Better Neighbours

In a clear break from its past, Latin America and the Caribbean (LAC), particularly South America, experienced a growth spurt with equity during the first decade of the 21st century. One policy area that has moved back to center stage is regional integration. Indeed, since at least the 1960s, LAC has experimented with various forms of regional integration with the hope that fostering regional economic ties can yield the type of economic success that the region has long sought. The current push toward regional integration has been influenced by the success of the East Asia and Pacific (EAP) region, where intraregional trade, exports to the rest of the world, and incomes have risen together as the region continues to catch up to the income levels of the United States. The goal of leveraging formal trade arrangements to accelerate growth is evident in many of the trade agreements that are in place in the region. This report revisits the concept of OR and presents evidence supporting the idea that a revitalized OR strategy can contribute to growth with stability by exploiting the complementarities between regional and global economic integration. It presents a five pronged strategy, including: (i) reducing external most-favored-nation (MFN) tariffs; (ii) deepening economic integration between South America and Central and North America; (iii) harmonizing rules and procedures governing the exchange of goods, services, and factors of production; (iv) stepping up efforts to reduce LAC's high trade costs; and (v) integrating labor and capital markets in the Americas. The report draws upon two prominent strands of economic theory. The first is the idea that the gains from trade depend on differences between countries. The second is the idea that trade facilitates learning, either through the experience of exporting or from the exposure to new products and ideas that are embodied in imports.