The Pacific Alliance hosted meetings from the Ministers of Finance and the High-Level Group this week. What progress did they make?

During the XVI Meeting of Ministers of Finance, which took place in New York, they agreed to explore the option to issue a new catastrophic bond to cover risks of floods and droughts. This initiative is well received after the successful issuance of  CAT Bonds to cover earthquake risks last February.  The Pacific Alliance is also working on an agenda towards financial inclusion. Members agreed on the development of common criteria/standards for Fintech Regulation to promote these kinds of activities. They also reported some progress on the implementation of the Pacific Alliance Infrastructure Fund.

On the 24th of April 2018, the Deputy Ministers of Trade and Foreign Affairs held a virtual meeting to discuss the awaited 2030 Strategy for the Pacific Alliance, the entrance of the four associate members, and the next presidential meeting to take place in July. However, not much else is reported on the content and scope of this strategy and proposals are not publicly available for consultation on their website or through other means.

In the meantime, other regional players continue to explore membership to the Pacific Alliance. This is the case for Ecuador which has expressed interest in joining the mechanism on two occasions.  Whether these intentions are to materialise seem unlikely in the short and even medium term. However, Ecuador’s statement is a strategic geopolitical move by president Lenin Moreno to distance from this predecessor’s foreign policy. With this announcement, Moreno makes the call that he wants to build new alliances during his presidency, ideologically different to the ones made by Correa. He wants to signal a more open and liberal approach to regionalism with the aim to embrace economic and political relations with the Asia Pacific beyond China.

How stable this resolution is as a state policy will be a challenge for Ecuador’s membership acceptance and would certainly test one of the openness features that the Pacific Alliance preaches. Adding a new full member with an unstable foreign policy orientation could prove disastrous for the future progress of a consensus-based intergovernmental mechanism such as the Pacific Alliance.

Sources: Nueva Sociedad; 20minutos.com.mx; alianzapacifico.net
photocredits:@MauricioCard

Abstract:
The benefits of deeper, broader and more diversified capital markets are, in theory, well-established. The primary purpose of capital markets, or the buying and selling of equity and debt instruments, is to serve as a conduit for the transformation of savings into investment for the real sector, thus constituting an alternative to bank financing.

Markets also serve as a mechanism through which risk is transferred, and risk exposure diversified, enabling financial intermediaries to manage risk more efficiently. Deeper and more liquid capital markets, along with a large investor base, can lead to effective price signalling mechanisms and reduced transaction costs via frictionless trading in the secondary market.

Within the context of Latin America, could efficient capital markets play an essential role in achieving the wider socio-economic goals of the region?

Broadening and deepening capital markets via regional integration initiatives may, in theory, create a number of positive outcomes: greater investment and growth by disconnecting investment from domestic savings rates and unlocking cross-border capital flows; financing to address the region’s infrastructure needs; financial stability in a region where volatility has historically been prevalent; development and diversification of a private sector that remains commodity-dependent and often crowded out by government investment.

Academically, these gains are relatively well-established, if not unilaterally accepted. But do they translate into reality? This paper explores the possibility for and applicability of capital markets integration in Latin America, precisely the economies of Mexico, Chile, Colombia and Peru.

It explores three main channels:

1. Assess whether there is scope for regional integration in Latin America. Identify the key drivers for regional integration by reference to other integrating regions (Europe, Asia, East Africa), and assess the applicability of these trends to Mexico, Chile, Colombia and Peru.
2. Identify the principal risks and rewards of capital markets integration, and analyse how they apply to these four economies
3. Assess whether a gap exists between the theoretical model of integration and the reality within the region.
4. If challenges and barriers to integration exist, what policy initiatives can and should be undertaken to address them?

Resumen:
No disponible

Institutional Authors: Inter-American Development Bank and Columbia University
Authors: Mario Campa, Sebastian Essl, Muhammed Gundogdu, Caitlin Page, Hongrui Zhang, Liting Zhao
Spanish Title: Regional Capital Markets Integration in Latin America: Mila & Beyond
Full document: Campa, Regional Capital Markets Integration in Latin America- MILA and Beyond

Abstract:
This paper develops an analysis of how macroeconomic convergence among Mexico, Colombia, Peru, and Chile has translated into a non-intentional institutional and similar constitutional order, in areas as important as fiscal and monetary stability. The current reality opens many possibilities for deep financial integration and regulatory cooperation. These aspects are not sufficiently reflected in the Treaty and the Additional Protocol.

In fact, these instruments have followed the standard practice of previous Free Trade Agreements (FTAs) under the NAFTA model on financial services treatment that does not fit adequately with the objective of creating a free trade zone based on the free movement of capital and financial services.

An example of this reality is the timid development of mutual recognition of financial service authorisations in FTAs in contrast to the technical agenda of future developments in the Pacific Alliance. In this context, this paper offers some specific proposals for the peculiar institutional construction of the Pacific Alliance and regulatory cooperation. The proposals are based on the soft law experience of partners and the levels of convergence already obtained. The paper also reviews eventual consistency problems between financial integration and other international commitments of partners.

Resumen:
No disponible

Author: Manuel Monteagudo
Full document: 2017, Monteagudo, The Pacific Alliance in Search for a Financial Integration- So Close and Yet so Far

Abstract:
These four countries along Latin America’s west coast have taken great strides in recent years, and they are poised to emerge as regional leaders. Like the animal, these Pacific Pumas are comfortable operating quietly, away from the spotlight. But their positive momentum is difficult to ignore.
United in the Pacific Alliance, the Pumas represent more than 200 million people with a US$2.22 trillion GDP; their combined global trade accounts for half of the Latin American total, while the depth and breadth of their free-trade agreements have positioned them to increase commerce with Europe, the US and Asia. This is the story of the advancement of Mexico, Colombia, Peru and Chile—the Pacific Pumas—and of the opportunities they have moving forward.
The first section considers the emergence of the Pumas individually. It begins with an overview of the four large Latin American countries that have matured economically and politically precisely as their region, the Pacific, has become a cauldron of global growth. The second chapter highlights the macroeconomic stability of the four, while the third considers their democratic maturation. The section concludes with a chapter on the Pumas’ embrace of globalization, suggesting their preparedness for a 21st century economy.
The second section analyzes the Pumas’ global opportunities. Through the Pacific Alliance, Mexico, Colombia, Peru and
Chile can leverage their individual success through a pact large enough to attract international attention. Chapter 5 debates the importance of the Alliance, while Chapter 6 considers its ramifications throughout Latin America. Chapter 7 examines the importance of the Pumas in greater trans-Atlantic relations, and Chapter 8 reviews the opportunities and challenges the Pumas face in dealing with China.
Together, the two sections outline a golden opportunity for the Pacific Pumas to achieve internal prosperity and stability, while emerging as regional leaders and strategic partners of the US, Europe, and East Asia.

Author: Samuel George
Full document: 2014, George, The Pacific Pumas- An Emerging Model for Emerging Markets

Abstract:
Not available

Resumen:
La obra parte de una visión general y abarcativa del nuevo proceso en la historia de la integración latinoamericana y caribeña. Se le considera en términos formales como un compromiso de amplio alcance (Gazol Sánchez) que plantea varios interrogantes hacia su interior y en relación con terceros países. Esta perspectiva continúa en el capítulo siguiente y se lo concibe como una de las últimas estrategias alternativas en materia comercial dentro del actual contexto global, que intenta crear un eficiente corredor comercial vía Pacífico desde un enfoque latinoamericano (Romero León – Lascuraín Fernández).

Luego, se examinan dimensiones más particulares, dentro de las cuales, surgen problemas críticos. Una de las problemáticas específicas deriva de los aspectos políticos y geopolíticos de la propuesta de convergencia Alianza del Pacífico-Mercosur y los límites que presenta. En cuanto a lo político, Giacalone señala como positivo la promoción del diálogo, la búsqueda por hacer incluyentes los acuerdos existentes y la disminución del lenguaje nacionalista, como también la confrontación ideológica.

Geopolíticamente ambos se necesitan, uno se halla en la ribera pacífica y el otro, en el atlánticocaribeño; uno tiene mayor número de acuerdos comerciales vigentes, que facilitan la inserción productiva global y la atracción de IED, y el otro, mayor fortaleza industrial y variedad de productos para exportar. En consecuencia, la convergencia no solo amplía las opciones económicas y la negociación de los conflictos internos, sino también daría a la región una mayor proyección externa, dentro de un ámbito global que busca articularse en mega-acuerdos regionales. Continue reading

Abstract:
Significant opportunities exist for deeper integration. To achieve these more challenging elements, the pact will need more time to deliver. For example, despite the foundation built by the Mercado Integrado Latinoamericano (MILA), financial integration has been underwhelming, and regulatory harmonisation remains incomplete. Issues pertaining to pension funds, bank accounts, the joint financing of development projects, and obstacles in capital flows must be addressed.

All four member countries pursue liberalised trade in an effort to move away from commodity reliance, yet, as slumping commodities yield decelerating growth, more attention must be paid to export diversification. Both observer countries and member states still wrestle with how to harness the potential of such an impressive coalition, and deeper energy integration remains one of the greatest opportunities for the Alliance.

These challenges point to the Alliance’s still untapped potential. Chile, Colombia, Mexico, and Peru have picked some of the “low-hanging fruit” of regional integration. Now, the next stage begins. This means reaching for the higher, more difficult—yet ultimately more fulfiling—levels of collaboration. It is crucial to establish milestones—three, five, and ten years out—to maintain momentum.

Over the course of the last year, we held two private roundtables featuring global leaders from the public, private multilateral, and academic sectors. In particular, this network called attention to opportunities in financial, energy, and commercial integration. The group also discussed the Pacific Alliance’s potential as a regional leader and global player, with a specific emphasis on making use of the pact’s diverse observer countries.

This document reflects the outcome of our dialogues—both as a group and bilaterally.

Resumen:
No disponible

Authors: Jason Marczak, Samuel George, María Fernanda Pérez Argüello and Andrea Saldarriaga Jiménez
Institutional Author: Bertelsmann Foundation
Full document: 2016, Marczak & George, Pacific Alliance 2.0

Summary:
The Pacific Alliance (PA) is a pragmatic and dynamic integration process whose members—which currently include Chile, Colombia, Mexico, and Peru—seek the free circulation of goods, services, capital flows, and people among them, as well as cooperation in a wide variety of other areas. The PA subscribes to the modern view of “open regionalism,” because it promotes trade and capital flows with other regions—in particular, with East Asia and Mercosur—and it remains open to new members. Several other Latin American countries have indicated their potential interest in the PA, and Costa Rica is currently advancing in the process of joining.

Financial integration is, thus, one of the PA’s primary goals. Financial institutions within the region, in particular of emerging financial multilatinas, already have important cross-investments.

But the best-known development so far in this area is the Mercado Integrado Latino Americano (MILA) platform, partial integration of the four current PA members’ stock exchanges.

This paper discusses, first, why financial integration, and in particular capital market integration, may provide substantial benefits to the PA’s members, especially in the current external environment.
It then focuses on the potential for the integration of capital markets within the region and on how a significant push toward regulatory harmonisation can contribute to meeting this goal and reenergizing MILA.

Resumen:
No disponible

Author: Guillermo Perry
Full document: 2016, Perry, Financial Integration in the Pacific Alliance

Abstract:
The Latin American Integrated Market agreement between Peru, Chile, Colombia and Mexico was signed within the framework under the Pacific Alliance, following the experiences of the European Union and integrated Asian and Middle Eastern markets. This agreement was aimed at diversifying markets and attracting global investors. We identify the impacts on returns and volatility at the main stock indexes for each of MILA member countries through the application of correlation and cointegration analyses, and using the impulse response function of vector autoregression (VAR).

Resumen:
El Acuerdo del Mercado Integrado Latinoamericano (MILA) suscrito entre Peru, Chile, Colombia y Mexico fue suscrito en el marco de la Alianza del Pacífico, siguiendo la experiencia de la Union Europea y los procesos de integración en Asia y Medio Este. Este acuerdo busca diversificar los mercados y atraer inversionistas del resto del mundo. Mediante análisis de correlación y cointegración, ademas de fiunciones impulso-respuesta de vectores autoregresivos (VAR), idenficamos los impactos en los retornos y en la volatilidad de los principales indices para cada uno de los paises miembros del MILA.
Palabras Clave: Integración financiera, cointegración, volatilidad.

Authors: Jaime Rojas-Mora and Julio César Chamorro-Futinico
Full document:2016, Rojas & Chamorro, Dinámica y Volatilidad en los Indices Bursátiles de los Países de la Alianza Pacífico