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Andean bloc boosts area trade
Journal of Commerce / December 22, 1999

By Larry Luxner

LIMA -- While Mercosur -- the four-nation trade bloc made up of Argentina, Brazil, Paraguay and Uruguay -- has become a household word throughout Latin America, fewer people are familiar with the much older Andean Community.

Formerly known as the Andean Pact, this five-nation trade bloc is headquartered in Lima and comprises Bolivia, Colombia, Ecuador, Peru and Venezuela.

Except for Bolivia and Peru, whose economies are holding steady, the region is mired on one of its worst economic crises in decades. Colombia remains plagued by never-ending violence and terrorism, while Ecuador and Venezuela appear to be trapped in economic chaos sparked by low commodity prices and past fiscal mismanagement.

Nevertheless, the five Andean Community members enjoyed a $2.585 billion trade surplus in the first half of 1999 -- an impressive turnaround from the $4.75 billion deficit recorded for the same period last year. Bolivia and Colombia showed trade surpluses, while the other three countries -- Ecuador, Peru and Venezuela -- experienced big drops in their first-half deficits.

Inter-Andean trade rose 12%, from $816 million to $916 million, while regional inflation during the first half of 1999 stood at 14.7%. Individually, inflation figures ranged from a low of 1.4% in Bolivia to a high of 56.5% in Ecuador.

Here's a look at what's happening in three of those countries: Bolivia, Colombia and Ecuador.

BOLIVIA: The Bolivian economy under President Hugo Banzer remains fairly strong, with the country's 8 million people among the few in Latin America enjoying moderate economic growth in 1999.

Earlier this year, a group of 28 donor nations and intenrational organizations agreed that Bolivia "has achieved remarkable success in macroeconomic stabilization," but stressed that these achievements "must now be replicated in the social sectors to reduce poverty, which is still at high levels."

The donors expect to commit around $980 million by year's end on mostly concessional terms in support of Bolivia's economic reform and investment program. So far, the country has received $760 million of debt relief under the Heavily Indebted Poor Countries (HIPC) initiative -- the first nation in Latin America and the Caribbean to do so.

One of Bolivia's most important sources of foreign exchange is oil and gas, and private investment in prospecting for new Bolivian oil and natural-gas deposits totaled $60.5 million during the first eight months of 1999 -- a 400% increase over the year-ago period. To date, the Bolivian government has authorized 100 shared-risk prospecting, extraction and marketing contracts, 52 of which were the result of the capitalization of formerly state-owned YPFB. The rest were joint ventures existing before the selloff. Among the biggest investors in Bolivia's hydrocarbon sector: Maxus, Bolipetrol, Diamond Shamrock, Total, YPF-Repsol, Pan Andean, Tesoro, Chaco and Vintage.

Meanwhile, Bolivia implemented a sweeping new customs reform law that seeks to attract foreign investors while cutting down on corruption. The Customs Law, approved by Congress in August, "is the centerpiece of the Banzer administration's anti-corruption policy and makes a sharp break with the past, replacing legislation decreed during the Siles administration in 1929," says the Bolivian Embassy in Washington.

The law aims to control the flow of contraband, which represents $300 million in lost government revenues per year, equivalent to 3.7% of Bolivia's GDP. Under the law, the new customs service will be governed by an autonomous directorate under the tutelage of the Ministry of Finance. Members of the directorate are named by the president form a list of names approved by Congress with a two-thirds majority. Directors will serve for up to five years. The law prohibits hiring directors with family links up to the fourth degree, and also requires customs agents to be accredited by a license, for which they must compete in an open examination. It also establishes a two-phase exam process to weed out unqualified personnel from among existing employees.

Finally, smugglers now face mandatory jail sentences of one to six years, proportional to contraband value. Customs agents linked to contraband or customs falsification will also face mandatory jail terms of two to five years.

COLOMBIA: Once one of Latin America's strongest economies, Colombia expects to see its GDP tumble by 2.4% this year. Its unemployment rate is already the region's highest, at 19.7%, and few would argue that Colombia ranks as Latin America's most violent country -- a fact that's put tremendous pressure on President Andres Pastrana to make peace with guerrillas who control much of the country's jungle territory.

At the same time, The World Bank, the Inter-American Development Bank, the Andean Development Corp. (CAF) and the Latin American Reserve Fund (FLAR) have all agreed to support a $2.7 billion financing program announced in September from the IMF's Extended Fund Facility, which brings the total value of external support to Colombia to nearly $7 billion. The multilateral financial institutions have agreed to provide Bogota with $4.2 billion over the 2000-02 period; to this package, the IDB will kick in $1.7 billion, the World Bank $1.4 billion, CAF $600 million and FLAR $500 million.

"This financing will restore confidence and reinvigorate the Colombian economy," says the IDB, adding that "a substantial part of these funds will be allocated to finance a social safety net." In that context, the Pastrana government has agreed to expand social spending by $900 million over the next three years.

Meanwhile, the United States and Colombia will share information needed to combat drug smuggling and trade-related money laundering. U.S. Customs Commissioner Raymond Kelly said Sep. 22 that the cooperation accord -- Washington's seventh such pact with a foreign country -- "will enable us to more easily and readily exchange information with the Colombian government." Customs recently warned major U.S. exporters of appliances and other consumer goods that it will go after firms that don't work to ensure their goods aren't involved in money laundering. The deal is expected to provide the legal basis for sharing documents such as shippers' export declarations and import manifests.

ECUADOR: This year, Ecuador's Gross Domestic Product is expected to fall by up to 7%, making it the worst economic performer in Latin America. In September, Ecuador missed a $44.5 million interest payment, becoming the first country ever to partially default on its Brady-bond payments. Analysts say this could trigger an unprecedented moratorium on payment of $500 million in Eurobonds.

"We've been having a very difficult time in Ecuador for many years now," said the country's ambassador in Washington, Ivonne Abdel-Baki, in a recent interview. "We have had so many problems and crises, starting with El Niņo. Low oil prices added to the problem, then came the financial crises in Asia, Brazil and Russia. At least the war with Peru is over, thank God."

At the moment, Ecuador's per-capita income stands at $1,250, and 60% to 70% of its 12 million people live in poverty. Unemployment is estimated at 30% and rising, while the value of Ecuador's currency is falling fast. A year ago, there were 5,500 sucres to the dollar. Today, $1 can buy 18,800 sucres. The sucre has lost 82% of its value in the last three months alone.

Meanwhile, Ecuadorian business groups, banks, the military and other sectors of society have asked Congress to hasten approval of the national budget and tax reform as prerequisites for economic recovery. Analysts say the sooner both are approved, the sooner a contingency deal can be reached with the IMF and other multilateral lending agencies.

President Jamil Mahuad has asked Congress to approve a 15% value-added tax (up from the current 10%), but is willing to accept 13% on condition other taxes are approved that can keep the budget balanced. Javier Espinoza, the newly appointed economy minister and former head of the Quito Chamber of Commerce, sais that while the international environment is ripe for renegotiating Ecuador's foreign debt, Ecuador should also make sacrifices to improve the economy.

Foreign investment would certainly turn things around. Earlier this year, Mahuad launched the U.S.-Ecuador Business Council -- a new organization dedicated to improving the business relationship between Washington and Quito. The embassy and 19 U.S. corporations are backing the effort, including energy giants Arco, Texaco, Enron and Occidental, as well as Continental Airlines, BellSouth, Philip Morris, Kellogg, Microsoft and Great Lakes Dredge & Dock. The council is being chaired by Einaudi Luigi, former special U.S. envoy to the Peru-Ecuador peace talks.

Yet, "because of the critical situation, we are not getting much foreign investment," said Abdel-Baki. "Everything has been put on hold."

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