemented early. Early implementation would also enhance the confidence of the smaller and relatively less developed economies and facilitate the negotiating process for the FTAA.

The Process to Date

23. The initiative to promote the establishment of a financial mechanism to assist in creating the basis for free and fair trade in the context of the FTAA has been spearheaded by the Government of Guyana. The concept was endorsed by the Conference of Heads of Government of the Caribbean Community at its Sixteenth Meeting in Georgetown, in July 1995. In furtherance of this, the CARICOM Prime Ministerial Sub-Committee on External Negotiations agreed that the proposed financing mechanism should be conceptualized as a Regional Integration Fund. The objective was to focus the proposal more closely on the adjustment requirements which would arise from further Hemispheric economic integration, in particular the creation of the free trade area and on the nature of economic and trade activity in the Hemisphere.

24. In the effort to elaborate the proposal, the Government of Guyana has convened two high level consultations -- in June 1995 and in October 1996 -- to discuss all aspects of the Regional Integration Fund. The conclusions and recommendations of the consultations have informed the current draft of the proposal.

25. The CARICOM Governments have also sought the technical support of the Secretariat of the Economic Commission for Latin America and the Caribbean (ECLAC). In this regard, the Latin American Council of ECLAC in October 1996, mandated the Secretariat to assist in undertaking the technical work required to advance the proposed Fund.

26. The CARICOM Governments sought to have the Hemispheric Ministers of Trade at their Meetings in Denver and Cartagena consider the concept and establish a Working Group involving all the prospective members of the FTAA to develop the proposal. The proposal was not considered by the Ministers although the Second Trade Ministerial Meeting in Cartagena accepted and transmitted to the Vice-Ministers for the proposal from Bolivia that recognition should be given to the need to develop concrete action of immediate application that include technical assistance, transfer of technology, financing and other measures that permit the full participation of the smaller economies in the process of constructing the FTAA.

27. The Vice Ministers have not yet given any consideration to the Bolivian proposal.

28. In spite of the absence of formal consideration of the proposal for a Regional Integration Fund, many countries in the Hemisphere have expressed interest in the concept. Some countries have expressed the desire to see a fully elaborated proposal. The full elaboration of the proposal is constrained however by the fact that this requires the input of all the States. In this context the Second High Level Consultation convened by the Government of Guyana recommended that the Draft Proposal be submitted to the Working Group on Smaller Economies established by the First Trade Ministerial Meeting. A formal submission was made to the Fifth Meeting of the Working Group in November 1996 in Caracas.

Next Step

29. The concept of the Regional Integration Fund has been defined to the stage where broad political acceptance by the potential membership of the FTAA is required. This is now urgent in order to facilitate and give direction to the additional technical work.

30. Participants at the Second Consultation convened by the Government of Guyana concluded that in order to promote and further develop the concept of the Regional Integration Fund, a technical diagnostic study should be undertaken at the earliest opportunity. This study should, inter alia, address the following issues:

(i) the economic impact of measures proposed to foster the creation of the FTAA on the smaller economies;

(ii) a program of policy response to the Agenda for Change in the FTAA process;

(iii) operation modalities for the Regional Integration Fund such as forms of assistance, eligibility criteria, etc.; and

(iv) potential sources of funding for the Fund.

31. Financial support is to be sought to undertake the diagnostic study as outlined above.